Pensions Bill 2013 Briefing for Commons Second Reading,17th June 2013

Transcription

1 2013 Briefing for Commons Second Reading,17th June 2013 parliamentary brief The mainly legislates for a single-tier state pension, by combining the basic state pension and state second pension thus ending contracting out arrangements. The TUC broadly supports simplifying state pensions but has raised concerns about several aspects of the reforms. But it also includes other measures, such as: an acceleration of the increase in state pension age (SPA) to 67, whch the TUC opposes, and includes some detail on how future SPA changes will be determined. measures on private pensions, including plans for a pot follows member solution to the small pension pots issue, and a new general power to exclude groups from auto-enrolment, both of which the TUC opposes. Single-tier state pension Background The post-war Beveridge reforms resulted in a single state retirement pension, linked to earnings, on which most employees (or at least men) were expected to build an occupational pension normally final salary related provided by their employer. Barbara Castle added SERPS the state earnings related pension to this to provide an income related second state pension for workers who were not in a workplace pension. Employers (and their staff) who provide a good enough workplace pension can contract out of SERPS and in return pay lower National Insurance contributions (NICs; their employers also pay lower NICs). The 1979 Conservative government reduced the value of SERPS, and broke the earnings link in the basic state pension (BSP). The subsequent Labour government rebalanced SERPS over time away from providing earnings related benefits to provide more help for the low paid and renamed it the state second pension (S2P). The Pensions Commission, with TUC support, recommended an eventual flat rate S2P but was cautious about ending contracting out due to the complexity involved and the potential impact on defined benefit (DB) pensions. In 2011 the coalition government consulted on whether to speed up the Pensions Commission Congress House, Great Russell Street, London WC1B 3LS t: f: web: Parliamentary Officer: Julie Crowley t: jcrowley@tuc.org.uk General Secretary: Frances O Grady 1

2 timetable, or abolish S2P altogether, eventually deciding on the latter. We opposed both options at the time, but recognise the significant concession later made by the government in opting for the rapid approach when they allowed contracted out pension savers to accrue a much higher state pension than expected after the end of contacting out. This will mean many employees will face higher NICs (ie members of public sector and private sector DB schemes), but most will receive a higher state pension in return. Main benefits The long-term benefits of a single-tier state pension rest on the importance of a simple state pension in providing a solid platform for private saving. Also, depending on the level at which it is set, single-tier could benefit low-earners or non-earners unable to build up significant amounts of earnings-related state pension, although the introduction of S2P had already achieved this to some extent. In the shorter-term, the winners are principally those without access or strong entitlements to the earnings-related state pension, ie SERPS or S2P. Clauses 4-5 and Schedule 1 provide for a process whereby state pension entitlements at the point of implementation are calculated on the basis of the new system or the old system, whichever is higher, with individuals then able to accrue additional amounts in the new system, up to the single-tier level. Many people retiring in the next years (mainly women) that have taken time out of the labour market, for instance due to caring responsibilities, or who have experienced long periods of low earnings, will therefore receive a higher state pension (this problem would not have persisted in the long-term in the current system due to the greater accessibility of S2P over SERPS). Self-employed people have no entitlement to earnings-related state pensions through paying lower NICs. They will therefore receive a higher state pension than expected from 2016, though the self-employed will worry that their NIC payments will increase as a result so there may be some sting in the tail for younger selfemployed people. Most people that have been contracted out of earnings-related state pensions will benefit when they retire through being able to accrue a higher state pension from 2016, although they will pay higher NI contributions at a time when wages are running behind prices. But private sector workers, on average, will be no better off because their employers will be permitted to reduce the value of their occupational pension as a result of losing employer NICs rebates (as long as the change is cost neutral to the employer but see below). Public sector workers will benefit when they retire as the government commitment not to make further changes to their pensions for 25 years means they will not face the reduction of occupational benefits their private sector colleagues face. But 2

3 the government s cuts to public sector pension accruals and increases in contributions were set in the knowledge of the likely end to contracting out, and public sector workers will face higher NI contributions coming on top of increased contributions and pay freeze and restraint for many years. Potential problems The TUC strongly opposes the statutory override (Clause 24 and Schedule 14) for private sector employers to make pension scheme changes commensurate with higher National Insurance costs (arising from the end of contracting out), without trustee or member consent. Because the calculation of costs will be made at aggregate level rather than per individual, it is expected that many individual scheme members will be worse off although the impact will be neutral overall. As pointed out by the Work and Pensions Select Committee, the DWP has not undertaken an impact assessment of those affected by this measure. Schedule 14 requires actuarial certification of scheme changes to ensure consistency with the Bill, but we believe this protection is insufficient. Schedule 14, Clause 1 indicates the government also intends to apply the override to protected persons, ie individuals transferred from public sector employment due to privatisation with a legal guarantee that their pension entitlements could never be altered without their consent. The TUC is strongly opposed to this measure. The abolition of S2P means the vast majority of future pensioners will be worse off under single-tier, including low earners, because the single-tier accrual rate is much lower than the current system for people not contracted out. This impact is indicated by DWP s impact assessment, but obscured because the number of losers are presented only in cumulative terms, ie everyone retiring between 2016 and 2060 those retiring later are more likely to lose out, and to lose more. In terms of the transitional rate of single-tier (clause 5), it is unfair that people relatively close to retirement and not contracted out of S2P are not able to accrue a state pension above the single tier starting rate despite continuing to pay full NICs. Similarly, Schedule 1, Clause 6 states that benefits already accrued above the single tier starting level will be revalued pre-spa in line with inflation; currently S2P accruals are revalued in line with earnings. These problems do not make a single-tier a bad structure, in combination with auto-enrolment into a private pension, but do mean that single-tier pensions need to be set at a higher level. We believe that a higher starting level, broadly in line with what a low-earner could accrue over their career in BSP plus S2P, would help single-tier to achieve its saving platform objective by encouraging people to be less risk averse in private pension saving. The UK already spends less on state pensions than many countries a state pension set at 144 will ensure the gap will grow. This impact could also be offset at a lower short-term cost by uprating single-tier at a faster rate. 3

