Two former pensions ministers and a former pensions commission member have suggested pensions need a radical overhaul – including reintroducing the principle of a carer’s entitlement to a second-tier pension and raising employer contributions. Is the government’s focus on engagement misplaced? 

 

Sir Steve Webb, former LibDem pensions minister, said pensions policy was a slow-motion car crash. Alongside Baroness Jeannie Drake, who sat on the pensions commission that came up with auto-enrolment, and Baroness Ros Altmann, a former Conservative pensions minister, Sir Steve lambasted the current system for not doing enough to make people save at scale. What is more, some design features of the system are making the situation of women in particular worse, not better. 

 

 

Women spend on average 10 years outside of paid work to provide unpaid care. Under the current state pension system – devised by Sir Steve – they are no longer entitled to a second-tier pension but can accrue carer’s credit. Somewhat arbitrarily, the entitlement to carer’s pension credits is recorded by the state if someone files a child benefit form; in order to receive carer’s credit, they need to do this regardless of whether they are entitled to child benefit or not.  

 

Many people fail to send a child benefit form as they do not realise they have to do so to record pension credits. Sir Steve said since former chancellor George Osborne brought in a single earner limit of £50,000 for couples to receive child benefit, the number of people filling in a form has reduced each year, while previously, the number of claims had been steadily rising. “We’re going back to the 1940s, where mothers with children are getting a lower state pension,” he said. 

 

Carer’s credit should instead be given at the birth of a child, he suggested. In addition, Sir Steve said the Treasury should scrap the three-month time limit for backdating pension credit claims. “It would cost the Treasury virtually nothing up front because it’s credits for 20 years hence, so it’s a future government’s problem. But it would mean all these women would start to build up decent pensions. So if the committee recommend anything to improve women’s state pension position, that’s the one thing I’d encourage them to change,” he said. 

 

 

Baroness Drake also warned that women are worse off in the new system, which is built on the principle that a pension is accumulated by each individual separately. This puts disproportionate pressure on women, as – she pointed out – care demands on women are growing, with women not only caring for children but increasingly for elderly relatives and grandchildren. “That squeeze is getting greater,” she said. 

 

Baroness Drake noted that the principle in both state and occupational pensions is that women should earn pensions in their own right, “but when the single state pension was introduced... what went is the principle that carers should be credited into the second-tier pension”, she said. “The argument is, ‘Well, the pension has been flatrated, it’s more generous, you can accrue it more quickly’. That may be the case, but women still lost out,” she said. Caring is an economic activity, she stressed; therefore, “the principle that carers can accrue both basic and second-tier pensions should be there”, for example by allocating a payment to a Nest account or a pre-existing pensions account. 

 

 

Cracks quickly appeared around the £10,000 earnings trigger for auto-enrolment between the witnesses. While Sir Steve said it made sense to put the trigger at about the level of the annual state pension to avoid low earners over-saving, Baroness Drake disagreed, saying women’s earnings fluctuate throughout their lifetime because of caring responsibilities, meaning it could still make sense to save into a pension at low income. “Why must they only depend on the smoothing of income the public gives them, we want them to have financial resilience,” she said, expressing a dislike for automatically excluding some people: “I don’t buy it, I don’t agree.” 

 

Baroness Altmann noted that some people, women in particular, may be employed in more than one job, each paying less than £10,000, and would thus be excluded from auto-enrolment despite their overall earnings justifying it. “It’s really important we don’t discriminate against the lower paid in terms of pensions,” she said, who would thus be missing out on employer contributions and tax relief that people on higher incomes receive. 

 

 

The Conservative peer was however against raising minimum employer contributions, currently sitting at 3% of qualifying salary. “I would... ask the committee to consider whether it is right that we force the employer to keep paying more and more into people’s pensions when the employer is already paying quite high national insurance to provide the basic state pension," she said.  

 

Baroness Altmann maintained that how much extra people have above the state pension was “an individual responsibility”. She said the UK had been “lulled into” the idea that employers should provide pensions. “But in most cases this comes out of the labour costs pot, so if you tell employers they need to put more into a pension, people will get less pay, and I would rather leave it up to them to decide whether they want to put their extra pay into a pension or have it now,” she argued. 

 

For Sir Steve, the case for higher employer contributions is clear, as they currently do not match employee contributions. “I can't think of a country in the world where workers have to put in more than their employers,” he said. If people are being made to contribute more, the risk of opt-outs increases, he noted, arguing that the reverse would be true if employer contributions were higher; workers would be giving up more by not being in the pension. Sir Steve suggested a 5% minimum employer contribution instead of the current 3%. 

 

“The suggestion that going from 3% to 5% is onerous on employers, going to a more and more unreasonable amount – we always laud Australia, who went from 3% to 6% to 9%. That's all on the employer, that’s not the employee. We say this is the best system in the world, and we’re whingeing about going beyond 3%,” he added. “3% from the employer is a joke.”