NORTHERN IRELAND ASSEMBLY
COMMITTEE FOR SOCIAL DEVELOPMENT
Pensions Bill
21 June 2007
Members present for all or part of the proceedings:
Mr Gregory Campbell (Chairperson)
Mr David Hilditch (Deputy Chairperson)
Mr Mickey Brady
Mr Thomas Burns
Mr Fred Cobain
Ms Anna Lo
Mr Fra McCann
Mrs Claire McGill
Miss Michelle McIlveen
Mr Alban Maginness
Witnesses:
Mr Gerry McCann (Department for Social Development)
Mr John O’Neill (Department for Social Development)
The Chairperson (Mr Campbell):
We come now to the proposed Pensions Bill. I welcome John O’Neill and Gerry McCann from the Department for Social Development’s social security policy and legislation division. The proceedings will be recorded by Hansard. I ask members to try to keep their question specifically to the subject.
The Bill is quite complex, Mr O’Neill, and I do not think that you need the Chairperson of the Committee for Social Development to tell you that, but I will do so anyway. To get through this as painlessly as possible, we should use language that we all understand and keep the acronyms down to a minimum, so that we do not have to keep going over things. That way we might get through this faster than might otherwise be the case.
Mr F McCann:
I understand that the Minister intends to seek accelerated passage. I take it that there will not be a decision on that today?
The Chairperson:
No.
Mr John O’Neill (Department for Social Development):
As you know, the Executive are preparing their legislative programme over the summer, and the Minister for Social Development has made a number of bids for inclusion in that. One of those bids will be for a Pensions Bill, which will correspond to the Bill that is currently before the House of Lords. It is quite likely that if that is successful, the Bill will be coming before the Assembly immediately after the summer recess. We wanted an opportunity to come to the Committee and explain what is in the Bill and what the implications might be for Northern Ireland. This is a strict parity measure in line with most of the legislation on social security and pensions that comes before the Committee.
The current pensions system has been described as impenetrable, even by experts. It is complex, and there are a number of layers. Many people build up pensions from a variety of pension vehicles over their working lives. They may even have residual rights that go back to pension schemes that they left a number of years ago.
Basically, there are three tiers in the pension system. There is tier one, which is the basic state retirement pension that everyone knows about, although there are four different categories of that.
Category A is based on the National Insurance contributions that people pay or get credited. A category B pension is based on the spouse’s, or civil partner’s contributions —that is, a wife’s, a civil partner’s, or a husband’s contributions. Category C, which in theory exists, is really for people who were over pension age in 1948. There are no people left in that category in Northern Ireland, but it is still on the books as a category of pension.
The Chairperson:
That sounds like something of an anomaly.
Mr O’Neill:
One has to wait until one is sure that there are actually no people who were over pension age in 1948 left alive, or their widows.
The Chairperson:
That would make them 125 years old.
Mr O’Neill:
Apparently, there are 70 people still alive in Great Britain who were over retirement age in 1948, or their widows.
Mr Gerry McCann (Department for Social Development):
They fall under category C pension still. There are still some people around.
Mr O’Neill:
Then there is category D, which is for those who are over 80. That was known as the very traditional old-age pension, which people acquired at 80 whether they had contributed or not. There are still some of those people around, and that is the only basic pension that they receive. All employees and self-employed people who earn over a certain limit — lower earnings limit, as it is called — pay National Insurance contributions and therefore earn entitlement to the category A basic state pension.
There is also a second tier — the additional pension. Between 1961 and 1975, it was called graduated retirement benefit. From 1978 to 2002, it was called the state earnings related pension scheme (SERPS). Since 2003, it has been called the state second pension (S2P). All employees who earn over a certain amount earn the additional pension unless they have contracted out. Certain carers and people who earn under a set amount are deemed to have income of a level that would enable them to earn S2P as though they had earnings of £13,000.
The third tier is the private pensions sector, which is largely privately funded but is incentivised through tax relief. Private pensions include employer-run occupational pension schemes — as a result of which both employer and employee pay lower National Insurance contributions (NICs) — and personal pensions, which are normally entered into by individuals although a contribution is also paid by Her Majesty’s Revenue and Customs (HMRC). That tier is entirely voluntary.
