Steve Webb MP writes… A truly radical pensions reform

As LDV readers will no doubt be aware, this year marks the 105th birthday of the 1908 Old-Age Pensions Act. Through this Act, Lloyd George introduced the first state pension to Britain, providing 5 shillings (£0.25) a week for those over 70. Fast forward nearly forty years to another great Liberal, William Beveridge, and the National Insurance Act of 1946 that gave birth to the modern state pension. Beveridge’s original idea was for a single, simple, decent state pension, paid after a lifetime of National Insurance Contributions and not subject to a means-test.

Beveridge’s principles have been subject to a sort of permanent evolution for decades, after successive governments tinkered with the state pension, often with the best of intentions, but always in a way that made things more complicated. Indeed, what we now have is a system so fiendishly difficult that the Pensions Commission declared the UK system as one of the most complex in the world. Only one in four people agreed in a recent survey that they knew enough about pensions to decide with confidence about how to save for retirement. The reasons for this uncertainty are easy to see.

In Britain today we have not one but two state pensions. We have a basic state pension of £107.45 per week that even the Government doesn’t think is enough to live on. Then there is the additional pension (variously known as SERPS or the State Second Pension), a scheme with variable amounts paid out in retirement according to past earnings but with the chance for people to opt out into a company pension scheme. Even these two pensions together are often not enough to live on, so millions of pensioners receive a further means-tested top-up called the pension credit, and even this has different elements (the ‘guarantee credit’ and the ‘savings credit’) each with its own rules, premiums and tapers. It is little wonder that people think they need to be Einstein to know what they will get in retirement. Worse still, the current system actually discourages some people from putting anything aside; the mass reliance on means-tested benefits leaves people unsure whether they will benefit from the savings they make. But it doesn’t have to be like this.

Wouldn’t it be better if people who had contributed through their lives, either through paid work or caring or in some other way, could be guaranteed a pension clear of the basic means-test, a foundation on which they can build? That is what Liberal Democrats have been campaigning for decades to deliver, and today we have published radical plans for today’s workers to retire on a single, simple, decent pension. Back to the Beveridge model, but updated to reflect modern working patterns and modern patterns of life, with a particular focus on treating men and women the same for the first time.

This new ‘Single Tier’ pension is something that has much in common with the long-cherished Liberal and Liberal Democrat goal of a Citizen’s Pension. The basic idea is that someone starting work under the new ‘Single Tier’ pension rules will build up just one state pension. It will be set above the level of the basic means-test (currently £142.70 per week) and the full rate will be payable for 35 years of National Insurance Contributions. As happens now, there will be credits for those who cannot contribute to their pension because of caring responsibilities, and the new rules will particularly benefit many older women whose time at home with children in previous decades has damaged their state pension entitlements. Each individual will qualify for a pension in their own right, with no complex rules about claiming pensions based on someone else’s contributions. Because the new ‘Single Tier’ pension is set above the basic means-test, money you put aside from working to top up your state pension will be far less likely to be clawed back through Gordon Brown’s intricate means-tested benefits system.

If you are already drawing a pension before the start of the single tier state pension, you will continue to get your pension under the current rules. If you start to draw a pension after the single tier is brought in, our starting point is what you have already built up. That means all the pension rights that you have built up will be honoured.

Single Tier isn’t about spending more money on pensions – it is about spending in a clearer, simpler way to better support private saving. That is why the overall cost of the new system will be the same as the system it replaces. The higher flat pension is affordable because people no longer build up very large earnings-related pensions from the Government. So Single Tier will not be a king’s ransom, but it will cover the basics. It will treat men and women equally for the first time and will value unpaid caring work just as much as a high-flying city job. That is why the big winners from Single Tier will be women, carers and some low earners who haven’t previously received much in the way of earnings-related state pension. And for the first time ever, we will be bringing the self-employed fully into the state pension system.

