Accounting watchdogs have accused the Government of leaving people in the dark about a key state pension change that will make an estimated 50,000 worse off in the first year of reforms starting next month.
They weighed in over the poor treatment of a specific group of state pension claimants, who will be hit by the axing of inflation uprating, saying: ‘Some people are likely to lose out and they have not been able to find the information they need.’
The state pension overhaul has already caused uproar as many people who expected to get the full new ‘flat rate’ of £155.65 a week have discovered they will end up with smaller payments. This is because they contracted out of paying the additional state pension top-up and under-paid National Insurance during their working lives.
Pensions Minister Ros Altmann has already admitted that the new state pension was ‘mis-sold’ to the public, while alarmed MPs recently demanded urgent changes to state pension forecasts to combat widespread public confusion about the changes.
Now the National Audit Office has joined in the attack, with a report saying it was concerned the Department for Work and Pensions only has ‘limited information’ about who would be affected by one particular aspect of the pension reforms, the uprating of Guaranteed Minimum Pensions.
It contended that there has been a lack of clear information and the DWP could have done a better job.’It is now seeking to improve how it communicates the impact of pension reforms, and will need to help people identify how they are affected and provide them with accurate and more complete information so that they can make informed decisions about their future pension arrangements,’ said the NAO.
‘The examples used in this report are extreme and aren’t representative of most people’s circumstances. ‘Changes to the Guaranteed Minimum Pensions are part of the transition to a simpler new state pension that will ensure people have a solid basis from which to save.’The DWP estimates that by 2020 75 per cent of people in the new state pension with a GMP built up between 1978 and 1988 will be gainers.
What is at stake for people claiming state pension?
Accounting watchdogs acknowledged that the uprating issue was a complicated area, and the actual impact on individuals would depend on a number of factors including age, employment history, earnings and future inflation.
It involves people who contracted out of additional or second state pension arrangements, in exchange for making lower National Insurance payments. Their pension schemes were made responsible for paying Guaranteed Minimum Pensions, to ensure no one lost out from doing this.
Under existing rules, pension schemes must uprate Guaranteed Minimum Pensions accrued between 1988 and 1987 up to a maximum of 3 per cent a year, and the DWP then recalculates the state pension payable each year too. The new state pension abolishes contracting out, but schemes will have to carry on doing this for any Guaranteed Minimum Pensions people have built up.
However, for people retiring after 6 April this year, the Government will no longer take account of these inflation increases to Guaranteed Minimum Pensions when uprating people’s new state pensions.
How will people lose out?
The NAO said that increases in state pension age mean that the Guaranteed Minimum Pensions could lose more value before people draw their state pension.
But although Guaranteed Minimum Pensions will lose value under the new rules, people may be able to build up additional entitlement to new state pension.
‘The amount by which individuals will be affected will depend on the time they were in a contracted-out scheme, the value of their new state pension, how the government decides to uprate the state pension and future inflation rates,’ it said.
The NAO added that the impact of new state pension reforms on people with Guaranteed Minimum Pensions will vary widely.
‘The type of person who will do comparatively worse under the reforms is someone who has spent long periods in a contracted-out pension scheme and is close to retirement on 6 April 2016 so has little time to build up additional entitlement to new state pension.
‘The Department estimates that 180,000 people who will reach state pension age in 2016-17 will have Guaranteed Minimum Pensions from before 1988.
‘The amount by which people will be affected depends on their specific employment history. The Department’s modelling forecasts that 50,000 of these people will be worse off in 2017-18 as a result of the introduction of new state pension.’
People affected not provided info directly
The NAO said the DWP had issued factsheets on the new state pension, but provided limited details on the circumstances in which people with Guaranteed Minimum Pensions could end up worse off under the new arrangements.
It noted: ‘It believes it could be misleading to show people how they might be affected by one aspect of pension reforms in isolation, without considering the combined impact of changes. ‘The Department has not therefore provided information directly to people with Guaranteed Minimum Pensions about their overall state pension income.’