In the event that an occupational pension scheme or sponsoring employer is unable to meet its obligations, a safety net called the pension protection fund, which has been in existence since 2005, will provide up to 80% — up to a maximum of approximately £30,000 — of what the person would have expected to receive. For schemes that went bust before the pension protection fund was established — in Northern Ireland that applies especially to members of the Richardson’s Fertilisers pension scheme — the financial assistance scheme can provide help in certain circumstances. The cap on assistance under that scheme will increase to £26,000, and the de minimis rule that currently operates will be removed.
There is also pension credit, which was previously known as the minimum income guarantee. Pension credit pays a credit to ensure that no pensioner who is single has an income of less than £119·05 a week and that no pensioner couple has an income of less than £181·70 a week. Pension credit includes a savings credit that rewards those over 65 who have saved for their pension. The savings credit provides up to a maximum of £19·05 a week for a single person or £25·26 a week for a pensioner couple.
The Bill contains reform measures that flow from the report of the independent Pensions Commission, which is known as the Turner Commission. The commission produced these three reports a number of years ago —
The Chairperson:
I hope that Mr O’Neill is not going to give those out.
Mr O’Neill:
The commission was chaired by Adair Turner, who used to be the chairman of the Confederation of British Industry (CBI). The final report suggested that we needed to improve the coverage, generosity and sustainability of the state pension and to provide some simplification measures for private pensions. The subsequent White Paper in which the Government consulted on the proposals received only three responses from Northern Ireland organisations: Help the Aged, Advice NI and the Women’s Support Network.
The aim of the proposals is to recognise the different ways in which people contribute to society by ensuring that carers have a better opportunity to accrue pensions. Currently, only 40% of women in Northern Ireland are entitled to a full category A pension based on their own contributions. Many women have a pension that is based on their spouse’s contributions. Under the proposals, it is anticipated that the proportion of women attaining pension age with a full basic pension will increase to 75% by 2010 and to 90% by 2025.
The Chairperson:
Is that perhaps optimistic?
Mr O’Neill:
No. We know that more and more women now participate in the workforce. However, as I will explain later, many women need to leave the workforce for caring and child-rearing activity. We are improving the credit that they will get in those circumstances so that, when they reach pension age, they will have a greater entitlement in their own right. By 2025, we expect that 90% of women who reach pension age will earn a pension that is based on their own contributions or on the credits that they have received.
The Chairperson:
However, the proportion will almost double within the next three years. Is that right?
Mr O’Neill:
It will increase to 90% by 2025.
The Chairperson:
Is the figure expected to increase from 40% just now to 70% by 2010? Is that right?
Mr G McCann:
The number of qualifying years will drop from 39 to 30 years.
Mr O’Neill:
To earn a pension, a man currently needs a contribution record of 44 years, and a woman needs a contribution record of 39 years. Under the proposals in the Bill, the threshold will drop to 30 years for both men and women.
The Chairperson:
The change in the number of years will effectively —
Mr O’Neill:
The change will quickly bring many women into full provision.
I will now outline the main provisions of the Bill. It is intended to improve the coverage, generosity and sustainability of state pensions by linking the uprating of the pension credit standard minimum guarantee and the basic state pension to earnings. At present, both are linked to prices.
The Bill is intended to improve entitlement to the basic state pension for women and carers by enacting a single condition of 30 qualifying years, instead of 44 years for men and 39 for women, as exists at present. It revises and modernises credits for caring that will apply to both the basic state pension and the second state pension. In order to flat rate and simplify the state second pension, the earnings-related component will become smaller over time and disappear by around 2030. A single flat rate component will replace it.
In response to the aging demographic profile of the population, it is intended gradually to raise the state pension age from 65 to 68 in three tranches, between 2024 and 2046. The Bill provides for consequential amendments to other social security benefits.
The Bill will abolish adult dependency increases for category A and category C retirement pensions, which will simplify the rules for the state pension, as the rules governing entitlement to adult dependency increases are complex. That reform flows from the increasingly outdated policy rationale for adult dependency increases, which is based on the concept of a single-breadwinner household. It reflects the change from the situation in 1948, when a majority of women were not in work, to the present day when many more women are in the workplace.
