Pensions minister Ros Altmann has raised seven points of contention with Hymans Robertson’s report on losers in the transition to a single-tier state pension, following a public row over its coverage last week.
The DWP’s move is in response to a request from Corporate Adviser for clarification as to the basis of her statement the consultancy’s release was misleading and scaremongering, wording for which she has subsequently apologised.
Hymans Robertson has responded to each of the challenges, arguing that contracted-in workers already at the single-tier maximum of £151 next April lose around £2.75 a week state pension for each year they work up to state pension age, even though they will continue to pay full National Insurance Contributions.
Corporate Adviser asked the DWP what assertions in the Hymans Robertson report are incorrect. Here are The DWP’s seven criticisms of the Hymans Robertson report, as well as Hymans Robertson’s responses to them.
Department for Work and Pensions: The picture is not black and white, as this release suggests. It is not correct to describe the new State Pension system as complex. This is a misrepresentation. It is the old system which is complex and that is part of the reason why a new State Pension was needed. Each individual has different circumstances and for most people those circumstances change over their period of entitlement. It is therefore the case that someone may benefit from some elements of the changes, but not benefit from others – it is not as simple as discussing people as winners or losers, as each person’s circumstances throughout their working lives need to be taken into account.
Hymans Roberston: What we have highlighted is the complexity in understanding how an individual will be affected, and particularly the complexity in the transition from the current to new regime. For those approaching retirement the picture is far from clear. The fact that some people benefit from elements of the change and others don’t is testament to the fact it is ‘complex’. People won’t be able to work out their starting amount – they will need to be told. That proves it’s not as simple or as straightforward as some may think.
We’ve always said that trying to simplify the State pension is commendable. However, as the changes are being pushed through in one sweep rather than in phases, this has thrown up anomalies where different groups of people are being treated unfairly.
DWP: Those who have contracted out will not ‘lose out’, as outlined in the Hymans Robertson press release. In fact the majority do better in the new system than the old. Where someone has a lower amount of new State Pension because they were contracted-out in the past, they will have paid less National Insurance into the state system. They will have built a private pension in another scheme. If they had still been paid the full new State Pension, then effectively they would have two pensions while people who paid higher National insurance only have one.
Hymans Robertson: We highlighted in our press release that the majority of those who had contracted out would be winners under the new system. On the face of it most of them win because they keep their private pension and get a higher pension from the state. In terms of those who lose, we drew attention to low earners who are contracted out who will earn less state pension each year going forward because of the loss of the State pension top up, and those who lose increases on part of their scheme pension.
DWP: This following statement needs clarification: “Those who have accrued more than £151 will not be able to accrue any more State pension after April 2016, but may have to continue paying higher NICs for no benefit”. These people won’t see any change in their NI rate. They will of course benefit from a ‘Protected Payment’, uprated in line with prices, and under the current Government will also see the value of the full new State Pension uprated by the triple lock.
Hymans Robertson: The point we are making is that if someone has accrued full STP they don’t get a reduction in NICs. At the moment if you are paying full rate NICs and are contracted in you continue to accrue additional State Pension each year until you reach SPA. So these people may be accruing around £2.75pw of additional State Pension each year. Going forward they will get nothing (except if over STP CPI on protected amount). On the face of it, that isn’t a great deal.
DWP: The new State Pension will simplify the system – and this research does not take this into account. With so much complexity, people generally had no idea how much they would actually get from their State Pension in future. Some people (especially higher earners) could have built up thousands of pounds more state pension each year than others on lower incomes, or with interrupted work history, women and the self-employed often have much lower levels of State Pension than men and higher earners. This left nearly half of pensioners in line for means-tested benefits, but anyone on means-testing could see their private pensions or earned income penalised. This is to change, with the proportion of new pensioners on means tested Pension Credit is expected to fall by half.
Hymans Robertson: We support women and others on low incomes getting more State pension and highlighted these as winners in our analysis. However, the State pension changes result in an overall lower spend to the Government (0.4 per cent to 0.6 per cent of GDP) and result in a huge redistribution of benefits within that lower cost envelope. The majority of the “winners” from this redistribution are not low paid women – they are employees with actual (or prospective) long periods of contracted-out service (e.g. the Public Sector) and the self-employed. The speed of the transition means that the re-distribution of spend on state pensions is pretty extreme. Many people will not know how much they will get from their State pension in the near future – that’s the point of our research.
DWP: Hymans Robertson say that people who were contracted out for short periods in the 1980s/early 1990s could be worse off to the tune of £20,000 over their retirement – but their research is not clear. How much deduction do they claim people were expecting, and what is this expectation based on? In fact, around 90 per cent will gain enough state pension over and above what they would have received under the current system to offset the extra NICs and any adjustments to their workplace pension scheme.
Hymans Robertson: The Government appears to be overlooking the impact of the loss of increases on Pre 88 GMP. In its own technical note the DWP shows someone with pre 88 GMP of £18 and shows that in year one of payment if CPI is 2 per cent the person loses out on 36p a week which is £18 a year.
DWP: The Hymans Robertson release asserts that other losers include those whose foundation amount is less than the Single Tier and who don’t have enough years left between now and SPA to make up the difference. In actual fact this group will retire on approximately what they would have built up in the old system – and around 20 per cent will get more.
Hymans Robertson: While this group will retire on what they had under the old system, they will not receive the full £151 so will see themselves as losers. This is because publicity around the STP has led most people to expect they will get the full £151 which isn’t the case.
DWP: As with any pension reform, it is important to consider the longer-term and the aim of the new system is to ensure future sustainability and affordability of State Pensions for future generations. This research does not take this into account.
Hymans Robertson: We recognise this and our press release highlighted that the Government estimates that it will save £8bn p.a. from implementing the new State pension. For the Government to expect spending on state pensions to reduce as a result of the reforms, then on average most people must be ‘losers’. We were primarily concerned that many individuals would not be aware of how much they would be entitled to, hence why we highlighted who would win and who would lose.