FOI Act enquiry reveals full scale of single-tier losers

Contracted-in men and women across low, medium and high income groups retiring in all years after the introduction of the planned single-tier pension will receive less than they would have done under the current system, raising serious questions about the Government’s claim that the new system helps low earners, a Freedom of Information Act request has revealed.

The request, made by Corporate Adviser, shows workers with long employment histories across all age and income brackets are substantial losers under the government’s state pension reforms. Contracted-out workers, who are more likely to already have pension provision, and who do not form part of the auto-enrolment target audience, stand to gain more from the reforms, the figures show.

Males on £14,000 reaching state pension age in 2025, 2035 and 2045 would have received £158, £171 and £193 respectively in 2013/14 terms, the Department for Work and Pensions has confirmed, but will receive just £150 under the single-tier proposals.

Their contracted out counterparts would have receive £132, £144 and £165 respectively, but will all have sufficient time to build up the full £150 single-tier pension, and will get to keep their contracted out pot as well.

Females on £25,000 reaching state pension age in 2025, 2035 and 2045 would have received £184, £190 and £202 respectively. Their contracted out counterparts would have received £122, £133 and £152 respectively, again all having time to rebuild their state pension to the same level as contracted in women.

The Freedom of Information Act enquiry has also revealed figures that give an approximate picture of the number of low earners who would have qualified for state second pension but will not qualify to be automatically enrolled into a workplace. The DWP was not able to give a figure for those earning less than £9,440, the earnings threshold for auto-enrolment. But it did confirm that in 2011 a total of 4.17m people earned between £5,200 and £10,399, of which 2.44m were women and 1.73m were men. Of these, there will be some people who did not build up contributions towards S2P on the basis of their Class 1 contributions, who nevertheless get a NI credit towards S2P for other reasons such as caring. A further 3.8m men and women earned less than £5,199 as at April 2011.

Hymans Robertson partner Chris Noon says: “What jumps out at me is the £193 per week pension that the person retiring in 2050 would have received. This confirms our figures which show that low paid employees will be hardest hit by the move to the single-tier arrangements. For these individuals this shortfall is circa £1,600 a year – or roughly a 25 per cent reduction in state pension.
“The DWP are clearly aware of this impact and it was raised by us and a number of other consulting as part of the select committee review process. The Government and the industry seem to be ignoring it because they think the simplicity is worth it – and what’s more are claiming that it’s all about benefitting the low paid. They’re getting away with it because of the complexity in State pension provision but if these individuals realised that they were losing about £40,000 of value it would be a different story.”

Towers Watson senior consultant David Robbins says: “This set of State Pension reforms will claw back part of the extra cost that Parliament loaded onto the system in 2007, just before the financial crisis broke.  Unsurprisingly, a system designed to save money in the long run will produce smaller pensions for most people in younger age groups.  These cutbacks might be needed to make the system sustainable but will be harder to swallow because the Government is simultaneously giving a State Pension windfall to older workers who spent much of their career in good final salary schemes in the public sector and elsewhere.” 

A DWP spokesperson says: “We have always said our state pension reforms will tackle the complexity of the current system, and will work alongside automatic enrolment to help people to plan better for their retirement. Those people who have been contracted in will have their NI contributions recognised in the new system. For example, if someone’s NI record at implementation would give them £160 in the current pension system, they cannot get less than this under single-tier. Most people will not have been contracted into the second state pension for their entire working lives.”

Outcomes for people reaching state pension age in selected years, earnings £14,000 a year in 2013/14 terms. Source – DWP

Gender Contracted in/out Year reaches SPA Current system: Average weekly state income over retirement (2013/14 earnings terms)

Male

Contracted in

2025

£158.00

Male

Contracted in

2035

£171.00

Male

Contracted in

2050

£193.00

Male

Contracted out

2025

£132.00

Male

Contracted out

2035

£144.00

Male

Contracted out

2050

£165.00

Female

Contracted in

2025

£158.00

Female

Contracted in

2035

£170.00

Female

Contracted in

2050

£192.00

Female

Contracted out

2025

£131.00

Female

Contracted out

2035

£144.00

Female

Contracted out

2050

£164.00