4 The Bill in fact fails to include the current (non-statutory) requirement for BSP to be uprated by a triple lock of earnings, inflation or 2.5 per cent (although we acknowledge S2P in payment was only uprated by inflation). Clause 20 also replicates the anomalous and unjust current arrangements whereby individuals retiring in certain foreign countries do not have their state pension annually uprated. Clause 2 increases the number of NICs qualifying years needed for a full state pension from 30 (for BSP) to 35, and introduces a minimum number of qualifying years needed for any amount of state pension (which may be as high as 10 years). The impact of changes to qualifying years will be limited in practice for the vast majority of people, but undermines the balance struck by the Pensions Commission between a universal and contributory system. The government has not published an assessment of the type of people most likely to be negatively affected. The five-year increase to 35 has been justified by the government with reference to increasing SPA, which means people will in theory have longer working lives. Yet there are no plans to increase SPA by more than three years, and the Bill provides for only a two year rise, and not until12 years after single-tier is introduced. Despite the government s claim that single-tier will be cost-neutral, pensioner expenditure will fall as a result of this reform. Furthermore, the additional National Insurance costs for public sector employers (ie revenue for the Exchequer) has not been included in this calculation. Public sector employers will be compelled to pay an additional c. 3.5bn per year from 2016, creating further pressure on service budgets. Although this is not strictly a pensions issue, it cannot be emphasised enough that much of the stated savings to the Treasury from ending contracting out can only come about through cuts in public sector spending elsewhere, especially given that much of the extra revenue has been allocated to new initiatives announced at Budget The TUC is concerned about how the state pension entitlement of people who have been contracted out will be calculated under Clause 6. The government has indicated a rebate-derived amount will be deducted to reflect time spent paying lower NICs at any point before While likely to be neutral in most cases, and easily applicable in straightforward cases such as lifelong public sector workers, the government has yet to publish sufficient detail on the formula for establishing the rebate-derived amount. The fails to eliminate means-testing within pensioner benefits, in contradiction to the stated aim of the reform, and in fact potentially makes the system of pensioner benefits more complex than the current system. Over the long term eligibility for Pension Credit will fall, but around 1 in 20 pensioners will remain entitled to the Guarantee Credit element. The short term fall in eligibility is in fact achieved mainly due to the immediate abolition of the Savings Credit 4

5 element (Schedule 12, Part 3). As a result of this many low-income pensioners will receive less overall from the state under the new system compared to the old system the promise to match entitlements under the old system only applies to the state pension not means-tested benefits. The Bill fails to replicate current arrangements for passporting for Guarantee Credit. Presently many low-income pensioners are automatically entitled to benefits such as Housing Benefit and Council Tax Benefit via Pension Credit eligibility. Although many future pensioners receiving single-tier will live on an income barely higher than the current minimum income guarantee and will therefore still require other means-tested benefits to alleviate poverty, it appears they will be required to go through new claims processes that have not yet been specified and may differ between local authorities. The Bill gives rises to gender inequality by implementing single-tier at a point at which male and female state pension ages will still be unequal. 700,000 women born between 6 April 1951 and 5 April 1953 will reach SPA under the current system, while men born on the same day will reach SPA under the new system. The government has not published an analysis of the number of women who will get less than men as a result of this situation, although they have indicated that the median state pension value for this group will be 6 lower under the old system than the new system (although this does not consider the impact of abolishing Savings Credit in the new system). Many will have significantly larger nominal losses, if they have no entitlement to SERPS or S2P. The TUC believes that, if single-tier is introduced, all men and women born after 6 April 1951 should receive the higher of their state pension value under the old or new system. Anybody retiring before April 2016 including existing pensioners will have no entitlement to single-tier. Although the Pension Credit safety net ensures an income roughly the same as they would get under single-tier, under the current system Pensions Credit penalises pensioners with an income from savings or employment above the level of BSP in a way that single-tier would not. Furthermore, many existing pensioners, especially ethnic minorities, do not claim Pension Credit due to the complexity of the claims process. State pension age The TUC opposes the Bill s accelerated timetable for increasing the state pension age to 67 (clause 25), and the method for deciding future changes (clause 26) measures which the Work and Pensions Select Committee were not given sufficient time to examine. There exist enormous inequalities in life expectancy between people living in different regions and nations of the UK. A higher state pension age means people with lower life expectancy spend less time in receipt of state pensions and therefore receive disproportionately less back in return for a lifetime of contributions compared to those with a higher life expectancy. 5

