The Demise of the State Second Pension
Heard of elephants?† Of course I have.† When people talk about the Ďelephant in the roomí they are usually referring to an issue so big, so enormous that it should be so obvious to everybody, but that, strangely, nobody ever seems to mention.† The point being, I suppose, that itís all very well talking about the newspapers on the coffee table looking untidy, but why bother to even mention that if the fact is that an enormous great elephant is slumped across the settee and both armchairs?† Tidying up the coffee table isnít likely to make the room much more presentable and useful if no-oneís prepared to even acknowledge that the real problem is that thereís a thumping great elephant making himself at home in the place.
As far as our pension reforms are concerned we havenít so much as got the problem of having an elephant in the room as having a whole herd of the things trolling around in there.† Itís possible to understand, I guess, how we could contrive to overlook one elephant, but a whole herd of them wandering all over the place?† Sooner or later someoneís got to mention it, so it had might as well be me.
One of the elephants in our pensions room that Government ministers up to now have been blissfully able to ignore is the fact that pension savings can be reduced in value (or even reduced to having no value at all) through interaction with means-tested entitlements paid out to older people.† To ignore the way that this elephant can reduce the value of millions of auto-enrolled saversí pensions by at least 40% while busily working on reducing the up-front costs of pensions is a classic case of tidying up the newspapers on the coffee table Iíd say.† Another is the very real threat to existing pension schemes posed by the proposed 2012 changes and the probability that many will either level-down or even close completely. †The other elephant, which was the subject of yesterdayís BeeLine, is the problem employers will have fulfilling the requirements on them to give information about pensions, but not stumbling into the trap of giving advice while theyíre about it.† Thatís closely followed by another elephant that we donít really want to talk about either which is the whole question of advice; especially as itís realised that everyone will need it, but hardly anyone will get it.††
Another of the rampaging elephants in our particular room, and the one Iíve had my eye on for some time, is the one thatís wiped-out the State Second Pension and no-one seems to have even noticed.† Itís a bit like one of the things has blundered into our cabinet full of all our best china and smashed it all to pieces and weíre still all worrying about the way the newspapers are arranged on whatís left of the coffee table.† Iím pretty shocked by all this to be honest and, just in case you havenít spotted whatís really going on in this room weíre in, or in case youíre even one of the new ministers in the DWP team and you just happen to be reading this BeeLine, or maybe you write about personal finance for a newspaper or something, perhaps I could explain.
The State Second Pension, which is currently called S2P and was previously called Serps, provides earnings-related pension benefits for employees who are not contracted-out of it.† It is a compulsory pension scheme if you like that is operated on a pay-as-you-go basis through the National Insurance system.† The major change being made in these current reforms is that the earnings-related state second pension is being knocked on the head.† Soon, all itíll provide employees with will be a flat-rate top-up to the woefully inadequate and similarly flat-rate basic pension.
This is redistribution of national insurance contributions on a massive scale.† Many low earners and non-earners will benefit enormously from this redistribution, which is good, but at the same time many middle earners will lose out big time.† I find it most surprising that this massive elephant in the room is never discussed.† Sure weíve all heard about the better pension outcomes for low earners, but the money to pay for that doesnít come from out of nowhere; it comes from other peopleís national insurance contributions.
In the post-2012 world weíll all be paying the same rate of National Insurance Contributions with the amount paid determined by how much we earn, but we wonít get an earnings-related benefit in return for those contributions.† Basically weíll all eventually get the same benefit irrespective of how little or how much we pay in contributions.† I donít think thereís anything wrong with National Insurance contributions being treated just like any other tax, by the way, Iím just amazed it never gets talked about thatís all.
Losing their earnings-related second pension will be a big issue for many middle-earning employees, many of whom are probably already saving for a pension either on their own or with the help of their employers.† To get their pensions back on track theyíll ideally need to start saving more than they are currently.† But to do that theyíll first have to spot this particular elephant.† Personally I think itíd be easier if we lived in a home where the buffalo roam, even if it meant we had to have a few deer and antelope thrown in too.† At least it would give us something to talk aboutÖ..
9 October 2008
Pensions Act 2007
BeeHive, BeeLine 'Taxing Poorers Savers'† 22 April 2008
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