[Relevant documents: The Fourth Report of the Work and Pensions Committee, Session 2005-06, on Pension Reform, HC 1068-I, and the Government’s response thereto, Cm 6956.]
Order for Second Reading read.
I beg to move, That the Bill be now read a Second time.
This Bill takes forward the key recommendations for pensions reform made by the Turner commission in 2005. These reforms will help to lay the foundations for a sustainable and affordable pensions system marked by significantly less means testing and greater personal responsibility for ensuring financial security in retirement. They will also provide a fairer deal for women and carers.
The Bill makes important changes in five key areas. First, it will establish a simpler and more generous state pension that will provide a solid platform on which people can save, while continuing to target resources on those most in need. Secondly, there will be new rules on eligibility for the basic and second state pension which, for the first time, will properly recognise the social contributions that people make. In doing so, it will deliver fairer outcomes for many women and those with caring responsibilities.
Thirdly, the Bill will pave the way for a new system of personal accounts that will make it easier for more people to save for their retirement, thus sharing the responsibility for pension saving more clearly between individuals and Government.
Fourthly, the Bill will facilitate a streamlined regulatory environment that will strengthen existing pension provision, reduce the burden of regulation and help employers who already provide good workplace schemes. Finally, it confirms a higher state pension age for the future, which will keep the proportion of life spent receiving the state pension broadly stable for each generation, and help to secure the long-term financial stability and sustainability of the state pension system.
The Bill represents probably the biggest change to our pension system since Clement Attlee’s post-war Labour Government implemented the Beveridge reforms. Thanks to the work of the Pensions Commission and to the national pensions debate, I hope and trust that these reforms will enjoy widespread support both in the House and outside. Those of us in the House today, when, as I hope, we support the Bill later tonight, have the opportunity to cement that consensus and, for the first time, to offer all our constituents a framework of long-term stability on which they can plan for their retirement with confidence.
The Bill comes after 10 years of progress, since the Government came to office, in reducing the poverty that had all too often become associated with old age.
Can the Secretary of State tell us what the increased cost will be in the first full year of implementation? Does the big increase mean that the Chancellor is blocking early implementation of the measure and delaying it until well after the next election?
The figures have all been set out, but in relation to the right hon. Gentleman’s point, the Government are presenting the legislation and the Government are behind the reforms. He might like to look at the last page of the Bill to see which Ministers support it.
We are all aware that it was the Conservative Government who broke the earnings link in the first place, and that in statements in the past the Opposition have made it clear that they are proud of that fact. Can my right hon. Friend inform the House about the work he has done to forge a new consensus on this significant issue?
It is important that there should be consensus, if possible, about long-term reform of our pension system. That is precisely why my right hon. Friend the Prime Minister established the Pensions Commission in 2002. It has done sterling work in helping to forge agreement across the parties about the future of our pension system, which is a good thing. My hon. Friend draws attention to the actions of the Conservative Government in relation to pensions, and I want to say one or two words about that in a second.
We all look forward to the hon. Gentleman’s rewriting of the history of that issue. I know that he was a supporter of breaking the link to earnings, so perhaps he will provide his justification for that later. It certainly had the effect of reducing public spending—obviously so—but it created the legacy of pensioner poverty that we had to address when we came to office, and in relation to which we have made significant progress.
In 1997, one in four pensioners faced the indignity of living below the poverty line. Many had to live on as little as £69 a week. Change to put that right was our first priority, and rightly so. Since 1997, 1 million pensioners have escaped from relative poverty, and more than 2 million from absolute poverty. We are spending £10.5 billion a year more—nearly 1 per cent. of gross domestic product—on pensioners than we would have done had we continued the policies that we inherited in 1997. We have increased the basic state pension by significantly more than inflation, equivalent to more than £350 a year extra for a single pensioner. The poorest third of pensioner households will, on average, be £2,000 a year better off in 2006-07 than under the system of 10 years ago. As a result of all those measures, pensioners are, for the first time in a generation, less likely to be poor than any other group in society.
Our second priority was to improve confidence in the private pensions market, which is why we acted to clear up the pensions mis-selling scandal and why the Pensions Act 2004 created the new pensions regulator, the Pension Protection Fund and the financial assistance scheme. However, despite those important changes, real and obvious challenges remain for the long-term future of our pension system. That is why, as I have already said, my right hon. Friend the Prime Minister established the Pensions Commission in 2004 to assess what further reforms might be necessary to meet them.
The commission identified four major issues. First, people were not saving enough for their retirement. Secondly, by 2050, there will be 50 per cent. more pensioners than today, while the ratio of those in work to those in retirement will have halved. Thirdly, as a result of a historical legacy, the current state pension system is, as we all know, complex and delivers unfair outcomes, especially for many women and carers. Finally, if we maintain current indexation policies, the basic state pension will be worth only £35 in today’s earnings terms by 2050 and more than 70 per cent. of pensioner households could be eligible for pension credit.
The Secretary of State is right to say that many pensioners are, thanks to the Labour Government, much better off today, but the Pensions Commission recommended the restoration of the earnings link by 2010 or 2011, and Government proposals do not introduce that measure until 2012 at the earliest. Is not my right hon. Friend concerned that that is too late to improve incentives and it may also mean that the value of the state pension could continue to decline—in the view of Age Concern, to the equivalent of only £75 a week?
My hon. Friend is right, but she will also be aware that Lord Turner and the pension commissioners have welcomed the Government’s proposals for taking the commission’s conclusions forward. We have always made the point—and this is particularly incumbent on those who hold ministerial office—that it is important to make it clear to our electorate that we will carry out the reforms when we believe them to be affordable. That is rightly a judgment for the Government and Ministers to make. It should be challengeable, as it is in the House and elsewhere, but we believe that we are taking a prudent and sensible course of action. I do not believe that restoring the earnings link in 2012 will materially affect any of the calculations or assumptions that underpin the Turner report, particularly in respect of those who are most likely to benefit from the reforms.
Although the restoration of the link is welcome, how does the Secretary of State respond to the National Pensioners Convention, which argues that the link is not being restored to its previous level? Previously, the Secretary of State had the option of making a link to either earnings or prices—whichever were more beneficial—but the pension is being linked now only to earnings. Why not return to the previous position?
There is some flexibility in the Bill with respect to the issue of prices or earnings, which I believe is right. I am surprised that the hon. Member for Angus (Mr. Weir) has found the time to join us today, as I thought that he was busy celebrating the 300th anniversary of the Union—[Interruption.] I am sure that many of his constituents are.
I believe that the Bill addresses all those crucial challenges head on. Crucially, it does so in a way that promotes personal responsibility for dignity and security in old age with outcomes that are fair, simple, affordable and, above all, sustainable. Part 1 provides for a simpler and more generous state pension, a simplified state second pension, new rules on eligibility that will give women and carers a much fairer deal, and a higher state pension age.
Because it is linked with our policy for increasing the state pension age. I have to say that I am not going to give way to the right hon. Gentleman again in this debate—[Interruption.] No, the questions are certainly not too difficult. In fact, I am now tempted to give way again, but I know that the right hon. Gentleman will make his own speech in his own way later, as he always does, but I understand that he is one of the few Conservative Members opposed to the principle of automatic enrolment and mandatory employer contributions. I suspect that we will see the right hon. Gentleman take issue with his own Front-Bench spokesmen later in the debate.
The Secretary of State has indicated that the delay in making the earnings link is because of the link with the higher state pension age. Does he agree, therefore, that if the Government decide to delay the improvement of the earnings link until beyond 2012, there should logically be a delay in introducing the higher state pension age?
No, I do not accept that. I will come to those points later, because the issue of the state pension age is important.
As proposed in the pensions reform White Paper last May, the first three clauses reduce the number of years needed to qualify for the basic state pension to 30 and also replace home responsibilities protection with a new deal of weekly credits for carers. For the first time, a life of social contributions will be properly recognised and rewarded on an equal footing with work.
The measures that my right hon. Friend is announcing are important, but will he also look at the position of people who work in a number of part-time jobs and do not pay national insurance? If they worked in those jobs cumulatively, they would pay national insurance. They might miss out on a state pension in later life. Will he look again at whether something can be done for people in that position to enable them to pay national insurance or to deem national insurance to have been paid?
We have been looking closely at that issue. My hon. Friend has raised it with me on a number of occasions. It certainly came up during the work of the Turner commission. I have to say honestly that what she proposes would be extremely difficult from an administrative point of view. However, we are more than happy to continue to look at the issue. She might want to discuss that with me. I suspect that my hon. Friend the Minister for Pensions Reform will deal with that issue in Committee.
If the hon. Gentleman will just give me one moment, I am trying to make an announcement, but I do not seem to be getting very far. Some people who have paid voluntary national insurance contributions since the publication of the White Paper last May might have chosen not to do so if they had been aware of the proposed changes on eligibility entitlements. That applies most obviously to someone due to reach state pension age after April 2010 who already has 30 qualifying years. I can announce that the Government will make arrangements whereby individuals in that position will be eligible for a national insurance refund.
A lot of the welcome changes that the Secretary of State has just been talking about represent a great improvement in the condition of women and will benefit women. However, there is one area where women are disbenefited: in relation to the Pension Protection Fund. As I understand it, on divorce, pensions paid from the Pension Protection Fund are not regarded as pensions. When is a pension not a pension? When it is compensation from the PPF. That means that those payments are not available for adjustment between the parties to a divorce. Will he do something about that?
These issues are generally very complex. The PPF is not actually the subject of the Bill, although I am sure that the hon. Gentleman will want to table some amendments—I am not trying to help him out there. My understanding is that it is perfectly appropriate for a court to take PPF income into account during the process of finalising the financial arrangements on settlement, so I think that there is a way through on that one. It might be more helpful if I were to write with more detail, setting out the position more fully.
I hope that the announcement that I have made about national insurance contribution refunds will be welcome to hon. Members on both sides of the House. Today, less than a third of women reaching state pension age get a full state pension. In 2010, as a result of the Bill, the figure will reach 75 per cent. By 2020, it will reach 90 per cent. That means that in 2020, more than 300,000 extra women will be entitled to a full basic state pension when they retire, rising to almost 500,000 more by 2025. That will be a major step forward for women in our society.
Yes, we have looked at that issue carefully and it has been a major concern for us. The proposals in the Bill and the other reforms that we are taking forward will be of some assistance.
Clause 5 will restore the earnings link and allow for that to happen from 2012 or, in any event, by the end of the next Parliament. As a result, by 2050 the basic state pension will be worth twice as much in real terms as it is today. The clause also places in primary legislation the Government’s pledge to uprate the standard minimum guarantee element of pension credit by earnings.
The Government are committed to reducing the extent of means-testing in the future, thus ensuring that pension credit continues to be targeted at people who would otherwise have been poor in retirement, or those who have only small and modest savings. The clause provides the means of securing that important outcome. As a result, by 2050 less than a third of pensioners will be eligible for pension credit, with only about 6 per cent. receiving the guarantee credit alone, and it may be possible for small savings to be taken as a lump sum through the process of trivial commutation. In the vast majority of cases, those receiving pension credit will be continue to be rewarded for saving for their retirement.
The restoration of the earnings link and measures to increase both simplicity and intelligibility are welcome. I think that the right hon. Gentleman would accept that the overall litmus test or yardstick for the Bill should be whether means-testing will be reduced. What is his estimate of the scale of the prospective reduction over a 10-year period and a 20-year period?
We think that means-testing could be significantly reduced. As I said, if we do nothing now, it will reach about 75 per cent. of pensioners by 2050. With these reforms we can get the figure down to about 30 per cent., so there would be quite a significant reduction. I am trying to make the point that the majority of people in receipt of means-tested additional financial help will be those who have saved for their retirement, so they will be given a reward for saving.
There is an argument to be had about the role and extent of means-testing in any pension system. The Liberal Democrats would remove it entirely and adopt a universal citizens pension at a totally unaffordable cost of between £10 billion and £20 billion a year. I think that we can dispense with that solution as a rational contribution to the debate, but there is an argument to be had about precisely how the balance should be struck. It is right and proper that we have a system that encourages people to save and rewards those who do so, and that is what means-testing will increasingly achieve in the future.
The Secretary of State mentioned trivial commutation. Has he given any thought to the level at which that should be set, especially when the new personal savers accounts come in, to ensure that the Government give the message that it always pays to save?
My hon. Friend makes a good point. At present, the limit on trivial commutation is set at £15,000. It is right that that should be subject to ongoing review and continual analysis. We in the Department will do that, together with our ministerial colleagues in the Treasury. I assure hon. Members that we are aware that the matter needs proper scrutiny.
The Secretary of State will know that Lord Turner’s aspiration for the personal accounts was that for every £1 that a person saved, he or she would get £2 back because of other contributions. Is the right hon. Gentleman in a position to tell us what proportion of the target audience for personal accounts he expects to get that two-for-one return or better?
I think that the figures are set out in a document that we published when we produced the second pensions White Paper, but I am afraid that I do not have them to hand. If they are not in the document, perhaps we can return to the matter in Committee. We believe that the vast majority of people will be able to look forward with some confidence to receiving £2 back for every £1 put in.
Clause 4 will abolish adult dependency increases. The existing dependency increase provisions are a hangover from the immediate post-war period when single breadwinner households were the norm. We live in a very different world today. There is no justification for the taxpayer subsidising couples when only one member has reached pension age, no matter how young the other member of the couple may be. Furthermore, entitlement to adult dependency increases is based on an all-or-nothing earnings limit that creates a disincentive for younger women who are married to men drawing a state pension. If those women earn over that amount, the state pension of their husbands is automatically reduced. The money that we are saving by scrapping ADIs is being reinvested, under the reforms, to provide more generous eligibility criteria for state pensions, so that women, in particular, can qualify for a full state pension in their own right. There is no adverse impact on those with low or modest incomes, as the increases are taken into account on a pound-for-pound basis in calculating pension credit.
Clause 9 provides that people can accrue entitlement to the state second pension, based on new crediting arrangements. That means that about 180,000 more people, including 110,000 women, could accrue entitlement to the state second pension in 2010 through the new carer’s credit. As the Pensions Commission recommended, we are phasing out the earnings relation, through provisions in clauses 10 to 12, to create a clear space for personal accounts. However, we are going one step further by replacing the complexity of the current system with a flat-rate amount of £1.40 a week on top of the basic state pension for each qualifying year spent either working, caring or doing a combination of both.
Let me be clear: no one loses out because of the withdrawal of the earnings relation. The earnings uprating of the basic state pension more than makes up for the changes. Even the highest earners are better off—a high earner who worked from age 25 would get £102 from state pensions in 2053 under the current system, but under the proposals in the Bill, they would get £139, so the measure is not a stealth tax, as some have suggested. There are no overall losers under our reforms to the state pension system.
What thought has been given to economic migrants—we know that there were more than 500,000 of them last year, from various countries—who settle in the UK and may become UK citizens, if they are unable to accrue 30 years-worth of contributions while they are settled in the UK? That does not appear in the Bill. Secondly, what discussions has the Secretary of State had with his counterparts in other European Union countries about the transfer of economic migrants’ basic state pension contributions from their home country to the UK pension fund?
Entitlement to the basic state pension or the state second pension will be based on the number of qualifying years in which the person paid into it, as well as on where they live and what other rights they have when they retire. If they do not have 30 years-worth of contributions, but retire and are settled in the United Kingdom, they will be entitled to as much of the state pension as they have paid for, and potentially to a pension credit top-up, too. Those rights are portable, and it is important to remember, in the context of the European Union, that we have an obligation to pay pensions under the terms of various regulations, particularly the 1408 regulations. The system is relatively clear, and I am not really entirely sure what point of substance the hon. Gentleman was raising—
No, I do not want to give way to the hon. Gentleman again. If I have not dealt with his point, my hon. Friend the Minister for Pensions Reform can deal with it in Committee.
Taken together with the basic state pension, the simplified entitlement effectively provides a single state pension for most contributors, giving people a much clearer picture of what they can expect to receive from the state in retirement. For example, by the 2050s, someone who had contributed for most of their life through working or caring would be entitled to about £135 a week from state pensions in retirement, instead of between £90 and £100, which is what they would receive today, before the reform is made. As they could be confident that the entitlement would lift them clear of pension credit, they could plan their private saving effectively, too.
Some of us argue that the improvements in the basic state pension should be greater, and should be made more quickly, to improve the foundation for private savings, but the Secretary of State points to the issue of affordability. Is he not concerned about the fact that a large proportion of state expenditure on pensions goes towards supporting the personal pensions savings of higher-rate taxpayers? Could not some of those resources be switched to helping people on lower incomes, by improving the basic state pension?
In her previous intervention, my hon. Friend prayed in aid the Pensions Commission. The commission considered precisely that point and said that it was not sensible or possible to do the sorts of things that she argues we should do. In any event, let me make it quite clear that tax relief for pension contributions is not a matter for me.
I will not give way to my hon. Friend again on that issue because it is properly a matter for the Chancellor to consider in the normal Budget-making process.
No. If the hon. Gentleman does not mind, I would like to make progress. Perhaps he can make his points in his own speech.
Finally, clause 13 legislates for a gradual increase in the state pension age, which will increase by one year every decade between 2020 and 2050, and each change will be phased in over two consecutive years in each decade. In making a commitment to increase the state pension age to 68 by 2046, the Bill seeks to set a course for 40 years. That is a major step for any Parliament, but it is absolutely the right thing to do. Those gradual increases will not eat into the retirement that people can expect to enjoy, as they are designed simply to match the increase in life expectancy over that period. The Pensions Commission report made it quite clear that the state pension age should increase to reflect rising longevity, and our decisions are fully consistent with its recommendations on the issue.
My right hon. Friend is right that that is important, and it is the right policy to pursue. What would he say to manual workers with hard jobs who will not enjoy the life expectancy that others enjoy after retirement? Is there a case for looking at their specific circumstances?
I welcome my hon. Friend’s support for the policy and I accept his concern, which is shared by Members on both sides of the House. It is worth making two points. From an historical perspective, when David Lloyd George and the Liberal Government introduced the state pension in the early part of the last century, it was payable at the age of 70—the average life expectancy for the people mentioned by my hon. Friend was barely 50—so it was not a brilliant deal. We are not proposing anything as draconian. Secondly, the Pensions Commission identified that problem and suggested that the Government continue to make sure that pension credit was payable at 60. We are looking carefully at that proposal as one way of addressing people’s concerns.
It is worth bearing in mind the fact that life expectancy has increased for people in all parts of the United Kingdom, as well as for all occupational groups. We can all look forward to a longer period in retirement, but if we want the state pension to be simpler and more generous—that comes at a price, as we all know—we have a choice. Either we try to find a way of making the additional expenditure sustainable in the long term without the need for tax rises, or we go down the easier route that some hon. Members would advocate by loading it all on to tax rises and passing the bill on to future generations. I do not believe that it is prudent or responsible to pass that problem on to our children and grandchildren, who would pay the cost of the package in extra taxes. That is dodging the issue, and I do not think that we should do it.
While it is unpopular to talk about working longer, the simple fact is that if we are not prepared to increase the state pension age, we will create an unsustainable financial burden for future generations which, as I said, is the wrong thing to do. The increase in the state pension age is therefore at the heart of the Bill, ensuring the sustainability of the reform package and locking in the essential stability that is needed in any successful pensions policy. Part 2 implements a number of measures designed to support good quality employer pension provision by reducing the regulatory burden and making the existing system simpler for employers and providers.
Clause 14 allows occupational pension schemes to do away with the complexities of the detailed rules on guaranteed minimum pensions by converting members’ rights accrued between 1978 and 1997 into a new scale of benefits. The requirement for the new rights granted after conversion to be of at least equal actuarial value to those that they replace will properly safeguard members’ interests, while the fact that a scheme is allowed to adopt a unified and streamlined benefit structure will enable administrative savings and give members greater certainty about their rights in the scheme as well as greater flexibility to transfer successfully to other schemes.
Clause 15 abolishes contracting out for defined contribution schemes, as recommended by the Pensions Commission. During the Bill’s passage through Parliament, we intend to take powers to enable us to remove the complex rules governing rights accrued in contracted-out defined contribution schemes, following the outcome of the review of the open market option for annuities that we expect to be completed by the end of the year. The removal of those rules will simplify the management of rights for both schemes and members, reducing costs to schemes and supporting our aim of simplifying pensions regulation. In addition to the measures in part 2, our rolling deregulatory review offers the opportunity for further radical change, not merely to rewrite existing legislation but to cut red tape and make it easier to deliver workplace pensions.
My hon. Friend the Minister for Pensions Reform today announced further details of the institutional review that will consider how the functions of organisations involved in the regulation and protection of workplace pensions—such as the pensions regulator, the Pension Protection Fund and the Financial Services Authority—can best develop within our new pensions settlement. It will also extend to cover those involved in the provision of advice, mediation, dispute resolution or compensation for pensions.
My right hon. Friend has acknowledged that the private savings element is crucial. Can he give an assurance that in the years ahead, those who retire on a stock market downturn will get as fair a deal as those who retire on a stock market upturn?
There is a way of trying to manage risk in relation to equity investments, which is called lifestyling. It is a way of loading the risk early on in the investment programme and moving into bonds and safer investments later. The detail of how all those investment decisions are made is not properly a matter for Ministers and is not covered by the Bill. That is rightly a matter for professional fund managers to address in the way that they invest those pension investments to which we are all contributing.
The right hon. Gentleman has been extremely generous in giving way. I ask my question on behalf of a number of constituents who are worried—that is, a clearly defined group of people who are finite in number, who took early retirement through a private pension scheme that has subsequently gone bankrupt. The Secretary of State knows that as a result of previous changes to legislation, such people get a much reduced income, although they could not have anticipated such a change in their circumstances at the time of making those arrangements. Will he therefore consider using the Bill as a vehicle to address the wrong done to that group, who could not anticipate the change in their arrangements, given that as a result of the PPF, anybody considering taking early retirement in the future will be well aware that their income in later life might be reduced?
That is probably one of those interventions for which I wish I had not given way. The hon. Lady has made an important point. I raised the matter in relation to a point about the PPF that the hon. Member for Angus made earlier. The Bill makes no provision for the Pension Protection Fund. If the hon. Lady wants to table an amendment in Committee or on Report, it will give Ministers an opportunity to discuss any specific proposal that she has. The Bill makes no provision to deal with the issue that she raised, but we stand ready to consider any detailed amendment that she might wish to table.
Part 3 provides for the creation of a personal accounts delivery authority—
I am extremely grateful to my right hon. Friend for giving way. Has he considered giving that authority clear statutory objectives at the outset, one of which should be to minimise the effect that it has on good workplace pensions?
Indeed; we will do that. We made clear in the White Paper that we published in December what the express statutory remits for the personal accounts delivery authority should be. We have chosen not to set them out in the Bill because the House has not given consideration to the legislation to set up the personal accounts system, and it would be pre-emptive if the Bill sought to make provision when the substantive legislation has not been brought forward. I can assure my hon. Friend that we will introduce legislation, I hope in the next Session, and that that will be one of the express statutory objectives of the new personal accounts authority.
The authority will be an independent body with financial sector expertise that will, in the first instance, advise the Government on the design of the operational structure of these new accounts and prepare to put in place the necessary contractual arrangements with the private sector. It will then be responsible for beginning the process of creating the infrastructure to deliver the scheme from the contracted providers.
The creation of the delivery authority provided for by the Bill is the first step towards establishing personal accounts. Following the current consultation on last month’s White Paper, we intend to legislate further on the detail of the new low-cost personal accounts, which will be the catalyst for a new savings culture in our country. They will help, rather than compel, people to save for their retirement. The accounts will be transparent. It will be the people’s money, not the Government’s.
