Reporting the death of S2P

Milarky

In today's Independent:

Part of the package agreed between TB and GB will be the removal of State second pension (S2P) contracted-out rebates to individuals. No date is mentioned but given the logic of putting off restoration of the earnings link until 2012 without phasing I'd guess that will be 'D' day (eg final rebate for 2011-2012?)

Rebates for 'contracted-out' employer schemes will remain however. That makes sense since a) the associated rebates are much lower - only having to cover 'SERPS' levels of benefit, b) those arrangments pre-date the personal 'contracting-out' regimes of 1988/2002. c) Takes the guesswork out where it is most difficult/contentious - on individuals.

[Oh, and d) It was a 'Tory' policy so politically attractive to drop! But Frankie Field isn't happy about this ]

lswwong

Well, I recently contracted back in. Still, I guess there is no telling what I will get when I retire, one way or another.

EdInvestor

S2P remains alive and well

It is "protected rights" pensions ( the contracted-out version of S2P) that are slated for the chop.

This will at least remove some of the complexity from the pensions system. IMHO it also makes sense in the context of the overall shift to company money purchase pensions which expose people to much more risk.

I hope they will remove all the lingering restrictions on existing protected rights pensions as well, so they can be treated just like ordinary PPs.

Paul_Herring

1) So does this mean that more people will try to contract out until everyone's forced to contract back in to get the money into their personal pensions?

2) What happens to protected rights? Will the government try to claim them back?

3) I got the impression before this that the state pension was going to be simplified - fixed amount, increasing by wage inflation each year - that article seems to indicate that S2P will continue to exist.

dunstonh

2) What happens to protected rights? Will the government try to claim them back?

When serps has been reduced in the past, protected rights from contracting out was not clawed back. To do so would require primary legislation and the feeling is that those that have contracted out will keep contracted out benefits. Those that contract in would lose them but that would be compensated by the higher state pension (which those contracted out would still get). Another reason the Govt would have problems clawing back protected rights is that it would devastate the stock market and could send some insurance companies under.

Milarky

Paul_Herring wrote:

3) I got the impression before this that the state pension was going to be simplified - fixed amount, increasing by wage inflation each year - that article seems to indicate that S2P will continue to exist.

Nothing in life is that simple. The amount of basic ('flat rate') state pension you receive is actually a set of segmented annual entitlements. That's the same approach with the 'earnings related' (SERPS/S2P) additions too. But the benefits 'payable' are often quoted on the unstated assumption that these schemes have all been around by fifty odd years before you retire - and therefore value these elements at the 'maximum' possible - not what most people will get.

The 'simplification' would consist of:

From 2012 uprating both 'flat rate' and 'earnings related' entitlements at the same rate - not at different rates.

The 'earnings related' element is itself 'flat rate' below a certain level and at a variable rate above that level. However that variable proportion is only 10 percent and the resulting state pension will be: 'mostly flat rate and indexed to earnings.'

But that will still only be for any pension rights built up after the end of contracting out. That's always the way these simplifications work-out.

Some figures:

If you aren't contracted out the state pension for you this year consists of

1/49th of 84pw. This 'bit' then gets uprated with prices

In addition you get 1/49th of 40% of the difference between the level set by the government of £12K and the level of the full basic state pension (of £4400 approx). This bit then gets carriedto a future year - and is uprated with earnings. The two reference figures (£4400 and 12K) on which each 'flat rate' addition are based themselves uprate - the first at the slower index of prices and the latter at the higher rate of earnings. This makes the future value of the addition doubly uncertain.

But let's do the sums anyway.

By 2012, (6 years) 12k will have moved (at 4% pa) to 15.2k

By 2012, £4400 will have gone up to only £5100 (at 2.5% pa)

By 2012 the difference will stand at about 10K.

You then get '40%' of this over a full working lifetime of 49 years (But let's say that as part of this simplification they change that awkward figure from '49' to '50'. They have said that state pension age will initially go to 66 at some stage. 50 is a better number to go with.)

10k x 40% is £4000 - what you would get(in 2012 prices) at retirement from this part of the state pension. Add to this the old 'basic' state pension of £5100 - earned in 1/50th segments over the same working lifetime - and you get a 'full state pension' of nearly twice the basic (£9100) increased in line with earnings thereafter. But only people born after about 1996 (16 at 2012) will actually get this because only they will have 50 years membership by the time they retire.

The 'non flat rate' portion then pretty much withers. At present you get just '10%' (cf '40%') of the earnings about the '£15k' reference figure upto '£35k' added to you flat rate - as a maximum. So the future variable state pension (on top of the future 'full state pension of £9100*) would be between 0 and 2k. Another way to consider this statement is that everybody (who 'qualified') would get 9/11th or about 82% of the maximum allowed state pension. And everyone gets an 'additional' pension of 2/3rds the maxmium 'additional' pension (4k of 6k). Of neccesity therefore this 'universal' sum needs to be a decent amount - but can't be too much either.

*This would be £150pw in today's money