When the Liberal Democrats first entered Government, our priority was to protect today’s pensioners. That is why we introduced the triple lock guarantee to ensure that the value of the state pension will always rise by whatever is higher of inflation, earnings or 2.5%. That meant that last April we were able to deliver the biggest ever cash increase in the state pension of £5.30 a week and this April will pay an above-inflation increase in the pension. Now we are also tackling the needs of future pensioners and delivering a simple, single decent state pension – something Liberal Democrats have argued for over decades. Delivering it would be a truly radical reform, and one that Liberal Democrats could be proud of.

You can read the executive summary at the DWP website.

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28 Comments

  • Liberal Neil 14th Jan '13 - 5:51pm

    Good stuff Steve. Well done.

  • The “biggest ever cash increase” was because the price level saw its biggest ever increase. Every time I see him him say that as if it was impressive I lose faith in the accuracy of anything else he says.

  • I think you’re confusing me with someone else.

    But anyway, could you explain your comment? The ‘biggest ever cash increase’ was a CPI uprating, no? Under the previous govt it would have risen the same (in fact more, as RPI, no?)

    The thing is Webb has an economics degree so must understand inflation.

  • Really pleased to see a sensible policy being introduced which reduces rather than increases the reach of means-testing.

  • Foregone Conclusion 14th Jan '13 - 10:12pm

    @Matt,

    The inflation measure for the state pension is RPI.

  • If previous administrations had implemented the Beveridge Report as it was written rather than picking and choosing the parts that suited them, social welfare would be in better shape today.

  • Richard Shaw 15th Jan '13 - 9:33am

    @Matt

    “Under the previous govt it would have risen the same (in fact more, as RPI, no?)”

    In fact, no. The State Pension actually decreased in real terms between 2002 and 2009, so an at inflation increase is not the trivial achievement you imply. Plus, even if inflation was really low, then pensions would still rise by at least 2.5% thanks to the Triple Lock,

  • Tom Richards 15th Jan '13 - 9:48am

    don’t know if anyone saw him in Parliament yesterday but Steve was fantastic when he was announcing this – probably one of the most in command performances I’ve seen from a Lib Dem minister since David Laws in the first couple of weeks of the Coalition.

  • Richard Cole 15th Jan '13 - 11:13am

    Matt
    There is an assumption that RPI is always higher than CPI but this is not the case. Over much of Brown’s time as PM (second half of 2008 to beginning of 2010) CPI was higher than RPI. While sometimes the gap can be quite large the two measures are close at the moment and have been for over a year.

    You suggest that ‘the price level saw its biggest ever increase’. This is, of course, completely wrong. We have seen much higher levels of inflation in the UK. Over the period 2010-2012 RPI went up higher than it has been for some years while CPI was lower over most of this period. It is important to note that CPI is likely to be a better reflection of inflation as experienced by pensioners than RPI which is influenced by mortgage costs.

    The triple lock system gives a gives three measures with pensions being uprated by the highest. If inflation continues on its downward trend and real wages stagnate, pensions will still increase by 2.5%, which certainly did not happen under the last government.

  • Daniel Henry 15th Jan '13 - 2:26pm

    @ Richard Shaw
    I wasn’t aware that pensions had risen below inflation in the past.
    Do you have a link to your source on that information?

  • But what will the state retirement age be? Over 70 is likely. What will happen to those who employers will not want? JSA, workfare, sanctions and poverty? If the age is set to life expectancy that will come down pretty rapidly. I also expect that winter fuel allowance etc will be abolished with this. Devil is in the detail.

  • I think that the benefit to women who take time out to look after children is overplayed. There has been automatic crediting of a national insurance contribution to women who get child benefit since 1979 so there can’t be many of us left who lost out and haven’t reached retirement age -and I only lost 3 years. More to the point, what is going to happen to women where the family has just lost child benefit because of the new income rules?

