The Future of Pensions: will recent pension changes alter levels of pensioner poverty?

Nov 16, 2015 | BLOG

By: Liam Foster

This blog is one in a series of blogs on the Future of Ageing, published in the lead up to the ILC-UK Future of Ageing conference on the 24th November. To register to attend this conference, click here.

Drawing on an article written for In Defence of Welfare 2, this blog considers the extent to which pension changes made under the Coalition government represent a more positive future for pensions.

Since its conception Beveridge’s blueprint for pensions has been built upon in piecemeal fashion by British governments. Ultimately, these changes have failed to halt concerns about the future sustainability of the pension system. The Coalition government announced a number of measures designed to transform the complicated pension landscape during its time in office. Changes included accelerating the rise in the State Pension Age (SPA) and reforming the indexation of the Basic State Pension (BSP) in order to halt the decline in its value. The State Pension system will be substantially reformed, with the BSP and state second pension (S2P) replaced by a new Single-tier State Pension (STP) set at approximately £151 per week (in 2015-16 prices) for those below the SPA in 2016. It is claimed that the STP will eventually be easier to operate than the current system.

The introduction of the STP is intended to provide the foundation for auto-enrolment. The intention of auto-enrolment, phased in from 2012, has been to offer an occupational pension to people without access to good-quality workplace provision, while co-existing with the latter if they have benefits above the minimal National Employment Savings Trust (NEST) scheme. The logic behind auto-enrolment is that, while structured information may improve understanding, behavioural barriers, including myopia, cynicism and inertia, inhibit pension saving. The Coalition government also enabled flexibility in the way a Defined Contribution (DC) pension fund could be used from the age of 55, removing the requirement to annuitise 75%.

But what do these measures mean? The accelerated rise in the SPA means approximately 4.4 million people will have to wait up to a year longer for their state pension. While the ‘triple lock’ measure is to be commended, use of the more realistic Retail Price Index, which reflects rising costs of essentials such as food and energy, would help the poorest pensioners. In principle, the introduction of the STP is a welcome development for many low earners. However the STP will only replace about 25% of national average wages. In the short term it may provide a stronger foundation than the current system for some individuals (although long-term prospects are less positive). Women will be less likely than men to receive the full amount, given their breaks in employment, if these do not all qualify for NI credits. There are also large numbers who are already retired or due to retire in the near future that will be excluded from the STP. The change to STP is expected to reduce pensioner poverty from its current rate of 11% to 10% by 2025. However, if the STP were available to all, including existing pensioners, this would reduce pensioner poverty to 7%.

The introduction of auto-enrolment may increase numbers of lower earners saving into private pensions, but it is not without risks. All Defined Contribution (DC) schemes, including the government–sponsored NEST, individualise risk. Employees earning below £10,000 pa are not auto-enrolled and those earning below £5,772 p.a. may opt into NESTs but will not attract an employer’s contribution. This may incentivise employers to keep wages low and restrict hours of work. As in other private pensions, no credits are provided for periods of family care for children or parents. Alternatively a fully portable voluntary ‘pay-as-you-go scheme’, including carer credits, could be operated, thus avoiding the penalty for caring years which is incurred in private pensions.

In sum, the impact of these pension changes is mixed. The STP will be easier to operate, but its level and inclusiveness need to be improved. While the new pension regime may eventually reduce complexity and encourage retirement saving, it will not reduce the gap between the poorest and the most affluent pensioners.

Liam Foster

Senior lecturer - Social Policy and Social Work, University of Sheffield

Liam’s research interests include: gender and pension provision, gender inequality in the workplace, funeral provision and poverty, disability and ageing research, theories of ageing, and the sociology of sport.