The Single-Tier State Pension: Part 1 of the Draft Pensions Bill

House of Commons Work and Pensions Committee

The Single-tier State Pension: Part 1 of the draft Pensions Bill

Fifth Report of Session 2012–13

Volume II Additional written evidence

Ordered by the House of Commons to be published 26 March 2013

Published on 4 April 2013 by authority of the House of Commons London: The Stationery Office Limited

The Work and Pensions Committee

The Work and Pensions Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Work and Pensions and its associated public bodies.

Current membership Dame Anne Begg MP (Labour, Aberdeen South) (Chair) Debbie Abrahams MP (Labour, Oldham East and Saddleworth) Mr Aidan Burley MP (Conservative, Cannock Chase) Jane Ellison MP (Conservative, Battersea) Graham Evans MP (Conservative, Weaver Vale) Sheila Gilmore MP (Labour, Edinburgh East) Glenda Jackson MP (Labour, Hampstead and Kilburn) Stephen Lloyd MP (Liberal Democrat, Eastbourne) Nigel Mills MP (Conservative, Amber Valley) Anne Marie Morris MP (Conservative, Newton Abbot) Teresa Pearce MP (Labour, Erith and Thamesmead)

The following Members were also members of the Committee during the Parliament: Harriett Baldwin MP (Conservative, West Worcestershire), Andrew Bingham MP (Conservative, High Peak), Karen Bradley MP (Conservative, Staffordshire Moorlands), Ms Karen Buck MP (Labour, Westminster North), Alex Cunningham MP (Labour, Stockton North), Margaret Curran MP (Labour, Glasgow East), Richard Graham MP (Conservative, Gloucester), Kate Green MP (Labour, Stretford and Urmston), Oliver Heald MP (Conservative, North East Hertfordshire), Sajid Javid MP (Conservative, Bromsgrove), Brandon Lewis MP (Conservative, Great Yarmouth) and Shabana Mahmood MP (Labour, Birmingham, Ladywood)

Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/workpencom.

The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Committee staff The current staff of the Committee are Carol Oxborough (Clerk), David Foster (Committee Media Adviser), James Clarke (Inquiry Manager), Judy Goodall (Committee Specialist), Daniela Silcock (Committee Specialist), Emma Sawyer (Senior Committee Assistant), Hannah Beattie (Committee Assistant). Contacts All correspondence should be addressed to the Clerk of the Work and Pensions Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2839; the Committee's email address is [email protected]

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/workpencom)

1 Aegon Ev w1 2 Aon Hewitt Ev w2 3 aquilaheywood Ev w6 4 Aviva Ev w8 5 British Australian Pensioner Association Inc. Ev w10 6 Civil Service Pensioners' Alliance Ev w12 7 Citizens Advice Ev w14 8 EEF Ev w17 9 Madeline Fox Ev w20 10 GMB Ev w21 11 Stephen Hawley Ev w23 12 Hymans Robertson Ev w24 13 International Consortium of British Pensioners Ev w27 14 Anthony VT Johnson Ev w28 15 Lynne Johnson Ev w29 16 Jill Klee Ev w30 17 Mercer Ltd Ev w31 18 National Federation of Occupational Pensioners Ev w34 19 National Pensioners Convention Ev w36 20 James Nelson Ev w39 21 Pensions Action Group Ev w43 22 Sheila Telford, Chairman, Canadian Alliance of British Pensioners Ev w44 23 Police Federation of England and Wales Ev w45 24 Public and Commercial Services Union Ev w47 25 National Union of Rail, Maritime and Transport Workers Ev w48 26 Anne Street Ev w50 27 Towers Watson Ev w51 28 UNISON Ev w56 29 Unite Ev w56 30 Tony Lynes Ev w61

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Written evidence

Written evidence submitted by Aegon Summary 1. Aegon is broadly supportive of the proposed changes to the state pension. They should make a major contribution to reducing dependency on income-related (ie means tested) benefits and thus provide a better foundation for private saving. 2. Means testing will not be entirely eliminated, however. The impact of Housing Benefit, in particular, could continue to erode the value of private savings for many people. 3. It will be important that the reforms are seen to be fair in how they take account of previous National Insurance (NI) contributions and existing entitlements. The White Paper and the Draft Bill give rise to a number of issues around the treatment of those who have been self-employed or who have contracted out of the State Second Pension (S2P) for significant periods. 4. The changes also need to be communicated effectively and widely understood in order for any beneficial impact in terms of encouraging private saving to be realised.

Means-testing 5. The reforms proposed in the White Paper and the Draft Bill will ensure that many more people get a higher state pension as of right, without having to claim means tested uplift. This is a welcome advance in many respects. 6. The current extent of means testing in retirement means that many people currently face real disincentives to save. Many more people, for whom it would be beneficial to save, worry that they will not see the full benefit of that saving and are so also deterred. 7. As the Government has suggested, removing these disincentives will help underpin the reform of private pensions: greater certainty around what to expect from the state, combined with the requirement for employers to contribute, means that for those being automatically enrolled into a private pension now and over the coming years, it will nearly always “pay to save”. 8. It is important to note, however, that the issue of means testing in retirement is not solely a “pensions” issue. Housing Benefit and Council Tax Benefit, for example, also play a significant role for many pensioners. 9. We have not examined in detail the Government’s proposals for reform to these and other means tested benefits. Most of the debate has been around the impact on working age households. There will be important impacts on both existing pensioners and, in terms of their incentives to save while they remain in the workforce, those who will be eligible for the new single-tier pension. We hope the Committee will examine these issues and ensure they are given sufficient weight in scrutinising both these reforms and changes to the welfare system. 10. As always with issues around means testing, a balance will need to be drawn between targeting assistance where it is most needed, and ensuring that the value of private saving is not unduly eroded.

Accrued Entitlements 11. Perhaps the biggest single issue the reforms set out in the Draft Bill need to address, is how to account fairly for existing entitlements and National Insurance contributions as we effect the transition from the current system to the new. 12. It is in everyone’s interests that the state pension framework is stable and commands wide public conﬁdence. For that to be the case, it needs to be fair, and to be seen to be fair. 13. There are two distinct but related concerns in the way the Bill takes into account previous National Insurance contributions.

The Self-employed 14. Under the current system, National Insurance contributions (NICs) made by the self-employed have not counted towards Additional State Pension (SERPS or S2P). Under the proposed new system, however, pre- commencement qualifying years appear to count towards the new single-tier pension in exactly the same way as those for employed persons. 15. While this may be interpreted as a generous extension of the beneﬁts of a full state pension, it also raises questions around the existing disparity between the rates of National Insurance paid by employed and self- employed people. While this is properly a matter for the Treasury and subsequent Budgets, we feel it would be useful for the Committee to examine the Government’s intentions in this area. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Contracted-out Beneﬁts

16. It is not clear to us how the “contracted-out reduction” (Schedule 1, Part 2, paragraph 5 of the Draft Bill) will operate. We would welcome further clarity on this point and hope that the Committee will press Ministers and ofﬁcials on this point.

17. The formulation in the White Paper and the Draft Bill appears to allow those with existing entitlements in contracted-out schemes effectively to “bank” those beneﬁts and continue to build up (post-commencement) qualifying years for the single-tier state pension. This could result in their qualifying for the full amount of the single-tier pension, while also receiving the beneﬁts of their contracted-out contributions via their contracted- out scheme.

18. Those who have spent the same period contracted in and paying full National Insurance contributions are subject to different transitional treatment. Those with an S2P entitlement may be entitled already to more than the new single pension and again can “bank” this. They do not, however, then receive any further state pension entitlement for future years of NI payments.

19. The way in which the contracted-out reduction is determined will have a bearing on relative outcomes.

Communication of the Reforms

20. The Government and others have “sold” the reforms in part on the basis that they should help individuals to be clearer about what they will get from the state when they retire, and provide a more secure basis for private saving.

21. Once the single-tier system reaches “steady state” it will undoubtedly be much easier for people to understand, even if they do not have full contribution records.

22. That steady state will not exist fully for some time. During the transition, there will be large numbers of people with signiﬁcant contribution records, in many cases a combination of contracted-in and contracted-out, some periods in self-employment or out of the workforce altogether, who will need to know what their existing entitlement is and what they can do to augment it.

23. The proposed state pension statements set out in the White Paper are a welcome initiative. However, they depend on individuals requesting the information. If people are not aware of the changes, or their potential importance for them as individuals, they may not seek out further information.

24. We would like the Government to commit to a signiﬁcant public information campaign around implementation, using a wide range of channels to communicate the changes and encourage people to seek out further information. The Money Advice Service and the Pensions Advisory Service will clearly have an important role to play in this.

25. At the same time, the opportunity should be taken to highlight the beneﬁts of private saving, using the state pension statement to give individuals a much clearer idea how much they are likely to need to save on top in order to achieve the standard of living to which they aspire in retirement.

26. Without this “call to action”, the beneﬁts of the reforms, in terms of providing clearer incentives to save, are unlikely to be realised in practice. 14 February 2013

Written evidence submitted by Aon Hewitt

SINGLE-TIER STATE PENSION

Summary

1.1 Aon Hewitt is pleased to submit its comments to the Work and Pensions Select Committee. By way of background, Aon Hewitt is a global company providing human resource consulting and outsourcing solutions with more than 29,000 professionals in 90 countries.

1.2 The simplicity of the proposed single-tier arrangement is welcomed.

1.3 For the vast majority of individuals, this will make retirement planning signiﬁcantly easier, and will hopefully encourage individuals to save more for retirement given the lower reliance on means-testing that is expected. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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1.4 As we note below, the proposals could have significantly different implications for certain groups of individuals. The proposals would also appear to lead to further implications which may not necessarily achieve the aims set out in the Department for Work and Pensions’ (DWP) White Paper, in particular: (a) The relatively advantageous position that the proposals would appear to provide to private sector workers in contracted-out occupational pension arrangements versus other private sector workers who have always been in their employer’s contracted-in pension arrangements. (b) The improvements in state benefits that those in contracted-out public sector arrangements are expected to receive with no compensatory reduction in scheme benefits. 1.5 It is important to note that the test that the new approach “will cost no more than the current overall system” appears to have been carried out by excluding the significant additional National Insurance contributions that the Government will receive as a result of ending contracting-out. (See the note to chart 6.1 on page 33 of the Impact Assessment which states that “NICs impacts are excluded”.) The increase in National Insurance revenues resulting from the proposed changes amount to around £6 billion per annum (see table 6.1 on page 35 of the Impact Assessment). If these additional revenues had been included in the assessment, this would presumably have shown a material reduction in overall (net) expenditure, which is consistent with a large number of individuals being worse off as a result of the proposed changes. 1.6 We accept that it may be appropriate to exclude the National Insurance Contributions relating to public sector employers (around £3.5 billion per annum) from the assessment of whether the new approach will cost no more than the current system. This is because no reduction to these members’ benefits is proposed to offset the increase in National Insurance contributions. However, it might be inferred that this approach effectively meets the costs of retaining public sector pensions at current levels (rather than adjusting these benefits) by adopting a lower level of future state benefits for the population as a whole than might otherwise be necessary. 1.7 The proposals clearly have cost implications for public sector employers. Government will need to consider what mechanisms are required to give effect to meeting the cost of these proposals at employer level. Additionally, Government will need to consider how these proposals sit in relation to the broader agenda for reform of public service pension provision whereby occupational pensions are subject to a change project which includes a material element relating to cost reduction. 1.8 In view of the consequences identified at paragraphs 1.4 and 1.5 the DWP may wish to consider refinements to its proposals. These could include the following alternative suggestions: (a) the single-tier pension could be increased in level to reflect the National Insurance savings to be expected; (b) the single-tier pension provided could include an offset for any notional State Second Pension rights that were in effect forgone by virtue of having been contracted-out in the past (ie with the offset being applied at State Pension Age, rather than at implementation). This would address the potentially advantageous position that some members in contracted-out arrangements will find themselves in versus contracted-in members, by being able to “replace” the benefit lost through contracting out by earning additional accrual. This might lead to savings that could be utilised to further improve the level of state provision; (c) for those who have been contracted out, rather than set the foundation amount as being the maximum of the single-tier pension at implementation (including a reduction to reflect contracting-out) and the pension under the current system (which in most cases would be based on the current Basic State Pension), set it at the level of the single-tier pension at implementation (including a reduction to reflect contracting-out). Workers who have been contracted-out would then need to contribute for longer if they are to reach the full level of the single tier pension; (d) alternatively, it may be appropriate that once an individual has built up the full single-tier pension entitlement, they are granted a National Insurance rebate; and (e) the Government may wish to reconsider the “Faster Flat Rating” option, of retaining the current system (including the retention of contracted-out defined benefit (DB) arrangements) but accelerating the move towards a flat state second pension (albeit with the level set so as to meet the Government’s aims of controlling long term costs). 1.9 We would note that options 1.8 (b) and 1.8 (c) above would need careful consideration as they may lead to the state benefits provided to formerly contracted-out members being lower than the Basic State Pension.

Impact on Speciﬁc Groups Women and people with caring responsibilities 2.1 The impact for women and people with caring responsibilities will vary signiﬁcantly from one individual to another. 2.2 In respect of women, who on average may earn less than males, the move towards a single-tier pension should create more balanced state provision between males and females. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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2.3 We would note that: — Certain younger carers, with significant career headroom, perhaps receiving child benefit in respect of children under the age of 12 or claiming disability benefits, may potentially receive a lower state pension under the proposals, versus those they would have been entitled to under the current system following changes to the State Second Pension made in recent years, particularly if wage growth is lower than the 4.76% per annum assumed in the Single-Tier Impact Assessment, or if the triple-lock protection does not average 5% per annum, or if allowance is made for potential real rises in the state second pension in the longer term once it has reached a flat benefit. This is because before allowing for future inflationary increases the £144 per week single tier pension would compare with a full Basic State Pension and State Second Pension of at least around £190 per week over a full working lifetime assuming the current system had applied throughout. — The changes in the state system may lead to improved state benefits (or at least reduce the chances of means testing) for carers with fewer years to go before State Pension Age. These carers may have built up relatively little earnings-related state benefits prior to 2002 and may therefore benefit from the higher foundation amount upon transition to the new system. Similarly, those caring for children between the age of six and 12 were unable to obtain credit within the state second pension system until 2010 and so may benefit from the proposals. — If for any reason a woman or carer were to have less than the minimum qualifying number of years in the proposed system, their entitlements could be lower than at present. That said, guarantee credits are likely to significantly affect retirement income for many in this situation.

Self-employed 2.4 The proposals lead to a fairer system in respect of the self-employed who are not currently entitled to build up any State Second Pension.

Younger/Older cohorts 2.5 Since April 2002, a proportion of State Second Pension accrual has in effect involved a flat tier for any individual earning over the Lower Earnings Limit (until April 2012 this was through the use of the “deemed earnings factor”). As a result, for younger workers, the proposals could lead to materially lower state benefits if earnings growth is not as high as assumed in the Single-Tier Impact Assessment (4.76% per annum) or the triple lock provisions do not lead to increases in the single-tier pension of 5% per annum, or if allowance is made for potential real rises in the state second pension in the longer term once it has reached a flat benefit. This is because before allowing for future inflationary increases the £144 per week single-tier pension would compare with a full Basic State Pension and State Second Pension of at least around £190 per week over a full working lifetime. 2.6 The reforms are likely to be more beneficial for the older cohorts, particularly the lower paid, who may have built up relatively low levels of earnings related state benefits whilst participating in SERPS (State Earnings-Related Pension Scheme) prior to April 2002, and may now benefit from a higher foundation amount.

Those who will rely on income related benefits 2.7 We have not considered this matter in detail. Removal of Savings Credit may potentially lead to less incentive for those with low savings to make further provision for their retirement, which could increase the degree that individuals without a full working lifetime will rely on the guarantee credit. However, this needs to be balanced with the further simplicity that the system will provide, and the likely level of savings available for this cohort of individuals. The fact that other benefits contingent on receipt of means tested benefits will continue for only five years means that there will be workers who do not lose out on overall pension (compared to the current system and Pension Credit) but still lose out on additional benefits.

Other segments to the population 2.8 The question also invited us to consider other segments of the population, and below we comment on: (a) the impact on workers in contracted-out private sector arrangements versus workers in contracted-in private sector arrangements; and (b) the impact on workers in contracted-out public sector arrangements.

Workers in contracted-out private sector arrangements versus those in contracted-in private sector arrangements 2.9 Those that have been contracted-out for much of their careers to date, but with a reasonable period remaining until State Pension Age, are not particularly penalised by the transitional deduction for contracting- cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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out (clause 5 and schedule 1). This is because the foundation amount calculated will typically be based on the individual’s accrued Basic State Pension entitlement, and there will still often be sufficient career headroom to build up the full single-tier pension before State Pension Age. They will therefore often eventually receive the same single-tier pension as those in contracted-in private sector arrangements, but will presumably have built up a higher occupational pension with their employer in the past by virtue of having been contracted-out. Those that have historically been contracted-out are also far more likely to benefit from the security of a defined benefit pension arrangement.

Workers in contracted-out public sector arrangements

2.10 We note that public service employers will be unable to pass onto employees the cost of increased National Insurance from their arrangements being contracted back into the State Pension System. We note the implications of the changes are therefore: 2.11 A more generous level of overall benefits for public sector workers (because individuals will now be able to accrue the single-tier pension on top of their existing public sector pension provision) thereby likely widening the gap with the private sector. We believe that the Government may wish to consider further this consequence of the changes, and how this fits in relation to the broader agenda for reform of public service pension provision whereby occupational pensions are subject to a change project which includes a material element relating to cost reduction. As noted above, we feel it appropriate that the means for financing these improvements are made clearer, including the mechanisms required to give effect to meeting the additional cost at employer level. 2.12 In addition, and as noted above for private sector workers, many public sector workers will have sufficient career headroom to be able to build up a full single-tier pension despite having been contracted-out. 2.13 We set out earlier in our response potential alternatives that the DWP could consider if it wished to address these points (though the need for mechanisms to meet the additional cost at employer level would remain).

Proposed Arrangements for Transition 3.1 As noted above, whilst the transitional arrangements (clause 5 and schedule 1) protect accrued benefits they seem to be particularly beneficial to those in contracted-out pension arrangements who, with sufficient career headroom, may be able to build up a full single-tier pension to the same level as counterparts in contracted-in pension arrangements. 3.2 We also note above the impact of ending contracting-out in the public sector. 3.3 The proposals to enable private sector employers to amend DB arrangements without requiring trustee agreement are welcomed (clause 24 and schedule 13/14). Having reviewed paragraph 2(b) and 2(c) of schedule 14 we believe the words “amount of the scheme’s liabilities” should read “value placed on the scheme’s liabilities”. Significant care will be required when defining this within regulations, as the amount of reduction in liabilities due to increased employer National Insurance will significantly vary depending on the assumptions adopted (including the assumed discount rate). We note that the power to reduce benefits/increase contributions cannot be used before the implementation date—we would suggest that the power should be available for a short period before implementation so that employers can choose a convenient time to contract back in and adjust benefits (paragraph 7 of schedule 14). 3.4 Whilst in itself, ending contracting-out in the private sector might simply lead employers to slightly reduce accrual rates in DB schemes or increase member contribution rates further, amongst other pressures on DB pension arrangements at the moment (the effect of low bond yields, changes to pensions taxation planned from April 2014), the removal of contracting-out is likely to provide a further push towards more radical reductions in private sector pension benefits in many industries—particularly full closure to DB accrual. 3.5 Further clarity is also required as to how public sector outsourcing contracts in the past will be affected, and how costs will be absorbed where employers participate as an admitted body. Additional clarity is also needed around how the changes will affect broadly comparable arrangements that employers have provided in the past.

Impact of the Changes in the Qualifying Rules for State Pension 4.1 Clause 2(1b) The longer (35 year) qualiﬁcation period for a full state beneﬁt versus 30 years for the Basic State Pension is consistent with increases in State Pension Age (SPA) and general expectations that working careers will become longer (it is not clear whether the intention is to increase this maximum with future rises in SPA although this would require amendment to primary legislation). As most individuals that have historically contracted out will have an opportunity to build up additional single-tier pension from 2017, the conclusion that 80% will be entitled to the full single-tier pension by 2030 seems reasonable. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4.2 Clause 2(2b) The use of a minimum qualifying period may lead to lower benefits (or greater application of means testing) for those with no or very low incomes over most of their careers who have not been able to benefit from NI credits. However, this would appear consistent with the DWP’s aims to provide benefits for those that have meaningfully contributed towards the system.

Affect on the Future need for Means-tested Pensions Beneﬁts and Incentives to Save for Retirement 5.1 For many, the adoption of a clear single-tier pension from the State will encourage more individuals to save more themselves for retirement. 5.2 Compared to the system in place from April 2002 onwards, many modest earners, earning above the Lower Earnings Limit (who would have been entitled to the Fixed Rate Additional Amount, or the deemed earnings factor previously), will receive lower state entitlements which could increase their reliance on the guarantee. 5.3 For those earning less than the Lower Earnings Limit for much of their careers, the removal of the Savings Credit reduces any incentive to save, however, the level of savings likely to be available for this group may be limited in any case. 15 February 2013

Written evidence submitted by aquilaheywood 1. Introduction 1.1 We welcome the opportunity to submit evidence to the Work and Pensions Select Committee for its pre- legislative scrutiny of Part 1 of the Draft Pensions Bill relating to the establishment of a single-tier State Pension. 1.2 To put our response in context, we have provided the following details about aquilaheywood and our clients. 1.3 aquilaheywood, the Group comprising aquila and heywood, is the leading supplier of pensions administration software solutions in the UK. The pension schemes for ten million members in more than 200 major organisations are run using the Group’s administration software solutions. These solutions cover the whole range of available schemes including defined benefit (DB), defined contribution (DC), hybrid, career average, cash balance and stakeholder, as well as a full range of other group and individual products including Group Risk, Individual Protection, (G)SIPPs and Wraps, Income Drawdown and Annuities. 1.4 The Group provides solutions across a diverse range of markets including Financial Services, Third Party Administration, Corporate and Public Sector pension schemes in the UK, Ireland and the rest of Europe. Its clients include Aviva, Aegon, Fidelity, Irish Life, Scottish Widows, British Airways, BBC, Asda, BP, Diageo, the European Central Bank, Aon Hewitt and most local authority schemes. We also provide software and services in to central government schemes in Scotland and Northern Ireland.

2. Summary 2.1 We understand and identify with the need to reform the current state pensions system and support the move towards a single-tier state pension that will: — involve less means testing of benefits for pensioners; — ensure that individuals who are automatically enrolled into pension schemes fully benefit from their membership of the scheme and the investment in their future retirement benefits by themselves and their employer rather than just reducing their entitlement to means tested benefits; and — provide a mechanism for defined benefits schemes to cease contracting-out without significant impacts on benefits and costs to employers and members. 2.2 Given the short timeframe to submit evidence to the Select Committee we have not had the opportunity to engage with our clients about the impacts of the Draft Pension Bill. We anticipate that other organisations will comment on the impacts on existing schemes both in the private sector and the public sector. 2.3 We have some concerns that the qualifying period and transitional arrangements will mean that the objective of ensuring that that individuals who are auto-enrolled into pension schemes fully benefit from their membership of the scheme will not be satisfied. 2.4 With the restricted time to submit evidence, we have decided to focus on a subject that, in our belief, is not adequately covered in the Draft Pensions Bill but we believe is imperative for the successful implementation of the single-tier state pension and that is the issue of the communication of state pension benefits and state pension ages before, during and after the transition to a single state pension. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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3. Communication The Need for Communication 3.1 We fully identify with Steve Webb MP’s comments in June 2004 when he was Liberal Democrat Shadow Work and Pensions Secretary: “For people to be able to plan for retirement they need reliable, complete and accurate information. Many have pensions from many different employers, saving schemes and have complex state pension rights. To plan for a secure old age people need information in one place and simply explained”.1 3.2 Steve Webb MP was commenting on the previous Government’s proposed plans to launch a “web-based retirement planner” at a cost of £10 million to set up and £5 million a year in running costs. Not surprisingly this project did not proceed but there is still a need for individuals to have easy access to their accrued and potential pension rights in an easy and accessible manner. 3.3 In the “old days” it was common knowledge that the state pension age (SPA) was 65 for men and 60 for women and the Basic State Pension was well-published amount. The subsequent equalisation of, and increase in, SPA together with the introduction of Additional State Pensions (SERPS and S2P) means that very few people know the state pension benefits that they are entitled to or the date on which the benefits are available. 3.4 Whilst the Department for Work and Pensions (DWP) have introduced websites that individuals can use to get state pension forecasts, individuals need to register with the Government Gateway to access Additional State Pensions or complete forms and wait for details through the post. Neither of these approaches is “immediate” and easy to access for individuals or their advisors. 3.5 With the introduction of the new single-tier pension, we believe that individuals (and financial advisers) need easy access to details of their “transitional” state pension amount (with any deduction for contracted-out periods of service), the extra pension for each year of future qualifying year and the date at which the single- tier state pension should be payable. 3.6 This information should be available in real time: — to individuals through a government-provided website, but with less onerous security procedures than the current Government Gateway—for example with individuals providing their National Insurance (NI) number and supporting data such as surname and date of birth; — to individuals through a secure website supplied by their pension scheme that uniquely identifies the individual’s NI records; — to pension schemes and pension providers for inclusion in benefit statements; and — to financial advisors who are authorised by the individual to access state pension data. 3.7 The mechanism for providing the relevant information should be similar to the two-way real time messaging introduced by HM Revenue and Customs (HMRC) to provide real time information (RTI) about income payments (including tax and NI contributions) for payroll systems. Indeed the implementation of payroll RTI should ensure that employees’ National Insurance contributions are up to date at the time the request for state pension data is requested; thus providing state pensions RTI.

Mandating State Pension Communications? 3.8 The current disclosure regime does not cover all pension scheme members. Members in defined benefit schemes are not legislatively obliged to receive any form of annual statement. Benefit statements (along with other scheme information) must only be provided within two months of an individual requesting a statement. In practice most employers will provide a benefit statement to current employees, although this is not a statutory requirement. 3.9 The current combined pension forecast arrangements are voluntary and can only be requested by employers or trustees of pension schemes. In addition this only allows employers/trustees to combine state pension projections from the DWP with the amount of pension that the employer/trustees is currently projected to provide. Moreover, the technology underlying the provision of the data for combined pension forecasts is out-dated and does not provide real time information. 3.10 With access to real time data, consideration should be given to mandating pensions scheme to include state pension details in benefit statements and/or SMPI (Statutory Money Purchase Illustrations) statements in a prescribed format. 3.11 Whilst individuals with multiple pension pots will, under the proposed mechanism above, have state pension benefit details on each of their annual statements, the prescribed format will make it clear that the state pension benefit is only payable once. Moreover, the proposed introduction of “pot follows member” when members join new pension schemes should result in individuals having fewer pension pots in future. 1 http://www.stevewebb.org.uk/news2004/news331.html cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4. Cessation of Contracting-Out and Equalisation of GMPs 4.1 Clause 24 and Schedule 14 allow for private sector employers to reduce pension scheme benefits (or increase employee contributions) for the cessation of contracting out to the extent that they offset the cost of additional employer National Insurance contributions. Under the Draft Bill, this can be done without trustee approval being required. 4.2 The Pensions Act 2007 allowed for the conversion of GMPs (Guaranteed Minimum Pensions) in occupational pension schemes as long as the cost is neutral to the pension scheme member. This requires that the post-conversion benefits are actuarially equivalent to the benefits that would have been provided before the conversion. 4.3 DWP is currently consulting on the equalisation of GMPs. Anecdotal evidence suggests that schemes will not convert GMPs whilst there is uncertainty about to how GMPs should be equalised. 4.4 We believe that consideration should be given to allow conversion of GMPs and the amendment of benefits/contributions for the cessation of contracting out (to the extent that they offset the cost of additional employer National Insurance) and address equalisation issues at the same time. This would also remove the burden of equalising GMPs as a separate exercise and avoid separate complicated communications to members.

