UK Pensions Policy Social Policy Area

¶ … UK Pensions Policy" - Social Policy Area

The pension policy of the UK is one that is followed as a model by various other parts of the world for its efficient dealing with the problem of pensions for the aged of the UK. The government takes a ken interest in reforms in the area of pensions, and it was for this reason that it announced the latest set of reforms in the year 2000, in its 'pre-budget report' that was released in the month of November of the same year. The report contained a series of reforms and improvements for pensioners. Some of the measures were: increases in the pensions according to the above- inflation rates, above inflation increases in the rates of the 'minimum income guarantee', also known as the MIG, and the introduction of the newly formulated 'pension credit' that was basically a means tested benefit for the pensioners. Taken as a whole, the government will be paying pensioners the amount of more than 4 billion pounds a year, every year to pensioners, from the year 2003-2004 onwards. This amount would be a great boon for pensioners in improving the quality of their lives in their final years, especially in the case of those who are extremely economically deprived. (Recent Pensions Policy and the Pension credit)

The fact that the UK is a 'unitary' state in which the central government plays a major role in the directing of several affairs at the state level must be remembered where the issue of Pension Policy is concerned. All the different regions have a separate Secretary of State as well as an Administrative Department based in the Central Government, and its own executive and assembly department that will play the role of the central government in the ministry. At times, the Health Board is responsible for social services and the Housing Executive attends to housing problems. However, this is not the permanent framework upon which the entire government system runs; there may be changes from time to time and these changes are implemented for the benefit of the people of the UK. For example, the Department of Social Security has been recently reformed into the Department of Work and Pensions, and this has resulted in the formation and implementation of newer policies for the benefit of pensioners. (An Introduction to Social Policy) The Department for Work and Pensions is now responsible for the Government's entire welfare reform policies and agenda, keeping in mind the basic aim of promoting independence and self-esteem and providing opportunities of improvement to those citizens who are aged and disabled or sometimes employed. (Department for Work and Pensions)

New Labour is the name that has been adopted by the British political Labor Party as an alternative name. It originally came into existence after a conference slogan that had been used by the Party in the year 1994, after which it became popular by demand. With the adoption of this new name the Party saw an amazing rise in its steadily falling fortunes, and therefore the name was considered to be lucky. Though the name is now being used only in party literature, it is still popular and is also the most satirized names in the history of the UK. (New Labour)

The important question is, why was there a need for a pension strategy, and what prompted the New Labour Party to come up with a complete set of reforms and changes in the pension schemes and policies for pensioners? In the year 2002, the entire subject of UK pensions was undergoing a crisis. Not only the government but also the public demonstrated a large amount of concern for he issue of pensions. Stock markets had also nose-dived, leading to a sharp decrease in the returns of investments for investors and savers and pensioners. A lot of companies were also closing down their schemes for 'final salaries' and this led to a widespread panic attack among those persons who were retiring from work at the time. In addition, there were numerous well-publicized pension fund scandals and this too added to the tensions among the aged and the retired. According to rough estimates, there is a gap of about 27 billion pounds between what people actually needed to save in order to retire comfortably and lead a fruitful life after retirement, and the actual amount that was being saved. The situation was recognized as a 'crisis' and the government was forced to look into the matter and deal with the crisis immediately. Therefore, the government outlined its plans for the improvement of the lives of pensioners in its 'Green Paper', wherein a long-term resolution for the ongoing crisis was outlined. (Pensions in Crisis, Your Queries)

It was against this background that the New Labour Party presented its set of reforms for the pensioners and the retired people of the UK. This document outlined a number of reforms for employer-sponsored schemes that would be offered by a company for the persons retiring from its offices, and a thorough change in the contracting arrangement of certain second-tier pension schemes. (Working and Saving for Retirement) This document will help the pensioners of the UK, whose numbers were growing at a faster rate than ever before, as compared to those people who are still able to remain in the workforce. This phenomenon is sometimes even referred to as a 'demographic time bomb', wherein employees can be expected to live well after they have reached fifty years of age, and their productive years as employees stops by the age of 50 to 60 normally. The result will be that most of these people will have to spend more years of their lives outside a place of employ than within it. The gap between the amount being saved and the amount that is actually needed widening as days go by is another issue that is bothering policy makers and this Green Paper brought out by the New Labour party has been able to address these sensitive issues in a proper manner. (Q and A, Pension shake up explained)

