A report from the UK National Association of Pension Funds (NAPF) has called for a new citizen's pension regime to be implemented. The NAPF said the new system would reduce pensioner poverty, provide a simpler state pension system on which to build additional savings, and be fairer to millions who miss out under the current system.
In its report, the NAPF said a simpler, fairer citizens’ pension would provide a more secure guarantee against poverty in later life, and lift up to 10 million future pensioners off means tested benefits.
The NAPF’s original proposals for the new citizens’ pension scheme, published three years ago, have met with criticism on the grounds that the regime would be too costly, that removal of contracted out rebates would damage private pension saving, and that a residency criterion would be dangerous.
However, the new report has attempted to address these issues. In terms of cost, the NAPF pointed out that a citizens’ pension introduced in 2010 would cost no more than the current state pension system, provided the money currently spent on the basic state pension, state second pension (including contracting out rebates) and pension credit was used.
Furthermore, the report has looked at ways the future cost of raising the citizen’s pension in line with earnings could be addressed. Suggestions include raising the state pension age to 67 by 2030, with either an increase in national insurance (NI) contributions of up to 1.5%, or a further increase in state pension age to 69 by 2040.
In terms of contracted out rebates, the report states that the removal of GBP3 to GBP4 billion of contracted out rebate money from final salary private sector pension schemes would allow those schemes to redesign benefits to offset the cost. This would also enable hard-pressed employers to hand a tranche of their pension liabilities back to the state, reducing the ‘liability overhang’ in final salary schemes, according to NAPF.
Finally, on the issue of residency qualification, while some have expressed reservations about replacing NI contributions with a residency qualification as the basis for entitlement to a state pension, the report argues that both systems produce a similar endpoint, so it makes sense to choose the system which is simpler and more cost-effective.