How the government stole billions of pounds from pensioners….and no-one noticed!

Nicholas Wheatley

One of the things that everyone knows about the state pension is that it increases in line with the cost of living. Currently the government has guaranteed to increase pensions each year by either average earnings, CPI (consumer prices), or 2.5%, whichever is the highest. This is called the triple lock. Most importantly it ensures pensions rise with prices, so that pensioners aren’t plunged into poverty if there is a sudden surge in inflation.

But quietly, without giving any warning, when the new state pension was introduced on 6 April 2016, the government withdrew part of this guarantee from millions of pensioners. So stealthy were they that no-one noticed as they dipped their hands into the pensioners’ pockets and took part of their pensions. And every year, the government takes more and more money from these pensioners, while the pensioners remain oblivious to what is happening.

So which pensioners are affected, how much do they lose, and how did this happen?

How much do they lose?

The Government Actuaries Department has made an estimate of how much each pensioner stands to lose over their lifetime.

But the amount of the loss increases on a year by year basis. So currently, a pensioner who retired in 2016 will have a pension worth about £250 a year less then her neighbour who retired in 2015 but made the same lifetime pension contributions. But in another 15 years time, assuming inflation of 2%, her pension will be as much as £2000 a year less, and if she is fortunate enough to live into her mid 90s she will find herself as much as £3500 a year worse off than her neighbour. The only difference between the two pensioners is that the more fortunate one reached state pension age in 2015, before the introduction of the new state pension, while the less fortunate one reached state pension age in 2016.

Which pensioners are affected?

Although several million pensioners are likely to be affected to some degree, those standing to lose the most are people who contracted-out of SERPS (State Earnings Related Pension Scheme) between 1978 and 1987, and who either reached State Pension Age between 6 April 2016 and 5 April 2020, or else reached State Pension Age any time after 5 April 2016 but took early retirement before this date, or else took early retirement between 6 April 2016 and 5 April 2020. This could amount to as many as a million pensioners who will lose out as a result of the introduction of the new state pension.

However, one group of pensioners who meet these conditions will not be affected by this loss of pension. These are public service workers, almost all of whom are in contracted-out pension schemes. A few weeks before the new state pension came into effect the government rushed through a provision ensuring that members of public service pension schemes would still receive the full cost of living increases, guaranteed by the government, that their private sector colleagues no longer received.

It is inevitable that as a result of this last minute change to public service pension schemes, the civil servants and ministers who are responsible for the loss of cost of living increases for private sector pensioners, will have their own pensions fully protected against cost of living increases and will not lose out as a result of the introduction of the new state pension. A fortunate coincidence?

How did this happen?

In 1975 the government passed the Social Security Pensions Act 1975 which reformed the state pension. It was now split into two parts, the basic state pension and an additional state pension called SERPS. It also allowed people to “contract out” of SERPS, no longer receiving that part of the state pension, and join an occupational pension scheme instead which would commit to providing a Guaranteed Minimum Pension (GMP) which would match the SERPS amount. To encourage people to contract out, the government made a commitment to increase the Guaranteed Minimum Pension in line with inflation after retirement. When the Social Security Pensions Act 1975 was read for a second time in parliament, the Secretary of State for Social Services, Barbara Castle, stated:

“Once pensions have been put into payment, responsibility for increasing both the basic and additional components to take account of inflation will fall to the State scheme even where a pensioner is receiving some or all of the additional component from his occupational scheme”

In a booklet called “NP34 (Jan 1978) New Pensions: A More Secure Future” produced by the Department of Social Security, the following statement was made:

After you retire the state will protect your guaranteed minimum pension (and widow’s guaranteed minimum pension) against price rises. So you will have at least the same protection as someone who depends entirely on a state scheme pension”

So the Secretary of State and the Department of Social Security made it very clear. “After you retire the state will protect your guaranteed minimum pension…against price rises”. 

But when the new state pension was introduced in 2016 the government reneged on the promises it had made in the 1970s. And as a result, as many as a million pensioners were deprived of the price protected guaranteed minimum pensions they had been promised by the government. And the government was aware of exactly what it was doing and made no attempt to communicate with pensioners and those nearing retirement to let them know what was happening.

The Ombudsman

However, a few very clever people did notice what the government had done and complained to the PHSO. The complaints were upheld and the failure to communicate the changes was judged to be maladministration. However, a complaint upheld by the PHSO does not necessarily lead to the type of changes and restitution that might be expected. This will be the subject of a future blog post.

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