The Government has proposed two options for State Pension reform, set out in a green paper launched yesterday. The industry already seems to favour the second option of a single-tier flat rate pension.

In the Department for Work and Pensions paper, A State Pension for the 21st Century, the Government outlines its ideas for State Pension reform. The first option would be an acceleration of existing reforms so that the state pension evolves into a two-tier flat rate structure more quickly. The second option is the introduction of a single-tier flat rate pension of £140 a week, subject to inflation.

The paper said: “Option one would accelerate the pace of existing reforms so that the State Second Pension would become flat rate by 2020 instead of the early 2030’s. This would give people a clearer idea of the state pension they would get in retirement as they would receive a set amount of pension for each qualifying year. At the end of transition, all those with a full contribution record, for example 30 qualifying years, would build up the same state pension, currently estimated at around £140 a week, albeit through two tiers.”

Under this option, contracting out would continue for members of DB schemes. Under the second option contracting out would end, although it would continue during transition to the single-tier pensions.

The paper stated that the second option would be cost-neutral: “Under option two, the payment currently estimated at around £140 to all future pensioners would be funded by ending the State Second Pension, Savings Credit and introducing a seven-year minimum qualifying rule. The Government is clear that any reform will not increase public spending dedicated to state pensions in any year.”

The Government said it is seeking views on the matter, both on the two options proposed or any new option for state pension reform that meets the Government’s principles of personal responsibility, fairness, simplicity, affordability and sustainability.

Joanne Segars, chief executive of the National Association of Pension Funds, commented: “We’ve endured one of the meanest state pensions in Europe for far too long. This is a turning point for the UK’s pension system. Millions will enjoy a simpler, more generous pension which sets a foundation for them to plan their retirement.

“For the first time in a generation, people will know that it pays to save. Whatever they manage to put aside won’t be eroded by means-testing in their retirement.

“The current system is not only unfair, it’s a complex mess. Even pension experts struggle to calculate their own state pension from a jigsaw of payments and credits.

“The end of ‘contracting out’ by defined benefit pension schemes is an inevitable part of simplification. But the Government must make an early promise that it will make it simpler for schemes to contract back in. It must not load extra costs and red tape on these pension schemes, which are under severe pressure.”

Duncan Howorth, CEO of JLT Benefit Solutions, said: “The move to a single-tier state pension is a huge step forward. Simplicity is the key to building confidence in pensions and the new system certainly scores highly in this regard.

“The single-tier pension forms a strong basis from which auto-enrolment can be implemented and removes the risk of means-testing – namely that individuals may end up being no better off by saving in a private pension. The single-tier plan is a bedrock providing a much-needed base level of confidence across all forms of retirement saving.”

Ros Altmann, director general at SAGA, said that the big problem is that the Government is not proposing to include existing pensioners in the new system and “they will be left behind in a system that is inferior”. She is in favour of the second option. “With Option one, most of the complexity and unfairness will remain and the mass pensioner means-testing will persist. The proposals in Option two, however, mean that future pensioners will have a system that is simple, clear and decent. They will know the deal. The State Pension will give them a basic minimum of £140 a week (in today's money) which will be around £155 a week by the time it comes in.”

Altmann also commented on the Government’s plans for state pension age increases in the future, for which they also see two options: increasing it through a formula linked to life expectancy or through a review.

She said: “The DWP says it will be looking at continuing an ongoing process of pension age rises for the future and will seek to tie the state pension age to rising longevity. This will mean that younger people cannot be sure at what exact age they will start receiving a state pension. This is an important idea. We need to get away from the notion that there is one fixed age beyond which people are no longer fit to work and therefore must receive a state pension.

"Of course, there are limits to how far and how fast the state pension age can rise, and there is a concern that the most immediate changes are being made to quickly. It’s far better to indicate to future generations that the state pension age will rise after, say, 2020 or 2030, rather than suddenly imposing huge changes, especially on women who have no private pension resources.”

Malcolm Small, director of policy at TISA, said: “People are crying out for simplicity and clarity in the state pension system. The sooner we can deliver it, the clearer and more urgent the incentive will be for the UK population to save more for its own future.

“This is the single most vital pension reform this Government can undertake. Without it, all other reform efforts are tinkering at the edges. There is consensus in the savings policy community that radical action is needed here; we must hope for at least some political consensus.”

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