The Unite case in detail

Transcription

1 Unite the Union s submission to the House of Commons Work and Pensions Select Committee in respect of the Government s Single Tier State Pension proposal This response is submitted by Unite, the UK s largest trade union with almost 1.5 million members across the private and public sectors. The Union s members work in a range of industries including manufacturing, financial services, print, media, construction, transport and local government, education, health and not for profit sectors. Executive Summary At a time when the need for a defined benefit state pension to provide a foundation for people s uncertain private pensions has never been greater the Government is proposing to drastically reduce its scope. While the single-tier raises the minimum level of state pension and reduces mean-testing it does so by removing earnings-related additions to what is an inadequate Single-Tier level and diverting the NI people will still be paying for them. In the short-medium term the main losers will be those with the poorest or non-existent private pension provision who have been contracted-in

2 and placed the greatest reliance on State Second Pension many of those will see their State Pension reduced by up to one fifth. While contracted-out employees stand to get higher state pensions after the change, those in the private sector may face offsetting losses in their company pensions and those in the public sector may find their future pay and job security are impacted, as the Government has not promised to compensate public sector employers for their higher NI costs. Transition terms are unfair to contracted-in employees and they should be given scope to add to their Single-Tier benefits on a basis equivalent to that being offered to Contracted-out employees. Proposals to interfere in private sector DB pensions by over-riding protected persons legislation, and requirements in scheme rules for employers to make changes only by agreement, should be rejected. The Unite case in detail 1. Unite does not believe that any satisfactory basis for state pension reform can be devised or achieved, for an ageing population, without an increase in the planned level of public expenditure on state pensions. 2. For every improvement received by groups within a cost-neutral framework then there must correspondingly be deterioration in benefits for some other groups. 3. We have already noted that the restoration of the earnings link is being paid for by a rising state pension age, which is particularly unfair for those groups in society who have a shorter life expectancy. 4. Now the proposed Single-Tier will in part be paid for by restricting the maximum scope of defined benefit state pension provision for workers who have never had, who no longer have or who may never have access to

3 occupational DB pension provision. Many of them in the past will have had no company pension provision at all. 5. Unite does not accept the notion that compelling employers to contribute a minimum level of contributions through the auto-enrolment provisions excuses a further reduction in the scope of state provision. Auto-enrolment was conceived as providing a supplement to an inadequate basis of state pensions rather than a replacement for it. 6. The Government, whilst highlighting the winners from the Single-Tier policy has also claimed credit for the policy resulting in a projected reduction in state spending (down from 8.5% to 8.1% as a share of national income by 2060). It has been much less forthcoming about exactly who the losers are from this policy, whose losses logically must outweigh the gains of the winners 7. Buried away in Annex 3 of the White Paper, is paragraph B.15 which says the following: The trade-off for the simplicity and clarity of a flat-rate single-tier pension is that the amount of pension that people can get will be capped at 35 qualifying years of contributions or credits. In practice this means that higher earners and those with longer working lives would be entitled to less state pension under the single tier than they would have been entitled to under the current system. 8. Losers are not therefore confined to higher earners, they also include people across the broad range of earnings who have longer working lives, as we will illustrate below. It will also hit people whose working lives include periods of credits, not just those who have been in paid work throughout. 9. Even higher earners, as a category, needs to be carefully considered as in this particular context only earnings up to 40,000 p.a are at all relevant.

4 10. The Table below illustrates why members at most salary levels who have been contracted-in throughout their working life will lose from the reforms. The calculations assume constant earnings but clearly members moving between the levels would be proportionately affected. The results are not materially affected if for part of their career they have been in receipt of credited years. It shows how total state pension benefits will change as a result of the reforms Illustration 1: Impact on expected State pension of Single-Tier for employees contracted-in throughout their working life Pay level Retiring in 2027 Retiring in 2037 Retiring in ,250-5% -8% -16% 26,500-13% -14% -20% 39,750-15% -16% -21% (Calculations provided by Bryn Davies FIA, an acknowledged expert on the state pension and private pension provision) 11. Figures for calculated for 2057 and beyond are slightly higher indicating a 20-25% loss across the income spectrum. As these will be people whose working career has been mostly in an area where contracted-in will become the only possibility they show the long term reduction in the quality of state pension provision for the great majority of people. 12. Under transitional terms, discussed below, many of those who have been contracted-out will stand to benefit from higher state pensions although those in the private sector may suffer reductions in their company scheme benefits which may offset part or all of that change. 13. In presenting analysis of the impact of the proposals the Government has highlighted those retiring in the near term, presented cumulative data for all those retiring after the new system takes effect in 2017 and taken into account the effect of the (somewhat uncertain) effect of an assumed higher rate of