We estimate that, by 2020, additional spending on pensioner benefits as a result of the Bill is expected to be some £600 million per annum at 2006-07 values. That is in addition to an already projected annual cost of pensioner benefits of £4 billion per annum by 2020. Statistics show that of the 262,000 pensioners currently in receipt of retirement pension in Northern Ireland 36% are male and 64% female. On average, £24 million a week is spent on pensions.
The Chairperson:
Is the significant gender disparity due simply to women’s longer life expectancy?
Mr O’Neill:
Women tend to live longer than men, and they receive pension from age 60; therefore there are more women than men in the pension system. The average payment of retirement pension is £90·66 per week, but that takes no account of pension credit. It is simply payment of state pension.
Mr Cobain:
Could Mr O’Neill return to the earnings issue? Is there a move to pensions that are related to earnings rather than to the retail prices index (RPI)?
Mr O’Neill:
Yes. I am unsure of the date for that; it is stipulated in the Bill. I will return to that.
I turn now to what will be done in the field of private pensions. This is where it becomes quite complex.
The Chairperson:
I thought that might be the case.
Mr O’Neill:
The Bill would permit the trustees of defined benefit, contracted-out occupational pension schemes to simplify scheme structures by converting guaranteed minimum pensions that relate to certain pension rights earned before 1997 into ordinary scheme benefits. However, those ordinary scheme benefits must have at least equal actuarial value to the guaranteed minimum pensions.
It will also abolish contracting out in defined contribution schemes. The pension system is complex, and it is difficult even for experts to make a judgement call about whether an individual in a defined contribution scheme would be better off contracted out or contracted into the state second pension. This provision removes the need to make that difficult decision.
It is also the intention to enable occupational pensions schemes to operate simpler internal dispute resolution procedures. That will remove the requirement for the Department for Social Development to approve actuarial guidance notes relating to pension schemes and provide for the initial functions of the personal delivery accounts authority, which will operate on a UK-wide basis, in preparation for the introduction of a personal retirement accounts system to enable people to save for their retirement.
That is as simple as I can make it.
The Chairperson:
Thank you, Mr O’Neill and Mr McCann. Pensions can be a very dry subject.
Mr O’Neill:
I heard a member refer to accelerated passage. In the case of social security Bills, it is normal to apply for accelerated passage. However, the Minister makes that decision on a Bill-by-Bill basis, and no decision has yet been made with regard to this Bill. The Minister will decide closer to the time whether to apply for accelerated passage for this Bill.
The Chairperson:
I understand.
It was mentioned that, due to age and the number of years of contribution, there will be an increase from 40% female qualification for a full pension to 75%. Has there been any research into the net effect for retirees, in terms of additional income that they will receive as a result of the change in 2010, when the 75% figure for females is reached?
Mr G McCann:
I am not aware of any such research. I could find that out and write to the Committee. I do not have any statistics with me.
Mr Brady:
Mr O’Neill mentioned that £24 million a week is spent on pensions. However, the pension is a contributory benefit. There is a perception that it is a state handout, but it is not. The pension here is lower in comparison to other countries in Europe.
Mr Cobain raised the issue, which interested me, of pensions being linked to earnings rather than to the RPI. Would that be better for pensioners? I am not sure what logistics are involved in deciding on a figure for average earnings. Is there is a comparison over a range of occupations or will the figure be set just above the benefit level?
Mr O’Neill:
Pensions were linked to earnings until the 1980s. Then the break was made, and they have been based either on the Rossi index or on the RPI.
Mr Brady:
Considering the mess that was made of SERPS, whereby people were told to contract out and contract back in, I hope that the current proposals are an improvement on that.
Mr O’Neill:
The problem is not just the rate of contribution to a pension, but also the help that is provided through the taxation system — the rebate. It is a very difficult calculation, given that we do not know what the Chancellor will do. The Chancellor has a role as well as the Department for Social Development, and the Department for Work and Pensions in Great Britain. The calculation of the link between earnings and pensions will be made by the Secretary of State for Work and Pensions. There are relevant provisions in the legislation, the detail of which will be decided closer to the time.
