Government needs to shell out £2 billion a year to tackle S2P muddle |
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Tue, 30 Aug 2005 20:05
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LONDON: The government will be required to pay an extra 2 billion pounds a year to company pension schemes that have opted out of the state second pension (S2P), according to actuary firm Watson Wyatt. The firm also said the rebate offered to the firms for contracting out should rise in 2007 by as much as 50 per cent.
The government had paid 3.1 billion pounds to company schemes and their members in 2004-05.
According to the firm, the value of the reduced national insurance payments for companies and their staff is not sufficient to take care of the opting out of the S2P.
It said the current rebates are based on the contention that pension schemes can earn higher investment return than can be guaranteed. Since this is not possible, the rebates are inadequate. "In addition we know that people are expected to live several years longer once they retire," said Nigel Bodie, senior consultant at Watson Wyatt.
The whole system of reduced national insurance payment was mooted by the Labour government in 1978. It was introduced to go in parallel with the pension scheme then prevailing, called State Earnings-Related Pension Scheme (SERPES). With slight modifications, this scheme was rechristened as S2P in 2002.
The Conservative government in 1988 expanded the scope of national insurance to allow self-employed people too to take rebates from their NI contributions if they invested the money in a personal pension. The government then felt this could be a better idea if people took responsibility for their pension provisions. The step has proved to be fallacious.
Anyone earning more than 4,250 pounds per year is entitled to S2P. Those who stay in S2P receive an additional income, administered by the government, when they retire.
According to the Financial Services Authority, several millions of people who had opted out of the S2P are in fact standing to lose. This has activated the government, which has asked its actuary department to decide on the level of rebates that should be available to company schemes and individuals who opted out of S2P between 2007 and 2012.
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