REPORT
Summary
These Regulations propose a new method for uprating old age pensions from October 2013. The new method will continue to peg the medium to long-term growth in pensions in line with the growth in average earnings whilst guaranteeing a minimum rise in any one year in line with the increase in the cost of living for pensioners. This will ensure that future pension increases will always at least match the rise in prices during the year, whilst also allowing pensioners to enjoy increases that keep pace with the earnings index in the long-term.
In contrast to the “triple lock” method rejected by the States in early 2012, the additional cost associated with this method is limited and does not build up from year to year. The proposal will protect pensioners from the impact of high prices without damaging the long-term sustainability of the Social Security Fund.
In line with a commitment made by the Minister for Social Security in November 2012, and supported by a States decision at the end of last year, these Regulations also provide for an adjustment in the value of the current old-age pension, to bring it in line with the increase in RPI (Pensioners) from June 2012. It is planned that pensioners will receive a lump sum amount in early May in respect of the difference in the value of the old age pension between October 2012 and May 2013, followed by an increase in the pension rate until the next uprate which is due in October 2013. The total cost of these adjustments is estimated at just over £2 million, which will be met from the Social Security Fund. Income support payments to pensioners will be amended in line with these increases, to ensure that low income pensioners receive the full value of the adjustment and the uplift in the pension rate.
Background
At present, the States of Jersey old age pension is increased each October by the percentage rise in the Jersey Index of Average Earnings. Historically the percentage increase in earnings has usually exceeded the increase in the cost of living, as measured by the Retail Price Index. Since 2001 the old age pension has been uprated in line with the increase in the earnings index. Between 2001 and 2007 the value of the old age pension grew by 28% and the improved spending power of the pension echoed the increasing prosperity of the general working population. However, the global downturn has disrupted this upward trend and in four of the last five years prices have risen faster than wages, and both workers and pensioners have seen a fall in the real value of their incomes.
Following the most recent increase in the States old age pension of 1.5% in October 2012, Ministers made a commitment to review the mechanism for uprating the old age pension. The issue was investigated during the autumn of 2012 and the mechanism which these Regulations propose was first announced by the Minister for Social Security in November 2012.
Changes to future uprating methodology
It is vital that any changes made to pension uprating safeguard the future value of the pension and ensure that it remains affordable in the long term as pensioner numbers increase.
Any uprating methodology must remain mindful that pensioners can be particularly vulnerable in times of recession; equally in years where average earnings stagnate, it should acknowledge the financial pressure placed on the working population, who fund the pensions paid.
As previously announced, the new uprating methodology refers to both changes in RPI (Pensioners) and average earnings. It guarantees that pensioners will always receive an increase at least in line with the cost of living for pensioners while also following the trend in average earnings, which are expected to rise faster than the cost of living in the long-term.
In summary:
- In years where prices (RPI (Pensioners)) rise faster than average earnings, pensions will increase by the percentage increase in prices.
- In years where average earnings rise faster than prices RPI(Pensioners), the pension will increase by at least the midpoint between the average earnings increase and RPI (pensioners).
- If the midpoint increase would take the value of the old-age pension below the long-term growth in earnings, then the old age pension will be increased so that it matches the long-term growth in earnings.
However, if in any year, the uprating process would result in a reduction in the value of the old age pension, then the old age pension will remain unchanged at its previous value.
The diagram below illustrates how the method will work. In this hypothetical example, in year 3 and year 8 prices grow faster than earnings and the old age pension increases above the level of the earnings index in each of those years. This protects pensioners whenever prices are rising faster than earnings. The method then continues to provide increases in the pension rate but over one or two years the pension index is brought back in line with the earnings index. The fluctuations in the earnings index are smoothed out to protect pensioners from short-term changes in the economy.
The baseline for the growth in earnings will be measured from 2011. In that year the index of average earnings stood at 267.3 and the weekly old age pension rate was set at £184.45. The adjustments that will be made to the current old age pension (see next section) are equivalent to the old age pension rate in 2012 being set at £189.84 per week. This provides a pension index for 2012 of 275.1, compared to the index of average earnings in 2012 of 271.4.
Subject to the approval of these regulations, the next uprate will take place on 1 October 2013 using the new method and based on the RPI(Pensioners) and the average earning index figures for June 2013. The new uprating method will only be applied to old age pensions. All other contributory benefits will continue to be linked directly to the index of average earnings.
