Security in Retirement?

Published in Bottomline Summer 2006

The combination of longer life expectancy and a falling birth rate has created a situation in which the percentage of the population in the UK over 65 years of age, will double between now and 2050. Taken together with the recent closure of many final salary pension schemes, this startling statistic has led to talk of a pensions crisis. In this article we consider the Government’s proposals for dealing with this situation which were recently set out in ‘Security in retirement: towards a new pensions system’, May 2006.

Measures of low income amongst pensioners

In Table 1 (page opens in a new window) we have used data from HBAI 2004/05 to categorise the pensioner population according to three standard low-pay metrics: 50%, 60% and 70% male median earnings (MME). The first low pay threshold, 50% MME, is the rate the government promised as the National Minimum Wage in 1999. At present the National Minimum Wage, at £5.05, is £0.34 lower than this threshold across the UK and £0.52 higher than this threshold based on earnings in the North West.

Uptake of benefits amongst low-income pensioners

Analysis of the data presented in Table 1 (page opens in a new window) shows that 75% of pensioners who are not in receipt of the benefits listed, have an income that is lower than the 50% MME threshold. This is an area of concern and may indicate a low take-up of Pension Credit. It is clear that when any changes to pension entitlement take place it is vital that this is followed by a publicity campaign which has clear guidelines and is made available to all.

Levels of savings

Another disturbing statistic to emerge from these data is that very few low-income pensioners have access to significant levels of savings. Of those with income below the 50% MME threshold a third have no savings at all and only 19% have savings of over £11,999. Lack of access to savings may in itself be a result of many people in this category having had very low levels of pay throughout their working lives and have therefore been unable to accumulate any form of ‘retirement nest egg’.

Access to occupational pensions

It is clear from Table 1 that many pensioners are not benefiting from occupational pension schemes. Of the 10.4 million pensioners in Britain, 31% or 3.2 million do not have an occupational pension, and 61% of those with an income below the 50% threshold do not have an occupational pension. Instead many pensioners are reliant on a basic state pension, the value of which is being steadily eroded as a result of the link to prices rather than earnings. Lack of an occupational pension may stem from two reasons. First, many low-income occupations have historically lacked such schemes. Second, many of those in the lowest paid occupations are simply unable to afford contributions and opt out of voluntary schemes in order to maximise their income whilst working.

The proposal – ‘Security in retirement: towards a new pensions system’

The Government proposes three key changes that it hopes will ameliorate the looming pensions crisis. Firstly in 2012 personal accounts will be introduced to give those without access to occupational pension schemes the opportunity to save. People will be automatically enrolled into either their employer’s scheme or a new personal account, with the ability to opt out if they choose to. Responsibility will be shared between the individual, the state and the employer with employees contributing 4% (if earning between £5,000 and £33,000 a year), employers contributing 3% and the State 1%. Employer’s contributions will be phased in over three years.

Simultaneously the Government proposes to link State pensions in line with earnings growth, rather than prices. Leading up to the earnings link, means tested provision will continue to be focused on those with small savings by targeting Pension Credit on this group. The State Second Pension will become a flat-rate weekly top-up to the basic state pension and the transition will be complete by 2030.

Finally, between 2010 and 2046, the Government will make a series of changes to both the retirement age and amount of National Insurance contributions required to qualify for the State pension. Further, what has previously been defined as a ‘contribution’ will be reformed. This will include:

• the number of years needed to qualify will be reduced to 30,
• a new weekly credit will be introduced for those caring for children which will replace Home Responsibilities Protection,
• those caring for the severely disabled for at least 20 hours a week will be entitled to a new contributory credit,
• the initial contribution conditions to the basic state pension will be abolished so that carers of both children and the severely disabled will build entitlement to the basic state pension without having to make a minimum level of contributions,
• the rules for entitlement to the basic State Pension will be simplified and will be equalized for men and women.

It is planned that between
2010 - 2020 – the state pension age will raise to age 65 for women,
2024 - 2026 – the state pension age will raise to 66 for both men and women,
2034 - 2036 – the state pension age will raise to 67 for both men and women,
2044 - 2046 – the state pension age will raise to 68 for both men and women.

Key outcomes

The link to earnings and the emphasis on saving is intended to reduce means testing so that by 2050 it is expected that a third of pensioners will be entitled to Pension Credit, whilst the reform of the contribution system should ensure that by 2010 70% of women reaching state pension age will be entitled to a full basic state pension compared with 30% at present.

The future?

It is not under dispute that the restoration of the link between the basic state pension and earnings will reduce the number of people claiming Pension Credit. However, low-earners will continue to find it difficult to save. As the Guardian, May 26th 2006, reported ‘1 million people are in danger of becoming bankrupt after taking on large mortgages and loans. For these people, saving for their retirement is not an option and they will continue to rely on means testing unless saving is made a viable option.’

A ‘Living Wage’

In order to decrease the number of people reliant on means tested Pension Credit the government proposes that we must turn into a ‘nation of savers’. But if this is to be achieved it must be ensured that those who are working and saving for retirement have sufficient earnings for this to be possible. Under the Government’s pension reform proposals those who are at present reliant on Tax Credits will end up contributing a smaller proportion of their overall income than those in better paying jobs, simply because Tax Credit income will not form part of the personal account system. How then can this situation be avoided? Quite simply, the minimum wage must continue to increase above average earnings until it reaches the level of a ‘living wage’ whereby workers are given a ‘fair rate for the job’.

One major benefit of a ‘living wage’ is that it would also go some way to decreasing the gender pay gap, which has contributed to the inequalities in income between pensioners. A key aim of the proposals has been to eradicate gender inequalities in measured poverty among pensioners and the Equal Opportunities Commission (EOC) have made their own suggestions as to how carers and those on a low-income (a higher proportion of which are women) can be brought out of poverty in their old-age. The EOC recommend reversing the current system, in which high earners are paid more state pension, so that a higher state pension is given to the low paid and those who spend their working lives as parents or carers. It would be these people who would receive a state second pension whereas those who are in a position to save would only receive the basic (or universal) state pension.