My adult children are in their early twenties. They will experience the radical simplification to the state pension introduced in 2016. All of their working life dates after 6th April 2016. As a result, their state pension is worked out in a very simple way. They will get a full flat-rate state pension if they build up 35 years of paying (or being credited with) National Insurance Contributions. If they only build up 34 years, they will get 34/35 of the full rate and so on. What could be simpler?

The trouble is that most people in the current workforce have been around for a bit longer. If they have just one year in the system before 6th April 2016, their new state pension calculation suddenly looks a lot more complicated. Although the answer is increasingly likely to be that they will get the standard flat rate, the calculation to get to that answer remains involved and very difficult for people to understand or check. And I believe that over time people will increasingly wonder why things could not be done more simply.

Consider my own situation. At time of writing I am aged 55 and am due to get a state pension at the age of 67. Most of my working life has been before April 2016, but I have several years of contributions since the rules changed.

Working out my state pension involves several stages.

First, the DWP will calculate for me a ‘starting amount’ as at 6th April 2016. The starting amount is the higher of:

1. My entitlement by that date under the old rules – a basic state pension based on 30 years of contributions plus any earnings-related (SERPS) pension I had built up by that date; and
2. My entitlement by that date had the new rules been in force – a flat rate state pension based on 35 years of contributions minus a deduction for past contracting out;

My final state pension will then be the starting amount plus 1/35 of the full flat rate for each year of contributions from 16/17 onwards, capped at the full flat rate amount. (At present rates, I happen to get around £5 per week on my state pension for each additional year worked).

The account above immediately highlights the complexity of the calculation.

Although I come under the ‘new’ state pension, the first thing that happens is that the government work out my entitlement under the old rules. This brings in the whole complexity of basic pension, additional pensions, contracting out, graduated retirement benefit and all the rest of it. Even though these things have been abolished, a notional calculation still has to take account of them.

Even the ‘new’ rules calculation as at 2016 includes an adjustment for past contracting out – the deduction of the so called ‘contracted out pension equivalent’. It is nigh on impossible for people to work out where this number comes from or if it is correct – especially for those who contracted out into money purchase pensions.

You may wonder why all of this complexity has been retained in the new and simplified state pension?

The answer is to do with fairness in the transition to a new system. This relates to two groups:

1. Those who had already built up more than the new flat rate amount when the system changed in 2016; if the flat rate is (say) £175 per week, and you had already built up £200 per week under the old rules you would be pretty aggrieved to have your pension cut; so an ‘old rules’ check is needed to make sure people aren’t losing out;
2. Those who were contracted out in the past; this group saved money by being contracted out, and there was always an expectation of a deduction from their state pension at retirement as a result; to simply forget in 2016 about past contracting would have been very unfair to those who never contracted out.

The trouble is, short-term transitional protections implemented in 2016 alongside a major shake-up start to look harder and harder to understand the further we move beyond 2016. To give an extreme example, as things stand, someone who started work in 2015 could retire in the 2060s and still have a state pension calculation based on rights up to 2016, adjustments for contracting out etc. Whilst the priority for reformers five years ago was getting the new state pension landed, and these transitional rules were an important part of that, continuing to base future pension entitlements on rules from the last century gets harder to justify with every passing year.

In an ideal world, everyone would be treated the same way as my adult children, with a flat pension paid to those with the full number of years and a pro rata reduction for those who fall short. In the early years of the new pension, that would have been unfair for the reasons set out above. But the number of people to whom these transitional calculations are making any difference is declining steadily. There must come a time when a future government should simply ‘draw a line’ and fully implement the new and simplified system for all, finally sweeping away all of the complexity of the old pension system.

For now, the government will not want to go anywhere near state pension reform for fear of getting ‘stung’ if it were to stir up the ‘WASPI’ issue around state pension age equalisation. But I foresee a time when the case for further radical simplification of the state pension system will become overwhelming.

Steve Webb is a partner at LCP and was the pensions minister from 2010-15.