How and why have pensions been reformed since 1997?

Considering the scope of change to the pension provision in recent years combined with the pressures of growing elderly population, it seems sensible to consider this costly area of welfare spending as a potential area for ’15 marker’ examination.

Sustainability of public sector pension provision

New Labour looked to reform public sector pensions to help to ensure financial sustainability and to reflect ‘improved longevity, modern working patterns and the practice in the majority of private sector pension schemes’. After a considerable amount of industrial strike action, negotiations took place between Alan Johnson and Brendan Barber and the decision was taken to increase the State Pension Age (SPA) to 65 for new public sector employees (such civil servants, teachers and NHS staff) taking up a post after October 2005. Existing public sector workers retained the right to retire at 60. In 2011, the Coalition also targeted public sector employees; removing ‘final salary’ pensions and replacing them with ‘career average’ ones.

 

Ageing population

Reforms to pensions have been necessary due to the fact that the UK has an ageing population. The number of 65+ year olds is predicted to increase by around 60% by 2032 and this has provided the impetus to reform the pre-coalition system of means-testing and top-up payments implemented under New Labour, a system which IDS regarded as excessively complicated and wholly unsustainable. The coalition introduced a streamlined system offering pensioners a flat rate of £144 p/w (although access to the full amount is dependent on the claimant having made 35 years’ worth of National Insurance contributions). The fact that the SPA for men is now due to rise from 65 to 66 from 2020, and to 68 by 2046, with women moving to an SPA of 66 a few years after men, likewise reflects demographic pressures. It is also worth remembering that the Coalition removed the mandatory retirement age altogether.

New pensions schemes introduced under the Coalition, such as the National Employment Savings Trust (NEST), were designed to encourage the younger population to start saving for their pensions, so that the role of provision doesn’t fall entirely on the future governments. There were also changes to private workplace pensions; reform has made it compulsory for employers to opt workers into workplace pensions. Since April 2014, workers have had to opt-out of schemes. Again the idea is to encourage private pensions and mitigate against the burden of an ageing population.

 

Ideological motives – less ‘nanny state’

The coalition government ended the rules requiring compulsory annuitisation at 65. An annuity is essentially an allowance given to a pensioner based on his private pension savings from an insurance company. In other words, it offers a regular payment drawn from pensions savings in order to last their entire retirement. That was the pension system under Labour. The changes introduced in April 2015 now mean that pensioners have complete access to their pot of pension savings and can choose to do whatever they wish.

 

‘Grey vote’

The Coalition introduced a ‘triple lock’ guarantee for pensions, which ensures the state pension goes up by whichever is higher – inflation, wages or 2.5%. The Conservatives, in the Thatcher years, broke the link between pensions and earnings and Labour famously increased pensions one year by 75p. The guarantee will cost £45 billion over the next 15 years. The implementation of ‘triple lock’ under the coalition may be seen as partially motivated by the voting power of the pensioner population. In the 2010 and 2015 general elections, the percentage of the population aged 65+ turning out to vote was 75 and 78 respectively. Conservatives are arguably helping those most likely to vote, and vote Conservative.  However, since calling a snap general election, it seems likely that Theresa May will abandon the triple lock pledge on the grounds of economic sustainability – let’s wait for the manifesto…

 

 

 

 

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