Savers will have choice over which funds to invest, and auto-enrolment will secure economies of scale so that individuals can take the benefit from lower charges and higher returns. Simple, low-cost, flexible and portable personal accounts may generate an additional £4 billion to £5 billion of new net saving each year—equivalent to about half a percentage point of gross domestic product. They will help millions of people to take greater responsibility for building their retirement income by giving them greater opportunities and incentives to save and building on the solid platform provided by the changes to the state pension system in the Bill.
Part 4 contains a number of technical and financial provisions and provides that the operation of the personal accounts delivery authority will extend to Northern Ireland.
The Secretary of State said that the delivery authority will be independent. How does he reconcile that with the provisions in schedule 6, whereby the appointment of the chairman and the deputy chairman is at the discretion of the Secretary of State?
That will not compromise the independence of the delivery authority. The Secretary of State is the right person to make those appointments. I wonder who else the hon. Gentleman would entrust with that responsibility, given that the scheme is being set up by Parliament and must eventually be properly accountable to Members in this place.
When people take out a pension, they are putting their money away for 20, 30 or 40 years, or even longer. They expect the framework in which they make that decision to save for their future to remain as stable as possible over that period. Today, we can make it clear that our intention is to help people to save with confidence. Over the past 30 years, as the Pensions Commission highlighted, the pensions environment has failed to provide that stability. On top of demographic changes and stock market fluctuations, policy has frequently changed, under numerous Governments, leaving us with what the Pensions Commission described as arguably the most complex system in the world. We owe it to our constituents and to future generations to reach beyond the normal partisanship of party politics and to establish, through this legislation, a pensions system that can truly stand the test of time.
The Bill gives every Member of the House the chance to demonstrate, first, a strong resolve in addressing the pensions challenge that we face as a country, and secondly, the opportunity for all of us to make common cause with our constituents in helping them to plan for their own financial security in retirement. In supporting the Bill tonight, right hon. and hon. Members will take a major step towards a sustainable, affordable and trusted system that will meet the needs of those in retirement both now and in the future. That is why I commend the Bill to the House.
The Bill before us proposes to create a more generous, more widely available, less means-tested and simpler package of state retirement benefits. It will address the worst elements of unfairness in the current system and provide a platform for a workplace pension savings scheme intended to rekindle the savings habit, particularly among those on average and below average incomes. We support those objectives and we support the principles of the Bill—although, as I am sure that the Secretary of State would anticipate, there are issues that we will want to examine in Committee.
As the Secretary of State acknowledged, the measures to achieve those objectives form a coherent package, and the reforms stand or fall together. Although the Bill contains the substance of only one part of that package—the reforms to state pension provision—and creates the mechanism for further development of the second part of the package, which is the personal accounts workplace saving scheme, we will need to consider the bigger picture as regards the problem that we are seeking to address and the Government’s proposed response to it.
The challenge that we face as a society is demographic change. In a nutshell, people are living longer, and in the future there will be fewer workers to support a larger number of pensioners under our pay-as-you-go state pension system. At the same time, with earnings outstripping increases in the basic state pension, the real value of the basic state pension in earnings terms has continued to erode. The Government’s response has been a dramatic expansion of the means-tested, top-up system of pension credit. On the Turner commission’s projections, if nothing changes by 2050, 75 per cent. of all pensioners will be on means-tested pension credit. That matters for two reasons.
First, although means-tested retirement benefits have undoubtedly succeeded in taking a significant number of pensioners out of poverty, for many, the system is complex, intrusive and inaccessible. There are 1.5 million pensioners who do not claim the pension credit to which they are entitled. Half of them live in poverty. For them, the combination of the falling real value of the basic state pension and complex, means-tested pension credit means a descent into deeper poverty.
Does my hon. Friend agree that the complexity of pension credit adds cost to the system? It would be preferable to pass the cost on to pensioners and help alleviate their poverty rather than investing it in a complex system that is unwieldy for them to use. [Interruption.]
I am sure that my hon. Friend intended to say that we should reduce the costs and pass the savings on to pensioners in the form of higher benefits. I am sure that all hon. Members agree that the goal should be to reduce the administrative cost of benefit payment systems in order to use more of the available money for the people who need it.
Did my hon. Friend notice that the Secretary of State tried to imply that linking the standard pension only to prices was a Conservative, not a Labour policy? Is not it the case that, by 2010—the last date for an election in this Parliament that could remove the Government from office—the Labour Government will have enforced a state retirement pension that increases in line with prices for 13 years, never believing that changing it was affordable? We need to know why they believe that they can afford it if they stay in office thereafter.
My right hon. Friend is right, and I shall deal with affordability shortly.
The second reason why the increase in means-testing matters is that, although its use has allowed poverty in retirement to be targeted at relatively low cost to the Exchequer in the short term, its expansion has a long-term cost—a reduction in the incentive to save. Since Labour came to office, the savings ratio in this country has almost halved. It is not difficult to understand why. An effective marginal 60 per cent. withdrawal rate acts as a major disincentive to saving for retirement for those who are either caught in that trap or believe that they might be caught in future.
Now the Government propose to change tack and halt the erosion of the value of the basic state pension. The Secretary of State knows that the 2005 Conservative manifesto pledged to link the basic state pension to earnings. At the time, the Government condemned that pledge as unaffordable. We therefore welcome the conversion to a commitment to the earnings link from 2012 and the simplified contributions rules, which mean that men and women who have worked or cared for someone for 30 years will be entitled to a full basic state pension in their own right. We also accept the increase in state pension age that will partly finance the changes.
The Government have taken major steps forward and the Secretary of State should be congratulated on his success in persuading the Chancellor to agree to the provisions, especially given the unconventional style of his charm offensive on No. 11.
I am a little confused—perhaps the hon. Gentleman can enlighten me. My understanding of his party’s policy is that it would reduce the proportion of gross domestic product that the state spends. Although I welcome his talk of consensus, I am confused about how he can agree with the broad thrust of our policy when his would reduce the finances with which his party could operate.
The hon. Lady has not done her homework. She is not quite at one with the Secretary of State, who has urged us to form a consensus. She is apparently upset by our agreeing with much of the Bill.
Let us consider the costs. I think that it was the Age Concern brief that pointed out that, for all the Government’s grandiose rhetoric, what they are actually doing is putting in place a system that will, over 45 years, use approximately the same proportion of gross domestic product to fund a higher number of pensioners in retirement. The Secretary of State has always argued that this reform package must be affordable. It is affordable, and that is why we are prepared to support it, and why it will secure consensus in the House.
I share my hon. Friend’s perhaps faint praise for the Government’s acceptance of the Conservatives’ policy of raising the basic state pension in line with average earnings. Does he share my concern, however, that the Government are not so enthusiastic about extending the abolition of means-testing? That might call into question the success of personal accounts.
The hon. Gentleman mentioned his party’s election manifesto pledge to restore the link between pensions and earnings. If my memory serves me correctly, however, it was not a full-blown commitment to restore the link for anything beyond one term. Does he not recognise that the pensioners of this country need and deserve a sustainable system? People are not looking for a policy commitment that lasts for only four or five years.
The hon. Gentleman is absolutely right. The commitment that we made at the last election was the commitment that it was prudent to make at that time. We have already heard today that the Chancellor has insisted that the Secretary of State’s commitment will be effective only in 2012 or 2015. We believe, however, that restoring the earnings link to provide that stability is affordable now.
The Turner commission emphasised the need for a bipartisan approach to pension reform. We agree—but not because of a lack of evidence to make a partisan case. We know who is responsible for accelerating the collapse of Britain’s pension provision from the strongest in Europe to among the weakest, as the right hon. Member for Birkenhead (Mr. Field) has suggested. We also know whose decision it was to mount a £5 billion a year raid on our pension funds. We know who has presided over 60,000 occupational pension schemes entering wind-up, and who is responsible for the Government’s lamentable failure to respond effectively to the challenges of the ombudsman’s report and to address the needs of the victims of the pre-Pension Protection Fund pension scheme failures. We still agree with Turner, however, because, whoever is responsible for having exacerbated the problem, it makes sense in the national interest to work together to pursue political consensus in trying to sort the matter out for the future.
The principal measures in the Bill will not be implemented until the next Parliament. Nobody knows which of us will be implementing them. The proposed changes will affect people’s long-term planning and savings behaviour over a 40 to 50-year time horizon.
Does the hon. Gentleman accept that there was no point in restoring the link with earnings while so many pensioners, especially women, did not get the state pension anyway? We could have increased pension levels until kingdom come, but a large number of pensioners would have remained in poverty because they did not get the state pension at all.
With respect to the hon. Lady, I have already acknowledged that by welcoming the proposal to standardise the contribution requirements for men and women at 30 years’ work or caring.
Consensus cannot mean a blank cheque for the Government of the day. The building of consensus, however important, does not excuse the Opposition of the day from their duty to scrutinise the Government and hold them to account. A lasting consensus will be one that is built on solid foundations, on transparency, on knowledge and on a widespread understanding of, and acquiescence in, the proposed changes. It will not be one that is based on ignorance. It must be a consensus that embraces all of our society, and not one that is built in the Westminster village behind the backs of the people whom we are here to represent. Even while supporting the Bill, therefore, we must debate the unresolved question of the level of mean-testing. We must carefully consider the changes proposed, identifying the winners and losers as the state pension pot is redistributed, and we must analyse critically the proposals for personal accounts. We will therefore approach 2012 as a society that has made a set of decisions openly, with a full understanding of what we are doing, why we are doing it and what we are seeking to achieve.
I am bound to say that we have been disappointed by the Government’s management of the consensus-building process. The country at large has little or no understanding of the state pension reform, beyond the headlines of the earnings link and the increase in the state pension age. Even more worryingly, a large proportion of employers—particularly smaller ones—who will face compulsory pension contributions under the package are completely unaware of the additional burden. Closer to home, I was surprised by the Secretary of State’s announcement today that he intends to incorporate new provisions in the Bill, which we are only now considering on Second Reading. We have not had any discussions about those new provisions, and know nothing about them. While we have appreciated the opportunity to have a couple of briefing meetings with the Minister and his officials, it has been difficult to obtain some of the key information required to scrutinise the proposals properly.
I tabled a dozen or so parliamentary questions in July, seeking information about the proposed changes. Those questions fell unanswered at Prorogation in November—no doubt the victim of the Minister’s traffic light scheme. Despite a ministerial promise on 15 November to answer them anyway, not one had been answered to me a month later—[Interruption.] The Minister says from a sedentary position that they have all been answered now. When did the answers arrive? This morning. In the meantime, typically, as soon as the House resumed for a new Session in November, the hon. Member for Yeovil (Mr. Laws) re-tabled all of my questions word for word. He has had a bit more success than I had; so much for consensus-building.
To return to the substance, hanging over the debate is the unresolved difference in projections of the level of means-testing that will remain in the system and its impact on savings behaviour and thus on the likely success or failure of personal accounts.
I agree with the hon. Gentleman about the need to reduce means-testing as much as possible. There are two ways of doing that: one is to improve the value of the state pension and its universality as compared with means-tested benefits; the other is to hold down or reduce in real terms means-tested benefits. Can he assure the House that Conservative policy is no longer to do the latter, because the Conservative party was advocating that at the last election?
I assure the hon. Lady that we accept the pension credit regime put in place by the Government, including the statutory uprating of pension credit to which the Secretary of State referred. I will deal with her point in a moment.
The Department for Work and Pensions and the Secretary of State have said today that means-testing will be limited to less than 30 per cent. of the pensioner population by 2050. However, the Pensions Policy Institute, a respected independent think tank, believes that 45 to 50 per cent. of pensioners could be affected. That is an important difference and, on balance, most people in the pensions sector appear to trust the PPI’s modelling more than the DWP’s. Confidence in the DWP statistics is perhaps not enhanced by, for example, the use of one figure to project the growth of state second pension income in the means-testing model, and a lower figure to project state second pension income in the model for the future cost of Government spending programmes.
Since September, we have been urging the Government to try to reach an agreed position with the PPI so that Parliament and the country can understand the nature of the platform that the changes in the state pension system will provide as a base for the personal accounts savings system. It is hugely disappointing that the Bill should come to Parliament today with such a large discrepancy between the different projections of the future level of means-testing unresolved.
We recognise that whichever figures are right, there is no quick or easy way of reducing means-testing. Having introduced extensive means-testing of benefits for pensioners, neither this nor any other Government would be prepared to see an increase in the number of pensioners in poverty. That is the answer to the question from the hon. Member for Birmingham, Selly Oak (Lynne Jones). No Government would be prepared to see a de-linking from earnings of the pension credit threshold, which, as it is defined, would push more pensioners into poverty. Nor is it possible for any fiscally responsible party to promise to erode means-testing by massive increases in basic state entitlements, as some have been tempted to do.
Conservative Members, however, have a long-term aspiration to see the level of pensioners means-testing gradually reduced. I invite the Minister to commit the Government to the same long-term aspiration, so that collectively we can send a clear signal to potential young savers that the major political parties are committed to a long-term reduction in disincentives to save that might otherwise deter those savers from seeking to provide for their own well-being in retirement.
If I heard the hon. Gentleman correctly, he said that although he was very concerned about the issue of means-testing, he would not propose to do anything to diminish the Government’s own projections of the level of means-testing. Is that really his position?
What I have said to the hon. Gentleman—and I do not imagine for a moment that he would do anything different—is that we do not intend to attack the pension credit threshold, which would be one of the two ways of closing the means-testing gap in the short term. It would be a case of either reducing the level of means-tested benefits or increasing the level of basic state pension entitlement in a way that would be fiscally unaffordable. But the fact that there is no short-term ready way of dealing with the position does not mean we should not aim, over 20, 30 or 40 years—a time scale which is relevant to incentivising young savers—to send a clear message that we aspire collectively to reduce the level of means-testing in the system over time.
I want to make a little progress.
In a moment I shall deal with the part of the Bill that introduces the personal accounts delivery authority, and with the wider elements of that part of the reform package. First, however, let me draw attention to some issues that need to be addressed in the interests of transparency.
There is a great deal of concern about the element of uncertainty over the starting date for the earnings link in 2012 which the Chancellor has introduced into the equation. We have a long-term framework for public-expenditure projections. The Treasury, we are asked to believe, cannot take a view on whether the earnings link will be affordable in five years’ time, but is apparently quite happy to enter into 20-year private finance initiative contracts and the ordering of military equipment for delivery in a decade.
It must be concluded that this is simply another example of the Chancellor’s wish to have the last word on every single subject: of the “clunking fist” insisting on stamping its mark on every step that the Government take. Rather than a graceful move allowing the Prime Minister and the Secretary of State to take the credit for having the good sense to adopt our policy of an earnings link for the basic state pension, an elaborate, confusing and—if I may say so to Labour Back Benchers—politically costly contortion has been performed, so that long after the present Prime Minister and, I suspect, the present Secretary of State are gone, the Chancellor can be the one to announce that the earnings link will definitely be introduced in 2012. That, I suggest, is the worst kind of manipulation for party or, in this case, factional political reasons.
We understand that every commitment any Government make is always implicitly subject to affordability, but given the long-term framework for public expenditure decisions, that caveat can be intended only to protect against a catastrophic and unpredicted downturn in the economy. Therefore, unless the Chancellor knows something that he is not telling us, we need the Government to be much clearer about 2012 and to say explicitly that that date will be delayed only in the most extraordinary and extreme economic circumstances. Anything less will introduce an element of doubt and confusion that will undermine one of the fundamental purposes of the whole reform package: to create stability upon which people can plan their own futures.
Although the hon. Gentleman makes many political points, it is clear from what he is saying that his party has no aspiration to reduce the level of means-testing faster than the Government proposals. I ask him to respond to a point I made earlier about higher level rates of tax relief on pensions contributions. I asked the chair of the Pensions Commission—Adair Turner—about that, and while my right hon. Friend the Secretary of State was correct in his statement about Adair Turner’s view, Adair Turner said that one way of being able to release money for improving the basic state pension would be to hold down the size of the total pension pot that is available for tax relief. Would the hon. Gentleman like to comment on that suggestion?
The hon. Lady is absolutely right, and Lord Turner is absolutely right to observe that that would be one way of doing that. However, as the Secretary of State said, Lord Turner went on to say that it would not be the right way of doing that, and I agree with his analysis.
Let me respond to the first part of the hon. Lady’s question. She said that my party did not have any proposals for reducing means-testing any faster than the Government. I have made it clear that we accept that there is no quick or easy way of reducing means-testing in the short term that is both fiscally affordable and does not increase pensioner poverty, but—
Perhaps the hon. Lady will let me answer her first question before she seeks to ask another. I hope in this debate to get Ministers to establish whether the Government, while recognising all the difficulty that there is and the impossibility of doing anything more in the short term, none the less harbour an aspiration in the medium to long term, when it becomes possible, to reduce means-testing further; or do they, as some Opposition Members suspect, think that means-testing of between 30 and 40 per cent. is a desirable status quo that they would want to preserve in the long term? I simply seek to establish that we are all on the same page in respect of the long-term wish list.
Perhaps the hon. Lady will deal with this matter in her speech, and I can then intervene on her if that proves to be appropriate.
The second area of concern relates to the transitional arrangements for moving from the existing required years of contribution to a blanket period of 30 years of work or qualifying caring in 2010, because, to be blunt, there are no transitional arrangements. As the Bill currently stands, there will be a sudden step down, from 39 years to 30 years for women, on 6 April 2010. Therefore, a woman with 30 years-worth of contributions who reaches the age of 60 on 5 April 2010 will spend the rest of her life on approximately three quarters of a full basic state pension, while her neighbour who reaches the age of 60 a day or two later will enjoy a full basic state pension. The average life expectancy for women at 60 years of age is 24 years, so the difference in terms of current earnings over the remainder of those women’s lives would be something in the order of £26,000. That cannot be right and is bound to lead to a real sense of injustice. It offends one of our basic principles, accepted by the Government, for the assessment of the pensions reform package: that it must be equitable, and be seen to be equitable, between different groups in society. It should not be beyond the wit of a competent Government to devise a cost-neutral phasing approach that avoids the perceived injustice of a cliff edge in 2010.
I take the hon. Gentleman’s point about the need for smoothing, but in addition to the basic state pension, many people will have some private savings or some form of private income for a second pension, or there will be various top-ups. It is almost certainly completely inaccurate to focus on one element of people’s income post-retirement and say that they will suffer for the rest of their lives because of this cliff edge, and it is misleading for the many women who will benefit from these changes.
The hon. Lady has eloquently made the case for our canning the Bill and all going home. She has just said that the basic state pension does not really matter because there are lots of top-ups. The whole premise on which the Secretary of State is working is that we have to stabilise the basic state entitlement in order to promote saving over the long term.
This is the point at which I was going to discuss the voluntary contributions that have been made and are still being made—an issue that we have raised with the Secretary of State on many occasions—but as a result of his announcement today, he has, perhaps happily, reduced my speech by a couple of minutes. However, I should like him to clarify one part of that announcement. Will contributions deemed by the Treasury to be precluded contributions—those that cannot increase someone’s entitlement to benefit—made from the conclusion of today’s Second Reading debate be refundable? I think that that is the intention behind his announcement, although it was not 100 per cent. clear whether the measure will be effective from today or from some later stage in this Bill’s passage.
I did not intend to interrupt the hon. Gentleman, but I am grateful to him for letting me in again. The refunds will be made from 25 May, which was the date of publication of the White Paper.
Excellent. So the refunds will be retrospective, which deals with one of the concerns that, as the Secretary of State knows, we have raised. That has slightly pulled the rug from under the Minister for Pensions Reform, who said only last Monday at departmental questions that
“contributions paid at the time should not be refunded”.—[Official Report, 8 January 2007; Vol. 455, c. 16.]
So he was doubtless in the loop on the discussions, just as I and my hon. Friend the Member for Eastbourne (Mr. Waterson) were.
The third issue on which I want to touch is the changes to the state second pension. We accept that these changes are part of the financing package that allows the introduction of the earnings link, while containing state pension spending within a given percentage of gross domestic product. However, there will be a distributional impact on different groups within society, and it is important that those affected by these changes understand them. Essentially, those earning above £34,000 a year will continue to pay national insurance contributions on a growing part of their earnings above that level, but will no longer receive any earnings-related element of pension accrual on those contributions. So the part of the contribution that pays for the earnings-related state second pension becomes a straight tax.
Many in this House will be thinking, “So what? People on £34,000 a year and above can handle that.” However, because this will be frozen in money terms, over time, the tax will affect everyone on £18,000 a year or more in today’s earnings terms. As Amicus said in its briefing, it will affect people on average and below average incomes. For those who have contracted out of the state second pension into an occupational or personal pension plan, their contracted-out rebates will reduce or end altogether, depending on whether the scheme is defined benefit or defined contribution. So their contributions to their chosen DB schemes will be reduced, and those in DC schemes will be forced to contract back into the state second pension scheme at the very point where it is reducing the earnings-related benefits that it provides. Part of the package that may be, but it will strike many people as an odd way to promote confidence in long-term pension saving, and it has received little or no publicity outside the narrow confines of the industry and the Westminster village.
What of the huge cash saving to the Government from abolishing contracted-out rebates? Perhaps the Government could make it clear what the figure is. The White Paper originally gave an estimate of £4 billion, and the briefing that most Members will have received refers to that figure, but the regulatory impact assessment says that it is less than £2 billion. That is a slightly disconcerting lack of precision on the part of the bookkeepers. Whether it is £2 billion or £4 billion, it has not been taken into account in the Government’s overall costing of the reform package. In other words, the Government have not taken into account that cash saving. The Secretary of State has said that it, or part of it, should be used to support pension saving, but we have heard no such commitment from the Treasury. I would be grateful, as would many people outside this place, if the Minister, when he winds up tonight, could make it clear whether the Government intend that that money, or a proportion of it, will be available to support the introduction of personal accounts and funded pension saving, and whether that position has been agreed with the Treasury.
The fourth issue that I want to highlight is the proposed change to pension savings credit that will create a band of 100 per cent. withdrawal rate for some of Britain’s poorest pensioners. Those with an income just above the basic state pension with, for example, a tiny occupational pension or small amounts of savings income will be hit the hardest. Almost 1.5 million pensioners will be worse off than they would be under the existing system. For example, by 2010, a pensioner with an annual income just £250 a year above the basic state pension will lose £145 of savings credit. The Government say that that is part of the package, but hitting the very poorest savers is an odd way to encourage saving for retirement among those on lower incomes, and I urge the Minister to look again at that provision. I guarantee that our colleagues on both sides in the other place will want to do so if he does not.
Part 3 of the Bill establishes the personal accounts delivery authority with a remit to work up the detail of the scheme that the Government have outlined or propose amendments to it. The promotion of pension saving to the millions of people who are not saving at all or not saving adequately is an essential element of this reform package. My colleagues and I had to think long and hard about Turner’s proposals to use auto-enrolment and compulsory employer contributions to provide a targeted workplace saving scheme focused on the lower paid. Despite the burden the proposals will impose on business, we took the decision to support them and, by doing so, allowed the debate to move on to one about the shape and form of personal accounts. We took that decision because we believed that it was in the national interest for us to do so. But as the debate has moved on, several problems have arisen. First, the level of means-testing projected for 2050 on either model represents a serious disincentive to pension saving. The Government envisage a model based on generic advice only, but it is clear that with 30 per cent. means-testing, let alone with 45 or 50 per cent., many people will be, understandably, confused about whether they would merely save themselves out of means-tested benefits to which they would otherwise be entitled. It is unclear at this stage who will take on the thankless task of giving that generic advice, and who will pay for it. Pension saving will not be right for everyone in a means-tested environment, and in a model free from individual advice, we all have an obligation to ensure that Government do not promote saving that does not pay, with the potential for the mother of all pension mis-selling scandals.
