Consider dropping single-tier proposals – Aon Hewitt

The DWP should consider dropping its single-tier pension plan because it may not meet the policy objectives set out in its White Paper says Aon Hewitt.

The consultancy says the government may wish to reconsider the faster flat rating of state second pension option because the single-tier option treats private contracted-out workers considerably more advantageously than contracted-in workers and gives public sector workers improvements to their state benefits with no compensatory reduction in scheme benefits.

In a submission to the DWP Select Committee, Aon Hewitt says the DWP may wish to reconsider the ‘faster flat rating’ option, of retaining the current system – including the retention of contracted-out DB arrangements – but accelerating the move towards a flat state second pension, albeit with the level set so as to meet the Government’s aims of controlling long-term costs.

Other options suggested by Aon Hewitt include increasing the single tier pension in level to reflect the National Insurance savings to be expected.

It also suggests including an offset for any notional State Second Pension rights that were in effect forgone by virtue of having been contracted-out in the past, with the offset being applied at State Pension Age, rather than at implementation. This might lead to savings that could be utilised to further improve the level of state provision.

It also suggests for those who have been contracted out, rather than set the foundation amount as being the maximum of the single tier pension at implementation, including a reduction to reflect contracting out, and the pension under the current system set it at the level of the single tier pension at implementation, including a reduction to reflect contracting out. Workers who have been contracted-out would then need to contribute for longer if they are to reach the full level of the single tier pension.

Or it may be appropriate that once an individual has built up the full single-tier pension entitlement, they are granted a National Insurance rebate, says Aon Hewitt.

James Patten, corporate pensions consultant at Aon Hewitt said: “What we are saying to the government is be aware that there are certain implications to what is proposed that they may have not foreseen.

“Firstly the change to the new system would be more favourable to those people who have been contracted out versus those that have always been contracted in. Provided they have a reasonable number of years to go before reaching retirement, these people will be able to earn a single tier pension which is the same or close to that received by those who have always been contracted in.

“And secondly, when we look at public sector pensions in isolation, the question we raise is whether both the implications of the State Pension Review and the abolition of contracting-out were taken into account in the Government’s response to Lord Hutton’s review of public service pensions, and, if not, why it is that public sector employers will not be able to change benefits or member contributions to take account of the end of contracting-out in the way private sector employers can?”

“So one option is to retain the two tier pension scheme and contracting-out but with the second tier being flat, or alternatively consider introducing an adjustment so there is some form of deduction to any period that people have been contracted-out. The savings that arise might then be used to give a higher state pension overall than under the current proposals.”