One of the reforms written about in the Green Paper brought out by the New Labour's Pension Strategy is that the second state pension must replace SERPS that had been the norm until the year 2002. SERPS is nothing but the 'State Earnings Related Pensions' that was the name given to the governments additional pension scheme. Under this scheme, those persons who had been earning about 75 pounds or less per week and had not been 'contracted out' would in effect have been building up an additional amount of pension under the scheme, which is now known as the 'State Second Pension'. Even those persons, who had made contributions to the scheme before the month of April 2002, are still eligible for the additional pensions and this additional income will continue for many years to come for these people. The reason behind the governments replacement of the SERPS with that of the State Second Pension Scheme was because the government felt that the disabled and the handicapped and those with long-term or even fatal and chronic illnesses a chance to have the benefit from the additional pensions being offered to them under this new scheme.

The government is also able to demonstrate its support for those people who belong to the middle or low-income earning groups through this scheme, whereby these people may still earn less but will benefit more in their future years because they will become eligible for additional pension under the Second State Pension Scheme. The innate working of this scheme is based on the principle that the earnings or the credits of earning groups is hiked up to a flat rate of 10,800 pounds, irrespective of whether these people have actually earned this amount or not. For example, if a person has been able to earn less than 10,800 pounds, but more than the lower earnings limit of the National Insurance of 3,900 pounds, then the government under this scheme will treat that person as having earned the amount of 10,800 pounds. Any individual, who had been earning the required minimum rate and had also been paying sufficient contributions to the National Insurance, would become automatically eligible to be a part of the additional pension scheme. Certain people who are already members of some private pension schemes have the option of opting out of joining this scheme by the system of 'contacting out' of SERPS whereby that person's employer as well as that person would have to pay lesser amounts to the National Insurance than he would otherwise have to pay. If a person belonged to a personal pension plan or a stakeholders plan already, then he could contract out and the government would still pay up part of the contributions towards National Insurance into this plan, in the form of a rebate. (Pensions Explained, what is Serps?)

However, people who had been originally paying into the SERPS scheme would still have to pay their contributions towards additional pension, the only change being that the scheme is under a new name, and it is more beneficial to those who had no proper access to pensions in the years before 2002, especially physically challenged and disabled persons. What has been achieved by the new State Second Pension is that not only will the disabled be able to lead better retired lives, but the chronically ill would be able to afford the cost of care for their illnesses under the additional benefits offered by the scheme, and in addition, the lower and middle earners will now be able to build up a good amount of money for their secure futures. (Pensions Explained, what is State Second Pension?)

The New Stakeholder Pensions were introduced by the New Labour's Pension Strategy plans in 2001, and this was a new form of private pension scheme that would not only be a part of the government's general pension policies, but would also maintain it's 'private' policy label. The primary objective of this new stakeholder pension was to bring about a change in the existing ratio of 60:40 of the state and private pension provisions to the ratio of 40:60 by the end of the year 2050. What is required for the successful implementation of this scheme is this: any company that has more than five persons in its employ must comply with the regulations and requirements of the new stakeholders pension plan. In order to comply with this it is necessary for the company to provide all its employees with details of this scheme after identifying it as a legally registered scheme under the plan so that the number of people who would join in these schemes would increase significantly.