The issue cannot be fudged or avoided. It must be confronted head on. The Government must stop making statements like the one that the Secretary of State made earlier or the one on the Minister of State’s blog that
“even a part-time worker earning £6,000 could receive almost £2 in retirement—getting out double what they put in”.
If any pension provider made such a statement, he could expect the regulator’s knock on the door about five minutes later. If we are to have an open and transparent debate about the value of personal accounts and if we are to convince people of their credibility as a long-term savings vehicle, the Government must be disciplined in the way they present the possible returns. When he winds up the debate, I want the Minister for Pensions Reform to give a commitment that the Government from now on will use the same regulated assumptions and restrictions to express projections of returns to savers in personal accounts that regulated pension providers are required to use. In that way, we will hear no more sloppy “£2-for-£1” offers; instead, projections of returns to different groups of savers will be expressed in the industry-standard, regulated form.
I agree with what the hon. Gentleman says about the importance of accurate advice, but did he hear the Secretary of State say earlier that he believed that the vast majority of people going in for personal accounts could expect a return of better than £2 for every £1 put in? Does not that contrast with the Department’s published research, which says that most people will get £1 for every £1 that they put in?
I heard the Secretary of State’s earlier remarks, but I am not sure that the hon. Gentleman is exactly right in what he says. My point is that telling people that they will get back £1 for every £1 that they put in at the start of their working lives is very different from telling them the same thing in the last year of their working lives. They are two very different propositions, and that is why we have regulations that require investment providers to use assumed rates of return when they present a proposition to the public. My suggestion to the Minister is that the Government need to be equally disciplined.
Our second concern is an overriding one, and has to do with the risk of levelling down among employers who currently offer good-quality occupational pension schemes. The personal accounts system will allow an employer either to offer personal accounts with a 3 per cent. contribution, or to auto-enrol all employees in that employer’s own pension scheme, provided that it has an employer contribution of at least 3 per cent. The overwhelming majority of occupational pension schemes have employer contributions in excess—and sometimes substantially so—of 3 per cent. The evidence is that many employers faced with the prospect of much higher uptake of membership of pension schemes as a result of auto-enrolment, and thus much higher costs, will compensate by reducing their contribution level over time. If they do not do that for all employees, they will certainly do it for new joiners. The achievement of more savers but less saving would represent the ultimate failure of the personal accounts dream.
We believe that the Government must insert into the delivery authority’s remit a statutory obligation to seek to minimise the levelling down that I have described. They must set out, for the authority and for Parliament, the explicit criteria against which the scheme’s successful implementation will be judged. How much levelling down is an acceptable trade-off for how many extra savers and how great an increase in total saving?
Thirdly, personal accounts were presented as a targeted intervention to deal with the market’s failure to provide pensions for people on lower incomes. The Turner commission specifically recommended a £3,000 annual contribution cap to prevent unfair, state-subsidised competition for the savings of higher earners. Like most of us, Turner thought that those people could be left to make their own arrangements.
The Secretary of State has asserted that cherry-picking Turner is not an option, but the Government have ignored his advice. They have said that they will set a cap at a minimum of £5,000 a year—a level that would embrace more than 95 per cent. of all current members of occupational pensions schemes. In other words, the Government have moved by stealth from introducing a targeted intervention aimed at a specific and under-served group of savers to making a grab for almost the whole of Britain’s occupational pension savings sector.
That would be a disaster for the pensions industry, for occupational pension scheme members, and for the political consensus in respect of a targeted intervention. It would also make it almost impossible to measure the scheme’s success in attracting its target audience of low-income savers, and I hope that that is not the Government’s intention. The Government must revert to the original intention behind personal accounts, which was that they would be a targeted intervention to support people on average or below-average incomes, and that means that they must take Turner’s advice on the level of the contribution cap.
We support the principle of targeted intervention to promote workplace saving through auto-enrolment and compulsory employer contributions, but such a scheme will work only if it is based on political consensus. In trying to turn it into something other than the one Lord Turner recommended, and which the original White Paper proposed to introduce, the Government are pushing the boundaries of that consensus too far.
The details of personal accounts will be set out in a future Bill, but I hope I have made it clear that if the consensus underpinning this Bill is to extend to the Bill introducing the personal accounts scheme, the Government must address the questions I have raised. In particular, they must revert to targeting the scheme on its intended audience.
The need for pension reform is clear and the need for political consensus to underpin sustainable reform is even clearer. We are willing to play our part in building a robust consensus based on a solid proposition and underpinned by open and transparent analysis of the challenges that have to be addressed. As my remarks about personal accounts have confirmed, we believe that, taking the package as a whole, we have some way to go in building such a consensus. The Bill makes a good start, by delivering reforms to the state pension system that will form the foundation on which the broader reform package is constructed.
In Committee, we shall ask the Government to answer the points about the implementation of state pension reform that I have raised this afternoon. We shall ask them to acknowledge our concerns about personal accounts by giving clear guidance to the delivery authority about the required outcomes, and to address the threat to the climate of confidence in personal accounts posed by the ongoing public relations disaster that is their record on occupational pension scheme failures.
We welcome the Bill and I sincerely hope that by the time the Bill to implement personal accounts comes before the House, the Government will have acted to address the serious issues that hang over the future of that project, and thus rebuilt the political consensus without which it cannot succeed.
On a point of order, Madam Deputy Speaker. On today’s Order Paper there are three written statements from the Home Office: “Criminal records update”, “Independent Race Monitor” and “Prevention of Terrorism Act 2005”. As yet, none of those statements has been put in the Vote Office and we believe that at least one of them—“Prevention of Terrorism Act 2005”—refers to another piece of bad news; namely, the loss of another suspected terrorist under the control orders legislation. I am concerned that the Government, who should have published those statements by now, are trying to bury bad news. Is there anything you can do, Madam Deputy Speaker, to accelerate the release of those written statements?
Ministers on the Treasury Bench will no doubt have heard the point that the right hon. Gentleman made. Written ministerial statements should indeed be laid in the House promptly, and I shall have the right hon. Gentleman’s point investigated.
The last time the House debated pensions we ended on a note of consensus about consensus. I agree with the hon. Member for Runnymede and Weybridge (Mr. Hammond) that that is a good place to start.
I want to dispute with the hon. Gentleman a little, however, and travel a short way down memory lane in respect of his point about the link with earnings. He is right to have given that some analysis, but it needs a little bit more. I think that the previous Government’s decision to break the link with earnings was rational and they did it for good reasons. That point bears thinking about this afternoon, as we are deciding whether to restore the link. We have to do so for good reasons. Those reasons, and the link’s affordability and sustainability, must be considered in the context of why it was rationally broken, which was because the economic circumstances of the time were entirely different.
I remember that time very well indeed. I was a parent, recently divorced and buying a house by myself for the first time. When I went out shopping in the morning, I did not know whether interest rates would have changed by the time I got home in the evening. Those were different times. It was reasonable and rational in those circumstances to take that decision when pensioners did not know whether their pensions would change or whether they could afford things any more. I believe that the Government were right to say at that time that prices were rising fast and getting out of control. It was reasonable and rational to decide that carrying on was not the right way for pensioners to move forward. There was a big debate in the House and both sides divided on what was the best thing to do at that time. Now, however, the circumstances are completely different and there are completely different controls on the economy, so it is possible to look at affordability. Now is the time to move forward.
I want to concentrate most of my remarks on another issue—that of unfairness, which I believe has been built into the pensions system for many years because it was part of our social history and part of what we thought of as normal for family life. It was always regarded as normal for mum to stay at home and for dad to go out to work. That was just the ordinary way of things, but the world has changed and everything has to change with it.
It is now right to look ahead at a number of issues. We were looking at a demographic time bomb in the 1980s, particularly in respect of how many people would be in work. We did not properly look forward to its impact on pensions, but now it is coming home to roost. It could be said that the demographic time bomb is about to explode. Now is the right time—looking back 30 years and looking forward another 30 years—to take decisions. If we do not take them today, we will be making a very big mistake indeed. We have to view the issues in that context. The hon. Member for Runnymede and Weybridge is entirely right in his analysis of demographic change, so now is the right time for the Bill.
The Bill is also right in its social context, as we are seeing changes in family life and changes to work patterns. It is also right to think about young people and what we expect of them. I do not think that it would be right to tell young people that we expect them to pay for the needs of older people tomorrow so that the elderly can enjoy a luxurious retirement at their expense. It would not right be right to shift the burden of responsibility on to them. We need to draw some logical conclusions from that.
I am left looking at a particular group of people—those who have traditionally been left out of the pension market almost altogether. I refer to working women, 30 per cent. of whom draw full state pensions, but the majority of whom do not. That is because, despite huge changes in social life, women are still the main carers. Women are still the main people who look after young children and who, at the end of their working lives, remain the main carers of elderly parents or others in the family who are in need. We have to recognise that. It is not just a family responsibility, but the responsibility of us all, because the economic impact is huge. We are talking about a contribution to the nation of billions of pounds. It is not just thousands of pounds of investment for the family, but billions of pounds of investment for the whole country. We owe these people—not only but mainly women—a huge debt of thanks.
The Bill goes a great deal of the necessary distance. It is not just a matter of saying thank you, as thanks are worth nothing if they are not backed up with something positive. There are a number of ways of dealing with that problem. The debate that has led to the consensus considered a whole range of ways of opening up the whole Pandora’s box by starting from scratch and devising a new pensions system. We could have started again and looked at how citizens could be rewarded for their contributions to society. That would have been one rational way of proceeding, but it would have been extraordinarily expensive and might have thrown away another factor that our society has grown to value. There was already an in-built consensus about it and everyone understands it. I am talking about the national insurance system.
The national insurance system is a misnamed system. It is not really an insurance system by anybody else’s standards. It is not an insurance system in the sense that means that someone gets rewarded if their house burns down. It is not that kind of insurance. It is not the sort of savings scheme that anybody else would recognise as a savings scheme. It is the kind of British system that only the British really understand. We know and love it, and we know what it means to us. There is a definite consensus about it. Everybody who pays it knows what it means to them. It was right not to scrap it, but to say, “Let’s see what we can do with what we already have, and what will bring the benefits that throwing that out and bringing in a new citizen’s pension scheme would have brought.”
That was the right way to go. It has addressed all the concerns about people who work, but miss out some valuable years of their adult working lives because they are making important contributions to family life by bringing up children and looking after elderly or disabled people in their family. Recognising that was crucial. Reducing the qualification period to 30 years was a simple, but crucial, mechanism. At a stroke, it achieves what an otherwise much more complex way of achieving the same end would have done. I congratulate the Government not just on listening carefully to what women were asking them to achieve and achieving that end, but on doing so in a rational way. I am grateful for that.
I ask the Government to think again, however. I made this point in an intervention, but for the benefit of the House I will explain it more carefully. There is a group of people—it may be a small group—who I fear may get left out of all this. A person could take on a number of part-time jobs, all of which added together as though they were one job could result in an amount of money that would qualify that person to pay national insurance. At the moment, none of those jobs, on their own, would qualify for national insurance.
A person might do one job before their children go to school, another after the last child has been dropped off at school, another after they have picked the child up from school, and another after the child has gone to bed. People fit those jobs around their family life. All the jobs are for just a couple of hours and are low paid. They are all proper jobs and they are all a valuable contribution to our economy. Added together, they do not come to a whole day’s work that any one employer would recognise, but all of us would recognise them as a full day’s work. However, those people pay no national insurance contributions and so do not qualify for a state pension. That has the feeling of unfairness about it. I recognise what the Minister has explained to me about administrative burdens. However, I hope that we can find a way around the problem.
The picture that my hon. Friend is painting implies that the issue is about people fitting their working lives around their families. She is quite right, but we also have to accept the fact that there are employers who do not offer employment to people on anything more than a very part-time basis. That means that there is no real opportunity to work the requisite hours for paying national insurance, even if employees want to do so.
Both situations arise, and, in both cases, people are falling out of the system and being disenfranchised. Some people are not getting the opportunities of others who work exactly the same number of hours for exactly the same pay, but do so for one employer—that is the problem. People working for one employer will qualify because they pay national insurance, but those about whom I am talking will not, although, interestingly, they may pay tax cumulatively. However, they may not pay national insurance in such a way, which is unfortunate because it means that they do not get their entitlement.
I ask the Government to consider whether it would be possible to deem the national insurance of such people to have been paid. We have changed other aspects of the system to allow such credits to be made. Such a process would impose an extra burden on the Exchequer because we, the Government, would be making a payment on behalf of those people’s employers. However, if we did not do so, there would be a difficulty when a person had several employers because one would have to pay the employer’s part of the national insurance contribution. That could give rise to negotiations among employers that would not go very well at all, so I can appreciate that that process could be difficult. That is why I propose the simple solution of deeming a credit for those people.
At the end of someone’s working life, it might be that such credits would not be necessary because they had qualified in any event under the 30-year rule. However, would it not be sad if part of a person’s working life, in which they had spent five or six years working in the way that I outlined to fit around their children, did not go towards allowing them to meet the 30-year rule and thus to qualify for a full state pension? If we introduced my proposal into the Bill, we could enhance it further.
As I am a Back Bencher, I have not fully costed my proposal. I accept that that might present a problem for the Government and that the Bill must hang together as a whole. However, the Secretary of State has worked with me quite closely in the past, for which I thank him. Before I stretch his patience yet further with my attempts to get such a measure into the Bill, I make the plea that he work with me throughout the passage of the Bill so that, by the end of the process, it can hopefully be improved yet more.
I congratulate the hon. Member for Colne Valley (Kali Mountford) on her thoughtful speech. I start where she started, with a note of consensus about the Bill. Although many of us have put this on record before, it is worth pointing out that the Bill has its origins in the report of the Pensions Commission. I pay tribute to the work that Lord Turner and his two fellow commissioners put in, as well as that of all the staff of the commission. The Work and Pensions Committee’s report on this matter pointed out that the way in which the Turner commission operated and managed to influence the political and academic debate, and the debate in the sector, was a model for the way in which such independent commissions can work to have an impact on Government policy.
In the spirit of generosity, I congratulate the Secretary of State, Work and Pensions Ministers and their departmental officials on managing to deliver the Bill on time, especially given the opposition in government at the beginning of the process to the substance of many of Lord Turner’s proposals. It must have been tricky to secure the agreement of the Chancellor. We can only hope that his agreement will survive beyond any point at which he might take over as Prime Minister later this year. We hope that some of the proposals with which he earlier disagreed will be brought forward.
It is worth reflecting on the effect that the Pensions Commission had in helping to forge an agreement on pensions policy. The range of issues on which there is now agreement between the three political parties is far broader than anybody could have expected, even before the last general election. They agree on the earnings link, on raising the state pension age—traditionally a controversial and sensitive issue—on the issue of women’s pensions, and on a number of other key issues, including auto-enrolment. As the hon. Member for Runnymede and Weybridge (Mr. Hammond) suggested earlier, the Conservatives support the compulsory employer contribution. Those are all marked changes for the parties collectively, so it is worth paying tribute to the Turner commission and the Government for getting this far.
I hope that the Secretary of State will excuse me for injecting a note of caution about that great consensus, because as he and other hon. Members will know, in the past there has been cross-party consensus on pensions issues on a number of occasions, and that consensus has not always lasted. Yesterday, I was looking at “The Five Giants: A Biography of the Welfare State”, the influential and impressive book on the welfare state by Nick Timmins, now of the Financial Times. In an interesting passage worth reflecting on today, he recalls the last time that there was major consensus between the three political parties on pensions reform. It was in 1975, when there were proposals to link the basic state pension to earnings, and to introduce a state earnings-related pensions system. Nick Timmins says that, in 1975,
“After all the controversies which had surrounded pensions for two decades, the Bill which was to affect the future of pensions of millions was given an unopposed second reading with fewer than a dozen MPs in the chamber.”
There are a few more than a dozen MPs present at the moment, but we will see what the numbers are at 10 o’clock. I suspect that today’s Second Reading may be unopposed, too. Mr. Timmins continues:
“The opposition spokesman who waved it through was a fresh-faced Norman Fowler, just a few weeks into his new job.”
Of course, just a few years later, the Government who introduced the Bill were swept away. The account goes on:
“A decade later, he”—
that is, Norman Fowler—
“was to attempt to consign SERPS to history.
But in 1975, the pensions industry was desperately concerned to have its future settled after the frustrations of the previous two decades. The new scheme did provide a clear role for the private as well as the public sector”.
The Bill, essentially unchanged, became an Act, but within a few years the great hopes for a consensus proved to be a pipe dream.
Perhaps the hon. Gentleman could clear something up for me, because I am now genuinely confused about where he stands on the issue of consensus. The last time I heard a spokesman for his party speaking about the issue, he started off by saying that the Liberal Democrats supported the cross-party political consensus on the Bill, and ended his speech by saying that we should have a citizen’s pension, which fundamentally undermines the principles set out in the Bill. Will the hon. Gentleman make absolutely clear to the House whether he supports the architecture proposed in the Bill, and if so, will he stop banging on about the unaffordable citizen’s pension?
I am grateful to the hon. Gentleman for paving the way for the next part of my speech, in which I will discuss our support for the citizen’s pension, and the problems that will arise from building a future pension systems on the sandy, unsound foundations of the basic state pension system, even after the reforms. We have spelled out many times that although we agree with the Bill’s principles, and although we believe that it heads in the right direction, we have major concerns that it will not deliver a decent foundation pension, and about the extent of means-testing. The hon. Gentleman shares many of those concerns, and I have often been on public platforms with him when he expressed anxieties about means-testing. The truth of the matter, as we discovered this evening, is that he is not prepared to do anything about it, as his aspiration is to deal with the issue in 20, 30 or 40 years’ time. It is a serious problem, however, so the time scale of such an aspiration is not satisfactory.
I am interested in what the hon. Gentleman has said. We have heard a great deal about consensus in the House, but is it not more important to secure consensus outwith the House about how we are to proceed? That can be done only by addressing the problem of means-testing and making improvements to the affordability of the basic state pension by offering a citizen’s pension.
The hon. Gentleman makes an excellent point. If the Secretary of State and the hon. Member for Runnymede and Weybridge listened to people outside Parliament they would realise that there is considerable consensus on the proposals and the Bill’s principles. At the pensions conferences that I attend, people fundamentally agree, as far as I can establish, that we are seeking to build on a basic state pension foundation that entails too much means-testing and may therefore fail. At the pensions conference organised by the Financial Times in November—I believe that the Minister for Pensions Reform spoke at that conference, and that the hon. Member for Runnymede and Weybridge attended, too—representatives of the pensions industry were polled on their attitude to the critical issue of pension reform and means-testing, and whether or not the Government were building on a solid foundation. My recollection is that the overwhelming majority of people who expressed a view did not believe that the Government were building on a firm foundation. The hon. Member for Angus (Mr. Weir) therefore made an excellent point by suggesting that the consensus outside the House is that the Bill is not perfect. There is support for its principles, but there are major concerns that there is too much reliance on means-testing, which is dangerous. I shall come on to discuss that.
The hon. Gentleman is talking about the citizen’s pension as if it were a panacea and its mere introduction would result in the abolition of means -testing. That would not be the case if the citizen’s pension were introduced at the level of the basic state pension. The citizen’s pension will not, in itself, end means-testing unless it is introduced at a level equivalent to the pension credit, which makes it unaffordable in the short term.
The hon. Lady signed up to the excellent report on the issue by the Select Committee on Work and Pensions, which shares my concerns about the extent of means-testing in the system. She is quite right to say that any reduction in means-testing that does not involve cutting means-tested benefits would result in more universal state pension provision, which I believe she supports, and a higher state pension. She will be delighted that I shall discuss the economics of that proposal later.
First, however, may I discuss the issue that has the greatest potential to hole the consensus on pensions? The previous consensus faltered after 1975 because there were essentially two problems: the first was one of affordability—no doubt, we will return to that later—and the second was one of political philosophy. In 1975, the House signed up to a formulation that required the state to be involved in the first tier of provision and to deliver a second tier—namely, the state earnings-related pension scheme. Differences over affordability and in philosophy led to the breakdown of that consensus.
I am not convinced that those are the two points on which the present reform will falter. It is difficult to see it faltering over the issue of affordability, at least in the next 20 years or so, because as the Secretary of State knows, the deal that he has done with the Chancellor involves a reduction in the share of gross domestic product going into state pensions between now and 2020. The Minister for Pensions Reform shakes his head, but if he looks at his own report, he will see that the share of GDP being spent on pensions goes down from 6.2 per cent. now to 6.1 per cent. in 2020. He is frowning again, but he will confirm those figures when he reads the detail of his report later.
Is it possible that the Minister is confused because he has not used a net present value calculation? Something similar happened when the occupational pension fund cost was calculated for the ombudsman. That may be why the Minister thinks the proportion of GDP is going up instead of down.
The hon. Lady cleverly makes her point about the pension compensation. I cannot speculate on the reasons for the Minister not reading his own reports, but when he looks at them in detail and at the regulatory impact assessment for the Bill he will see, in black and white—we are grateful for the statistics being so clear—that between now and 2020, the share of GDP spent on state pensions will fall from 6.2 to 6.1 per cent. So the reform is not in any sense an unaffordable solution. Indeed, it is an incredibly cheap solution, which is why there are the problems with means-testing.
I do not believe the reform will falter on philosophical grounds, either. There seems to be a relatively strong agreement, at least between the Front-Bench teams of the three political parties, and I think on the part of the nationalist parties as well, that the state’s responsibility is to focus on the first-tier pension and try to take people out of poverty. The Government rely to some extent on means-testing to do that poverty prevention work. There is an assumption that the second pension will be independent of the Government, will not depend on their good will in future to continue, and will involve private accounts which individuals own. That is a different approach for the Labour party, by comparison with both the state second pension and the state earnings-related pension scheme, but it is more likely to endure.
The hon. Gentleman is right. We also agree with the consensus—possibly the only part of the consensus with which we agree. However, in our view the private account will work only in conjunction with the citizen’s pension; otherwise the problems inherent in means-testing arise. Why save when one will lose some of the savings through the operation of means-testing?
I am in danger of agreeing too much with the hon. Gentleman before the Scottish and Welsh elections, so I will not flatter him unduly. Those are indeed our concerns. It will be much more difficult to persuade people to save in their own accounts if there is a large measure of means-testing.
The hon. Member for Runnymede and Weybridge suggested that there was a band of expectation for means-testing in the future, which even under the proposals is between 30 per cent.—the Government’s figure—and the mid to high 40s per cent.—the Pensions Policy Institute figure.
The hon. Gentleman did not answer the point from the hon. Member for Angus (Mr. Weir) about the level at which he would fix his citizen’s pension. Does he recognise that even if he set it at the level of the guarantee credit, 80 per cent. of the people who are forecast to be on pension credit are above that level? Half those people are on disability premiums or carer’s premiums. Does he propose to take all those means-tested extra benefits, which give people £30, £40 or £50 a week, away from them? How will he explain that to people with genuine disability and caring needs?
What I recognise, and what the Pensions Policy Institute has already costed, is that the sort of proposal that we make would lead to a massive reduction in means-testing from the levels that the Minister is considering. I hope he will confirm that the band of expectation for means-testing for his policy is between 30 and 45 per cent.
I do not necessarily go as far as the hon. Member for Runnymede and Weybridge in casting too many aspersions on the Government’s statistics on the matter. I have no doubt that there are some very skilled and able people in the Department who have come up with the estimates. But the hon. Gentleman will understand why there is a natural instinct to believe that the Government will have used assumptions that massage the extent of means-testing down as far as possible. The Secretary of State says that these are good people and that the statistics are reliable, but during the Bill’s passage we will want a much better assessment of the extent of the problem.