5. In Conclusion 5.1 Whilst we fully endorse the overall approach to the introduction of a new single-tier state pension, we believe that more attention should be provided to communication aspects. Consideration should be given to include changes to the Draft Bill to ensure that individuals have a clear understanding of their current and prospective beneﬁts in the new single-tier state pension and the date from which these beneﬁts are payable. 15 February 2013

Written evidence submitted by Aviva 1. Introduction 1.1 Aviva is one of the world’s largest insurance groups with over 53 million customers worldwide and 45,000 employees. In the UK we manage pensions for over two million people as well as over 5,000 company pension schemes. 1.2 Aviva is strongly in favour of the proposed simpliﬁcation of the state pension. Aviva research in 2010 found that two-thirds of the working population view the state pension as a core source of income in retirement, but two-thirds do not know how much the state pension is. The proposed simpliﬁcation will provide a clearer foundation on which all additional retirement savings can be built. 1.3 However it is inevitable that creating a new single tier state pension will mean some people will be better off in the future under the new system, whereas others would have been better off under the current rules. While these compromises are necessary, we would like to see them being minimised wherever possible. There must be broad fairness otherwise we could derail this vital reform and undermine the overall policy goal of creating a simpler state system which delivers a clearer foundation for additional personal savings. 1.4 The Select Committee’s inquiry will therefore be very helpful in analysing the complexities and fairness issues now to help the Government addresses any implementation issues and smoothes impacts before the Bill goes through Parliament.

2. What impact the proposals will have on specific groups, including: — Women and people with caring responsibilities — Self-employed people — Future pensioners who will still rely on income-related benefits in retirement 2.1 Women with a more flexible labour history and carers will benefit from the positive recognition of their contribution to society, and we welcome the fact that self employed people, who are often lower earners, will see some redistribution in their favour which means they will no longer be relatively worse off by missing out on access to the State Second Pension. 2.2 However we note analysis from the Institute for Fiscal Studies2 which finds that the proposals “imply a cut in pension entitlements for most people in the long run” as since 2002 coverage for the state system has been almost as broad as the proposed rules, but the annual pension accrual from qualifying activities such as paid employment, caring, self employment or raising children is higher under the current pension system. 2.3 Despite this, it is hard to make an accurate assessment now of what the current state pension might be in the future given unknown political, economic and social changes over the next 30 years. Further, this system is designed to work alongside the growth in private provision under automatic enrolment so the state pension 2 http://www.ifs.org.uk/publications/6547 cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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payments due under the proposed reforms would for many future pensioners be supplemented by income from private pension savings.

3. The proposed arrangements for the transition from the current system to the new one, including: — How accrued rights will be protected — The effects of ending contracting-out of the State Second Pension. 3.1 There is a need for care and fairness in the transition from the old to the new system—especially in relation to the treatment of contracted-in and contracted-out savers. While the details are yet to be agreed, Aviva sees a potential unfairness in the treatment of contracted-in versus contracted-out savers. 3.2 The calculation of the foundation amount, which protects people’s rights under the old system, is broadly fair. The issue is the future accrual, where contracted our workers will be allowed to build up to £144 per week again whilst keeping their contracted out benefits, whilst contracted in workers can’t build up additional entitlements because they don’t face the notional deduction. We examine this in detail below. 3.3 We understand that, when the new system starts, a saver who has been contracted-out for a period of their working lives will have their foundation state pension adjusted and reduced to take into account their contracted-out years—ie reduced by the “rebate derived amount”. We understand this individual will then able to continue building state pension benefits, on top of this calculated foundation, up to the single-tier level of c £144 per week. 3.4 In comparison, an individual who has been contracted-in throughout their working life will not be subject to any reduction via the “rebate derived amount”. Once their foundation amount reaches c £144 there is no scope for continued benefit accrual. (eg the example of Liz in the published single-tier White Paper.) 3.5 The calculation of the “rebate derived amount” will significantly influence the magnitude of this potential “unfairness”. Aviva does not want this potential issue to derail what is otherwise a positive policy development.

Additional example to highlight different experiences of contracting out 3.6 John is in a money purchase contracted-in scheme when the new system is introduced (say in, 2017) he will have been working for 33 years of which 28 were contracted-out as he has been a member of a DB scheme for most of his working life. He will receive a foundation amount which is calculated as (33/35 x 144) minus a “rebate derived amount”. We don’t yet know the “rebate derived amount”, but as an extra year of NI under the new pension is worth £4.11 per week so we will use that as an estimated deduction. So, John’s foundation amount is £135.77 minus £115.08 (ie 28 x £4.11) = £20.69. However, John’s foundation amount can never be less than John’s state pension entitlement under the old system. 3.7 To make sure John isn’t worse off under the new system there a safety net of his position under the old system. As John had 30 years NI credits at the date of the change, his foundation amount is the current basic state pension of £107.45, rather than the £20.69 derived from the new system calculation. As he has also been contracted out for 28 years, he has SERPS/S2P equivalent (in the form of guaranteed minimum pension, or GMP, or as section 9 (2B) rights) embedded in his DB benefits, worth say £100 a week. 3.8 Where the problem arises is in the new system. John is then allowed to build up another £37 of state pension to get to the £144 per week—accruing at a rate of £4.11 for every extra year of NI credit after 2017 this will take nine years. Compare that to Liz and Jenny from the consultation paper, who have never been contracted-out. They get £144 and £147 respectively and are not allowed to build up any more state pension. They don’t have any contracted-out equivalent GMP or section 9 (2B) rights to add to these totals. 3.9 John gets £144 from the new system plus £100 state pension equivalent from the old system that is embedded in his DB pension. Comparing John with Liz and Jenny, the transition looks quite skewed in John’s favour. Sorting this out should not be too difficult. The consultation and Bill have a way to go before they become final. We should use that time to iron out as much unfairness as we can.

4. What impact the changes in the qualifying rules for a State Pension are likely to have 5. How the proposals are likely to affect the future need for means tested pensioner benefits and incentives to save for retirement 4.1 We believe these areas are closely linked. Overall we believe that simpler qualifying rules and a single state pension payment will together make it much easier for people to understand their own pension situation. It will be easier for the Government to administer, and people can more readily see what they can expect to receive in retirement. A simpler flat rate pension should also ensure that those who most benefit from a minimum income standard will get it—as opposed to the current system, under which DWP figures suggest about a third of those who should receive them are not currently claiming pensions credit for which they are eligible 4.2 Aviva research3 found that more than six in ten people in the UK view the state pension as their primary or secondary means of funding their retirement, but despite this reliance many do not know much 3 Syndicated “At Retirement Survey”, in conjunction with Marketing Sciences, of 1,100 50+ year olds, August 2009 cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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about the system they will rely on for their ﬁnancial security in retirement. A clearer system is also a more effective incentive to save. If people know what they will get from the state, they can more easily see where their provision may fall short and take steps to make private savings. 4.3 While the proposed single-tier state pension of £144 per week improves accessibility and simplicity, it still provides a limited replacement income in retirement and so there will be a real need to encourage people to save privately to supplement this core income. Our analysis has shown that the new state pension combined with minimum automatic enrolment contributions to a private pension, will only deliver acceptable income replacement rates for younger lower earners. 4.4 Ofﬁce for National Statistics4 research shows the average retired household expenditure for those who mainly depend on the state pension. With nearly a quarter of their income going on housing fuel and power, this would equate to £33 per week based on an income of £144 per week. Similarly, pensioners would have about £24 for food—at 17% of income—and £8 for transport, at 6%. The need to supplement the basic state pension, even at £144 per week, is clear. 4.5 A single-tier state pension combined with greater access to private savings through auto-enrolment should mean people are more engaged with their retirement planning and able to easily increase their savings levels. It is much easier to encourage savings behaviour when people know anything they save can add to their retirement income. 15 February 2013

Written evidence submitted by the British Australian Pensioner Association Inc. The British Australian Pensioner Association (BAPA) has around 3,000 members who are representative of over 250,000 British state pensioners living in Australia. 1. The words “simple” or “simplify” are mentioned a number of times in the proposed Bill. 2. This submission seeks to demonstrate that the existing system could be made even more simple and fair in accordance with the stated aims. 3. This submission primarily seeks to address the issues raised in clause 20 of the proposed Bill. 4. Everyone pays into the National Insurance Fund (NIF) in order to qualify for the state pension under exactly the same rules. 5. Everyone qualifies for the state pension under exactly the same rules, based on the number of years of contributions into the NIF. 6. When it comes time to pay annual increases to the state pension, different rules are applied depending on where you happen to live. This is unfair and more complicated. The countries where the state pension is frozen has no logical or reasonable basis. 7. Pensioners living in mainly Commonwealth countries are disadvantaged. Although there are several Commonwealth countries where pensions are uprated either because they are EU members or because there is a reciprocal agreement in place that includes UK pension uprating. 8. Reciprocal agreements are in place between the UK and Canada, and the UK and New Zealand, but these for some reason do not include the uprating of UK pensions in those countries. This is despite the fact that both Canada and New Zealand and even Australia uprate the pensions of their pension recipients residing in the UK. 9. Australia terminated the Australian UK Social Security Reciprocal Agreement in February 2001 because it was costing the Australian taxpayer many millions of dollars to top up the pensions of frozen British pensioners living there under the terms of the agreement. This termination resulted in other adverse effects because uprating is not the key aim or focus of the Reciprocal Agreement. Australia already uprates the Australian pensions of its people living in the UK even now without a reciprocal agreement in place. 10. Each year a statutory instrument called The Social Security Benefits Uprating Order is passed by Parliament. This uprates the British state pensions of all people in receipt of the state pension no matter where they live in the world. 11. Following that, another statutory instrument called The Social Security Benefits Uprating Regulations is passed by Parliament which freezes the state pensions of people living in most Commonwealth countries. 12. We suggest that if this latter statutory instrument, the Regulations were not passed, given that the first Order was passed, that this would lead to a simplification of the state pension system and enable it to become fairer. 13. Here is a selection of what MPs have said in the past. They were at the time in Opposition. 4 Office of National Statistics, Pension Trends, 24 October 2012 cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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14. Previous Liberal Democrat Spokesperson for Work and Pensions, Steve Webb MP said: “All state retirement pensions in payment to pensioners living outside the United Kingdom shall be subject to annual uprating by the same percentage rate as is applied to such pensions payable to pensioners living in the United Kingdom”. He signed an EDM that said: “That this House notes with concern that 520,000 British pensioners living abroad have their pensions frozen in value and thus not increased when the pensions in the United Kingdom receive annual increases; believes the practice of freezing these pensions is wholly unfair, discriminatory and irrational especially when some pensioners living overseas do have their pensions increased annually; believes that all pensioners living abroad, many of whom have made lifelong mandatory payments to their state pensions, are deserving of this annual increase; and urges the Government to bring forward proposals to end the evident unfairness in the current arrangements.” 15. Leader of the Liberal Democrats, Nick Clegg MP said: “I can assure you that Liberal Democrats ﬁrmly believe that pensioners that have paid taxes and contributed towards National Insurance should not be penalised for choosing to live abroad in retirement”. 16. Previous Liberal Democrat Spokesman for Work and Pensions, David Laws MP said: “Whatever his view on whether we should uprate pensions for those who move abroad, however, we surely cannot defend the current situation, in which some are uprated and some are not. He will know that even Ministers have admitted that the situation cannot be defended on the basis of any logical and rational system.” He also said: “Uprating arrangements for the pensions of those who live abroad represent an enormous injustice. They are totally arbitrary and illogical”. 17. Then Labour Secretary of State for Work and Pensions, James Purnell MP said: “Of course, it is not legally necessary to have a reciprocal arrangement before making such (uprated) payments. Any Government could do that unilaterally”. 18. Conservative Shadow Minister, Oliver Letwin MP said: “The current situation (of frozen pensions) has evolved as a product of history, not rationality”. 19. Previous Pensions Minister, Stephen Timms MP said: “Bilateral agreements can be the means of providing annual increases of retirement pension, but that is not their primary purpose. An agreement is not strictly necessary to allow payment of pension increases, as that could be achieved through changing UK domestic legislation.” 20. Social Security Minister, Jeff Rooker MP told the Commons in November 2000: “I am not prepared to defend the logic of the present situation. It is illogical. There is no consistent pattern. This is a historical issue and the situation has existed for years.” 21. Conservative Leader, David Cameron, when still in opposition, wrote: “You may know that my Shadow Pensions Minister Nigel Waterson MP has tabled Parliamentary Questions on this subject. He has also pressed Government Ministers on the matter during the Commons passage of the Pensions Bill. Government Ministers have refused to initiate negotiations with those countries with whom we currently have no reciprocal arrangements but I can assure you that this issue will be considered as part of the Conservatives’ policy review process.” 22. Labour Shadow Minister Ian McCartney MP in 1993, wrote, and signed, a letter saying: “Labour’s policy is to ensure equality of treatment to all British pensioners who live abroad in countries outside the European community.” 23. In that same year, a Liberal Democrat policy paper read: “Pensioners who go to live abroad get no annual uprating in their pensions at all, unless they live in another EC country or a country with which the UK has a reciprocal social security agreement. In 1991, 343,000 pensioners lived in ‘frozen rate’ countries (mostly in Australia, Canada, New Zealand and South Africa). This discrimination is inexcusable. Liberal Democrats would ensure that non-resident pensioners get the same uprating as resident pensioners”. 24. There are over 550,000 British state pensioners living overseas who have their state pension uprated every year, just as if they were living in the UK. 25. There are over 550,000 British state pensioners living overseas who have their state pension frozen at the rate at which it is ﬁrst paid or as at the date of migration. 26. All of the above state pensioners, both uprated and frozen, have paid into the National Insurance Fund under exactly the same rules. 27. When a pensioner from a frozen country visits the UK or EU on holiday or for family reasons or any other reason, the current system allows them to advise the Department for Work and Pensions (DWP) of their travel plans and received the uprated pension whilst they are temporarily (or ordinarily) resident in the UK or EU. There have been cases where pensioners have been required to produce copies of airline tickets, travel itineraries, boarding passes, hotel bills, etc. in order to substantiate their claims. All these records need to be processed by DWP staff at a cost to the taxpayer. Once they return to their frozen country, their state pension is returned again to its old frozen pension rate. This is a degree of complexity that would no longer be needed if all pensions were uprated equally no matter where pensioners live. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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28. It has been recently suggested that to uprate all state pensions, no matter where pensioners live, would cost of the order of £655 million. We note that the National Insurance Fund, which is used to pay all state pensions, whether uprated or frozen, currently has a surplus balance of the order of £30 billion according to HM Revenue and Customs (HMRC). The Government’s Debt Management Ofﬁce (DMO), part of the Commissioners for the Reduction of the National Debt, which holds the National Insurance Fund Investment Account, records a cash balance of over £28.6 billion as at the 31st January 2013. 29. Accordingly, we suggest that the NIF is available to pay the uprated pensions of all people who paid into it.

Summary 30. We propose that this bill is a good opportunity to simplify the state pension system and make it fairer. Accordingly, we identify that inﬂuential MPs across the board have in the past recognised the unfair and illogical frozen pension system. The NIF pays out all state pensions, whether uprated or frozen and funds are available in the NIF to ﬁnance the uprating of all pensions. 15 February 2013

Written evidence submitted by the Civil Service Pensioners’ Alliance About the Civil Service Pensioners’ Alliance (CSPA) 1. The Civil Service Pensioners’ Alliance is a voluntary membership organisation of retired civil servants, which campaigns on behalf of the 500,000 civil service pensioners. The CSPA has approximately 60,000 members in the UK, organised into 100 local groups with membership drawn from all grades and all Departments of the Civil Service and related bodies. The CSPA is recognised by the Cabinet Ofﬁce as the representative organisation for retired civil servants. 2. As well as pensions, the CSPA lobbies and campaigns on a wide range of issues of concern to older people, including health, social care, transport and social inclusion, and works closely with other organisations that represent older people, such as the National Pensioners’ Convention, the Public Service Pensioners’ Council and Age UK.

Introduction 3. On 14 January 2013 the Government published a White Paper setting out its plans to introduce a new single-tier state pension. Shortly after, on 18 January 2013, a Draft Pensions Bill was published, setting out the legislative changes which would be needed to implement the reforms. CSPA is pleased that the Work and Pensions Select Committee will be undertaking pre-legislative scrutiny of the Draft Bill and welcomes the opportunity to comment on the Government’s proposals. 4. The Draft Pensions Bill provides for reforms to the state pension system (the single-tier state pension), which will affect new pensioners from 2017 at the earliest. As well as representing the interests of our current members, the CSPA will also be responding on behalf of our future members, who have not reached retirement age. 5. On behalf of our current retired members, the CSPA must preface its comments on the Draft Bill. Whilst the CSPA believes that the introduction of a single-tier state pension does provide a solid basis upon which to reform the State Pension scheme and agrees that the reforms should make it easier for people to plan their retirements, whilst working, by providing greater clarity about the level of support that can be expected from the state in retirement and whilst the CSPA accepts that there may be some practical barriers in assimilating the current arrangements for existing pensioners into this new single-tier system, the CSPA, nevertheless, has to draw to the attention of the Committee that there is great concern amongst current pensioners that the Government has, by excluding them from this new legislation, ruled out future improvements in the existing state pension arrangements. 6. The Committee is, therefore, asked to consider referring this point back to the Secretary of State for Work and Pensions with a strong steer that any existing reform in State Pensions must include equivalent improvements for existing pensioners, without the loss of any better individual entitlements.

Wider Policy Implications The level of the single-tier state pension 7. CSPA is also concerned with the decision that the Government has taken to introduce the single-tier state pension at approximately £144 per week (for a single person), just above the current Pension Credit or Minimum Income Guarantee of £142.70 per week. The CSP- believes that the target for the ﬂat-rate state pension should be set at around £176 per week, based upon 60% of the Minimum Income Standard, widely cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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regarded as the Poverty Threshold. Such a signiﬁcant reform as that envisaged in the proposals for a single- tier state pension will not have the lasting impact intended if it were to fail the simple test that it would still leave its recipients in what would be generally regarded as poverty!

Abolition of Pension Credit 8. A key corollary of the introduction of the new single tier state pension will be the abolition of Pension Credit. Whilst this simplification of pensions is to be welcomed, lifting pensioners out of means tested benefits, the Alliance is concerned about how the passported benefits that currently accompany a claim for Pension Credit (such as Housing Benefit and Council Tax Benefit) will be made available to recipients of the new single-tier pension. 9. CSPA is keen to ensure that this process is made clear to ensure that new pensioners do not lose out on the benefits of automatic passporting which currently exists in the pensions system. 10. With the abolition of Pension Credit and other means tested benefits from 2017 it is clear that the means testing framework for current pensioners will need to be re-designed to deal with the ever decreasing number of pensioners using these services and the likelihood that their circumstances are more complex than ever. The CSPA urges the Government to ensure that a suitable administrative function is retained beyond the introduction of the new single-tier pension in 2017 for current pensioners who will continue to claim means tested benefits.

The Draft Pensions Bill 11. If the proposed introduction of the single-tier state pension addressed the issues of concern, set out above, over the exclusion of existing pensioners and leaving many pensioners below the poverty threshold, the CSPA could broadly welcome the provisions in the Draft Bill for future pensioners, but would, in any event, recommend that a number of issues in the following areas are carefully examined by the Work and Pensions Select Committee: — Part 1 (State Pension), Clause 24 (Abolition of contracting-out for salary related schemes etc). Schedule 13 Abolition of contracting-out for salary related schemes. Schedule 14 Power to amend schemes to reﬂect abolition of contracting-out. — Part 2 (Pensionable Age), Clause 25 (Increase in pensionable age to 67).

Part 1 (State Pension), Clause 24—Abolition of contracting-out for salary related schemes etc 12. Clause 24 of the Draft Pensions Bill abolishes contracting-out National Insurance Contributions (NICs) for salary-related occupational pension schemes, which will result in such individuals and employers paying more National Insurance. 13. As the CSPA set out in its response to the consultation on DWP Green Paper A State Pension for the 21st Century, it is opposed to the abolition of the contracted-out rate of NICs because it fears that such a step would further discourage retirement saving. 14. The abolition of the contracted-out NICs will, inevitably, force current members of private occupational pension schemes to contribute even more to their pensions or to receive reduced benefits in order to cover the 3.4% increased costs of NICs for employers. The Alliance fear that the combination of higher levels of NICs, additional contributions to pension schemes or reduced benefits and the freedom given to employers to unilaterally change the Trust Deeds for such private occupational schemes will force or encourage many individuals to leave these schemes, discouraging saving for future retirement. Whilst public service pension schemes will be affected differently because of the 25 year embargo on any further significant changes, the combination of increased NICs from employees and employers and the consequent further squeeze on Departmental budgets will inevitably have longer term adverse consequences for those public service pension schemes, as well as other terms and conditions for public service employees.

Part 2 (Pensionable Age), Clause 25—(Increase in pensionable age to 67) 15. Clause 25 of the Draft Pensions Bill brings forward, by eight years, the timetable for increasing State Pension age (SPA) from 66 to 67, to begin in 2026 and end in 2028. The State Pension age was due to increase to 67 between 2034 and 2036. This further revision of the consensus that was established in the 2007 Pensions Act over the dates for re-aligning the State Pension ages for men and women and for the later increases in State Pension ages to 66 and 67 will add to the consternation of the previous and abrupt changes to the provisions of the 2007 Pensions Act; the CSPA trusts that the Committee will ensure that the Government is advised to proceed by consensus if further changes in the State Pension age are considered. 16. The Alliance recognises the need for the provisions in Clause 26 to provide for a system of periodic reviews of the State Pension age, at least every ﬁve years. These reviews will take into account analyses provided by the Government Actuary on increases required to the State Pension age in order to ensure individuals maintain a speciﬁed proportion of adult life in retirement. A report on wider factors produced by an independently-led body will also be considered as part of the review; the CSPA strongly adheres to the view cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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that those wider factors must include the signiﬁcant variations in longevity related to geographical location, previous occupations and income/wealth.

17. Whilst CSPA notes the need for the commitment to periodic reviews of pensionable age, it is concerned that the Draft Pensions Bill, as currently drafted, does not reﬂect the good practice guidance of the 2005 Turner Commission, which recommended that those affected by any future increases in the State Pension age be given a minimum of seven years notice of any change in the date that they will begin to receive their payments, in order to allow them to adequately prepare for their futures. 15 February 2013

Written evidence submitted by Citizens Advice

Introduction 1. In 2011–12 the Citizens Advice service advised more than 2 million people on 6.9 million problems. We provided advice on 2.3 million beneﬁts and tax credits problems, of which almost 100,000 related to the state retirement pension and state Pension Credit (PC).

2. The complexity of the current arrangements for the financial support of pensioners is highly unsatisfactory. One third of those eligible for means tested benefits, including Pension Credit and Housing Benefit, do not claim them as many people believe they will not be eligible or that claiming will negatively impact on other benefits they may be receiving. CAB (Citizen Advice Bureaux) advisers spend substantial amounts of time helping pensioner clients with these complexities.

3. We therefore welcome the opportunity to submit evidence to the Work and Pensions Select Committee on the Draft Pensions Bill (2013). There is much to support in the Draft Bill, particularly simpliﬁcation of the system and a greater number of pensioners qualifying for a pension at the full rate—in the longer term. Citizens Advice would like to see some of the provisions that are being left to secondary legislation safeguarded through inclusion in the Bill.

4. The process of designing and implementing the single-tier pension is also a great opportunity to address the challenges of the current system and ensure they are not transferred to the new state pension model.

Safeguarding Key Principles in Primary Legislation 5. There would be great benefits in setting the core elements of the single-tier pension proposal in primary legislation. This would ensure that the intended simplification of the system is not watered down. For example, if the starting amount of the full-rate pension and the minimum qualifying years is defined now, impact assessments and personal planning can be as accurate as possible. Without this the same difficulties in predicting retirement income will be maintained until the regulations are set, with consequential impacts on preparing for retirement for those approaching pensionable age. Analyses based on the white paper and impact assessments could be rendered obsolete if the starting amount and minimum qualifying years change.

Minimum Qualifying Years Part1 Paragraph 2(3) 6. The minimum number of qualifying years would be better set in primary legislation. Not doing this leaves too much leeway to increase the minimum to a level above ten years in regulations. The January 2013 White Paper suggests either seven or ten minimum qualifying years will be required for any eligibility for the single- tier pension, and then goes onto provide all modeling based on a ten year minimum.

Single-Tier Starting Amount Part1 Paragraph 3(1) 7. The starting amount of payment of the single-tier pension is not set out in the Bill. In the White Paper the starting level of the single-tier pension was suggested as £144 per week in today’s terms and is set above the basic level of means tested support. This is less than the amount speciﬁed in 2011 Green Paper, which proposed a starting level of £140 per week which represented an amount that was 5.5% above the state Pension Credit (PC) (guarantee amount) for 2010–11, and almost 2% above the PC level for 2011–12. The £144 per week amount proposed in the White Paper is just under 1% more than the 2012–13 PC amount, and is almost 1% less than the 2013–14 PC amount.

