PENSIONS ACT 2014:
SUMMARY
AUGUST 2014
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The Pensions Act received Royal Assent on 14 May 2014. This is a short summary of the major relevant provisions of the Act for NUT members.
Single-tier pension
The Act introduces a single-tier pension to replace the current system of a basic state pension and an earnings-related state second pension. The new pension has been designed to cost no more than the existing system.
The implementation date for the new system is 6 April 2016.
Level of the proposed pension
The single-tier pension will be set at £144 a week in 2012/2013 terms. The NUT believes the proposed level of the single-tier pension is too low and that it should be set at or above the poverty threshold (currently £178 a week).
Qualifying conditions
Thirty-five qualifying years of NICs or credits would be needed for a full single-tier pension. Currently it takes 30 years to get the full basic state pension. Credits could be earned during unemployment, caring for children aged 12 or under, or caring for sick or disabled adults. The NUT thinks the increase in qualifying years could be especially harmful to women.
There will also be a minimum qualifying period of ten years. Those with fewer than 35 qualifying years but above the minimum qualifying period would get a pro-rata amount.
Qualification will be based on individual qualification. There would be no entitlement based on contributions from a spouse or civil partner.
Abolition of contracting out
The Pensions Act 2014 will end ‘contracting out’. The Teachers’ Pension Scheme is currently contracted out of the state second pension. This means that teachers do not accumulate state second pension but instead pay a lower rate of NICs than other employees.
Contracting out will end as there will be no state second pension to contract out from. From April 2016, teachers face paying an additional 1.4 per cent in NICs but they will, in return, build up rights to a higher state pension.
Employer NICs are set to rise by 3.4 per cent from April 2016. The Public Service Pensions Act 2013 means that the Government cannot seek to recoup this money from the Teachers’ Pension Scheme - either by raising employee contributions or cutting scheme benefits. However, if employers have to pay these extra NICs, they may seek to recoup the money elsewhere, through poorer pay, or job losses.
Cost of new scheme
The single-tier pension is cost-neutral. Winners are balanced by losers. Winners from the single-tier pension are the self-employed who were not previously able to build up state second pension, people (mainly women) who have taken time out of the workplace to bring up children, formerly contracted-out employees (like teachers) and low earners.
Losers from the single-tier pension are middle to high earners, especially those who were contracted into the state second pension. New entrants to the workforce are also set to get less on average than if the current system had been maintained.
The single-tier pension is cost-neutral itself, but the Government will benefit from the increase in tax revenue from NICs caused by the end of contracting-out.
Transition to new scheme
Accrued rights to the state second pension built up under the old system would be recognised (but not fully respected) under the new system.
People’s pre-implementation National Insurance records would be translated into a single-tier starting amount based on the formula: (number of pre-implementation qualifying years / 35) multiplied by the level of the full single-tier pension in April 2016. If the current system rules would give a higher valuation, this would be used.
The Act states that people who have been ‘contracted out’ of the state second pension will have a deduction taken from the single-tier starting amount. This is broadly the amount of state second pension which would have been earned if the individual had been ‘contracted-in’.
Existing pensioners
Pensioners who reach state pension age before the introduction of the single tier pension will retire on the current system. Their pensions will be upgraded according to current rules (currently triple lock for the basic state pension, CPI inflation for the state second pension).
State Pension Age
Acceleration of state pension age to 67
The Act includes an acceleration in the increase in the state pension age to 67 by bringing it forward eight years. This will affect members currently aged between 45 and 53.
The NUT opposes increases in the state pension age beyond 65. The Government’s proposed changes to the Teachers’ Pension Scheme mean this change will increase the age at which members currently aged under 52 can get a full occupational pension.
Regular reviews of state pension age
The Act contains a mechanism to hold a compulsory review of the state pension age at least every six years. The stated aim is to keep state pension receipt to the same proportion of adult life. The review will be informed by the Government Actuary’s Department and by an ‘independently-led body’ on wider factors on setting state pension age, such as variations in life expectancy. The first review will have to take place by 7 May 2017.
The NUT believes this proposal will lead to further increases in the state pension age, which will feed through into the Teachers’ Pension Scheme because of the planned link between scheme pension age and state pension age. The NUT thinks teachers can’t be expected to work into their late 60s – see for more.