The crucial issue is that of returns from the personal account. When I first saw the Secretary of State, as he was paving the way for the Bill, he said that he wanted to ensure that more or less everybody who had an account would be better off as a consequence. Over the past couple of months, the Government have had to water down that commitment by saying that some people may actually lose out. Today, the Secretary of State said that the vast majority of people could expect to gain £2 for every £1 that they put into the account, despite the effects of means-testing. I am baffled by that.
I will in a moment, but I am sure that the hon. Lady would not want to get in the way of the Secretary of State clarifying this matter.
A DWP research report entitled “Financial incentives to save for retirement”, which was published alongside the Bill, says:
“the system that we propose, in combination with the introduction of personal accounts, will see the large majority of people … expecting a payback well in excess of £1 plus inflation for every £1 that they save, subject to factors such as investment growth and fluctuations in annuity rates.”
That is an absolutely lousy rate of return.
Indeed. That implies that people who save money in personal accounts will start by going on an up escalator in relation to the value of their contributions, because they will get the employer contribution, the money from the taxpayer and, they hope, the investment returns that are no doubt built into the Government’s figures, but will then start on a down escalator because they will lose the charges, lose the income tax on the pension when they draw it out and, in some cases, lose pension credit, council tax benefit or housing benefit, while those who are self-employed will not get the employer contribution at all. The great aspiration originally set out by Lord Turner—that every £1 that goes in should be worth at least £2—seems to have turned into the rather modest expectation of £1 for £1. Even more worrying is the apparent confusion about the issue. I will happily give way to the Secretary of State if he can clarify it, because it is pretty important. Unless I have misunderstood him, he is saying that the vast majority of people are going to gain £2 for every £1, yet his report says that it will be £1 for £1.
I am sure that most of my hon. Friends will wonder how it is that the hon. Gentleman is not going to oppose the Bill’s Second Reading. We are all in the dark about that one.
Let me clarify the issue. I am advised that a large majority of people with a good work history, saving from the age of 25, can expect a payback of about £2 per £1 in 2012. Of course, that crucially depends on for how long they contribute to the scheme. The research document that we published states, as we must, that these figures are for illustrative purposes only. We say very clearly that as specific circumstances change or underlying assumptions vary, that could of course lead to different results.
The hon. Gentleman criticises the levels of means-testing, but he has been unable to set the level of his universal pension. He has also been unable to find any way of explaining how he is going to fund the £20 billion to £30 billion a year that will be needed in extra public spending. As my hon. Friend the Member for Aberdeen, South (Miss Begg) said, he would need to set his universal pension at about the same level as the guarantee credit. His solution to the problem to which he draws the House’s attention is simply unaffordable.
I am delighted that the Secretary of State took the trouble to intervene. I have no intention of finishing my speech without tackling precisely the points that he raised. However, underneath the bluster he appears to be rowing back from his earlier comments. Saying that many people with long work histories will get £2 for £1 and so on is different from his earlier comments. Then, he said that the majority of people who joined the scheme would get £2 back for every £1 invested, yet despite those remarks that is clearly not the Department’s position, which is that the large majority can expect £1 back for £1 invested.
Perhaps there is a consensual way ahead and I therefore look forward to the winding-up speech of the Minister for Pensions Reform and his telling us the proportion of people in the target audience for personal accounts who will be subject to means-testing. The proportion is bound to be higher in the target audience for personal accounts than the cited 30 per cent. Is the figure 40 or 50 per cent?
There appears to be much uncertainty and I should like to know the proportion of the target audience that can expect £2 back from investing £1. That is critical. Our ability to persuade people that it is a no-brainer to save in the personal account depends heavily on the perception that for every £1 one puts in, one gets £2 back, because even without the investment return one gets the employer contribution and the taxpayer contribution. There are few other investment vehicles that can easily provide guarantees such as £2 for £1. It then becomes easy to sell personal accounts.
However, if all the Secretary of State can say is that the majority will get £1 for £1, that is hopeless. Many people will be especially vulnerable to losing much of their savings. They include older people, those on housing benefit, the self-employed and those with broken work histories.
I shall give way when I have finished my point. As the hon. Lady knows, some people have enormous debts, which they may be paying off at high interest rates. They will not want to save money in an account that gives them no return when they need to pay off debts on which they are paying interest rates of 30, 40 or 50 per cent. I apologise to the hon. Lady for keeping her waiting.
The mention of housing benefit reminded me to intervene. The hon. Gentleman has still not made clear Liberal Democrat policy on, and attitude to, means-testing. All that he has said today and on previous occasions suggests that means-testing is bad and should not form part of the system of income that we pay to pensioners. As the Minister for Pensions Reform pointed out, doing away with means-testing would mean that the citizen’s pension would have to be considerably higher than the income guarantee simply because there are means-tested benefits such as housing benefit, carer’s benefit and so on. Do the Liberal Democrats want to do away with housing benefit, which is means-tested and important for pensioners, or does the hon. Gentleman claim that means-testing is dreadful except for the poor, for whom it is okay?
We are clearly saying that the amount of means-testing that appears to be built into the Bill is in danger of causing mass Government-sponsored mis-selling or deterring people from saving in the personal accounts. I ask the hon. Lady to reflect on the sense of a position whereby as many as 50 per cent. of the target audience for personal accounts may lose money and have low investment returns. The report that I cited earlier, “Financial incentives to save for retirement” has several omissions, not only the hidden bit about £1 for £1, which make it clear how dubious the benefits will be for many people.
There is also an admission in the Department for Work and Pensions’ report that
“people may see a lower expected payback due to complex circumstances such as entitlement to housing benefit and council tax benefit, as well as pension credit.”
Most people would not regard the entitlement to housing benefit and council tax benefit as involving complex circumstances. Many of the people in the target audience for personal accounts are on housing benefit and council tax benefit. The report goes on to show that the difficulties involved in the means-testing will be even more significant—[Interruption.] I am delighted that the Secretary of State is heckling me. I suspect that I am hitting a sore nerve. The report states:
“However, a level of payback cannot be guaranteed, and the choices and characteristics which may leave a small number of people at higher risk of low payback may not be apparent to either individuals or Government during working life.”
Not only will many people lose money under this scheme but, because of the degree of means-testing, many of the people who start personal accounts will not know at the time whether they will get a decent return. I would be happy to give way to the Secretary of State if he wishes to comment on that.
Those are not my facts—they are the facts in the Secretary of State’s own report, which he does not appear to have read. They make it increasingly clear that the rather sensitive and self-conscious statement that he made on personal accounts on 12 December to the effect that
“We have already acted to make sure that the state pension provides a solid platform on which people can save.”—[Official Report, 12 December 2006; Vol. 454, c. 739.]
is not true. When the Secretary of State—[Interruption.] I am coming on to how we will vote on pension legislation. I assume that he wants to encourage the process of consensus, but it does not sound like it, given the nature of his sedentary contributions.
I urge the Secretary of State to reflect on the report from the Pensions Policy Institute entitled, “Are Personal Accounts suitable for all?”. I have no doubt that he will have read it, and he will therefore know that it contains examples of some of the at-risk groups ending up, in extreme circumstances, getting only 5p or 15p on £1 back for £1 of saving. The extent of the means-testing that is embedded in the proposed system and the inability of the Government to say whether the vast majority of people will get a two-for-one return pose a serious risk to the consensus on pensions.
Our position is that, although we support the principles behind the Bill, we want to see serious efforts being made to deal with this problem before the Bill to introduce personal accounts comes before the House this autumn. I thought that I detected that view being expressed by the hon. Member for Runnymede and Weybridge as well. We could not, in all honesty, warmly support that Bill if we had serious concerns that there was going to be mis-selling or that many people—particularly those on low incomes—were going to lose a large amount of their savings in personal accounts.
I am intrigued by what the hon. Gentleman is saying. He is arguing that personal accounts will not incentivise saving, but his proposed citizen’s pension would disincentivise anyone from doing anything at all. People would rest secure in the knowledge that, later in life, they would receive a high level of universal pension. However, my constituents do not believe in a something-for-nothing society. They believe that what they get out should reflect the contributions that they have made. Women argue that their home caring responsibilities should be acknowledged for the contribution that they make to society. Although the concept of a universal pension has attractive features, it is wrong in some of its political and technical aspects.
I understand the hon. Lady’s point, and she is entitled to put forward that view. I must remind her, however, that her great commitment to the contributory principle is soon to be manifested in her willingness to vote with the Government on diminishing the significance of the contributory principle by reducing the number of years of contributions needed to get a full basic state pension. No doubt all sorts of other modifications will be put in as well.
The serious rock underlying the Bill is the means-testing. We can have our political debates in here, and the Secretary of State can heckle from the sidelines, but when he and the Minister for Pensions Reform go around the country, they will find that my concerns are exactly the concerns not only of the consumers who will have to make these judgments, but of the industry itself.
I am grateful to the hon. Gentleman for giving way and I promise to stop heckling him, but only if he stops saying what he is saying. My hon. Friend the Member for Northampton, North (Ms Keeble) made a good point about how the contributory principle contrasts with the universal residence-based pension that the hon. Gentleman is proposing. He has suggested that he is unlikely to support the second pensions Bill—[Interruption.] Well, he said that his position on that was not clear. We understand that, but will he at least confirm that he will vote with the Government and the Opposition in support of this Bill tonight?
Thank you, Madam Deputy Speaker.
I am not surprised that the Secretary of State is spending so much time reflecting on our plans, because he is so sensitive about the weakness of his own. That weakness is being discussed out there in the country, as he will discover when he goes out and talks to consumer groups, businesses and pension providers. These are their concerns.
The hon. Member for Runnymede and Weybridge said earlier that people acknowledge that there is a risk of averaging down attached to the Government’s proposal to set a benchmark for personal accounts in terms of the employer’s contribution. There has to be some risk for the more marginal employers in those circumstances. Whether the Secretary of State likes it or not, however, what people out there really fear is not only some averaging down in existing provision, but that the personal accounts will not work. The Government could give generic financial advice on the matter, although the Secretary of State seemed unable to do so today, even in broad terms. The key factor, however, is that people’s economic interest in investing in the personal accounts must be clear, but at present it is not. I heard some Labour Members expressing concern about that earlier and I hope that the issue will be addressed in the debate.
I want to touch on a number of other key issues before I return to the question of affordability, on which I know that the Secretary of State will be desperate to intervene on me again. The first issue of concern is the earnings link. The Secretary of State expressed concern earlier when he was questioned about the frustration of people over the delay in restoring the link. Either he has not been getting out and about enough in his constituency or he was being somewhat optimistic about the perception of the Bill across the country. Hon. Members on the Back Benches, who can speak fairly candidly, know that members of the existing pensioner generation are immensely disappointed that the restoration of the earnings link is to be delayed until 2012 or even 2015. I am sure that if the Secretary of State and his Front-Bench colleagues were being perfectly straightforward, they would admit that they were deeply unhappy and embarrassed about the fact that the Chancellor has refused to allow them to make that commitment sooner.
The Secretary of State must know that millions of those in the existing generation of pensioners could be dead by the time the earnings link is restored. It could take until 2020 to get back to the level of state pension in relation to earnings that existed when these decisions were made in 2006, because until 2012 or 2015 the basic pension will continue to shrivel away in relation to average earnings. I cannot understand why the Government are not more embarrassed about that.
It was intriguing to hear the Secretary of State’s response to an intervention from the right hon. Member for Woking (Mr. Redwood) about the ambiguity in introducing the earnings link in 2012. He said that the Government could not introduce it earlier than 2012 because of the timing of the increase in the basic state pension age, which implies a link or coupling between the two. However, the Government are dealing with those two things in a completely disconnected way. They have made it absolutely clear that the basic state pension age will be increased in 2024 come what may, even though no commitment whatever has been made to a firm date for the earnings link restoration. If the Government want to delay restoring the earnings link until beyond 2012, surely it is logical for them to consider delaying the introduction of a higher state pension age, too.
I hope that the Minister for Pensions Reform will comment on the discretion that the Bill allows the Secretary of State to exercise in fixing the average earnings measure that will be used. Perhaps that should not greatly worry us and he will put our minds at rest. As the Bill makes such specific provision, however, and as so many different measures of average earnings could be used, I hope that some clarification will be made.
I hope that I can set the hon. Gentleman’s mind at rest. The arrangements proposed in the Bill are similar to those that exist for inflation, which allow some flexibility. The measure that we propose to use is the same as that which we use currently for uprating guarantee credit in line with average earnings. Such matters change over time, however, and it is important to leave the Government of the day with flexibility in that regard.
I am grateful to the Minister for his clarification. I hope that we will seek to embed in the Bill the intention behind his comments. We are legislating not only for the period in which this Government will be in office but, he hopes, for the long term. We must therefore ensure confidence that the method of uprating will not be twisted around in the future.
I hope that I am equally successful in getting the Minister to intervene on one other point in relation to the earnings link. It might be regarded in some places as a small point, and he will no doubt smile again when I mention it; I have mentioned it to him before. The issue is that of the frozen pensions of about 1 million UK citizens who now live abroad. The obvious injustice is that half those pensioners will get their pensions uprated by prices, and half will get no uprating at all in future.
I have given way a number of times to the hon. Lady.
When the earnings link is introduced, that bizarre injustice will be increased. The Minister can intervene on me if I have got this wrong, but my understanding is that half of the UK pensioners living abroad in future will have an earnings uprating, and half will have their pensions frozen. The decision on whether people get an uprating will not depend on any great logic, but on an arbitrary, historic division of those countries that are and are not uprated. People who live only a mile apart but on different sides of a border, such as that between Canada and the United States, could receive totally different pensions. The existing anomaly will therefore be made even more confusing.
There is no discrepancy. If someone is entitled to a citizen’s pension and has paid their taxation, of course they should be entitled to the uprating. The hon. Gentleman cannot, however, justify the Government’s proposal under which a British pensioner living in Canada will in future have their pension frozen, whereas a British pensioner living in the United States will get an earnings uprating. Is the Secretary of State happy about making an existing injustice even worse through the restoration of the earnings link?
I shall make progress, as other Members want to speak—[Interruption.] I hear demands for me to raise other points. If my hon. Friend the Member for Solihull (Lorely Burt) catches your eye later, Mr. Deputy Speaker, she will want to raise some of the issues and concerns about women and carers. The Government could go further on some of those points. I welcome the speech of the hon. Member for Colne Valley, who picked up on one anomaly that may arise. I hope that the Minister for Pensions Reform will comment on the issue raised by the hon. Member for Runnymede and Weybridge about the money from scrapping contracting-out of defined contribution schemes and what it will be used for. That is an extremely important question.
The Secretary of State raised the issue of affordability and the price that we ought to pay for getting the pension system right. Our contention is clear—the Government are building on an insecure and sandy foundation, which will undermine the personal accounts scheme. In that respect, our argument is exactly the same as the Conservative party’s, except that we are taking it to its logical next step. We are saying that something should be done about it, rather than simply aspiring, as those on the Conservative Front Bench have done, to finding some money to do something about it in 20, 30 or 40 years’ time.
On affordability, I understand that the Secretary of State must operate within the plans laid down by the Government. It is notable that the Government are seeking to deliver pensions reform while cutting the state pensions’ share of GDP. It is no good the Secretary of State shaking his head—that is precisely what his figures show. That is why we have such a problem with means-testing.
The Secretary of State needs to pick up on two issues. As he knows perfectly well, we would introduce a citizen’s pension using the offset method at about 0.4 or 0.5 per cent. of GDP. That, of course, is a significant amount. The issue, however, is what the consequences would be of not finding the money, over a period of time, to improve the basic state pension. If the consequences are that the entire pension reform programme is undermined, spending such money would be sensible.
Had we asked the Secretary of State, who was a Health Minister for a considerable period, to comment in 1996-97 on what increase in expenditure would be needed to deliver a decent NHS, he would have been constrained in his answer by the limited commitments made by the then shadow Chancellor. If any of his hon. Friends had suggested that the share of GDP spent on health should increase by 2.3 per cent. over 10 years—five times the amount that we are talking about for a reform of state pensions—he would have regarded such a proposal as idiotic. However, that is what has happened. The Government are spending £65 billion more in cash terms than in 1996-97 on the NHS, and £50 billion more in real terms.
Anybody can seek to influence the debate and scare ill-informed opinion by waving large numbers around. However, over time, Governments who seek to make a priority out of particular areas of expenditure can do so, as the Government’s record on the NHS has shown. If the Government want to find some savings to improve the state pension architecture, I hope that they will adopt exactly the proposal suggested by the Select Committee on Work and Pensions—with the support of the excellent hon. Member for Aberdeen, South (Miss Begg)—and establish a commission to look into the reform and sustainability of public sector pensions.
The current feeble proposals for reform mean that a Government who propose to cut the share of GDP going into the state pension architecture over the next 15 years are miraculously finding the money to raise the share of GDP to be spent on public sector pensions by 50 per cent. Finding the money to spend on public sector pensions before finding the money to put into the basic state pension architecture indicates a bizarre set of political priorities. If the Minister wants to find money for his reforms and make the pensions system work, he should consider reforming public sector pensions and adopting the Select Committee’s proposal.
Ultimately, the Government must decide whether or not the pension reforms will work, and the biggest obstacle to their successful operation is the extent of means-testing. If the Government do not take account of shared concerns about that problem they may find that while, as in 1975, there is a loose consensus on the principles of reform, it is likely that in 20 or 30 years we shall be looking at a set of reform proposals that have failed to deliver on their basic objectives.
Order. Before I call the next speaker, I should tell the House that further to the point of order raised earlier by the right hon. Member for Haltemprice and Howden (David Davis), the Home Office has now placed in the Library the three ministerial written statements that were due today.
I was interested by the speech of the hon. Member for Yeovil (Mr. Laws). I think that the thrust of some of the Liberal Democrats’ political arguments about the citizen’s pension is wrong, and that any amount of special pleading about the technicalities will not deal with the basic underlying issue of whether pensions should reflect something of the contribution that people make during their lives.
Having listened carefully to my constituents, I believe that they expect there to be some link between contributions and pensions. They do not expect people to be left with nothing, but they do expect people’s input during their working lives to be recognised when they retire. In particular, the contribution made by women as carers should be valued. I am very pleased that, probably for the first time, that important issue has been dealt with. It is well understood by my constituents, and many women, especially Labour Members of Parliament, have campaigned for it to be built into our pensions system. I pay tribute to the former Member of Parliament for Sheffield, Hillsborough, Helen Jackson, who did a huge amount—lobbying the Government and lobbying around the country—to ensure that the inequalities faced by women in retirement were remedied.
I was first made aware of the importance of women’s pensions shortly after the 1997 election, when I was going from door to door speaking to prospective constituents. I met a woman who had had a miserable marriage. She had worked throughout her life, but had paid the married woman’s stamp. When her children had grown up and left home she divorced her husband, who was some years older than her. Then, at the age of 58, she had been swept off her feet and had married a much younger man, a sort of toyboy.
My hon. Friend clearly approves of that. Two years later, however, that woman found that she had lost her pension. As a married woman who had worked and been financially independent throughout her life, she was told that she could not have a pension until her husband retired. To say that she was spitting teeth would be putting it mildly. It was she who first brought home to me the level of women’s understanding of pensions, or at least their understanding, through bitter experience, of poverty in retirement.
The Bill will make a big difference, and I am very pleased that for the first time ever the disadvantage inflicted on women pensioners has been recognised by the Government. The Bill would deal specifically with the problem of the constituent who first alerted me to the issue, because it allows women who retire before their husbands to obtain class B pensions without having to wait for their husbands to retire. It will therefore bring direct and practical benefit to a large number of women.
Other elements in the Bill will right the wrongs that have left so many women pensioners in poverty. At present, one in five single women pensioners risk being in poverty owing to their different working patterns and the impact of child care, widowhood and divorce. The effect of divorce has not been sufficiently recognised. In 2002, 40 per cent. of divorced older women were in receipt of minimum income guarantee, and nearly 63 per cent. of divorced and separated older women currently have no private pension income at all.
The Bill deals with a number of complex and detailed issues. Several have already been discussed today, so I shall deal with just four.
Clause 3, an important clause, concerns pension credits for parents and carers. A welcome aspect of the Bill is the extension of carers’ ability to claim the credits that they need in order to obtain pensions, but it is important for the new entitlement provisions to be drafted widely enough. That is something that worries carers’ groups. Constituents have expressed to me a fear that in its present form the Bill may be too restrictive, as it defines entitlement according to existing regulations or in terms of benefit entitlement, including, in the case of those caring for children, entitlement to child benefit. That means that some carers may miss out. It might be more constructive to replace or supplement the proposed arrangement with a system of certification by local authorities. There would be logic in that, as local authorities—through the director of education and children’s services, and through social services departments—are responsible for commissioning care for children and vulnerable adults. They would therefore be able to issue certificates identifying the carer and the amount of care being provided.
Let me give an example that has arisen a number of times in my constituency. There is a high level of employment among my constituents, and women have traditionally worked. My constituents are also very family-orientated. If—unfortunately, this is a frequent reason for family breakdowns—a lone mother has become involved in substance abuse or her physical or mental health collapses, the grandparents will often take in her children and, in many cases, care for them into adulthood. In some instances, a grandmother who is still of working age must give up her job. In others, the grandparents will not obtain the child benefit book. Not wishing to bother with the bureaucracy of having it altered, they may deliberately leave it with the children’s mother to maintain a link between her and her children, and perhaps also to encourage her to think about getting the children back.
I understand that, in such a case, a grandmother would not be able to obtain credits towards a pension because of the work that she had done in caring for the children, unless she could qualify as a foster parent. I have contacted social services departments on several occasions about the possibility of securing foster payments for grandparents, but I am not sure that they could qualify as foster parents, which is what I gather the legislation requires. Carers who look after a number of different people for shorter periods would not qualify either, unless the hours were right. Moreover, carers would have to be claiming the right benefits. Disability living allowance must be at the higher or middle rate, not the lower rate. Parents, or in many cases a lone parent, with a number of children receiving the lower rate would have to stop working to look after them.
I hope that my hon. Friend the Minister will give some indication of Government thinking, and will say whether he is prepared to consider the possibility of local authorities’ being able to issue certificates stating who is or is not a carer. We certainly need some way of ensuring that people with a valid status as carers can obtain support without having to be in receipt of all the right elements of benefit.
Another issue that has often been raised with me is not addressed in the Bill. Overlapping benefits and entitlement to mobility benefits affect pensioners generally and also carers, but the Bill is silent on them. I wish to discuss two particular points, one of which is pensioners’ rights to carer’s allowance, the entitlement to which currently ends at retirement. I hope that I am correct about the technical points on this matter, but if not, I am sure that my hon. Friend the Minister will put me right. The withdrawal of that allowance means that pensioners caring for disabled spouses or for children do not get support for performing that caring role. The theory is that because carer’s allowance reimburses people for lost income as a result of their caring, it is not appropriate for pensioners. However, for people in that situation it appears simply that once they hit retirement age recognition of their caring role is lost—as is the fact that such caring is, indeed, work. I presume that when the state retirement age increases, the entitlement to carer’s allowance also increases, but I would appreciate clarification on that, and also on whether there might be any relaxation of the rules in respect of pensioners’ rights to access carer’s allowance. I have written on several occasions to the Department about the issue, which continues to be a source of considerable grievance to many of my constituents.
The second issue to consider is the ability of pensioners to get the mobility component of disability living allowance. Once people start receiving pensions they get attendance allowance rather than DLA. That restriction is bitterly opposed by my constituents. We enjoy greater longevity and have increased expectations of a good quality and standard of life when we are older; my constituents—in common with those of other Members—expect to remain mobile until they are much older than did previous generations. I visited a constituent at home shortly after she had had, at the age of just over 60, both of her legs amputated. She was refused any help to get mobile. She had been used to driving and had previously led a mobile and active life, but just because she was retired, she was told that she would not get as high a level of support as she might otherwise have received. That was difficult for her to accept. Will my hon. Friend the Minister say whether any further thought is being given to such support for pensioners?