8. Secondary legislation is not strong enough a safeguard to protect the amount. The amount of the single- tier pension needs to be known now or it will render analyses of the reforms null and void. Citizens Advice supports a level of single-tier pension set at no less than 5% above Pension Credit minimum guarantee, ﬁxed in the Bill, and up-rated by the triple-guarantee for state pension. In this way the amount of the full single-tier pension can be predicted regardless of commencement date and will greatly assist those approaching retirement in their planning. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Impact the Proposals will have on Specific Groups Women 9. Overall, women will make significant gains as a result of the change to individual qualification and single- tier provision. The single-tier pension accelerates the move towards pensions equity between men and women. Citizens Advice welcomes and supports these advances. 10. It is for women, however, that the challenges of the current system could be replicated under the single- tier system, creating unintended barriers to achieving a high value pension in their own right. 11. We are concerned about the impact of individual qualification on women who never work outside the home, or do so for a period less than the qualifying minimum, or work at very low wages. The risks largely centre on how National Insurance (NI) issues for those not paying them through taxation on earnings including: — how to access NI credits or contributions; — the complexity of maintaining NI records; — the cost of maintaining NI records; and — communications for and understanding of managing NI records. 12. For example, whilst child benefit automatically provides National Insurance credits for the claimant, there is no automatic crediting of NI after the youngest child reaches 12 years in this system, even where full- time caring continues. 13. There is also risk for women in middle to high earning families as a result of the changes to child benefit eligibility. This change increases complexity for families where one is earning over the child benefit earnings limits, meaning a potential loss of automated NI credits. In such circumstances women will need to know that they will have to maintain child benefit payments, then have this amount clawed back through taxation, and complete an annual tax assessment in order for the partner with caring responsibilities to receive automatic NI credits. Alternatively, if the family chooses to stop child benefit there will need to be knowledge and resources to make voluntary NI contributions. 14. Some couples manage their caring responsibilities and home life with one working full-time and the other working part-time—potentially below the lower earnings limit (LEL) and thus not paying NI contributions. Although women’s overall participation in the labour market has increased over time, higher numbers of women than men work part-time (and part-time work is generally low paid, even if scaled to the full-time equivalent) in order to meet caring responsibilities. In the UK just over 50% of mothers with school- age children work less than 20 hours a week. 15. In addition, recent labour market trends indicate that there has been a considerable increase in part-time workers over the course of the economic downturn, potentially increasing the number of people below the LEL. Even where people work more than one part-time job, if both are under the LEL they will not be adding to their NI record. The ability to afford voluntary contributions would be limited at this earnings level. 16. Many of these women would currently derive or inherit rights from their partner but would not under future proposals. The removal of derived or inherited rights is inconsistent with expectation that couples are a “benefit unit” and financially inter-dependent whilst of working age. 17. This situation may be more prevalent for people of different cultural familial structures which could lead to nil or low pension eligibility for women in minority ethnic communities where it is expected and the norm to continue home duties after children have grown. Some of the women affected may be harder to reach with regard to NI record communications due to cultural and language differences. 18. There are also risks for the parent/s of a disabled child who dies in adulthood. Where the person with caring responsibilities may have built up some qualification to a state pension through NI credits, the difficulty of entering workforce later in life and the ability to make up to 35 years from this point, could see such carers receiving a significantly lower pension. Where the parent is does not have a partner the impact could be devastating.

Disabled, Ill and Unemployed People 19. We are particularly concerned that large gaps in NI records will develop for people who are too ill or disabled to work. Where the person does not then qualify for ESA (Employment and Support Allowance) (income related), or its equivalent under Universal Credit, because of their partner’s income, there is a considerable risk that they develop gaps in their NI record which would not apply to someone who does not have a partner and therefore qualiﬁes for the income related beneﬁt. This risk is increased by the time limiting of ESA (contributory) to one year, which came into effect in 2012. 20. Similar situations could arise for people who are unemployed but do not qualify for income related Jobseeker’s Allowance (JSA) or its equivalent in Universal Credit (UC), though periods of unemployment may be of shorter duration than periods out of the labour market due to illness or disability. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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21. To continue to be eligible for automatic NI credits, the ill/disabled or unemployed person would have to continue to claim, which would mean meeting the requirements of the benefit, whilst getting no financial support. 22. Citizens Advice would like to see greater safeguards built into the legislation for those who are at risk of not reaching the minimum qualifying years, or of attaining only low qualifying years, or who are isolated from the means to build qualifying years as a result of culture, caring responsibilities or lifestyle choices (such as ongoing home duties). These are not new risks arising from the proposals, but the redefining of the pensions system and provides an opportunity to engage those on the periphery. This is addressed further in the section on Communications (overleaf).

How the proposals are likely to affect the future need for means tested benefits pensioner benefits and incentives to save for retirement 23. The single-tier proposal, through reduced complexity and relative ease of predicting future entitlement, could incentivise personal saving for retirement. The introduction of automatic enrolment in a workplace pension from 2012 and the National Employment Savings Trust (NEST) further complement the proposal. 24. Conversely, the topline message that the basic state pension is rising to a level above Pension Credit could disincentivise saving. Unless communications can provide a clear understanding of the process, and general improvements in financial literacy are achieved, the need for means tested pensioner benefits will not decline.

National Insurance Contributions and Credits 25. In order for the single-tier pension to succeed and meet aims around equality and reduced complexity there will be a need to address the system of NI contributions and credits. Please refer to paragraphs 9–22 for more detail. One way to achieve this would be through implementing automated crediting in as many instances as possible. 26. Whilst it is not in the purview of this Bill to address such processes, we would ask the Committee to consider whether other legislation and processes administered by other Departments interact with the proposed pensions system to create barriers to accruing eligibility. 27. The introduction of Universal Credit from late 2013 could improve access to NI credits, by bringing a range of beneﬁts and allowances into a central system. This will not, however, reach those who do not qualify for support under UC.

Impact of the Abolition of Savings Credit 28. The abolition of the Savings Credit element of State Pension Credit for those who reach pensionable age on or after commencement of the new scheme will mean more than the loss of up to £18.54 per week for singles, and £23.73 per week for couples. In the short term, following commencement of the single-tier pension, this will mean less cash for those who have small personal provision for their retirement which will not be replaced. 29. We are not convinced that this measure is anything other than a way to quickly reduce costs through a decrease in means testing and it is incompatible with the broader pensions policy intent of encouraging personal saving for retirement, and the Savings Credit in particular was implemented to ensure that those pensioners who had mode some saving towards their retirement were better off than those who had not saved. 30. The closing down of Savings Credit leaves a gap in the system for those on low incomes who would thus qualify for a better rate of Housing Beneﬁt, and cold weather payments. It must be remembered that not all who receive Savings Credit are in receipt of guarantee credit, so the end of Savings Credit could mean increased burdens on those with modest personal provision.

Pensionable Age Part 2, Paragraph 26 (1)(a) 31. We are very concerned that the Government has, to date, addressed increasing longevity and its impact upon state pension age solely in terms of average increases. We consider that socio-economic variations in longevity also need to be addressed in the context of raising state pension age. In our August 2010 response to the Government’s consultation on raising state pension age we highlighted that there is no discussion of the socio-economic distribution of life expectancy, and current trends related to this. 32. The Marmot Review showed that there are significant geographic, income and socio-economic variations in life expectancy and disability-free life expectancy. Since poorer people tend to depend more heavily on state benefits for their retirement income than wealthier people, it is important that the Government considers how raising the state retirement age more quickly will affect poorer, less healthy and more vulnerable people, not just the population as a whole. As suggested in the Review, social protection needs to “enables and incentivises people to move into retirement at a pace that reflects their health and wider capabilities.” cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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33. Citizens Advice asks that socio-economic variations in longevity be included as one of the “other factors the Secretary of State considers relevant” for the purposes of the periodic review and report about pensionable age.

Protection of Accrued Rights Part 1 Paragraph 7(4) 34. This clause describes limits placed on how much state pension a person who inherits rights will be allowed to receive under transitional entitlement. A limit applied to amounts over the “amounts provided for by regulations” is an erosion of accrued rights. Whilst we understand that the Government might want to limit amounts that can be inherited in order to work towards individual qualiﬁcation, it contravenes the principle of protecting accrued rights. 35. We ask that greater clarity is provided in primary legislation through publication of the formula to make transparent exact sums that will be inheritable.

Uprating and Revaluing of Accrued Pre-commencement Rights Schedule 1 Part 2 Paragraph 2 Step 4, Paragraph 6; Schedule 12 Paragraph 12 (5) 36. The process of determining a person’s single-tier amount where there are pre-commencement qualifying years will devalue the protected payment over time. That is, where a foundation amount is found to be “in excess” of the full rate single-tier amount it will be “revalued” from the commencement date to the person reaching pensionable age in “accordance with the general level of prices”. 37. Whilst we understand that the application of the lower measure to “revalue” amounts accrued over the full rate single-tier amount will align protected payments with additional state pension, our preferred option is to revalue protected amounts by the triple guarantee so that they do not lose value against the foundation amount in the period leading to pensionable age. This will impact more on those who accrued a signiﬁcant amount of pre-commencement years, but also have a signiﬁcant number of years until reaching pensionable age.

Communications 38. As a result of the transitional arrangements considerable complexity remains in the pension system and we accept this as unavoidable. A commitment to a sustained communications programme could improve outcomes, manage expectations, minimise misinformation, promote action on NI contributions, and support personal saving for retirement. 39. We consider that the aims of the single-tier proposal should be more clearly set out. In effect the Government is saying that it will ensure that anyone who has spent most of their adult life working or caring in the UK, or has been unable to do so because of long-term health problems, will receive a state pension which covers basic living costs. The real value of this pension will be safeguarded by the triple guarantee. If people want to have a higher standard of living in their retirement, it will be up to them to enrol in an occupational or private pension scheme, or be automatically enrolled in a scheme, for which they will receive tax relief on their contributions. We believe that it will be essential that the Government spells out clearly that this is the new contract for state pensions between the Government and individuals.

About Citizens Advice The Citizens Advice Service provides free, independent, conﬁdential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims: — to provide the advice people need for the problems they face; and — to improve the policies and practices that affect people’s lives. 15 February 2013

Written evidence submitted by EEF About the Engineering Employers Federation (EEF) 1. EEF, the manufacturers’ organisation is the representative voice of UK manufacturing. We work with policymakers to create policies that are in the best interests of manufacturing, which ensure a high growth industry and boost its ability to make a positive contribution to the economy. 2. EEF members have a long tradition of providing pension benefits, manifest in the wide incidence of high quality pension schemes, both defined benefit (DB) and defined contribution (DC). 3. It is because of this history and commitment to pension provision in the manufacturing sector that the Bill will significantly affect many EEF member companies; such companies will be materially impacted by the cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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abolition of contracting-out on a DB basis. EEF also has a strong interest in the proposals relating to the qualifying age for the state pension due to the labour market implications and its interaction with occupational pension schemes. Accordingly, we have conﬁned our commentary on the state pension aspects of the Draft Bill to these provisions.

Summary 4. EEF has warmly welcomed the single-tier pension as providing a workable balance between the aims of reducing pensioner poverty and controlling the costs on the public purse. Further, simplification and maintaining an incentive to save for a pension are vital pillars in promoting adequate incomes in retirement. Without such reforms, auto-enrolment is unlikely to be a success. 5. We have also argued that the transition to a single-tier pension is a pivotal moment for those companies who still have defined benefit schemes open to future accrual; the abolition of contracting-out and the loss of the National Insurance Contributions (NIC) rebate could lead such employers to close those schemes. Whilst there is a widely held view that DB schemes are now in terminal decline, we believe the position is more complex than that. Granting employers a statutory override to assist them in absorbing the cost of losing the NIC rebate is an important measure underpinning the broader policy objective behind the workplace pension reform—to encourage higher private pension saving—if it helps those employers keep DB schemes open to future accrual. 6. Therefore, EEF welcomes the commitment set out in the White Paper to an override. We also recognise that this is a relatively novel concept and that there are challenges in drafting it. In paragraphs 9 to 19 we make observations on whether the provisions as drafted will achieve their objective. 7. We also welcome the approach of referring the question of if and when there should be future increases in state pension age to an independent body. However, we do have reservations about the potentially narrow scope of such a review. 8. Finally, we believe the Draft Bill should make more explicit provision for the Government to take on a central role in communicating the changes. The transition is a vital one and a clear commitment to meeting the communications challenges should be central to the project, and not one subject to the generic departmental funding pressures prevailing at the time of launch.

The Ending of Contracting-out 9. Regarding Clause 24 (2): EEF supports the introduction of a statutory override enabling employers to pass through the increased costs from losing the NICs rebate consequent upon ending contracting-out. 10. In the interests of fairness and good employee relations we also support the override being narrow in scope and available as an option for a limited time window. 11. However, currently Clause 24 and Schedule 14 have been drafted too restrictively. For the avoidance of doubt, Clause 24 (2) should make it clear that an employer may make such changes as are necessary to its pension arrangements to take account of increases in the employer’s NICs in respect of relevant members because of the repeal of section 41 of the Pension Schemes Act 1993. A wider formulation such as this would deal with the issues set out below. 12. By way of background, where an employer is proposing to change pension arrangements, such as altering the accrual rate and/or increasing employee contributions, the employer’s obligations are likely, depending on the speciﬁc circumstances, to include one or more of the following: (a) consult with trustees; (b) reach agreement with the trustees (in principle, mitigated by the statutory override); (c) consult with the affected members under the rules of the scheme and/or the Pension Schemes (consultation by employers, etc.) Regulations 2006, and possibly; and (d) obtain the agreement of the active members to the proposed change. 13. In view of the complexity above, the relevant provisions of the Bill should be drafted to avoid an overly restrictive interpretation by the courts of when the override can be put in play (which arguably the present wording could lead to). The Bill should make it clear, with a “for the avoidance of doubt” preamble, that the employer can rely on the override where: (a) the rules cannot otherwise be changed at all; (b) the employer is not in fact required to seek the consent of the trustees; (c) the employer needs the agreement of the trustee; and (d) the rules can only be changed following consultation with, or with the agreement of, the active members. Under some scheme rules, members are required to give their consent to any changes to their detriment in respect of future service. A statutory override limited to “overriding trustees” would fall short, therefore, of meeting the wider policy objective. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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14. In addition to the above (ie (a)–(d)) , the employer should be able to rely on the override in order to change the relevant terms of a contract of employment, if that is required, and not just the pension scheme rules. By way of background, employees’ pensions rights (such as what contribution they must pay) can in some circumstances be determined by their contracts of employment, not by scheme rules. This situation might arise over time because, for example, there may be a conflict between the rules and the contracts. Normally, to the extent that the change involves the employer varying the terms of a person’s contract of employment, then the employer can only lawfully make the change with the consent of the individuals, which may not be forthcoming. 15. The Bill should, therefore, be amended so that, where it is not only (or not even) the pension scheme rules that determine employee contributions/accrual rates, then the employer should also be able to use the override rather than have to seek individual employees’ consent. 16. Under the Bill, as a safeguard to employees’ interests, employers will still be required to consult with employees and their representatives on how they plan to pass through the increased NIC costs. 17. In summary, the position we seek to avoid is one where the employer could in principle use the override to alter the scheme rules to, for example, increase employee contributions but the contract of employment may provide otherwise and so the override has not met its objective—to provide an easement. The Bill should give the easement to all employers to avoid the outcome of each employer having to seek legal advice to determine whether reliance on the override to change the rules of the scheme is enough to pass through the cost of the extra employer NIC contributions. 18. Schedule 14, paragraph 2 (1) (a) permits the override to be used to “increase” member contributions; this should be amended to provide for “to introduce or increase” employee contributions. In this context also, further consideration should be given to how the override would interact with salary sacrifice schemes where (albeit uncommon) the member is not making a direct contribution into the scheme. 19. Together these changes would avoid another “small print lottery”—the phrase coined to describe the situation to which employers and trustees recently found themselves subject to in relation to the switch from using CPI (consumer prices index) rather than RPI (retail prices index) for revaluing and indexing pensions, ie their ability to take advantage of the change being subject to the minute detail of their own scheme/ circumstances. 20. With regard to paragraph 12 of Schedule 14, the power to make procedural regulations for the exercise of the override, we consider that such procedural regulations are superfluous given there is already a duty on employers to consult members and prospective members under the existing employer pension consultation obligations. In relation to trustees, it would be sufficient to make clear that the override does not oust any existing duty under the rules of the scheme to consult trustees, but the Bill/Regulations should not add any fresh procedural obligations.

State Pension Age 21. Regarding Clause 26: Employers have a strong interest in the age at which state pension age is payable, particularly since the abolition of the default retirement age. Employers are concerned to ensure that a broad assessment of all relevant factors is undertaken, including labour market implications. 22. Accordingly EEF has supported the introduction of a periodic review of the state pension age undertaken by an independent body with a wide remit to consider all relevant factors. In relation to the alternative proposals initially ﬂoated by the Government for establishing a mechanism for future increases in state pension age, of the two options—increasing it through a formula linked to life expectancy or through a review, EEF believes the review mechanism would provide a fairer and more sustainable approach. This is because the question of what the state pension age should be has many levels of complexity beyond life expectancy, raising such questions as the way the labour market operates, patterns of health and well-being amongst older workers, justice between generations and between different socio-economic groups. 23. The question of the state pension age is potentially hugely divisive as experience from other jurisdictions shows. We are concerned therefore that, under Clause 26(5), there is a power for the Secretary of State alone to determine the relevant factors in addition to life expectancy that should determine state pension age. We believe a more appropriate balance is for the reviewing body to take evidence on what the relevant factors are during its deliberations. 24. We also suggest Clause 26 (1)(a), the basis of the power to review the state pension age, should not give a power to review the rules for determining the state pension age; it should simply be a power to review “the state pension age”. The framework, or rules, for undertaking a review should be settled by this Bill, with no window for re-opening the approach. This may not be what the drafter intended but the addition of the words “the rules” opens up the possibility for tinkering, which should be avoided. 25. Further some of our member companies are concerned about how a rise in state pension age interacts with bridging pensions. We suggest there is a case for any rise in the state pension age to be accompanied by a statutory override allowing schemes to track the change through their own schemes without having to seek member/trustee consent or undertaking the pension consultation obligations referred to above. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:35] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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26. Clause 26 (3): Regarding the frequency of reviews, as drafted, there appears to be a long stop provision of at least once every six years. We think it should be clear, if that is what is intended (and which we would support) that the reviews should be no more frequently than once every ﬁve years.

The Communication Challenge—Transition to the Single-Tier Pension 27. The changes heralded by the Draft Pensions Bill represent a major communication challenge, not only for the Government and other state agencies but also for employers extending over several years. We believe the scale of the challenge will require a higher level of creativity and funding for communication campaigns than the Government would ordinarily be prepared to contemplate. In particular, to bring about behavioural change to increase private savings will require investment in high quality online tools to help individuals identify what they need to know and what they need to save. 28. Furthermore, employers, as they currently are at the point of retirement, will be the ﬁrst port of call for myriad questions about what the reforms might mean. The challenge of responding accurately is too great to be left to individual employers. Employers are nervous of talking to their employees about state pension because it is so complicated. This is a further reason why we advocate a major investment by Government in online tools to help individuals identify what they need to do to safeguard their interests in retirement. 15 February 2013

Written evidence submitted by Madeline Fox Executive Summary 1. This submission relates to the proposals to introduce a single component flat rate pension and the adverse effect the proposals will have on a small group of people. 2. Under the provisions of the Draft Bill approximately 80,000 women, born between 6 April and 5 July 1953, will not benefit from the proposed flat rate although men in the same age category will. 3. This discrimination, whether intended or not, should not be permitted to remain in the Bill and it should be amended accordingly.

Introduction 1. I am submitting this as an individual who wishes to see fair treatment for this group of 80,000 women. 2. As a former Chartered Member of the Institute of Personnel and Development and a former human resources practitioner I have always supported employment related policies which have worked towards fair treatment for all those in work who pay their taxes and National Insurance Contributions (NICs) in exchange for a fair deal from the Government, particularly at the point they retire. 3. I am not one of the 80,000 affected women but I feel strongly that they should not be the subjects of discrimination. 4. In 2010 the Liberal Democrat manifesto promised to “hard-wire” fairness into British society. References to fairness also featured over 20 times in the Conservative Party manifesto of the same year. Principles of fairness are fundamental to the way the two parties in power wish to conduct their political business. They have it in their power to re-dress the blatant unfairness in the Draft Bill.

Factual Information 1. The financial impact for this group of women will be substantial. 2. This group of women has already seen their pension age put back as part of the acceleration to equalise retirement ages for men and women. 3. The Government originally intended this group to retire under the new system. It is only the slippage in introduction dates from April 2016 to 2017, which has thrown up this anomaly. 4. The proposals, as they stand, are discriminatory towards a clearly defined group of women. A man born on 6 May 1953 will benefit from the new flat rate pension. A woman born on the same day will not. 5. The women in this group are not even eligible for the options available to everyone else whose pension age was increased or who are set to retire after 6 April 2017 and whose National Insurance (NI) contributions records are inadequate. They may not defer their pension date; nor may they buy additional years. 6. Statistics show that women in general are already disproportionately affected by poverty in retirement because of lower average earnings and career breaks to have and care for children. One of the major aims of the Draft Bill is to address this issue and it is to be applauded for doing so. Yet, it specifically excludes a clearly identifiable group of women from being able to so benefit. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Recommendations for Action 1. Allow this group of women, who retire before 6 April 2017, to benefit from the proposed single component flat rate pension. 2. Allow the women in this group to defer taking their pension until they can benefit from the new flat rate pension. 3. Allow women in this group to choose whether to take their pension under the old or new rules. 5 February 2013

Written evidence submitted by GMB Summary 1. GMB is deeply concerned at the impact of the end of contracting-out and believe that this system could be retained in some format. We are equally concerned at the consequential moves to over-ride protections and allow employers to implement change without recognition of these. 2. GMB believes that reforms predicated on no extra spending on old age beneﬁts cannot be supported as the pension system is in need of a cash boost from public ﬁnances. The fact that long term expenditure savings are predicted along with extra revenue from a potentially greater National Insurance (NI) yield, means that the provisional level of single-tier pension should be increased. Current pensioners are also in need of a cash boost to their state pension income. 3. GMB continues to reject changes that will see the state pension age increase from its current level until policies are introduced to redress the imbalances in life expectancies that persist in society. These considerations may feature in the proposed review, but it would appear that such issues are secondary to the overall experience in life expectancies.

Introduction 4. GMB is the UK’s third largest union representing 620,000 members. Our members work in both public and private sectors and are covered by the full range of occupational pension arrangements. We also have an active section of retired members many of whom are currently in receipt of a state pension. 5. GMB welcomes the opportunity afforded by the Committee to comment on the Draft Pensions Bill. We previously engaged with DWP and the Pensions Minister when their Green Paper A State Pension for the 21st Century was published.5 Many of the arguments we made at that time have not been addressed in the intervening period and remain relevant today. 6. Reform of the state pensions system is long overdue and whilst we welcome commitments to making this system fair, simple and sustainable; we must recognise the significant degree of subjectivity attached to each of these qualities, as well as a long legacy of expectation and interaction with other benefits and private provision. 7. GMB has clear policy that every pensioner should be able to plan for a dignified retirement with the ability to live in security in their old age. Some of the proposals included in the White Paper and Draft Bill will go some way to assisting in this. Other proposals are viewed less favourably and should be reconsidered. 8. This submission will look at GMB’s priority areas in considering the White Paper and Draft Bill, with reference to the provisions of the Draft Bill.

The Interaction with Occupational Pensions 9. GMB recognises that the Government’s proposal for simplification of state pension provision includes the abolition of the second tier (State Second Pension). A major consequence of this abolition is the ending of contracting out (Schedule 13) and the rebate of National Insurance for both employees and employers of contracted out, defined benefit (DB) pension schemes. 10. GMB would question whether such a move is completely necessary, and believes that a form of contracting-out (or reduced accrual) under the single-tier proposals could be developed. This might include building up a proportion of the single-tier pension for years of contracted-out service, in exchange for a rebate of National Insurance contributions. For example an individual might accrue a single-tier pension equivalent to £3.30 per year of contracted service (80% of full rate), with the difference continuing to be made up through a quality defined benefit arrangement. We would welcome a discussion with Department for Work and Pensions (DWP) officials on such a provision. 11. The principle of retaining some ability to contract out (or equivalent) is, in GMB’s view, vital for the continued provision of quality defined benefit provision. 5 A copy of GMB’s response to the Green Paper can be seen at http://www.gmb.org.uk/docs/ 11095%20GMB%20RESPONSE%20TO%20DWP%20CONSULTATION%20ON%20STATE%20PENSION%20REFORM.doc cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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12. The ending of the current rebate will result in additional expenditure for both employees and employers— 1.4% of banded earnings for employees and 3.4% for employers. Chapter 3 of the White Paper covers this and introduces the Government’s intention to ease the mechanisms applying to some employers seeking to apply detrimental changes to pension schemes. These easement powers are outlined in Schedule 14 of the Draft Bill.

13. In many occupational pension schemes, employers have the sole power to enforce changes to pension terms (for future accrual). In other such schemes employers will have to obtain the agreement of scheme trustees. Some schemes will require the collective consent of a proportion of active scheme members to bring about such changes, as a consequence of protections that were negotiated at the time of privatisation of various industries. Finally, members of some privatised industries are covered by “Protected Persons” status, the legislation which DWP has also launched a separate consultation on.

14. The powers outlined in Schedule 14 seek to diminish any requirements to obtain consent for changes. GMB strongly rejects such a move, and cannot understand the rationale for applying this. The protections relating to member consent and Protected Persons, were given as long term assurances to those who have sought to take responsibility for their retirement savings and were accepted by employers operating in the relevant industries at that time.

15. A view may exist that such protections offer too much control for pension provision to employees. GMB has experience in recent years of a number of instances of detrimental changes being agreed where members who are subject of either Protected Persons legislation6 or who are required to consent to rule changes.7 Conversely we are not aware of any situations whereby an employer seeking to make changes has been blocked from doing so by these protections. Rather these employers have sought to enter into a reasoned dialogue with staff and negotiate change with representatives. GMB would wish to see this approach maintained and no carte blanche given to employers to enforce change without meaningful dialogue. Given that the costs associated with the abolition of contracting out will not fall solely on employers, it is likely that employees will also seek to re-examine the deductions made from their take home pay. This is particularly true in areas which have seen protracted wage stagnation and increasing costs of pensions to members.

16. The ultimate rationale for seeking to apply this over-ride is due to an increase in National Insurance, through the loss of the rebate. GMB is mindful that no such powers were considered necessary when National Insurance rates were raised in 2011 or 2003; or in 1999 when the system of employers’ National Insurance was reformed. As such we can not accept the rationale for an over-riding power now.

17. In any event, the focus on restricting these powers is on the extent to which an employer may seek to reduce its costs by more than the potential increase in National Insurance costs. Whilst this measure may be technically understandable (notwithstanding comments above), the restriction ought to also consider the extent to which scheme members’ total pension income might be detrimentally prejudiced by such reforms. The perceived expectation is that any loss in occupational scheme beneﬁt permitted by the proposed over-ride, would be at least offset by an increase in state pension income. GMB has not seen any evidence to reassure us that members would be better off if these reforms were allowed. If the powers were to prevail, we would suggest that the restrictions outlined in Clause (2) of Schedule 14 should be extended to ensure that members should not face a reduction in total income from their normal pension age.

State Pension Age

18. GMB has consistently rejected previous proposals to raise the state pension age, including that outlined in Clause 25; and we will continue to do so in the presence of signiﬁcant variations in life expectancy across regions, social class and income level. With regard to Clause 26, we welcome the apparent move to consider a report into “other speciﬁed factors” (other than life expectancy). However GMB feels that the remit of the person or persons conducting any review should be extended to ensuring that the least well-off in society, who will be most reliant on state pension income, are given greatest regard in assessing the impact of state pension ages.

19. The wording of clause 26 allows for significant deviation from what would otherwise be an important principle in considering the impact of longevity increases. Government has specified that a proportion of adult life approach as a first basis for setting state pension age is appropriate. However no indication of what an appropriate proportion is has been given. Furthermore no explicit definition of when a person reaches the specified age for entering “adult life” has been given. Clarity and debate on these issues is much needed to lend any credence to the Government’s proposal.

