It aims to reform the state pension system in
line with four guiding principles:
- personal
responsibility – enabling individuals to take responsibility for meeting
their retirement aspirations;
- fairness
– ensuring an adequate level of support for the most vulnerable and
ensuring all groups are treated fairly;
- simplicity
– simplifying the state pension so that it is easier for people to plan
for their retirement; and
- affordability
and sustainability – any option for reform must be cost neutral.
The Government believes it is necessary to
reform the state pension for future pensioners and is seeking views on two
options as described below.
OPTION
1: Faster Flat Rating
Option 1 is to consider accelerating the pace
of the existing reforms so that S2P transitions to a flat rate payment by 2020.
This would be achieved by lowering the Upper Accrual Point (UAP) to the Low
Earnings Threshold (LET) over a 7 year period and thus removing the
earnings-related band for S2P. From 2020, S2P would be a flat rate payment of
£1.60 per week (revalued by earnings) for each qualifying year.
Therefore, in the longer term, individuals
contributing to the BSP and S2P for 30 years would be entitled to a state
pension of around £145 per week, albeit through two tiers.
People with 30 qualifying years would be
entitled to qualify for the full BSP, but contributions paid to S2P over a
working life (16 to SPA) would count towards entitlement.
The method of uprating the two different
elements of state pension would continue as now; the BSP would continue to be
uprated in line with the “triple guarantee” and S2P in line with Consumer
Prices Index (CPI).
Under this option, contracting-out would
continue for members of Defined Benefit (DB) schemes, but the value of the
rebate would be reduced over time.
The Government acknowledges that under this
option the reforms would take a long time to feed through and a majority of
people could expect to receive a state pension that lifts them above the level
of means-tested support only by around 2050.
OPTION
2: Single-Tier State Pension
Option 2 is the more radical approach of
combining the BSP and S2P into one single-tier state pension set above the
Pension Credit standard minimum guarantee. S2P would end for future pensioners.
To qualify for a full amount of single-tier
state pension – around £140 per week, individuals would, as now, have to build
up 30 years of National Insurance contributions or credits. Under this option,
everyone would qualify individually, whether single, married or divorced, and
the self-employed would be able to build up entitlement.
There would be a minimum of seven years of
contributions to qualify. The whole of the single-tier state pension would
increase in line with the triple guarantee and the Savings Credit element of
the Pension Credit would cease to exist.
Under this option, contracting-out for DB
schemes would end. While it is intended that this would simplify the system
over the long term, it is acknowledged that this will create administrative
issues in the short term. During the transition, many individuals would receive
their single-tier state pension from a combination of their state and
contracted-out scheme, as happens now.
Changes
to the State Pension Age
The Government is also considering how to
take into account changes in life expectancy when setting the State Pension
Age. The two options are:
- increasing
the State Pension Age through a formula linked to life expectancy
projections; or
- increasing
the State Pension Age through pre-determined regular reviews.
It is keen to set a mechanism which sets the
balance between taking into account longevity increases in a timely fashion,
while still allowing individuals to prepare for their retirement.
The consultation will close on 24 June 2011.