On the entitlement of part-time workers to pensions, the reduction in hours worked for people to qualify for state pension is very welcome. As a result, many more women will be entitled to the state pension. Despite what the hon. Member for Runnymede and Weybridge (Mr. Hammond) said, it would have been wrong to have dramatically improved the value of the state pension when that would have left so many pensioners still in poverty simply because they are women and so they do not get the state pension at all. I look forward to the value of the state pension being increased once the proposed changes are in place. Those changes will also mean that more people—up to a total of 70 per cent. I think—are included in the state pension net.
There is still an outstanding issue related to the qualification of part-time workers. Many women in my constituency make up their working week by working a number of shifts for different employers—working flexibly to meet their family commitments and their financial needs. That has been of benefit to the local employment market and the local economy, as well as to local families. Some such women might work eight hours for one employer, eight hours for another and four for another, and yet they still might not qualify for a state pension. Will my hon. Friend the Minister look at the possibility of easing up on the rules so that more part-time workers are able to qualify for the state pension?
My final point, which overlaps with those made by several other Members, is to do with the provision of information and the personal accounts delivery authority, which the Bill will establish. I welcome that, and I regret the early efforts to undermine a new savings scheme for pensioners that should give people the cornerstone for independence in their retirement based on the savings that they have made during their working lives. That is the right way to proceed, and the loss of that linkage has been profoundly damaging to people’s security in retirement. It is also right that the scheme should be compulsory—which would mean, of course, that there would be auto-enrolment. But there is a caveat. In the past, people have asked me what sanctions might be imposed on those who do not make private provision. However, there must still be a secure safety net for people who are not able to, or who, for one reason or another, do not, make private provision. The Bill provides only for the outline establishment of the authority—the detail will come later—but I ask the Minister to comment on how the difficult issue of information and advice will be handled.
Every time that there has been a major problem with pensions, usually the heart of that problem has been to do with the provision of information—not merely the detailed advice on what people should get, but the basics of the information. The pensions mis-selling scandal, for which the Conservative party was responsible, was largely to do with Government advertising that encouraged people to take out private pensions. I remember an earlier debate in this House when those advertisements were waved around and their terms were read out. The widows’ state earnings related pension scheme debacle—constituents of mine provided one of the test cases considered by the ombudsman—also centred on the provision of information and whether people were given notification about the changes at the right time.
Recent problems with occupational pensions have also been caused by issues related to the provision of information. [Interruption.] Yes, I take on board the point that the hon. Member for Hemel Hempstead (Mike Penning) makes. One of the issues that got women into pension difficulties was the married women’s stamp and what information women were or were not given when they signed up to it. A steady stream of women have come to my advice surgery saying that when they signed up for it they did not understand that that meant they would not get their own proper pension. I have looked into that. Employers have provided forms that show that the women had the necessary information and that they ticked the boxes and signed the papers, but many women argue that they did not understand what they were doing when they signed for that stamp. In my first jobs, I had the married women’s stamp, and I know exactly how it felt to sign something and then later to find out that I had, to an extent, signed away my future.
In terms of the married women’s stamp, the problem was not that the advice from the Government was wrong; in fact, it was correct. The problem was to do with individuals’ understanding of that advice. My mother was told, “It doesn’t affect your pension”, but what those who told her that meant was, “It doesn’t affect the pension you will get through your husband”, which it did not. Therefore, advice might be correct, but someone’s understanding of that advice might be flawed, so it can be argued that the Government cannot be held to account because someone did not understand the clear advice that the Government gave at the time.
I take on board that point, and I have had an argument about that each time I have raised this issue. None the less, what women will say is, “I didn’t get the advice.” What they heard and what they were told might be two completely different things, but the end result is that many women were left in poverty in retirement because what happened to them was unexpected and they had not made provision, whereas if they had thought things through—if things had been slightly different—they would have done so. Some of them say, “I could have paid it, but I didn’t because I thought I’d still get a pension; so things went wrong.” Things are different now, in that women earn more and their employment status has changed, but it is really important that we get it right this time.
Who will be responsible for providing not just detailed advice some way down the line, but the initial information: the employer, the new authority, the Government or the new national independent financial advice service that the Government heralded this week? What arrangements will be made to ensure that the information is comprehensible? One difficulty is that pensions is a very obscure and complex subject. With the best will in the world, it can be very hard to ensure that the information provided can be understood by the general public, as well as by the experts. We need to be sure that people know what is happening to their money and what choices they can make, and that they do not find 30 or 40 years down the line that they are paying the price of a badly worded leaflet, or of having been given some unclear information.
The Bill will go a very long way toward righting a wrong that has caused misery to many women in retirement. I have asked my hon. Friend the Minister for some assurances and further information, which I hope he will give, but as I understand it, 500,000 more women will get full-time state pensions as a result of this legislation. I hope that it will ensure that people make personal provision for their future security, mark the end of a long-running injustice that many women in my constituency have experienced, and provide them and their families with real security in old age.
I welcome a great deal of what is in the Bill, and I pay tribute to the extensive consultation that has taken place through Turner, discussion of the White Paper, the Select Committee and the all-party committees of this House. I pay particular tribute to the hon. Member for Birmingham, Selly Oak (Lynne Jones), whose all-party group on pensions consensus has contributed considerably to getting us where we are today. Having said all that, if I now say a few things that might be construed as slightly critical or ask awkward questions, I hope that I will not be accused of slagging off the Bill in the way that the hon. Member for Yeovil (Mr. Laws) did for nearly 45 minutes—only then to say that he was going to vote for it.
Personal accounts are a good idea for all sorts of reasons. At the end of the day, they will encourage a savings culture, and I hope that the idea will eventually be built on in the same way as in Australia, for example. However, it will not suffer from the disadvantage of the Australian system, which is entirely compulsory. There is an opt out for those who may be advised—one hopes that generic advice, at the very least, will indeed be provided—that it would not pay them to enter into the system. The Bill has that element of flexibility, but it creates a structure that can be built on for the future, and it might mean that a lot of people will eventually be a good deal better off in retirement than they would otherwise be. The initial figures are in fact very modest. The total sum is about 8 per cent. of pay, which will not provide anybody with a realistic pension during their lifetime, so they will still be dependent on state support. However, it is a start, and, as such, a good thing.
I am a little concerned about the possible impact on existing employer schemes. There is a danger that employers might trade down in terms of what they provide for their employees because of the existence of the new system, or that it might undermine the operation of some existing employer schemes. The personal accounts delivery authority will have to look at that issue very carefully.
The personal accounts delivery authority will have a considerable role in, and influence on, the scheme’s design, but it is not entirely clear from the Bill as published what the precise objectives will be. Will they, for example, be the same as the objectives set out in the White Paper? How will the authority deal with investment strategy, and will it deal with generic or other advice for employees? Going beyond that, can the Minister explain why it is proposed that the authority, having finished its work, will hand it all over to a personal accounts board? Why will all the expertise built up in the authority be scrapped and handed over to somebody completely different? There must be a case for considering whether the board—the successor body—is in fact a natural evolution of the authority.
The Minister seeks to intervene but if I may, I shall deal with another couple of points first. I will be very pleased to give way to him in a moment, so that he can answer these points.
As I was saying, an element of expertise will have been built up by PADA, as we may come to call it. One other thing that puzzles me about the current proposals is that it is not intended to involve the various stakeholders ab initio; for some reason, they will become involved a good deal later down the line. Surely it would be much better to involve them from the start, when we are looking at the scheme’s design, rather than leaving it till later on, when certain elements may have been set in stone. I now give way to the Minister.
There will not be time at the end of the debate to reply to all the points made, so on this very important point, I want to reassure the hon. Gentleman now that he is absolutely right: one would expect a large degree of continuity between the delivery authority and the personal accounts board. All that the Bill is doing is establishing that they will be differently legally constituted organisations with different responsibilities. It may not be that every single person carries on from one organisation to the other, but the hon. Gentleman makes the very good point that the expertise should be maintained and that stakeholders should be involved from the very start in developing policy. However, there should not necessarily be strict representation on the board of every stakeholder; otherwise, it might not be able to be as flexible as we would like.
I am very gratified by the Minister’s response; there could otherwise have been a lot of wastage of effort and expertise.
I have some concerns about the reforms to the second state pension. The earnings-related element is set to disappear. It was said earlier that that will not be unfair to above-average earners because they will get the same as everybody else, but they will surely be paying more, so at the end of the day they will be paying more for less; I do not see how that can be avoided. I am also concerned about the effect on defined-benefit schemes, which will suffer from the lower contracted-out rebate. They are already in some difficulty, and not everything that the Government have done to date has encouraged the companies that provide such schemes. The reforms will make life rather more difficult for them, which I would have thought was the last thing that the Government wished to do. At the same time, the take-home pay of their employees will be reduced. Those two things make that particular element of the second state pension reforms rather difficult to understand.
On guaranteed minimum pensions, I am delighted that the Government are getting rid of this extraordinarily complex and contentious regime. Employers have made many mistakes with GMP, and the advice given by lawyers has often been contradictory. I am sorry to say that the advice given by the National Insurance Contributions Office has also sometimes been wrong and contradictory. That even happened with the House of Commons scheme, the board for which I have the honour of chairing, so anything that reforms GMP will be a good thing. However, the initial reform proposals look extremely complicated, and I hope that they can be made as streamlined as possible. If we can in some way get rid of the whole thing in one fell swoop and remove the burden from employers, that would be welcomed by everybody I know in the pensions world. The situation on the abolition of contracting out for defined contribution schemes is different and, on balance, will probably be a good thing. It is the defined benefit schemes that I am worried about.
All the hon. Members who have spoken today have welcomed the return of the link to earnings of the state pension. It must be a good thing, but there is still some suspicion about when it will occur. As others have said, the promise is rather vague. Will it be 2012 or might it be 2015, or will it just disappear into the ether and never occur? The Bill does not contain a firm commitment to the establishment of the link.
We also need to know how average earnings will be calculated. We are told that it will be done by the Secretary of State, but how will he do that? Will a detailed system of calculation be laid down in some annexe to the Bill? After all, calculations of average earnings by different experts all come out different.
Does my hon. Friend agree that in order for trust in the Government on pensions to be rebuilt, the pledge to restore the link must change from an aspiration to a commitment, with a defined timetable? In that way, people can know ahead of the general election whether it is real or just another empty and false Labour promise.
My hon. Friend is right. It would reassure many people if we had more certainty on this issue. It would also reassure many people if the calculation of average earnings was done for the time being by some independent authority, rather than the Secretary of State. Otherwise, it would be open to future manipulation and we know that that has happened under Governments of all complexions. An independent calculation of average earnings would therefore reassure us all.
The Government have been a bit timid on changing the state pension age. I said that when the White Paper was published and when Turner made the proposal. It would be possible to compress the timescale proposed in the Bill, so that the changes would happen earlier. I know that the Government have said that the equalisation of pension ages between men and women is dictating the timetable, but I disagree. It would be possible to compress the timetable and achieve considerable additional savings by so doing, which could provide cash to abolish some of the means- testing that people are so concerned about—especially the Liberal Democrats. Their solution seems to be, “Well, the Government spend lots of money on everything else, so why not spend lots of money on this?” Liberal Democrats are prone to saying that, but if we compressed the timetable, we could find some money to help in getting rid of means testing.
The proposal is to wait until 2044 and 2046 to change retirement age to 68. Well, the US already has a retirement age of 67, as does Scandinavia. For us to wait almost another 40 years to make the change to 68 is very unambitious. If others can go faster, we should too, and there are great savings to be had by doing so. Indeed, with the improvements in medical science and the resulting increases in longevity, it may not be impossible to change the retirement age to 70.
My hon. Friend will of course be aware of the comments made by Lord Turner in his report to the effect that one has to give people a minimum length of time to complete the financial planning for their retirement. While it probably would be possible to compress the timescale in the way that he is describing, there is a cut-off point because after a certain stage in people’s working life they cannot alter their financial plans that much. There might be some scope for compression, but there would be a limit to it.
The hon. Gentleman mentions longevity, but does he accept that one problem is the disparity in longevity between areas? It was recognised by Lord Turner to some extent, when he suggested that pension credit should apply at age 60 for some groups. Does the hon. Gentleman see any solution to the problem, given that he proposes accelerating the change to retirement age?
The hon. Gentleman is right to say that in parts of the United Kingdom, notably the one that he represents, longevity is not as good as it is elsewhere, but that is largely due to poorer health, with greater rates of smoking and unhealthy eating habits. Education is the major key to equalising longevity throughout the UK, because there is nothing inherently unhealthy about living in Scotland. Most medical opinion is of that view. However, I do understand that at present there are wide disparities.
I understand the hon. Gentleman’s point, but the medical profession and improved education can help. It is not an insuperable problem and I am not sure that we should be prevented from doing something that would benefit the nation as a whole—including a high proportion of the hon. Gentleman’s constituents—simply because of disparities in health outcomes.
Pension credit is a difficult problem. Even on the Government’s figures, one third of pensioners will still be claiming pension credit by 2050, and we need to do everything in our power to try to eliminate means- testing. It has a high administrative cost and we also need to restore dignity. Most of my constituents who claim benefit would much prefer not to have to do so and the elimination of means-tested benefits, wherever possible, should be an objective for both sides of the House. I have given one example of ways in which we might be able to save enough money to enable us to do that.
The Minister will recall from my Adjournment debate on 2 November that I am delighted that the Government are making changes to the home responsibilities protection provision. The changes will be good for parents and carers, and 20 hours a week is a reasonable requirement. The Minister will remember from my Adjournment debate that I am concerned about how the 20 hours will be defined. Who will provide certification? In many cases, the time spent by carers is difficult to measure. Perhaps we should require a medical practitioner to say that a particular patient needs at least 20 hours of care, as that would be preferable to requiring carers to prove that they provide 20 hours of care.
The system must not be too hard and fast, as hours of care often fall at different times of the week, according to the arrangements that families make for looking after sick and elderly relatives. Carers perform an enormous duty for their own kith and kin that greatly benefits the country as a whole, and we must make it as easy as possible for them to make a legitimate claim.
The hon. Lady anticipates me, as I was about to say that social workers could undertake that role, although not to the exclusion of anyone else. For example, if a GP believed that the degree of care given to a person in the course of a week was reasonable and necessary, then his certificate to that effect should also be acceptable. Some people give up their whole lives to caring, and one can only admire what they do. They should not suffer from having a lower pension in the latter part of their lives as a result of the care that they have given.
The change in national insurance contributions for those retiring before 6 April 2010 has been mentioned already. The current proposals for the reduction in qualifying years for those retiring after that date mean that the people who retire immediately before it will lose out considerably. It must be possible to construct some form of taper to remove that cliff edge: without it, an estimated 5 million women will suffer a very substantial diminution in their income for the rest of their lives. It should not be beyond the wit of the Government, in consultation with all other parties, to come up with a mechanism to deal with the problem.
In conclusion, this is a good Bill. An enormous amount of thought has gone into it, and I wish it Godspeed.
I want to add my voice to the general consensus in support of the Bill. I am sure that that includes the Liberal Democrats, although they sometimes say one thing and then do something completely different. However, I am willing to believe the warm words uttered by the hon. Member for Yeovil (Mr. Laws), and that his party will support the Bill later tonight.
Consensus is important for a Bill like this. We get the chance to re-engineer the architecture of the entire pension system, in a way that covers both state provision and private occupational pensions, perhaps once every 50 years, so we must make sure that we get it right. Some changes will be inevitable as the years go by, but I hope that the solution offered by this Bill, and by the subsequent legislation to introduce personal accounts, will remain fundamentally unchanged for a long time, so that future pensioners get a fair and equal settlement.
I have been a member of the Work and Pensions Committee for six years, and it has been interesting to see how the emphasis in the pensions debate has shifted. In the early days, that debate was all about how to deal with existing pensioners, but in the past few years we have begun to think about what we can do for tomorrow’s pensioners.
Although it would probably not be true to say that the question of pensions is on everyone’s lips, the subject used to be a matter for older people only. Now, younger people are talking about the provision that they will have to make for their later years. They may not yet understand what they will have to do, or be ready to make the necessary contribution to ensure an income in later life, but they are starting to consider their pension provision. I hope that the introduction of the national pension saving scheme and the personal account will give younger people an incentive, for the first time, to put money aside for later in their lives.
I totally agree with the hon. Lady that it is very important to get younger people to consider their future and their pensions. However, does she regret that the Bill will do nothing for existing pensioners, 3 million of whom will be dead before they gain any discernible advantage from the changes being introduced?
Not every Bill does everything for everybody. This Bill is about tomorrow’s pensioners, and was never intended to be about today’s. As it turns out, greater longevity means that it will affect today’s pensioners, as some of them will still be alive to benefit from its provisions.
I am pleased to say that the Bill will be of particular benefit to women, and that is what I want to concentrate my remarks on, but women who have retired already believe that the introduction of the pensions credit has been a great help. The Government have come a long way since the election in 1997, when they inherited an enormous problem of pensioner poverty. Only 10 short years ago, pensioners were dying from a lack of food and heat in the winter. Then, being a pensioner very often meant living in poverty: now, pensioners—or old people as a whole—are no more likely to live in poverty than members of the general population. That is a remarkable turnaround, and shows what a huge effect the shift in public policy has had.
That shift began with the introduction of the pension credit. I make no apology for the element of means-testing involved, nor for the steps that the Government took in introducing it, as the policy was absolutely correct. My hon. Friend the Member for Northampton, North (Ms Keeble) was right to say that increasing the basic state pension or restoring the link with earnings would have had no impact on the poorest pensioners, or on the 1.5 million women who did not qualify for the basic state pension.
Urgent action needed to be taken, and that is what the Government did in the years immediately after 1997. The pension credit lifted 2 million pensioners out of absolute poverty and more than 1 million out of relative poverty, and the Government now have a breathing space. They are therefore able to look at tomorrow’s pensioners, including those women who have yet to retire, to see what needs to be put in place so that they can benefit from the basic state pension. That is what the Bill is about—making sure that more and more women will qualify for the basic state pension when they retire. The Government have chosen to achieve that aim by reducing the number of years needed for eligibility for the basic state pension and by changing the qualifications, especially for carers.
The hon. Members for Runnymede and Weybridge (Mr. Hammond) and for Bournemouth, West (Sir John Butterfill) both talked about the cliff edge for national insurance contributions in 2020, when, depending on a woman’s age, she could be just one day short of benefiting from the 30-year contribution period. Both cited the number of women who would be affected by the change, but that is not necessarily the number who will be disadvantaged by it. The figures do not take into account the fact that a large number of those women will already be receiving pension credit, so the level of the basic state pension or its contributory elements will not matter; almost all their pension will be made up by pension credit. None the less, I urge the Government to look into some form of smoothing mechanism, to make sure that the cliff edge is not so absolute. However, I accept that there has to be one at some stage; there has to be a specific day when the qualifications change.
I had planned to speak about the more generous carer’s credit, but my hon. Friend the Member for Northampton, North went into detail about the definition of a carer in her speech. She set out how a carer could qualify for credits towards contributions to the basic state pension. However, I urge the Government to consider how different caring roles can add up to the 20 hours a week set as the threshold. Eligibility should not be dependent on only one job; for example, women of my age who have looked after their children may have gone back to work but dropped out again in their 50s to look after grandchildren and an elderly relative. The individual elements of such care might not add up to 20 hours, but in combination they could easily do so.
The hon. Member for Bournemouth, West suggests that GPs should make judgments about care for people with disabilities or ill health. I have to disagree: GPs are not qualified to make judgments about the amount of care an individual needs. They can determine whether someone is ill and what medical care they need, but I do not think they would welcome having to make judgments about social or personal care; it is not in their remit. I say that as someone with a disability. Just because a doctor may be able to diagnose my condition, they do not necessarily understand its effects on how I live my day-to-day life. Putting such matters into the hands of GPs makes them medical rather than social judgments.
Of course I understand that a wide range of people could make such decisions; I merely suggest that GPs could be one of them. I am reinforced in that view by a case that I discussed with the Minister in November, in which the GP was prepared to put in writing his view that the patient needed at least a certain quantity of care over a week. There will be variations from case to case, but in some cases a degree of medical knowledge, which a social worker might not have, would be essential in evaluating the situation. We need a range of expertise.
Indeed, and we need to ask GPs if they would be willing to take on that role. The Government should not land things on various professionals without asking their opinion; they need to be engaged in the debate.
Everything in the Bill that makes it easier for women to build up their national insurance credits is to be welcomed. As those provisions are implemented, and more and more women begin to qualify, it will make sense to restore the earnings link to the basic state pension. I regret not that we did not restore the link, but that the pensions debate has been sidelined into that narrow category. It made for an easy slogan, but there was not always full understanding of what restoring the link meant. When I spoke to pensioner groups, I discovered that they had different interpretations. Some, like the Government, thought it meant restoring the annual upgrading to match the annual increase in earnings. However, some pensioners thought it meant making sure that the basic state pension was a percentile of the average wage, while others thought it meant they would receive backdated payments amounting to what would have been paid in the annual uprating from the date when the link was broken to the day it was restored.
Those who were crying—a very Scottish word that means “call”—for the restoration of the link may not all have been calling for exactly the same thing. The Government should make it possible for almost everyone to qualify for the basic state pension. The contribution need not be monetary, as it obviously is in the national insurance scheme; it could be social, based on the time people have given in their caring role. The wider the Government can spread the net, to ensure that as many people as possible qualify for national insurance credits, the wider the coverage of the basic state pension and the more sense it will make to restore the link. Before we even consider restoring the link, we have to make sure that it is as easy for women to qualify for the basic state pension as it was, in general, for men; otherwise we shall merely have expanded the inequalities inherent in the existing system.
I urge the Government to go slightly further than the Bill proposes—I hope that the Liberal Democrats will be pleased with my suggestion. The hon. Member for Yeovil was correct to say that I would have preferred a universal pension. That would be the ideal, but I accept the reason why the Government have not, in the short term, used residency to determine who should qualify for the basic state pension. There are difficulties in defining who is resident because the data have not been collected. It will take some years to build up the database, so it is more sensible to adopt the proposal in the Bill and reduce to 30 the number of qualifying years for the basic state pension. That will achieve the same outcome, but much more quickly.
Perhaps to the disappointment of the hon. Member for Yeovil, the universal pension that I envisage would be at the basic state pension level. We need a means of getting the necessary coverage so that everybody who has lived in the UK for 15 or 20 years will receive the basic state pension. The Liberal Democrats and the Scottish National party propose a citizen’s pension, but it is unaffordable as it is tied into somehow—I am not sure exactly how they are going to do it—eliminating means-testing.
I thought that I understood the citizen’s pension until I heard today’s debate. I had thought that it would be set at a sufficiently high level to minimise, although not eliminate, means-testing and that the qualification would be based on residency. If that were the case, those who had previously paid national insurance contributions in the UK, but now lived abroad, would qualify for the citizen’s pension. However, the hon. Member for Yeovil said that they would not, so I do not know whether the citizen’s pension is based on residence or contributions or what. It cannot be both, so we need to be much clearer about what it would be based on.
I will give way in a few moments.
I understand why the Government went down the road that they did. On the political front, the people who would benefit from a citizen’s pension are campaigning for it at the moment, but if we were proposing that those who had contributed through national insurance would benefit from it, they would now be campaigning on the basis that they had paid all that money so why should those who had paid nothing receive the same as them? On the basis of equity, the debate would have changed. As I said, I understand the political reasons behind the Government’s maintenance of the contributory principle. A great deal of work remains to be done to change people’s perceptions or feelings about the fairest way of operating a state pension system—that people should get something for something.
