This piece first appeared in Saga Magazine in June 1999
The text here may not be identical to the published text

The Government is going ahead with plans to slash the value of the State Earnings Related Pension Scheme (SERPS), introduced by the last Labour Government in 1978. The changes will

• Cut the value of SERPS to a quarter of its present value over the next 20 years.
• Slash by more than half the SERPS paid to widows whose husband dies after April next year.

The problem with SERPS is that very few people outside - or even inside - the Department of Social Security understand it. So cuts in its value can be sneaked in with little political impact. The last Conservative government changed the rules for SERPS twice - once in 1986 and again in 1995. But both sets of changes were timed to begin well into the future - April 1999 and April 2000. And it has been left to the Labour Government (a LABOUR Government as Neil Kinnock might once have said) to introduce changes which will cut the incomes of newly retired people and newly widowed women as the third millennium dawns.

SERPS was introduced by Barbara (now Baroness) Castle in 1978. The new scheme was designed to give everyone the benefits of a scheme which would rival some of the better company and public service pension schemes. It was biased to ensure good pensions for manual workers and for women - both groups largely then excluded from good occupational pension schemes. In its original form it gave people a pension based on the best twenty years of their working life. That helped women who often did not work for the forty years that was then more typical for men, and it helped people in manual work by basing the pension on the average pay earned over their highest earning 20 years rather than just on the last few years before retirement when their pay often fell.

SERPS was calculated as a quarter of average earnings over the period and is paid as an extra state pension on top of the basic retirement pension. Barbara Castle planned to raise it each year in line with earnings or prices whichever was the higher. That policy was abandoned in 1979 but individual earnings in each year are still raised in line with average earnings up to pension age before the pension is calculated. Anyone who was already in a company scheme which paid as good or better benefits could contract out of SERPS. But everyone else who worked - except the very low paid and self-employed people - were in it automatically, paying for it through higher national insurance contributions. The scheme began in the tax year 1978/79 and within months of the 1979 General Election the new Conservative Government was considering how to dismantle this state scheme which it said would be a burden on future generations.

It took years to find and alternative. Eventually it decided simply to cut back on the cost of SERPS and try to persuade everyone to pay for their own pension and introduced new personal pensions from July 1986. The Government, supported by major financial institutions approached the change with missionary zeal. The state offered a large bribe from the National Insurance Fund to everyone who left SERPS for a personal pension - those payments still cost the Fund around £2 billion a year. And the insurance companies and independent financial advisers managed to sell more than a million people the wrong pension and the industry is still in the middle of sorting out the mess and paying out an estimated £11 billion in compensation.

Despite these problems, the cuts in SERPS were left in place and then deepened with more reductions in 1995. It is those two sets of cuts which come into effect this year and next.

The changes

Barbara Castle's dream of a pension worth a quarter of the average of the best twenty years pay has been cut to a fifth of the average pay over a whole working life - including the years when little or nothing was earned. That change will halve the value of SERPS for the average pensioner who retires when the change is fully phased in by 2019. And further changes about the way that earnings are calculated and increased in line with inflation - introduced in 1995 - will almost halve the value of SERPS again, cutting the cost of SERPS to barely a quarter of its original forecast.

The changes will be phased in very slowly - so slowly in fact that the SERPS paid to someone retiring in 1999/2000 will actually be slightly higher than that paid to someone who retired last year. But as the years pass, newly retired people will get less and less State Earnings Related Pension Scheme, cutting its real value to almost a quarter of the amount paid last year - which was £95 a week on top of the basic state pension for an average earner who had stayed in SERPS for 20 years, and could be as high as £121 for higher earners. Because the changes only affect newly retired people - no-one with SERPS today will see its value cut under present plans - the Government hopes it will be a cut in public spending on pensioners that will be so gradual that no-one will notice.

Widows cuts

That cannot be said for the biggest and most dramatic cuts in SERPS. Women who lose their husband on 6 April 2000 or later will get less than half as much SERPS as women whose husband died the day before on 5 April 2000. There are two changes

•  they will get half his SERPS instead of all of it
•  his SERPS will be less anyway under the changes already announced.

Official estimates show that around 50,000 newly widowed women each year will lose more than £1000 a year on average from their annual widow's pension. A woman whose husband dies on April 5 2000 will inherit all her late husband's SERPS and, on average that will be worth £33 a week or £1716 a year. But if he dies the next day, April 6 2000, she will inherit only half his SERPS and that will be less anyway. On average she will get just £12 a week - £624 a year - a cut of £1092. Unlike most changes to benefits, and the changes to the main rate of SERPS, this one will not be phased in. And that led the present Leader of the House of Commons Margaret Beckett to give this extraordinary advice when the new rules were passing through Parliament. She was then the Opposition spokeswoman on social security and told fellow MPs on February 27 1986

"There is an abrupt change...between those who are widowed on 5 April [2000] and on 6 April. I advise anyone who is married to a man who is lingering on 5 April quickly to shove a pillow over his face, because it will halve the pension entitlement if the husband dies on the following day."

Despite that strong attack in Opposition the Government seems happy to implement the cuts. Within twenty years the savings to the Government from the cuts in the SERPS paid to widows will be £2.3 billion a year.

No information

Although the present Government seems happy to introduce the cuts, it has been embarrassed by recent revelations that that no-one in the Department of Social Security told the public about the changes to widow's SERPS for ten years after Parliament had passed the laws which implemented them. People who asked information from the Benefits Agency before 1995 were not told about the changes which began in April 2000. And the leaflet number NP46 which explains the details of how the state pension scheme works was not changed until its April 1996 edition - a full ten years after the changes were passed through Parliament.

Thousands of men who enquired about the change were told that their wives would inherit all their SERPS if they died. And that could have led them to reduce the amount of private widow's pension they paid for through an insurance company. Many people feel they were misled and are seeking compensation. Anyone who thinks they were misled should contact their local Benefits Agency office and let them know that a claim for compensation could be made in the future. But the actual claim will have to be brought by a widow after her husband had died and she will have to show that her late husband sought advice and that it was wrong and that he provided her with a lower widow's pension following that advice. It is a tough test and it seems unlikely that many people will pass it and get compensation.

Charities such as Age Concern are calling for the changes to be postponed. The Government seems unlikely to listen.

SERPS ENTITLEMENT

Not everyone pays into SERPS. People in good occupational pension schemes never have. And since 1988 people who paid into a personal pension have been able to pay lower national insurance contributions and put that money into a personal pension instead. Further changes have brought more people out of SERPS and into company scheme, but five and half million employees still do pay into SERPS and millions more have paid in at some time during the last 20 years and have some SERPS entitlement. The amount of SERPS entitlement depends on average earnings in each of the years paying into the scheme up to the last tax year before pension age is reached. The changes to the amount of SERPS itself will affect anyone who reaches pension age from April 6 1999. The changes to the amount of SERPS a widow inherits will affect any woman whose husband dies from April 6 2000.

June 1999

e-mail Paul Lewis on paul@paullewis.co.uk