Nearly 300,000 people are due to receive lower pensions in a move announced in December last year. The government plans to scrap the ‘derived benefit’ top-up for spouses worth up to around £66 per week, a benefit that disproportionately benefits women.
It’s the latest in a salvo of policies designed to reduce pensions spending at a time when every pound has to stretch further.
Derived benefit explained
The top-up is awarded to people who have failed to accrue the required 18 years of National Insurance contributions required to receive the state pension, but whose spouses have met the requirement. Approximately 3% of all pensioners receive the derived benefit top-up.
It was introduced in the National Insurance Act of 1946, under the dominant societal model of the male breadwinner. Women were extremely likely to reach state pension age without qualifying for their own pension, and so were awarded up to 60% of the full pension while their husband was alive, increasing to the full rate once widowed.
By design, the majority of claimants are still women, who may have taken career breaks to look after children. Of the roughly 300,000 pensioners expected to affected between 2016 and 2030, 190,000 are women.
The top-up is expected to be scrapped when the single-tier pension is introduced in 2016.
The case for cutting
The government’s case for cutting the derived benefit top-up is three-fold:
- There is a need to cut the pensions budget.
- The benefit no longer fits the times.
- The majority of claimants live overseas.
That the pensions budget needs cutting is clear and undisputed. 30% of government spending is on welfare, and retirement benefits (including state pension) amount to more than half of that. The ageing population means this spending is only going to balloon unless radical, structural changes are made.
The most interesting reason for cutting the benefit is based on recent trends. Looking at the government’s own graph, we can see that the proportion of women reaching state pension age who are entitled to the full state pension has increased dramatically even in the last 15 years.
As put in a statement by the DWP: “We have always said that under the new single tier pension everyone will build up a state pension on their right. This will put an end to the outdated notion that a man needs a pension while a woman needs a husband.”
Scrapping the top-up then, is both in keeping with the contributory principle of the welfare state and a shift in keeping with demographic shifts.
The final reason, and what seems to be the real thrust of the argument, is that the majority of claimants are actually living overseas “with little or no connection to the UK”. For example, based on the most recent figures, “nearly 70% of the awards to date relate to married men living outside the UK.” Quite rightly, and again in keeping with the contributory principle, the coalition takes the view that the pensions budget is best spent on people who have worked, and are living, in the UK.
Defending the benefit
The government’s case is certainly persuasive, particularly considering the relatively small number of people affected – and their concession that to take away the benefit overnight would be conspicuously unfair, putting transitional measures in place. However, like all government cuts, their reasoning deserves further scrutiny.
The principle defence of the benefit is that cutting it completely simply doesn’t make sense. Yes, the majority of women now qualify for a full state pension themselves. But there is still a sizeable proportion that don’t. Women are disproportionately affected as they are more likely to take career breaks. The solution to that problem, whilst still in keeping with the contributory principle would be some sort of derived benefit based on their spouse’s NI contributions…
That the pensions bill needs curtailing is irrefutable. But to take the other side of the argument, retirement is becoming progressively harder to pay for from an individual point of view. Pensions minister Steve Webb has admitted himself that the state pension provides only a “bare minimum”. According to pension provider Fidelity’s pension calculator, it takes a pension pot of hundreds of thousands on top of the state pension for even a modest retirement income. In this context, taking away the top-up seems perverse. The contributory principle is important, but so is welfare-as-safety-net; protecting the most vulnerable in society.
That there has been a growth in men living overseas able to claim the benefit – presumably because they emigrated and so have not built up their NI contributions – is a reason to clamp down on awards to emigrants, not to scrap the benefit altogether.
The bigger picture
The government needs to reduce the pensions bill however it can. As such, it’s hard to shake the feeling that the derived-benefit top-up has come under fire mostly because it affects a relatively small number of people, and therefore will go relatively unnoticed. The move to scrap it has certainly received very little media attention.
Similarly to raising the state pension age with no regard to national and professional disparities in life expectancy, it seems like another case of using a blunt tool where sharper nuance is required.