To clarify the issue, does the hon. Lady understand that what the residence criterion means for the citizen’s pension is that the number of years of residence in a country rather than national insurance contributions provide entitlement? That is totally different from being resident in a country at the time when the pensions are paid.
I still do not know how many years are involved, so perhaps the hon. Member for Yeovil will intervene again to clarify whether it is 10, 15 or 20 years. If it is 10 years, it means that anyone who has lived in Britain for 10 years and then moves anywhere else in the world will qualify for a full citizen’s pension in the UK—even though they spent only 10 years living here and are no longer living here.
However, if they had been working, they would have paid national insurance contributions for their 10 years of residence, so I do not understand why it is so substantially different. It was, after all, Turner whose preferred solution was a citizen’s pension. Many others who have contributed resent the fact that people who have made no contribution in national insurance are still eligible, if they have no other benefits, for the means-tested benefits—and often at a higher rate.
So what of a married woman who has run off with some American toy boy and has never paid national insurance contributions? Just because someone is resident in the country does not mean that they are paying national insurance contributions, so we are back to the same problem. Part of the reason for the Bill is that not everyone was qualifying under the contributory principle. What Lord Turner proposed was not the citizen’s pension as devised by the other political parties, but one as an element of a universal pension. It was not based on the contributory principle. The two are different.
Let me return to my earlier point: as we expand the net of qualification under the contributory principle through national insurance contributions—or, indeed, through credits, which should satisfy my hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones)—it may become sensible in future for residence to become an easier means of identifying those who should receive a basic state pension. At the moment, that is not possible and it will continue not to be possible in future unless at some stage the Government begin to collect the data that would allow people to prove their residency. If that were part of the Bill, it would allow future Governments to decide whether to change the basis in years to come—without having to redesign the architecture of the basic state pension.
If we are talking about a pensions system that will last well into the century and for the next 50 years, it may make sense to give future Governments the flexibility to make that choice if they so want. I urge the Government to look further into that. [Interruption.] I am pleased to hear the agreement of the hon. Member for Yeovil about that; it may be one of the few things that we agree on. My proposals are practical, but unfortunately the introduction through the Bill of the citizen’s pension tomorrow would not be possible and I accept the Government’s reasons why it would not.
I have spoken much longer than I intended to. My final point is a matter of concern to me, which is why I tried to intervene on the hon. Member for Bournemouth, West. The hon. Member for Angus (Mr. Weir) has already put forward the arguments that I would have made if I had been able to intervene. I had serious concerns about the raising of the state retirement age. It may be because I was born in 1955 and, as a female, will be the first of my generation not to receive her state pension until she is 65. Perhaps that concentrated my mind. I suspect that the hon. Member for Bournemouth, West is slightly older, so perhaps that is why he suggested raising the retirement age much sooner. It may be easier, as it will not apply to him or his generation.
I had serious concerns, as do a number of the trade unions, about the raising of the state retirement age simply because of the different demographics throughout the country. Where many men have worked in heavy industry and lived in the most industrialised parts of the country—Glasgow is a good example—the average life expectancy can be as low as 59. People die before they even reach the current state retirement age. I have to say that that is not just a matter of geography or education, but more a consequence of poverty. Unless the Government can ensure that the next generations do not live in poverty—the Government’s avowed aim to lift children out of poverty by 2020 is crucial—the children born in poverty today will not enjoy the same longevity as those born to middle class parents. We must ensure that we lift those children out of poverty so that they can live as long as their more affluent neighbours—and the job has to start now.
The package of proposals from Lord Turner included the raising of the state retirement age, and part of building a consensus is that individuals involved in the process have to accept some things that they like less than others as part of that overall package. That is what consensus building is all about—recognition that some parts of the population do not like certain aspects, but they should nevertheless agree to them if they are acceptable and will work for the vast majority of the population. I have thus swallowed my objections to raising the state retirement age, though the long lead-in time is absolutely right and it is dependent on the Government getting their public health policies and their anti-poverty strategy right. It will affect only people younger than 47, who will have the chance to enjoy the same benefits after retirement as everyone else.
I have taken up quite a long time. I welcome the Bill and I look forward to the following Bill on personal accounts. I raised the issue of the trivial commutation level with Secretary of State. Getting that level right will be important in answering some of the concerns that the Liberal Democrats have expressed about whether it will always be right to save and whether there will be some—again they will predominantly be women—who may not benefit because they have small amounts of saving. If we get the trivial commutation level right, being able to take a lump sum, without affecting means-tested benefits, would help to answer some of the questions. This is a good Bill and I am delighted about the change that it will make in the lives of women. They will be able to contribute to, and will qualify for, a basic state pension and they can look forward to a level of income that means that they will be able to enjoy their old age and the years that they have to live beyond retirement age.
I congratulate my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) on an excellent and thoughtful speech. It showed, not surprisingly, that he has a considerable grasp of the subject. He showed good sense in accepting formally on behalf of my party the Government’s pension credit system, which I think we should accept. However, in all frankness there was one matter on which he did not convince me and I want to touch on it briefly. It is quite useful for these matters to be discussed in public in time to influence the second Bill—the personal accounts Bill.
The matter is that of the limit on contributions to personal accounts when they come in. My hon. Friend said that the Government were wrong to have a limit of £5,000 and that we should have a limit of £3,000—if I caught what he said correctly. I cannot see why we need a limit at all. The object of the operation is to encourage people to save and to maximise general savings and particularly long-term savings—savings designed to produce an income in retirement. It therefore seems to me that if anybody, whatever their circumstances or level of income, finds that when personal accounts come in they are the right vehicle for them and are a better deal all things considered—including the lower fees that we have been promised, which are an important aspect of the return available on any investment—I see no reason why that person should not come in with any amount of money, whether it is £3,000, £5,000 or £10,000 a year, if they want to and can afford that. We do not have running Revenue limits any longer; we have one global lifetime limit from the Revenue. That means that there is no reason on those grounds to have a running limit. No doubt we shall have to come back to that matter when the second Bill is introduced. I hope that we have some debate in advance of that Bill being drafted, because I am not sure that either my hon. Friend or the Government are on the right lines in thinking in terms of limits.
I feel strongly that when we are designing a national public service such as a pensions system for the future, the House should not be in the business of taking into account the interests of a particular industry. We are not in the business of designing a pensions system for the future to suit the pensions industry. The pensions industry does a tremendous job and I have no reason to say anything against it as a whole. It is a large industry and includes independent financial advisers, pension funds, actuaries and so on and so forth. However, I do not accept that a limit should be imposed on the maximum contributions that can be made to a personal account simply because of the danger that, if there were no limit, undue competition would be created for other parts of the pensions sector. The creation of competition is a benign and good thing and should not be artificially restricted.
There are many welcome things in the Bill and I agree with much of what has already been said on the subject. There is one thing that I regret, although it may be a bit late to alter it. There are a couple of things that could be, and should be, changed, and I trust that that will happen in Committee. There is also one overshadowing problem that the Bill does not recognise and I want to dwell on that at slightly greater length.
I regret that we are taking so long to restore the earnings link. It was rightly said by a Scottish nationalist earlier that we are not actually restoring the earnings link—we are not restoring anything, because the system that prevailed until 1981 was a link to earnings or prices, whichever was the higher rate of increase. There was no choice about it. We are not restoring that; we are creating a new system, which for the first time is an earnings-linked system. That point aside, it seems a great pity, largely for reasons that have already been mentioned, that we cannot bring forward the introduction of that new system. The people whose interests the House ought to be most attached to—the oldest people of all; the world war two generation—are most unlikely to benefit if the earnings links does not come in until 2012 or even 2015.
I recognise that we must maintain the fiscal viability of any measure that we pass through the House. I would be in favour of bringing forward the increase in the retirement age. I am in favour of bringing forward a rise from 65 to 66 perhaps in the next year or two, and then bringing forward a rise to 67 much more rapidly than the Government envisage. As several people have said, there are other countries—I would add Germany to the list already mentioned by my hon. Friend the Member for Bournemouth, West (Sir John Butterfill)—that already have a pension age of 67. I see nothing shocking about that. The Government have missed an opportunity—they could have done both things in a way that would be acceptable to the Chancellor, who I know is an overbearing presence on the Department for Work and Pensions. They seem to have missed that trick.
There are two more minor matters that I hope can be addressed in Committee. This is an obvious case of where we should just polish the existing text. There have been calls for that already from both sides of the House. I am sure that the Government, who are in a reasonable, consensus-seeking mode, will have taken account of them. However, one issue is the moment of introduction of the earnings link and, later on, the moments of introduction of the new retirement age, which will increase from 65 to 66 and 66 to 67 and so forth. As things stand, appalling unfairness will be created. The other issue, which is important, is the introduction of a new system under which 30 years of contributions will qualify for a full pension, rather than 44 and 39 years, which is the rule at present. The Government propose to go in one jump, on one day—6 April 2010—from requiring 44 years, or 39 years in the case of women, to 30 years. As has already been said, somebody who is 65 on 5 April 2010 will find that he or she has a pension that is considerably less than somebody who happens to have been born a day later and becomes 65 on 6 April 2010. If someone loses out on roughly a third—that would be the gap between 30 years and 44 years—of his total pension entitlement, which is about £84 at present, that would mean that he was losing about £27 or £28 a week simply by virtue of being born on one day rather than another. That cannot be right. Similar unfairness and anomalies will be created when the new retirement ages come in if the whole of the disbenefit is suffered on one particular day.
The Government seem to have forgotten entirely about the concept of a taper. Whenever we make changes to the tax or benefit systems that have a significant, long-term effect on people’s earnings, they should be phased in or tapered, simply out of sheer humanity. That would be the way to pre-empt the great sense of injustice that will otherwise pollute the new regime from the very moment of its introduction, which would be a great pity. I do not know whether I will be lucky enough to be selected to serve on the Public Bill Committee. If I am, and if no one else proposes an amendment along the lines that I have suggested, I will do so myself. However, I trust that the Government will propose such an amendment to deal with the problem.
My main worry is the overarching problem with which the Bill does not deal, namely, means-testing. There is no question at all that in the present circumstances, and in the circumstances that can be foreseen when the Bill reaches the statute book, there will be a large number of people who will have no motivation to make a voluntary pension contribution by way of a personal account or any other means.
Way back in the 1997 Parliament, when the Government first introduced the minimum income guarantee, which was the predecessor of the pension credit system, I happened to be my party’s spokesman on pensions. At that time, I made the calculation—I think that that was the first time that it had ever been made, and it appeared in the following day or two in not just the specialised press, but the general press—that a person would need to save for a capital sum on retirement of £80,000, on the values of that day, to gain even one penny’s benefit from those savings from a modest income. At the time, £80,000 would have yielded an income of £5,000 a year on a 6 per cent. annuity, and £5,000, on the assumptions that I set out to the House—no one quarrelled with them—was the average value of the benefits that could be received in addition to the maximum state retirement pension, particularly housing benefit, council tax relief and the minimum income guarantee supplement. On the assumption that the person concerned had a full contributions record, I calculated that all the £5,000-a-year annuity benefit would be completely forgone because it would equal the amount of means-tested benefit available to that person.
Things have moved on since I made my calculation. The pension credit is worth more than the minimum income guarantee was at that time, and rents, and thus housing benefit, are somewhat higher. The relevant figure in the calculation is now certainly more than £100,000. A person would have to save more than £100,000 for there to be any benefit on retirement from those savings, if he or she was on a low income and otherwise eligible for means-tested benefits. That is a horrifying thought because to save an amount yielding a capital sum of £100,000 at the age of 65 would represent a pretty heroic savings effort for someone on a small income.
The figure that the hon. Gentleman cites was considered by the Work and Pensions Committee in the last Parliament. The Minister for Pensions Reform and the hon. Member for South-West Bedfordshire (Andrew Selous), who is sitting on the Opposition Front Bench, were members of that Committee, so they will remember that we queried whether the £80,000 figure was correct. The hon. Member for Grantham and Stamford (Mr. Davies) failed to include in his calculation that someone who had managed to pay £80,000 into a fund that could be put into an annuity would have paid national insurance contributions, meaning that he or she would receive the basic state pension. The £5,000 would thus have been received on top of that pension and the person would not have lost pound for pound as a result of the pension credit. The figure of £80,000 was relevant only if a person had no other income whatsoever and qualified for the full amount of pension credit. The calculation—
Order. I think that the hon. Lady has had more than her two-penn’orth today. That was probably sufficient by way of an intervention.
The hon. Lady misunderstands my logic and what I am trying to say. She certainly misunderstood what I said when I first made the point about eight years ago. I am comparing like with like—I am comparing comparables. For the purposes of my calculation, I am assuming that someone has a full contribution record and thus receives the state retirement pension. The question is whether that person will get anything more than that pension.
The figures have changed a bit since I first made my calculation, although not by much. At that time, the minimum income guarantee would have provided £20 a week more than the state retirement pension. Housing benefit typically would have provided about £50 a week, although now the figure would be £60 or £70. On top of that, council tax relief would have provided perhaps £10 a week, although the amount would now be £20 a week because of the dramatic rise in council tax since then. People at that time would thus have been entitled to some £5,000 a year by way of means-tested benefits on top of their state retirement pension, because, as I am sure that the hon. Member for Aberdeen, South (Miss Begg) knows, if people have only their state retirement pension to live on, they automatically get council tax relief, housing benefit and the minimum income guarantee—now the pension credit. All that benefit would be forgone by people who had some £5,000 of retirement annuity on top of their state retirement pension.
If one does the calculation today, the figure is rather higher, given that the value of the benefits has increased, so the capital sum needed from which to purchase an annuity on retirement would now be more than £100,000. If, after cashing in a capital sum of £100,000, a person had £6,000 from a retirement annuity as their only income in retirement, apart from the state retirement pension, they would find that they had wasted the whole £100,000, because the £6,000 that would be received would disqualify them from the means-tested benefits that they would otherwise get. There is thus a break-even point, which is now slightly more than £100,000, at which savings give absolutely no return.
I ask the hon. Member for Aberdeen, South not only to follow that logic, but to bear with me and go to the next stage. A person who had saved £200,000 would receive a return from that by way of an annuity that would be exactly half what the market return would be. In other words, that person would receive half what the market would regard as a reasonable return for deferring consumption throughout a lifetime and undergoing an investment risk by saving money. It is not unless a person expects to be able to accumulate an amount considerably in excess of £200,000 in a retirement fund with which to purchase an annuity on retirement that it becomes worth while to think about making personal pension contributions.
I am afraid that that is the overshadowing reality, and it means that someone who does not expect to be able to save that kind of money would almost certainly be much better off consuming their income—spending it on enjoying their life and doing what they want to do—rather than saving it, because they will know that when they reach 65 they will get not only a full state retirement pension, but the full pension credit, in addition to housing benefit, council tax relief and the other means-tested benefits to which they may be entitled. Such an uncomfortable reality means that anyone giving honest advice to a person in such circumstances would have to say, “How much do you expect to be able to save in your lifetime? If you can’t save beyond £200,000, it really isn’t worth it.”
Just imagine the effort required for someone with an income of under £20,000 a year, or even £25,000 a year, to save a sum that would, on reasonable rates of return, amount to £200,000, £250,000 or more on retirement. It would be an heroic effort, and that heroic effort would almost certainly yield a derisory return. People who earn much more substantial amounts of money might be able to put aside £5,000, £10,000 or £15,000 a year, and for them it is very worth while to save that money, but unfortunately it is not worth while for others to do so in present circumstances, and the Government have hardly changed that at all. We must all be concerned about that.
The Liberal Democrats identified that problem and have come up with a solution that everybody else regards as simply not financially viable, and I share that view. Their solution is not realistic; it is funny money, and it is not a sensible way of moving forward. We must be able to afford what we propose for the British public. An alternative used elsewhere is compulsion. The hon. Member for Northampton, North (Ms Keeble) mentioned the Australian superannuation system, which I have considered, and it is an attractive system that runs extremely well. Compulsion means the state telling everybody that they will have to pay for what they receive in retirement. No doubt there is a means-tested safety net, so that people do not die in the gutter if, for one reason or another, they manage to avoid saving any money through the compulsory scheme. Nevertheless, in such a system, what people receive on retirement is seen to be the direct result of the compulsory saving. That, of course, was the original basis of the Lloyd George proposal introduced in the House exactly 98 years ago. Compulsion has not been mentioned at all in today’s debate, although just about every other aspect of the subject has been. It is something to which we will almost certainly have to return.
There are great problems with compulsion. People will say, “I’m compelled by the state to save; the state is forcibly extracting a certain amount of money from my salary. Even though it is supposedly being saved for my benefit, I regard it as a tax. It is an imposition and it is not voluntary.” I quite understand the political sensitivity of the matter. It would be a brave Government who decided to introduce compulsion, but I do not think that we should exclude the idea. I am not urging my hon. Friends to include the proposal in our next manifesto, but we should not exclude the idea from the debate, just as it has been excluded, slightly artificially, from our otherwise detailed and multifaceted discussion this evening.
Several hon. Members rose—
Order. Before I call the next speaker, I point out that the Front-Benchers’ speeches were very long, and so far only one speech by a Back-Bencher has taken less than 20 minutes. If all hon. Members are to contribute, speeches will have to be considerably briefer. I call Mrs. Janet Dean.
I promise to be brief; otherwise my voice might give out. I greatly welcome the Bill, particularly the measures that will benefit women and carers. The reduction of the number of qualifying years to 30, and the introduction of weekly credits in place of the current home responsibilities protection, will increase the percentage of women who will be entitled to a full basic state pension. Of course, we should recognise that home responsibilities protection already brings benefits to many women, even though it is more restrictive than the proposed credit system. However, I will raise one problem with HRP that I hope will be avoided under the new credit system, and I hope that Ministers will consider how those affected by the problem can be helped.
In August 2005, I was contacted by my constituents, Mr. and Mrs. Cartwright, who discovered when Mrs. Cartwright received a state pension forecast that she had not been awarded home responsibilities protection. When my constituents questioned that, they discovered that their child benefit, which they had claimed since 1984, was deemed to have been paid to Mr. Cartwright, even though it was paid into their joint bank account. When they applied for child benefit, Mr. Cartwright’s name was put first on the application form, for no reason other than that his name appeared first on the bank account. He was therefore treated as the recipient of child benefit, and that qualified him for HRP. I believe that that may be a significant problem now that child benefit is paid into bank accounts. It would never have arisen under the old system of payment books, in which it was clear that it was the mother who received the benefit.
Mr. and Mrs. Cartwright should have received form CH718 for Mrs. Cartwright to complete, which would allow her to give her permission for Mr. Cartwright to receive child benefit and therefore the HRP. My constituents do not believe that they ever received that form, and the Child Benefit Office is unable to provide copies of returned forms. The onus is on the claimant to prove that they never received the forms, which is impossible after 20 years. There seems to be confusion on that point. My recent inquiries revealed that the rule is that if no completed CH718 form is received, the claim from the husband should be disallowed. However, while making representations in 2005, a member of my staff was told that although the forms are sent out, if they are not returned, it is assumed that the claimant received them, and that the first named person on the form is accepted.
Whatever happened regarding the form more than 20 years ago, it is clear that no one would knowingly waive their right to home responsibilities protection when they had been caring for their children and not working. My constituents were certainly not aware of the implication of putting the husband’s name on the claim form and the effect on the entitlement to HRP. It is difficult to find out how many people may be affected by the problem, and it is probably only when people draw close to retirement age and receive a pension forecast that we will know the true extent of the problem. Certainly, both my assistant and my constituents have been told by the National Insurance Contributions Office that it knows of many such complaints.
The Pensions Advisory Service produced a document entitled “Report on Women and Pensions Helpline”, which was the result of a pilot helpline available from 18 October to 10 December 2004. The report states:
“A recurring comment from many callers was that they were unaware of, or confused by, HRP and how it may apply to them. Particularly relevant for couples, is the fact that HRP is only automatic when the child benefit is being paid to the non-working partner. Some enquiries came from individuals where the child benefit was being paid to the working partner rather than the partner who had given up work or was working reduced hours to look after the couple’s children. We were able to advise why they should be changing the payee details for the child benefit.”
I recently contacted the Pensions Advisory Service and was told that about 500 calls to the helpline concerned the subject of HRP, and the main problem was lack of understanding of how the system works. The issue highlighted in the report of the “wrong” partner receiving child benefit mainly concerned cases in which men stayed at home to care for the children, and due to ignorance of how the system works, their child benefit was paid to the mother, even though she was the working partner. As a result, the stay-at-home husband did not qualify for HRP.
Whether it is fathers losing out on HRP because they stay at home to care for their children, or mothers such as Mrs. Cartwright missing out because the husband’s name was inadvertently put on the form first, the situation is clearly ridiculous. No one would willingly lose some £32 per week in pension entitlement. In such cases, it should be reasonably easy to establish that the working parent has paid tax and national insurance during the years in which they were eligible for HRP, whereas their partner has not. It would therefore seem possible to transfer the right to HRP in those circumstances.
I am grateful to my hon. Friend the Minister for Pensions Reform for meeting me to discuss my constituents’ case. I hope that amendments to the Bill will be considered, so that we can address the problem that affected Mr. and Mrs. Cartwright and, I believe, many more people throughout the country.
I shall not waste 48 minutes of the House’s time, which is what the hon. Member for Yeovil (Mr. Laws) did. He lambasted the Bill, only to say that he would support it. I, too, support it, and it would have been much easier if he had said that he was going to do so at the start of his speech instead of waffling for 48 minutes.
I welcome many of the Bill’s proposals, and many of today’s contributions have sensibly identified things that need a little tweaking in Committee and at later stages in proceedings. I was interested in what the hon. Member for Northampton, North (Ms Keeble) said about the changes that the Bill will bring about, particularly for women and carers. I am a new Member, so this is the first opportunity that I have had to debate the subject, but it is a scandal that women have been treated as second-class citizens in pension entitlement for many years. I was shocked to read a letter from the Office of the Pensions Advisory Service to my mother, who sadly divorced late in life. She had worked throughout her life and, at the beginning of her career, she signed a document and received the married woman’s stamp. She did not realise, however, that she was signing her rights away if her marriage did not last until she reached pensionable age. She is lucky, and she would be happy for me to tell the House that she has been swept off her feet by a wonderful younger man—he is two years her junior—who provides her with the financial security that she deserves. They live in Spain, but she had to endure a degrading experience. She worked all her life and paid her stamp, so it is morally wrong that payment of her pension depended on whether her husband was in work and whether the marriage lasted. The Bill addresses many of the problems experienced by that generation.
The Bill addresses, too, many problems experienced by carers, whom we have all met in our constituency surgeries and during the course of our duties. Their work, dedication and love is flabbergasting, and that applies not just to part-time paid carers but to people who are looking after loved ones at home. I am worried about the problems that carers and workers in other industries may experience if the retirement age is raised to 70, and if the Minister does not have time to deal with my concerns tonight, I am happy for him to write to me.
Carers try hard to do everything for their loved ones. They often lift their loved ones when they are not really strong enough to do so, as they hate to ask for help. We must provide that help, but I have visited many carers who try to do everything that they possibly can long after they are physically capable of doing so. I am concerned that carers will be asked to look after their loved ones until they are 60, 65 or 70, although they may not be physically capable of doing so. What back-up mechanisms are there? Hon. Members will know that, all too often, social services do not ask, “How much time can we give?” but “How little time can we give?”
One of my constituents is confined to a wheelchair, and suffers from Parkinson’s and an extremely debilitating form of motor neurone disease. He is allowed 10 minutes’ help in the morning to get up, dressed and washed and 10 minutes’ help in the evening. He used to receive 20 minutes’ help and, before that, 30 minutes, but because of financial pressures on social services that period was reduced.