20. GMB is also mindful of the impact of state pension age on the recently negotiated public services pension schemes, many of which will have an inherent link to state pension age. Although it is not an issue for this Draft Bill, we wish to ensure that regular reviews of the appropriateness of this link will be conducted. 6 http://www.iwcsss-pension.org.uk/editorimages/documents/20110830%20Pension%20Booklet%20A4_IWCSSS%20ﬁnal.pdf 7 http://www.professionalpensions.com/professional-pensions/news/2100389/union-negotiators-pensionable-salary-cap-centrica- scheme-running cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Expenditure & Income 21. Although not a direct feature of the Draft Bill, it is appropriate to comment on the fact that the reform agenda is not being underpinned by any moves to increase the level of spending on state pension benefits, and indeed DWP figures show that the reforms will serve to reduce expenditure in the long term. This position is not acceptable to GMB and nor should it be to the UK population. UK will lag behind most EU countries and the OECD (Organisation for Economic Co-operation and Development) average8 in public expenditure on pensions. This situation needs to be rectified with a significant cash boost to pensions provision for all pensioners. 22. Whilst the reforms have no immediate impact on expenditure (but a long term reduction), it is important to note that the abolition of contracting out would generate significant levels of revenue for HM Treasury. It is important that this extra income is directed towards applying significant improvements to the state pension system, for example through an uplift to the single-tier level.

Transitional Impact—Reduction In S2P/Serps Revaluation 23. Schedule 1 of the draft Bill covers how transitional pension arrangements are to be treated. The White Paper indicates that individuals will have a foundation amount calculated on the basis of their National Insurance record prior to implementation. This will be compared to the equivalent single-tier amount. Anyone with a foundation amount exceeding the full single-tier level will have the excess treated as a protected payment. 24. This Protected Payment is to be revalued between implementation and retirement in line with a prices index (Clause 6(5) of Schedule 1). 25. Prices based revaluation represents a signiﬁcant detriment to members with substantial SERPS (State Earnings-Related Pension Scheme) or State Second Pension built up with the assumption that these beneﬁts would be revalued in line with earnings increases (assuming the long term position of earnings increases exceeding price increases is resumed). GMB can see no reason why the protected payments should not be subject to the same level of increases as the single-tier level over the period between implementation and retirement.

Implementation Date and Coverage 26. GMB is dismayed that the proposals and Draft Bill offer no prospect of reform for today’s pensioners, or those who reach state pension age prior to implementation date. As outlined in paragraph 21, current and future pensioners are in need of a much needed boost to state pension provision. 27. Whilst a date for single-tier implementation has not yet been set, the Committee will be aware that a provisional date of April 2017 has been indicated. This provisional date for implementation may temporarily (and unintentionally) compound the historic gender discrimination of state pension provision. The equalisation of state pension age is currently under way with female state pension age being raised to 65, in line with that for men. Equalisation will not be achieved until after the provisional implementation date, meaning that men and women of identical ages will be served by different state pension systems. Whilst GMB would not wish to call for any unnecessary delay of implementation, we feel that Government must be mindful of this potential discrimination. 15 February 2013

Written evidence submitted by Stephen Hawley I have a number of concerns about the proposals although I agree with the concept of introducing a simpler state pension that does not force recipients to undergo the indignity of applying for means tested beneﬁts. I have, however, listed my concerns below: 1. I believe that the new pension should be introduced for current pensioners and not just those who will become pensioners after 2017. If one of the objectives is to simplify the state pension then it seems counterproductive to have a two tier system in operation that penalises current receipients and those who will start receiving their pension before 2017. Moreover, many of those who are receiving a full pension now will have needed to contribute for 39–44 years in order to qualify so it seems inequitable that they should receive a lesser pension. It will also be more costly to administer a two tier system. 2. The number of years of National Insurance contributions required to obtain a full state pension was reduced relatively recently to 30 years. I consider that this is an appropriate number of years and it will be of particular help to women. The Government are keen to promote the family and one partner in a couple may choose to stay at home while the other partner works. If the couple did not have children then it is unlikely that the stay at home partner (which is 8 http://www.oecd-ilibrary.org/docserver/download/8111011ec032.pdf?expires=1360843946&id=id&accname=guest&checksum= C29DC618FBCE2680C9C4795FD1F90F73. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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frequently the woman) would not accrue additional years towards the state pension. Couples are already penalised through the tax and benefits system and this would act as another disincentive to marriage or any other form of long-term commitment. 3. I agree with the proposal to require a minimum of 10 years contributions in order to receive even the most basic of state pensions. 4. I understand that there is a proposal to reduce the pensions of those who have been contracted out of the state second pension. This seems inequitable as those workers will have already contributed to a full state pension and would not have received the state second pension. It would also complicate the new state pension, introducing a two tier system and create more bureaucracy. Clarification is also needed in a couple of areas: (a) some workers pay contracted out National Insurance contributions on some of the pay but other components of the salary package my not be contracted-out and may not form part of the final salary package. For instance, car and phone allowances, overtime, etc are often not part of the salary for assessing workers’ final salary pension and so are contracted into the state pension. Will those who have made such contracted-in payments qualify for the full state pension? (b) workers on a low salary who are below the National Insurance threshold but above the qualifying level to receive National Insurance credits may be in a final salary scheme. How will they be treated? Will they get the full state pension or a reduced pension even though they are not liable to pay National Insurance contributions? (c) will workers who have contracted out be given the opportunity to buy extra years of the full state pension and, if so, will the cost take account of the fact that many will already have made substantial National Insurance contributions even at the contracted out rate? 5. How will those who have less than ten years National Insurance contributions be treated? Will they simply be given Income Support equivalent to the full state pension? If so, then this is not much of an incentive to work and pay National Insurance. 6. Further to point 5, how will overseas workers be treated if they move to Britain within a few years of the pension age? Will they be given Income Support equivalent to the full state pension? If so, then this could encourage “pension tourism”, whereby those living in less developed countries who have a right to live in Britain but who have not made sufficient National Insurance contributions move to this country in order to to access a better pension than they would receive in their home country especially if this is combined with Housing Benefit payments that meet their accommodation costs. 7. The pension age has been increased but the proposed new pension still compares unfavourably with pensions paid not just in comparable countries but also in some coutries that are significantly less wealthy than our own. Therefore, I believe that the starting point of £144 per week for a full state pension is still too low and should be significantly higher. In conclusion, Britain is still a relatively wealthy country that raises large amounts of money in income tax. While other countries seem to prioritise normal workers, the so-called strivers that the political parties in this country suggest they are eager to appeal to, and pay a decent pension, our own country seems to have other priorities. I don’t believe this has changed under the new proposals. 1 February 2013

Written evidence submitted by Hymans Robertson Executive Summary We are pleased to submit our response to the Work and Pension Select Committee in relation to its pre- legislative scrutiny of the Draft Pensions Bill relating to the establishment of a single-tier state pension. Rather than responding to all questions we have focussed on the following: — What impact the proposals will have on younger and older cohorts of future pensioners, women and people with caring responsibilities, self-employed people and future pensioners who will still rely on income-related benefits in retirement. — The effects of ending contracting-out of the State Second Pension. Hymans Robertson welcomes the announcements to simplify the State Pension and to seek to make it sustainable to increases in longevity. When the state pension was first introduced as a means tested benefit in 1909, 9% of adult life was spent in receipt of it. For the generation reaching state pension age today, this has tripled to over 31%. The Draft Pensions Bill goes some way to reforming the current system which is overly complex. Anything that brings simplicity to pensions and encourages saving has to be welcomed, even at the cost of a complex transition. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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This simplification should be viewed as an opportunity for pensions. It essentially creates a clean sheet of paper for both the government and the pensions industry to think about how to create a sustainable system for the future. However the reform needs to be considered in the context of wider developments such as public sector pension reforms, current discussions of private sector “defined ambition” and the need to rebuild a culture of saving for the future that has been lost in the last 50 years. In particular, as currently proposed in the Bill, current Public Sector employees will be significant winners from these reforms because they will be able to accrue substantially higher state pension benefit in the future. At the same time, public sector employers will be significant losers. They will suffer badly unless changes are made to public sector scheme benefits (which is hardly likely) or they are given significant increases in their government financing. Public Sector employees should not generally benefit from the transition to a single-tier state pension at the expense of their employers and their private sector counterparts. This transition period towards a single-tier state pension will be lengthy and in order to justify the policy, current changes need to last 30 years for people to properly plan for their retirement.

Request to give Oral Evidence Hymans Robertson would welcome the opportunity to discuss the points made in this submission with the Committee in more detail.

About Hymans Robertson 1. Hymans Robertson is one of the longest established independent pension consulting and actuarial firms in the UK. The firm offers a range of services including actuarial, investment and workplace benefits consultancy to defined benefit and defined contribution pension schemes. 2. In 2008, the firm launched Club Vita, a not-for-profit longevity research company, Club Vita, has more sophisticated analysis and data on life expectancy than anything previously available in the industry and it has quickly established itself as the market leader (according to the Pensions Protection Fund) in longevity analysis across public and private sector schemes. 3. The firm serves a range of clients including FTSE 100, FTSE 250 and privately-held companies. Over the past two years the firm has also prepared a number of the UK’s biggest companies for the onset of automatic enrolment. Hymans Robertson is also the largest adviser to public sector pension schemes, advising around half of all Local Authority Pension Funds, Police, Fire, Civil Service and NHS schemes. 4. Hymans Robertson has been involved in several pension reform projects: it worked with the Isle of Man Government to help it undertake a major reform of its public sector pension schemes, advising on initial options for change and the financial implications. This was followed by assistance with extensive consultation with members, assisting with all aspects of implementation of the agreed changes including transfer of accrued rights to a new unified scheme. It has also been heavily involved in change management projects for the NHS scheme and communications projects for the teachers pension scheme following recent reforms in the UK.

Questions Responses Question: What impact the proposals will have on specific groups, including, women and people with caring responsibilities, self-employed people, younger and older cohorts of future pensioners and future pensioners who will still rely on income-related benefits in retirement. We agree with the Government’s impact assessment that the proposals will generally have a positive impact on women, people within the caring profession and the self-employed. Although they will be required to pay higher National Insurance contributions, generally employees in the public sector will also be positively impacted because they will be able to accrue substantially higher state pensions in the future. Given that the single-tier state pension costs are expected to operate within the same cost envelope, this leaves private sector employees substantially worse-off. Our analysis indicates that this impact is at all salary levels and could cost the average private sector employee an extra 10% of salary a year to make-up the shortfall. With private sector pension provision already substantially below that in the public sector, the proposals as outlined potentially create a much bigger future pension problem in the private sector. Public sector employees should not generally benefit from the transition to a single-tier state pension as they will under the arrangements as currently proposed.

Question: What will the effects of ending contracting-out of the State Second Pension be? One of the key features of the Draft Pensions Bill is the end of “contracting-out”, the process whereby members of a pension scheme replaced the state second pension with extra money from their private pension scheme. This has been bad value for money. It is a feature of deﬁned beneﬁt (DB) schemes, but was removed from DC schemes last year. The end of contracting out will produce winners and losers. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

Ev w26 Work and Pensions Committee: Evidence

The winners The five million public sector workers are clear winners. They will get to keep their defined benefit pension schemes unchanged and get the extra state pension in exchange for a relatively small increase in National Insurance contributions. Another winner would be anyone with previous contracted-out defined benefit pension provision will be a winner, due to the proposed deductions from the foundation amount to reflect previous periods of contracted- out service (the contracted-out deduction and the rebate derived amount). The key point is that in principle the National Insurance contribution rebates were broadly balanced by higher contributions to the Public Sector or occupational pension schemes; similarly the minimum benefit levels in those schemes simply compensated the reduction in Second State Pension (S2P)/State Earnings-Related Pension Scheme (SERPS). However, by treating people differently now, depending on whether they were previously contracted-out or not, the former contracted-out employees are permitted to bank their S2P-equivalent pension in the public sector or occupational scheme, whilst having the opportunity to earn a full single-tier state pension. Individuals with contracted-out service should not be able to accrue a full single-tier state pension over their working life. They should be treated in a similar manner to contracted-in workers who have accrued SERPS/ S2P under the current system. Total accrual should be limited at the full single-tier state pension less the National Insurance rebate amount (ie the figure used in calculating the Foundation Amount). In this way, relative to individuals without any contracted-out service, these individuals would not be able to receive a double state benefit (ie previously benefitting from lower national insurance rates and being able to accrue a full state pension). The proposals also recognise groups who were disadvantaged under the previous system, namely carers, the self-employed and those raising families. It is perfectly reasonable that these groups should be winners.

The losers The main losers are public sector employers. Employees in public service pension schemes (who are in general contracted-out) already enjoy very favourable pension arrangements relative to the majority of employees in the private sector. The approach proposed by DWP will allow many of these public service employees the opportunity to accrue additional state pension (as noted previously). This comes at the cost of a significant increase in National Insurance contributions paid by public service employers. This additional cost will need to be handled in one of the following three ways (or a combination): (a) it could be borne by the taxpayer through an increase in central government budgets (albeit there are many employers in the Local Government Scheme who would not benefit from this, such as contractors and charities), or (b) the cost of service provision (and likely the quality of service) will need to reduce, or (c) public service pensions could be reduced to an equivalent degree. There is no scope in the White Paper as drafted to reduce the occupational scheme benefits in public service schemes (which have just been through the Hutton review). However, if public service employees are treated similarly to contracted-in employees, they would not earn additional pension from the state. This saving would allow the employers’ National Insurance contributions to be re-circulated back into their budgets, so the taxpayer would not have to meet the additional burden. We believe this revision to the arrangements proposed in the White Paper would be substantially more fair to all stakeholders. Turning to the private sector, the Draft Pensions Bill may speed up the demise of what remains of DB pensions. For the one million private sector workers still lucky enough to have DB pensions, the prospects don’t look rosy due to the end of contracting out. This is because of the extra cost this will put on employers. Inevitably some companies will simply take the extra cost on the chin but for many others this will prompt benefit reductions to employees which are very broadly equivalent to the increase in their state pension. Such employees will have reduced take-home pay (due to the removal of the National Insurance contracted-out rebate) in return for broadly unchanged retirement income. The easement to allow employers to make a compensatory adjustment to benefits without trustee agreement is of limited value—trustees do not often stand in the way of employers making justifiable and well-reasoned changes. The requirement to consult employees over the change is the more onerous requirement and if employers need to consult employees over the change, they may well decide to take the opportunity to close their schemes altogether. 15 February 2013 cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Written evidence submitted by the International Consortium of British Pensioners Background and Summary 1. The International Consortium of British Pensioners (ICBP) welcomes the opportunity to make this submission to the Work and Pensions Committee. The issue of frozen pensions will be of signiﬁcant concern to currently working individuals, who when they reach retirement age will feel the full impact of the White Paper. 2. The ICBP is a worldwide consortium formed by interested groups in Australia (British Pensions in Australia, British Australian Pensioner Association) and Canada (Canadian Alliance of British Pensioners, British Pensioners Association of Western Canada) with active support from groups in South Africa, Indonesia and Thailand. It represents the interests of some 560,000 recipients of the UK Basic State Pension (BSP) worldwide who have their BSP frozen at the level at which they ﬁrst started to draw the said pension in their country of residence. 3. The majority of these 560,000 pensioners have lived, worked and paid mandatory National Insurance (NI) Contributions in the UK in the same manner as pensioners currently resident in the UK, in the EU or in any of the 16 countries with which the UK has signed a reciprocal social security agreement. 4. The Committee’s attention is drawn to House of Commons Library Standard Note, Frozen Overseas Pensions, 27 July 2011,9 which provides a history of the BSP entitlement of expatriates.

Historical Context 5. The practice of freezing pensions is, as stated by the Rt Hon Oliver Letwin, MP, “a product of history, not rationality.” (Attachment A: Private letter to John Markham, 11 May 2012)10 6. The practice dates back to post-war Britain when the Government had severe limitations on ﬁnancial resources and actively encouraged British nationals to emigrate to Commonwealth countries. The subsequent policy of freezing the pensions of non-residents of the UK led to public outcry and was amended to exclude those living in countries with which the UK signed a reciprocal social security agreement. At the time, Commonwealth countries did not have state pension schemes equivalent to the BSP and were unable to sign such agreements. 7. The practice was examined by the Social Security Select Committee 1996–97, which recommended that the indexation of frozen pensions be the subject of a free vote at prime time in the House.11

Societal Pressures and Financial Benefits 8. As the proportion of Britain’s ageing population increases, so too does the number of people who will be affected by this freeze should they wish to consider emigrating. 9. The legislation freezing pensions causes great hardship on those affected, with some individuals prevented and separated from family and friends (Attachment B: Case study Rita Young).12 10. This is important as studies have shown that each individual pensioner who emigrates provides significant long-term savings to the UK economy.13 — Savings to the NHS budget and Age Related Benefits amount to £7,700 per capita per year. These savings begin immediately upon the emigration of each pensioner. — After taking into consideration the additional cost to HM Treasury of providing pension parity and the loss of £3,900 per capita as a result of lost council, indirect and income taxes (assuming that the BSP recipient has sufficient income to pay the level of taxation), the conservative estimate of Net Present Value of combined benefits to the Treasury will rise to £1.1 billion by the 15th year, and to £7.2 billion by the 20th year. 11. A survey14 by Opinium of UK adults aged 45–65 showed that a significant number were considering retirement abroad, and that 22% of them would be very likely to change their mind if their pension was to be frozen. 12. The ICBP has responded to HM Treasury concerns about the costs of up-rating frozen pensions, particularly with regards to healthcare costs relating to returning expatiate pensioners (Attachment C: ICBP letter sent to HMT, August 2011).15 9 http://www.parliament.uk/briefing-papers/SN01457 10 Information provided, not printed. 11 Session 1996–97 Social Security Select Committee, Third Report, “Upratings of state retirement pensions payable to people resident abroad”, 26 January 1997, pg xvii 12 Information provided, not printed. 13 Oxford Economics executive summary Uprating Frozen Rate Pensions http://pensionjustice.org/wp-content/uploads/2013/01/ Attachment-D_-OxfordEconomics.pdf 14 Oxford Economics Report (March 2011), Uprating frozen rate pension, pg 5 15 Information provided, not printed. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Legal Factors 13. Tim Otty QC, who appeared for the Applicants in the European Court of Human Rights case of Carson v United Kingdom, has advised that, notwithstanding the Court’s decision in that case, there remains scope for a legal challenge to be made to the non-indexation of pensions for some expatriate pensioners on the ground that such non-indexation breaches the right to family life enshrined in Article 8 of the European Convention, at least in cases where it causes or contributes to family separation. Mr Otty’s advice, explaining the Carson decision, the arguable ﬂaws in the Court’s reasoning, and the further arguments remaining available to expatriate pensioners, is attached (Attachment D: Legal case).16

Recommendations 14. The ICBP is seeking to ensure that future generations of British pensioners are able to move and retire abroad free from financial penalty in the form of a frozen state pension. This would provide pensioners with a genuine retirement choice as opposed to the current situation where many are prevented from joining family abroad due to the financial hardships of a frozen pension. 15. This can only occur if the regulation responsible for freezing pensions is removed. (Currently Regulation 3, Social Security Benefits Up-rating Regulations 2011—SI 2011 No.830.) 16. Alternatively, the UK government could respond positively to the repeated requests by the governments of Australia and Canada for reciprocal social security arrangements to be established. (Attachments E and F: Correspondence from governments of Canada and Australia).17 22 January 2013

Written evidence submitted by Anthony VT Johnson Summary 1. This submission relates to Section 4 of the Single Tier Pension White Paper and several of the clauses within addressing those that have paid contracted out National Insurance (NI) contributions throughout there careers. 2. For those who will currently reach state pension age (SPA) in April 2018 and have the necessary 35 years NI contributions proposed in the single-tier pension White Paper, but were contracted out, there is a problem of insufficient time for them to address any shortfall between transition of the scheme and their SPA. 3. The proposed scheme will enable workers to build back the qualifying entitlement they have lost through being contracted out but only if they are in work and have a long enough period in which to achieve it. This ability is not available to those close to SPA at the time of transition. 4. Transition arrangements need to be put in place to enable those who retire within, say, five years of the transition to the single-tier pension gain more credit for their current eligibility to reflect their closeness to their SPA. This could be graduated which would ensure that those closest to retirement maintain their current full pension entitlement.

Introduction 5. I am an individual and former employee. I have been in continuous employment throughout my working life but now am no longer in work.

Information 6. I am a 59 year old individual who is not working and will currently reach SPA in April 2018. Prior to this I was in continuous employment for 37 years and paid NI throughout that time, mostly at a contracted- out rate. 7. The changes proposed in the Government’s single-tier pension White Paper (Clause 80) indicates that at reduction will be made for those years where my contributions were contracted-out. Whilst the White Paper states that I will not receive less than my current entitlement (Clause 86) my prospective pension under the single-tier pension will be a long way short of the advertised £144 per week. 8. Clause 80 indicates that it will be possible to increase ones pension by adding qualifying years prior to reaching SPA. However, my SPA is currently within one year of the proposed implementation of single-tier which allows almost no time for me to regain sufﬁcient qualifying years, especially as I am not currently in work. Consequently my pension will permanently be at a reduced rate for the remainder of my life. 16 Information provided, not printed. 17 Information provided, not printed. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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9. Clause 84 discusses the rebate derived amount but not how this is to be calculated. Consequently it is not currently possible to establish the impact of single-tier on my pension so that I can attempt corrective action on my qualifying years. 10. Clauses 92, 93 and 108 describe my current situation and the whole focus is on a working person being able to make up some of the difference prior to SPA. I do not have the time available to enable this to happen even if I were in employment.

Recommendation 11. Transition arrangements need to be put in place to enable those who retire within, say, five years of the transition to the single-tier pension to gain more credit for their current eligibility which would reflect their closeness to their SPA. This could be graduated ensuring that those closest to retirement maintain their current full pension entitlement. 12. The transition to the single-tier pension needs to include some form of time allowance for those close to the SPA to enable them to make the necessary adjustments to their pension provision. 13. Those close to SPA need to know their foundation amount as soon as possible and significantly earlier than 2017 so that they can plan and make adjustments. Issuing this in 2017 is too late for people like me who will retire in the years immediately following transition. 14. There needs to a confirmed method offered for individuals to buy back missing NI contributions. Again not announcing this until much closer to the implementation, if at all, does not allow those close to SPA to plan. 15. The rate at which individuals can buy back missing NI contributions should be reduced for those close to SPA as they have not the luxury of time across which to spread the payments. 16. There needs to be a right of appeal against any calculation of the foundation amount which is incorrect or penalises the individual. 5 February 2013

Written evidence submitted by Lynne Johnson Summary 1. This submission relates to the Eligibility Rules for the single-tier pension White Paper. 2. Eligibility for a full single-tier pension is proposed to be set at 35 years. This is a significant increase on the current 30 year requirement. It is especially harsh for women who are still recovering from the impact of previous changes to their pensions through the equalisation and extension of retirement ages. 3. Women who are close to their state pension age (SPA) are especially vulnerable to this change as they do not have time in which to accumulate the now necessary additional National Insurance (NI) years and will always have a reduced pension as a result. 4. Transition arrangements need to be put in place to enable those who retire within, say, five years of the transition to the single-tier pension gain more credit for their current eligibility to reflect their closeness to their SPA. This could be graduated which would ensure that those closest to retirement maintain their current full pension entitlement.

Introduction 5. I am an individual and have been a full time mother and employee. My NI contributions record is therefore made up of working contributions, Home Responsibility Protection (HRP) and a few additional purchased years. Over the past few years my prospective state pension has changed a number of times as a result of two changes to the retirement age for women and now the single-tier pension. These changes have pushed my SPA out by over ﬁve years and this has made planning for retirement increasingly difﬁcult especially this close to my SPA when I have little time to address these latest changes.

Information 6. I am a 59 year old individual who is not working and will currently reach SPA in March 2019. I have 32 years NI contributions comprising working contributions, HRP and some purchased years. Over the past few years my prospective state pension age has changed a number of times as a result of two changes to the retirement age for women and now the single-tier pension. My birthday is two days outside the cut off for the last changes to the retirement date, pushing it out to 2019, so I am one of the women worst hit by the previous delay to my SPA. All these changes have made planning for retirement increasingly difﬁcult especially this close to my SPA when I have little time to address these latest changes. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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7. The eligibility for the full rate of single-tier pension is proposed to be 35 years (Clause 33). This is an increase of ﬁve years from the current requirement for a full pension. I currently have eligibility for a full pension in that I have slightly more than the required 30 years. Accordingly I have planned on that basis. The single-tier pension will reduce the amount of pension I will be entitled to. Details of how much this reduction will be will not be given to me until the foundation amount is calculated in 2017. That will give me a very short time in which to try and address my contributions shortfall. As I am not working this will be extremely difﬁcult.

Recommendation 8. Transition arrangements need to be put in place to enable those who retire within, say, ﬁve years of the transition to the single-tier pension to gain more credit for their current eligibility to reﬂect their closeness to their SPA. This could be graduated ensuring that those closest to retirement maintain their current full pension entitlement.

9. The transition to the single-tier pension needs to include some form of time allowance for those close to the SPA to enable them to make the necessary adjustments to their pension provision.

10. Those close to SPA need to know their foundation amount as soon as possible and signiﬁcantly earlier than 2017 so that they can plan and make adjustments. Issuing this in 2017 is too late for people like me who will retire in the years immediately following transition.

11. There needs to a conﬁrmed method offered for individuals to buy back missing NI contributions. Again not announcing this until much closer to the implementation, if at all, does not allow those close to SPA to plan.

12. The rate at which individuals can buy back missing NI contributions should be reduced for those close to SPA as they have not the luxury of time across which to spread the payments.

13. There needs to be a right of appeal against any calculation of the foundation amount which is incorrect or penalises the individual. 5 February 2013

Written evidence submitted by Jill Klee

This submission refers primarily to Part 1 of the Draft Pensions Bill, Section 1 State Pension, (2) A person who reaches pensionable age before the day on which this section comes into force is not entitled to beneﬁts under this Part.