Adjustments
In line with the commitment made by the Minister in November 2012, and the subsequent States decision in December 2012 (P.97 Old-age pension: increase for 2012, as amended), these Regulations also provide for an increase in the current rate of old age pension and a lump sum payment in respect of the difference between the current value of the pension and the increase in prices as at June 2012.
The Regulations will create a new benefit, in the form of a single payment, the “2013 old age pension adjustment" calculated as the additional amount that pensioners would have received since October 2012 if the pension had been increased by 2.9% at that time. The lump-sum will be paid to all pensioners who are eligible for a pension on a specific day and it will be added to their usual pension payment for that week.
This lump sum will be followed the next week with a mid-year uprate, calculated to raise the value of the old age pension to the same level as would have been achieved had an uprate of 2.9% been applied in October 2012. This will increase the full rate single old age pension from £187.25 per week to £189.84 per week.
As set out in the comment to P.97 Amd, providing these backdated payments represents a major administrative task. The timetable to implement the proposed solution currently provides for the lump-sum payments to be made on 2 May 2013 and for the revised old age pension rate to be payable from 9 May 2013. As payments are made in advance and operational changes need to be made some time before the planned payment dates, the exact date and the value of the lump-sum payment will be confirmed by a Ministerial Order, to be made by the Minister for Social Security, in early April.
Based on a payment date of 2 May 2013, the maximum value of the 2013 old age pension adjustment for a single pensioner with a full contribution record is £80.29. The value of the adjustment will vary according to the value of the weekly pension rate for each individual pensioner. Thus,
- The lump sum will be paid proportionate to the contribution record of the pensioner. For example, a single pensioner with an 80% record will receive £64.23.
- The lump sum will be reduced accordingly for pensioners who have opted to take a reduced pension at age 63 or 64.
- A dependency increase of 66% will be paid to husbands who receive a pension in respect of a dependent wife.
Pensioners and income support
Just over 2,000 local pensioners claim income support. The income support system includes a pension income disregard which ensures that people aged 65 and above receive up to an additional £45.08 per week (single pensioner) or up to £74.13 per week for a pensioner couple.
In the week in which the 2013 old age pension adjustment is made, the IS pension disregards will be increased in line with the maximum value of the lump-sum payment. As with previous annual uprates, this will ensure that all low income pensioners benefit from the full value of the 2013 old age pension adjustment.
In the following week, the pension disregards will be adjusted in line with the maximum value of the revised pension rate. These changes will be made by Ministerial Order at the beginning of April.
Administration of the 2013 old age pension adjustment
As set out in the comments to P97. Amd, the calculation and payment of backdated amounts across 28,000 pensioners represents a substantial administrative task. The Regulations reflect a pragmatic solution to this problem. In particular, the 2013 old age pension adjustment will be paid to all pensioners who are eligible to receive an old age pension in a specific week (planned to be the week of 2 May 2013). All eligible pensioners in that week will receive a payment based on the total number of weeks since the October 2012 uprate, and their contribution record. This will include some pensioners who have reached pension age after October 2012 and before May 2013.
Even with this simplification, substantial administrative effort will be required to ensure that:
- Pensioners are fully informed as to the payments that they will receive
- Income support claimants receive the full value of the additional amount
- Local pensioners can be advised of their income tax liability for 2013
- Payments can be made efficiently throughout the world
- Backdated claims received later in 2013 can be dealt with fairly
Financial and Manpower Implications
The proposed uprate methodology ensures that the increase in pensions in a particular year cannot fall below RPI (Pensioners) but can, on occasion, rise above the increase in the Index of Average Earnings. In these years the cost to the Fund will be greater than under the current method. The additional cost will depend on the difference between the increase in prices and the increase in earnings in that year.
Adjusting the 2012/2013 pension rates in line with the 2.9% increase in RPI (Pensioners) as at June 2012 will introduce an additional cost of approximately £2.04 million. Based on a payment date of 2 May 2013, the 2013 old age pension adjustment will be paid to just over 28,000 pensioners, cover 31 weeks from 4 October 2012 to 8 May 2013 and cost approximately £1.21 million. The pension uprate, to run from 9 May 2013 to 30 September 2013 will cost approximately £0.83 million. These costs will be met from the Social Security Fund.
Increasing the value of the pension disregard within the income support calculation will create additional cost within the income support budget. However, this cost forms part of the normal uprating process and is included within the cash limit for 2013.
There are no on-going manpower implications. However, considerable temporary resources will be needed to ensure the smooth payment of the 2013 old age pension adjustment. Existing departmental resources will need to be reallocated from other operational areas to administer this project.
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