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The State Pension: No Longer Fit for Purpose

The State Pension is facing fiscal calamity. Total spending on it has increased by 25% since 2010-11.

In the last year, the National Insurance Fund (NIF), which funds the State Pension, received £84 billion in NICs, but paid out £92 billion in benefits (including £86 billion as the State Pension): it required bailing out by a £4.6 billion Treasury grant.

Furthermore, due to the diversity in UK life expectancy, a universal State Pension age (SPA) is increasingly unjust. For example, on average Tottenham Green man’s return on his NICs, in the form of his State Pension, is only about a quarter of that of Chelsea man’s. This is terrible value for money for those who can least afford it.

Michael Johnson urges the Government to take action. Writing in a new report The State Pension: No Longer Fit for Purpose, published by the Centre for Policy Studies on Thursday 3 November, he proposes that the State Pension is put into “run-off” and replaced with a Workplace ISA and a new residency-based Senior Citizens’ Pension (SCP).

The Proposal (PLAN A)

“Run off”
The State Pension should be put into “run-off”, so that, from 2020, no further “entitlements” would be created. Past “entitlements” would be honoured, as the legacy State Pension, which should be means-tested, along with the whole range of other pensioner benefits.

Senior Citizen’s Pension (SCP)
A residency-based Senior Citizens’ Pension (SCP) should be introduced, payable from the age of 80. All non-pensioners in 2020 would be eligible for it, thus the first payments would be made in 2034. Perhaps set at £200 per week, it would be 30% larger than today’s full State Pension.

Workplace ISA
The SCP should be complemented by a Workplace ISA, to accommodate employer contributions made under automatic enrolment (AE). This would be significantly pre-funded by the State via a 50% bonus, up to a modest annual cap, with no access to assets permitted until 65. The 15 year period until receipt of the SCP invites structured draw down or annuitisation. Thereafter, the SCP would socialise longevity risk across the nation. There is an opportunity to introduce the Workplace ISA in the 2017 review of AE.


 
Michael Johnson comments:

“In 2014 the then Chancellor announced “Freedom and Choice” which, by ending the requirement to annuitise, gives individuals greater flexibility when accessing their pension savings, i.e. more control. The public response has been very positive. 
Subsequently, the Lifetime ISA was announced, potentially indicating a change in direction for how long-term savings are taxed. Meanwhile, company DB schemes are withering on the vine, and automatic enrolment into DC schemes has become an integral part of the retirement savings landscape.

The proposals in this report, to replace the State Pension, take into account the broader pensions and savings environment. They are consistent with the direction of travel initiated in 2014: their purpose is to complete the journey, set against a pervading ethos of personal responsibility (self-reliance). They explicitly embrace the message that work pays, while providing a robust safety net for those who need it.

The report considers the hint within John Cridland’s recent interim report that he may recommend a more personalised approach to State Pension age (SPA). This is to be discouraged: there is a real danger that introducing different SPAs for different people could lead us down a slippery slope into immense complexity. It would be expensive to administer and could be highly contentious (potentially litigious). Consequently, the State Pension is no longer fit for purpose.”

Click here to read the full report.

Media Impact: 

Michael Johnson - Thursday 3rd November 2016

Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.