Mr Brady:
My other concern is the possible accelerated passage of the Bill. We are on a steep learning curve, and if the Committee could scrutinise the Bill after the summer, it could study the legislation in depth, rather than be castigated for agreeing to aspects of it that were not fully understood. Legislation is complex and must be studied in depth. I hope that the Committee will be better prepared next time.
Mr O’Neill:
There will be a much greater opportunity to study the Bill this time.
Mr Brady:
I am glad to hear that.
Miss McIlveen:
As the youngest member of the Committee, I probably know the least about pensions. The Bill is now at Committee Stage in the House of Lords. What issues were raised during the House of Commons debates on the Bill?
Mr O’Neill:
I have looked at some of the debates. One change will be made. Initially, the Bill stated that carers would get credits. There will be an amendment that provides for situations whereby someone is entitled to a benefit, such as disability living allowance (DLA) or attendance allowance, but even though they do not claim it, the carer is not entitled to credits. The amendment will provide that if a health or social care professional certifies that someone is a carer, that person is able to obtain credits in the pension system. That amendment will be introduced at some stage during the passage of the Bill.
Much discussion has centred on some of the regulation of the occupational pensions industry. The discussion on that aspect of the Bill tends to be among a few experts in the House of Lords who have worked on occupational pensions schemes for a long time. There have been no major changes to the Bill during its passage.
Miss Mcllveen:
There is a parity issue. Will any amendments that are made at Westminster be automatically included in the Bill that is introduced here?
Mr O’Neill:
In Northern Ireland, there is separate legislation on occupational personal pension schemes. As far as we are aware, there are no providers of occupational personal pensions that are based in Northern Ireland. Most of the providers, such as Friends Provident and Standard Life, are based in Edinburgh or London.
There are separate public service schemes in Northern Ireland. Some 32% to 33% of people in Northern Ireland work in the public sector. Therefore, there is a high coverage of public sector pension schemes through the Civil Service, local government, the Health Service, the education sector, the police, and so on. In Northern Ireland, there is a below-average provision of pensions for people who work in small and medium-sized enterprises. Those people have less provision of personal and private pensions than their counterparts in mainland GB.
That is one of the areas on which we are working, because it is evident that with the workforce declining, and people living longer — what is termed the “demographic time bomb” — there cannot be a situation in which more and more people, when they reach retirement age, are dependent on state benefits. There is going to have to be a situation in which the state provides some help in retirement, but people are going to have to save more towards providing assistance for themselves in their retirement.
The received wisdom is that, to have a reasonable life in retirement, provision from various sources is needed — savings, pensions, and other sources — of between one third and one half of what was being earned while in work. No Government in the world could provide income of that level through the state benefit system. Therefore, people are going to have to make choices and start preparing much earlier in life.
The difficulty is that people on low incomes, and those starting off in employment, have other demands on their income. It is a question of when people start saving — the earlier the better. If pension entitlement is built up by people from their 20s to their 60s, they will have 40 years’ provision. The later one starts, the more difficult that is to make up. Therefore, our view is that people need to be encouraged into the pension system as early in their working life as possible.
There will always be those who, through severe illness or for other reasons, cannot contribute to that system, and the state safety net will always be there through the state pension system and various other benefits, including disability living allowance and severe disablement allowance.
Mr F McCann:
Part of what I was going to ask has been covered. A lot of people depend on the public sector for paying into pensions, and Mr O’Neill is right: there is a sizeable number of people who are on low incomes. What has been outlined will have a big impact on them because they can barely meet their weekly needs now. Is the fact that the pensionable age is rising contributing to the change?
Mr O’Neill:
The pensionable age is rising because people are living longer and are generally healthier. A man can now expect to live for perhaps 20 years after retirement. It was a lot less than that, 20 to 30 years ago. Therefore, the state is paying out a lot more in pensions for a lot longer. In financial terms, that is unsustainable in the long term. There is a pay-as-you-go system for pensions, whereby the money that comes in through National Insurance contributions is recycled into the pension system. If more money has to be paid out through the state retirement pension, more money needs to be raised through National Insurance contributions or taxes.