The legislation that traditionally covers the previously used occupational as well as personal pension schemes is applicable to this new scheme too, but the difference lies n the regulatory standards and the framework on which it is based. When an employer has been able to identify a stakeholder pension scheme and has been able to educate his employees on the various details pertaining to this scheme, he is then required to provide his employees with reasonable access to persons who are in charge of representing and selling this scheme. The employer would also be required to deduct contributions to this scheme from the employee's wages if requested to do so by the employee himself, and pay this amount into the stakeholder pension scheme. However, the employer is not expected to make any monetary contributions towards this scheme; it is the sole responsibility of the employee. In the case of the non-compliance of the employer, he would have to pay a hefty fine of up to 5,000 pounds, and up to 50,000 pounds for non-compliance from a company.

The stakeholder pension scheme is one that has been surrounded by controversy, even before its inception in the year of 2001. The point of debate was whether an individual already paying into the 'occupational pension' scheme would be able to pay into the stakeholder scheme as well, at the same time. Another issue of debate was the question of the maximum charge possible for the stakeholder pension. Another important issue of controversy was whether this new scheme would be of benefit to those persons with annual earnings of 10,000 to 20,000 pounds for whom a well-planned occupational scheme may be unavailable or inapplicable, and for whom personal pension schemes may not be of good value. The government was able to deal with these controversies by allowing partial concurrent payments of pension schemes by employees, and this benefited those who were actually outside of the originally intended target group of people. However, the policy in itself was a success and quite a few people have joined up as part of the New Stakeholder Pension Scheme brought out by the New Labour Party as part of a whole range of new and better pension policies for the pensioners of the UK. (Stakeholder Pensions)

The scheme of State Second Pension that is meant for lower and middle-income earners served to double the benefits that these people were receiving under the SERPS schemes, and higher earners were allowed and encouraged to continue with the present schemes that they were paying into, that were those of personal and occupational pensions. There was, however, a gap between these two groups of people, and the stakeholders scheme was created to fill in this gap. The person who enrolls in this scheme would have to be earning between 9,500 pounds and 21,600 pounds, since these amounts would contribute towards the 'disposable income' of the individual. The disposable income of a person would in effect allow him to save for his future. But in the case when he is unwilling to make this sort of contribution towards his own future due to various reasons like, if he changed his job frequently, or if he was at that time in his life unwilling or ineligible to make such a large investment, or even if he was at that time put off by the high rates of personal pension schemes, he could contribute towards the stakeholders scheme which did not require high investments and was therefore appealing to this particular set of individuals.

The charges towards enrolment in this scheme would be not more than the charges being paid for the charges he would pay towards a personal pension scheme wherein he would pay the costs of operational management wherein the charges would be restricted to within a rate of 1% of the total value of the members payment. The advice about the scheme would have to be provided by the employer to his employee, and this would bring down the cost of his paying for a separate advisor. The payment schedule was also altered in a manner that would even allow small investors to pay into their own pension fund, whereby contributions of less than 20 pounds would also be accepted, and the frequency of payments was also not strictly regulated, and this allowed an individual to pay according to his affordability and convenience at that particular time. The government provided a single integrated tax scheme for the person enrolling in the stakeholder pension scheme, and this allowed him to make payments of more than 3,600 pounds without fear of repercussions. (Stakeholder Pensions)

It was from the month of October 2003 that the newly formulated 'Pension Credit' replaced the 'Minimum Income Guarantee' of pensioners above the age of 60 years in UK, under the New Labour's Pension Strategy. The new 'pension credit' plan is nothing but a plan that would make sure that persons above 60 years are guaranteed an income of above 105.45 pounds per week for a person who is single, and of 160.95 pounds per week if living with a partner. This scheme allows for an aged person to make full use of his years of saving money for the purpose of retirement funding, if he had saved money before his retirement, he would be offered additional money to the tune of 15.51 pounds per week if single, and 20.22 per week if living with a partner. However, the scheme is based on accurate calculations of weekly income of those aged 60 and above, after deductions, and this entails the listing of certain typical income schemes.

