Tagged: pensions

Who will get the new pension?

I’m indebted to Gareth Morgan for drawing my attention to a discrepancy in the figures for the new pensions scheme.  Gareth had drawn information from the Sunday Times, which had discovered from an FoI request that “Two-thirds of the people who reach state pension age in 2016-17 will not receive the full pension, according to the DWP.”   The Sunday Times had been told: “For most people who retire next year, the weekly pension will fall short of the headline figure by an average of between £35 and £55 a week … For those who retire in 2020, the average shortfall will be between £15 and £25. I was referring to different information from the DWP, which suggests that 45% of people will get the full rate (I’ve shown the graph here: the numbers are on page 35).  These figures can’t all be right.

NSP

Part of the explanation may be, I think, the apparent disappearance of large numbers of women from the figures in the second report (see figure 24, page 37) – and I’m not at all clear how as few as 20,000 women come to be counted as 27% of all those retiring.  I suspect that the Sunday Times’s figures are more trustworthy than the DWP’s.

Further note, 6th April:  I’ve had an explanation from the DWP.  The totals they presented were rounded to the nearest 10,000, while the percentages were left alone.  That explains how 20,000 gets to be treated as 27% of 90,000.   The huge approximation – on a figure of 20,000, plus or minus 5,000 is 25% in each direction – means, unfortunately, that the figures in the report don’t add up.  The main surprise is that official statistics can be presented with such little regard for the data. 

A small cut or two for pensioners

Today’s Autumn Statement reverses the decision to withdraw large amounts of people’s Tax Credits, but otherwise it doesn’t have much to say about benefits.  Most of the decisions  relate to changes in timing.  Apart from that, there’s a plan to make social renting subject to the same Local Housing Allowance rules as private rented housing and rules to stop some claimants spending more than a month abroad.

The effects of cuts or spending decisions generally appear in the tables of a Blue Book, on pp 112-3.   It’s surprising that two apparently minor tweaks to the ‘Savings Credit’, a complex addition to  the means-tested Pension Credit, are set to save £135m next year.  The Savings Credit currently costs £618m, and goes to 1.15m pensioners (an average of £536); the projected saving is more than 20%.   One of the two tweaks is a small adjustment in the rates:  Paragraph 3.49 states:  ” The Savings Credit threshold will rise to £133.82 for a single pensioner and to £212.97 for a couple (note:  this year’s rates are £126.50 and £201.80), which will reduce the single rate of the Savings Credit maximum by £1.75 to £13.07 and the couple rate by £2.68 to £14.75. ”  The other tweak, in para 1.135, is this:  “by adjusting the Savings Credit threshold, the Pension Credit awards for those currently receiving Savings Credit will be frozen where income is unchanged.”  If this means that people receiving Savings Credit will lose the value of the £4.40 increase in the minimum guarantee, it will affect about 723,000 claimants (the ones who get both the Guarantee Credit and the Savings Credit).  That  could add up to the size of cut the Treasury is talking about – but this money is not actually being saved, it’s just not being spent on some while it is being spent on others.

Richard Murphy on private pensions

In his blog, and in an earlier report, Richard Murphy makes a blistering attack on the private pensions industry.  Private pensions currently receive £38 billion a year in tax reliefs and subsidies – an amount so large that it pretty much pays for private pensions.  The private pensions industry does what it does at a staggeringly high cost, and it has lost a substantial bite out of money it was supposed to be safeguarding.  Murphy asks:

  1. Why are we investing pensions in this way when there are clearly better options?
  2. Why are we structuring pensions this way when it clearly allows the extraction of excessive fees for poor return from the system?
  3. Why are we subsidising this failure with so much state money – enough, in fact, to represent a third of our real state debt right now?
  4. Why are we tolerating the massive redistribution of wealth from many to a few that this system permits?
  5. Why are we allowing so many funds to be put to idle and non-productive use outside the mainstream economy?
  6. What can we do better?
  7. Why aren’t more people asking these questions?

The sixth question is, of course, the difficult one.  I’ve argued many times that, regardless of the mess caused when benefits are badly designed, setting them right is never an easy option.  Redistributing costs and benefits means that whenever some people are made better off, someone else has to be worse off.  The only way out of the bind is to spend more money, at least enough to protect people from the more serious anomalies; and reshaping the system of subsidies and reliefs will have to be done gradually, to ease the pain.

 

Is independence a threat to pensions?

I was asked by the BBC to comment on a poster produced for the independence debate, which suggests that pensions may be under threat.  My contribution is on the BBC website, here.  Basically, there are three types of provision for pensioners to consider – the state pension, occupational pensions, and further benefits, many of which are under threat anyway. Reorganising occupational pensions might be a nuisance (they’d probably have to be split into English and Scottish schemes to comply with European regulations) but I don’t think there’s a serious risk in any of these categories.

