Supplementary written evidence from Paul Lewis (USP0114)

This evidence supplements and gives more detail on my oral evidence given to the Committee on 25 November 2015.

Introduction

The new State Pension is the biggest change in state pensions since the introduction of the State Earnings Related Pension Scheme (SERPS) on 6 April 1978. Indeed, many of the oddities and problems of the new State Pension relate to the unravelling of SERPS and its successor State Second Pension (S2P) which replaced it from 6 April 2002.

Replacing one system of pensions which few people understood with another which few understand will inevitably cause confusion. But those difficulties have been exacerbated by the decision to apply complex transitional provisions for those in the early years of the new State Pension. People who reach state pension age in the early years will get a mixture of both systems.

Even when the new State Pension is fully formed and the transitional provisions have disappeared with the passage time – by say the 2050s – the new State Pension will still not be flat-rate as it is often called. One in ten men and 15% of women who reach state pension age in those years will get less than the standard amount because they will have fewer than 35 years of National Insurance contributions required for the full pension.[1]

The 2050s are as far in our future as the start of SERPS is in our past. So it is of course likely that one or more changes will have been made to the state pension by then.

State pension age

The Conservative government of John Major considered raising the state pension shortly after the General Election of 1992. Plans to introduce the change were delayed at least one year for fear of the public reaction.[2] After that delay the Pensions Act 1995 was passed in July to raise state pension age for women to 65, equal to that of men.

The change was forced on the Government by Europe. Sex equality laws applied to social security but allowed a derogation for the state pension.[3] But that had to come to an end and the government was running out of time. It implemented the change through a leisurely timetable beginning in 2010 and running to 2020, raising the pension age for women by one month for every month rise in birthdate.

There was little mention in the press at the time. A cuttings search I did found a few references in 1995, often just a single paragraph in a longer piece and mainly on the business or finance pages of broadsheet newspapers.[4] The Department slowly changed its leaflets to mention the change.[5] It also claims it took out adverts between 2001 and 2004 but requests for details of them were refused by the FoI team on grounds of cost.[6]

In 1995 the women who would be worst affected were between 40 and 45 years old. The younger they were the longer their pension age would be extended.

In 1995 the millennium still seemed a long way away and 2010 still more 2020 seemed far enough in the future to leave most people unconcerned about it. Just as changes in 2030 to 2040 are not top of individuals’ agendas now.

That might explain the fact that it was almost 14 years before the Department began to write to the women who were affected. Information obtained by Freedom of Information requests reveals the timetable.[7] The first letters were written in April 2009 and continued until March 2011. They were done in batches by date of birth. The result was that women born between 6 April 1950 and 5 April 1953 were informed of the change at the age of 58 (a few outliers would have been just 59 or 57 within a few days of their 58th birthday). The average notice before they were 60 was just 1 year and 4 months.

This detailed information was not published by the Department until October 2015 after FoI requests by the campaign group Women Against State Pension Inequality (WASPI)[8]. This analysis of that data is mine.

Even more extraordinary than the 14 year delay from the passing of the 1995 Act was the five year delay after departmental research published in 2004 found that awareness of the changes was by no means universal.[9] It found that only 59% of working age people were aware that state pension would be changing for women. That fell to 43% for those not in a pension scheme at work. And the same percentage, just 43%, of the women who would be affected by the changes could identify their own pension age between 60 and 65.

The department sat on that research for five years before it began to write to the women who were affected to tell them what their state pension age would be.

Pensions Act 2011

That first wave of letters was halted when the Coalition Government considered raising state pension age for both men and women. The change was motivated not by Europe but by rising longevity and the growing future cost of the state pension which that would lead to.

Initially the rise for men and women was to follow the arrival at a pension age for women of 65 from April 2020. But the government decided that was not quick enough and proposed speeding up the change for women to April 2018 with a further rise to 66 by April 2020. After much debate and last minute amendments that was ameliorated slightly at a cost of £1 billion to bringing forward the rise to 65 to November 2018 and the rise to 66 to October 2020.

The Act was passed on 3 November 2011 and a second wave of letter writing was begun. Again the detailed dates for this have been revealed only recently through FoI requests.[10] The first batches of letters were sent in January and February 2012 to women born 6 April 1953 to 5 April 1955. They were told at the age of 57 or 58 about this double effect two changes to their pension age. The letters were sent on average two years before they were 60.