These are the various pensions that the individual has applied to, like for example, the State pension that is based on contributions to the National Insurance, the personal or private pension that is provided by private pension companies in order to make a provision for a second pension plan for an individual, and the work pension that is provided to the employee by an employer of a concern or business establishment. In addition, if the person is a part of a CA or an Invalid Care allowance, that is actually a tax free benefit for those people who offer informal care to others, or part of a Bereavement Benefit Scheme, then his income level will be taken into account while deciding on the amount of pension credit to be allowed him. If the person has any sort of additional earnings from nay other job, then this will also be taken into consideration. Certain types of incomes are however, exempted from the Pension Credit benefit.

These are 'attendance allowance' that is paid to a person, who cannot take care of himself, the 'Disability Living Allowance' that is paid to a person who is disabled in any manner and needs help in taking care of himself, the 'Housing benefit' that is otherwise known as a renting rebate or allowance wherein the rent payer gets a special concession from local councils in paying his rent, and the 'Council Taxes benefit' that is also paid by local councils towards the council tax that is to be paid by an individual. Therefore, the amount of money that will be paid into a Pension Credit Plan will be calculated on the basis of the amount of savings of the individual over the previous years, and by counting the amount of 1 pound per week as that person's income for every 500 pounds or over 600 pounds.

The savings that are counted are any money that the individual may have deposited in a bank or a building society or in a post office account, any investments that he had previously made in National Savings Certificates and in Premium bonds, and in such investments as ISA, PEP and TESSAs. If the person is in possession of an income bond or of a capital bond, then these will also be taken into account when calculating the amount of the Pension Credit to be paid. One example of how the Pension Credit Plan has been of benefit is the case of Amy, who lives with her son and whose State Pension comes up to about 79.60 a week. The Pension Credit plan will aid her by offering an extra 25.85 per week, and because of this her weekly income will become 105.45, which is a substantial amount for her. (The Pension Service)

It is a fact that there are, in UK, more than 150,000 divorces per year. Therefore it was a necessity that some provision was made for divorces in the newly introduced pension plans of the New Labour Party. Now, courts dealing with divorce cases will have to keep in mind the fact that now pensions will have to be split up or shared between the two splitting partners. The better-off partner, be it the husband or the wife, will have to part with the compensation for the future loss of pensions by either 'offsetting' by which a spouse has to give up his rights to pension through adjustment with a large amount of money, or by 'earmarking' by which the spouse is prevented from accessing money from the retirement fund, and this will mean that the partner will have his retirement fund intact when the time comes, unlike as in 'offsetting' wherein the partner will have to rely on state pensions in his old age. In 'earmarking' the disadvantage is that the couple will have to remain in touch after the divorce, and both will not be financially independent of each other, while offsetting also has its own set of disadvantages. The new system of 'splitting' will ensure that both the sides will be able to retain their share of the ownership of the pension. An individual can retain the money n the original scheme or transfer it into an entirely new plan. (Split the Difference)

Malcolm MacLean in his review of the pension plan in an article in the October 2004 issue of Online BBC News, is of the opinion that as a people, the citizens of the UK are definitely living longer lives, and the question is whether the State will be able to provide for the thousands of her citizens who have retired and have to live on pensions for fifty years or even more of their lives. Therefore, he opines, a senior citizen must have a secure plan for his future by which he will be able to live comfortably for the rest of his years, and he must believe that the state will not be able to provide fully for this requirement. This would mean that the earlier a person starts a pension plan, the less it will ultimately cost him because he would be paying in as much as he can afford to during his productive years. The better method would be to explore all the different ways in which to save money, as for example, in property, in art, in individual savings accounts.

In this way, he will not have to depend entirely on his pension plan alone. When the other investments generally entail the payment of taxes, a pension plan would make sure that the pensioner is exempted from taxes in all his personal contributions at a high rate, thereby enabling him to build up a virtually tax free fund for his future. In any case, the pensioner would do well if he were able to make himself familiar with all the intricate details of his pension plans, so that he would know how the plan works, and also of the amount of risk involved in the plan, and whether he is ready to take up such risks with his investments. Therefore, if possible, an individual is advised to join up a pension plan while he is in the employ of any firm, so that some of the risk is borne by the employer, and not joining would almost mean giving up a part of that person's salary.