Summary

There is a tranche of women, born in the first half of 1953, who will be unfairly discriminated against by the proposals currently contained in the Government’s white paper and who have no chance at this late date in the careers to affect the level of their final pension. I ask your committee to consider these women and to suggest transitional arrangements which will soften the effect of the double whammy of increased age at retirement and of their date of birth arbitrarily denying them the benefit of the new single-tier pension. 1. For women born in 1953 before 6 May their retirement age has been increased (twice) to between 62 years and nine months to 63 years and two months depending on their exact month of birth. For me, born on 1 May 1953, I shall get my pension at 63 and two months on July 6 2016. Had I retired at 60, as I expected during nearly all of my working life, I would have received over three years worth of pension by this age. I have 36 years of qualifying N.I. payments and my pension prediction is for £ 120.90 a week or £ 6,287 a year at today’s prices. I have mostly done part-time relatively low paid work while I brought up three children so will receive little above the basic pension. 2. The white paper proposals now show that I, and women of a similar age, will be too old (by a matter of a few weeks in my case) to qualify for the single-tier pension set at £144 a week or £7,488 a year. For the rest of my life I will thus receive over £1,000 a year less than someone just a few weeks younger than me who has the same (or one years less) qualifying years. We will thus be hit by the double whammy of getting the pension later and not qualifying for the more generous single-tier pension. The combined effect will be a serious loss of income. 3. While appreciating the need to extend the pension age, the current proposals heap an unfair and discriminatory burden on a narrow tranch of women and the two hits are being introduced so late in their working lives that they have insufficient time to make extra payments to significantly boost their final incomes. In my case, and probably in many others, I cannot make extra payments since I already have 36 qualifying years, one more than will be required by younger women for the single-tier pension. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4. I respectfully ask that your committee consider the case of women of my age and propose to the Secretary of State for Pensions that extra transitional arrangements are introduced to the existing proposals so as to increase the pension we will receive and lessen the exceptional and arbitrary discrimination that will affect us for the rest of our lives. 28 January 2013

Written evidence submitted by Mercer Ltd 1. Executive Summary 1.1 The transitional rate of state pension as drafted does not correctly reflect the State Second Pension accrual of both contracted-out and contracted-in employees. 1.2 Some additional transitional provisions are needed for formerly contracted-out schemes. 1.3 Existing legislation for schemes ceasing to contract-out is complex and burdensome. “Protections” for members continuing to accrue benefits are at present little used, poorly understood and largely unnecessary. The abolition of contracting-out will drastically increase the number of schemes needing to take account of these provisions, with little benefit for members or the state. These could be removed without detrimentally affecting members’ existing rights. 1.4 Existing and to-be-retained restrictions on the use of contracted-out rights are inconsistent, unnecessary and serve little purpose, particularly once the single-tier state pension is implemented. The default should be that pension rights arising from contracted-out employment are subject to the same terms as other pension rights. The abolition of protected rights from 6 April 2012 provides a precedent for this simplification.

2. Introduction 2.1 Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset—their people. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. 2.2 In the UK, our client base includes employers and trustees providing occupational pension schemes to employees in all sectors of industry. We provide pensions advice and services to companies in the FTSE 100, but we also have a large proportion of clients that are employers classed as small to medium sized enterprises, or trustees of pension schemes with sponsoring employers in this class. 2.3 Our evidence is offered as pensions professionals who will be involved in implementing the legislation and explaining its implications to both our clients and their scheme members. Speciﬁcally, we address the questions on the proposed arrangements for the transition from the current system to the new one, particularly in relation to the ending of contracting-out.

3. State Pension Transition (Schedule1, Paragraph5) 3.1 Step 2 of Schedule 1 calculates a pension based on the new system, with an adjustment for rebates received for any period of contracting-out. The rebates are based on the 1988–89 onwards rules for State Earnings-Related Pension Scheme (SERPS), even though the State Second Pension (S2P) was introduced from 2002–03. This is because contracted-out schemes under S2P received rebates based on the earlier SERPS provisions. 3.2 However, in our view, the draft wording does not correctly achieve the intention in respect of the 2002–03 to 2016–17 period. It compares the S2P actually accrued (including any “top-ups” for certain contracted-out members) with the SERPS beneﬁt that would have accrued had S2P not been introduced (and assuming the member had been contracted-in for the whole period of service, if they had not). This creates a mismatch for both contracted-out and contracted-in employment. We think the clauses in 5(b)(i)–(ii) which “use SERPS” need to be invoked prior to the comparisons of what an individual would have accrued based on their actual employment history in sub-paragraphs (a) and what they would have accrued had they never been contracted- out in (b). We have already raised our concerns in greater detail with the Department for Work and Pensions (DWP) so we do not elaborate further here.

4. Abolition of Contracting-out for Salary-related Schemes (Clause 24 and Schedule 13) 4.1 Existing legislation relating to schemes and members who cease to contract-out can be complex, difficult to understand and difficult to apply. The abolition of contracting-out presents an opportunity to simplify this legislation and remove unnecessary rules: however, the Pensions Bill does not address this. In fact, the proposed measures for the abolition of contracting-out will add to complexity. In sections 4.2–4.5 below we highlight several areas where simplification could be achieved. We also highlight (in section 4.6) the need for transitional provisions relating to payment of contributions equivalent premiums. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4.2 The “anti-franking” rules 4.2.1 The anti-franking rules are set out in sections 87–91 of the Pension Schemes Act 1993. These aim to ensure that, for those members who leave contracted-out service before retirement, revaluation on the guaranteed minimum pension (GMP) element of the member’s pension is paid in addition to the pension at leaving and not offset against it. These rules were introduced in the mid 1980s, at a time when pensions generally did not have a statutory entitlement to increases in either deferment or payment. Since then, anti- franking has also been applied to any revaluation on the pension in excess of the GMP. 4.2.2 Several different elements of benefit make up the anti-franking minimum, but two of these—the “appropriate addition” and “later earnings addition”—apply relatively rarely, where an individual continues in pensionable service under the same scheme after leaving contracted-out service. These two elements are the most complex part of the anti-franking legislation. 4.2.3 Once contracting-out is abolished, the “appropriate addition” and “later earnings addition” will apply to many more schemes and individuals, assuming active members of former contracted-out salary-related schemes will remain in pensionable service under the scheme after cessation of contracting-out. Although currently contracted-out members have not accrued GMP since 5 April 1997, they have continued to build up additional pension rights of at least the reference scheme test standard and with an entitlement to at least statutory increases in payment. They are also entitled to statutory increases in deferment on all their benefit if they leave pensionable service before their normal retirement age. 4.2.4 Thus, three decades on from the original legislation, anti-franking legislation makes little if any practical difference to members’ benefit but significantly increases the complexity of calculations and member communications. These complexities could be removed without detrimentally affecting members’ rights. We suggest that consideration is given to this, particularly since it is not the employer that has chosen to cease contracted-out employment. 4.2.5 If it is not thought appropriate to remove the anti-franking rules, their impact could be lessened if they were modified so that they are only triggered when the member leaves pensionable service, instead of at the date contracted-out employment ceases (see paragraph 4.4.3 below). This would avoid the need for an “appropriate addition” or a “later earnings addition” and would, in effect, mean that members were treated (as far as the anti-franking rules are concerned) as they would have been had the government not decided to end the ability to contract out. 4.2.6 Consideration should also be given as to whether the wider anti-franking provisions could be removed for all post 5 April 1997 leavers who have not yet retired, or at least for those whose contracted-out service will end on the new state pension provisions coming into force.

4.3 The protection rule (Schedule 13, paragraph 33) 4.3.1 Although section 50 of the 1993 Act is due to be repealed, regulations made under it currently require a scheme ceasing to contract-out to put a “protection rule” in place, which increases the complexity of schemes’ beneﬁt structures and administration. Is the intention (which we would support) that the provisions of Regulation 45 of The Occupational Pension Schemes (Contracting-out) Regulations 1996 would not apply to schemes ceasing to contract-out by reason of the abolition?

4.4 GMP revaluation after contracting-out ceases 4.4.1 This is closely linked to the points made above and has even greater practical consequences for schemes. At present, if a member is contracted-out, any GMP they have is revalued using “section 148” orders until they cease to be in contracted-out employment. In the vast majority of schemes, once someone has left contracted-out employment, a “fixed rate” of revaluation applies over any period of deferment until GMP pension age. There is an implicit assumption here that contracted-out employment will not cease before pensionable service ceases, and this is widely embedded in schemes’ rules and calculation procedures. 4.4.2 If schemes were forced to end their contracted-out service but decided to remain open to further pensionable service this assumption would break down, requiring fixed rate revaluation to start while the member is still in pensionable service and at a rate based on the date contracting-out rather than pensionable service ceases. This would require extensive amendments to schemes’ rules and calculation systems, staff retraining, and more complicated member communications. 4.4.3 In our view the simplest solution would be to preserve the status quo (for the member) by legislating that, for the purposes of GMP revaluation, a member in contracted-out employment on (say) 5 April 2017 is deemed to remain in contracted-out service until they cease pensionable service or would otherwise have ceased contracted-out service under the existing legislation (eg because they attain state pension age). The effect of this would be that the GMP would continue to be linked to section 148 orders until the member left pensionable service (or attained GMP pension age). 4.4.4 We also suggest that, since the fixed rate of GMP revaluation will be reviewed for dates of exit after 5 April 2017, a decision is taken to adopt the statutory rate of revaluation that applies to other pension accrual (limited price indexation). cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4.4.5 These steps might also remove or reduce the anti-franking difﬁculties referred to above at least for future leavers.

4.5 Restrictions on former contracted-out benefits (Schedule 13, paragraph 25) 4.5.1 Schedule 13 introduces a new section 37A into the Pension Schemes Act 1993, which allows for regulations to be made to impose restrictions on the transfer of former contracted-out rights and on the payment of such rights as a lump sum. We also understand that a large part of the Occupational Pension Schemes (Contracting-out) Regulations 1996 would remain in force. 4.5.2 These restrictions are likely to mean that contracted-out benefits cannot be paid in the same manner as ordinary scheme rights, which in some cases have the effect of restricting ordinary rights. The effects are complex, since some restrictions apply to GMPs but not to “section 9(2B)” rights. 4.5.3 Furthermore, what may be an “authorised” payment for HM Revenue and Customs and the Finance Acts may not be for the contracting-out legislation, leading to frequent confusion and, effectively, different tax law applying to contracted-out rights. 4.5.4 We cannot see the rationale for continuing to impose these restrictions once contracting-out has been abolished and the single-tier pension implemented. Our view is that, once contracting-out has been ended, members and schemes should have the same options over (and equally be subject to the same restrictions on) their contracted-out rights as they do over their ordinary pension rights. As a precedent, the previous laws and regulations applying to protected rights fell away on the abolition of contracting-out by the money purchase method, so that they could be dealt with in the same way as other scheme benefits. This simplified matters considerably for former contracted-out money purchase schemes and we recommend a similar approach is taken with former contracted-out salary-related schemes.

4.6 Payment of contributions equivalent premiums (Schedule 13, paragraph 37) 4.6.1 This paragraph repeals sections 55–68 of the Pension Schemes Act 1993 which deal with payment of contributions equivalent premiums (CEPs) for individuals who leave a contracted-out pension scheme before completing two years service. This is sensible as there will be no need for CEPs once contracting-out is abolished. 4.6.2 For a period after the abolition date, however, it will be important to maintain the ability to pay a CEP for those scheme members who leave service shortly before the abolition date. Currently, pension schemes have six months from the date contracted-out service ceases to elect to pay a CEP and this is prescribed in regulations. If it were not possible to elect to pay any CEPs once the abolition date is reached, pension schemes will be faced with ever-decreasing timeframes in which to pay a CEP for these members.

4.7 Earnings definition (Schedule 13, paragraphs 7(3) and 43(6)) 4.7.1 The definition of “earnings” to be substituted refers back to section 8(1B) of the Act which is created by the Bill. However, although the inserted 8(1B) defines an “earner” it does not define “earnings”.

5. Statutory Power to Amend Schemes (Clause 24 and Schedule 14) 5.1 It is important that the statutory power of amendment is flexible enough for employers to be able to make practical use of it. However, there are also some practical considerations that need to be further considered. 5.2 The power should be clear that the test is an aggregate test, and not on a member-by-member basis (which would not result in a practical scheme design). This could be made clearer in either Schedule 14 or subsequent regulations. 5.3 A possible interpretation of Clause 24 of the draft Bill, and Schedule 14, is that it enables employers to use the amendment power to amend all members’ benefits, including any who are not contracted-out. 5.4 However, Clause 24(2) says the purpose of the amendment power is “…to take account of increases in the employer’s National Insurance contributions in respect of those members…”. This introduces the possibility that the power is only exercisable in respect of those members who are contracted out. We suggest that the intention is clarified. Our view is that, for administrative practicality and consistency among members, from an employer’s perspective, it would be desirable if the modification could apply to all members, and not just those who have been contracted out. Example of members who might not be contracted out are listed below: — Members over State Pension Age still in active service. — Members paid less than the Lower Earnings Limit. — Members temporarily working abroad. 5.5 In each of the above three groups it can be argued that these members are fundamentally part of the same affected “group” of employees, yet the abolition of contracting-out would not actually result in a change to the employer’s National Insurance bill in respect of them. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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5.6 We suggest that the power should be exercisable in respect of all members eligible for benefits on the same basis as the contracted-out members of the scheme, regardless of the technicalities referred to in 5.3.1–5.3.3 above. Although this could result in lower benefits for some members, there will also be winners and losers within the group of contracted-out members. Employers do not need to take advantage of the power, but if the power were restricted the outcome could be that members whose circumstances temporarily took them outside the contracting-out framework would remain entitled to higher benefits than their peers, which would be hard to defend. 5.7 Paragraph 9 of Schedule 14 limits the application of the power to no more than once for any group of relevant members. We understand the intention and agree that it would undesirable to have to make more than one change. However, from a practical point of view this may be overly-restrictive and result in unintended consequences. Prohibiting further amendments, even where the net effect of the overall change meets the initial test, seems unnecessarily restrictive. 5.8 Finally, we suggest that, for multi-employer schemes, there should be a power for participating employers to nominate a particular employer to exercise the power on their behalf (for example, similar to what is currently in operation in the scheme funding regime and the member nominated trustees regime).

6. Scheme Returns 6.1 Clause 33 of the draft Bill extends the maximum period between scheme returns from three to ﬁve years for micro schemes with no more than four members. Returns for deﬁned contribution (DC) schemes with less than 12 members are currently issued every three years, on a rolling basis. Consistency might suggest the scheme return provisions here could also be extended to schemes with less than 12 members. An alternative limit might be schemes with less than 10 members, given that the Government’s policy on reducing regulation for small businesses regards any company with fewer than 10 employees as a “micro-business”. 6.2 We would also urge the government to consider the position of other schemes as well as seeking to reduce the administrative burden for micro-schemes. There is a case for reviewing the increasing volume of information required in scheme returns, which, in fact, have to be updated annually, and are a major and costly exercise for many occupational schemes.

7. Recommendations for Action 7.1 Correct the transitional calculations of pensions based on the new system. 7.2 Disapply “appropriate additions” and “later earnings additions” for members who have not yet ceased contracted-out employment. 7.3 Consider whether wider anti-franking provisions could be removed for the same members. 7.4 Consider whether any aspects of anti-franking could be removed for other members. 7.5 Remove the protection rule provisions for the affected schemes, if this is not already intended. 7.6 For revaluation purposes treat GMPs as still contracted-out while in pensionable service and consider the rate of revaluation to apply post-April 2017. 7.7 Remove restrictions on contracted-out benefits and former contracted-out schemes. 7.8 Put transitional provisions in place for contribution equivalent premiums. 7.9 Correct earnings definition. 7.10 Broaden statutory amendment power to cover all employees under the contracting-out certificate. 7.11 Extend micro-scheme provisions to schemes with less than 12 members. 15 February 2013

Written evidence submitted by the National Federation of Occupational Pensioners

About the National Federation of Occupational Pensioners (NFOP) 1. The National Federation of Occupational Pensioners is the oldest and largest occupational pensioner organisation in the UK, with over 80,000 members nationwide organised into 180 branches. 2. As well as pensions, the NFOP lobbies and campaigns on a wide range of issues of concern to older people, including health, social care, transport and social inclusion, and works closely with other organisations that represent older people. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Introduction 3. On 14 January 2013 the Government published a White Paper setting out its plans to introduce a new single-tier State Pension. Shortly after, on 18 January 2013, a Draft Pensions Bill was published setting out the legislative changes which would be needed to implement the reforms. NFOP is pleased that the Work and Pensions Select Committee will be undertaking pre-legislative scrutiny of the Draft Bill and welcomes the opportunity to comment on the Government’s proposals. 4. The Draft Pensions Bill provides for reforms to the State Pension system (the single-tier pension) which will affect new pensioners from 2017 at the earliest. As an organisation that represents only existing pensioners, our remarks on the Draft Bill will be largely limited to those areas of the legislation which impact upon existing pensioners.

Oral Evidence 5. NFOP would like the Work and Pensions Select Committee to consider calling us to give oral evidence to the Committee as part of this inquiry. We believe we have a particular expertise in examining the impact of these reforms on both current and future members of occupational pension schemes.

Wider Policy Implications Abolition of Pension Credit 6. A key corollary of the introduction of the new single tier state pension will be the abolition of Pension Credit. Whilst this simplification of pensions is to be welcomed, lifting pensioners out of means-tested benefits, NFOP is concerned about how the passported benefits that currently accompany a claim for Pension Credit (such as Housing Benefit and Council Tax Benefit) will be made available to recipients of the new single- tier pension. 7. NFOP are keen to ensure that this process is made clear to ensure that new pensioners do not lose out on the benefits of automatic passporting which currently exists in the pensions system. 8. With the abolition of Pension Credit from 2017 it is clear that over time the number of eligible individuals will reduce, delivering an administrative saving for the Government. Nevertheless, we believe that it is vitally important that the existing administrative provision for claiming Pension Credit is retained throughout the transition to the new system to ensure that current pensioners, whether they are already in receipt of Pension Credit or become eligible through a change in circumstances (for example if a spouse or civil partner dies) can obtain the necessary support they are entitled to.

The Draft Bill 9. NFOP broadly welcomes the provisions in the Draft Bill for future pensioners, but recommends that a number of issues in the following areas are carefully examined by the Work and Pensions Select Committee: — Part 1 (State Pension), Clause 2 (Entitlement to State Pension at full or reduced rate). — Part 1 (State Pension), Clause 24 (Abolition of contracting-out for salary related schemes etc). Schedule 13 Abolition of contracting-out for salary related schemes. Schedule 14 Power to amend schemes to reﬂect abolition of contracting-out. — Part 2 (Pensionable Age), Clause 26 (Periodic review of rules about pensionable age.

Part 1 (State Pension), Clause 2—Entitlement to State Pension at full or reduced rate 10. Clause 2 of the Draft Bill amends existing pension legislation to increase the qualifying period for a full state pension from 30 to 35 qualifying years. 11. NFOP are concerned about the transition arrangements that will be provided to those individuals who, despite not having reached state retirement age, will have made “life decisions” and chosen to leave paid employment in the knowledge that they currently qualify for a full state pension (having accrued 30+ qualifying years). NFOP believes that provisions should be included in the Bill to ensure that all individuals with 30 qualifying years are advised of their projected pension under the revised scheme (30/35th of £144 per week) and given the opportunity to “buy” additional qualifying years to enable them to maximise their state pension.

Part 1 (State Pension), Clause 24—Abolition of contracting-out for salary related schemes etc 12. Clause 24 of the Draft Bill abolishes contracting-out under salary-related occupational pension schemes, which will result in such individuals paying more National Insurance because there will no longer be a lower rate for people who were contracted-out. 13. NFOP is concerned that the abolition of the contracted National Insurance Contributions (NICs) will force current members of occupational pension schemes, both private and public, to contribute more to their pensions to remain in those schemes. We fear that increased NICs in such schemes will force up the cost of personal contributions to these schemes, and may discouraging saving for future retirement. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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14. NFOP is clear that it is important for the Government to ensure that the end of contracting out is not taken by employers as an opportunity to justify the closure of defined benefit schemes. 15. In order to facilitate and encourage savings any change in the scheme arrangement following the abolition of contracting out should encourage the employee to increase contributions to maintain their existing level of pension rather than be forced to accept a reduction of the benefit.

Part 2 (Pensionable Age), Clause 26—(Periodic review of rules about pensionable age) 16. Clause 26 of the Draft Bill will require the Secretary of State to review whether the rules about pensionable age are appropriate, having regard to life expectancy and other relevant factors, in a report published every five years. These reviews will take into account analysis provided by the Government Actuary on increases required to the state pension age in order to ensure individuals maintain a specified proportion of adult life in retirement. 17. Whilst NFOP welcomes the commitment to periodic reviews of the pensionable age, we are concerned that the Draft Bill as currently drafted does not explicitly reflect the statement made in Paragraph 153 of the Government’s Pensions White Paper, The transition to the single-tier pension that: “Should a future Government decide to raise the State Pension age following a review, this Government believes that a ten year notice period will be sufficient notice for individuals affected to prepare for the change.” 18. NFOP would suggest that provisions are made within the Draft Bill to ensure that individuals approaching retirement are given this ten year notice period, to ensure that there is adequate time for an individual to make the necessary adjustments in their financial planning. 15 February 2013

Written evidence submitted by the National Pensioners Convention

Summary — The level of the proposed single-tier state pension is not only lower than currently available (based on 30 years’ worth of National Insurance contributions) it is also too low to address the existing and future financial needs of Britain’s older generations. The state pension needs to be increased for all pensioners to more than the official poverty level (£178 per week before housing costs in 2012). — The exclusion of existing pensioners from the proposal will be particularly harsh on millions of older women who currently have a state pension income of considerably less than £144 a week. Those who would benefit from the proposals should therefore be included. — The proposals as they stand will maintain a two-tier state pension system between existing pensioners and those that retire after April 2017. As such it neither simplifies the system nor makes it any less complicated for people to understand. — Existing reforms, such as those designed to equalise the state pension age for men and women, will have yet to be fully implemented before the new single-tier system comes into place. This will create specific anomalies and unfairness, particularly for women born between April 1953 and 1954. — Increasing the number of years’ worth of National Insurance contributions from 30 to 35 (after the 30 year rule has only been in place since April 2010) will be seen as unfair by those who have yet to retire, and by those who retired under the old rules which required 39 years for a woman and 44 for a man. For credibility, where favourable a single figure should be applied to all existing as well as future pensioners. — The abolition of contracting-out of the second state pension will cause particular challenges in both the public and private sectors. In the public sector the need for additional employer contributions are likely to lead to wage freezes or job losses, and in the private sector employees are likely to find they have to pay more into their schemes or accept less when they retire. Giving private sector employers the legal right to amend the terms of their pension schemes without the consent of trustees would also set a very serious and unacceptable precedent. — The proposed increases and automatic review of the state pension age would have profound effects on specific sections of the population, based on income, profession, geography and other factors. The arguments surrounding an ageing population are not therefore the same as having an ageing workforce, and the state pension age should not at this stage be increased beyond 65 for men and women. — Any new state pension system must be properly indexed to take account of the rising costs of living and the general level of prosperity. As a minimum this requires a link to the higher of wages, prices (retail and consumer price indices), as well as to a guaranteed 2.5% safety net. — More information is required as to the impact that the single-tier state pension would have on means- tested benefits, for existing and future pensioners. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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1. Introduction 1.1 The National Pensioners Convention (NPC) is Britain’s largest pensioner organisation representing around 1.5 million older people, active in over 1000 afﬁliated groups. The NPC is run by and for pensioners and campaigns for improvements to their income, health and welfare. 1.2 On 14 January 2013, the Government published its White Paper, entitled The Single-Tier Pension: a simple foundation for saving followed a few days later by the Draft Pension Bill. The main proposals contained within both documents include: — Combining the basic and second state pensions into a single-tier pension for those retiring after April 2017. — Increasing the number of qualifying years needed to receive a full state pension from 30 to 35. — Abolishing contracting-out and give powers to private sector employers to unilaterally alter their occupational pensions rules. — Bringing in further increases in the state pension age (SPA) and an automatic review of SPA linked to longevity. 1.3 Given that such proposed changes are both signiﬁcant and fundamental to the state pension system, it is therefore extremely worrying that the period of time given over to initial public consultation on this issue is scandalously short. Just four weeks have been allowed for individuals and organisations to submit their view to the Work and Pensions Select Committee; who themselves have been given little more time to carry out pre-legislative scrutiny. This therefore raises very serious questions as to the government’s commitment to real dialogue and discussion on this issue.

2. Background 2.1 Successive governments have tinkered with our pension system—reluctant to grasp the need for substantial reform of the state pension, whilst being overly optimistic as to the ability of private occupational pensions to deliver prosperity for all. Whilst these new proposals might therefore change the basic structure of the state pension system, they are far from radical enough to tackle the serious problem of pensioner poverty and hardship facing millions of both current and future pensioners. 2.2 Since coming to power in June 2010 the government has weakened the UK pensions system as a result of its decision to alter the indexation arrangements of the basic and second state pensions, all public sector pensions and as many as 60% of private occupational schemes. The move from using the retail price index (RPI) as the accepted measure of inflation, to the usually lower consumer price index (CPI) has already started to reduce the retirement income of millions of pensioners, and even the welcome decision to restore the link between the basic state pension and earnings is seriously undermined by the change to CPI, the failure to raise substantially the level of the basic state pension and the current near-zero increases in wages. 2.3 Much of the rationale behind the White Paper is also based on a number of flawed assumptions. Contrary to the government’s view, the complexity of the current state pension system is less of a barrier to saving than the lack of spare capital which individuals can put aside for their retirement and the risks associated with defined contribution occupational pensions which are wholly reliant on the performance of the financial market. Life expectancy projections and the capability to continue working well beyond 65 have also been grossly over exaggerated, and bear little relation to actual experience. Therefore, if the UK’s pension system really is at a crossroads, these proposals are destined to take us in the wrong direction.

Specific Aspects of the Draft Pensions Bill 3. Part 1 State Pension—Clause 1 (2) Exclusion of existing pensioners from the provisions of the Bill 3.1 Whilst it has been hailed as a radical reform of the UK state pension system, the draft Pensions Bill and the White Paper have failed to address the current injustices and unfairness experienced by millions of existing pensioners. In particular, the current basic state pension remains completely inadequate—as demonstrated by the need to provide additional support through the means-tested Pension Credit, yet the proposals do nothing to address this. 3.2 Nevertheless, a majority of male pensioners who were able to build up a full SERPS (State Earnings Related Pension Scheme) record on top of their basic state pension will already be receiving more than the proposed £144 a week, but as many as 5 million female pensioners currently have state pension incomes that are nowhere near that level. Excluding them from the proposals effectively leaves these individuals to continue with the complex and ineffective system of means-testing. 3.3 The introduction of a cut-off date in April 2017 for the new pension scheme will therefore create a two- tier system. As a result, some individuals will be getting simplified state pensions whilst others will be left to claim means-tested benefits. Already millions of existing pensioners have missed out on the reduction in National Insurance which now only requires 30 years of contributions to get a full state pension, whereas many of them retired when the rules were 39 years for a woman and 44 for a man. Had this change been applied retrospectively, at least 500,000 pensioners would now be getting a full state pension. However, perpetuating cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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such differences in the pension schemes across different generations of pensioners is simply unfair and does little to simplify an already complicated system.

3.4 Equally important is the fact that the proposed further reforms would come into place before existing reforms have been fully implemented. For example, the equalisation of the State Pension Age for men and women will not be ﬁnalised until 2018—but introducing the single-tier pension in 2017 means that women born between April 1953 and 1954 will retire on the old system just before the new proposals come into force, whereas a man born on the same day will retire slightly later, but receive a pension under the new arrangements. Such haste only adds to the unfairness and complexity that already exists.

