Last week’s Queen’s Speech targeted “two of the major problems of our time” – state care and pension provision.
On the latter, the industry has largely applauded the simplification embedded in the new single-tier state pension, replacing a system that even the most enthusiastic pensions devotee would have described as unnecessarily complicated.
It has not applauded the acceleration of the changes, specifically the impact of the abolition of contracting-out and the resulting national insurance hit for companies. Last week we looked at how United Utilities had set up a special risk management group to deal with the reform.
But the level of the new provision has hardly received the same attention. The Trades Union Congress has objected to what it sees as a fall in the share of the nation’s GDP going to pensioners in an ageing society.
“The vast majority of future pensioners will be worse off under single-tier because they could have expected to accrue S2P [the old state second pension] at a higher rate than single-tier,” it told MPs last week.
“This does not make a single-tier pension plus auto-enrolment a bad structure, but does mean that single-tier pensions need to be set a higher level.”
On a 40-hour week, the living wage gives £298. On an assumed lower earnings limit of £5,000 and average earnings of £26,000, the additional state pension – which broadly aimed at 20 per cent of the earnings between these two levels – would give you £4000 a year or £76 a week, calculates John Lawson, head of corporate benefits policy at Aviva.
Added to the basic state pension of £110 a week and you get £186 in total. "So the proposed £144 is well short of the previous ambition, even for average earners,” he adds.
The optimistic view is that auto-enrolment and private savings will help fill the gap between pensioners’ state entitlements and their standard of living, but many remain unconvinced.
“The time to repair the roof is when the sun is shining,” runs JFK’s familiar phrase. At the least, it is a pity these major long-term reforms are being attempted at a time when money is short, and is not the current government’s fault they were not addressed when it was a bit sunnier.
At worst, it is a tough hit to the income of a growing and, in parts, vulnerable division of our society.
Ian Smith is editor of Pensions Week. You can follow him on Twitter @iankmsmith and the team @pensionsweek
