IFS says more losers than winners in state pension reform

14th January 2013

It is certainly not the reaction that pensions minister Steve Webb would have been hoping for. The Institute for Fiscal Studies has run its ruler over the Government’s state pension reforms and decided the changes mean more losers than winners in the long run. The unions are also fearful that any state pension gains may be wiped out by cuts in final salary and career average entitlements with yet another standoff between the Government and the public sector brewing. 

The IFS verdict in particular will upset the Government which was hoping to convince the public that most people would benefit from the change. Some of the initial headlines were favourable. The Daily Mail deemed the reform a “£155 pension boost for stay-at-home mothers” for example.

The economics think tank does says that some people will benefit, for example, the self employed, who have not picked up their state second pension entitlements.

But more broadly the IFS has told the country that many people will be less well off in these observations on its website. At the heart of the IFS argument is that the change implies a cut in pension entitlement which most people build up year by year, because the actual accrual rate for the pension benefit is lower than under the current system. The IFS says those accruing state pension entitlement already represent a wide group of people such as those in employment, but also the unemployed and those looking after children aged under 12. It says that in its calculations benefits accrue at £5.05 of additional state benefit for every year worked for lower earning groups and at a higher rate for higher earners, while £4.11 is what is on offer under the new system i.e. less year by year.

The upshot is many people will accrue less pension.

There are also worries that the abolition of contracting out could remove a big source of funding to final salary schemes. That applies whether the schemes are funded or partially funded public sector schemes. It could see some big funded schemes close and it could leave schemes adjusting the rate at which benefits are accrued downwards so, for example, they might be under pressure to move from paying benefits worth 1/60 of salary for a year's service to say 1/80 of salary. So while some public sector workers may get a better state pension they may also see their employers, whether a company or a public sector employer, under pressure to cut what they receive.

That explains the trade union oppostion.

Karen Jennings, Unison's assistant general secretary said: "These changes are being lauded as a good deal for pensioners, but it is worth remembering that £144 is still well below the poverty line, and more will need to be done to prevent workers finding themselves desperately poor in retirement.

"Who will be worse or better off following these changes will depend on salary growth, which remains stagnant for many workers, including millions in the public sector, and inflation, which continues to eat at the income of low earners.”

And Unite's assistant general secretary, Gail Cartmail, said: "These proposals could present real dangers to workers in the private sector. The new system will involve higher national insurance for employees currently in contracted-out defined benefit pension schemes, and higher national insurance for their employers as well.

"There is a danger employers will seek to claw back the cost by reducing the quality of their current pension scheme. The end result could mean any gain in state benefits will be wiped out by increased costs to employees in the private sector."

It seems the government still has a lot of convincing to do.

Leave a Reply

Your email address will not be published. Required fields are marked *