3.5 Despite recognising that the means-tested Pension Credit is ineffective, the government is prepared to maintain it for existing pensioners for at least another 60 years whilst the two systems run in parallel and sees no contradiction in continuing with a beneﬁt that 1.8 million people don’t claim, despite being entitled to do so. A simpler approach would be to include all those existing pensioners who currently have a state pension income below the proposed £144 a week into the new arrangements.

4. Clause 2 1(b) Increases the number of qualifying years to receive a full state pension from 30 to 35

4.1 Under the existing rules, employees get £3.58 a week basic state pension and £1.46 a week second state pension for every year of National Insurance contributions. For 30 years’ worth of contributions, this would give a full basic state pension of £107 and a second pension of £43—equal to £150 a week. Under the new proposals, employees will get £4.10 a week single-tier state pension for every year of National Insurance contributions. They will be required to pay an additional ﬁve years’ worth of National Insurance and would receive a full pension of just £144 a week—£6 a week less than an individual could get if they retired today with a 30 year contribution record.

4.2 According to the Institute for Fiscal Studies (IFS), most people born after 1970 could expect to receive less from the state pension. The IFS said: “It is important to be clear that—while there will be a fairly complex pattern of winners and losers from the reform in the short term—the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups, most notably the self-employed”. The proposals are therefore less generous in the long run for the vast majority of retirees; as acknowledged by the fact that by 2060 the cost of the scheme as a percentage of gross domestic product (GDP) will be 0.4% lower than the existing arrangements.

4.3 It is also predicted that the reform is actually likely to net the Treasury an annual windfall of at least £9.2 billion in extra National Insurance contributions from employers, who will no longer receive a contracting- out rebate. This is in addition to the £28 billion surplus balance that is already in the National Insurance Fund, which the government is using to pay off the national debt rather than fund better state pensions.

5. Clause 24 (2) Abolishes contracting-out and gives private sector employers the right to amend the terms of their pension schemes for up to ﬁve years

5.1 Under the draft Pensions Bill, the process of employees and employers contracting-out of the state second pension scheme will be abolished. The rebate of National Insurance payments that they receive (of 1.4% and 3.4% respectively) will then need to be paid.

5.2 However, employers in the private sector offering defined benefit (final salary) occupational pensions (affecting around 1.8 million workers) will be given a five year period in which to unilaterally alter the terms of their schemes without the consent of the trustees in order to offset the additional National Insurance costs. In effect this will mean passing onto employees either additional contributions or lower pensions in retirement. It has been widely acknowledged that this could therefore signal the end of the final salary pension scheme in the private sector altogether.

5.3 Whilst those in the public sector will not be affected in this way, employers will still be looking to ﬁnd other means of off-setting the extra 3.4% National Insurance contributions they will have to pay. This could potentially be through wage freezes or job cuts. The implications of this change are therefore extremely profound and require further investigation.

6. Part 2 Pensionable Age—Clause 25 Increases pensionable age to 67 between 2026 and 2028 Clause 26 Reviews pensionable age no later than 7 May 2017 and no later than every six years thereafter

6.1 The White Paper and draft Pension Bill propose automatically linking the state pension age to life expectancy, without any acknowledgement that longevity is affected by profession, income, region and other factors. Whilst as a society we are able to keep people alive for longer than ever before, that does not in itself mean that people are able to work longer. In addition, there are serious concerns as to the health of future generations and the urgent need to enable younger people to get into the workplace. None of this can therefore be addressed by simply raising the retirement age. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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7. Schedule 12 Uprating of pension to be not less than the percentage annual increase in the general level of earnings

7.1 The White Paper suggested single-tier state pension figure of £144 is still over £30 a week less than the official poverty level for older people (£178 a week before housing costs in 2012). Even if a single-tier state pension was therefore desirable, setting it at an inadequate level does nothing to address the need for financial security in retirement for existing and future pensioners.

7.2 At the moment the basic state pension is indexed in line with the so called “triple lock” to the higher of wages, consumer prices index (CPI) or 2.5%, whilst the second state pension is linked to CPI. The draft Pensions Bill however only talks about the new single-tier pension being linked to “at least wages”, with anything over £144 per week being attached to CPI. As has been seen over the years following the removal of the link with earnings in 1980 and the recent need for a 2.5% minimum increase, it is essential that pensions are linked to both wages and prices (RPI and CPI), as well as to a minimum guarantee in order to maintain their value relative to the costs of living and general economic prosperity. Any new pension system must also therefore maintain this approach to indexation.

Additional Items

8. Future of means-tested beneﬁts

8.1 Neither the White Paper nor the draft Pension Bill contains sufﬁcient detail as to the impact that the new single-tier pension would have on means-tested beneﬁts. At present, pensioners with less than £142.70 a week can claim Pension Credit to take them up to that level and those with modest savings can also apply for additional Savings Credit to a maximum of £18.54 (single) and £23.93 (couple).

8.2 Pension Credit is recognised as a “passport” benefit which automatically entitles recipients to Council Tax and Housing Benefit, but given that it will no longer be available for future retirees, it is unclear how the five years of transitional arrangements for those who would have got Council Tax and Housing Benefit under the old scheme will be applied. Pensioners currently in receipt of these additional benefits will also need reassurance that they will not be affected, unless they are also included in the new pension arrangements.

9. Alternatives to the White Paper and Draft Pension Bill

9.1 There is an urgent need to strengthen the existing state pension by moving towards a Citizen’s Pension funded through National Insurance, but based on residency of say 30 years, rather than years of contributions. Increasing the basic state pension for all existing pensioners to the ofﬁcial poverty level (estimated as £178 a week in 2012) continues to be the most effective way of covering the day-to-day needs of older people.

9.2 This would largely remove the need for means-tested Pension Credit support for all but a very small number of individuals unable to meet the citizenship criteria and the main gainers would be those, particularly women, who do not currently have a full 30 years contributions/credits record. Even those that are currently in receipt of means-tested support would not be financially disadvantaged by raising the state pension above the official poverty level (providing housing and council tax benefit remained available).

9.3 The basic and second state pensions should be uprated annually in line with average earnings, retail prices index (RPI), CPI or 2.5% (whichever is the greater) so that its value is maintained for the future and pensioners share in the rising prosperity of the nation.

9.4 The State Second Pension (S2P) should be retained as a good earnings-related pension for all workers, maintaining the higher replacement rate for the low paid. This would be paid to everyone with a minimum of seven years and a maximum of 50 years’ contributions or credits.

9.5 The state pension age (SPA) for men and women should be maintained at 65 from 2020 without any automatic linking of SPA to life expectancy.

9.6 There are a range of measures that can be used to raise the necessary funds required to improve the state pension system, including abolishing the upper earnings limit on contributions, using part of the surplus (accrued and annual) in the National Insurance fund, reforming tax relief on private pension contributions and tightening up on tax avoidance and evasion.

9.7 The government should do more to maintain and strengthen good occupational pension schemes, in both the public and private sector, and recognise that placing the provision of a decent income in retirement for future generations of pensioners in the hands of the ﬁnancial markets through automatic enrolment could be an expensive risk for millions of low paid workers. 15 February 2013 cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Written evidence submitted by James Nelson The author of this submission is a retired Actuary, born, brought up, and trained in Edinburgh. The submission deals with the long-term design of the new scheme, with little reference to transitional arrangements that will be necessary to protect existing and accrued beneﬁts.

Pensions 1. The objective of the proposals for the revision of the state pension system is to remove the complexity that makes it difficult for a prospective pensioner to know what pension he might expect at retirement, or even for an existing pensioner to understand how his pension is made up. 2. The underlying idea of the Beveridge Plan was to mitigate poverty and to reduce the need to rely on means tested National Assistance. The pension was to be a universal flat amount, like the present Basic Pension, dependant only on number of contributions and not at all on amount of contributions. So it was not only a universal flat pension, but also a universal flat contribution. 3. Many changes were made over the years, including the change from number of contributions to number of qualifying years. 4. It was intended that the citizen should base his retirement plans on the foundation of the secure state pension, but should make whatever arrangements could be made to enhance the ultimate retirement income. Unfortunately there was always a lack of prudence on the part of the citizen. This was alleviated somewhat by the efforts of life insurance companies and others to set up employer financed occupational pension plans, based largely on defined contributions. 5. The most significant change in the state scheme was the introduction of graduated contributions, which purchased graduated benefits. The scheme introduced in 1961, called Graduated Retirement Benefits (GRB), was replaced in 1975–78 by the State Earnings Related Pension Scheme (SERPS). Both GRB and SERPS involved graduated benefits based on graduated contributions. The SERPS plan was supposed to be similar to the best occupational Defined Benefit plans. 6. This departure from the original pristine design has led to perplexing complexity, and many minor corrections and changes. Perhaps people do understand the formulae used to determine their contributions, but they have little hope of understanding the prospective pensions. One look at the table in booklet NP46 evidences the incomprehensibility of the SERPS system. 7. The move to remove all this complexity and return to the simple universal flat pension is therefore a good move. The level should of course be set so as to absorb and eliminate the means tested Pension Credit benefits. 8. Some mention has been made lately of such benefits as Winter Fuel Allowance, free TV licences, bus passes and the like. It has been suggested that these should be means tested and not available to so-called “millionaire” pensioners. This proposal would perpetuate the means testing system, which Beveridge sought to abolish. 9. It will be objected that “millionaires” don’t need such benefits. However it should be remembered that people with high incomes pay higher income tax. This might not fully compensate the state for the “unneeded” benefits, but it is something to bear in mind when complaining about “middle-class welfare”. 10. If anyone objects that rich people hire clever accountants to reduce their apparent income, then we must answer that in that case they would qualify for means-tested benefits. And of course that would be a taxation problem, not a benefits problem.

Contributions 11. The Beveridge plan was implemented with flat universal contributions. The original scale of contributions was based on traditional actuarial methods. It was realised that the National Insurance Fund would need to be supplemented from time to time by subventions from general revenue, particularly because the scheme would be introduced with a fairly short lead time. 12. Contributions do not seem to be based on actuarial methods any more. Indeed the financing of the scheme seems to be based on social welfare considerations. Pensions are determined by reference to cost of living, or latterly the “triple lock” process. The method of determining contribution levels is not disclosed. There was no increase in contribution levels when the scaling of the basic pension was changed from working lifetime to 30 years. 13. Instead of calculating contribution levels, the Government Actuary is required only to advise whether the proposed level of contributions and benefits is sustainable in the short term. In fact the NI Scheme is regarded as a PAYGO system with no need to build up a fund to meet accruing benefits when they mature. This is specially important in relation to the present additional pensions, the contributions for which are just poured into the common pool. There seems to be no plan to fund for the future. 14. It seems to be proposed that the existing system of contributions scaled to income will be retained. No mention has been made of any change in the contribution system. In fact the details released so far mention cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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that contributors who are in contracted out pension schemes will find their contributions increased, due to the termination of the contracted out reductions. 15. If this is the proposal, then it is an unwise and unfair proposal. People will perceive that their contributions are not the same as other people’s, yet they get no additional benefit for the additional contributions. It would be better to split the NI Contributions into two components, (1) a flat contribution to secure the flat age pension and (2) a contribution for a personal pension based on defined contribution principles.

Women 16. It is proposed that women should no longer be dependant on contributions made by their husbands, but should earn their pensions in right of their own contributions. 17. If this is adopted then adequate provision must be made for crediting of contributions while they are out of the work force caring for children or elderly parents. Increasingly, these considerations apply equally to men. 18. It will not be good enough to leave this matter to chance. A system of payment of a small conribution, such as the present class 3 contribution might be considered, or an easy method of establishing entitlement. 19. The Home Responsibilities Protection was a cumbersome system, and deprived many women of proper pensions if their time in the work force fell short of the target time. In addition, the reduced Married Women’s “Stamp” did not qualify for the basic pension, which many found out to their cost only upon retirement. 20. Under the new system adequate transition provisions must be made for women retiring after the new single tier pension is implemented.

Non-Resident Pensioners 21. Clause 20 of the draft bill (see appendix18) will continue the existing system whereby some pensioners living overseas have their pensions “frozen” and do not receive any annual indexation. This applies only to some, especially those who live in old loyal Commonwealth countries. By contrast, pensioners who live in the old rebel colonies that left the Commonwealth in 1776 enjoy the same annual indexation as pensioners who live in the UK or the EU or one of an oddly assorted list of countries. 22. It is instructive to consider the origin and history of this discriminatory treatment. 23. There is no mention of such discrimination in the Beveridge Report. Naturally, since the pension had for many years been 10/-per week, payable throughout His Majesty’s dominions. Also, the Report was written before the rise in the old age pension, which took place in 1946. 24. In that first post-war year, the age pension was increased from10/-per week to 26/-. The increase was restricted to resident pensioners. It was said to be in anticipation of the NI Scheme which was to be introduced soon, and in fact commenced in mid 1948. 25. Here is an explanation received from the Department for Social Security in May 2000. When the rate of pension was increased in 1946, the increase was not paid to pensioners abroad. The reasons for this decision appear to have been related mainly to the forthcoming new scheme of National Insurance. It was considered that the substantial increase in pension, from 10 to 26 shillings, was a first instalment of the new scheme and that pensioners abroad had made only a small contribution to their pensions and could not reasonably expect a share in the new scheme. 26. If this was the reason then the reasoning is flawed. The increased pension was paid to resident pensioners, despite the evident fact that they would have made only a small contribution to their pensions. 27. The more likely explanation is that the country’s economy was under stress, caused by financing the war. One cynical observer has suggested that the rise in the pension was a political move, a consequence of a promise made during the 1945 election, and that overseas pensioners were not voters. 28. Ever since 1950, political parties in opposition have stated, time and time again, that this policy is wrong, and that all pensioners should be paid their full entitlement in accordance with their mandatory contributions to the NI Fund. However, on gaining power, those same political parties have reneged on their assurances. 29. Lord Rooker, when he was the minister admitted that there is no logic in the distinction between frozen and unfrozen countries. In a BBC programme broadcast on 16th October 2000, he said: “There isn’t a logical pattern. There are 130 countries where the pension is frozen and 40 countries where it’s uprated every year. This is for historical reasons. I don’t seek to defend the logic by the way...” 30. The situation has changed over many years as gradually the British government has been forced to pay annual increases in more and more countries. 18 Ev 43 cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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31. Here is an excerpt from a “boiler plate” letter received from one of the Minister’s assistants: 32. “Pensions have been payable in certain countries outside the UK since 1929—initially in HM Dominions and then, between 1948–1955, in a small number of European countries, In 1955, retirement pensions and widows benefits became payable worldwide. Upratings were not normally payable. Upratings were less frequent then than they are now and the fact that they were not generally payable abroad seems not to have been considered controversial. 33. “The last to come into force which provided for upratings was in 1992 (with Barbados) and fulfilled a commitment given in the 1970s.” 34. The EC Regulations on Social Security for Migrant Workers require uprating of benefits throughout the European Union. In practice, the entry of the UK into the EC had little effect on the provision for uprating pensions in the Member States, because there were pre-existing reciprocal agreements with all of them except Denmark providing for their payment. 35. The expansion of the EU has meant that several members of the Eastern bloc have been admitted into the group of countries where British pensioners enjoy annual indexation. One observer has quipped that pensioners in Eastern Germany had their pensions uprated when a little man stood on the Berlin Wall with a sledge hammer in his hand! 36. There is no discernible reason why MPs, and especially ministers, change their stance when they achieve government. Perhaps there is a “Sir Humphrey” in the civil service, telling the minister that to index all pensions would be a “courageous decision”. 37. Here is a selection of what MPs have said in the past. Of course they were at the relevant time in Opposition. 38. Steve Webb MP: “All state retirement pensions in payment to pensioners living outside the United Kingdom shall be subject to annual uprating by the same percentage rate as is applied to such pensions payable to pensioners living in the United Kingdom” 39. Nick Clegg MP: “I can assure you that Liberal Democrats firmly believe that pensioners that have paid taxes and contributed towards National Insurance should not be penalised for choosing to live abroad in retirement.” 40. David Laws MP: “Whatever his view on whether we should uprate pensions for those who move abroad, however, we surely cannot defend the current situation, in which some are uprated and some are not. He will know that even Ministers have admitted that the situation cannot be defended on the basis of any logical and rational system.” 41. He also said “Uprating arrangements for the pensions of those who live abroad represent an enormous injustice. They are totally arbitrary and illogical.” 42. James Purnell MP: “Of course, it is not legally necessary to have a reciprocal arrangement before making such (uprated) payments. Any Government could do that unilaterally.” 43. Oliver Letwin MP: “The current situation (of frozen pensions) has evolved as a product of history, not rationality.” 44. Stephen Timms MP: “Bilateral agreements can be the means of providing annual increases of retirement pension, but that is not their primary purpose. An agreement is not strictly necessary to allow payment of pension increases, as that could be achieved through changing UK domestic legislation.” 45. In November 2000 Jeff Rooker MP told the Commons: “I am not prepared to defend the logic of the present situation. It is illogical. There is no consistent pattern. This is a historical issue and the situation has existed for years.” 46. David Cameron MP, when still in opposition, wrote: “You may know that my Shadow Pensions Minister Nigel Waterson MP has tabled Parliamentary Questions on this subject. He has also pressed Government Ministers on the matter during the Commons passage of the Pensions Bill: “Government Ministers have refused to initiate negotiations with those countries with whom we currently have no reciprocal arrangements but I can assure you that this issue will be considered as part of the Conservatives’ policy review process.” 47. In 1993 Ian McCartney MP, wrote, and signed, a letter saying: “Labour’s policy is to ensure equality of treatment to all British pensioners who live abroad in countries outside the European community.” 48. In that same year, the Liberal Democrat policy paper read: 2.6.1 Pensioners who go to live abroad get no annual uprating in their pensions at all, unless they live in another EC country or a country with which the UK has a reciprocal social security agreement. In 1991, 343,000 pensioners lived in “frozen rate” countries (mostly in Australia, Canada, New Zealand and South Africa). This discrimination is inexcusable. Liberal Democrats would ensure that non-resident pensioners get the same uprating as resident pensioners. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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49. The simplest solution to this long-running confusion and discrimination is to do what was done in 1929, and to make pensions payable throughout HM dominions, and include all annual indexation, which is the common practice of all democratic governments of the western world. Better still, to do what was done in 1955 and extend the full beneﬁts of the pension system world-wide. 50. The annual cost would easily be absorbed in the resetting of all parameters in the introduction of the proposed changes in the levels of pension.

APPENDIX CLAUSE 20 OF THE DRAFT BILL 20 Overseas Residents 1. Regulations may provide that an overseas resident who is entitled to a state pension under this Part is not entitled to up-rating increases. 2. In this section “overseas resident” means a person who is not ordinarily resident in Great Britain or any other territory specified in the regulations. 3. Regulations under this section do not affect the rate of an overseas resident’s state pension for any period during which he or she is in Great Britain or a territory specified in the regulations (but once the overseas resident ceases to be in Great Britain or a specified territory the rate reverts to what it would have been had he or she not been in Great Britain or a specified territory). 4. Regulations under this section do not affect the rate of a person’s state pension once the person stops being an overseas resident. 7 February 2013

Written evidence submitted by the Pensions Action Group We are a group representing over 150,000 people who lost some or all of their pensions following either the insolvency of their employer or the winding up of their company scheme with insufficient assets and we would wish to make the following brief comments. Our concerns are more about the past and the lack of trust in Government on pension related issues but we welcome any planned improvement in state pensions provided they are fair. Our concerns: — We have made submissions in the past to this Committee and have offered to provide oral evidence. — We feel our views reflect the views of the general public and should be listened to. However our views seem to disappear in a black hole and get the feeling that they are neither valued nor considered. Specific comments: — Trust in private sector pensions is sadly lacking given the continued tampering and the failure of successive Governments to resolve the problems of the past. — When in Opposition the Coalition in Committee stated that the Financial Assistance Scheme was not giving people what they had lost and that the 90% headline was a myth, in fact hardly anyone is receiving 90% with most around 80% and reducing and some even below the 50% laid down by the ECJ. — Even now, and days after the announcement by the Minister of reforms to state pensions, the Opposition have been talking about more tax raids on private sector pensions . We ask: “Will Governments ever learn that trust has to be earned?” Create the framework by legislation but stop continual tampering, remember it was not many years ago that the UK boasted the best pension system in Europe—no longer the case by a very long way. — Whilst we welcome reforms that both simplify and improve state pensions people should not suffer as a result of reforms. — Any pensions paid for through contracting out must be protected and not absorbed into the new system. — Any transition to increased pension ages should recognise that what has been paid for must be protected and paid when due. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Summary from the Pensions Action Group We are not commenting on the specifics of reform to State Pensions but are very concerned that the Committee recognises the following: Our views do not seem to be taken into account by the Committee; The Government must resolve the problems of the past and give people the protection and benefits they paid for; and We must have some protection against inflation to safeguard the future of our pensioners, particularly at a time when every core and essential utility bill is ever increasing. The Government must restore trust by: — Resolving the issues of the past. — Stop tampering with private sector pension provision. — Stop looking at pensions as a source for more tax. Pension saving is based on the expectation that the promised payments will be delivered when the saver is too old to make up any shortfall. MPs of all parties must recognise that the current shortfall in savings is a direct result of the broken pensions promises of the past. There are nearly 500,000 members in the Pensions Protection Fund (PPF) and Financial Assistance Scheme (FAS) who have seen their pensions reduced and continue to shrink in real terms with every passing year. Their friends, family, work colleagues and acquaintances will all be very well aware of what happened to their savings—a huge number of people. No amount of dodgy inertia selling will overcome that dead weight. The problem needs to be tackled at its source— the PPF and FAS need to be improved. 10 February 2013

Written evidence submitted by Sheila Telford, Chairman, Canadian Alliance of British Pensioners Executive Summary The Canadian Alliance of British Pensioners is a totally volunteer driven organisation dedicated to seeking the unfreezing of British pensions for its members. We ﬁrmly believe that there exists at the moment, a once in a generation opportunity to right the terrible injustice of frozen British pensions, which illogically exist for almost half of all British pensioners who live overseas. A reciprocal agreement is not necessary; there are strong economic arguments in favour of unfreezing; the Canadian government is becoming more vocal in its condemnation of the British policy of freezing. The time to act is NOW.

Personal Background: Sheila Telford I am Chairman of the Canadian Alliance of British Pensioners. I have paid 38 years of contributions to the UK pension scheme. I am now in receipt of a frozen basic state pension (BSP). I moved to Canada, via Alaska with my British husband who was working for a British company, BP. My children became Canadian and so I am now settled in Canada: it is where my family is. I learned that my pension would be frozen when I enquired after the move to Canada (a company posting), became permanent. The fact that had the posting route gone from Canada to the USA instead of the other way round, my pension would now be fully indexed, is interesting to note.

Professional Background: Sheila Telford My professional career was that of an HR professional in the UK, with BP, BP Norge, a London Accountancy firm, a London law firm and a newspaper company in Aberdeen. I have been advocating for justice for British pensioners with frozen pensions since I discovered the impact of freezing on the very elderly and most vulnerable of British citizens. I have been active with the totally volunteer Canadian Alliance of British Pensioners, and on the board of directors for five years and assumed the Chairmanship in 2012. I receive no payment for what I do.

Submission The Canadian Alliance of British Pensioners is a not for proﬁt, totally volunteer driven organisation representing the interests of some 158,000 British State Pensioners living in Canada. The Canadian Alliance of British Pensioners is a member of the International Consortium of British Pensioners, which organisation has also made a submission to the Select Committee. We believe that the current overhaul of the British pensions system is a once in a generation opportunity to do what everyone knows is right: unfreeze the pensions of those who live in countries in which pensions are currently frozen. Clause 20 of the White Paper suggests that no change will be made in the current arrangements for overseas residents who receive frozen pensions and it is this which I wish to challenge. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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The purpose of this White Paper and consequent legislation is to simplify the British pension system: Surely, one of the great inconsistencies and complications of the pension system is the fact that half of pensioners living outside the UK have their pensions frozen, while the other half have their pensions indexed every year as if they still lived in the UK. All these people paid into the UK state pension in exactly the same way. And it has been repeatedly agreed that the system is illogical. Now is the time to address the illogicality.

Unfreezing of Pensions; WHY you need to act now 1. Foreign governments whose taxpayer are having to support frozen British state pensioners as a result of the British Government’s refusal to pay its pensioners as it does those living in other countries, are getting increasingly frustrated with the UK’s refusal to address the issue. The Canadian Government has described Britain’s policy as “an irritant” and has vowed “to keep up pressure on the British Government will continue to push this issue until fairness and equality are afforded to British pensioners in Canada” (email from office of Canadian Minister Diane Finley’s office dated 31 January 201319). 2. Many UK Ministers of the crown have declared that the policy of which countries are frozen and which are not is irrational. This proposed legislation is the time to introduce clarity, consistency and justice. 3. In spite of suggestions to the contrary, a reciprocal or bilateral agreement is not necessary to unfreeze pensions. An act of parliament or the current proposed legislation would be enough to right the wrong. 4. The cost of uprating frozen pensions now would be less than 1% of the pensions’ budget. 5. Many elderly Britons living overseas with their family are having to contemplate returning to the UK to live alone in their final years because they can no longer afford to live on the pittance of a pension they receive overseas. 6. There is strong evidence to demonstrate that the UK would benefit financially in the long run from the unfreezing of pensions to the tune of £7 billion (Oxford Economics report, submitted by ICBP). 7. If pensions were unfrozen, more people would be inclined to retire overseas, saving the National Health Service billions of pounds. Already, those pensioners who do live overseas save the NHS some pounds two billion pounds every year. 8. Unfreezing pensions would enable elderly pensioners to move overseas to spend their retirement years with their families, rather than spend these years alone in the United Kingdom. This is a basic human right. 9. Unfreezing pensions would free up much needed housing stock in the United Kingdom as it would enable British pensioners to move overseas, in the knowledge that they will have a certain level of income, which is their right, to support them. 10. A whole DWP department is dedicated to answering queries from frozen pensioners with regard to uprating pensions for the short time that “frozen” pensioners visit the UK. 11. There are already criticisms of the proposed pension reform as it creates have’s and have not’s. The losers will be older persons. When you add the dimension of frozen pensions to this, there will be a category of elderly British state pensioners, some of the very elderly of whom, usually widows, receiving less than £10 a week. Frozen pensioners will not give up! It is essential that this issue is addressed now. Please seize the opportunity to give dignity and justice to elderly British State pensioners who actually save the country a great deal of money because they live overseas. 12 February 2013

Written evidence submitted by the Police Federation of England and Wales Summary 1. The Police Federation of England and Wales (PFEW) represents 133,000 police constables, sergeants, inspectors and chief inspectors. The PFEW is also the largest constituent part of the Staff Side of the Police Negotiating Board (PNB), which exists to negotiate the pay and terms and conditions (including pensions) of all 158,000 police ofﬁcers in the UK. 2. This submission relates to the effects of ending contracting-out of the State Second Pension. 3. PFEW has serious reservations about members’ ability to pay increased National Insurance Contributions (NICs) and still remain in their occupational pension scheme. Police ofﬁcers already pay one of the highest pension contribution rates in the public sector (currently 12.25% for most of our members) and the rate is set to increase further, up to 14.2%, within the next two years. 19 Information provided, not printed. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4. We recommend that the Government reconsiders its intention to introduce a single-tier state pension and the consequential ending of contracting-out arrangements. 5. If the single-tier state pension does come into effect, the extra NICs should be a fair added cost for the higher level of beneﬁts and no more than that, in order not to distort the economics of members’ pension provision and impair their ability to afford adequate occupational pensions. 6. If the single-tier state pension does come into effect we recommend that the Government commits to recycle any excess resulting from the additional NICs paid by both police members and the employer into the police pension schemes.

