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Reform of State Pension Arrangements 5 December 2008

The Department of Health and Social Security yesterday, Thursday 4th December, presented a briefing session for Members of Tynwald on the provisions of the United Kingdom Pensions Act 2007.

The 2007 Act, the provisions of which substantially represent the recommendations made by the former UK Pensions Commission, chaired by Lord Adair Turner, provides for the biggest reform of State pension arrangements since the 1940s. The Pensions Commission was established by the UK Government in December 2002 and was tasked with reviewing the operation of the UK pensions system and making recommendations for reform. General consensus between the main political parties to the Commission’s recommendations made possible the relatively swift passage of the then Pensions Bill, to ultimately become the Pensions Act 2007.

The 2007 Act provides for, among other things, future upratings of basic State pensions to be linked to rises in average earnings (instead of prices) from a date yet to be specified. This may be from as early as April 2012 and must be no later than April 2015, but it will be for the present UK Government to decide on the precise date. The Act also provides that in respect of people reaching State pension age on or after 6th April 2010 the number of qualifying years required for a person to earn a full basic State pension will be reduced from the present 44 years for men and 39 years for women to 30 years for both. And the existing rule whereby persons who have qualifying years for less than a quarter of their working life are not entitled to any basic State pension at all is to be scrapped, so that for every qualifying year a person will earn 1/30th of the full rate of basic State pension. To pay for this, State pension age will gradually rise to 68 (for both men and women) by 2045 and the earnings-related State Second Pension will gradually become flat rate by around 2030. The ability of defined contribution schemes to contract out of the State Second Pension arrangements will also come to an end.

The Act also establishes the Personal Accounts Delivery Authority. Personal Accounts will be introduced in the UK in 2012. Generally speaking, workers will either be automatically enrolled into their employer’s workplace pension scheme or entered into the new Personal Accounts scheme. For Personal Accounts, workers will contribute 5% of banded earnings (including 1% tax relief) into a centrally-managed, low-cost savings account, independent of Government. Their employer will also be required to contribute a minimum of 3% of earnings, making a total contribution of at least 8% of earnings. However, workers can decide to opt out of the Scheme. No decision has yet been made as to whether personal accounts would be suitable for the Isle of Man.

Hon Eddie Teare MHK, Minister for Health and Social Security said,

“The reforms provided for in the 2007 Act will be of great benefit to many. With future basic State pension upratings relative to earnings, the value of those pensions will begin to rise in real terms and the reduction in the number of qualifying years required will ensure that many more people with broken work records, particularly women who have brought up children, have a full State pension when they reach retirement age. Only around 30% of women currently qualify for a full basic State pension. Yes, State pension age has to rise to pay for these improvements, but it is a natural consequence of increasing life expectancy and a reduction in the numbers of workers when compared to pensioners in the decades to come. The alternative would have been to gradually reduce the value of State pensions or to have expected workers to pay an ever-increasing proportion of their wages and salaries into the National Insurance Fund. There has to be fairness across the generations and I believe these reforms will secure that.”

The Minister added,

“Under reciprocal arrangements, we are obliged to apply the State pension reforms to the Island and I will be moving Orders in Tynwald at the beginning of next year to achieve just that. However, Personal Accounts sit outside reciprocal arrangements and in the coming months we will need to continue discussions with Treasury colleagues about what private savings initiatives might be appropriate for the Island.”

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