The Chairperson:
Is it not true that after 2020, there will be significantly fewer women in that category because their age profile will have risen?
Mr O’Neill:
They will still be receiving retirement pensions.
The Chairperson:
Five years later than they currently do.
Mr O’Neill:
Yes.
The Chairperson:
Therefore, that will mean a significant saving to the Exchequer.
Mr O’Neill:
There will be some saving. However, those women, when they reach the age of 65, will still be living longer, and they will have to be paid for a lot longer.
The Chairperson:
Yes. However, if they were living, on average, to the age of 90, they would currently be able to get a pension for 30 years. After 2020, if they still live to the age of 90, they will only get a pension for 25 years. That is bound to create a significant saving.
Mr O’Neill:
There will be more and more of them who are living to the age of 90.
The Chairperson:
That is right — and that is happening anyway. However, after 2020, there will be a five-year saving because females will be paid five years later than they are today.
Mr G McCann:
We are working on the basis of those figures. The savings from raising pension age for women are already factored in.
Mr O’Neill:
The system is pay-as-you-go, and, therefore, the money that goes into National Insurance contributions is recycled out as pensions. More and more people are getting the state pension, and the workforce contributing through National Insurance contributions is declining. In 1948 there were four workers for every pensioner. That is now down to 2·4 workers supporting every pensioner, and it may go as low as two workers supporting every pensioner. Those workers are being asked not only to fund the National Health Service and everything else, through the tax system, to pay for pensions for those who are retired but also to save more for their own retirement when they reach 65 years of age. We call it the demographic time bomb; we have to plan now for what will happen.
The Chairperson:
The fuse seems to be getting quite short.
Mr O’Neill:
It is, yes. That is one reason for the increase in the age when people receive the state pension. With no disrespect, the later changes will not affect most of the people in this room. The first change will be the increase in the pension age for women from 60 to 65, which will take place incrementally from 2010 to 2020. The next two changes will occur between 2024 and 2046, when people will have to wait an extra year for their state retirement pension, and that will affect only the people starting out in the workforce now.
Mr Burns:
Mr O’Neill said that people should start to save earlier and build up their pension contributions. However, mortgage repayments are going through the roof, and people are using all their money to pay those; they will not have any money left to put into a pension scheme. People are still sceptical about pension funds and wonder whether the money saved will be relevant, or meet their needs when they reach the age of 65. What additional benefits would people gain from not having a private pension, as opposed to what they would gain if they did? Many people are not sure when to start saving for an additional pension.
Mr O’Neill:
One of the difficulties of recent years has been the student-loans system. A lot of students are now leaving university with a high level of debt, and servicing that debt may take priority over saving for a pension.
The Maxwell pension scandal, to a certain extent, gave private pension plans a bad name. However, the pension protection fund, which is funded by a levy on all schemes, is now in place to protect those who invest in defined benefit occupational pension schemes. The protection fund has only just begun, and it will take some time to build up reserves to meet any demands made on it. There is always a role for the trustees of pension schemes to keep an eye on what is happening. The primary duty of those trustees is to ensure that money is invested properly and that everything goes OK. They have a critical role to play. We hope that the pension protection fund will give people the assurance that they need.
I accept that for a person coming into the workforce at 20 years of age, a pension is something that is 40 to 45 years ahead, and it is not given much thought. However, with people living longer, and with greater demands on Government expenditure, thought will have to be given to the provision of a pension and building it up. The Government, and other organisations, will have to educate people and convince them of the need to contribute towards their retirement. The Government will also, through the pension protection fund, have to guarantee that the schemes people invest in will pay out at the end of the day.
Most of the money invested in personal and private pensions is then invested in the stock market or in Government bonds. Shares can go up and down, and the proceeds, to a certain extent, depend on the state of the stock market.
Personal accounts are being introduced.
This will be a new type of pension, aimed at the lower end of the earnings scale. The Bill paves the way for powers for the personal accounts delivery authority, and it is likely that a further Pensions Bill will set up personal accounts. Those will have contributions from the employer, the employee and from the Government, and, will be in addition to the existing stakeholder pensions and the other types of available personal and occupational pension schemes.
The Chairperson:
There was much controversy surrounding those pension schemes in their early stages.
