Like our tax code, pension provision in the UK has grown in a piecemeal, ad hoc way. Problems in the system have been addressed as they come up with little notice taken of the effect on the overall system, and little care taken to prevent the system becoming over-bureaucratic. Indeed, given that many reforms originate with the bureaucrats, this has, perhaps, been part of the intention; whilst the political interventions have often fallen victim to the law of unintended consequences.
For some decades now, the state pension has had two elements - the Basic State Pension with entitlement based on the number of years of National Insurance Contributions made and a second tier: first GMP, then the State Earnings Related Pension Scheme (SERPS) and latterly the State Second Pension (S2P).
These second tier pensions were related to earnings (within certain bands) over the working lifetime. Since the late eighties up until last year, it was possible to opt-out of SERPS and use National Insurance rebates to buy alternative private pension provision. The advisability of this varied dependent on circumstances and actuarial forecasts - but that is another story!*
Under Labour, "Pension Credits" were introduced - these were payable to pensioners on low incomes in order to top-up the State Pension. They were, however, withdrawn through the use of a taper where a pensioner had alternative savings and private pension income. The effect of this was to penalise personal pension provision and saving for retirement - particularly at the low end of the pension income spectrum.
The Liberal Democrat manifesto at the last election committed the party to a "Citizens Pension" payable at the level of the pension credit, when resources allowed. The single-tier pension is very similar and the aim is for it to come into force in April 2017: There was no equivalent in the Conservative Manifesto (which committed to protecting the value of Pension Credits) or the Coalition Agreement; this is a coalition policy, yes, but it has heritage on the Liberal Democrat side of the Coalition.
In a letter to Lib Dem members, Steve Webb MP, Pensions Minister said:
"The single-tier pension is a fairer way of ensuring people will get a decent pension in their old age. It will treat men and women equally for the first time and will value unpaid caring work just as much as a high-flying city job. That is why the big winners will be women, carers and some low earners who haven’t previously received much in the way of earnings-related state pension.
This new ‘single-tier’ pension has much in common with the long-cherished Liberal Democrat goal of a Citizen’s Pension. The basic idea is that someone starting work under the new rules will build up just one state pension. We are ending the fiendishly complex system of two state pensions and tax credits that Labour presided over.
Our reforms go back to William Beveridge’s original idea of the modern state pension. Beveridge had envisaged a single, simple, decent state pension, paid after a lifetime of National Insurance Contributions. It will be set above the level of the basic means-test (currently £142.70 per week) and the full rate will be payable for 35 years of National Insurance Contributions.
Successive governments tinkered with the state pension. That means we now have a system the Pensions Commission declared as one of the most complex in the world. Worse still, the current system actually discourages some people from putting anything aside.
As the plans I unveiled today show, it doesn’t have to be like that in the future. Another example of Liberal Democrats in the Coalition Government delivering a truly radical reform, and one that we can be proud of."
*For the avoidance of confusion, I should point out that the ending of "Contracting Out" was introduced by Labour and carried through by the Coalition.