I agree that we need to ask for advice from people such as GPs. The hon. Member for Aberdeen, South (Miss Begg) said that GPs will not be interested in doing extra work, but I think that they will be if they are paid for it. If they are not paid, they will not do it, as that is part of their contract.
I am concerned about other workers who will be expected to work until they are nearly 70. I come from a family of construction workers, and I have seen generations of workers do heavy work on construction sites, particularly groundwork. Gentlemen cannot physically do that work once they are in their 60s, and it is degrading for them to be asked to make the tea or undertake other duties on site. They are skilled workers, but their speciality is heavy work, and they cannot go on working in the construction industry until they are 70. I do not know what modelling the Government have done on the opportunities for those workers between the ages of 65 and 70 because, in most cases, they will not be able to carry on working on construction sites. It is important, however, that we do not expect them to undertake degrading duties.
Someone aged 50 or 60 in a construction job may rightly think that they cannot continue to undertake heavy manual labour until they are 70, so they will try to retrain. However, as a result of the Government’s cuts in further and higher education funding for elderly people, they cannot do so, and thus cannot escape the trap highlighted by my hon. Friend.
My hon. Friend makes a valid point. There is a difference between longevity—we all know that people are living much longer—and physical capability and ailments that prevent someone from working. I am almost 50 and—perhaps because I was part of the Airborne and because I was a fireman—I am starting to suffer from arthritis. If I was doing a physical job in the construction industry and my condition worsened, I would not be able to carry on. I would be faced with a decision. Would the doctor sign me off, because I was not physically capable of doing my job? Would I attempt to retrain or would I take a job stacking shelves? All those options need to be modelled by the Government if we wish to extend the retirement age—and I accept the reasons for doing so—as that extension is not just about the age at which people die but whether they are fit and capable of working. We must not subject them to degrading treatment as they grow older.
The hon. Member for Northampton, North raised the important issue of the disability living allowance, payment of which stops as soon as the claimant reaches retirement age. DLA entitles most people to a mobility vehicle, so if we extend the retirement age to 70, we must make sure that we extend DLA, too. All the benefits that stop at 65 for a DLA claimant should continue to 70. We could even consider extending DLA into retirement, because someone who has had a mobility vehicle for many years has come to rely on it to get out of the house and remain active. As soon as they retire, however, that entitlement stops.
That is right, but the position is confusing. I have dealt with constituents in my surgery who have suffered as a result of mistakes in DLA.
The Minister would not expect me to make a speech about occupational pensions without mentioning the theft of pensions from 65,000 pensioners, not least the 700 former Dexion workers in my constituency. That is important to this debate, because it is about trust. The Government have made a huge assumption that many people will open a personal account or a private scheme, to which they will be expected to contribute. Less than 50 per cent. of working people pay into a pension scheme, and 80 per cent. of the schemes set up by companies are shells—nothing goes into them at all. If we do not address the issue of trust and the need for people to be sure that their money is safe, if we do not apply to Government advice the criteria that we apply to advice from a financial adviser, as both are covered by the same legislation, if we do not convince the public that their pension will be safe, if the Government do not accept the ombudsman’s report on maladministration, people such as my constituents, Mr. Peter Humphrey and the widow of David Cheshire, will demonstrate, and reports will appear in the press. They will not go away, as they will go on fighting for their rights, which will destroy the Government’s credibility and their efforts to sell personal accounts throughout the country.
The Government assume that many people will open a personal account, but the simplest way forward is to accept the ombudsman’s report on maladministration. I was working in a different capacity at the time, but I accept that my party made mistakes. The Government must accept that they, too, have made mistakes, so that confidence in pensions can be rebuilt.
If one talks to the younger generation—I am nearly 50, so I am getting on—it is clear that they are not investing in pensions. They are not putting money away for a rainy day. That is partly because, as we heard earlier, if they are on a low income, they have to put so much away in order to beat means-testing for benefits. That is a difficult situation, but the biggest problem is trust. No one trusts pensions enough to put their future into them. The Government could do so much for the Bill, which is an excellent Bill, if they accepted that they made a mistake, and compensated properly those whose pensions were stolen from them. Then we could start afresh and restore confidence in pensions. Hopefully, the Bill could regenerate the entire pensions industry.
For too long, women have had a raw deal from the pensions system, which may explain why women have been out in force on the Government side during the debate. Only a third of women retire with a full state pension. One in five single women pensioners risk being in poverty in retirement.
Yesterday, when I went to the relaunch of the British Heart Foundation shop in Alfreton in my constituency, there was a murmur of great approval from the older women volunteers when I said that I intended to speak about women and pensions in the House today. It resonates with women that the issue must be sorted out.
Women must be at the heart of pensions review and reform. If we get it right for women, we will get it right for everyone else as well. I make no apology for going on about women again, or for repeating my request to those on the Front Bench to reconsider the proposals to re-examine the position of part-time women workers and the definition of carers. I repeat the pleas of my colleagues on those matters.
I am proud to support the Bill. My right hon. Friend the Secretary of State pointed out that it is the biggest reform of our pensions since Clement Attlee’s post-war Labour Government implemented the Beveridge report. It has not been spelled out, but it is obvious that those reforms were based on a traditional model of a one-earner family, in which the man was the breadwinner, with a steady job for life, who financially supported his wife, who in turn carried out her family responsibilities without any financial recognition for her contribution to society. After the second world war, women were sent back into the home from the workplace and the nurseries were all closed down.
The model of work and family life on which the old pensions system was based is very long gone. Women’s and men’s working and family lives are increasingly complex, with fragmented working patterns, a complex system of caring for children, parents and other dependants, and trying to combine that with making financial provision. The world has changed since the days of Attlee and Beveridge. Now we seek to legislate for the model of the family, working lives and the care of dependants. That is why I say that basing the new system around women and what is right for them will make it right overall, because it will focus our minds on what is different today from what was done when Beveridge and Attlee set up the original system.
We know the position in which the old system has left women. I do not have time to go through the entire range of statistics, but listing them one after another shows how women have been disadvantaged. For example, 2.2 million women do not accrue rights even to the basic state pension. Retired men on average have between £50 to £100 per week more private pension than women of the same age. Almost two thirds of divorced and separated older women have no private pension income at all, and by 2020 there will be as many divorced women aged 65 to 75 as widows.
I have about 10 other statistics, but if I go through them all, there will be no time for anyone else to speak. It is a uniform picture of women being disadvantaged and of inequality in the system, which does not reflect the reality of modern life. Again, if we get it right for the modern system of the family, working life and women, we should get it right overall.
The Bill starts to do that, with the reduction in the qualifying years to build up a full pension entitlement and the reduction in the number of qualifying hours, and by positively crediting the time spent caring, so that for the first time we properly treat social contribution on an equal footing with cash contributions. Under the previous system, the cash contributions were credited but the social contributions were not, because it was not necessary. The woman would be looked after by the man. That is the way it worked.
Personal accounts will give everyone the chance to save in a low cost environment, and restoring the link to earnings and embedding it in legislation will make it far more difficult than it was last time for a future Mrs. Thatcher to break the link again. We have the figures showing how those changes will bring far more women and far more carers into entitlement to pensions, and make it possible for those women to accumulate a decent pension in future.
Instead of 30 per cent. being entitled to a full basic state pension, the Secretary of State explained that 75 per cent. of women will be entitled to that by 2010 and over 90 per cent. by 2025. The Bill is excellent and provides a good basis for adjusting to modern times and a modern world, not just for the next 40 years but hopefully beyond that, although I would not like to predict how the world will have changed over that period, given the present speed of change.
As my hon. Friend the Member for Colne Valley (Kali Mountford) acknowledged, the set of proposals in the Bill has been carefully crafted and costed, but like other colleagues, I shall suggest some areas where I ask Ministers to look again to see whether we can stretch it a little further. I know that there was some dismissal of the way in which the tax relief disproportionately benefits the better off, but perhaps it is possible to do a little more stretching within that equation to deal with some of the issues that have been raised.
Before I move on to that, I shall deal with a topic that has not been mentioned. Unless we sort out the gender pay gap, we will never achieve equality in retirement. Women who work full time earn 13 per cent. less in median hourly earnings and 17 per cent. less based on mean hourly earnings than men. Women are at greater risk of falling below the poverty line. If people are in poverty while they are in work, they take that poverty with them into retirement. That is why the statutory minimum wage was so important. It made a crack in that gap, but the gap is still there.
It is important to place the debate in the context of the Women and Work Commission report. The commission was given the task of seeking to close the pay and opportunities gap for women within a generation. That ties in closely with the changes to the pension system. The Trade and Industry Committee, of which I am a member, is studying the Women and Work Commission report to see how and if it is to be implemented.
I do not have time to discuss the excellent research findings in the report produced by the Equal Opportunities Commission with Scottish Widows, which looked at the psychology of choices made by men and women, which is clearly influenced by the financial resources that they have. It examines the proportions of men and women who say that they are able to save more money, and how much money they feel able to put into provision for their retirement. Women tend to use any money that they have to give to their children and to look after them, rather than making personal provision for their own retirement. That research is interesting.
On the Bill and points that were raised by colleagues and others earlier, four out of five part-time workers are women. In spite of the provisions in the Bill, many will still find it difficult to build up their entitlement to a basic state pension. I, like others, can cite people who work, for example, as a dinner lady at lunchtime and in a corner shop in the evening, but who do not manage to get above the lower earnings limit, pay their national insurance contributions and gain eligibility in any of the jobs that they are doing. Will the Minister look into the possibility of amalgamating the hours and the work that they do, so that those people can be given a credit?
It was pointed out to me by my hon. Friend the Member for Colne Valley after she had spoken that women who do not build up eligibility for credit and for pension will have to be paid something anyway. At the end of the day they will be given a credit of some kind, such as a minimum pension guarantee, so why not find a way to credit the work that they are doing and to amalgamate their various jobs? If they are doing a number of part-time jobs, none of which gets them into a position where they are paying NI contributions and therefore building up their entitlement, we should find a way for them to do that. I ask the Minister to consider that point, with which the Secretary of State expressed some sympathy.
Carers UK applauds the introduction of the new carers credit and has highlighted the tens of thousands of extra carers who will become eligible because of the changes that are being made. However, the qualifying conditions mean that 40,000 people caring for 20-plus hours a week will still not get entitlement to basic state pension and that 60,000 people will still not get entitlement to the state second pension. My hon. Friend the Member for Northampton, North (Ms Keeble) gave some good examples of the sorts of people who are not covered and why that is. The Carers UK document sets out six categories of people who would clearly seem to be caring for people but will not be able to build up the qualifications they need to become eligible for getting the credits that would feed into their pensions. For example, there is the person who cares for someone but does not wish to claim disability benefits. There is the person who is looking after someone with fluctuating conditions, so they claim their benefit or credit one week, and then the next week they have to go back and say that the situation has changed. There is the person caring for someone who goes into hospital for long enough to lose their benefit. The Carers UK document sets out a whole range of situations in which people who are caring for others for more than 20 hours are week are unable to get the entitlement that enables them ultimately to get their pensions.
In relation to the big debate that took place earlier about who might be able to certify that someone is a carer for 20 hours a week, Carers UK proposes that that could be done by a health or social care professional—a GP, a social worker or a health visitor. A GP may well know that a person with whom they are dealing has someone who is caring for them for that length of time, even if they are unable to say whether they need it. I ask Ministers to look again at that proposal, or at least to allow eligibility to rest not only with those with high-level disability or incapacity benefit.
The EOC research found that if conditions were right, including the option of working flexibly, up to 1 million older workers said that they would re-enter the work force. The Minister might like to consider extending the right to request flexible working to all, which might partly sweeten the pill of raising the retirement age. It could be a slightly less daunting prospect if we say to people, “You might carry on working for longer, but this flexibility means that you do not necessarily have to work bang up to that retirement age.”
I congratulate the Government on carrying out a gender impact assessment. From April this year, all Government Departments will have to undertake that in relation to significant pieces of legislation under the new gender duty on public bodies. Perhaps the Minister could point out to his colleagues in other Departments that they will have that task in future. I look forward to some extremely interesting reports.
My hon. Friend the Member for Northampton, North talked about the importance of information and publicity and had an interesting debate with my hon. Friend the Member for Aberdeen, South (Miss Begg) showing that whether or not the Government put out the right information it is crucial to think carefully about how to explain systems that remain complicated no matter how much we try to simplify them.
We seem to be moving towards a consensus. I am pleased that that consensus reflects more accurately the world as it is now and moves us on from the world of 50 years ago. I hope that we can get this right in a way that is fair to women, to part-time workers, to their dependants, to carers and to men. If we move along those lines, we should end up with a pensions system for the future that is fair and reflects life as it is lived now, in all its complexity and with all its difficulties, and gives people a decent deal in retirement instead of leaving them in an appallingly unjust situation. I commend the Bill and hope that we will consider amendments to improve it further as it makes its way through the House.
Like many Members, I welcome the Bill. I am pleased to follow the hon. Member for Amber Valley (Judy Mallaber). Somewhat to my surprise, I found myself in agreement with many of her comments about the benefits of the Bill in bringing women, carers and others who have not been able to secure full state pensions into that category.
It has been an interesting debate enlivened at one point by the revelation that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) has his own shadow in the copycat form of the hon. Member for Yeovil (Mr. Laws). We are getting used to the Government looking to the Conservative party for inspiration for fresh policy initiatives—for example, in this Bill we have the linking of the state pension to earnings rather than prices, which was in the Conservative manifesto at the last election—but now we learn that the Liberal Democrats look to the Conservative party for their parliamentary questions.
The Bill seeks to deal with a big demographic challenge that has been ticking away but has not been addressed by any Government for some time. An illustration of the consequences of that was brought home to me in my constituency the other day by the primary care trust, which had put together a report on our community hospitals that pointed out that more than 30 per cent. of the people in south-west Shropshire are now over 65. I accept that that proportion is much higher than the national average, but that is still rising rapidly. Those over 85 are expected to increase by 50 per cent. over the 10 years to 2013. As a result of medical advances and people living longer our future pension provision faces a rapidly growing funding crisis. The Bill is a first step in attempting to deal with that.
Sadly, the Bill will do virtually nothing for many years for existing pensioners. Reservations have been expressed to me, and no doubt to other Members, by representatives of pensioner groups about the fact that such a forward-looking measure that does so little for existing pensioners. The link to earnings, which the Chancellor has left himself wriggle room to defer until 2015, means that for today’s pensioners a very modest increase in their state pension might be forthcoming in anything from five to eight years’ time. That does not give rise to much enthusiasm in the senior citizen forums that I attend.
I welcome the introduction of personal accounts and the prospect of restoring some of the savings culture that has been so weakened, particularly in the past 10 years. When I have raised that with Ministers in the past, they have always tried to brush it aside by saying that it is entirely correlated with the strength of the economy, but it is not purely to do with the economy it is also to do with the culture and savings habits of the population.
Let me deal with two main difficulties with the Bill. One is an omission and I hope that the other can be tackled in Committee. The omission is the lack of reform of public sector pensions. That is a missed opportunity. For party political reasons, the Government have not dealt with the disparity between public and private sector pension provision and established common rules for all pensioners. When the Secretary of State was challenged about that in the Select Committee, he said that he did not perceive it as a problem because 10 per cent. of civil servants change employment every year. He anticipated that that would continue so that, by 2026, only a minority of people in the civil service could retire at 60. He calculated that, by the time the measures were fully implemented, only 3 per cent. of civil servants would be entitled to retire at 60. That may be the case because the arrangements will be introduced over several decades. In 50 years, no one in the civil service will retire at 60. However, that is far too long a period for bringing the two sectors of society together. The Government have made a feeble attempt to find an excuse for not being prepared to tackle the public sector pension challenge.
My hon. Friend the Member for Runnymede and Weybridge referred to the other issue when he mentioned the state second pension. The abolition of the contracted-out rebate and the proposals to move the state second pension on to a flat rate over time have revealed the prospect of many people who are in that pension regime saving for no return. The state second pension will effectively be a stealth tax dressed up as equalisation of pensions. That must be tackled, because there is an injustice in arrangements whereby the benefits for a specific category of people go to waste. I hope that we can consider that in Committee and ascertain whether we can introduce provisions to right the wrong.
I want to concentrate on two other specific matters. The first is specific or general advice, which relates to the operation of personal accounts. It has been a thorny issue for the Government, not least because of their track record. Other hon. Members have mentioned the parliamentary ombudsman’s devastating critique of pensions mis-selling, which the Government ignored but the public did not. It raises the question of trust. If the Government wish to encourage saving, the population needs to have complete trust and confidence that the governance and structures of the scheme in which it saves are subject to rules of conduct. Advice is key. As other hon. Members said, given the prevalence of means-testing, which will continue to apply to many who consider whether to opt in or out of the personal accounts scheme, it is important that people receive clear guidance about whether it is appropriate and in their interests to participate. The Government have failed to tackle the matter fully, although I expect that it will be picked up when we consider the second stage Bill in the summer.
Trust covers so many different aspects. The collapse of final salary pension schemes has posed questions, with which we are all now familiar, about pensions. The Financial Services Authority imposes clear rules and procedures on private sector providers in the savings industry. The Government choose to ignore that when they describe the way in which the personal accounts system might work. That is a great mistake. When setting up a new system, it is vital for the Government to use clear, precise and careful language, especially when they describe what they want to achieve and try to build trust among the population.
Given that there will be no time to tackle all the points in the winding-up speech, I draw the hon. Gentleman’s attention to the fact that the review that we announced today of the regulatory landscape will tackle the regulation of personal accounts. They should be regulated in the same way as any other financial product and we are considering precisely that issue. Of course, there is a difference between an informal discussion in a blog and the professional advice that one provides as part of a regulated service.
We will participate in that consultation and examine the Minister’s pronouncements carefully, whether they are formal or informal. A problem with advice is that it adds cost. The Minister accepts that some sort of advice will be necessary, whether in a generic printed form or on websites. However, it needs to be clear, available and inexpensive.
The second matter, which follows from the first, is trust in the system of governance. I asked the Secretary of State about independence during his opening remarks and I did not find his response reassuring. Independence and the perception of the independence of the regulatory body is vital because it helps establish trust in personal accounts. For individuals, many of whom will not have saved previously, to decide to lock up amounts of money for the whole of their working lives, they need to be sure that their savings will be administered properly, invested wisely and not be subject to Government interference.
In the consultation stages before the Bill was published, many commentators called for the scheme to be independent of Government and accountable to Parliament, similar to the board of trustees of a defined contribution scheme. The Pensions Commission proposed that and the Select Committee agreed, as did many of the independent commentators, from the Consumers Association—Which?—at one extreme to the Investment Management Association acting for the professional investment managers at the other.
Although the Secretary of State talked about independence, the Bill gives him specific powers. I should like to reiterate them, to ascertain whether the House believes that the personal accounts delivery authority will be independent. The Bill gives the Secretary of State powers to determine the average earnings calculation—surely that should be job of the newly independent National Statistics? He will have the power to remove the chairman or any non-executive. He will also have the power to determine the remuneration of the chairman, the chief executive and all the non-executives, covering their pay, their pensions, their allowances and their gratuities—it is interesting that the members of such an authority might expect gratuities—and to determine whether they are entitled to compensation on loss of office. He will also have the specific power, set out explicitly in the Bill, to issue guidance from time to time to the authority about the discharge of its functions. The authority will have to pay regard to that guidance.
The authority will be independent in name only, not in substance. The Government need to be much more imaginative in granting independence to the authority and, more specifically, to its successor, the personal accounts board. Perhaps they might like to look to the Conservatives for ideas on how to grant independence, so that the public can have real confidence, over successive Governments, that their funds will not be at risk from Government meddling.
The overriding message from today’s debate has been that neither the issue of pensions nor the Bill can be seen in isolation. The Government need to adapt to people’s increasingly complex work and social lives, and to develop a new approach to preparing our citizens for making financial decisions appropriate to their needs. My hon. Friend the Member for Amber Valley (Judy Mallaber) has mentioned the need for a continuing effort to address the pay gap between the genders. Other hon. Members have mentioned the issue of those who suffer from long-term low pay, and their ability to make their savings work for them.
I congratulate the Department for Work and Pensions on the way in which it has carried out the pre-consultation process, including the work of Lord Turner’s commission. This is a good example of the Government doing the necessary ground work for an ambitious programme that will affect people’s lives for the next 30 to 40 years. Building a robust and thorough consensus is very much part of that. Despite the very long speech by the hon. Member for Yeovil (Mr. Laws) on behalf of the Liberal Democrats, I am still somewhat confused as to what his proposals are. However seemed to suggest that he would be part of the consensus this evening. The Scottish National party has indicated its agreement in principle to a personal account system, and I shall be interested to hear how it envisages such a system operating under its own policies. No doubt its representatives will table amendments on Report, and it will be interesting to flesh out the debate at that stage.
On the major points, the Government have achieved the consensus correctly, although there obviously had to be an element of compromise involved. The commitment to restore the earnings link is essential and, like many other Members, I would urge the Government to make that reconnection sooner rather than later. We need to ensure, as far as possible, that the real value of the basic state pension is at least preserved, and to encourage people to come on to the personal accounts system.
In my opinion, the most important feature of these proposals is the automatic opt-in provision. Most people are aware that it makes sense to save for their retirement, but as I found out when I worked as a solicitor before coming into the House, persuading them to do so is like trying to get them to draw up a will. They know that it is the right thing to do, but many people, especially the young, have an inbuilt resistance to giving the issue serious thought leading to a definite decision. Death and retirement planning remain the modern social taboos.
There is no doubt that this is a complex issue, however, and many people lack the knowledge to make an informed decision, or even to know where to go for proper advice. Poor awareness often translates into unrealistic expectations, particularly for those on the lowest incomes. I welcome the comments made on Monday by the Minister for Pensions Reform and the Economic Secretary to the Treasury about the need to improve people’s understanding of their financial affairs in general. This must involve tackling the great deal of misinformation out there unfortunately, mainly among the most vulnerable and least knowledgeable in our society. This measure must also be part of a wider effort to persuade more people of the value of saving regularly to deal with emergencies when they arise and to control their personal debt and keep it at a sustainable level. Otherwise, we shall face the possibility of people deliberately opting out of the scheme for short-term emergency reasons and losing out in both the short term and the long term.
A number of hon. Members have rightly mentioned the fact that we need to restore confidence in pensions. Again, this is particularly true for those on the lowest incomes. Although the financial services industry has been perfectly capable of dealing with people on higher incomes, it has never truly been able to offer stand-alone pension products for those on the lowest incomes. The level of administrative charges remains one of the most crucial factors in determining the worth of the scheme. That is why the reduction of the administrative charge for the proposed personal accounts to a much lower level than those charged on the open market will be significant for those on the lowest incomes. Given that at least one third of the adult population are not saving for their retirement at all, the need for such change is urgent.
It is also true that the nature of work, our health as a nation and social changes such as the fact that 25 per cent. of us now live alone, make it difficult to imagine what is going to happen 30 to 40 years hence. The circumstances pertaining when our parent’s generation entered the workplace had changed radically by the time they retired. My mother, who is 79 years of age, received a dowry from the civil service when she left to get married in lieu of her benefits; in fact, she has received no pension for her years’ service. When she returned to the workplace, she was not allowed, for the first few years, to join the local authority superannuation scheme.
Thankfully, those circumstances are now gone and past. The current adult population, however, are seeing rapid changes and much more variety in how people work, how long they expect to work and the type of jobs that they enter. Those who are entering the job market now will see even more change. We cannot just park the issue for 20 years at a time; we must be prepared constantly to review and alter arrangements to suit changing lifestyles.