The constraints of the article meant that an interesting aside had to be dropped, but having a blog allows me the indulgence of dropping it in here anyway.  This is the question of what happens to upratings for people who get a pension from the UK but later go to live in Scotland.   The UK government has long refused to uprate benefits for pensioners who live in some other countries, including Australia, New Zealand, Canada, South Africa and some others such as Nigeria or Yemen; there’s a detailed report here.  They argue that the UK does not have a legal agreement to pay upratings in these countries. However, they do pay upratings in the European Union, Turkey and the USA.  Steve Webb, the Pensions Minister, has told a Holyrood committee that there shouldn’t be a problem – and it would be astonishing if the UK government imposed rules for Scotland that treated English pensioners in Scotland worse than Turkey or Israel.

Another scare story, this time about pensions

The Scotsman devotes this morning’s first two pages to concerns about private pensions after independence, under the title Scottish independence: EU deals pensions blow.  It’s prompted by an announcement from the EU that the rules on cross-border pensions will stay as they are.   Under EU rules, cross-border pension schemes have to be fully funded; many UK schemes (about 5000 out of 6300) are currently in deficit.

A scheme doesn’t become a cross-border scheme because it’s paid to someone abroad – many people live abroad now (for example, pensioners living in Ireland and Spain) and receive British pensions.   It’s a cross-border scheme if it is based and operated across boundaries, levying contributions from people in different countries.

There are some issues.  Some pensions firms will have to change the way they operate.   Schemes in deficit will have either to stop taking contributions from people situated abroad, or set up new, independent schemes for each country.  Some people will have to join new pensions schemes, as many people do now when they move jobs; and some of them will find, reflecting the current economic climate, that the terms are less favourable than their current scheme – typically the scheme will offer lower returns, it won’t be salary-related, and and the date of retirement will be later.   It’s a consideration, but it’s hardly decisive for the independence debate.

 

 

It's not quite the end of annuities

There has been some excitement at the thought that pensioners will be able to blow their pension pots on a Lamborghini, rather than buying an annuity. There may be some problems with this arrangement – no doubt the sharks will be circling at the smell of money in the water – but somehow the idea that pensioners will be lining up to buy cars that cost £300,000 and do 11 miles per gallon doesn’t quite square with the experience of most of the older people I’ve ever met.

I can make no great claim to understand the annuities market, but there are reasons to doubt that this week’s Budget has knocked the bottom out of it.  According to the Association of British Insurers, the numbers of people who take out large annuities is very small.  Most pots are limited; many annuities – more than 100,000 a year – are bought for less than £10,000; the median pot is around £20,000.  They explain that an investment of £5000 will typically secure an income of £20 a month.

Much of the trade seems to depend on the idea that someone who is looking for a range of investment options will be able to use part of that money to guarantee a fixed income.   On that basis, the most likely outcome of the change in rules is that, as workplace pensions grow, more people will use part, rather than all, of a pension pot to guarantee an income.  If they like the idea, they can start small and decide later to buy more income.

Pension age: a third of adult life

One of the most intriguing statements in the Chancellor’s speech was the suggestion that the government is moving towards a formula for setting the age of retirement.

“We think a fair principle is that, as now, people should expect to spend up to a third of their adult life in retirement.”

It’s difficult to make out just what this means, for three reasons.  The first is the question of when adult life begins.  Many of the people retiring at present began their working life at age 16.    The age of majority is 18, and in England the school leaving age is set to increase to that point.  People who go to college may not start their working life until they are 21.  The difference of five years could make a difference of nearly two years to the proposed age of retirement.  A background note says that the government is planning to take 20 as the start of adult life.

The next wrinkle comes from that expression, “up to” a third.  That might mean that people should be able to expect that third, unless they die earlier.  However, it could also mean that this is a reasonable target for the maximum period of retirement, so that relatively few people will get it for much longer.

Then it’s not clear when this expectation applies – when someone starts their working life, when they are making pension plans, or when they retire.  I’d plump for the last of those, because anyone who dies before pension age has had to pay to benefit those who didn’t; and in the background note, that’s also what the government has gone for.

On that basis, someone who has worked from 20 to 66 should be able to expect to live to age 89.  That seems to imply that 66 is late to retire; 64 would be more justifiable.  That, of course, is what we would have had if male and female pension ages had been equalised reasonably, instead of just jacking up the female retirement age.

Having said all this, a third is not a bad rule of thumb.  It implies that if people’s life expectancy on retirement goes up from 87 to 93, pension age should increase by two years, which I think is more or less what’s being proposed.

More on the Scottish Government’s Pensions Policy

Saturday’s press releases about pensions have been followed up by a detailed policy document.  The Scottish Government explains that  “For those in Scotland in receipt of the UK State Pension at the time of independence, the responsibility for paying that pension would transfer to the Scottish Government.”  What that means, for the State Pension is that

  • “The single-tier pension would be paid in full to everyone who reaches State Pension Age after the introduction date and has 35 qualifying years of National Insurance (NI) Contributions or NI credits.
  • There would be a qualifying requirement of 7-10 years of contributions.
  • All Additional State Pension rights accrued prior to April 2016 would be retained and paid to individuals on retirement.”

