Cicero Policy Briefer

Issue 22, March 2008

Pensions—and women—at risk

By Baroness Hollis

It is difficult to make pensions work for women. Pensions were designed for men’s full-time working lives—and while he held on to his job and his wife held on to him, she derived her pension through him. But half of all marriages now end in divorce. Yet looking after a home, caring for children, grandchildren and elderly parents, with at best a part-time job, means that most women can never build a full state pension, let alone a private pension, in their own right either.

The 2007 Pensions Act will in due course help the next generation of women. From April 2010, it will reduce the number of years they need to contribute to receive a full state pension from 39 to 30; and though it reduces the number of years of abatement for having children, from 16 years’ worth of credits to 12, it does help carers of older people, who will in future need only to care for 20 hours a week, rather than the current 35. The hope is that 70 per cent or more of women will be retiring with a full state pension rather than the current 25 per cent.

The 2008 Pensions Bill, based on the Turner recommendations, similarly tries to rectify women’s shortfall in private pension savings, by introducing the ‘soft compulsion’ of personal accounts. However, many women should opt out—if they are only 10 to 15 years away from retirement, are tenants, if they are single, have few savings, if they are very low-paid or if their hours may reduce because of their own health or that of an elderly relative, then personal accounts are probably too risky for them. They will certainly face the means-testing trap of pension credit, whereby they lose 40 per cent of their pension. But many will also face another risk, and an unnecessary one: if they do not have a full basic state pension, they could lose their personal pension pound for pound.

Take Susan, who has a state pension forecast of £67 per week (rather than the full £87) as she was a foster carer for many years. She has a personal account pension which would bring in £30 a week. £20 of that £30 is set against her state pension shortfall, leaving her with £10. That is then subject to the 40 per cent pension credit means test. So she is left with £6—far less than her contribution of £15 to the personal account. She gets out less than she put in. She was mis-sold. And no employer would want to take that risk.

There are many women like Susan—women who had children before 1978’s introduction of Home Responsibilities credit; service wives who accompanied their husbands abroad; women who could never manage more than a part-time job because of their caring responsibilities; women who had several part-time jobs but are not allowed to add them together to get into the National Insurance system.

They could, if they knew their way around the system and had the resources, have bought Cl.3 voluntary contributions as they went along—just as businessmen posted abroad do. (You can buy back up to six preceding years.) Some 200,000 people a year do this. But most Susans don’t know until the year they retire what their shortfall is, and by then it is too late.

This is why, in July 2007, we ran an all-party amendment in the Lords to allow people the right to buy back (no freebies!) up to nine additional years of Cl.3 contributions over and beyond the current entitlement. There was a huge majority in the Lords for this. The Government promised to “use their best endeavours to deliver the principle of the amendment”—but they haven’t. So with the National Insurance Bill coming up, followed by the Pensions Bill, we hope to run a similar amendment and this time persuade government to accept it.

It matters, not only because too many women will enter retirement in poverty and on means-tested benefits, the decency test; but also because as it stands, it discourages women from private saving and private pensions. Why bother to save if you may lose virtually every pound of it? There is a strong business case for making it possible for women to buy missing years for a full state pension so that a private pension is more secure, and worth having. If we don’t want women relying on the State, then we need the State to help women to help themselves.

Baroness Hollis of Heigham is the former Minister for Children and the Family and can be contacted here.