We have spoken about the raising of the pension age. Given that I represent a city that is routinely quoted as having the lowest life expectancy rates in the UK, the Minister for Pensions Reform will not be surprised to learn that while I understand the Government’s motivation, I am also concerned that that must be met by a visible, firm commitment to address the health inequalities that bedevil cities such as Glasgow, and by an equally firm undertaking to keep the matter under review. Obviously, it is possible—I hope that it is less rather than more likely—that life expectancy rates will stall or decrease as new health problems emerge. Again, we must build flexibility into the system and keep it under regular review.
Clearly, addressing the gender gap, reducing the number of years of qualification and reducing the number of hours for carers are important for our female population. We must be mindful, however, that affordability is much more likely to be a constraint for women than for men, with only 37 per cent. of women working full-time, compared with 60 per cent. of men. Women need to know that the new scheme will work for them and adapt to their life changes. As some of the problems experienced in relation to the tax credit scheme showed, we all underestimated to an extent the complexity of people’s working patterns. We need to address that.
The thoroughness of the gender assessment carried out was welcome and helpful. However, as my hon. Friend the Member for Aberdeen, South (Miss Begg) mentioned, we must ensure that the issue of trivial lump sum commutation is dealt with effectively. People will therefore be able to save with confidence, and even if their savings are low, which is likely for those who are over 45 when the scheme starts in 2012, they will get some value from them, even if only in the form of a lump sum. It is not, as the hon. Member for Yeovil said, that the scheme itself is at fault. Women’s median average earnings are much lower than men’s, and that is something that we should continue to address—the minimum wage has improved the position—but we should also remember that women live longer, so their annuity values will be lower. We must therefore ensure that they manage to escape the means-testing trap.
I agree with many of my hon. Friends that we need to consider the issue of carers. With 120,000 carers caring for 20 hours-plus a week who will apparently miss out under the current regulations, we must test the issue against the effect on carers and ensure that they are relieved of a burden. Yes, as the Secretary of State mentioned, there are additional costs, but we are still providing 50 per cent. of tax relief to the highest earners in society, the great majority of whom are male. If the Government are to follow through the gender assessment impact process as thoroughly as I am sure that they want to do, they should consider whether continuing that form of benefit is justifiable given the proven needs at the other end of the spectrum, where most of those affected are female. Will the Department keep that in mind in ongoing negotiations with the Treasury?
This is a good Bill that will deliver substantial benefits, particularly for women and carers, who are not covered properly by the pensions market. It is a major step towards encouraging confidence in long-term savings. However, it must be met with a firm commitment to tackling the other problems that I have mentioned, which have an impact on both pensions and income more generally.
I am grateful for the opportunity to speak because I have a special interest in the Bill. Although, as I am sure my speech will make clear, I am no expert on pensions, I am passionate about the subject. I speak for the Liberal Democrats on women’s and equality issues, and I can think of no area in which this country has treated its women more shamefully.
One in four women pensioners in Britain today lives in poverty. The average income of women pensioners is only 57 per cent. of that of male pensioners, and only 30 per cent. of women retiring today qualify for the basic state pension. A good many statistics have been quoted, so I shall simply say that more than 2 million women are poor enough to receive the means-tested pension credit. That will raise their weekly income to £114.05, which is still £14 below the Government’s official poverty level income of £128 for a single person. Of those 2 million women, 20 per cent. will be in even worse poverty because, for whatever reason, they do not claim the means-tested benefit.
It is not difficult to see why this state of affairs has arisen. For the most part, it is a self-perpetuating problem that will not be susceptible to resolution in the foreseeable future. As the hon. Member for Amber Valley (Judy Mallaber) observed, women earn less than men, so they accrue fewer pension contributions. Even if we compare the average full-time wages of the sexes, women earn 17 per cent. less than men—but many women work part-time so that they can care for growing families, elderly relatives and others, and part-time hourly earnings for women are only 88 per cent. of men’s. Given their lower earnings, women’s ability to pay any money into their pensions is diminished.
Historically, as many Members have pointed out today, the pensions system was designed on the assumption that the husband would be the main breadwinner. Married women were led to believe that they would still receive pensions if they paid the so-called married woman’s stamp, instituted by Beveridge in 1948. Too many found out too late that that was a fallacy. Even today, there are women who are still paying the married woman’s stamp. But perhaps the greater contributor to poverty among the elderly, particularly women, has been the fall in the value of the basic state pension caused by the removal of the earnings link in 1980, on Mrs. Thatcher’s watch. The basic state pension constitutes about half the income of women pensioners, a far greater proportion than that of men. Its value has now shrunk to £52.50 a week less than it would have been if the earnings link had been maintained.
For today’s 7 million women pensioners the picture is bleak, and for the fifth richest country in the world it is a national scandal. What are we going to do about it? In the Bill, the Government have gone quite a long way towards implementing the Turner recommendations, although if they had embraced the recommendations for a citizen’s pension—which has been Liberal Democrat policy for some time—much of the detail of the Bill, which leaves out some people who deserve a pension, would not have been necessary. However, we welcome the Bill as far as it goes, although I shall respectfully point out some areas in which I think it could be made better and fairer.
As we have heard, the Bill will help by reducing the number of years’ contributions needed for someone to claim the basic state pension to 30, from the current 44 for men and 39 for women. That will help women because, as I have said, many will have taken time off to bring up children, care for elderly relatives and so on. The introduction of the 30-year rule will create a cliff edge for those who have failed to achieve the 30 years because they retired a day, a week, a month or a year or more too soon. The gap that they will face will be huge.
We will propose amendments to help those who fall short of the cliff edge to qualify. We will submit them in Committee, but let me say that the example given by the hon. Member for Colne Valley (Kali Mountford) about people with part-time jobs will be taken into account.
In the spirit of consensus and wanting to be helpful, it would be helpful if Members knew in advance, if possible, of such Liberal Democrat proposals to enable us to deliberate on their detail, especially if the proposals warrant the support of the whole House. Do the Liberal Democrats propose that the period should be below or above 30 years?
We will table our amendments this evening, so the hon. Gentleman will know of our proposals as early as tomorrow. [Interruption.] Yes, as my hon. Friend the Member for Yeovil (Mr. Laws) says, “If you show us yours, we’ll show you ours.”
There should be recognition of the contribution that women have made to this country, particularly in the areas of unpaid work and caring for children and for the sick, the disabled and the elderly. We welcome the attempt that is being made in the Bill to right a wrong by enabling carers—men and women—who care for 20 hours or more a week to have their contribution counted towards pension credits. However, people who require care do not necessarily conform to neat categories of need. We can all recognise the picture of the severely disabled person who needs lots of care and attention; they are easy to identify. But we should also think about situations in which someone cares for a loved one who needs a lot of attention but does not qualify for the higher rate of disability living allowance. The hon. Member for Northampton, North (Ms Keeble) gave some good examples in that regard. Why should the level of disability dictate the allowances for the carer, who has to put in the hours of care regardless of what disability allowance the person that they care for is receiving?
Those who care for people with intermittent needs will also be left out of this entitlement. A mother might have an adult child who has mental illness. That child might be okay for periods, but when the illness hits lots of time will be needed to care for them. Will that mother be able to get a full-time, well-paid job, knowing that they might have to break off at any time? We will be able to include many more people who deserve to receive carer’s pension credits if we build a little more flexibility into the Bill. We will table amendments to that effect.
Finally, I want to speak about the plight of pensioners today. Tomorrow’s pensioners will be helped if the Bill is enacted but, to be frank, 3 million of them will be dead by 2012, having had no improvements in their harsh circumstances. Further, by 2012 the value of the basic state pension will have fallen to just 13 per cent. of average earnings—yes, just 13 per cent. That cannot be allowed to happen. The National Pensioners Convention and many other groups have called for the immediate restoration of the earnings link. The cost of that has been estimated at £600 million per annum. That is a lot of money, but it pales into insignificance compared with the billions of pounds that the Government have thrown away on computer systems that do not work and an illegal war in Iraq, and with what they propose to spend on identity cards.
The Government have pledged to eradicate child poverty by 2020. That is a laudable aim, but under these proposals by then one in five of all pensioners will be in poverty—and, we can be sure, even more women than at present will be swelling the ranks of the poor. The Government can do something about that now. Planning for tomorrow is essential, but relieving the inequality and injustice of today is also essential if we are to be able to call ourselves a caring and civilised nation.
I want to endorse the comments that several colleagues made about the welcome improvements in state pension provision for women in this legislation. It is also good that there has been such consensus on measures in the Bill, particularly those on the restoration of the link to earnings. However, I have some concerns about the lengthy delay before that improvement will be brought about. We will still see the value of the state pension reduce and means-testing increase until 2012 or even 2015. As has been pointed out, that means that today’s basic pension will be eroded in value from about £85 to £70, and potentially even to £67, a week. That is not good enough for a Labour Government.
The Pensions Commission pointed out in its earlier reports that, based on the Government’s own figures, spending on pensions and pensioner benefits was set to increase by 2050 to about 7.6 per cent. of gross domestic product from the current figure of 6.2 per cent., after an initial fall between 2010 and 2020 as the state retirement age for women increases. The commission proposed a trade-off between improved benefits and a rise in the state retirement age. For example, its proposed restoration of the link from 2010-11 at the latest could be accommodated if the state retirement age were increased to 69 by 2050 and spending increased to 7.5 per cent. of GDP, which is slightly less than the Chancellor’s prediction if there is no change. The Turner report reckoned that if the state retirement age were increased to only 67 by 2050 spending would increase to about 8 per cent. of GDP.
The Government have accepted that we should try to reduce means-testing by the restoration of the link to earnings, but they say that doing so to an earlier time scale cannot be afforded. Yet, according to their figures, we are talking about a cost of some £3 billion, at today’s prices, by 2050. Adopting the 2010-11 proposal would mean an increase to £50 billion, compared with £47 billion, if adopted, in 2012 and £42 billion, if introduced, in 2015. Those are fairly small sums in terms of the growth in GDP that we might expect by 2050. None the less, there is a small, affordable gap and, as I said in an earlier intervention, it could be bridged simply by switching priorities. I do not agree with the proposal of the hon. Member for Yeovil (Mr. Laws) that savings should be made from public sector pensions. That is far too vague and probably not deliverable, and I do not particularly wish to advocate a reduction in the benefits of people working in the public sector, who generally receive lower remuneration than those in the private sector.
I am grateful to the hon. Lady for giving way. Given her clear and evident reservations about the introduction of the average earnings link by 2012—she suggests that it is perhaps more likely to be 2015—and in the spirit of transparency and openness, come the next general election, will she be suggesting that pensioners in her constituency should expect that link not in 2012, but in 2015?
Well, I will not actually be standing at the next election, but I will be campaigning, and I hope to do so on as good a pensions package as possible. I do not anticipate that the change will be delayed until 2015—it is just that the Government have not specified whether it will be 2012 or 2015. I certainly hope that it will be well before 2015.
Where could we obtain the additional resources to improve the pensions package proposed in the Bill? The Turner commission pointed out that we spend large sums of money on tax relief, which it described as costly and poorly focused. It did not advocate one rate of tax relief for pension contributions for various practical reasons, and my right hon. Friend the Secretary of State was right to point that out. However, at one of the all-party group meetings with Lord Turner, I had the opportunity to make my point about the large sums of taxpayers’ money that go to some of the richest people in the land. Apparently—the figures come from my right hon. Friend the Member for Birkenhead (Mr. Field)—5 per cent. of the population get half of the tax forgone through tax relief on pensions. Lord Turner suggested a way forward that I commend to the Government. He suggested that the total pensions pot that is eligible for tax relief—now some £1.25 million—should be frozen. I noticed in the last pre-Budget report that my right hon. Friend the Chancellor projects an increase in that sum to £1.35 million—that is what I recall the figure to be, although I stand to be corrected. We have the opportunity, therefore, to shift our priorities from tax relief for those in the very highest income brackets—who are not necessarily the highest income earners—and use the money released to benefit the majority who are on fairly low incomes and depend on state provision.
Ros Altmann makes a similar point, but she also points out that if the contracting-out provisions were abolished, £10 billion could be released annually. As I have said, the proposals would involve an increase of £3 billion annually by 2050. Another submission to the Work and Pensions Committee suggested that we could consider reducing or abolishing the tax relief on lump sum payouts by private pension provision. If the Government really wanted to prioritise improvement in state pension provision, they could do so.
I endorse the comments by the hon. Member for Solihull (Lorely Burt) about the money that we will waste on a computer system for identity cards, which would be better spent on this issue. I could add to that the cost of replacing our nuclear submarines, but I shall stick to the possibilities for redirecting funding from within the pension system itself. If we do not improve the basic state pension and remove means- testing more than the Bill proposes, all we will do is ensure that we do not have any more means-testing by 2050 than we have at present. We all know the present disincentives to private saving, so I urge my right hon. Friend the Secretary of State to try one more time to bend the Chancellor’s ear on this issue. If we do not make the improvements that I have outlined, we will not build a truly firm foundation for private pension saving. In addition, people being auto-enrolled into the national pensions scheme could discover, when they come to retire, that continual means-testing means they are still no better off.
We have heard a lot in this debate about the consensus that exists in this House in respect of various pensions proposals. I suspect that members of the Scottish National party and Plaid Cymru stand somewhat outside that consensus. We support some aspects of the Bill, but other proposals cause us considerable concern.
The hon. Member for Amber Valley (Judy Mallaber) is no longer present, but she said that the plight of women pensioners resonates with her older constituents. That may be true, but the Bill’s biggest failing is that it does not tackle the problems faced by existing pensioners. The hon. Member for Aberdeen, South (Miss Begg) argued that it is not meant to, and I accept that that is probably the case, but we will fail to achieve the consensus that the Government claim to be seeking if we do not deal with those problems.
The important consensus is the one that exists outside this House, among the general public. If we do not achieve consensus there, we will not get people to take up the personal account—an important element in the modernisation of the pensions system. If today’s pensioners do not feel that their concerns are being addressed, they will continue to feel aggrieved, and they will pass that feeling of grievance on to others.
When the National Pensioners Convention launched its alternative White Paper, it stated:
“The Government’s failure to address issues of pensioner poverty, unpopular means testing and the plight of 5 million existing women pensioners is the biggest whitewash of older people in the history of social policy”.
It does not get much more aggrieved than that, but that is a feeling shared by many of today’s pensioners.
All hon. Members probably agree that there should be a link between earnings and pensions, and there was some discussion earlier about exactly what that link should be. That is important, as it was announced today that general inflation had reached 3 per cent., the highest level in 10 years. However, the inflation faced by poorer pensioners is effectively much higher, as more of their income goes on things such as energy—and gas prices, for example, have risen by 40 per cent. over the past year alone.
The Government have accepted that there should be a link between pensions and earnings, but have delayed implementation until 2012 at the earliest. As has been noted, the link might not be introduced until 2015. Perhaps I am getting cynical in my old age, but I suspect that the date may well depend on when the Chancellor becomes Prime Minister and decides to go to the country. The introduction of the earnings link is perhaps a sweetie to be pulled out at the appropriate moment—although the matter is less relevant in Scotland, as we will be well on our way to independence by then. [Interruption.] I regard this as evangelising for poor English pensioners.
The National Association of Citizens Advice Bureaux has asked for more details as to when the earnings link will be re-established. I do not suppose that the Minister will tell us, but it would be nice for pensioners to know when they might expect that uprating.
However, even if the Government were to re-establish the link, it would do nothing to address the fact that today’s pensioners have fallen way behind since the Tories cut the link in the first place, nearly a quarter of a century ago. Moreover, it is worth noting that what is being proposed is not the restoration of the link that has been talked about in this debate. Between 1975 and 1980, the Secretary of State with responsibility for pensions was required to have regard either to earnings or prices, depending on which of them he considered to be more advantageous to beneficiaries. That meant that there was some flexibility when it came to determining whether earnings or prices were of greater benefit in uprating pensions, whereas the new version will depend straightforwardly on earnings.
In addition, although restoring the link with earnings will prevent the basic state pension from declining in value year on year, it will not make good the fall in the value of pensions that has happened over the years. That is an important point, which is not fully understood by many pensioners. I quote again from the alternative White Paper produced by the National Pensioners Convention. It is referring to the Government’s White Paper, but the same point applies to the Bill. The document states:
“The White Paper’s failure to call for an immediate increase in the basic state pension and instead opt for a promise to restore the link with earnings some time between 2012 and 2015 will only give those on a full basic state pension approximately £1.40 a week more that year than they would receive anyway under the present system. Furthermore, the absence of any proposals to immediately improve existing state pensions has also in effect ignored the widely acknowledged scandal of low income amongst millions of existing women pensioners.”
Restoration of the link to the basic state pension will be delayed until at least 2012, when the value of the pension will have fallen to about 12 per cent. of average earnings—£71 in current terms. As has already been said, up to 3 million of today’s pensioners will die before the link is restored. Worse still, if it is delayed until 2015, the value will be only £65, and it is estimated that up to 4.5 million of today’s pensioners will never receive any benefit.
Those are legitimate concerns among today’s pensioners, and they affect the debate in the country, as well as attempts to find a consensus on the way forward. If we do not tackle those problems and provide a firm foundation for the future of the state pension, the Bill’s proposals will not succeed.
Much has been said about the citizen’s pension. The Scottish National party and Plaid Cymru support the citizen’s pension. After our last debate on pensions, I thought that we might be the last remaining parties to do so, but the Liberal Democrats seem to have come round to it again. The problem with the current system is that it is based on labour market participation, the effect of which is to translate poverty during people’s working life into poverty in old age. We all know that many women and carers do not receive the full basic state pension, because they have a broken employment history. I support the provisions that will tackle that problem. We welcome them, but they will still leave too many people in poverty.
Whenever the issue of pensioner poverty is raised, the Government point to the pension credit—as has been done this afternoon—but why should a pensioner have to rely on means-tested benefit for a decent retirement pension? The state should—indeed, it must—ensure that every one of our pensioners has a decent minimum income in retirement. By the very act of introducing pension credit, the Government accepted that the current rate of basic state pension is inadequate. With a citizen’s pension, every pensioner would have a decent state pension, which under our proposals would be set at the current level of basic state pension, together with the maximum pension credit, and thereafter linked to increases in average earnings.
If we introduce such a citizen’s pension, we will ensure that all our pensioners are lifted out of poverty and given a firm foundation on which they can build their own additional pension provision. I do not believe that the personal account scheme that the Secretary of State proposed has any real chance of success, because it will be undermined by means-testing, especially for its main target group—those on relatively low incomes. Whatever the reality, there is a great fear that they will not gain much at the end of the day, due to the effect of the means-tested pension credit. If, however, it was linked to a citizen’s pension it could provide a powerful incentive to make private savings and ensure that each pensioner had a much better standard of living in retirement.
The hon. Member for Glasgow, North (Ann McKechin) expressed surprise that we supported the personal account. I do not know why, because we proposed something similar more than two years ago, and when the White Paper was debated recently I made it clear that we supported such a scheme as an important part of the future pension.
Of course, it is legitimate to ask how we propose to fund the citizen’s pension, and we have not shied away from that. We do not follow the same route as the Liberal Democrats, as we have published figures to show that by using the amount currently spent on basic state pension and pension credit—and, crucially, by reforming the current system of tax relief on private pensions, on which the hon. Member for Birmingham, Selly Oak (Lynne Jones) touched—we could afford to create a true citizen’s pension. The problem is not lack of money, but lack of political will.
The Government often tell us that we must take the hard decisions. Frankly, it is about time that the Government took a hard decision for the benefit of the majority of pensioners. It is worth noting the extent of the tax relief on private pensions. When we published our proposals, “A Secure Retirement for All”, early in 2005, we calculated that the amount of tax forgone with the subsidy amounted to £11.4 billion a year. In his report, Lord Turner points out that the cost is £12 billion, but he goes on to refer to a further £8 billion in national insurance contributions, taking the total cost of the relief to £20 billion. In effect, that is a massive subsidy to private pensions, which could be used to provide a decent state pension for all.
Worse still—I was surprised that the hon. Member for Glasgow, North also mentioned this—half the total cost of tax relief on private pensions is received by the richest 10 per cent. of the population. It is high time that tax relief was reformed to become much more progressive and transparent. In particular, it should be aimed at encouraging and rewarding low and moderate income earners to save for retirement. The Bill does not tackle that problem—that serious omission will undermine the whole idea of personal accounts. I note in passing that the TUC briefing also says that consideration needs to be given to reform of tax relief.
Another aspect of the Bill with which we have great difficulty is the proposal to raise the state retirement age, which we believe will discriminate against those in many areas of the country where life expectancy is lower. The effect can be quite dramatic. If we take the example of a man in Glasgow—as already mentioned, one of the worst areas in this respect—I understand that life expectancy is about 69.3 years, whereas a man in Kensington in central London has a life expectancy of 80.8 years. Under the present system, Kensington man can expect to receive pension payments totalling £65,728—nearly four times that of the Glasgow man, who would receive a mere £17,888. If the pension age is raised to 68, Glasgow man would receive only £5,408, while Kensington man would receive 10 times more at £53,248. That is manifestly unfair.
To be fair to Lord Turner, he recognised that problem and suggested that eligibility to pension credit should remain at age 65, but that has not been accepted in the Bill. I was slightly encouraged to hear the Secretary of State say that the Government were considering the matter further, which may result in some resolution of the problem. When the hon. Member for Bournemouth, West (Sir John Butterfill)—he is no longer in his place—was questioned about it, he said that it was all to do with health and particularly mentioned Scotland. Well, in Scotland, it is not all to do with health. It is to do with poverty, as the hon. Member for Aberdeen, South rightly said, and with poor housing. Nor is it just a problem in Scotland, as the same applies to many former industrial areas of England and Wales as well.
It can be argued that inequalities in life expectancy may be eliminated over time, but although we talk about greater overall life expectancy nowadays, there is still a gap between different areas and until such time as that gap is closed, the problem will remain. As Age Concern mentioned in its briefing—Citizens Advice made a similar point—the impact will be disproportionately negative for people on low incomes, who may not have much choice about when they retire. The TUC drew attention to the same problem. It also said that there were many uncertainties about future mortality trends and that the Turner commission itself had identified some gaps in the data on the future of pensions. We therefore remain unconvinced that we should proceed with proposals to raise the state retirement age. Age Concern has also asked for assurances that increases in the pension age will be matched by measures to ensure that poorer groups do not lose out.
There is an additional point. People may stay in the job market longer as a result of the changes and there are also the welfare reform proposals, which may bring many more people into the job market. The Government, in conjunction with the devolved Administrations, have to look seriously at how to create more jobs to mop up those groups. There is no point in getting people to work longer if the knock-on effect is on unemployment rather than pensions.
To end on a note of some consensus, there are some areas of the Bill where we support what the Government propose. [Interruption.] I am trying to be fair. We are generally supportive of the moves to create the national pensions saving scheme of personal accounts. However, I repeat that, in our view, that will work only in conjunction with a citizen’s pension, to give confidence to those who are expected to use that scheme; otherwise, it will face the same problems as the current system. We also recognise that moves to increase the coverage of the basic state pension are sensible and have been widely welcomed in as much as they will offer some help to women and carers.
We welcome the fact that the reduction to 30 years for the qualifying period, the carer’s credit and the changes to the second state pension will help to boost the income of women and carers who have missed out on paying national insurance contributions because of their sometimes broken work records. However, we share the reservations voiced by Age Concern, which has called for the 30-year qualifying period and abolition of the 25 per cent. rule to be retrospective. The reality is that many older women, who are often among the poorest pensioners, will not benefit otherwise. Again, that move would go a long way towards addressing some of the concerns of today’s pensioners. Only by doing that will we get a true consensus for moving forward.