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  • March 2013
03

Faster move to single state pension 'could close final salary schemes'

Open-access content Monday 18th March 2013 — updated 5.13pm, Wednesday 29th April 2020

Plans to introduce a new single tier state pension a year earlier than planned in 2016 could accelerate the closure of final salary pension schemes in the private sector, industry experts have claimed.

2

Chancellor George Osborne announced yesterday that the introduction of the reforms would be brought forward from April 2017 to April 2016. He told the BBC's Andrew Marr Show that the flat-tier pension would be a 'huge boost for people who want to save for their retirement'.

However, Joanne Segars, chief executive of the National Association of Pension Funds, warned that the acceleration of the change set a 'very tight timeframe'.

She said: 'It would be a shame if big mistakes were made in a rush to implement the changes.'

In particular, Segars raised concerns over the impact that ending 'contracting out' of the second state pension would have on defined benefit pension schemes. Currently workers and their employers who have contracted out pay a lower rate of National Insurance than those who have decided to build a second state pension through the government.

'If the government gets it wrong then this runs the risk of sparking a fresh round of final salary pension closures in the private sector,' Segars said. 'Businesses who get caught on the wrong side of these changes will lose a significant rebate from the end of contracting out, and they will question whether they want to continue running these pensions. It is essential to give pension funds the flexibility and time to adapt and make the changes.'

Her sentiments were echoed by Malcolm McLean, consultant at actuaries Barnett Waddingham, who said: 'Both sponsors and members of defined benefit schemes will have to come to terms with the loss of their NI rebates in 2016 instead of 2017. A typical worker earning the average salary of £25,000 will pay an extra £270 a year with the employer having to stump up £657.

'This will inevitably put extra pressure in particular on those private sector employers who are currently struggling to support their pension arrangements and may be tempted to water down or, as a last straw, wind-up their schemes completely.'

McLean noted, however, that the earlier introduction would be good news for women who had faced another increase in the state pension age before the previous 2017 planned implementation date.

This was also highlighted by Tom McPhail, head of pensions research at consultancy Hargreaves Lansdown. 'This will be welcome news for the tens of thousands of women who would have missed out on the higher state pension as a result of reaching their state pension age just months before the introduction of the new terms,' he said.

Osborne also announced yesterday that the cap on the amount the elderly have to pay towards their social care costs, which was originally scheduled to be introduced in 2017 and set at £75,000, would now be brought in a year earlier and set at £72,000.

This article appeared in our March 2013 issue of The Actuary.
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