Background 7. We welcome the opportunity to submit evidence to the Work and Pensions Select Committee. This submission relates to Clause 24 (Abolition of contracting-out for salary related schemes etc.), Schedule 13 (Abolition of contracting-out for salary related schemes) and Schedule 14 (Power to amend schemes to reﬂect abolition of contracting-out) of the draft Pensions Bill.

The Impact on our Members of the End of Contracting-out 8. Police officers are members of either the Police Pension Scheme (PPS) 1987, which closed to new members in April 2006, or the New Police Pension Scheme (NPPS) 2006. Both are final salary schemes which are contracted-out of the State Second Pension. A move to a single-tier state pension, which naturally means the end of contracting-out arrangements, will result in additional National Insurance Contributions of 1.7% for our members. The employer will also have to fund an extra 3.4% in increased NICs. 9. We are concerned that from 2017 our members will have to pay a further 1.7% of relevant earnings in NICs which they may not be able to afford. This increase has to be seen within the context of recent and forthcoming changes to police pensions. For instance, with regard to pension contributions, in 2011 officers in the PPS 1987 already paid one of the highest member contribution rates in the public sector at 11%. This was increased to 12.25% for most members of the PPS 1987 with effect from 1 April 2012 and the Policing Minister has proposed that this increase to 13.5% with effect from 1 April 2013. As the Government’s intention was for an average 3.2% increase to the member contribution rates of public service schemes by 2015, our members in the PPS 1987 may have to pay an average of 14.2% in pension contributions from April next year. 10. You will be aware that the Government intends to close all public service final salary pension schemes in 2015 and replace them with Career Average Re-valued Earnings (CARE) schemes. The Government’s intention is that the average member contributions in the police CARE scheme will be 13.7%. Some officers, however, will remain in the PPS 1987 or the NPPS 2006 under transitional arrangements. 11. We understand the Government views auto-enrolment as a key feature of future workplace pension provision. However, we are concerned that members will opt out of auto-enrolment as they will not be able to afford the high contribution rate plus increased NICs. This could lead to pressure on the occupational pension schemes and also more reliance on state benefits by our members. It should be remembered that, because of the demands of the role, under the proposed CARE scheme for police officers the normal pension age will be 60. This means that members will rely on their police pension for income until state retirement age. If members have opted-out of their pension scheme due to unmanageable costs it could fall to the state to assist with their welfare. As such, what appears to be a short-term saving may well have a long-term cost implication. 12. We are pleased that, following the recent negotiations and consultations on public service pensions, public service employers will not be able to pass the cost of increased NICs onto scheme members by reducing the value of scheme benefits or by increasing member contribution rates. However, we recognise that employers will still need to meet the increased NIC costs.

Recommendations for Action 13. That the Government reconsider its intention to introduce a single-tier state pension and to end the contracting-out arrangements. 14. If the single-tier state pension does come into effect, the extra NICs should be a fair added cost for the higher level of beneﬁts and no more than that, in order not to distort the economics of members’ pension provision and impair their ability to afford adequate occupational pensions. 15. If the single-tier state pension does come into effect, the Government make a commitment to recycle any excess resulting from the additional NICs paid by both police members and employers into the police pension schemes. 15 February 2013 cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Written evidence submitted by the Public and Commercial Services Union Introduction and Summary 1. The Public and Commercial Services Union (PCS) represents over a quarter of a million members in the civil and public services including core civil service, those in public bodies and staff in private companies delivering public services. Some of those members have been the subject of a transfer to private employers and have a defined benefit (DB) private pension with the majority of members in the Principal Civil Service Pension Scheme. 2. The draft Bill confirms the previously announced bringing forward of the increases to state pension age (SPA). It announces an end to ‘contracting out’ and the introduction of a single tier state pension. 3. PCS has submitted evidence to express concerns over these changes, particularly the state pension age and the terms of review as well as the effect of the end of contracting out on defined benefit pension schemes. 4. We welcome the opportunity to comment on the draft Bill and would also welcome the opportunity to provide oral evidence to the Committee as we are in a unique position to comment.

Impact of the Proposals on Groups 5. Clause 25—increasing the pensionable age to 67. It is PCS policy that increasing state pension age to 67 by 2026 will have an unfair impact on groups with lower life expectancies. It will mean workers in lower paid jobs will retire later and die sooner, while those in higher paid professions will continue to retire earlier and live longer. Workers affected live all over the UK including areas that have lower life expectancies. How are these differences to be addressed? Many workers now (over 50%) are not in work near state pension age, not often by choice. ONS research on longevity20 shows that rises in longevity are not uniform and health and social factors are integral. 6. Clause 26—review of rules about pensionable age. Another concern relates to the mechanism by which future changes to SPA will be made. PCS believes that as a minimum, this mechanism should be fully independent, involve trade union representatives, and take into account the link between state pension age and public sector pension ages. The review, outlined in Clause 26, will be carried out independently and will take account of occupational and health differences. PCS welcomes independence but crucially would like to see consultation with trade unions to this review written into the bill. Good health is vital to keep working, but poor health is not the only reason people have to stop. Caring responsibilities and lack of jobs are also factors. There is also the intergenerational impact with youth unemployment a factor that should be considered.

The Effects of Contracting out 7. Clause 1 of the Bill confirms the replacement of the basic state pension (BSP) and the additional state pension (previously SERPS, now second state pension or S2P) into “single-tier” state pension (STSP). Public sector workers are not in the second state pension; they are in a defined benefit public or private occupational pension and are contracted-out. 8. Schedule 13 Part 1 section 24 would abolish “contracting-out” from S2P. This will affect members of defined benefit pension schemes, including members of the principal civil service pension scheme in the civil service and those in public service “broadly comparable” schemes run by private employers. They will pay 1.4% more in National Insurance contributions (NICs). Employers will pay 3.4% more in National Insurance. 9. Civil servants have faced a difficult few years with pay freezes or 1% rises—which have caused living standards to fall. Many find it difficult to make ends meet and pay their occupational pension contribution increases, which will further increase again in April 2013. This means that to pay the National Insurance increase they may have to opt out of the occupational scheme. It is a deterrent to saving for old age. This has come at the wrong time. When we surveyed our members last year we heard tales of real poverty, due to the government’s policy of pay freezes. 70% said they were worse off on average by £100 per month. It is our view that pensions are deferred pay. The occupational pension is a valuable part of the pay package in the public services and parts of the private sector. Whilst the extra NICs may provide a better state pension, the cost now is too high for many ordinary workers. 10. Public service pension schemes will not be able to take the money for the employer NICs directly from employees through extra pension contributions or watering down benefits. However, this is positively encouraged in private sector schemes when the Bill will allow trustee consent and scheme rules to be overridden to help employers claw back the extra cost. We believe that this is the death knell for private sector DB schemes and are not convinced by the “defined ambition” alternatives currently under discussion. The abolition of contracting-out (and associated NI rebates for employers) may lead to closure of defined benefit schemes in the private sector, meaning salary-related occupational pensions are less available in the future. This extra employer cost still needs to be found from the public sector employers and could mean cuts to jobs and services in the public sector. The timing of this and the impact on workers in all sectors is crucial. 20 http://www.ons.gov.uk/ons/rel/disability-and-health-measurement/sub-national-health-expectancies/2007–2009/stb-disability- free-life-expectancy.html cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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How the Proposals are likely to Affect Incentives to Save for Retirement

11. We believe that individuals towards the beginning of their working life can expect to receive lower overall outcomes under STSP than the existing system, because the assumption that this group will beneﬁt from automatic enrolment into a private pension may be erroneous. People may not be able to afford increased occupational scheme contributions and do not trust a deﬁned contribution alternative and may come to rely only on the STSP. This goes against the incentive to save.

12. The trade unions represent the workers that this Bill is intended to provide for but the lack of consideration over practical issues such as health, access to jobs, and the impact of contracting out on occupational schemes show fundamental ﬂaws. It is an opportunity missed to protect older people in the UK. 15 February 2013

Written evidence submitted by the National Union of Rail, Maritime and Transport Workers

1. Introduction

1.1 The National Union of Rail, Maritime and Transport Workers (RMT) welcomes the opportunity to contribute to the Works and Pensions Select Committee call for written evidence following the Government’s publication of the White Paper setting out its plans to introduce a new Singe-Tier State Pension. The RMT organises around 80,000 workers in all sectors of the transport industry and negotiates, on behalf of our members, with some 150 employers. With over 44,000 members employed on the railways, RMT is the largest of the rail unions.

2. Executive Summary

2.1 The RMT support an increase to the Basic State Pension to a level which assists taking pensioners out of poverty and ending means testing. However, we do not support “robbing Peter to pay Paul”. The abolition of contracting-out in 2017 will have negative implications on members of defined benefit (DB) pension schemes and is therefore of significant concern to the RMT.

2.2 The Government’s proposal to introduce a statutory override of the Protected Persons Regulations breaks the commitment made to workers following privatisation of the Railways and sections of London Underground.

2.3 The proposal to introduce an “employer override” to allow changes to be made to private sector scheme rules without the need of trustee consent is unacceptable. While, it is acknowledged that the increase in National Insurance Contributions (NICs) will have a negative impact on employers ﬁnances, to “bypass” trustees is an attack on the principles of the Pensions Act 1995 which introduced the requirement to have member participation on pension trustee boards.

2.4 The replacing of the Basic State Pension with a higher rate Single-Tier State Pension will have a major impact on pension scheme members’ future accrual where a pension scheme rules have an Integration Factor (offset) linked to the Basic State Pension.

2.5 The White Paper conﬁrms the previous announcement that the state pension age (SPA) will increase to age 67 between 2026 and 2028. The RMT is totally opposed to the increase in the SPA.

3. Abolition of Contracting-out for Salary Related Schemes

Schedule 13

3.1 The abolition of contracting-out will have dire consequences for the many deﬁned beneﬁt pension schemes which already face funding problems. While the proposed statutory override is designed to compensate employers for the ending of the National Insurance Contribution rebate, the administered cost in adopting pension scheme rule changes or/and contribution increases will still remain.

3.2 However, the real losers will be pension scheme members who are likely to see their benefits reduced or contributions increased or both. While it is argued that defined benefit pension scheme members will gain by the introduction of a Single-Tier State Pension this will be to the detriment of their occupational benefits.

3.3 This policy is nothing more than “robbing Peter to pay Paul” by increasing National Insurance Contributions for both members and employers to fund the introduction of a Single Tier State Pension. The RMT believe that this policy is likely to be a policy “own goal” with decent deﬁned beneﬁt pension schemes closing and as a result workers still relying on the State handouts. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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4. Power to Amend Schemes to Reflect Abolition of Contracting-out Schedule 14 (section 24) The power overrides other legislation 4.1 The Governments proposal to introduce statutory legislation to override Protected Persons Regulations so that employers can increase contributions or/and change benefits of those employees with protection status would be to the detriment of promises made prior to privatisation. 4.2 It needs to remember that Government policy dictated the privatisation of the railways, parts of London Underground (LUL), electricity, and coal, not those employed in these formally nationalised industries. 4.3 For those former British Rail employees this commitment of pension protection is enshrined within the Railways Act 1993 and parliamentary order known as The Railways Pensions (Protection and Designation of Schemes) Order 1994 (“the Order”) which offers the following protection: — “The Order requires that your pension rights in respect of future employment must be at least as favourable as the rights which the BR Pension Scheme provided on 31 May 1994” (Your Protected Rights, see attached).21 4.4 Any changes would also be contrary to direct assurances given to rail unions by the Secretary of State for Transport, Justin Greening MP, on 7 December 2011 that the Railways Pension Scheme would not be affected in any way as a consequence of the Red Tape Challenge. 4.5 The promise of protection for those London Underground workers whose employment switched under Public Private Partnership Agreements (PPP) is contained under the London Transport Pension Arrangement Order 2000 that: — “5 (3) if the scheme provided by the employer is the LRT Pension Fund, the appropriate provision is provision under which the pension rights which accrue to or in respect of the protected person under the scheme in respect of his service after his relevant transaction are overall material at least as good as the pension rights accruing to or in respect of him under the LRT Pension Fund in respect of service immediately before that transaction” (Statutory Instrument 200 No.3368, The London Transport Pension Arrangements Order 2000, see attachment).22 4.6 This promise is further endorsed by the then Deputy Prime Minister: — “The LRT Pension Fund will be structured to guarantee your rights to remain within the fund, while retaining a single board of trustees and a common governance” (Letter to LUL employees from John Prescott MP, 15 June 1999, see attachment).23 4.7 If a financial burden is being placed on the private sector DB pensions scheme as a result of contracting- out, than Government should put in place adequate provisions to ensure schemes remain affordable for all stake holders and that the above promises are honoured in full.

5. Power to Amend Schemes to Reflect Abolition of Contracting-out Schedule 14 (section 24) 5.1 The power to allow employers to make benefit changes or/and increase members contributions without trustee consent is contrary to the principles of the Pensions Act 1995, (Part One, 16) requirement for Member Nominated Trustee on trustee boards. 5.2 This proposal also undermines the very role of Member Nominated Trustees who make a significant contribution to running of DB pension schemes within the private sector. This contribution cannot be underestimated and is not just about making up the numbers on trustee boards to meet legislation requirements. Members Nominated Trustees play a valuable role informing scheme members about the scheme, helping to maintain membership and importantly giving members a voice on the day to day running of their future pension entitlement. 5.3 The RMT totally reject the view made by some employers that “trustee consent” is a hindrance and that making changes to scheme rules is often problematic. The very fact that employer representatives in the majority instances are involved in the decision making process on a relevant trustee boards can only lead one to believe that this proposal is aimed at excluding Member Nominated Trustees from the decision making progress. 5.4 While there may be circumstances where trust deed and rules do not permit any benefit changes or increases to contributions rates other than the closure of a particular pension scheme, this does not make it acceptable for Member Nominated Trustees being excluded from the decision making process. 21 Information provided, not printed. 22 Information provided, not printed. 23 Information provided, not printed. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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5.5 This proposal is nothing more than disingenuous to Member Nominated Trustees who work alongside employers to for the beneﬁt of all beneﬁciaries. Excluding Member Nominated Trustees from the decision making process would undermine the very fabric of the member involvement.

6. Pensionable Age 6.1 The RMT is totally opposed to the increase in the SPA which is clearly an attack on the poorest in society to make them work longer and to pay for economic crisis they did not cause. The claim by the Government that the need to increase SPA is essential to create a fair framework for future retirement provision is in the view of the RMT more to do with “balancing the books”. Many workers the RMT represent work long hours and carry out physically demanding jobs and the effect of increasing the SPA is likely only to reduce the amount of time they will enjoy in retirement. 6.2 The logic of increasing the SPA is clearly ﬂawed as the later people work the more this reduces the opportunity for younger workers to ﬁnd employment, which will only increase the burden on the state. RMT policy, along with the wider trade union movement, is to reduce the amount of time people spend at work before retirement, and to increase the amount of time in retirement. 19 February 2013

Written evidence submitted by Anne Street The following submission is from Anne Street a British citizen, taxpayer and voter born on 25 June 1953. It addresses the following lines of the inquiry:

What impact the proposals will have on specific groups, including: — Women and people with caring responsibilities. The proposed arrangements for the transition from the current system to the new one, including: — How accrued rights will be protected. — The effects of ending contracting-out of the State Second Pension. 1. I am one of the cohort of women, born between 1950 and 1955 who have seen our pension entitlement eroded and our pension age increase under four separate changes in government policy over the course of the last 20 years. 2. The first of these was in the 1990s when it was announced that women’s pension age should be equalised with men’s in line with EU equality legislation. Under that change my new retirement date age meant I would lose out on two years and 10 months of pension. 3. Three further changes announced within the last few years mean my pension entitlements have further slipped away from me. To the point that I now face a new retirement date of 6 April 2017, just weeks before the flat rate pension of £144 a week is due to come into force. This means that I not only will lose out years of pension, but also will be potentially £37 a week worse off for the rest of my life than someone born only a few weeks after me who will retire two months after I do, or a man born on exactly the same day as me. Over the course of a lifetime, (If I calculate 20 years of pensionable life this could amount to £38,480 in today’s figures). Add to this the loss of state pension for three years 10 months due to increased retirement age, amounting to roughly £21,000 if calculated using the £107 a week pension rate. These two amounts add up to almost £60,000.00 over the course of my life-time if I live to the average life expectancy for women of my age which is my mid 80s. 4. This loss compared to women of an almost identical age, but a couple of years older or just younger is serious and deeply unfair. For poorer women this could mean the difference from them being able to heat their homes and live with dignity in the winter in their old age. (£37 a week is just over the current average weekly household heating bill which is about £26 a week, a figure which will almost certainly rise by 2017 and beyond). 5. Plus I’d include info about the unfairness of the phasing of the retirement age....as I think we need to make a fuss about this. 6. The phasing of the retirement age for women in their late fifties is deeply unfair, particularly for women born in 1954 and 1955, who have to wait far longer for their pension than women born in 1950 to 1951. According to NI Direct, those born in January 1954 retire in March 2019, aged 66+, a full three and a half years after women born in January 1953, who are just 12 months older.

Second Earning Related Pension (SERPs) 7. Encouraged by the government I contracted out of SERPs into a private pension in the early 1990s. After a few years it became obvious that this was a signiﬁcant mistake, and I would be far worse off out of SERPS, so I opted back in. However, the result is that now I have less payments into SERPs and will be eligible for a much lower second pension than if government changes had not induced me to opt out. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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8. I am told that the Department for Work and Pensions (DWP) cannot calculate my SERPs entitlement until near my retirement but I fear my ﬁnal state pension will be signiﬁcantly smaller than I have calculated at a number of times during my life.

National Insurance Contributions

9. Women who were unable to make full National Insurance contributions over the course of their working age life, because of family caring responsibilities, will be the major losers as their contributions will now be calculated on 35 years instead of the previous 30 years.

10. All these changes come too late for us to make plans.

11. Many women who are already struggling to make ends meet with rising inﬂation and cost of living, simply cannot afford to buy back years as has been suggested by the Minister. This may be an option for women on middle incomes, but something which lower income women with no money to spare at the end of the week can only dream about as an impossible luxury.

12. Many women of my age do not have the full 35 years contributions. Either we were studying in our twenties, abroad doing voluntary work or travelling or took extended maternity leave to raise a family: Many of us never had the ﬁnancial possibility (or even awareness that we should or could) “buy back” missing years contributions.

Recommendations — Women born between 1950 and 1955 should be able to choose whether they go on to the new ﬂat rate scheme of £144 a week, once it comes into force, regardless of whether their retirement age comes before the date the new rate comes into force: they should graduate over to it. This calculation would be based on what their SERPs value will be and whether that gives them a higher income than the £144 a week or not. — 30 years NI contributions should entitle women born between 1950 and 1955 to a full state pension. This should not be increased to 35 years. — The phasing in of the retirement age for women in the age bracket born between 1950 and 1955 should be done more gradually. Given the litany of changes and broken government promises made to this age group no-one in this age group should have a retirement age older than 65.

In sum women born between 1950 and 1955 (currently almost half a million of us) have already had enough taken away from us and too many promises made and then broken about our pensionable age, our NI contributions, and our SERPs contributions because of successive changes in government policy and regulation. The Work and Pensions Select Committee need to take these broken promises into account when making recommendations about transitional arrangements for a group of women who have worked hard all our lives, either in paid employment and/or looking after their families. It is particularly important that lower income women who do not have savings are taken care of and that we should not be worse off than men born on exactly the same day as us. 15 February 2013

Written evidence submitted by Towers Watson

1. Summary — In a steady state, the single-tier pension provides smaller retirement incomes than the current system. — Overall, younger groups do worse out of the changes than people retiring soon after 2017. — The reforms signiﬁcantly favour those with substantial contracted-out service over those who have spent most of their careers contracted-in. — The reforms should have a positive impact on saving incentives for some groups and a negative impact for others. — Not all State Pension entitlements accrued under the old system are fully protected. — Under the mechanism for reviewing the State Pension Age, a lot will depend on the precise target for the percentage of adult life to be spent receiving State Pensions and on assumptions about how mortality rates will change in future. This paper has been prepared for the sole purpose of informing the addressee in relation to the scrutiny of the draft Pensions Bill. We accept no responsibility for its use by any party in any other context or for any other purpose. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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2. Impact of Single-Tier Pension Proposals on Individuals Career starters

2.1 A single-tier pension of £144 per week would be accrued at a rate of £4.11 of weekly State Pension for each year in which National Insurance Contributions (NICs) were paid or credited, subject to a minimum of seven to 10 years and a maximum of 35 years. Under the current system, people earning less than £14,700 accrue approximately £5.20 of weekly State Pension at State Pension Age (SPA) for each of their ﬁrst 30 years of NICs, and approximately £1.60 for any subsequent qualifying years.24 The same is true where people receive credits for activities such as staying at home with young children or looking after sick relatives. The graph shows how, for these people, any number of qualifying years produces a higher State Pension income at SPA under the old system than under the new system.

2.2 Chart: Single-tier projection for new career starters

2.3 The comparison with the old system would be less favourable still for employees with some earnings- related State Second Pension (S2P) accrual although the extra difference for this would decrease over time as the band of earnings used to calculate the earnings-related part falls away (as it will under existing legislation). By contrast, people who spend signiﬁcant periods either self-employed or claiming Jobseeker’s Allowance could expect to receive a higher pension under the new system.

2.4 The scale of these losses is signiﬁcant. For example, State Pension income at SPA for lifetime low earners could be: Number of qualifying New system Old system “Loss” years 30 £123 £156 £33 35 £144 £165 £21 40 £144 £173 £29 45 £144 £181 £37 All ﬁgures are in 2012–13 earnings terms.

2.5 The relative “loss” in weekly income will decline over time after SPA because under the new system the whole pension is expected to be increased at least in line with earnings whereas the S2P part of the “old system” pension is linked only to prices.

2.6 The numbers used above are calculated on the assumption that the single-tier pension and the Basic State Pension under the old system rise with national average earnings each year (the legislative requirement). If they instead rise with the triple lock (the Government’s aspiration) both the old system and the new system would produce higher pensions and the gap between them should be narrower. 24 The £5.20 ﬁgure combines the Basic State Pension and State Second Pension; the £1.60 ﬁgure is State Second Pension only. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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2.7 Smaller State Pensions are expected to be cheaper for the Exchequer in the long run. The DWP’s estimate of these savings is smaller than its earlier estimate of how much the Pensions Act 2007 would add to long- term spending on transfer payments to pensioners.25 2.8 The full single-tier State Pension is now suggested to be £1.30/week above Guarantee Credit rather than the £7.40/week gap (after 30 years) envisaged in the 2011 Green Paper. It might be that the lower than expected amount of £144 per week reﬂects the need to make some short-term savings to offset the more generous transitional provisions now proposed for those who have had contracted-out service in the past (see below).

Contracted-out individuals—established careers 2.9 This group, including workers who already have 30 years of National Insurance Contributions or credits needed for a full Basic State Pension by the time that the change is introduced, seem to benefit from the proposals. 2.10 For each year that people in this group pay National Insurance at the full rate, they will expect to get back an extra £214 (before tax) in every year after they reach SPA. The maximum increase in an employee’s National Insurance Contributions would be £483 this year if the change were already in force and is expected to be less than this by 2017. Even allowing for 40% tax relief, it would cost around seven times as much as this to buy a similar retirement income top-up through a private pension. 2.11 Public sector workers will not be having any adjustment made to their future pension accrual to offset the benefit described above. And even where private sector employers pass on the cost of the lost NI rebates (eg through reduced pension scheme benefits), many people with long contracted-out histories would get back extra State Pension entitlements that are around three times as valuable as the money they pay and/or the workplace benefits they lose. 2.12 An exception here would be members of schemes that decide to close to future accruals following the changes. In such cases, the extra State Pension entitlements may only soften the blow.

Contracted-out individuals—younger workers 2.13 Younger workers in contracted-out schemes don’t fare as well. Overall, they should beneﬁt from the reforms where employers (such as those in the public sector) do not pass on the costs of their lost rebates. However, they can expect to be net losers where these costs are passed on as well as where employers close their schemes.

Previously contracted-out workers 2.14 Older individuals who have already returned to paying the full rate of NICs but who were contracted out for a signiﬁcant part of their career—a common position amongst older employees in the private sector— will also be able to add more to their State Pension under the proposals.

Previously contracted-in workers 2.15 The position is very different for older workers who have spent the bulk of their career paying into second-tier State Pensions. They must continue paying full-rate National Insurance but will no longer earn additional State Pension income when they do so. 2.16 The table shows how employees’ National Insurance Contributions, and the State Pensions that they are promised in return for each additional year’s NICs, are expected to change for contracted-out and contracted-in workers during different stages of their careers. Employee National Insurance Increase in annual State Pension for each year’s NICs After—until full single- tier State Pension Before After Before accrued (then £0) With full BSP already accrued (30+ years NICs/credits) Contracted out of Reduced rate Full rate (up to Min: £0 (for people £214 S2P/SERPS— £483* extra; smaller with earnings above an currently and for increase for people age-related threshold— most of career earning <£40,040) eg, >c.£35,300 for people reaching SPA in 2022/23) Max: £85 (for people earning just over £5,564) 25 Single-tier impact assessment, chart B2; Pensions Act 2007 impact assessment, ﬁgure A7 cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Employee National Insurance Increase in annual State Pension for each year’s NICs After—until full single- tier State Pension Before After Before accrued (then £0) Contracted in— Full rate Full rate Min: £85 (if earning Usually £0. currently and for <£14,700). Can be £214 for a short most of career Max: £140* (if earning period if person with >£40,040) >30 years has been a low earner throughout career Currently contracted Full rate Full rate Min: £85 (if earning £214 in; contracted out <£14,700); for much of earlier Max: £140* (if earning career >£40,040) Until full BSP accrued (<30 years NICS/credits) Contracted out Reduced rate Full rate (up to Min: £185 (if earning £214. £483* extra; smaller more than an age- Ability to continue increase for people related threshold—eg. building up State earning <£40,040) c.£35,300 for people Pension at this rate will reaching SPA in endure for longer than 2022–23) that of otherwise similar Max: £270 (if earning person who was just over £5,564) previously contracted in. Contracted in Full rate Full rate Min: £270 (if earning Usually £214. <£14,700); Can be £0 for person Max: £325* (if earning with <30 years if history >£40,040) of higher earnings over a long period. Ability to build up State Pension at this rate will expire sooner than previously contracted- out person’s does. All numbers approximate and expressed in 2012–13 earnings terms. * Asterisked contribution/pension numbers would fall gradually over time under current system

A platform for saving? 2.17 The single-tier pension is intended to be a foundation for saving as part of a broader package of pension reforms. There are two reasons why it is supposed to encourage saving. 2.18 Firstly, the single-tier is expected to make it easier for people to see what they can expect to get from the State in retirement, and therefore to plan how much they need to save. This is a potential advantage of simplification. However, State Pensions have changed frequently over the years so there will remain uncertainty about what the State will provide in future. 2.19 Secondly, the single-tier pension is said to improve incentives to save by reducing the number of people eligible for Pension Credit. 2.20 DWP analysis suggests that the Bill will lead to a small reduction in the mean marginal withdrawal rate faced by pensioner households and in the proportion with marginal withdrawal rates above 20%.26 However, not all of the impacts that the reforms have on saving incentives will be positive. 2.21 To reduce eligibility for means-tested benefits, the Bill would withdraw Pension Credit more aggressively. At present, a single pensioner’s Pension Credit is withdrawn at a rate of 40p for each £1 that income from State Pensions and private savings exceeds £111.80, until entitlement is exhausted at an income of around £189. Under the Bill, Pension Credit would instead be withdrawn at a rate of £1 for every £1 of income, so that entitlement is exhausted once income exceeds £142.70. 2.22 People whose income will in any case be between £142.70 and £189 will therefore have a stronger incentive to save more (as well as potentially needing to in order to replace the lost Pension Credit). On the other hand, people who are concerned that they may not accrue the full State Pension will be heavily disincentivised from saving as under the current proposals they would stand to get no benefit from at least the first part of those savings. Also, the single-tier pension is capped at 35 years of contributions and there is an expectation that anyone with fewer contributions or credits than this will get a means-tested top-up to almost the same amount (unless the triple lock improves the value of the single-tier pension relative to the Guarantee 26 Enabling and encouraging saving, DWP February 2013, charts 1 and 2. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Credit over time). There therefore seems little incentive for individuals to ensure that they make NI contributions for State Pension purposes unless they also have sufﬁcient private savings to take their income above the Guarantee Credit level.