  • Peter Watson 15th Jan '13 - 4:53pm

    @CP “Why are working age people so short-changed?”
    I suspect that the reason is not unrelated to the increased propensity of pensioners to vote.
    Also, a case can probably be made that job seekers allowance should be paid at a level where there is a disincentive to live on it, whereas pensioners do not have the same opportunities to change their circumstances.

  • “Also, a case can probably be made that job seekers allowance should be paid at a level where there is a disincentive to live on it, whereas pensioners do not have the same opportunities to change their circumstances.”

    As if people would have no incentive to find work if they got £4,000 or £5,000 a year on JSA.

    The funny thing is that often the people who do say this sort of thing are also the ones who tell us how hard it is for the “squeezed middle” to make ends meet on £50-60,000.

  • Mark – that’s not ‘because of a guarantee’ though, it would have risen by slightly more under the previous rules.

    Richard S – That’s not true , from April 2002 to April 2009 it rose in value in real terms (using the RPI) by 4.8%.

    Richard C – The issue is not whether CPI is ever higher than RPI but whether it was in September 2011, and the answer is it wasn’t. Also it’s not completely wrong that the price level saw its biggest ever increase; in fact it’s correct . The CPI rose by 6 in the year to September 2011, the largest such increase since it was formed in 1989. The RPI rose by 50, the joint largest increase (along with September 1990) since it began in 1948 (the high % inflation of the 1970s saw increases of only 20-25).

  • Mark – Ok, here is a links howing it was changed from RPI (5.6%) to CPI (5.2%). http://www.guardian.co.uk/money/2011/oct/18/rising-inflation-state-pension-benefits

    But as you say yourself it was linked to RPI I think you know this. So can we agree this statement of yours “Given that the standard State Pension rose as it did because of a guarantee given by the Coalition” either isn’t true, or is true in the wrong direction (ie it would have risen by more under the previous regime?).

    On the RPI rising by 50 points, I’d need to link into an ONS webpage which is impossible. But I can demonstrate it by this link, which is a differently rebased RPI.

    http://www.wolfbane.com/rpi.htm

    Note September 2011 is 237.9, and September 2010 is 225.3. That is an increase (on this rebasing) of 12.6.

    Now compare say 1975, when inflation was 20%. The index increased to 35.6 from 28.1, which is 7.5. A much smaller increase in the index. The only comparable one of any September to September period in the 60 year history of the RPI is in 1990 – 116.6 to 129.3.

    I think your confusion is you are thinking in % terms. Steve Webb does not think like that – he thinks in absolute terms. In % terms the increase in state pension was nowhere near the highest ever, because of course it was an inflation linked increase and in % terms inflation was higher. But that is not Steve Webb’s claim.

  • Peter Watson 16th Jan '13 - 1:31pm

    “Also, a case can probably be made that job seekers allowance should be paid at a level where there is a disincentive to live on it, whereas pensioners do not have the same opportunities to change their circumstances.”
    I should have added a disclaimer: I was playing devil’s advocate rather than taking ownership of that particular point of view!
    Having said that, if we ignore the actual £/week and for the sake of argument assume that the cost of basic necessities are covered, should job seeker’s allowance should be the same as the state pension, less for the reasons mentioned, or more because the act of seeking a job requires investment?

  • I’m in my mid 30s. Can I opt out of the NI pyramid scheme? People of my generation and younger are being totally screwed over by high NI, rip off pension scheme fees, rising retirement ages (not matched the employment market) and smothered by a fat layer of greedy baby boomers.

  • Mark – the increase in the RPI is 50 on the ONS’s current basing and what I said on that one linked to. We could halve each index number and reduce the increase if you like.

    The figure is misleading for the reason you state, but that is exactly the same as what Steve Webb does. Which is the point – he is trying to mislead people.

  • @Alistair
    Not all babyboomers are greedy or rich! That is just more divisive propaganda to pit the young against the retired and deflect blame from the real culprits. Do not fall for it. This policy has certainly worked against the sick and disabled, the elderly are the next target.

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