Pensions - Articles - Do we need a final round of state pension simplification


Former pensions minister and LCP partner Steve Webb is calling on the government to consider whether further simplification is needed to the state pension system, following major changes in April 2016.

 The new regime is far simpler than the system it replaced for anyone who started work since April 2016. They will get a full flat rate state pension for 35 years of contributions and a reduced rate pro rata if they have less than 35 years.

 But there is still considerable complexity in the system for those who had years of work before April 2016. This arises from the need for ‘transitional’ measures designed to improve fairness at the time of change. These complexities include making ‘protected payments’ to those who had already built up more than the new flat rate figure by 2016, and taking account of past periods of ‘contracting out’ even though contracting out has now been abolished.

 The concern is that transitional measures introduced to smooth the introduction of the new system mean that there will be largely unnecessary complexity in the system for decades to come. Although most people will eventually retire on the standard flat rate amount, the calculations which have to be made remain very hard for people to understand.

 As things stand, anyone who worked before 2016/17 has a state pension calculation in two parts. First, a 2016 ‘starting amount’ is worked out which is the higher of their rights at that point under the old rules (basic pension plus SERPS) or the new rules (full flat rate pension minus an adjustment for past contracting out). Second, years from 16/17 onwards are added on at a rate of 1/35 of the full flat rate (roughly £5 per week on the pension for each year of work) up to the maximum amount.

 The problem with this structure is that although the answer will often be that the worker is entitled to the standard flat rate, the calculations still use concepts such as ‘contracted out deductions’, ‘SERPS’, ‘basic state pension’ etc., all of which have been abolished in the new system.

 In his latest analysis, Steve Webb argues that as the years go by it will become increasingly hard to justify working out state pensions for those retiring in 2025 or 2030 with reference to the rules of a state pension system that no longer exists. He calls for sweeping simplification so that everyone’s state pension will simply be a function of the number of years they have paid into (or been credited into) the system.

 Commenting, Steve Webb said: “For younger workers, the new state pension system is already much simpler than what went before. The amount they get is linked in a simple way to the number of years they pay in, with a maximum flat rate for 35 years of contributions. But for millions of workers who were already in work when the system changed in 2016, the calculation remains complex and opaque. Whilst some initial complexity was necessary on a transitional basis to avoid unfairness, retaining this complexity for decades to come will be increasingly hard to justify. DWP should consider whether the time has come for an even simpler state pension system”.
  

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