It looks as though Scottish Government is thinking of a  clean break: a country’s responsibility to pay pensions will be based on a person’s address at the time of independence.  Anyone currently in receipt of a State Pension will be passported to the new system.  If you worked in Scotland but now live in England, you won’t get a Scottish pension.  Conversely, if you worked in England but moved to Scotland, you will.  That should mean that there is no such thing, on the first day, as an English or Scottish expatriate; anyone who moves over the Border after retirement will carry with them entitlements from the nation they are coming from, regardless of where the contributions were paid.

The position of people who have not reached retirement age is not so cleanly defined.  It’s supposed to be dealt with by a transitional arrangement.

“For those people of working age, who are living and working in Scotland at the time of independence, the UK pension entitlement they have accrued prior to independence would become their Scottish State Pension entitlement.”

To make this work, the Scottish Government needs to know the UK pension entitlement.  The records, which are linked to the NI number, are not held in Scotland – they are the responsibility of the National Insurance Contributions Office in Newcastle, which keeps over 65 million National Insurance accounts.    The SG would need access to the UK records of most new claimants for the next 35 years.  It’s a big ask.  (It’s already the case that some functions in benefits administration, such as retrieval from storage, are cross-charged between agencies.  I don’t think the SG can assume that the UK government would not cross-charge for the service.)

There are some other issues to resolve.

  • The policy documents refers to people ‘living and working’ in Scotland.  If someone lives in Scotland but has only worked in England, what happens?
  • A person who works for more than 10 years in both countries would meet the qualifying requirement in both.  If the total is over 45 years, there is an entitlement to a full pension and enough further contributions to qualify for a partial second pension.  Someone who worked in two other European countries might reasonably expect pensions from both.  Would two pensions be payable?
  •  1.2 million State Pensions are paid to Britons living overseas.  Which ones will be paid by Scotland?
  •  Once payments to expatriates are accepted, can the government legally avoid making payments to expatriates in England?

None of these issues is a fundamental objection to the development of an independent Scottish system – they are examples only of the little knots that can trip governments up.  Partly in reaction to the scaremongering about independence and devolution, however, there has sometimes been a contrary tendency to pretend that there are no genuine problems to resolve.  In this case, there are.

'Retire early with independence'

The SNP have suggested that plans to raise the pension age would be put off in an independent Scotland.  The Scots die earlier – two and half years, on average – and the calculations don’t look the same for as they do for England.

That has to be right in principle, but it poses a practical problem.  Currently the State Pension is geared to a person’s work history, and the records are held in England.  To administer the pensions in line with existing entitlements, the Scottish Government would need to have access to those records.  There’s no obvious practical way of doing this, short of an individual request for details of each and every person by National Insurance number.    The pension would not be paid by the English authority, so the record would then have to be transmitted back to Scotland for processing and payment.

If there was instead a Citizens Pension, based on age, the records wouldn’t matter, and the provision of pensions could start from scratch.  That is only going to be politically feasible if the scheme is more generous than existing entitlements.  The UK government’s recent reform of pensions has gone some way towards establishing the new criteria, and it would only take a few small tweaks for it to be possible.

Benefits in an independent Scotland

A recent report by the Institute for Fiscal Studies has received a lot of press attention, and it has some helpful facts and figures, but it actually does very little towards breaking new ground. It says that benefits in Scotland cost relatively more than England for some groups (notably, for people with disabilities), and relatively less for others. It says that most of the money goes on pensions, which is hardly news. And it says that if there is radical reform, there will be losers as well as gainers, and that it is only possible to mitigate the losses by spending more. So far, so obvious.

The remit of the IFS briefing note is limited; it’s concerned with expenditure rather than equity or methods of paying benefit. It doesn’t actually provide key data on the issue which most people want to know, which is what Scotland could afford. To work that out, it would be necessary to compare Scotland’s national income and government revenue on one hand with liabilities and expenditure on the other – we have a good idea of how much money is spent, but how much revenue there would be is another issue entirely. Without that, it’s not really possible to say anything about the affordability of benefits. There are no indications that Scotland’s liabilities exceed its income to such an extent that benefit payments would be impossible; but beyond that, it’s difficult to draw any firm conclusion. What a country can afford depends on what it’s willing to pay for.

There are more serious challenges to developing a devolved or independent benefit system, but they are as much about mechanism as about cost. One example which emerged earlier this week was the question of what happens to occupational pension schemes: a cross national scheme has to be funded, so any Scottish schemes would need to be separated out. That points to a general issue about such schemes, which is that the smaller the scheme is, the more difficult it can be to balance the contributory base with existing liabilities. The basic way to overcome that problem is through pooling of risks between pension schemes – which generally happens in France (it’s referred to as a form of ‘solidarity’), but not in the UK, and its absence is a major reason for the instability of current UK schemes. A larger problem is the question of what happens to the contributory National Insurance system when all the records are currently held in Newcastle. I’m doubtful that the system is susceptible to devolution. It’s hard to see on what basis records could be transferred; Scotland would need a new and different pensions scheme, like a Citizens Pension.

There are, too, problems of cost control generated by a range of benefits which pay people to buy specific services in the market – housing, social care and child care among them. This approach is inherently defective; in every case it has led to accelerating costs without providing adequate basic protection. Any government, whether it is for Scotland or the UK, would need to rethink.