Mr O’Neill:
Stakeholder pension schemes have not been as successful as was originally thought, and the take-up has not been high. It is likely that personal accounts will have to be provided. Stakeholder pensions offer the facility to take out a pension; they do not have to provide it. However, it is likely that people will be assumed to be in the personal accounts system unless they have asked not to be in it. Auto-enrolment has been proposed; people will have to opt out.
Mr Brady:
The Government have to bear a fair amount of responsibility for the state that pensions are in. Between 1979 and 1989, the National Insurance fund went into the red for the first time in its history because, essentially, it was being funded by the Government to subsidise private pensions. Official Governments statistics show that the Government policy could have been better managed, and the problem with pensions should not have been allowed to happen.
I agree that the length of time taken to pay back student loans is a big issue. Students now leave university with debts of between £10,000 and £15,000, and do not see pensions as a priority.
Mr O’Neill:
The National Insurance fund is a matter for the Chancellor of the Exchequer and HM Revenue and Customs; it is not something that we in Northern Ireland have control over.
Mr Brady:
I understand that, but the National Insurance fund did go into the red for the first time in its history.
Mr O’Neill:
The Northern Ireland fund has to be topped up by a balancing payment from Great Britain.
The Chairperson:
The issues surrounding stakeholder pensions and SERPS were raised earlier. Is it correct that defined contribution pension schemes will not be able to contract out of the state second pension (S2P) from the date that the earning link to the basic state pension is restored?
Mr O’Neill:
Yes, that is correct.
The Chairperson:
What are the likely consequences of that for those contracting in in the early stages and those contracting out of SERPS? Now that people will be unable to contract out of S2P at that point, what are the likely consequences?
Mr G McCann:
Anything that a person has earned up to a particular time has safeguarded rights; they are safeguarded if that person stays in the scheme.
The Chairperson:
What will the effect be on an average individual who over the past ten or twelve years decided, initially, to contract out because of Government suggestion at that time and then contracted back in, who now has an S2P and has been told that he cannot contract out? At what point will the link between earnings and pension be restored? Will it be, perhaps, 2012?
Mr G McCann:
We do not know. That is up to the Chancellor of the Exchequer.
The Chairperson:
Regardless of when it is restored, what effect will the inability to contract out have on an individual?
Mr G McCann:
I cannot answer that question without doing further work. I can write to you with some figures.
Mr O’Neill:
An individual will have a pension that is based on some provision from his private scheme and from S2P. His or her pension will come from at least two sources.
The Chairperson:
I understand that; however, people need to know how much they will receive.
Mr O’Neill:
The Department will have to assess an individual’s income level. If someone has been earning SERPS, and now S2P, for a number of years, the Department will amend the income level to determine the consequences.
The Chairperson:
Suppose that a person on average earnings reaches the point when he or she can no longer contract out of the state second pension (S2P) in 2012. What effect would the decision to contract out for five years have on his or her pension?
Mr G McCann:
We could calculate those figures, but not now.
The Chairperson:
I appreciate that.
Mr O’Neill:
We will look at that, but we cannot give you answers now.
Ms Lo:
I wish to ask about women. Currently, women who have not worked for enough years, and who do not have a spouse to rely on for a pension, receive income support that is less than a pension.
Mr O’Neill:
When they reach pension age?
Ms Lo:
Yes.
Mr O’Neill:
They get pension credit, which guarantees them £119 a week. There are situations in which women, who have been receiving income support of £50 to £60 a week at age 59, retire at age 60 and immediately receive £119 a week — which is quite a step up — due to pension credit.
There is also home responsibilities protection (HRP), which cuts the number of qualifying years needed for a pension and is a system of credits for those people, particularly women, who leave the pension system to rear children and for various other reasons. It is similar to having paid National Insurance contributions for those lost years, and they can be used to increase their entitlement by building on the number of years that they have already accumulated. The drop in the qualifying period from 39 to 30 years will make it much easier for women to achieve a full pension using benefits accrued during their working life in combination with home responsibilities protection.
Ms Lo:
Women will generally welcome that, and it is recognition of their role at home looking after children.
