State Pension Reform

There are two parts to the UK State Pension: the basic State Pension, which is flat-rate, and the additional State Pension, which is earnings-related. The additional State Pension was provided through the State Earnings-Related Pension Scheme (SERPS) between 1978 and 2002 and, from 2002, through the State Second Pension (S2P). Under legislation already in place, S2P is becoming more flat-rate, and less earnings-related, over time.

The Labour Government introduced reforms to the State Pension in April 2010, with the aim of improving coverage and making it “less means-tested and closer to universal” than if the previous indexation arrangements continued indefinitely. The reforms included a reduction to 30 in the number of “qualifying years” needed for a full basic State Pension, from 44 (for men) and 39 (for women). The aim was that the State Pension should provide a better foundation for private pension saving. This was important to support the workplace pension reforms which would start to be introduced in 2012 (including the requirement for employers to automatically enrol employees and make contributions to a pension scheme). While, these reforms attracted broad support, opposition parties were concerned that they did not go far enough in reducing means-testing and that there was a risk the workplace pension reforms would be undermined if it was not clear enough to people that it would pay to save.

On 4 April 2011, the Conservative-Liberal Democrat Coalition Government published a consultation paper setting out options for reform of the State Pension, including the option of a single-tier pension, combining the basic State Pension and State Second Pension, set above the level of the Pension Credit standard minimum guarantee. The aim was to “better support people to save for their retirement.” The Government said it would legislate to introduce a single-tier pension for future pensioners early in the next Parliament. Further detail will be set out in a White Paper.

This note aims to provide some background to the proposal for a single-tier State Pension, to the end of 2012. A further note SN 6525 Single-tier state pension takes the story forward from publication of the White Paper in January 2013. Other aspects of reform are discussed in more detail in separate notes, for example: SN 2234 State Pension age and SN 4947 Pensions: automatic enrolment and employer contributions.