Tech talk
Pension Reform - White Paper - TT20/06
The Government has published a White Paper, "Security
in Retirement : towards a new pensions system", in response
to the Pensions Commission's report which was published in
November 2005. The Government has accepted most of the recommendations
of the Pensions Commission, the main proposals of the White
Paper being as follows.
Personal Accounts
From 2012 a new low cost pensions savings vehicle will be
introduced. Referred to, in the White Paper, as a personal
account, the proposals are along the same lines as the Pensions
Commissions' National Pensions Savings Scheme, i.e.
- Employment based
- Automatic enrolment into a personal account unless
employee has automatic enrolment in a "suitable alternative
workplace scheme"
- Membership from age 22
- Right to opt out
- Minimum contributions, based on earnings between
the Primary Threshold for NI contributions (approx £5000)
and the Upper Earnings Limit (approx £33,000), will
be
- Employee 4%
- Employer 3%
- Tax Relief 1% (where applicable, higher-rate tax relief will
be available)
It is the intention to phase the employer contribution over
the initial three-year period, at a rate of 1% per year. The
Government will consult on transitional support for small
businesses and whether a longer phasing in period is needed.
- To be available for the self-employed and those who
do not work.
A suitable workplace scheme is one that is at least as favourable
to employees as a personal account, for example contributions
to a DC scheme must be at least at the same levels as to a
personal account.
Later this year the Government will publish proposals as to
the best model for delivering the personal accounts deciding
from suggestions put forward by the Pensions Commission and
the pensions industry.
Reforms to State Pension
The Government agrees with the Pensions Commission that S2P should be moved to a flat rate from 2030. In addition the
following changes are proposed:
- Basic State Pension to be indexed in line with average
earnings from 2012 at the earliest, but could be as late as
2015 depending on affordability.
- The qualifying period for a full basic state pension
for men and women to be reduced to 30 years from 2010 and
contribution credits will apply to those people with caring
responsibilities.
- State Pension Age to be increased in stages to 68
by 2045.
Streamlining the regulatory environment
The following measures will be introduced to "simplify
and bolster existing occupational provision":
- Abolish contracting out under DC schemes (including
personal pensions) when the Basic State Pension is linked
to increases in average earnings.
- Set in place a rolling deregulatory review of pensions
regulations to remove, merge or simplify many of the layers
of legal requirements introduced since the Pensions Act 1995.
- Allow occupational schemes to convert guaranteed
minimum pensions to scheme benefits on an actuarial equivalent
basis.
- Pilot a pensions law rewrite project with a view
to simplifying current legislation.
- Review organisations established under the Pensions
Act 2004 to ensure they are set up in the most effective way
to achieve their long-term objectives.
- Extend the Financial Assistance Scheme to ensure
that people within 15 years of NRD on or before 14 May 2004
may qualify for help.
Comments
The (almost) total acceptance, by the Government, of the Pensions
Commissions proposals is welcome. By doing so we should avoid
the usual sniping by the opposition parties as the legislators
try to get the changes on to the Statute books.
It is unfortunate that the Basic State Pension will continue
to be based on contribution records instead of the residency
basis which the Pensions Commission proposed. However the
reduction in the qualifying period to 30 years goes some way
to compensate for this, as does the linking of Basic State
Pension to average earnings (albeit from a later date than
that recommended by the Pensions Commission).
Ian Westwater - May
2006