UK – Pension entitlements above the UK's proposed new flat-rate state pension should be paid to pensioners in a lump sum as the system is reformed, Barnett Waddingham has suggested.
Criticising the repeated delays to the promised White Paper – which pensions minister Steve Webb said would be published by the end of the year – consultant Malcolm McLean said the government had "shied away" from explaining the detail of how to transition from the existing state pension system and the new flat-rate payments.
The flat rate is expected to be around £140 (€172) a week, with reforms to put an end to contracting out and the associated state second pension (S2P) and SERPS system of additional entitlements.
Because the accrued benefits will continue to be paid out, it could lead to a "multitude" of different payment rates, which could be addressed through a cash equivalent payment to affected pensioners, McLean said.
He estimated that a pensioner with £25 a week of additional entitlements would cost £26,000 to pay off at a rate of 20:1, based on the current lifetime tax-free allowance for pension savings – resulting in a cost of £2.5bn to the Exchequer.
The cost would fall drastically if figures based around the Local Government Pension Scheme's current agreement were used, resulting in a £15,600 one-off payment to the pensioner with £25 a week in additional benefits.
"Clearly," he said, "much depends on which valuation factor is used. But, on the lower figures, at least the government may feel the initial capital outlay may represent a good deal bearing in mind that the payment will be taxable – often at the higher rate – and there will be no annual upratings required on this one-off payment going forward."
McLean added that buying out of any additional rights would also allow the new state pension system to be simpler, with equal entitlements for all recipients, rather than several differing tiers based on previously accrued benefits.
In other news, the Association of Consulting Actuaries (ACA) has found that small and medium-sized companies (SMEs) have seen contribution rates to pension schemes stagnate over the last three years.
It found that while the level of contributions from employers to defined benefit (DB) funds increased by more than one-third between 1996 and 2010, since then, it has only increased marginally, from 17.8% of salary to 18.1%.
The level of contributions from employees to defined contribution (DC) funds over the same period has fallen, from 5.5% in 2010 to 5.2% in 2012.
A similar slight decrease in contribution levels was also seen when examining employee contributions to DC funds.
The ACA said the level of contribution – around 9% into trust-based DC funds and 7.5% into contract-based arrangements – was "alarming", as the rates would not provide for sufficient assets in retirement.
The association's chairman Andrew Vaughan said he hoped the forthcoming state pension reform would provide a 'core' retirement saving for all workers.
But he added that more than 8% of income needed to be put aside.
"I would like to see the government and opposition pledge to raise the minimum pension contributions on band earnings to 10% by 2015 and 12% by 2020," he said, suggesting that the increase could be offset by cuts to national insurance that would be automatically earmarked as pension contributions.
The government has not expressed any intention to increase minimum contribution rates – laid down in legislation relating to auto-enrolment.
However, a recent paper by the Department for Work & Pensions did discuss the advantages of auto-escalation.
The pensions minister has previously said his department was looking at such measures, telling a conference in November: "People are far more willing to commute future increases – the increase is less than it would have been – than they are to take money out of their pay packet now."