Twenty million people will lose out from the introduction of a new flat-rate state pension with the burden falling most heavily on low-paid private sector workers, according to analysis by leading pension experts.
The startling figure, part of research by pension consultants Hymans Robertson, comes just before the new deal for pensioners is to be introduced in April. It appears to undermine government claims that the reforms will create a fairer, as well as a simpler, system.
The company also warns that the policy could have wider and graver repercussions for government than its attempts to slash credits for working people, which forced chancellor George Osborne to perform a spectacular U-turn in his budget last November.
Chris Noon, a partner at Hymans Robertson, told the Observer that research had revealed that while there would be winners among middle-to-higher earners from this April, the costs of these rises would fall on lower earners in the form of lower pensions in years to come for about 20 million people. “Within the private sector, it’s the low paid – those earning less than around £15,000 – that will be hit hardest. Gordon Brown made changes to the way the low paid accrue state pension, which resulted in employees with earnings below around £15,000 accruing relatively large amounts.
“Under the new rules, this population will be significantly affected. For example, for someone earning around £15,000 with a working life of 20 years, they will be looking at a drop of around £1,200 per annum. If that same person worked for 50 years they will be looking at £2,500 less per annum in state pension than they would have been entitled to under the old system.” Noon said more people would be affected than by cuts to tax credits. “With tax credits we’re seeing around three million people lose out, with a £4bn saving for the Treasury. With state pension changes, we’re seeing 20 million people lose, with an £8bn saving for the government.
“This is a much bigger issue affecting larger swaths of the population – and again, it impacts the lower paid. The only difference is tax credits affect individual’s incomes here and now, whereas state pension changes will hit them in the future.”
When the government first announced plans for a flat-rate pension to replace the current basic pension of £119.30, and the additional state pension, which is partly earnings related, ministers said the new system would be fairer and simpler. Recently they have faced criticism for not providing information to people on how they will be affected before the new system is launched, citing data protection issues for failing to send out letters.
Pensions minister Ros Altmann did not deny there would be losers, but said the existing system was not sustainable. She told the Observer that in the short term there would be more winners than losers. “In the years between now and 2030 the majority of women will get higher state pensions than under the existing system, and 70% to 75% of both genders will be better off. But to make the state pension sustainable many will get less than they would have done under the old system [in the longer term]. The important thing is that the old system is not sustainable or affordable in the longer term and could not have lasted that long without change.” She said that from 2030, plans for auto-enrolments into private pensions would help people make up any difference.
The full flat-rate pension will be introduced at £155.65 a week for those who have reached pension age, though many will receive far less. This is because some will not have paid enough in national insurance contributions, and others contracted out of the state earnings related pensions schemes for periods during their working life.
Frank Field, chairman of the all-party work and pensions select committee, said that while the broad thrust of the reforms was to be welcomed, his committee would hold inquiries into claims of unfairness. “The new state pension is an important reform, which offers the prospect of a minimum income for more of the retired without resorting to means-tested assistance. But the only way DWP achieved this in an age of austerity was to convince the chancellor it could be introduced at nil cost. Any reform on such terms ensures that gains for the winners will be paid for by the losers.
“The select committee will soon be considering a draft report on raising the retirement age to 65 for women, and then for both men and women to 66, and the impact of reducing the timescale over which this necessary reform is being introduced. This report will also begin the first of a possible series of reports on the impact of the introduction of the new state pension.”
Currently there are two parts of the UK state pension: the basic state pension, which is flat-rate, and the additional state pension, which is partly earnings-related. The government legislated to introduce a new single-tier state pension for future pensioners. One of the principles of the reform was that the new state pension would be set above the basic level of means-tested support.
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