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State Pension Reform

Volume 560: debated on Tuesday 19 March 2013

My noble Friend, the Minister for Welfare Reform, Lord Freud, tabled a written statement in the House of Lords yesterday because events prevented the Department from making an oral statement in the House of Commons as planned.

I am pleased to announce the Government will be able to launch the new single-tier state pension in April 2016, in keeping with the original timetable.

Our 2011 Green Paper “A state pension for the 21st century” set out the Government’s vision for a simpler state pension, which would reward retirement saving and be fairer for those who have historically had poorer state pension outcomes, such as women, the low-paid, the self-employed and those with caring responsibilities.

The work undertaken that resulted in our White Paper “The single-tier pension: a simple foundation for saving” took longer than anticipated, mainly because the existing system is so complicated, containing 60 years of modifications and tinkering, and the road to fundamental reform is not straightforward when we also need to recognise what people have built up under the existing system. Consequently, a start from 2017 reflected the additional 12 months it took to complete our plans.

However, given the positive response to our White Paper, we looked again to see if it would be possible to return to our original timetable and to deliver reform as soon as possible, to support the roll-out of automatic enrolment into workplace pensions and provide certainty for both individuals and their pension schemes at the earliest opportunity.

Therefore, I can confirm today that, from April 2016, those reaching state pension age will do so in the single-tier system. The individualised pension will reflect the lives and working patterns of today’s working-age population, and recognise the vital social contribution of those caring for children, elderly relatives or disabled people through crediting arrangements. The single tier will also mean that, for the first time in around 40 years, self-employed people will be treated the same as employees for the purposes of state pension entitlement.

Reform in April 2016 will mean that around 400,000 more people will reach state pension age under single tier, including every woman affected by the acceleration of the state pension age equalisation process in the Pensions Act 2011.

Arrangements will also remain in place to enable people to pay voluntary national insurance contributions and Her Majesty’s Revenue and Customs is reviewing the time limits for those who will receive a single-tier state pension so that, if they delay paying voluntary contributions until a pension statement based on the single-tier pension qualifying conditions is available, they will not lose out.

As the single tier is a flat-rate pension, a consequence of its introduction is the closure of the state second pension scheme and, with it, the ability to contract out of this element of the system. Those people who were contracted out will see their national insurance contributions equalise to the same rate as the rest of the population, but will also build up access to the same flat-rate state pension, set above the level of the basic means test. I can also confirm that 90% of affected individuals reaching state pension age in the first 20 years of the single tier will receive more state pension than the additional national insurance they pay.

As stated previously, this will result in additional national insurance revenue for the Exchequer. About £3.3 billion is employer national insurance contributions from the public sector and so in effect a transfer within the public sector. Of the rest of the revenue, around £0.6 billion is employer national insurance contributions from private sector, £1.4 billion is employee national insurance contributions from public sector and £0.2 billion is employee national insurance contributions from private sector—this money will not be used for net revenue raising. As per standard practice, the detail of these fiscal impacts will be accounted for in the Budget on Wednesday.