House of Commons Work and Pensions Committee The Single-tier State Pension: Part 1 of the draft Pensions Bill Volume I: Report, together with formal minutes, and oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/workpencom Ordered by the House of Commons to be printed 26 March 2013 HC 1000 Published on 4 April 2013 by authority of the House of Commons London: The Stationery Office Limited £0.00 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), 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] 1 Contents Report Page Summary 3 1 Introduction 7 State Pension reform and the Draft Pensions Bill 7 The current State Pension system 7 Key features of the Single-tier State Pension (STP) 8 Our inquiry 9 Our approach to this report 10 Structure of the report 11 2 Overall impacts of the reform 12 Greater simplicity and clarity 12 Interaction between State Pension reform and automatic enrolment 12 Pension Credit and reliance on means-tested benefits 13 Incentives to save 15 Winners and losers 17 3 Issues on which clarity is needed now 21 Balance between detail set out in primary and secondary legislation 21 Implementation date 22 Minimum number of qualifying years 23 Communications strategy 24 4 Ending of contracting-out 27 Impact on employers 27 Impact on Defined Benefit (DB) pension schemes 28 Impact on employees 30 5 Further improvements which need to be built into the new system 32 National Insurance issues 32 Self-employed 35 Setting and maintaining the differential between STP and Pension Credit 36 Uprating of State Pension for UK pensioners living in countries where it is currently frozen 39 6 Smoothing the transition to the new system 41 Calculation of the foundation amount for the STP 41 Derived rights 43 Women born between 1952 and 1953 45 Conclusion 48 List of Conclusions and Recommendations 50 2 Formal Minutes 58 Witnesses 59 List of printed written evidence 59 List of additional written evidence 60 List of Reports from the Committee during the current Parliament 61 3 Summary The Government plans to replace current complex State Pension provision with a simplified Single-tier State Pension (STP). The legislative measures required to implement this reform were set out in Part 1 of the draft Pensions Bill published in January 2013, together with a White Paper setting out the detailed proposals. The STP will be paid at a rate above the basic level of means-tested support (currently £142.70 per week). The Government’s White Paper is based on an illustrative rate of £144 per week (in 2012-13 prices). Full entitlement will require 35 qualifying years of National Insurance Contributions or Credits (NICs). People with fewer qualifying years will receive 1/35th of the full rate for each qualifying year. There will be a minimum qualifying period, yet to be defined, but expected to be between 7 and 10 years. We agreed to the Government’s request that we undertake the pre-legislative scrutiny of this important reform. However, the Government has made it very difficult for us to carry out this task effectively; first, due to the extremely compressed timetable it imposed on us and then by the change it made in the implementation date (from April 2017 at the earliest to April 2016) very late in the scrutiny process. It is clearly not possible for parliamentary committees to conduct effective scrutiny when the Government makes significant changes to reform proposals after the evidence-taking has concluded and so close to the deadline it has itself set for the scrutiny process to be completed. We decided to proceed with publication of our report because these State Pension reform proposals are so significant and affect so many people. We believe that our recommendations remain valid and that it is important for our findings to be available to Parliament when it begins its scrutiny of the final legislative proposals for the Single-tier Pension in a few months’ time. We consider it imperative that the Government now carries out a further Impact Assessment of the Single-tier Pension proposals, taking full account of the implications of the changed implementation timetable for individuals, the pensions industry and employers, and that it publishes this assessment at the same time as the finalised Bill is introduced. We welcome the improvements in retirement income that the STP will bring. It will mean more State Pension in the short to medium term for many people who have already had significant periods of low earnings or employment gaps, particularly women and carers, and who were not well covered by the Additional State Pension (SERPS and S2P). Although the overall impact is likely to be marginal for a number of people, there will be a clear short and long term benefit for certain groups, notably the self-employed. The greater simplicity that the STP offers should give people more certainty about the value to them of saving into a private pension scheme and should therefore work in combination with the complementary policy of automatic enrolment into workplace pensions, introduced in 2012, to help increase overall retirement income for many people. 4 However, the welcome clarity and simplicity that the new system will eventually bring will necessarily require a long and complex transitional period. It will affect all 40 million or so people of working age at the time of implementation. The STP is intended to reduce reliance on means-tested benefits. Pension Credit will still be available but the Savings Credit element will be abolished, which in itself will reduce the numbers of people eligible for means-tested benefits. However, there will be pensioners on low-incomes who will still rely on other means-tested benefit, particularly Housing Benefit and Council Tax Support. The way in which the STP will interact with these benefits, and with other passported benefits available from both DWP and other government department, needs to be clarified. One of the most significant changes the reforms will bring is that contracting-out will also end. This is the system under which employers who offer workplace pensions schemes, and the employees who are scheme members, can pay reduced National Insurance contributions in return for giving up entitlement to the Additional State Pension. This change affects pension schemes, employers and employees. The pensions industry and employers had indicated to us in evidence that they were broadly satisfied with their involvement in the development of the contracting-out provisions in the draft Bill. However, they were expecting to have until April 2017 to prepare for the changes; they will now have a year less. This may well present them with a more significant challenge and it is vital that DWP continues to work closely with pension schemes and employers on the detailed arrangements for ending contracting-out, which will be set out in Regulations. The key to the success of this reform is the way in which it is communicated to the public. There are already a number of misconceptions about what the STP will mean for individuals, including who stands to gain, who might lose, and whether individual entitlement that has already been built up might be lost. People closest to retirement understandably have the most immediate concerns. Many of these concerns have been raised with us during this inquiry. It is important that they are allayed as far as possible by the provision of accurate and understandable information at the earliest possible point in the process, particularly now that the implementation date has been brought forward by a year.