Pension Bill heralds long term changes

By Ian Pollock
Personal finance reporter, BBC News

John Hutton, Work and Pensions secretary

Governments are often accused of thinking short term.

But a pensions reform Bill, included in the Queen's Speech, is one of the most consciously long term bits of planning seen for some time.

Looking ahead to 2050, its main aim is to provide a higher level of state pension for many more people over the coming decades.

The big idea is that the link between the basic state pension and earnings will be restored some time after 2012 and the state pension age will be raised to 68 by 2046.

Just as importantly, the pensions of millions of women will be boosted because current regulations mean that many do not accumulate enough national insurance contributions to qualify for a full pension.

Consensus

There has been widespread support for the plans as outlined in the government's recent White Paper.

The key thing is that this is long term stuff Richard Brooks, IPPR

"There is broad consensus for the re-indexation of the basic state pension with earnings, reasonable support for raising the state pension age, but less consensus for the model for the new personal accounts," said Niki Cleal, director of the Pensions Policy Institute.

It is important to note that current pensioners will hardly be affected at all by the plans.

In fact, the younger you are the more important the changes are.

Richard Brooks, an associate director at the Institute of Public Policy Research (IPPR), said this was a big change in direction.

"The key thing is that this is long-term stuff," he said.

"They are trying to rebuild the value of the state pension and stop the spread of means testing."

Women

If the indexation of state pensions with earnings rather than inflation is combined, as planned, with a cut to 30 in the number of years of work or caring needed to qualify for a full state pension, the biggest winners will be women.

Women will have much to gain from pension reform, says the government

This is welcomed strongly by the trades union organisation, the TUC.

"I think the package is a very big deal - the most radical set of reforms for 50 years," said Michelle Lewis, pensions officer of the TUC.

But she pointed out that trade unionists are still unhappy that the basic state retirement age will be raised progressively.

"We are still to be convinced that the state pension needs to be raised," she said.

"Many of our members work in areas where they are pretty worn out by 65."

Lord Turner

The government launched its consultation earlier this year, in the wake of the proposals put forward by Lord Turner's Pensions Commission.

Generally these plans are quite well thought through Matt Wakefield, IFS

But the government immediately raised some people's suspicions that it would try to wriggle out of one of the main recommendations - that increases in the state pension should be linked to the rise in average earnings.

Back in May, the Work and Pensions Secretary John Hutton said a precise date for this would only be announced at the start of the next government and would be "subject to affordability and the fiscal position".

Since then several ministerial pronouncements have sought to reassure people that re-indexation really will come in, and by 2015 at the very latest.

But this verbal wrangle highlights a fundamental problem with any piece of long term legislation.

"Generally these plans are quite well thought through," said Matt Wakefield, an economist at the Institute for Fiscal Studies,

"But this government can't commit every government from now until 2050 to keep earnings indexation."

National pensions savings scheme

One element that will not be included in the new legislation will be Lord Turner's idea for a new national pensions savings scheme, or "personal accounts", as the government likes to call them.

Lord Turner, architect of the government's pensions reforms

This idea is going to be the subject of another White Paper in December and a further round of consultation.

This has been controversial with the private pensions industry hoping to get a slice of the business running such accounts for the state.

As currently proposed, all employers who do not currently pay into a pension scheme for their staff will have to start doing so.

Employers will pay 3% of salaries, employees will pay 4% and the government will contribute 1%.

There is a growing suspicion in some quarters though that this may lead to an example of the law of unintended consequences.

The fear is other employers might cut their current, higher, level of pension contribution down to the minimum level required by the Personal Accounts system.

"I think with the NPSS it is almost defining the level of contribution the government thinks is acceptable," said Ian Price, head of pensions at investment firm St. James's Place.

"So what you could have is an employer saying 'what I need to have is a scheme requiring a maximum contribution of 8% - if it's good enough for the NPSS (an early name for Personal Accounts) why isn't it good enough for us? "