Further batches were sent from October 2012 to November 2013 to those born from 6 April 1955 to 5 April 1960. They were generally given a little more notice, though the oldest group born 6 April 1955 to 5 April 1956 were told less than 2½ years before they reached 60. Each year younger adds roughly nine months to the notice. So the most notice of five years before their 60th birthday was given to those born 6 April 1959 to 5 April 1960. They were told at an average age of 54½.

I measure the notice before their 60th birthday because for many that was the first time they were told about any change at all and certainly the first time they were written to specifically to inform them of their personal pension age.

Letters astray

Writing a letter is not always sufficient to inform people. Many of the most outraged women in the WASPI campaign claim never to have had a letter at all. I am still getting frequent tweets from women making that claim. I might add that I have never had such a response on Twitter[11] or to my blogpost on this issue.[12]

The Department admits that it wrote "using the address details recorded by HMRC at the time" and that the mailing was "subject to the accuracy of their address details with HMRC".[13]

I have been in contact with the credit reference agency Experian – one of the firms which cleans up data and addresses for commercial enterprises. It tells me that a global survey of personal data found

• 'on average 23% of customer or prospect data is suspected to be inaccurate in some way, shape or form'. 
• ' Organisations believe they could increase overall sales/engagement by 29% if their data was fully accurate and to the highest quality'.

These quotes are from a report which is yet unpublished. I am told it was not just looking at addresses and it was global rather than purely UK research.[14] Nevertheless it gives a scale to the problem of identifying people accurately before writing to them. Even a 10% failure rate would be hundreds of thousands of people.

Commercial firms in finance and marketing now use commercial data checking and cleaning services routinely. I have an FoI request in to the Department asking how many letters were returned and what it did as a result. It has not been answered yet but one source suggests that the Department may not have records to answer the first question and the answer to the second is almost certainly nothing.

I make this case about a key change such as state pension age to indicate that the Department has failed in the past to communicate the change in a timely manner clearly or at all to many of those affected.

How much will the new State Pension be?

Adding time to state pension age is a simple idea and easy at least to get across. The changes to the new State Pension are anything but simple.

There is no answer, for example, to the simple question ‘how much will the new state pension be?’ The standard rate is to be £155.65 from April 2016. But in the first years most of those who become entitled newly will not get that rate. New figures obtained by me from the DWP under FoI requests indicate that in the first five years of the new State Pension (2016/17 to 2020/21) 47% of men and 59% of women – a total of one million people – will get less than the full amount. See Table 1 below.

Table 1

Source: DWP[15]

Table 1 above also shows that in the first year the situation is much worse for women with 78% getting less than the standard new State Pension. The FoI information also shows that most of those who get less than the full new State Pension will get exactly what they would have got under the old pension rules. See Table 2.

Table 2

Source: DWP[16]

After that first year there are negligible numbers who will get exactly the same as they would under the old system because the rules of the new scheme allows those who work or pay voluntary contributions from 2016/17 to boost their pension. That is one of the complex rules that make the new scheme hard to understand.

Women born 6 April 1951 to 5 April 1953

Another area of different treatment between men and women affects women born 6 April 1951 to 5 April 1953. These women are triply disadvantaged compared with men of the same age.

• All will reach state pension age it before the new State Pension begins on 6 April 2016. So they will get the old state pension.
• They have also had a rise in their state pension of between one and three years.
• They fall into the group who were told around the age of 58½ that their pension age of 60 was being increased to between 61 and 63.

Men of that age by contrast

• Will get the new state pension
• Have had no rise in their state pension age

This group of women want the choice of new or old whichever is the greater.[17] The Government has resisted that claim on the grounds that they have at least had the old state pension for some years longer than the men they compare themselves with.

Women born 6 April 1953 to 5 April 1959

These women will reach state pension age between 6 April 2016 and 5 April 2025, the first nine years of the new pension. In that time 2.14 million will reach state pension age and 1.03 million (47%) will get less than the full new state pension. They have also suffered an increase in their state pension age of more than three and up to six years of which they were given an average notice of less than 2 and a half years. On average they were informed just after they were 57½ that their pension age would not be 60 but 63, 64, 65, or 66.

A smaller proportion of men – 38% - will get less than the full new state pension. They were given an average of more than seven and half years’ notice of a rise in their state pension age from 65 to no more than 66.[18]

The women see this, not unreasonably, as discrimination against them on grounds of sex.[19]

Contributions

To get the full amount of new State Pension an individual needs to have paid or been credited with 35 years National Insurance contributions. That is five years more than the amount which has applied to those reaching pension age from 6 April 2010 when a 30 year period was introduced. Prior to that men needed 44 years and women 39 years.

