A single-tier pension: what does it really mean? - The Institute For ...

Short-run effect on pensioner incomes
only to individuals with less than 30 (or perhaps 35) qualifying years for BSP,
who would be the only ones to have benefited from them under the current
system.
4.3 Gains and losses over the whole of retirement
The previous section discussed how many and what type of individuals would
gain from the proposed single-tier pension in terms of pension income at the SPA.
However, as described in Chapter 3, the single-tier pension and the state pension
under current legislation are uprated slightly differently through retirement.
Under the current system, the BSP element is uprated by growth in average
earnings through retirement, while the SERPS/S2P element is uprated by price
inflation. Under the proposed system, pension income up to the single-tier
amount would be uprated by average earnings growth, while any additional
pension income above that level would be uprated by CPI inflation. This means
that total (cash) state pension income will grow more quickly under the
proposed system than under the current system. Therefore, any losses in pension
income at SPA will be at least partially offset by higher indexation later on, and
those who do not appear to benefit from the single-tier pension at SPA may
benefit from higher income later in retirement.
In this section, we consider whether individuals lose or gain from the proposed
single-tier system as a whole over the whole of their life beyond SPA. To do this,
we calculate the ‘present discounted value’ (PDV) of state pension entitlements
under the proposed and current pension systems. The PDV is calculated by
summing the stream of pension payments expected from the state from SPA until
death assuming that all individuals die at their age- and sex-specific life
expectancy 49 and discounting future payments using an appropriate discount
rate. 50
Table 4.6 shows what proportion of people with different characteristics would
have a PDV of entitlements under the single-tier system that is greater or less
than under the current system, and the mean change in the PDV from introducing
the single-tier pension; a positive value indicates that the PDV of entitlements is
greater under the single-tier system than under the current system. This is under
the assumption that individuals continue contributing until they reach SPA.
Across all individuals reaching SPA between 6 April 2016 and 5 April 2020, the
average change in the PDV (i.e. increase in wealth) is £4,013. Only 2% of people
would lose over the whole of their retirement – this is the group who would have
49
Life expectancies are taken from Office for National Statistics, 2009–2011 based cohort life
tables.
50 Table 4.6 assumes a 3% real discount rate. Using a higher discount rate will tend to increase the
value of the current system relative to the proposed system, since under the current system a
greater proportion of the total benefits are received early in retirement. Conversely, using a lower
discount rate will tend to increase the value of the proposed system relative to the current system.
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