Response to the Consultation by TAEN The Age and Employment Network

Transcription

1 Response A state pension for the 21st century Response to the Consultation by TAEN The Age and Employment Network June 2011 TAEN The Age and Employment Network, Tavis House, 1-6 Tavistock Square, London WCIH 9NA Tel: +44 (0) info@taen.org.uk Web:

2 About TAEN TAEN - The Age and Employment Network works to promote an effective labour market that serves the needs of people in mid and later life, employers and the economy. We provide information to older workers and jobseekers and all those who support them. We promote the practice of age management by working directly with organisations and sharing knowledge of the practice widely. We help organisations to champion age diversity and gain the knowledge, inspiration and support to translate this commitment into reality. TAEN has long believed that the pace of demographic change and the creation of an ageing society is one of the most profound changes facing our society. While TAEN member organisations include a wide range of bodies with broad interests in population ageing and the needs of older working people, our specific focus around work and employment means that we also share much with mainstream employment policy and practice organisations. Our staff team has experience of working in business as well as in education, in unions, and if the welfare to work industry. TAEN is an independent charity supported by Age UK with whom it enjoys a shared perspective on many issues. This submission represents the independent view of TAEN on the policy issues in question. The consultation The Government is looking at ways to reform the state pension system for future pensioners. The Government is consulting on: Two broad options for reform of the state pension that better support saving for retirement; and The most appropriate mechanism for determining future changes to state pension age. This response from TAEN will not attempt to cover all the points raised in the consultative document in detail but will highlight those that are closest to TAEN s areas of policy and experience. We have had the benefit of reading the response from Age UK and unless otherwise stated are happy to associate TAEN with the points made in Age UK s document. Page 1

3 Summary of options The Green Paper sets out two broad options to deliver a simple, flat-rate contributory state pension that lifts the majority of future pensioners above the standard means-test. The first option would speed up existing reforms to the additional state pension so that by the 2020 there would be two flat rate pensions. The second, more radical option would combine the current basic and additional state pensions into a single pension of around 140 a week in March 2011 prices. The paper also sets out two options for a more automatic mechanism for increasing state pension age to take into account changes in life expectancy. The first would increase state pension age through a formula linked to life expectancy and the second through regular reviews. General points TAEN agrees that the current state pension system must be reformed. Under the present system, too many people have unacceptably low incomes in retirement and fall back on means tested benefits. Many do not claim these and end up in poverty. Many people may feel they would like to work and earn in retirement instead of being forced to live wholly on their meagre pensions. Unfortunately, the UK s pension system pays too little heed to the needs of those who would like to spend some of their time in part time retirement or semi retirement. For example, deferring drawing one s state pension attracts an addition of 1 per cent for every five weeks of deferral, which might act as an incentive to continue in employment particularly for those whose total pension provision is poor. Once a decision is made to draw one s state pension there is no going back it continues to be paid and the deferral/enhancement opportunity is lost. If however, the system allowed for state pensions to be put on hold (not taken) and similarly enhanced in value (for example, when work has been secured following a period of retirement or semi retirement) this might provide a simple encouragement to work and earn during retirement. Also, while the law allows company pensions to be paid to individuals who continue to be employed by the same employer (thus allowing a form of flexible retirement) there is no individual right to such arrangements. Reforms of the kind referred to here could make a difference to the willingness of individuals to continue working during a more gradual process of retirement. They would benefit individuals, employers and the economy, make retirement decisions more a matter of individual choice and change the cliff edge nature of retirement as a total and complete withdrawal from the world of work. The taxation system does not do enough to acknowledge or encourage the efforts of those continuing to work beyond state pension age. Those who continue to work beyond state pension age are on the whole treated exactly as other earners for tax purposes, even though there are manifest advantages to the state in their being encouraged to work, both in terms of the increased financial independence work is likely to provide and the social and health benefits which good work confers on the individual. Page 2

