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

6. Wider implications of the proposed
reforms
The proposed single-tier pension reform marks the latest, possibly final, step on a
long – and ultimately somewhat circular – journey for state pensions in the UK.
The single-tier pension would bring back a state pension that looks rather like
the system in place before the 1975 Social Security Act, although with more
extensive crediting for those doing unpaid activities.
The proposed changes have significant implications for both the UK’s public
finances and for individuals and their finances. In this chapter, we describe how
the latest proposed reforms fit into the extensive history of state pension reforms
over the last 40 years, and discuss the wider implications of and lessons to be
drawn from the new system for the government and individuals.
6.1 A long and circular road
In 1974, the UK state pension system contained a basic state pension (BSP),
which was uprated each year in line with growth in average earnings. People
accrued entitlement to this pension if they worked and paid flat-rate NI
contributions; men needed 44 years and women 39 years of contributions to
receive the full BSP. 66
In 1975, the Labour government legislated for a new earnings-related pension,
which dramatically increased the pension that higher earners, in particular, could
get from the state. From the very start, commentators pointed out that this
system looked unsustainable and that the government did not appear to have
given adequate consideration to the long-run costs (Hemming and Kay, 1982).
The last 30 years have been spent – by parties of all political persuasions –
unpicking this policy and reducing the future costs to the taxpayer. At the same
time, the system has been made more generous to those who spend periods in
unpaid activities. The single-tier pension reform marks perhaps the final logical
step on this journey.
A number of different policy reforms have been attempted over the years to
reduce the overall cost of the UK state pension system and to divert more of the
spending towards those with lower lifetime earnings. Figure 6.1 gives an
indication of the effects of the various policies by showing the pension income at
SPA that low- and high-earning men born in 1950 would have expected to get at
certain ages, given the legislation that was in place when they were that age –
assuming that they expected it to remain in place. The low earner shown is
assumed to have earned fractionally above the lower earnings limit (LEL) for 49
66 As mentioned in Chapter 2, there was also graduated retirement pension, which had been
introduced in 1961. Entitlements to this are very low – largely because they have not been fully
uprated to account for price inflation over time.
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