Mr O’Neill:
Women also tend to be the carers, and the provisions for carers will help them as well.
Ms Lo:
In 2010, you say that the pension age for women will rise to 65.
Mr O’Neill:
That rise will occur progressively over 10 years. A woman who reaches 60 in 2011 will have her retirement date delayed by nine or 18 months, or whatever the figure is. By 2020, pension ages will be equalised for men and women. There are plans for two further increases in the retirement age between 2024 and 2046.
Ms Lo:
How well publicised is that in relation to women in their late 50s?
Mr O’Neill:
Those measures have been in legislation since 1995.
Ms Lo:
I just wonder how many women who are now in their 50s know of that.
Mr G McCann:
Leaflets, in which the coming changes and the need to plan have been clarified, are available through various systems.
Mr O’Neill:
We are working with other Government Departments that use people’s entitlement to pensions as a passport into benefit entitlements. For example, the Department of Health must be aware that a person’s entitlement to free prescription charges has begun, and the links with the Department for Social Development allow that to happen.
The Chairperson:
Will women who are employed in the public sector be informed of that gradual change to their retirement age as they approach what would have been their retirement age?
Mr O’Neill:
There are two distinctions. There is the age at which people will be entitled to the state pension, which will change for women between 2010 and 2020, and there is the age at which people will be entitled to a pension under whatever scheme of which they are members. Most public-sector schemes have a retirement age of 60 or 65. In a scheme such as that in the Civil Service, a person can retire at age 60, but must wait for a further five years before becoming entitled to the state pension. There is no link between the age at which a person will receive the state pension and the retirement age of any scheme of which a person is a member. Unless the law is changed, the lowest age that benefits can be taken from a final salary scheme is 50.
Mr G McCann:
I think that will change to age 55, but that is not under pensions law; it is a tax matter.
The Chairperson:
Is that for personal pension schemes?
Mr O’Neill:
It is for personal —
Mr G McCann:
It is for occupational pensions. At the moment, that is a tax matter. It is not our —
Mr O’Neill:
Some schemes can pay out from the age of 50, but they will not be able to do so in future, except for special occupations such as professional footballers and firemen, which pay out earlier due to the nature of those jobs.
Mr Burns:
The Chairperson touched on the subject of SERPS. Will you explain what SERPS is and contracting in or contracting out means?
Mr O’Neill:
SERPS and S2P are pensions that are additional to the basic state retirement pension. Anyone with an occupational scheme that provides benefits equal to those that would have been provided by SERPS can opt out, ie not pay into the state scheme.
People have always had to decide whether it was better for them to stay in the state scheme — SERPS, or S2P, as it is now — or to be in their occupational scheme. Over the years, the calculation on whether one is better off in one or the other has varied depending on how well the stock market is doing, and how much the pension pot would yield. A defined contribution occupational scheme provides a certain sum of money, with which an annuity must be bought.
The Chairperson:
Is that is the case at the moment?
Mr O’Neill:
Yes. One’s annuity must be bought by the age of 75. What can be bought in an annuity — which is bought from an insurance company — depends on the state of the market at the time. It also depends on gender. Women tend to live longer, and therefore the annuity amount that they can buy tends to be less than that which a man can buy; however, pension is paid out to women for a lot longer. The public service schemes generally pay a lump sum and an annual pension, which is usually linked to inflation.
Therefore, the amount that anyone can get out of a defined contribution occupational scheme — the pot at the end — will vary, depending on how good the investment advisers have been and on how much they have made from investing the money that is in the scheme. Sometimes, the amount expected is more than one would get from a S2P, so there has always been the need to take advice on whether it is better to stay in the state scheme — whether SERPS or S2P — or stay in the occupational scheme.
The Chairperson:
Is that the reason that many people were in SERPS, and then were out, and then went back in again?
Mr O’Neill:
Yes. When personal pensions were introduced, there was a great deal of mis-selling whereby people, particularly in public sector, such as health service or teachers’ pension schemes, were told that it would be much better for them to leave their schemes. That was not the case; those decisions were based on bad advice and mis-selling. That situation has been dealt with.