4 The system of pensions cannot be considered in isolation from the idea of working and earning beyond state pension age. The Government should consider tax incentives to encourage people to carry on working after state pension age, particularly for those who have little or no additional second pension provision. The Government should encourage many more employers to make flexible working and flexible retirement options far more widely available, introduce a right for all employees to semi retire at a given age which could be below state pension age and draw wider attention to the enhancement of state pension that is possible as a result of delayed taking of one s state pension. But working and earning in retirement will not replace the need for a decent state pension. A flat rate citizen s pension to which all citizens of the UK would be entitled should be set at the equivalent of at least 150 a week in present terms. The idea would be for this to be set at a basic living wage level and once established, it should be protected against erosion by automatic application of cost of living increases with a regular review arrangement so that pensioners earnings do not change disproportionately compared with earnings of the rest of society. TAEN believes that a higher flat-rate pension offers a fairer system for people who reach state pension age in the future who have been unable to build up a second pension due to caring roles, disability or low earnings. It will particularly help be the very poorest in retirement people who would be entitled to Pension Credit but who do not claim. TAEN accepts that there are many people who do not welcome the idea of work after retirement or who would not feel equipped to do it or do not want to extend what may have been an arduous and wearing working life. It is important to state firmly therefore that we should all have a right to retire on decent incomes. It should be the function of a state pension to provide such a level of decency in retirement. But there will also be others for whom the idea of giving up work completely is unwelcome, either because they want to remain in touch with the working world and colleagues or because they enjoy the work or need the money. Many more would be eager to work longer if they felt that this would benefit them more than it does at the present time. TAEN believes that continued working beyond state pension age and delaying taking the state pension, should attract enhancement of the state pension as it does today. (If the state pension is replaced by a citizen s pension fixed at a higher level, it should still be possible to earn enhancement of the pension by delaying taking it in the way described.) TAEN is concerned that the reforms outlined in the Consultation Paper will not take effect for many years, during which time many people will reach state pension age and make retirement decisions. We are also concerned that the reforms, when they are introduced, will not be applied to those already drawing their state pensions. This will create a two-tier system adversely affecting a large proportion of the pensioner population for decades to come. The difficult financial circumstances of many thousands of them will inevitably persist and the problem of pensioner poverty could well worsen. Clearly, higher state pensions for all would help enormously, would lift at least some of the current pensioners out of the means tested pensioner credit and could go some way towards encouraging saving. Page 3

5 While immediate pension increases may not be foremost of the Government s priorities in present economic, we believe that several of the reforms we are suggesting would support decisions involving flexible working beyond retirement and would go some way to alleviate financial hardships for some pensioners. These changes could be introduced with minimum delay and would offer the prospect of more immediate relief for those who are ready and willing to combine working and partial retirement in flexible ways. Consultation questions The Green Paper asks a number of questions as follows: Question 1 Would the current state pension, if left unchanged, meet the Government s principles for reform and provide an effective foundation for saving? TAEN believes that the current state pension system is not fit for purpose in a modern advanced society like the UK. Many citizens are left impoverished in older age; those who are most in danger of poverty are discouraged from saving because additional savings have a direct impact on their ability to receive means tested benefits. For the same reason, those who are most in need are discouraged from finding work to supplement their pensions because earnings from work (however little) would be set against their means tested benefits. Therefore the present system discourages saving and discourages earning in retirement. It is incapable of meeting the Government s principles for reform. Question 2 To what extent would faster flat rating meet the principles for reform and improve savings incentives? Moving to a flat rate pension more quickly would be very beneficial. It is unlikely that it will resolve problems quickly because what is needed is a fundamental change in the culture of working people and in society generally so that the importance of saving for retirement is appreciated. Moving to a flat rate system would of course take time and what is really needed is action that will bring about changes in behaviour as well as the alleviation of pensioner poverty as quickly as possible. Moreover, saving is by its very nature something that takes place over many years. So whilst people who do not currently save for retirement (because they believe it will not advantage them) will only slowly realise that the system can in fact benefit those who save. Changing human behaviour over the long term will not simply happen spontaneously but will have to be coupled with a strong emphasis on financial education and promotion of the advantages of saving for later life. Question 3 What further reforms might be required to the State Second Pension, such as crediting arrangements and uprating of pensions in payment, to better meet the Government s principles, recognising that there is a trade-off between coverage and the potential level of any combined, two-tier flat-rate pension? Page 4

6 We consider that the Age UK response on this question provides a helpful discussion of the implications for the State Second Pension of flat rating and are happy to identify with their comments. Question 4 To what extent would a single-tier pension meet the Government s principles for reform and improve savings incentives? We consider that the Age UK response on this question provides a helpful discussion. We add the following additional points. Whilst the single tier pension clearly moves state pension arrangements in a helpful direction particularly in relation to less well off people, it suffers from the following problems in our view: Firstly, it is too low as the Age UK submission and the Pensions Policy Institute have both argued. We have already stated that a decent standard of 150 (current equivalent) would be a realistic and attainable standard. The National Association of Pension Funds has put forward a figure of 154 a week. The question can only be answered in terms of current conditions and this will reflect current means testing benchmarks for pensioner credit. Under present conditions it is doubtful that a flat level 140 a week pension would offset a means tested pension credit supplement and therefore it might be inferred that it might have little impact on savings incentives. Secondly, it is not clear how far the rules on drawing one s single tier pension would discourage or encourage people in combining retirement with working and earning. It is important that the rules should be framed in such a way as to provide support and encouragement to people to continue to work and earn if they wish to do so whilst drawing their pension. If the principle of a flat rate were in some way to remove the advantage of deferring one s state pension in favour of a higher pension taken at a later date, this might have some impact on the number of people choosing to combine working with semi retirement. Question 5 Which of these two options would act as the best complement for automatic enrolment? We believe that option two will have a much greater impact on willingness to save and therefore the success of automatic enrolment. A single tier pension of at least 140 will be much more effective encouraging saving than a two tier approach which may take many years to introduce and where outcomes will be less clear cut. Given automatic enrolment will start to be introduced in October 2012 the sooner the policy is clear the better for developing communications. Page 5