In the long term this rule will mean that about 10% of men and 15% of women will get a reduced pension. In the early years the percentages for women are slightly higher – 33% in the first year and 22% in the first five years. After that they stabilise around 15%, though are higher in the 2030s. For men the percentage is 10% in the first five years, then rises to 14% in the 2030s falling to 10% in the 2050s. But in almost every year and in every five year period the percentage of women affected by this rule is 3 to 12 percentage points higher than that for men.[20]

This rule undoubtedly discriminates against women right up to the 2050s when the DWP projections end.

It is also worth noting that another contribution rule change denies the pension at all to anyone who has fewer than ten years’ contributions. Estimates in 2014 indicated that in the first five years of the new pension between 45,000 and 60,000 UK residents (2% to 3%) and between 30,000 and 40,000 people living outside the UK (18% to 23%) would not get the new state pension due to this rule.[21]

No gender or year by year breakdown is publicly available even though the DWP holds this information. It recently an FoI request for them on the curious grounds that “the information is intended for publication at a future date”.[22] It would not be unreasonable to assume that women were again the main victims of this rule. By 2040 the savings from this rule were estimated in 2014 as £650m a year in 2014 terms.[23]

This rule clearly takes any pension away from many people who have moved away from the UK or not been here for a full working life. It also discriminates against women who have not earned credits or worked in jobs which paid enough to get them over the National Insurance contributions threshold. 

Those who live abroad in most countries of the world already suffer from the frozen pension which never rises with inflation.[24] Their case is being investigated by the All Party Parliamentary Group on Frozen British Pensions chaired by Sir Roger Gale MP.[25]

Transitional rules

The main reason for people getting less than the full new State Pension for the first ten or fifteen years are the obscure and difficult transitional rules. These establish on 6 April 2016 entitlement to state pension under (A) the old rules and (B) the new rules. Whichever is the bigger is called the foundation amount. That is the default payment – no one can get less than that.

For those reaching state pension age in 2016/17 that is the amount they will be paid. For those reaching pension age later they will be able to earn extra new state pension for each year of contributions that are paid or credited in years before the year in which they reach state pension age. In effect they will get the foundation amount or their new state pension entitlement taking account of their extra contributions.

So far so, almost, simple. But the really obscure rule that people object to is that the entitlement under the new state pension takes account of time when they were contracted out of SERPS or S2P and paying into a company or personal pension. That is done, roughly, by working out how much SERPS or S2P they would have got and deducting it from the new State Pension. Given that the standard amount is £155.65 and SERPS/S2P can be a maximum of more than £160 a week it is clear that some massive deductions will be made, in many cases reducing the new pension to below the old. So in 2016/17 many people will get just their old entitlement. Those retiring in future years will usually be earning a bit more new state pension by extra years of National Insurance contributions from 2016/17.

This transitional rule has been very badly explained (and to be honest I am not sure I have it completely right). It seems very odd to people that the deductions made for SERPS/S2P are so large, and for the years 1997/98 to 2001/02 the deduction is based on estimates as no records for the relevant period were kept. In many cases wiping out the £30 or so difference between the new and old pensions. Some claim that just a few years contracted out can remove any entitlement to more from the new state pension than the old.

GMP

The new State Pension replaces all the old accretions on the pension which have been around for years. Graduated Retirement benefit of a few pounds a week, the annual Christmas Bonus of £10, and the extra 25p a week given to those over 80 will disappear and probably not be missed.

But one valuable benefit is disappearing for people who were contracted out from 1978/79 and paid into a pension at work. To make sure they were no worse off than those who stayed in SERPS part of that pension – normally called Guaranteed Minimum Pension (GMP) – was paid by the work pension and explicitly labelled as such. At the time pensions from work did not have to rise with inflation. But the state pension did. So the DWP paid the inflation proofing on the GMP as an explicit and separate amount in the state pension. When limited inflation proofing was introduced for work pensions the DWP paid the inflation proofing above the 3% limit which applied to work pensions.

