Pensions overhaul to fix system ‘in crisis’

Work and Pensions Secretary Iain Duncan Smith and Pensions Minister Steve Webb have laid out plans for radical changes to the state pension, which is available to most people across the country.

In a consultation paper, the Government suggested two routes for reform, the “more radical” of which would see higher basic payments for everyone funded by scrapping the second state pension which currently exists, and removing the savings credit.

The paper includes plans to increase the current basic rate of at least £97.65 to £140-a-week. Over the next five years, the Government also plans to remove means-tested credits, which currently see nearly half of all pensioners claim £132.60 a week as a result of top-ups and added, means-tested, extras.

The second state pension, which is linked to earnings, could also be phased out, and the retirement age for men and women will be set at 66 by 2020. Separately, the Government also plans to require employers to enrol employees automatically in private schemes to boost private pension savings.

It’s so complicated that nobody understands it…far too few people are saving as a result. Iain Duncan Smith

The plans are all part of a move to simplify the pensions system, in a similar way to the benefits system, and also to encourage people to save privately as well as relying on the state.

Iain Duncan Smith said: “What we have said is that two things exist. The first is that it’s so complicated that nobody understands it and (they) need to get this right for an income in retirement.

“The second thing is that far too few people are saving as a result. Seven million people don’t save at all towards their pensions right now. The third element, and really where it’s quite critical, is that it acts as a disincentive to save because right now nearly half of all pensioners are on a pension credit top-up which means basically it’s a crisis so we need to change that.”

Launching the reforms, Mr Webb said the system would be “simpler and fairer” for retiring workers – but the Labour Party questioned the winners and losers under the new scheme.

Winners and losers
So there are clear winners: and remember we are talking about future generations of retirees here, post 2015.

1. Poorer pensioners win by getting a little bit more: about £7 a week. (Don’t fall for the comparison with £155. Like-for-like a move from £133 to £140).
2. One million-plus underclaimers benefit the most – by the £40 a week that they weren’t claiming. This raises interesting dilemmas about progressivity. If they really needed the money, would they not have claimed it?
3. Separately stay-at-home mothers will find that their years looking after children will no longer decrease their state pensions.

But as Steve Webb admitted to Jon Snow on tonight’s Channel 4 News, all the winners, the giveaways will be paid for by takeaways elsewhere. And wheras the Government has been keen to push the radicalism and generosity of its plans, it seems rather more shy about explaining who will lose.

So let me tell you. There will be millions of losers too.

Read more from Faisal Islam on pensions: what you are not being told about the retirement revolution 

Clearer

Andrew Cawley, KPMG‘s Head of Pensions, told Channel 4 News that the changes would improve the system.

“It is now much clearer what the state provides,” he said. “People now have a much clearer idea of what the state will give them. Before with the second state pension, I think many people starting off their working life were confused about saving.

To me, getting a flat is more of a priority than a pension. Chris Jones, 27

“If we make pensions simpler, that’s the first step to people thinking, I should do more for myself. The other point is that for people on lower incomes, the new enhanced state pension implies heavily that we will see a removal of means-tested benefits. Our view is that these have been a disincentive to save – people didn’t know if it was worth saving because you may not get the benefits.”

Young people

The Work and Pensions Secretary Iain Duncan Smith said that one of the key groups he wants to help is young people.

“The key problem for us is that young people growing up now are going to take the burden of debt that we owe right now. They will have to pay for their grandparents and parents in retirement, and they will have to save. We therefore have to help them to save properly,” he said.

Channel 4 News has looked into the potential pensions timebomb of young people not saving for their retirement.

KPMG’s Andrew Cawley says that the Government’s changes to state pension will help – but the key issue is getting young people to set up their own pensions and save privately.

According to statistics from the Department for Work and Pensions, given to Channel 4 News, four out of five 18-24 year-olds admit they have no long-term savings plans in place – despite the fact that they are likely to spend more than 20 years in retirement as life expectancy increases.

In another recent survey, the DWP found that only 11 per cent of 16-24 year olds contribute to any type of private pension. This increases by the time they are 34 – but only up to 43 per cent.

‘Not a priority’

Chris Jones, 27, works as a credit controller in central London. He does not have a pension, and says that saving for a flat is more important than a pension to him.

“It’s not a priority to me right now,” he told Channel 4 News.

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“I moved back to my parents’ house so I can save more money each month, to go toward a house deposit. To me, getting a flat is more of a priority than a pension. Having been at home for over a year, I’m now looking to rent the least-expensive decent room I can find, so that I can continue to save for a house deposit. But with rents so high it is going to be difficult to save a meaningful amount each month.

“Also I was alarmed during the BP oil spill to hear that a big proportion of pension funds was tied up in BP shares – which obviously fell sharply in that time. It made me feel that perhaps other forms of saving were more secure, like ISAs for example.”

But he said he is worried about retirement.

“I am worried – gradually more so,” he said. “I probably earn above the average wage, but I am not able to save for both a house and a pension. I really do feel getting on the property ladder is more important in the short to medium term, or at least I feel like I ‘should’ do that first.”

I learned stupid stuff like how to sign a cheque in school – why did I not learn about pensions? Lisa McDowell, 24

Like Chris Jones, young people tend to believe that retirement is too far away to worry about – and have other financial pressures to consider, including paying back university debts and saving to buy a house.

But as life expectancy gets longer, worryingly, private saving seems to be slipping.

A recent Family Resources Survey found that between 1999/2000 and 2005/2006, the proportion of young people contributing to a private pension “declined rapidly”, while other age groups’ contributions remained steady.

This is despite the fact that the earlier people save, the better for their long-term security. Every £1 invested in your twenties could be worth 40 per cent more than £1 put aside in your forties.

Lisa McDowell is a 24-year old management consultant working at The Foundation. She believes it is her responsibility to save for her pension – but is still in the dark about the UK’s complicated system.

“It’s my responsibility to save for my retirement. I got a pension on the first day of my first job because my employer told me I should – but I have no idea what I contribute to it or what they contribute,” she said,

“I also don’t know about the state pension – do I get one? It should definitely be clearer. I learned stupid stuff like how to sign a cheque in school – why did I not learn about pensions?”

Pensions Minister Steve Webb told Channel 4 News young people should save for a pension – even graduates who will now face tens of thousands of pounds of debt because of higher tuition fees.

“Even a relatively small amount when you’re young builds up over the decades to when you retire so it’s worth getting started,” he said.

“The thing with tuition fees is, at the moment as soon as anyone earns £15,000 they have to start paying back their graduate debt. Under the new system it will be a threshold of £21,000 so all graduates will have higher debt overall but will be paying it back more slowly so month by month they will have more disposable income and a bit of cash perhaps to save for a pension.”

Despite the debt young people will find themselves in the Minister said they should still be thinking of the years ahead: “There’s always a reason for putting things off but if we don’t act now millions of people who will making pensions choices in the next few years, they may make the wrong choice.

“They may decide not to start saving because it’s too complicated. Now is exactly the right time to be bringing in a new simpler system for the next generation of pensioners.”

KPMG’s Andrew Cawley told Channel 4 News that there was a “generational issue” of fairness – but the babyboomers and credit crunch were not to blame. Instead, the fact that we are all living longer is why the state system needs reform, as well as why people need to take responsibility for their private pensions.

“The pensions that the babyboomers are getting now – the cost of these benefits is not sustainable so in a sense there is a generational issue here,” he said. “The biggest issue is that we are living longer. People in their twenties will probably see another increase in state pension age.”

Whatever happens to the state pension, young people have to take responsibility for their futures, Mr Cawley said.

“The message is that people need to look at saving earlier and saving longer.”