Better pensions for all

Another day, another change in the law. No sooner had the Labour Government finally forced through its plans to cut back the benefits paid to many widows and some disabled people than it introduced another major social security Bill (but see the BOX for a major U-turn by the Government). This one will abolish SERPS - the State Earnings Related Pension Scheme introduced by Barbara Castle more than 20 years ago - which was intended to make sure everyone had a second pension comparable to the best in the private sector.

In fact the best pensions are generally paid to people who have been in the public sector - topped by MPs and closely followed by their civil servants but also enjoyed by police officers, doctors, nurses, teachers, traffic wardens and town hall staff. Sadly, pensions on that scale paid for by the public purse are still not being offered to everyone else. But the Government hopes its plans will result in better pensions all round. And for Saga readers who have not yet retired the changes should mean that the extra pension from the state could be higher - and will not be any lower - than it is now. This latest round of changes will only affect people who reach pension age after April 2002. Anyone already over pension age by then will not see any change in the SERPS they get when they retire.

The Child Support, Pensions and Social Security Bill was published early in December. It makes radical changes to the way that parents have to support their children, to National Insurance, and to War Pensions Appeals. But the most dramatic change is the abolition of SERPS and its replacement by a new Second State Pension for people who reach pension age from April 2002. From that date new pensioners will get a mixture of SERPS and the new State Second Pension (SSP). At first, the SSP will be better than SERPS for people who earn less than average earnings. But eventually the Government plans to turn the SSP into a flat rate addition to the retirement pension - not related to earnings. By that time almost everyone will be expected to pay in to the new stakeholder pension - which begins in April 2000. Within a generation the Government says everyone earning more than £9500 a year will be buying their own pension outside the National Insurance system.

CHANGES

SERPS is a second earnings-related pension on top of the basic retirement pension and can add up to £100 a week or more to it, though most people get far less than that. It is paid for by higher National Insurance Contributions. Many people have chosen not to pay into SERPS - they put money into a company scheme or a personal pension instead. Paying into SERPS has become a worse deal over recent years as the value of the pension has been slashed by changes introduced by the last Government, even though the contributions have remained much the same. Now Labour is planning to replace it altogether.

There are three big problems with SERPS.

· It gives the smallest extra pension to people who have been low paid all their lives

· It does not help people with broken careers due to bringing up children, disability, or looking after someone else.

· It does not go to self-employed people

 

The new SSP will

· Be double the SERPS paid to people who have earned less than £9,500 a year

· Give more to everyone who has earned less than £21,600 a year

· Allow anyone getting, incapacity benefit, invalid care allowance or child benefit for a child under 6 to qualify for SSP as if they were earning £9500 a year

 

But it will not be extended to the self-employed. The figure of £9500 will be increased each year in line with average earnings. Under the plans, everyone with earnings below £21,600 a year will get more state pension with the biggest rises going to the lowest earners. Those earning more than £21,600 will not get any less than under the present rules. So in the short term the changes are an improvement and will cost a lot of money - up to £6bn a year extra when the scheme is fully in place.

So far so good - the new SSP will mean that the second pension is extended to people who cannot pay into it and will be improved for people on lower incomes. But this is just stage one. Within a generation the new SSP will be frozen so that everyone - regardless of earnings - is treated as if they earned just £9500. That means that anyone whose earnings are less than around half the national average will find the SSP they get is cut. Instead, they will be expected to pay into a new stakeholder pension - a simplified form of personal pension plan.

The State Second Pension will start in April 2002. And the SSP could be cut back for people under 45 a few years after that. The Government assumes that within a generation - by 2030 - no-one will be paying into the State Second Pension unless their income is less than £9500 a year.

But in the near future - for Saga readers now aged 50 or more - it should mean either a higher state pension or the same state pension they would get under the present scheme.

And there is another advantage for people who are running down their working lives. National Insurance Contributions for lower earners are to be cut. The level of earnings at which National Insurance Contributions start is to be raised so that by April 2002 it will be the same level as the personal tax allowance - £83 a week this year. Currently National Insurance Contributions start at £66 a week. That will reduce the contributions paid by lower earners.

The new Bill will also change the rules about appealing against decisions on war pensions. At the moment there are different time limits for different claims and some decisions cannot be appealed at all. In practice, the time limits are not applied and there are arrangements to allow decisions to be altered even where there is no formal right of appeal. The Government wants to tidy all this up. From some time next year [2001], every appeal against a new decision will have to be made within six months - or three months for an interim decision. Appeals against any pensions or awards made before that date will be allowed for a year, until some time in 2002. After that all appeals against earlier decisions will be banned.

The Government is also planning to change the people who sit on the tribunals which decide war pension appeals. These changes seem likely to make them less friendly towards the war pensioner. Generally the war pensions appeal procedure and structure will be brought more into line with the new tougher regime that now applies to all other social security benefits.

The Government has disappointed thousands of pensioners by putting off until after the next election any change to the rules about getting help with the cost of a residential care or nursing home. One of Labour's first acts after the 1997 election was to appoint a Royal Commission to look into improving the system of paying for care in old age. Thousands of older people are afraid that they may have to sell the family home to pay for spending their last few years in a care or nursing home. The Royal Commission reported in March 1999. A majority of its members recommended that the cost of nursing care in a home should be met by the state - just as it would be in hospital. People who could afford it should pay for the cost of their accommodation and board. But there should be big concessions on the way that their capital - including their savings and their home - was treated when their contribution towards the costs was worked out. The extra cost would be around £1bn a year and would grow over the next half century.

After months of delay, the Government has finally said it will not make any changes for at least two years. Early in December, the Secretary of State for Health, Alan Milburn, told Parliament that no extra money could be found before April 2002. He promised a response to the Royal Commission by the Summer of 2000 - up to 18 months after it reported - together with any plans to spend extra money on paying for care for the years from 2002/2003. As the latest possible date for a General Election is May 2002, it is clear that nothing will be done until after the ballot - if then.

Alan Milburn did give some indications of the way the Government is thinking. He said it would look at providing free nursing care - as long as the problems of defining 'nursing care' and 'living costs' could be resolved. He would also be talking to the financial services industry about long-term care insurance - a policy the Royal Commission rejected. And he made no mention of changing the rules about the way that capital was counted. The Royal Commission wanted to allow people to keep capital of up to £60,000 (currently the limit is £3000) and to completely ignore the value of an empty home for the first three months in care. Neither of these things was mentioned by the Secretary of State. His only concession was to look at excluding the value of a home if a 'former carer' continued to live there.

The Government was forced into an embarrassing retreat over cutting in half the amount of SERPS paid to women widowed after April 6 2000. Under plans inherited from the last Conservative Government, any woman widowed after that date faced a big cut in her SERPS. Despite the importance of the change, which was agreed in 1986, the Department of Social Security admitted that until recently anyone who enquired about benefit entitlements was not told about it. And after a major backbench revolt in the Commons and a defeat in the House of Lords, the Government agreed not to introduce the cut unless it came up with a suitable compensation scheme for people who had been misinformed. At the time of writing - before Christmas - there is no sign of that and if none is produced by April, the introduction of the change will be delayed - perhaps indefinitely.

February 2000

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