PENSIONS: THE NEW FRAMEWORK?
| DOI | http://doi.org/10.1111/j.1468-2230.1986.tb01677.x |
| Author | Richard Nobles |
| Published date | 01 January 1986 |
| Date | 01 January 1986 |
PENSIONS:
THE
NEW FRAMEWORK?
INTRODUCTION
THE
Government in its Green Paper on Social Security’ has
proposed the phased abolition of the State Earnings Related
pensions Scheme (SERPS) both on the grounds
of
its future cost
and because it believes that “social security must
.
.
.
reinforce
personal independence
.
.
.
widen
.
.
.
people’s opportunity to
make their own choices [and]
. . .
encourage
.
.
.
earning and
saving.”* The Green Paper should be read in conjunction with the
Government’s consultative document on personal
pension^,^
which
announces their intention to offer individual members of employers’
occupational pension schemes the right to choose whether to
remain in their scheme or to provide for their retirement through
their own savings. Between them, these two documents represent a
shift
of
responsibility for retirement provision from the state to the
private sector, and within the private sector, from collective
arrangements to more individual ones. This article examines the
arguments for, and consequences of, this shift in emphasis. The
first section begins with a brief description of SERPS, and then
considers whether it can bc afforded, and whether it is a desirable
system when compared with a scheme which increases the basic
retirement pension or a system of funded pensions. The second
section looks at the Green Paper proposals for SERPS’ replacement.
It compares the pensions likely to be payable with those offered by
SERPS; looks at the likely impact of the proposals on the
occupational section; and examines whether the present legal
framework provides adequate investor protection for those who
will, in future, have to augment their basic retirement pension
solely through private schemes. Much of the material which follows
is not legal in nature. The specifically legal content focuses on the
implications of the Government’s proposals for EEC legislation
and investor protection measures. The justification for including
the other material is that lawyers, if they are to contribute to a
debate, should understand the issues involved.
PART ONE
(a)
What
is
SERPS?
SERPS was intended to provide a pension equal to one quarter
of qualifying earnings in the best
20
years of an individual’s
’
Reform of Social Security. Crnnd.
9517-9.
’
Ibid.
para.
6.6
Thc Governrncnt’s proposals for individual pcnsion plans arc set out in “Pcrsonal
Pcnsions:
A
Consultativc Docurncnt.” D.H.S.S.,
passim.
1984.
42
JAN.
19861
PENSIONS:
THE
NEW
FRAMEWORK?
43
working lifetime. Qualifying earnings are earnings in excess
of
the
basic single person’s retirement pension payable at the time, and
below a ceiling of between six-and-a-half and seven-and-a-half
times that amount. Only earnings after
1978
can be qualifying
earnings. In times
of
inflation, the best
20
years will tend simply to
be the last
20
years.
To
counter this, and to prevent the pension
being eroded in value as it accrues, an individual’s qualifying
earnings are indexed to average
earning^.^
Until someone has over
20
years
of
qualifying earnings there is no question
of
choosing
“best years” and here the pension accrues at the rate
of
one-and-a
quarter
of
each year’s qualifying earnings.
The
20
best years formula is particularly favourable to women
who take years
off
from work to cope with family responsibilities.
In
theory, a woman could take
off
24 years from work and still
have a full SERPS pension. SERPS also favours women through
its generous treatment
of
widows. If a woman is over
50
when her
husband dies. she inherits his pension, and
if
over 40 she inherits a
fraction of
it.
This applies even where he dies before retirement
age. The widow’s combined pension cannot exceed the maximum
pension payable to a single person. Widowers can inherit their
wife’s pensions but only
if
both are over retirement age when the
wife dies.
Although the qualifying earnings, as they accrue, are indexed to
earnings, SERPs in payment are increased by reference to the
retail price index. Thus whilst SERPS guarantees a real level
of
income in retirement relative to that enjoyed whilst at work, there
is no guarantee that a pensioner’s lifestyle will improve as the
country becomes richer.5 People in contracted-out employment are
still part of the State Earnings Related Pension
Scheme,
although
they don’t receive their earnings related pension from the State.
Their employers have agreed to provide them with a pension at
retirement which is equivalent to SERPS in exchange for a rebate
of
national insurance contributions.h This pension is known as a
guaranteed minimum pension (GMP). Unlike SERPS the GMP is
not indexed.
To
prevent the pensions of these contracted-out
employees from being eroded with inflation the State pays an
addition to their basic pension which represents any decrease in
the value of the GMP since retirement.
When SERPS was introduced, the Government Actuary calculated
that it would increase the pensioners’ share
of
total personal
consumption from
10
per cent. to
13
per cent. over 40 years, and
increase average pensioners’ income from two-thirds
of
average
earnings to five-sixths.’
‘
Social Sccurity Pcnsions Act
1975.
s.21.
’
Social Sccurity Act
1975.
s.125
as
amcndcd
by
Social Sccurity Act
1980.
s.1.
’
Bcttcr Pcnsions. Cmnd.
5713.
p.XS4.
Currcntly
6.25
pcr ccnt. Thc Social Sccurity (Class
1
Contributions-Contractcd-out
Pcrccntagcs) Ordcr
19x2.
S.I.
19x21493.
To continue reading
Request your trial