6 data from England and Wales shows that life expectancy at 65 for routine and manual workers is 2.6 years (men) and 2.4 year (women) below that of managerial and professional workers. Moreover, since life expectancy has increased by only 21% (men) and 9% (women) for routine and manual workers, compared to 28% for all men and 15% for all women. The Bill includes some detail on periodic reviews for deciding SPA in the future, at least every six years. If SPA is to change again, the TUC would support an approach based on an independent commission. Trade union representation would be required both to ensure evidence about life expectancy inequalities is considered, and to reflect the link between SPA and normal pension ages in public sector and some private sector schemes. However, the Bill establishes a largely formula-based approach to deciding on SPA in the future, with ministers making decisions based on information about average life expectancy from the Government Actuary. We recognise that Clause 26(5) also requires the government to appoint an individual to provide a report on other specified factors relevant to the review. However, this is insufficient to establish an independent, impartial and thorough process by which all factors relevant to decisions on SPA can be considered. The Bill should indicate which factors are to be considered, and should include life expectancy inequalities, dependence on the state pension by different groups, the experience of older people in the labour market, and any link between SPA and occupational pension scheme retirement ages. Indeed a proper social partnership based approach to state pension age could be extended to other pension issues building on the consensus approach established by the Pensions Commission. Other private pensions measures The contains positive measures regarding private pensions and we welcome these responses to union and consumer campaigns. Clause 32 abolishes short service refunds, through which employers were previously able to recover their contributions into an employee s pension (in trustbased schemes) if the employee left the company within two years of joining the pension scheme. Currently, refunds are being used to sell trust-based pension schemes with sometimes less than satisfactory governance to employers of high churn workforces on the basis that they can reduce their pension contributions. Clause 30 creates a power to prohibit incentivised transfers through which employers encourage their current or former employees to relinquish DB pension rights. The power backs up a new voluntary industry code of practice and the government must be prepared to use it should the code fail. Clause 35 extends the government s powers to cap pension scheme charges. This is expected to lead to the prohibition of consultancy charging, a measure which the TUC has campaigned for, and will be accompanied by a DWP consultation on whether a cap on charges in general should be applied to all defined contribution pensions. However, we are concerned that clause 35 only 6

7 grants powers to cap charges for active members, as only schemes with eligible jobholders under Pensions Act 2008 are required to be qualifying schemes. Deferred members of pension schemes are excluded and may continue to pay much higher charges. These are welcome changes, but there are also issues of grave concern. The main problem with the Bill in terms of private pensions relates to Clause 29 and Schedule 16, ie the pot follows member approach to automatic pension transfers. The TUC opposes any proposal for automatic transfers of defined contribution pension pots when an employer moves jobs that could result in pensions being moved from a good scheme to an inferior scheme. While ministers have recognised this issue, it is unclear how they will deal with it, and the Bill provides little detail as the scheme is left to later regulation. While tough new regulations that ensure all auto-enrolment schemes are of sufficient quality to guard against consumer detriment on transfer would be welcome, there is no guarantee that they will be introduced given the likely opposition of parts of the pensions industry. We also worry about the costs for workers who change jobs frequently (often the low paid). The TUC along with many other pensions stakeholders continues to prefer a so-called aggregator approach, which would periodically sweep small pots into one or a limited number of high quality schemes. Schedule 14, Clause 1(4e) allows the government to make the pot follows member system applicable to pension pots accrued before the Bill becomes law although DWP has indicated it is likely to be applied only to future saving. If applied to accrued rights it could greatly assist individuals with deferred pots effectively trapped in high-charging schemes. We worry that Clause 34 is the s Beecroft clause. It provides the government an extremely broad power to create exceptions from employer duties to auto-enrol staff into a workplace pension scheme. This power arises from the need to exempt people in anomalous circumstances such as those close to exceeding tax relief limits, or people intending to leave their employer in the near future from being auto-enrolled. Yet the clause allows for regulations significantly broader in scope and could be abused by future governments in support of employers unwilling to make minimum contributions into staff pensions. The Bill does not make any reference to the restrictions on NEST, which the government recently consulted on. The restrictions prevent NEST from fulfilling its role in providing a low-cost, high-quality benchmark for the industry, and should be lifted. Clause 42 establish a new objective for the Pensions Regulator to minimise any adverse impact on the sustainable growth of an employer of its defined benefit regulatory regime. It remains unclear how this objective will be interpreted 7

8 and applied in practice. It seems likely that employers will be able to point to this law as a reason to reduce, for instance, deficit recovery contributions. While scheme members clearly have an interest in the continuity of their employer, this is not the same as saying employers should be able to get round their obligations to properly fund pension promises by saying the money is for growth. 8