3. Protecting Beneﬁts Already Built Up 3.1 The proposals include a number of transitional protection measures intended to recognise contributions made prior to the date of change and the impression has been given that all accrued rights are protected. However, there seem to be some areas where individuals could be worse off following the introduction of the single-tier pension in that beneﬁts that they would consider had already been earned before 2017 will be lost or reduced.

Derived and inherited rights for married people 3.2 The proposal is that derived and inherited rights (based on a partner’s NICs) will be largely abolished for pensioners under the new system. This proposal appears to run counter to the general claim that all “accrued” rights are protected. 3.3 One result is that, contrary to one of the objectives of the reform, some women will end up worse off under the new system than the old. It would be useful to know if the DWP has done any analysis of how many future widows (in particular) might be in this position and how much sharper the drop in income on their husband’s death would be under the proposals than under the current system.

Uprating protected payments 3.4 Individuals entitled to so-called “protected payments” are likely to receive lower payments for the NI contributions they have already made than they would have expected under the current system. Additional State Pension is currently uprated in line with average earnings before SPA, but protected payments will be increased in line with Consumer Prices Index (CPI) inﬂation. 3.5 The value of protected payments to individuals will erode during years in which average earnings exceed CPI, which many expect to be the more usual case in the long run. If earnings growth exceeds price inﬂation by 1% each year, then an individual ten years below SPA in 2017 could end up receiving a protected payment that is 10%-12% lower than the accumulated Additional State Pension he would have otherwise received.

4. State Pension Age Changes 4.1 The White Paper says that reviews of the SPA will be based around the principle of maintaining a given percentage of adult life in receipt of State Pensions. This is an important piece of new information about the Government’s plans. Stabilising a proportion of adult life in receipt of State Pensions, rather than the number of years in receipt of State Pensions, suggests that extra years of life expectancy would be shared between work and retirement rather than all being spent in work. 4.2 Under the mechanism in clause 26 of the draft Bill, the Secretary of State would at each review set a target percentage of adult life for people reaching SPA in a given period to be able, on average, to expect to spend “in retirement”. (We presume that “in retirement” is a drafting error and should read “in receipt of State Pensions”.) The Government Actuary’s Department would then advise on the changes to SPA needed to bring this about. A separate review would consider other “relevant” factors, potentially including health and inequalities in life expectancy.27 4.3 The precise target percentages set by future Secretaries of State could make as much difference to how quickly the SPA goes up as changes in life expectancy do. The Prime Minister has indicated that in his view it might be reasonable for adult life to be shared roughly in the ratio 2:1 between time in work and in receipt of State Pensions.28 But actual future changes in SPA will depend very heavily on how a concept such as “about one-third” is applied in practice. 4.4 When the SPA reaches 67 in 2028, the ONS mortality assumptions used by the Government in its analysis imply that people can expect to spend an average of 32.5% of life above age 20 in receipt of State Pensions. If the Government sought to maintain this percentage, the ONS projections imply that SPA would need to reach 68 only a few years earlier than under current legislation (c2040 rather than 2046). If it opted instead for exactly 33.3% then the increase to 68 could actually be put back a couple of years compared with the timescale currently in legislation, but a “rounded” percentage of 30% would require increases to 68 and 69 immediately after the accelerated (under the Bill) increase to 67 has taken place. 4.5 It would be important to understand how the Government intends to estimate life expectancy for the purpose of estimating the percentage of adult life after SPA at each review. If a “cohort” life expectancy is used (ie. including an allowance for projected future longevity improvements) then the answer depends to a 27 Towers Watson’s postcode mortality analysis, based on deﬁned beneﬁt pension scheme members, points to a difference in male life expectancy at 65 of almost four years between some areas of the UK http://www.towerswatson.com/united-kingdom/press/ 6915. 28 ITV, Daybreak, 14 January 2013. cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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signiﬁcant extent on the assumptions Government Actuary’s Department (GAD) makes about the inherently uncertain pace of future improvements.

5. Rebate Derived Amount

5.1 We have raised a query with the DWP regarding the calculation (set out in Schedule 1, paragraph 5 of the Bill) of the deduction for contracted-out service to be made in determining the transitional rate of pension (in the White Paper this is referred to as the “rebate derived amount”). We had assumed that the intention was for the deduction to be the same as, or at least similar to, the deduction from what would otherwise have been the SERPS/S2P benefit under the current system. However, for post-2002 service this does not appear to be the case and we have asked the DWP whether this reflects a specific policy decision or whether there is a problem with the drafting (they expect to give us a response within another week or so).

5.2 Our reading of the provision as drafted is that for many people it gives a lower deduction from the new State Pension than we would have expected, and indeed can give a signiﬁcantly negative deduction for a lower earner who was not contracted out of S2P during this period (and for whom the logical answer would be nil deduction/adjustment).

5.3 If this does reﬂect a policy decision to generate some additional beneﬁts for lower earners, we are surprised that no attention has been drawn to it.

6. Abolition of Contracting Out—Practicalities

6.1 Although there is a proposed override such that trustee consent will not be required to implement limited changes, we believe that the onerous requirement to consult with members will lead many employers to conclude that they might as well propose a more signiﬁcant set of changes (rather than just the narrow ones permitted by the override).

6.2 If the Government wants to encourage employers to restrict themselves to the “minimum” changes, but does not want to dispense with the normal consultation requirements, it might be able to facilitate this by providing generic communication material which makes absolutely clear that the proposed changes are a natural consequence of a Government reform which has anticipated that most employers would take this action. 16 February 2013

Written evidence submitted by UNISON

UNISON welcomes the opportunity to provide evidence to the Select Committee. UNISON is the UK’s largest public service trade union with 1.3 million members, one million of them women. They include frontline staff and managers working full or part time in local authorities, the NHS, the police service; universities, colleges and schools, the electricity, gas and water industries, transport and the voluntary sector and for private contractors providing public services and in the essential utilities.

Many of them are part time and low paid, working in traditionally low paid sectors like care, catering, security and cleaning. UNISON is concerned that more work has to be done to ensure that low paid workers in particular are not worse as a result of the proposed phasing out of the Second State Pension.

In the interests of brevity we fully support the points made in the submission of the TUC sent to the Select Committee and so will not repeat those points here.

In support of our concerns we attach a paper that was prepared for UNISON by First Actuarial last November when we were anticipating the White Paper on State Pension Reform.

This submission looks beyond just the impact of the proposed changes to the State Pension and compares the position of workers on different age and salary bands showing the “current position” with the “possible future position”. The possible future position includes a pension based on the minimum automatic enrolment pension where the employer will have to pay a minimum contribution of 3% on the banded earnings.

Our figures are based on a flat rate state pension of £140 per week at 2017 and do not take into account the transitional protections for some workers. As we write, we are commissioning First Actuarial to update these figures and would be happy to forward this when available.

Despite these caveats, the ﬁndings show that contrary to the reports that low paid will be better off under the proposals in the Bill, the opposite outcome may be true, if the level of contributions from employer and member is not signiﬁcantly higher than the current minimum rates for the auto enrolment pension scheme. 15 February 2013 cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Written evidence submitted by Unite This response is submitted by Unite, the UK’s largest trade union with almost 1.5 million members across the private and public sectors. The Union’s members work in a range of industries including manufacturing, ﬁnancial services, print, media, construction, transport and local government, education, health and not for proﬁt sectors.

Executive Summary — At a time when the need for a defined benefit state pension to provide a foundation for people’s uncertain private pensions has never been greater the Government is proposing to drastically reduce its scope. — While the single-tier raises the minimum level of state pension and reduces mean-testing it does so by removing earnings-related additions to what is an inadequate single-tier level and diverting the National Insurance (NI) people will still be paying for them. — In the short-medium term the main losers will be those with the poorest or non-existent private pension provision who have been contracted-in and placed the greatest reliance on State Second Pension—many of those will see their State Pension reduced by up to one fifth. — While contracted-out employees stand to get higher state pensions after the change, those in the private sector may face offsetting losses in their company pensions and those in the public sector may find their future pay and job security are impacted, as the Government has not promised to compensate public sector employers for their higher NI costs. — Transition terms are unfair to contracted-in employees and they should be given scope to add to their single-tier benefits on a basis equivalent to that being offered to Contracted-out employees. — Proposals to interfere in private sector DB pensions by over-riding “protected persons” legislation, and requirements in scheme rules for employers to make changes only by agreement, should be rejected.

The Unite Case in Detail 1. Unite does not believe that any satisfactory basis for state pension reform can be devised or achieved, for an ageing population, without an increase in the planned level of public expenditure on state pensions. 2. For every improvement received by groups within a cost-neutral framework then there must correspondingly be deterioration in benefits for some other groups. 3. We have already noted that the restoration of the earnings link is being paid for by a rising state pension age, which is particularly unfair for those groups in society who have a shorter life expectancy. 4. Now the proposed single-tier will in part be paid for by restricting the maximum scope of defined benefit state pension provision for workers who have never had, who no longer have or who may never have access to occupational DB pension provision. Many of them in the past will have had no company pension provision at all. 5. Unite does not accept the notion that compelling employers to contribute a minimum level of contributions through the auto-enrolment provisions excuses a further reduction in the scope of state provision. Auto- enrolment was conceived as providing a supplement to an inadequate basis of state pensions rather than a replacement for it. 6. The Government, whilst highlighting the “winners” from the single-tier policy has also claimed credit for the policy resulting in a projected reduction in state spending (down from 8.5% to 8.1% as a share of national income by 2060). It has been much less forthcoming about exactly who the “losers” are from this policy, whose losses logically must outweigh the gains of the “winners”. 7. Buried away in Annex 3 of the White Paper, is paragraph B.15 which says the following: “The trade-off for the simplicity and clarity of a flat-rate single-tier pension is that the amount of pension that people can get will be capped at 35 qualifying years of contributions or credits. In practice this means that higher earners and those with longer working lives would be entitled to less state pension under the single tier than they would have been entitled to under the current system”. 8. Losers are not therefore confined to higher earners, they also include people across the broad range of earnings who have “longer working lives”, as we will illustrate below. It will also hit people whose working lives include periods of credits, not just those who have been in paid work throughout. 9. Even “higher earners”, as a category, needs to be carefully considered as in this particular context only earnings up to £40,000 p.a are at all relevant. 10. Illustration 1 shows why members at most salary levels who have been contracted-in throughout their working life will lose from the reforms. The calculations assume constant earnings but clearly members moving between the levels would be proportionately affected. The results are not materially affected if for part of their cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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career they have been in receipt of credited years. It shows how total state pension beneﬁts will change as a result of the reforms.

Illustration 1

IMPACT ON EXPECTED STATE PENSION OF SINGLE-TIER FOR EMPLOYEES CONTRACTED-IN THROUGHOUT THEIR WORKING LIFE Pay level Retiring in 2027 Retiring in 2037 Retiring in 2047 £13,250 −5% −8% −16% £26,500 −13% −14% −20% £39,750 −15% −16% −21%

(Calculations provided by Bryn Davies FIA, an acknowledged expert on the state pension and private pension provision)

11. Figures for calculated for 2057 and beyond are slightly higher indicating a 20–25% loss across the income spectrum. As these will be people whose working career has been mostly in an area where contracted- in will become the only possibility they show the long term reduction in the quality of state pension provision for the great majority of people.

12. Under transitional terms, discussed below, many of those who have been contracted-out will stand to beneﬁt from higher state pensions although those in the private sector may suffer reductions in their company scheme beneﬁts which may offset part or all of that change.

13. In presenting analysis of the impact of the proposals the Government has highlighted those retiring in the near term, presented cumulative data for all those retiring after the new system takes effect in 2017 and taken into account the effect of the (somewhat uncertain) effect of an assumed higher rate of increase in the Single Tier in payment than the increase as would have applied to State Second Pension beneﬁts. In short it has spun the ﬁgures to show them in the most favourable light.

14. What this obscures, but cannot hide, is that after about 20 years the balance tips so that of those retiring there are increasingly more losers than there are winners. This is because as time goes on there are fewer outcomes shielded from the full effects of the new system by entitlements carried over from the present system and the reduced scope of the state pension becomes apparent.

15. SERPS (State Earnings-Related Pension Scheme) was conceived in 1978 as providing an earnings-related defined benefit pension, providing a substantial addition to the Basic State Pension for those who did not have access to an employer DB scheme certified as providing better benefits. It was designed for those employees who did not have the advantage of membership of such a company scheme and was to be paid in addition to a Basic State Pension in excess of the single-tier pension (as a proportion of earnings) that the Government now propose.

16. The original SERPS framework was a much better form of auto-enrolment for employees than what the current auto-enrolment provisions provide for as it provided a higher benefit and it was on a defined benefit basis and compulsory for both employers and employees. Regrettably, SERPS has been devalued over the years.

17. The pensions landscape has changed dramatically with the wholesale move away from DB pensions in the private sector and the advent of contracting-out on a deﬁned contribution (DC) basis which has recently been discontinued. For a lot more employees now SERPS/S2P has become important as part of a DB foundation to their overall pension which helps underpin the DC beneﬁts their employers now provide.

18. With the evolution of SERPS into State Second Pension a non-earnings related supplement for lower paid workers and carers was superimposed on the earnings-related framework in an attempt to shore-up a failing Basic Pension and reduce the degree of means-testing.

19. The single-tier pension effectively ends the provision of a state earnings-related pension and redirects the tax-beneﬁts currently tied up in that into providing further reinforcement for the inadequate level of the Basic State Pension. NI contributions as would have provided employees with an earnings-related beneﬁt are redirected to providing a non-means tested uplift to the current Basic State Pension.

20. The earnings-related element used to provide for those who were contracted-in to be able to add amounts which could add very substantially to their Basic State Pension, amounts which might serve to double their state pension entitlement. This provision has been removed at a time when it has never been more needed.

21. Unite is very much in favour of a higher Basic State Pension but believes it should have been ﬁnanced out of current surpluses in the NI Fund, higher overall NI and progressive taxation rather than by the ending of earning-related state pensions. A whole swathe of employees will end up receiving less State pension whilst seeing no change in their NI contributions. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Transition Issues 22. Employees who have been contracted-in are treated unfairly in respect of the transition provisions and this is the reason why they will feature highly amongst the losers from the single-tier policy. The Government is calculating that as their NI contributions will not change and as they often have a limited understanding of what their expected benefit is from State Second Pension then this will be easier to get away with. 23. A key design feature of the transition proposals has been to devise terms under which contracted-out employees, who will experience a rise in their NI costs, will get something by way of an increase in their state pension above what they would have received from the State under the present system. 24. This has been portrayed as allowing them to increase their single-tier entitlement by £4.11 for each future qualifying year of NI contributions until they reach the standard amount of £144. As most of them would in any event have established an entitlement to a full Basic State Pension (of £107 per week), then this potential will generally be limited to about nine years of £4.11 additions until they establish entitlement to the £144 per week. 25. In practice former contracted-out employees’ net gain can be a lot less than £4.11 per future year if they have more than nine years of qualifying years before their State Pension Age or they have already some entitlement to additional pension (as they have had a period when they were contracted-in or qualified for credits towards S2P). Outcomes will vary widely but generally those with longer to go before reaching State Pension Age will do much less well than those who are closer to State Pension Age. 26. For contracted-out employees, this scope to add to their single-tier arises because their SERPS/S2P replacement benefits are ignored when the scope to add to their state benefits after 2017 is assessed. This is done by the deduction of a rebate derived amount. So, a contracted-out member is subject to the limit of £144 on their single-tier pension but will receive all of their pre-2017 SERPS/S2P replacement benefits in addition to that. 27. Contracted-in employees will at the inception of single-tier be guaranteed a foundation amount of state pension benefit no less than what they had earned pre-2017. However, they will only be allowed to add further to their state pension if it is then less than £144 per week and the addition allowed will not allow it to go above £14. If it is less than £144 per week they can increase it by £4.11 for each future qualifying year. 28. This means that a contracted-in member who on the basis of their pre-2017 contributions under the present system has already built up an entitlement of £144 per week or more will not be able to add to it at all. Contracted-in members with a foundation amount less than £144 per week will not be allowed to increase it above £144 per week. 29. There will be some contracted-in members who already at inception have qualified for an amount of state pension greater than there single tier. Not only will they have no scope to add to their single state pension but their excess benefit will lose value, as compared to the present system, because it will be indexed only in line with Consumer Prices Index (CPI) inflation rather than continuing to increase in value in line with average earnings. 30. The Government assert that this devaluation is compensated by the fact that the single-tier once in payment may increase in line with earning or through the application of the “triple-lock” whereas State Second Pension benefits would only increase in line with CPI. We would observe that this is a rough and ready compensation and that members’ general preferences are to maximise their pension at the point of retirement. 31. The illustration below shows a comparison of outcomes for a contracted-in employee and a contracted–out employee member with a full career on average earnings retiring in 2027. They would have faired equally under the current system. 32. Illustration 2 shows that for the contracted-in person their state pension expectation is reduced by £23.60. In 2017 they already established entitlement to an amount greater than the full single-tier pension (STP) and they are not allowed to add to it. Their protected pension, the STP benefit in excess of £144 per week, loses value in real earnings terms. 33. By contrast, for the contracted-out person their expectation from state pension and State Second Pension replacement benefits (the rebate-derived amount) increases by £16.73. This is because they are allowed to fully top-up the STP foundation amount they had qualified for in 2017 (so their total STP is £144 per week in 2037) but also retain in full the value of their rebate derived amount (the part of their private pension which replaces State Second Pension benefits). cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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Illustration 2 TRANSITION TERMS COMPARED Accrued in 2017 Current System 2027 Proposed System 2027

C/In C/Out C/In C/Out C/in C/Out Basic State Pension £107.45 £107.45 £107.45 £107.45 State Second Pension £53.95 £73.47 Rebate Derived Amount £53.95 £73.47 £53.95 STP—Foundation £144 £107.45 STP—Additional £36.55 Protected Pension £13.32 Total £161.40 £161.40 £180.92 £180.92 £157.32 £197.65 (Calculations provided by Bryn Davies FIA, an acknowledged expert on the state pension and private pension provision) 34. It should be noted that many of these contracted-in employees are those who have not been fortunate enough to have access to a good company pension scheme. While they will not face an increase in their NI contributions they will of course be continuing to pay the higher levels of NI that contracted-out employees are now to be moved up to. 35. This issue of unfair treatment in the transitional terms for contracted-in employees can only be resolved fairly if presently contracted-in members are given scope to accrue single-tier beneﬁts above the level of £144 per week after 2017, as will put them on a par with contracted-out members. 36. This could be contrived by their being given limited scope to add to their beneﬁts comparable to that being offered to members of contracted-out schemes, for example by the deduction of a notional rebate- derived amount.

Implications for Occupational Contracted-out Schemes 37. Unite is opposed to the Government’s proposal for the new legislation to override protected persons legislation applicable to people who were employees in the rail, electricity and coal industries prior to privatisation. This is intended to allow employers in those industries to vary benefits and contributions to the extent necessary to recoup higher employer NI costs, should they wish to do so. 38. To persuade them to accept privatisation employees, at the time, were given a lifetime guarantee that their occupational pension terms would be maintained for the duration of their employment in the industry. The buyers of those industries accepted the commercial risk inherent in this provision and have no right to seek or be offered escape from that “contract” because of this particular reform. 39. The rail employers, who account for the largest numbers of protected members have benefited from another key change in pension as a result of Government action ie the switch to CPI indexation of pensions, and did not generally offer members compensation for that. 40. While these reforms hold out the prospect of higher state pension benefits for protected persons, these future increased state benefits are not guaranteed to endure. However, if they do not endure any change to protected terms would not be reversed. 41. Interfering with protected person terms would constitute an unacceptable precedent with an unpleasant overtone of retrospection. If the Government wishes to compensate these particular employers for an increase in their costs then it should do so at their own expense rather than inflicting the costs on the members. 42. Unite will be responding in due course to the DWP consultation on this aspect of the proposals. 43. The Government is also proposing that private sector employers with contracted-out DB schemes should be given a unilateral power to over-ride their scheme rules to recoup their additional NI cost. This is intended any restriction in scheme rules as might prevent amendment or any provision that requires trustee or member consent to rule changes. Employees will still be obliged to consult on scheme changes but it is suggested that they can do what they want, if they wish to, rather than seek agreement. 44. Unite does not believe these additional powers for employers are justified, and believes that these pressures on employers should be dealt with using the established processes in each scheme. They are sending a signal to employers suggesting that compensating changes ought to be made, which is generally unhelpful. 45. In most schemes the employer has the power to make changes but requires trustee consent. In practice the employer is generally in a position to force trustee agreement to a change by having the reserve power to do something worse for the members. This often translates to a recognition that future benefits are effectively determined by the employer. cobber Pack: U PL: COE1 [O] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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46. Where changes are proposed it is important that they should be fairly applied and the requirement for trustee agreement is the most likely thing to make sure that they are. 47. In a small minority of cases the employer might not be able to force through changes given their Scheme’s current rules. These constraints on employer powers have all been introduced, at some point, with the agreement of the employer. As is the case with protected persons there is no valid reason why these powers should be set aside in this particular contingency. 48. The practical reality is that there is no way that a benefit or contribution adjustment can be made that will be fair to individual members, even if the adjustment were made with this objective in mind. 49. Depending on their age and past employment history, members will gain widely differing amounts from the changed basis of state benefits. So, even a straight contribution adjustment would be very unfair. Likewise a benefit adjustment is problematic as the cost of DB benefits within a scheme varies a great deal according to a member’s age. So, any across the board benefit adjustment, eg a reduction in the accrual rate, would save widely differing amounts for different members. 50. There are other issues as will multiply unfairness eg where employers have more than one DB scheme and different benefit adjustments are made in each because of their different costs or employers whose schemes have more prudent valuation bases may find they can make smaller adjustments to benefits than employers with schemes with less prudent valuation bases. 51. There will be a general tendency for younger members to do a lot worse than older members as their future employment will generate a smaller increase in their state benefit relative to the extra NI contributions they have to pay and they will lose more from the changes proposed in their company scheme. 15 February 2013

Written evidence submitted by Tony Lynes The Single-Tier Pension—Today’s Pensioners need it too At present, people under pension age pay National Insurance (NI) contributions which entitle them to two kinds of state pension: flat-rate and earnings-related. Those whose employers provide an earnings-related pension scheme can be contracted-out of the state earnings-related pension, their NI contributions and those of their employer being reduced accordingly. Under the Government’s proposals, the state will no longer be involved in providing earnings-related pensions, so there will be no need for contracting-out: from 2017 (at the earliest), everybody under pension age will pay the full rate of NI contributions, resulting in a big increase in contribution income for the NI Fund. At the same time, the flat-rate element of the state pension will be replaced by a single-tier pension at a rate high enough, for most people, to remove the need for a means-tested top-up—the Pension Credit. At present, the basic state pension is only £107.45 a week, while the minimum income provided by Pension Credit is £142.70 a week. As a result, according to the white paper on the single-tier pension, nearly half (about 40%) of all pensioners are eligible for the means-tested Pension Credit—but around a third of them do not claim, missing out on an average of £34 a week. The proposed level of the single-tier pension—£144 a week at today’s prices, would be slightly above the means-tested minimum, and it would be paid without a means-test. All this, however, applies only to those reaching pension age in 2017 or later. Today’s pensioners are completely excluded. They will be left with their £107.45 a week basic pension, with a means-tested addition for those who claim it—and the scandal of the non-claimers will continue for decades to come. This doesn’t need to happen. As the White Paper says, “In a pay as you go state system, funding liabilities are passed from generation to generation: the National Insurance contributions of the working population provide for today’s state pensions for their parents’ and grandparents’ generations.” The logical way to spend the increased contribution income resulting from the ending of contracting out, therefore, would be to extend entitlement to the single-tier pension to existing pensioners. The answers to a number of parliamentary questions tabled by Harriet Harman (Hansard, 14 February 2013) show how the costs would work out. The estimated cost of raising the state pensions of existing pensioners to the single-tier rate of £144 a week would be around £10 billion a year. But a significant part of this total—estimated at between £1.94 billion and £2.80 billion for the year 2009–10—is the amount of means-tested Pension Credit which pensioners are already entitled to but do not claim, the cost of which should clearly fall on the Exchequer, not on the National Insurance Fund. Deducting this from the £10 billion total reduces the net cost to between £7.2 billion and £8.1 billion, of which about £6 billion will be covered by the additional NI contributions resulting from the abolition of contracting-out. The probable net cost to the NI Fund of paying the single-tier pension to those already over pension age in 2017 would, therefore, be between £1 billion and £2 billion a year, reducing year by year as a new generation of workers reaches pension age. While this is not an insignificant sum, as the price to be paid for providing a cobber Pack: U PL: COE1 [E] Processed: [28-03-2013 14:36] Job: 028249 Unit: PG01 Source: /MILES/PKU/INPUT/028249/028249_w016_027607_w002_JH_DPB02 - Jill Klee.xml

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minimum pension without a means-test it is decidedly modest. And it doesn’t take into account the administrative savings from no longer having to means-test a diminishing group of elderly pensioners. 28 February 2013

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