State Pension no longer fit for purpose
The figures show that this year, the National Insurance Fund, which funds the State Pension, had to be bailed out by a £9.6 billion Treasury grant.
This is over double the size of the bailout that had to be granted to the NIF last year, in 2014/15.
Many people don’t realise that the National Insurance contributions they pay during their time in employment are used to pay the State Pensions of those already retired.
We often speak to people who still believe their National Insurance contributions go into some form of pension pot for the future.
In 2015/16 the National Insurance Fund (NIF) received £86 billion in National Insurance Contributions but paid out £95 billion in benefits.
This included paying out £89 billion in State Pension.
As a result, the NIF needed a £9.6 billion Treasury grant bailout.
In 2014-15, the NIF received £84 billion in NICs, and paid out £92 billion in benefits (including £86 billion as the State Pension); it required bailing out by a £4.6 billion Treasury grant.
A new report published today has urged the government to take action.
The report by Michael Johnson is called The State Pension: No Longer Fit for Purpose, published by the Centre for Policy Studies.
It explains how to avert a potential fiscal disaster, recommending the State Pension should be put into “run-off” and replaced with a Workplace ISA and a new residency-based Senior Citizens’ Pension (SCP).
Johnson, who is a Research Fellow of the Centre for Policy Studies and a highly regarded pensions analyst, has recommended the following steps to avert a potential fiscal disaster.
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.
The SCP should be complemented by a Workplace ISA, to accommodate employer contributions made under automatic enrollment (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.
Explaining his proposals, Michael Johnson said:
“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 enrollment 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.
You can read the full report here.
What do you think? Is the State Pension still fit for purpose and would these recommendations solve a future fiscal disaster?