Thinktank says state pension faces fiscal calamity as it calls for its replacement

3rd November 2016

The state pension is no longer fit for purpose and is facing fiscal calamity argues thinktank the Centre for Policy Studies. The CPS says total spending on the state pension has increased by 25% since 2010-2011 and it is proposing radical reforms although some pension experts say the proposals would cause uproar.

The CPS adds that in the last year, the National Insurance Fund (NIF), which funds the State Pension, received £84 billion in NICs, but paid out £92 billion in benefits including £86 billion as the State Pension. The CPS argues it required bailing out by a £4.6 billion Treasury grant.

Furthermore, due to the diversity in UK life expectancy, a universal State Pension age (SPA) is increasingly unjust particularly to poorer citizens. For example, on average Tottenham Green man’s return on his NICs, in the form of his state pension, is only about a quarter of that of Chelsea man’s.

Michael Johnson urges the Government to take action in a report ‘The State Pension: No Longer Fit for Purpose’ he proposes that the State Pension is put into “run-off” and replaced with a Workplace ISA and a new residency-based Senior Citizens’ Pension (SCP).

“Run off”

The State Pension should be put into “run-off”, so that, from 2020, no further “entitlements” would be created. Past “entitlements” would be honoured, as the legacy State Pension, which should be means-tested, along with the whole range of other pensioner benefits.

Senior Citizen’s Pension (SCP)

A residency-based Senior Citizens’ Pension (SCP) should be introduced, payable from the age of 80. All non-pensioners in 2020 would be eligible for it, thus the first payments would be made in 2034. Perhaps set at £200 per week, it would be 30% larger than today’s full State Pension.

Workplace ISA

The SCP should be complemented by a Workplace ISA, to accommodate employer contributions made under automatic enrolment (AE). This would be significantly pre-funded by the State via a 50% bonus, up to a modest annual cap, with no access to assets permitted until 65. The 15 year period until receipt of the SCP invites structured draw down or annuitisation. Thereafter, the SCP would socialise longevity risk across the nation. There is an opportunity to introduce the Workplace ISA in the 2017 review of AE.

Michael Johnson says: “In 2014 the then Chancellor announced “Freedom and Choice” which, by ending the requirement to annuitise, gives individuals greater flexibility when accessing their pension savings, i.e. more control. The public response has been very positive.
Subsequently, the Lifetime ISA was announced, potentially indicating a change in direction for how long-term savings are taxed. Meanwhile, company DB schemes are withering on the vine, and automatic enrolment into DC schemes has become an integral part of the retirement savings landscape.

“The proposals in this report, to replace the State Pension, take into account the broader pensions and savings environment. They are consistent with the direction of travel initiated in 2014: their purpose is to complete the journey, set against a pervading ethos of personal responsibility. They explicitly embrace the message that work pays, while providing a robust safety net for those who need it.”

The pension industry says the proposals would cause uproar.

AJ Bell senior analyst Tom Selby says: “The solutions proposed in this paper would likely cause uproar. The Government has already faced protests over relatively modest increases to the state pension age – there would be riots in the streets if they hiked it to age 80 overnight.

“We do, however, support the idea of establishing an independent commission to review the pensions tax system and bring a period of stability for savers. Rather than tearing up the foundations of the UK retirement market, the Government should task this commission with evaluating the system we have now and recommending what, if any, reforms are necessary.

“If changes are made they should simplify, rather than complicate, the system and encourage more people to save for their retirement.”

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