7 Question 7 What would be the impact of ending contracting out as implied by any single tier model? Ending contracting out of defined benefit schemes would make it possible for employers to offer schemes that do not comply with Government recommended standards. It would seem likely to encourage the downgrading of good schemes and a growth of schemes offering an inferior level of benefits. Whilst it might encourage some regeneration of the lost pensions provision owing to scheme closures in recent years, we believe that the effect would be negative in net terms. Question 8 If the decision is taken to end contracting out, how could the process be managed so as to minimise any adverse impacts on employers and individuals? We believe this would be difficult to achieve. A mandatory consultation process in the reduction of scheme benefits might go some way towards providing protection but it would be no longer term guarantee. Question 9 In conjunction with the reforms outlined in Section 2 are there ways we can change the means-testing system for future pensioners to make it simpler, reduce disincentives and encourage personal responsibility while continuing to help pensioners avoid poverty? Less reliance on means tested pension credit may be achieved by improving the level of state pension basic provision. This should be the thrust of policy although there will always be people who need support on top of their basic state pension entitlement. Question 10 What mechanism should be used to determine future increases in state pension age? Question 11 How should the Government respond to the frequent revisions in life expectancy projections while giving individuals sufficient time to prepare? to 10 and 11 A review process is to be preferred. A longer explanation is called for in response to this question. Firstly, it is important to understand that all statistical measures have weaknesses and limitations. Estimates of demographic changes for example, entail assumptions. In predicting life expectancy, age and sex specific mortality rates are used to give a calculated figure. Statisticians concede that there are uncertainties associated with their projections. The Office for National Statistics offers figures which are based on different Page 6

8 methods of calculation and different scenarios regarding mortality rates, partly in recognition of this. Hence, it is important to treat projections with caution and guard against the wilder statements suggesting, for example, a dramatic increase in the number of people who will become centenarians, etc. An automatic link of state pension age to a set of indices would ignore all these weaknesses and assume that statistical measures are somehow a supreme and impartial measure, which they are not. Secondly, it is important to acknowledge that with advances in medical science, increases in life expectancy at 65 which may be significantly greater than increases in healthy life expectancy at the same age. People with poor health conditions may be kept alive longer by more successful medical interventions, which may be good for them, but present an added danger in using simple life expectancy figures as a yard stick for the state pension age. Government should consider the evidence on present and future life expectancy and healthy life expectancy as material to any decision to raise state pension age. Any review process should take these considerations into account. Thirdly, there are substantial socio-economic differences in life expectancy, both at birth and at age 65. Taking life expectancy at birth, in the period 2002 to 2005 males in the professional class (class 1) had a life expectancy of 80 years compared with 72.7 years for those in the manual unskilled class (class 5). All of these factors make us urge caution in applying future increases in state pension ages. A review process would certainly seem preferable to an automatic increase of state pension age, not least because serious consideration should be given to varying the age of entitlement to reflect the social inequalities of life expectancy, healthy life expectancy and fitness for work at a given age. These are complex issues and need to be tackled with sensitivity. However, TAEN believes there is a case to consider here for greater flexibility in fixing state pension ages. The Government should avoid exacerbating existing inequalities in pensions and retirement by opting for an ever escalating state pension age which penalizes some sections of society for the increasing health and life expectancy of others. Individuals need time to adjust their plans to changes in state pension age or retirement ages. More generally, TAEN believes that a wide range of flexible contractual arrangements and ways of working would make it possible for many more people to continue working later in life than they do presently. Changes should not be made in such a way as to disadvantage a single section or group within society disproportionately. Many women have been shocked to hear that about the proposals for successive changes in state pension ages arising from the Pensions Bill Those who under current rules would expect to gain their state pensions in seven years time will instead have to wait nine years. TAEN believes that it is important that people should be given long notice of increases to state pension age ten years would be reasonable. However it is also important that we move away from the idea of cliff edge retirement and encourage many more people to see retirement as a process so that work and an income can plan a role in providing sufficient wealth to truly make retirement a time of fulfilment and realisation of ambitions, rather than a time to draw in one s horns and get by on poverty pay. Such a transformation requires changes in public attitudes and practice along with those of employers and the state if they are really to take effect. Page 7

9 TAEN s aim is to help create an effective labour market which works for people in mid and later life, for employers and for the economy. Supported by TAEN is the operating name of Third Age Challenge Trust, registered charity no and company limited by guarantee, registered in England no