5 increase in the Single Tier in payment than the increase as would have applied to State Second Pension benefits. In short it has spun the figures to show them in the most favourable light. 14. What this obscures, but cannot hide, is that after about 20 years the balance tips so that of those retiring there are increasingly more losers than there are winners. This is because as time goes on there are fewer outcomes shielded from the full effects of the new system by entitlements carried over from the present system and the reduced scope of the state pension becomes apparent. 15. SERPS was conceived in 1978 as providing an earnings-related defined benefit pension, providing a substantial addition to the Basic State Pension for those who did not have access to an employer DB scheme certified as providing better benefits. It was designed for those employees who did not have the advantage of membership of such a company scheme and was to be paid in addition to a Basic State Pension in excess of the Single-Tier Pension (as a proportion of earnings) that the Government now propose. 16. The original SERPS framework was a much better form of autoenrolment for employees than what the current auto-enrolment provisions provide for as it provided a higher benefit and it was on a defined benefit basis and compulsory for both employers and employees. Regrettably, SERPS has been devalued over the years. 17. The pensions landscape has changed dramatically with the wholesale move away from DB pensions in the private sector and the advent of contracting-out on a DC basis which has recently been discontinued. For a lot more employees now SERPS/S2P has become important as part of a DB foundation to their overall pension which helps underpin the DC benefits their employers now provide. 18. With the evolution of SERPS into State Second Pension a non-earnings related supplement for lower paid workers and carers was superimposed on

6 the earnings-related framework in an attempt to shore-up a failing Basic Pension and reduce the degree of means-testing. 19. The Single-Tier pension effectively ends the provision of a state earningsrelated pension and redirects the tax-benefits currently tied up in that into providing further reinforcement for the inadequate level of the Basic State Pension. NI contributions as would have provided employees with an earnings-related benefit are redirected to providing a non-means tested uplift to the current Basic State Pension. 20. The earnings-related element used to provide for those who were contracted-in to be able to add amounts which could add very substantially to their Basic State Pension, amounts which might serve to double their state pension entitlement. This provision has been removed at a time when it has never been more needed. 21. Unite is very much in favour of a higher Basic State Pension but believes it should have been financed out of current surpluses in the NI Fund, higher overall NI and progressive taxation rather than by the ending of earningrelated state pensions. A whole swathe of employees will end up receiving less State pension whilst seeing no change in their NI contributions. Transition issues 22. Employees who have been contracted-in are treated unfairly in respect of the transition provisions and this is the reason why they will feature highly amongst the losers from the Single-Tier policy. The Government is calculating that as their NI contributions will not change and as they often have a limited understanding of what their expected benefit is from State Second Pension then this will be easier to get away with. 23. A key design feature of the transition proposals has been to devise terms under which contracted-out employees, who will experience a rise in their NI

7 costs, will get something by way of an increase in their state pension above what they would have received from the State under the present system. 24. This has been portrayed as allowing them to increase their Single-Tier entitlement by 4.11 for each future qualifying year of NI contributions until they reach the standard amount of 144. As most of them would in any event have established an entitlement to a full Basic State Pension (of 107), then this potential will generally be limited to about nine years of 4.11 additions until they establish entitlement to the In practice former contracted-out employees net gain can be a lot less than 4.11 per future year if they have more than 9 years of qualifying years before their State Pension Age or they have already some entitlement to additional pension (as they have had a period when they were contracted-in or qualified for credits towards S2P). Outcomes will vary widely but generally those with longer to go before reaching State Pension Age will do much less well than those who are closer to State Pension Age. 26. For contracted-out employees, this scope to add to their Single-Tier arises because their SERPS/S2P replacement benefits are ignored when the scope to add to their state benefits after 2017 is assessed. This is done by the deduction of a rebate derived amount. So, a contracted-out member is subject to the limit of 144 on their Single-Tier pension but will receive all of their pre-2017 SERPS/S2P replacement benefits in addition to that. 27. Contracted-in employees will at the inception of Single-Tier be guaranteed a foundation amount of state pension benefit no less than what they had earned pre However, they will only be allowed to add further to their state pension if it is then less than 144 and the addition allowed will not allow it to go above 14. If it is less than 144 they can increase it by 4.11 for each future qualifying year. 28. This means that a contracted-in member who on the basis of their pre contributions under the present system has already built up an

8 entitlement of 144 or more will not be able to add to it at all. Contracted-in members with a foundation amount less than 144 will not be allowed to increase it above There will be some contracted-in members who already at inception have qualified for an amount of state pension greater than there single tier. Not only will they have no scope to add to their single state pension but their excess benefit will lose value, as compared to the present system, because it will be indexed only in line with CPI inflation rather than continuing to increase in value in line with average earnings. 30. The Government assert that this devaluation is compensated by the fact that the Single-Tier once in payment may increase in line with earning or through the application of the triple-lock whereas State Second Pension benefits would only increase in line with CPI. We would observe that this is a rough and ready compensation and that members' general preferences are to maximise their pension at the point of retirement 31. The illustration below shows a comparison of outcomes for a contracted-in employee and a contracted out employee member with a full career on average earnings retiring in They would have faired equally under the current system. 32. The Illustration shows that for the contracted-in person their state pension expectation is reduced by In 2017 they already established entitlement to an amount greater than the full Single-Tier pension (STP) and they are not allowed to add to it. Their protected pension, the STP benefit in excess of 144, loses value in real earnings terms. 33. By contrast, for the contracted-out person their expectation from state pension and State Second Pension replacement benefits (the rebate-derived amount) increases by This is because they are allowed to fully top-up the STP foundation amount they had qualified for in 2017 (so their total STP is 144 in 2037) but also retain in full the value of their rebate derived amount

