My Lords, under the single-tier pension we will be merging two schemes: the basic state pension, which requires 30 qualifying years for the full rate, and the state second pension, which you can contribute to for up to nearly 50 years.
Requiring 35 qualifying years for the full single-tier pension strikes the right balance. It will enable the majority of people who contribute to achieve a full state pension through either work or the comprehensive system of credits available to people unable to work, while still retaining the contributory principle. This leaves considerable leeway for people to have gaps of up to around 15 years in their working life and still qualify for the full rate. In 2020, the significant majority of single-tier pensioners—around 85%—will have 35 qualifying years or more. Our analysis suggests that in 2020 around 90% of male and 80% of female single-tier pensioners will have 35 or more qualifying years.
There is a simple response to the point that the noble Lord, Lord Browne, raised about expectations. In the existing system, we have no such thing as a full state pension. We have £110 basic, plus who knows how much additional pension. It is complex and people do not know what to expect. That is exactly the point that the single-tier pension will address.
In the early years after implementation, people in Great Britain with between 30 and 34 qualifying years are just as likely as those with 35 or more qualifying years to have a higher state pension under single tier than under the current system. The transition calculation provides for a “better of” comparison at April 2016 so that the person receives the higher of their national insurance valuations based on old and new scheme rules, with the old rules being based on 30 qualifying years.
That will, in fact, advantage some people because, where someone does not have the 35 years needed for the full level of single-tier pension, they will receive a pro rata amount according to the number of qualifying years that they have built up, provided that they meet the minimum qualifying period. Someone with 30 qualifying years would therefore get a single-tier valuation of 30-35ths of the full rate, or around £123 per week, as my noble friend Lord Stoneham pointed out, less any adjustment for contracting out based on the illustrative single-tier rate of £144. In many cases, the single-tier valuation will be higher than the valuation that people would get under the current system, as 30 qualifying years of basic state pension gives an income of £107 a week in 2012-13 terms.
Furthermore, where someone’s foundation amount in 2016 is below the full single-tier rate, people will have the opportunity to increase this amount by gaining additional single-tier qualifying years before reaching
state pension age through work, paying voluntary contributions or receiving national insurance credits. The current broad range of credits will be mirrored under single tier, and when universal credit is in place, it will extend credits to an additional 800,000 people who do not receive them under legacy benefits.
These arrangements recognise people’s contribution records in the existing scheme and allow people to have significant gaps in their national insurance record while still ensuring that 80% of new single-tier pensioners reaching state pension age by the mid-2030s receive the full rate of the single-tier pension.
The amendment tabled by the noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, would require the Government to conduct a review of a phased transition for the move between 30 and 35 years for a full pension. I hope that I have reassured noble Lords that there is little evidence that such transitional arrangements are needed. However, I need to point out that, if a review were to recommend a single-tier pension based on a 30-qualifying-year requirement, this would carry with it cost implications. The estimated cost of such a system, compared to a 35-year model, would be around £700 million per annum in 2030 and £2.9 billion per year by 2060.
Furthermore, to reinforce the point about uncertainty raised by the noble Lord, Lord Browne, a delay in defining the qualifying requirements for the new system, which a review would necessitate, would introduce uncertainty for those closest to retirement. The period following Royal Assent will be a crucial time for the delivery of single tier, and making fundamental changes at that point might well delay implementation. This moves back to the amendment raised by the noble Lord, Lord McKenzie, about the importance of communicating the reforms and a clean communication. The point on the move from 30 years to 35 seems more of a communications issue than one of principle. To this end, helping people to understand how they may be affected, we have been conducting field work on communicating the impacts of the policy. I therefore ask noble Lords to withdraw these amendments.