The devil’s in the detail

The Pensions White Paper Security in Retirement largely follows the Pensions Commission’s earlier recommen-dations but with some significant differences, especially in the plans for state benefits.

These will be challenging for the administration of National Insurance and will leave some people worse off than under the present system.

The major proposal of the commission that drew Chancellor Gordon Brown’s political ire was its desire to see the state pension re-linked to earnings in the near future.

In the horse-trading in the run up to the publication of the White Paper, he seems to have accepted this, but with a let-out clause.

“During the next parliament, we will re-link the uprating of the basic state pension to average earnings,” the White Paper says.

“Our objective, subject to affordability and the fiscal position, is to do this in 2012, but in any event by the end of the parliament at the latest.”

Assuming this parliament and the next each run for four years, that brings us up to 2013. If they each go to their legal maximum of five years, though, it could be 2015.

The Pensions Commission in fact recommended 2010, and said that “while a short delay beyond 2010 would not seriously undermine the overall direction of the proposed reform... delaying to 2015 would, we believe, put off for too long the point at which we begin to halt the spread of means-testing:

Responding to the White Paper, commission chairman Lord Turner reiterated this. Long delay, he said “could undermine the balance of the overall policy package”.

The commission also wanted to see the state basic pension move from a contributory basis on to “a long-term residence basis... while leaving existing accrued BSP rights unchanged”.

The government has rejected this approach.

The White Paper includes a long and detailed statement of its rationale, but work and pensions secretary John Hutton gave a more succinct and political explanation at a Fabian women’s conference shortly before publication. There was, he said, a critical group of women – currently aged around 45 and over.

A residency-based approach for accruals from 2010 only would offer no immediate help to that group. Doubtless in his mind, was also that a residence-based pension would not pass the test for potential damaging headlines about foreign pensioners grabbing UK pensions.

As an alternative, Hutton put forward a new contributory principle for state pensions, which would ensure that “we value social contributions equally with cash contributions and move progressively away from a system predicated on a 19th century view of both working lives and social relationships”.

It would retain the crucial link between rights and responsibilities, “that principle of something for something that defines the role of the modern welfare state”.

This involves revamping the National Insurance conditions for drawing a pension in some surprisingly radical ways. The plan is to:
• Reduce the number of years needed to qualify for a full state pension from 44 for a woman and 49 for a man, to 30.
• Remove the “initial contribution condition” which stops people building up state pension on the basis of credits alone, without having ever paid NI contributions.
• Replace home responsibilities protection (HRP) with a new weekly credit for those caring for children.
• Bring in a new contributory credit for those caring for severely disabled people for 20 hours or more per week.
• Introduce various other detailed changes which overall should improve the position for those caring for children and other dependants, but also involve cutting “complicated and outdated provisions such as adult dependency increases and autocredits”.

And the aim is to do all this by 2010.

The plan is to bring forward legislation on state pension reform for introduction in January 2007, which presumably means that parliament will be presented with something that is a work-in-progress, progressively rewritten as the legislation proceeds through its various stages.

It is bound also to mean that the IT consultants spend many hours rewriting the software for the big NI system (NIRS2, which was plagued with bugs when it first started) to fit the new rules.

The changes to HRP are perhaps the most interesting. HRP covers people who are at home looking after children up to the age of 16, and also (with various limiting conditions) those looking after invalids or fostering. When calculating someone’s state pension entitlement, the number of years for which they are covered by HRP is taken away from the number of qualifying years required.

There is a separate system of credits for those caring for children under six for S2P. Both cover full years only. The proposal is to abolish HRP, and instead have credits, for both the basic pension and S2P, for each week spent caring for a child under 12, or for people with disabilities.

According to the White Paper: “Our intention is that any periods of care undertaken before reforms are implemented, which would qualify for HRP under the existing rules of the scheme, will be preserved, but converted into the new, more generous credits.”

This will happen from 2010, and the DWP estimates that in 2010, 70pc of women reaching state pension age could be entitled to a full basic pension, and 90pc by 2025. Effectively, it is a retrospective change to people’s advantage, a rare move when public spending is in question.

As against this, the whole pension will be paid later, with staged increases in state pension age from 2024 onwards. Pensions minister James Purnell was defensive about this when speaking at a recent Trades Union Congress conference.

He said: “Our current estimates indicate that if the life expectancy of those in the lowest socio-economic rise in line with that of the average man – and the indications are that it will – then they will not experience any reduction in the length of life after state pension age following the increase to 68 in the 2040s.”

The White Paper also lays out plans to revamp S2P into a flat-rate top-up to the basic pension, by around 2030 or shortly afterwards “in line with the recommendations of the Pensions Commission”.

That report proposed that the upper earnings limit for building up S2P (£33,540 in 2006-07) should be frozen in money terms, so that the element of earnings covered by S2P gradually shrinks. Once in payment, S2P will be linked only to prices.

As for the means-tested pension credit, the lower threshold for the savings credit element will be uprated in line with earnings while the maximum level will be “frozen in real terms” – which presumably means linked only to prices. The level of savings which qualifies one for the savings credit, therefore, will be gradually squeezed down.

Because of these cutbacks, the person who makes no pension savings will be worse off than they would be today as the DWP’s own tables – hidden away in an annex – illustrate.

In effect, more people will gain something from S2P through the changes in the crediting rules, but there will be less of it, and less opportunity for those who have not been able to save to apply for the pension credit. π