The Chairperson:
That is why I made the point that an impression has been created that people were contracting out of SERPS, and then advised to go back in again — and some people have come back out again. There will come a point in the foreseeable future at which individuals will no longer be able to do that. I would have thought that, at that point, people would wish to be clear that their inability to do that does not disadvantage them. That is why I asked my question, and we need an average figure.
We know that the contracting-out option will end, although there is no specific time for that. We need to be clear that its ending does not disadvantage those individuals who will no longer have the option to opt out. Up until now, they have exercised that option — many of them a number of times — depending on whether their circumstances rendered it advantageous to remain in a scheme. If that option is to be withdrawn, we need to be clear about what it will mean for individuals who are on an average wage. That is why it is so important that we get those figures.
Mr Burns:
Yes, that is exactly the problem. If pensions advisers are asked for help, they will say that they cannot offer advice, and that independent advice must be sought. That is because, if the wrong advice is given and everything goes wrong, the adviser is blamed. Therefore, the decision is left to the individual; the individual must take advice on his or her own pension. Advice changes — albeit not from day to day, or from adviser to adviser, but it is a minefield.
Mr O’Neill:
The difficulty is that we are all individuals, and pension earnings will depend on someone’s age, where he or she is in the labour market, how close he or she is to retirement, and the prospects of earning more money before retirement. Opting in or out of a scheme is very much an individual calculation. Someone at the beginning of his or her working life, with perhaps 20 to 30 years in employment ahead, has a much greater range of options than someone in his or her late 50s or early 60s, whose opportunity to earn more pension entitlement is very limited, therefore it must be an individual decision.
The majority of financial advisers recommend that most people who have invested in a final contribution pension scheme opt back into S2P. However, that adviser must be qualified to give that advice. Various bodies, such as The Pensions Advisory Service (TPAS), can give general advice on pensions.
Mr Cobain:
The big issue about the SERPS was that people who were in that pension scheme got very little return on the money that had been invested on their behalf. The Government encouraged those people to leave that scheme and to take out private pensions. Subsequently, there was a run on the stock market throughout the 1990s, and there were huge payouts for those who had invested in it.
The difficulty with occupational pensions is that investment is outside, in the stock market and in bonds. Given that the stock market goes up and down, there is no guarantee that someone with an occupational pension will, on reaching the age of 65, get a fixed sum. That will happen only with a SERPS pension. That type of pension can track someone’s earnings throughout his or her working life, but that will not happen with an occupational pension scheme. No occupational pension scheme — except that to which Assembly Members belong — will guarantee a person a fixed sum at the age of 65. It cannot be done.
Mr O’Neill:
I understand that the Assembly’s pension scheme is like the Civil Service defined benefit pension schemes, meaning that it is based on —
Mr Cobain:
There are no final salary pension schemes anymore, outside of ours.
Mr O’Neill:
There are some.
The Chairperson:
Their numbers are decreasing.
Mr O’Neill:
There are some, but they are falling in number. Under the SERPS pension scheme, up to £148 a week may be paid in addition to the state retirement pension. That is because SERPS began in the late 1970s.
Mr Cobain:
It did not pay it then, though.
Mr G McCann:
It did not pay that in earlier years, but it is beginning to mature. Therefore some people who have a SERPS pension are receiving up to £148 per week.
Mr Brady:
People who invest in payment policies experience the same problem. It is a big issue for people that their mortgages are nearing the end of their terms and they have insufficient funds to pay them off. Everything is kicking in at the same time.
Mr O’Neill:
Yes, it is all merging at one time. There is no doubt that the amount of money that is invested in personal occupational pensions is a very important part of the UK’s financial system. Pension funds are very important. I know that the Northern Ireland Local Government Officers’ Superannuation Committee (NILGOSC) is involved in property development and is an important contributor to our economy. In London, pension funds are an important influence in many large companies because those organisations are quite large shareholders. The total amount invested by occupational pensions schemes in the economy is about £600 billion. Therefore they are fairly important players in the financial market.
Mr Brady:
The railway companies, at one stage, were important investors.
Mr O’Neill:
From memory, the Coal Board fund was, in the past, a great investor.
The Chairperson:
I thank Mr O’Neill and Mr McCann for adding some colour to what can be a very dry subject.