This inflation proofing could be very valuable. One example I have seen for someone who reached pension age in 2004 shows GMP inflation proofing (called ‘payable additional pension’) of £4.73 a week in April 2004 rising to £27.16 a week in April 2014.[26]

This amount will be included in the foundation amount. As part of the new State Pension it will normally be raised each year by the rise in earnings. But that rise is on the additional amount - £27.16 in his case – not on the notional amount of SERPS/S2P earned up to 1997 which was £120.30 in 2004. So in the long-term he will get an earnings related rise of 4% on £27.16 rather than a 2% prices rise on £120.30 which would be £2.40. That loss of £1.40 a week will grow over his remaining years. Those long-run estimates of earnings and price rises are from the OBR and are different at the present time.[27]

Derived amounts

Only the state pension system could call a fall-back pension paid to a wife a ‘derived amount’. These category B pensions (a slightly less obscure name) are about 60% of the basic state pension paid on full contributions. From April 2019 those will be £119.30 for the full pension on own contributions and £71.50 a week for a spouse who has earned a lower pension than that on their own contributions.

The rules also allow a spouse who is widowed to get a pension based on their late partner’s contributions, effectively giving them at least a full basic pension.

Under the new State Pension no pension can be paid to a spouse on their partner’s contributions, before or after death. (There is an inevitable hinterland of transitional exceptions but they will apply rarely and only in effect for the first few years of the new state pension).

The people who benefited from Category B pensions were almost exclusively women. Indeed, they were designed for wives, who in the past typically did not work and pay contributions. Though with sex discrimination being outlawed they would in future have applied equally to male and female spouses or civil partners.

Their abandonment is most definitely discrimination against women.

Communications

Communication of the new State Pension has been dire. There have been ministerial articles in newspapers but they inevitably are positive and upbeat and fail to explain the many downsides, some of which I have set out above.

There is a limit to how much people will engage with the rules of a pension that they will not get for many years. So communications should concentrate on how the scheme will affect people who will reach state pension age in the next five or at most ten years.

For them the single tier or flat-rate pension will in fact be anything but flat-rate or single tier. As I said to the Committee it will be more of a vale of tears when people realise exactly what they will get. For most people, at first it will not be the flat-rate, for most of those it will be less, and for most of those it will be little or no more than the old pension would have given them.

So explaining the transitional rules and the contribution rules are important.

But much more important than ‘why’ is ‘how do I improve it?’ Departmental communications about that are poor. Not least because of the nature of the rules.

• If I have fewer than 35 years National Insurance contributions now should I pay more (answer generally no).
• If I have fewer than 30 years now should I pay more? Answer, maybe yes.
• If I have fewer than 35 years contributions should I pay more from April 2016? Answer yes.
• If I have 35 years should I pay more from April 2016? Answer probably yes.

After setting out clearly the choices and the general answers, more detail is needed in explaining the rules and how they work, what buying extra will cost, what that will gain in extra pension, and the circumstances when it is worth doing, and the deadlines for taking action. All those are important questions and clear answers are vital. But no simple guide exists.

What is clearly needed is an online system where an individual’s record can be pulled up and all those what-if questions can be answered in a system that guides the individual through the questions and answers so they can make rational choices. And if they are given the wrong answer and act on it then the Department should be ready with refunds and compensation.

That will not help the estimated 3.5 million households who do not have internet access or the 11 million adults in Great Britain who do not access the internet frequently.[28] Being poor, living in rural areas, being disabled, and being old are all associated with lower internet access. And for interactive sites to log on securely and do what-if calculations internet access is not enough - fast broadband is required. Even government plans envisage 5% of the country being without that by the end of 2017. For many in rural areas fast broadband remains a dream.[29]

So there will remain the need for telephone and face-to-face information and advice for many people for some years. That could be done by broadening the remit of the knowledgeable advisers at The Pensions Advisory Service, Pension Wise, or Age UK to provide advice as well as ‘guidance’ and giving them explicit permission to access this computer system on behalf of the enquirer.

Providing money for that service is more important than general advertising about the new state pension which inevitably is inevitably at a high level of generality and reaches few people who need the information the most.

Financial conclusion

The Committee has heard from the former Minister Rt. Hon. Steve Webb who told the Committee that he was expected by the Treasury to introduce his new pension system at nil cost.

Every one of these matters of unfairness or complexity described in my evidence was introduced to reduce the final cost to meet the Treasury demands. My understanding is that in the long term the new State Pension will cost less than the old state pension would have done. The Office of Budget responsibility has said that raising state pension age alone will save 0.9% of GDP (£15 billion in 2014/15 terms) in 2063/64. That would reduce public sector net debt by 17% of GDP by that date.[30] The Chancellor has said that raising state pension age was the biggest cut in expenditure he ever made.

It is therefore incumbent on the Department to do all in its power to ensure that the new regime – in terms of state pension age, new State Pension rules, and transitional provisions – is adequately explained to the millions of people who will be affected.

November 2015