SAGA: week state pension reform

The Government has just released a summary of the responses to its consultation on reforming the State Pension. The overwhelming majority of responses supported a flat rate state pension of around £140 a week (in today’s money) which would remove the mass means-testing of future pensioners and finally make it safe for most people on moderate incomes to save in a pension scheme.

The DWP will now be working on its own response to the consultation, as it decides how to proceed with state pension reform. I would expect a Green or White Paper later this year or early 2012 and it seems clear that, with overwhelming support for the most radical option, we are likely to get meaningful reform proposals. Of course, as always with pensions, the devil will be in the detail and we will have to see what is actually finally decided, but Steve Webb has been in favour of a flat-rate state pension for many years, so I would expect that to be the new future for state pensions.

It will be vital also to see how the Government proposes to tackle the transition from our current system, to a new system. This will not be easy, but politicians - and even the Pensions Commission - have ducked such much-needed reform for far too long and it is fantastic that this Government seems determined to finally get to grips with the scale of required reforms.

Saga submitted a response to this Consultation and our comments feature heavily throughout the document. We highlighted the long overdue need for radical reform of our state pension system, which is far too complex and which undermines private pension saving. [Saga’s response is in the notes to this release].

The Government identified four guiding principles for state pensions that are fit for the 21st century. They were fairness, simplicity, affordability/sustainability and encouraging personal responsibility. It is only the flat rate simple state pension that will achieve these objectives in the future. Any other system that retains or tinkers with the current pension system without radical overhaul, will not be simple, will not be sustainable, will not encourage personal responsibility and will retain many unfairnesses such as the unfair system of ’contracting out’ of state pensions which allows some workers to pay far less national insurance than others even in publicly funded, unfunded, pension schemes. Ending contracting out could save large amounts of money.

Our major concerns about the reform proposals revolve around the fact that this new pension system will not apply to existing pensioners, only to those in the future, however it is of course welcome that future state pensions will be far better for the disadvantaged groups and easier to understand than the current complex mess, which almost nobody comprehends.