The Government White Paper setting out proposals for a new single-tier state pension was published on 14 January 2013, followed by a draft Pensions Bill. It is intended that, from 2017, those reaching state pension age and qualifying for a pension will receive a flat rate pension, with no state second pension or means-tested pensions credits. The changes will not apply to existing pensioners.

The White Paper can be found here and the draft Bill here

Summary of proposals for new state pension

Single-tier pension rising in line with earnings (with a proposed weekly amount of £144) – the actual uprating policy will be set shortly before implementation.

35 years’ NI contributions or credits (with a proportionate pension for those with a minimum number of years’ NICs – possibly between seven and 10 years).

Individual qualification (e.g no separate widow’s benefits).

Ability to defer taking pension, but no lump sum option on deferral.

Removal of S2P, contracting-out and means-tested pensions credits.

The end of contracting-out

Contracted-out employees will be brought back into the state system and will pay full National Insurance (NI) contributions (an increase of 1.4 per cent of relevant earnings). Employers will have an increase in NI liability of 3.4 per cent of relevant earnings. The Government proposes that employers will be given an overriding unilateral power to change scheme rules to reduce benefits or increase member contributions to offset the increased cost. This power would apply only to future accrual and would be limited to “changes to the extent that they offset the cost of additional employer National Insurance contributions” and will require actuarial certification.

There is no proposal to remove the employer consultation requirements in respect of any changes made to offset costs but no consultation will be required purely on ending contracting-out because this is the direct result of a change in government policy. This means that employers with at least 50 staff intending to make scheme amendments to offset the increased cost will be required to consult affected employees.

However, public sector schemes will not be able to pass the increased cost on to their members. The Government has committed to the recent public sector pension reforms lasting for 25 years and future changes are limited by the Public Service Pensions Bill. But, the Government is considering whether to override the “Protected Persons” legislation which currently protects future benefits for those from certain former nationalised industries (railways, coal etc.).

Transitional provisions

Transitional provisions will allow an individual’s existing NI record to be recognised at the implementation of single-tier pension, while also allowing people who had been contracted-out to build up to the full single-tier amount by making additional payments.

Very broadly, each individual’s notional state pension will be valued as at the implementation date to ascertain their “foundation amount” – this is the higher of the valuation of their state pension rights under the current rules and under the new rules. The foundation amount will include a deduction for anyone with periods of contracted-out employment. Once the foundation amount has been established, if it is below £144 (on current figures), the individual can add extra pension at the rate of £4.11 for every further qualifying year. If the foundation amount is higher than £144 at the implementation date, then the excess will be a “protected amount” which will be paid in addition to the basic pension.

Review of state pension age (SPA)

The Government will carry out a review of the SPA every five years, based on the principle that people should maintain a specific proportion of adult life receiving the state pension. This will be based on analysis of life expectancy projections by the Government Actuaries’ Department and an independent report on wider factors. The first review will take place in the lifetime of the next Parliament.