9 (the part of their private pension which replaces State Second Pension benefits). Illustration 2 Transition Terms Compared Accrued in 2017 Current System 2027 Proposed System 2027 C/In C/Out C/In C/Out C/in C/Out Basic State Pension State Second Pension Rebate Derived Amount STP Foundation STP Additional Protected Pension Total (Calculations provided by Bryn Davies FIA, an acknowledged expert on the state pension and private pension provision) 34. It should be noted that many of these contracted-in employees are those who have not been fortunate enough to have access to a good company pension scheme. While they will not face an increase in their NI contributions they will of course be continuing to pay the higher levels of NI that contractedout employees are now to be moved up to.

10 35. This issue of unfair treatment in the transitional terms for contracted-in employees can only be resolved fairly if presently contracted-in members are given scope to accrue Single-Tier benefits above the level of 144 after 2017, as will put them on a par with contracted-out members. 36. This could be contrived by their being given limited scope to add to their benefits comparable to that being offered to members of contracted-out schemes, for example by the deduction of a notional rebate-derived amount.. Implications for occupational contracted-out schemes 37. Unite is opposed to the Government proposal for the new legislation to over-ride protected persons legislation applicable to people who were employees in the Rail, Electricity and Coal industries prior to privatisation. This is intended to allow employers in those industries to vary benefits and contributions to the extent necessary to recoup higher employer NI costs, should they wish to do so. 38. To persuade them to accept privatisation employees, at the time, were given a lifetime guarantee that their occupational pension terms would be maintained for the duration of their employment in the industry. The buyers of those industries accepted the commercial risk inherent in this provision and have no right to seek or be offered escape from that contract because of this particular reform. 39. The Rail employers, who account for the largest numbers of protected members have benefited from another key change in pension as a result of Government action i.e. the switch to CPI indexation of pensions, and did not generally offer members compensation for that. 40. While these reforms hold out the prospect of higher state pension benefits for protected persons, these future increased state benefits are not

11 guaranteed to endure. However, if they do not endure any change to protected terms would not be reversed. 41. Interfering with protected person terms would constitute an unacceptable precedent with an unpleasant overtone of retrospection. If the Government wishes to compensate these particular employers for an increase in their costs then it should do so at their own expense rather than inflicting the costs on the members Unite will be responding in due course to the DWP consultation on this aspect of the proposals. 43. The Government is also proposing that private sector employers with contracted-out DB schemes should be given a unilateral power to over-ride their scheme rules to recoup their additional NI cost. This is intended any restriction in scheme rules as might prevent amendment or any provision that requires trustee or member consent to rule changes. Employees will still be obliged to consult on scheme changes but it is suggested that they can do what they want, if they wish to, rather than seek agreement. 44. Unite does not believe these additional powers for employers are justified, and believes that these pressures on employers should be dealt with using the established processes in each scheme. They are sending a signal to employers suggesting that compensating changes ought to be made, which is generally unhelpful 45. In most schemes the employer has the power to make changes but requires trustee consent. In practice the employer is generally in a position to force trustee agreement to a change by having the reserve power to do something worse for the members. This often translates to a recognition that future benefits are effectively determined by the employer.

12 46. Where changes are proposed it is important that they should be fairly applied and the requirement for trustee agreement is the most likely thing to make sure that they are. 47. In a small minority of cases the employer might not be able to force through changes given their Scheme s current rules. These constraints on employer powers have all been introduced, at some point, with the agreement of the employer. As is the case with protected persons there is no valid reason why these powers should be set aside in this particular contingency. 48. The practical reality is that there is no way that a benefit or contribution adjustment can be made that will be fair to individual members, even if the adjustment were made with this objective in mind. 49. Depending on their age and past employment history, members will gain widely differing amounts from the changed basis of state benefits. So, even a straight contribution adjustment would be very unfair. Likewise a benefit adjustment is problematic as the cost of DB benefits within a scheme varies a great deal according to a member s age. So, any across the board benefit adjustment, e.g. a reduction in the accrual rate, would save widely differing amounts for different members. 50. There are other issues as will multiply unfairness e.g. where employers have more than one DB scheme and different benefit adjustments are made in each because of their different costs or employers whose schemes have more prudent valuation bases may find they can make smaller adjustments to benefits than employers with schemes with less prudent valuation bases. 51. There will be a general tendency for younger members to do a lot worse than older members as their future employment will generate a smaller increase in their state benefit relative to the extra NI contributions they have to pay and they will lose more from the changes proposed in their company scheme.

13 Submitted on behalf of Unite Gail Cartmail Assistant General Secretary Please direct enquiries to Bryan Freake, Unite Pensions Officer Unite Theobalds Road, London, WC1X 8TN February 2013 Submitted to : workpencom@parliament.uk Closing Date: 15 February 2013