The government is still paying £11.8bn a year through a state pension scheme scrapped more than two decades ago, The i Paper can reveal.
Around 6.6 million people are currently receiving an entitlement from the state earnings-related pension scheme (Serps), according to figures obtained from the Department for Work and Pensions (DWP) under the Freedom of Information Act.
The average payment is around £1,778 a year, equivalent to about £34 a week.
Experts say the figures show just how slowly major changes to the state pension system work their way through the population.
Ministers can change the rules for today’s workers, but pension promises built up under the old system can continue to cost the government billions for decades.
Serps was closed to new accruals in 2002 and replaced by the state second pension (S2P). S2P was then itself scrapped when the new state pension was introduced in 2016. Neither reform wiped out rights people had already built up, however.
So, while millions of workers are now building their retirement income under the new flat-rate state pension, the government is still paying out billions based on pension rules abandoned years ago.
How Serps worked
Serps was introduced in 1978 as an additional state pension on top of the basic state pension.
Unlike the basic state pension – where your payment is linked purely to the number of years of national insurance (NI) contributions or credits that you have – the amount you received under Serps was linked to earnings.
Workers could build up additional pension rights for every year they continued working before reaching state pension age – currently 66.
The amount depended on factors including earnings, NI records and whether someone was contracted out by their employer – meaning they built a private pension instead.
Serps was closed to new accruals in 2002 and replaced by S2P, which continued to provide an additional state pension for eligible workers, with greater support for some lower and moderate earners as well as people with certain caring or disability responsibilities.
S2P ended when the new state pension, worth £241.3 per week or £12,547.6 per year today, was introduced in 2016.
The reforms moved the system towards a simpler, flat-rate state pension. People stopped building up new Serps or S2P rights, but existing entitlements remained payable.
That is why the government is still paying billions through schemes that have not allowed new accruals for years.
A pension scheme that refuses to disappear
Around 3.7 million people have both Serps and S2P entitlements. Another 158,600 people are receiving an additional state pension entitlement alongside the new state pension, because they’re covered by transitional protections designed to protect the value of the rights they built up under the old system.
And around 4.3 million people have more than one recorded additional state pension entitlement.
The result is a state pension system in which millions of people are still receiving money calculated, at least in part, under rules that no longer apply to today’s workers.
The rules can change relatively quickly. The bill cannot.
Sarah Coles, head of personal finance at AJ Bell, said: “Making changes to pensions is like course correcting a super-tanker. Eventually you’re making a significant move, but it’s going to take an inordinate amount of time for that change to complete.
“There are 13.3 million people getting the state pension, and while we tend to hear far more about the new flat rate pension, most pensioners are on the old system.
“The earnings link to the state pension has been broken for new pensioners, but for older people, it’s an essential part of their pension, and something they were planning for throughout their working life.”
Pensions make up a significant chunk of total benefits spend, but Serps doesn’t make up much of the total. Calculated from the £154.2bn spent on the state pension this year, it’s less than 8 per cent, Coles said.
Could the bill have been even bigger?
A former pensions minister has warned that the cost of Serps could have become substantially larger had governments not overhauled the state pension system.
Sir Steve Webb, now a partner at LCP, said the reforms introduced in 2016 helped prevent what could have become a rapidly escalating future bill.
He explained: “Serps only started in 1978, and it takes a very long time for pension systems to mature to their full cost.”
Without the 2016 reforms though, the first people retiring with maximum Serps entitlement would have done so around 2028, with the cost continuing to rise substantially afterwards, Webb said.
He added: “One of the reasons for the 2016 state pension reforms was both to simplify things and to be fairer to women, but also to nip in the bud the otherwise soaring cost of Serps promises which would have had to be met by the current generation of workers.”
The reforms stopped people building up new Serps or state second pension rights. But they did not wipe out the rights people had already earned.
Could you be getting Serps?
If you worked and paid NI between 1978 and 2002, you may have built up Serps rights.
The amount depended on your earnings, NI record and whether you were contracted out.
Serps was replaced by the state second pension in 2002, so some people have rights under both schemes.
You cannot build up new Serps rights today, but existing rights remain part of your state pension.
You can check your state pension forecast through gov.uk to see what you are due.
If you have worked over several decades, don’t assume the headline new state pension figure is the whole story – you may have additional pension rights built up under the old system.
A DWP spokesperson said Serps was “a legacy system”.
They added: “People who reached state pension age before then continue to receive their state pension under the old rules, including any extra pension they built up through Serps.
“As Serps closed to new accruals, the number of people receiving Serps is expected to decline over time as existing recipients leave the caseload. Expenditure is also expected to decrease over the longer term.”