Government Shake-up For The State Pension

On 14th January 2013, the Pensions Minister, Steve Webb, unveiled a radical reform of the UK state pension system. The current two tier system consisting of the Basic State Pension and SERPS/State Second Pension is to be replaced with a single tier pension with effect from April 2017. The detail is contained in the draft Pensions Bill 2013.

The main drivers behind the reforms are:

- Simplicity for a system which is inherently complex and difficult to understand and to administer;

- Solid platform for individuals to save for retirement;

- Clarification of what individuals will actually receive when they retire; and

- Fairness for certain sectors of the workforce who currently miss out on a decent state benefit.

The new unified flat rate pension

The new state pension rate will be £144 (in today's money) per week. This simple flat rate of pension is set above the basic level of means-tested support (currently £142.70 per week for a single pensioner). To be eligible for the full amount, an individual will require 35 years of National Insurance Contributions (NICs) or credits (it will still be possible to top up NICs to increase the number of qualifying years). Those with a lower number of qualifying years will receive a proportionately smaller amount, however a minimum qualification threshold of between seven and ten years will be introduced so that only those who make 'a significant economic or social contribution' are eligible.

But there's a catch….

Under the contracting-out regime, schemes undertake to provide a pension broadly equivalent to the State Second Pension in exchange for lower NICs. The introduction of single tier pension means the end of: (i) the State Second Pension; and (ii) the ability for defined benefit pension schemes to contract-out of the State Second Pension.

This means, for previously contracted schemes an increase in NICs for employers and employees in defined benefit pension schemes. For employers this is 3.4% of NI earnings and for the six million employees affected it will be an extra 1.4%. Many employees are likely to find this hike unaffordable whilst employers will be hit hardest having to divert even more resource away from their business objectives. A proposition that many sponsors of defined benefit schemes will find difficult to swallow. That said, in order to allow employers to mitigate this cost, the draft legislation includes a limited override to enable employers of contracted-out schemes to amend their...