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State Pension Reform

Volume 526: debated on Monday 4 April 2011

With your permission, Mr Deputy Speaker, I would like to make a short statement about state pensions. The coalition has already taken steps to support current pensioners by reintroducing the earnings link for the basic state pension. Indeed, we went one step further with our triple guarantee, which will mean that a pensioner retiring today can expect to receive about £15,000 more in basic pension over the life of their retirement. However, the pensioners of tomorrow face a new landscape. With longevity continuing to increase, future pensioners can expect to work for longer and they may not have the same levels of housing equity. They are less likely to have the certainty of a final salary pension and from 2012 we will introduce a new system of automatic enrolment into workplace pensions.

Today, the Government are publishing a consultation document, which looks at whether the existing pensions system is suitable for meeting the challenges of the future. This Green Paper marks the next step in the coalition’s plan to create a system that is fair and simple for pensioners and that rewards those people who do the right thing and take responsibility for their future. It is right that we ask people to take responsibility for their retirement by saving over the course of their working lives, but it is also right that the Government should play their part by ensuring that we support those who make the right choices for their future and those of their families.

If we want to encourage pension saving, the key is getting the state pension system right. The current system has been in a sort of permanent evolution for decades, which means that planning for retirement is fiendishly complex. The Green Paper sets out two options for reform, neither of which involves spending more money on future pensioners than has already been forecast through the existing system. The key is to spend the money we have better. The objective is clear: to move to a simple, contributory state pension system that provides flat-rate support above the level of the means-tested guarantee credit, which would be easy to understand, efficient to deliver and provide a firm foundation for further saving.

The first option involves bringing forward existing reforms so that the state pension would evolve into a two-tier, flat rate system more quickly. The second, more radical, option is to move to a single-tier state pension. Both options are for future pensioners; pensioners who have already reached state pension age by the date of reform would not be affected, so no existing recipient of state pension would see their income reduced. For future pensioners, we would also continue to honour the contributions that people have built up to the date of reform. The option of a single-tier state pension would be a marked improvement on the current system, which is dogged by complexity and confusion. During the transition, many would receive their single-tier pension from a combination of their state and contracted-out scheme, as happens now, which means that they would receive less than the currently estimated £140 directly from their state pension.

Let me give hon. Members an idea of just how confusing the present UK pension system is for the average person. The Pensions Commission has described it as one of the most complex in the world and a departmental survey on attitudes to pensions found that barely one in four people agreed that

“they knew enough about pensions to decide with confidence about how to save for retirement.”

Worse still, few people have a clear idea of what their state pension will be worth when they retire. Critically, the current system actually discourages some people from putting anything aside; the mass reliance on means-tested benefits leaves people unsure whether they will benefit from the savings they make. Automatic enrolment into workplace pensions with employer contributions are due to start from next year, so we need to give people more clarity and certainty about what they will get from the state, thereby giving them a firm foundation for decisions about saving to fund their retirement.

For women, the low-paid and the self-employed, the state pension system can produce unfair outcomes. As a result, people in those broad groups are far more likely to have poorer state pensions, which we will address. Under a single-tier state pension, for example, the self-employed would be able to build up as good a state pension as anyone else. They stand to gain around £1.40 a week of state pension for every year of national insurance contributions that they make, up to a maximum of 30 years. That could provide them with a state pension of around £140 a week, instead of the current rate of £97. Currently, less than 50% of women in their late 40s or early 50s are expected to get £140 a week from state pension income in retirement. Our proposals would address that. We are clear that reform on this scale could take many years to deliver, but the prize—providing clarity to savers and all those planning for their retirement —is a real one.

There are two other, related issues. The Government recognise that means-tested benefits play an important role in targeting support where it is needed most and provide an essential safety net for the most vulnerable. However, means-tested benefits add to complexity and can be a real disincentive to saving for many people. Therefore, in addition to consulting on the two state pension options that I have briefly mentioned, the Green Paper seeks views on whether the current system of means-tested support would best meet the needs of future pensioners. On the state pension age, as life expectancy projections continue to be revised upwards, we also have a responsibility to ensure that the pensions system is sustainable and that the costs of increasing longevity are shared fairly between the generations. Therefore, as well as reforms to the state pension, we are consulting on the most appropriate mechanism for determining future changes to the state pension age.

As the coalition addresses those issues, I shall be seeking as many views and contributions to the debate as possible. We shall be asking all interested parties—hon. Members, employers, pension providers, members of the public and specialists—to work with us to ensure that we deliver the state pension system that the people of this country deserve. If we want future generations to take responsibility for their retirement, we need to deliver a simpler and fairer state pension system that acts as a foundation for people to build up to a decent income in retirement. Fairer, simpler systems that reward people who do the right thing and take personal responsibility for themselves and their families—these are precisely the same themes that run through the welfare reforms being implemented by my right hon. Friend the Secretary of State, from the universal credit to the Work programme.

With the Welfare Reform Bill we have set out how the coalition will transform working-age benefits to make work pay and tackle the root causes of poverty and welfare dependency, but we also need people to save for their retirement. We need automatic enrolment and employer contributions to work. With today’s Green Paper we are setting out how we plan to transform the pensions system and create a simple, decent state pension that is easy to understand and efficient to administer. We need to ensure that saving for the future pays. I am proud to be part of this bold, reforming agenda. Today’s Green Paper is a step on the road to a radical reform of the state pension system, and I commend this paper to the House.

I thank the Minister for advance sight of his statement—half an hour before he got to his feet. Given that the pensions Minister and the Secretary of State chose to announce the most positive elements of the Green Paper to the media over the weekend, I cannot help feeling that I am the only person who still has not seen it. Today we have heard proposals that include a universal flat-rate pension and further increases in the state pension age. Although in principle the move to a more simplified system is welcome, it raises a number of important questions.

The Labour Government recognised the importance of pension reform. Labour made great inroads, particularly in lifting more than 1 million pensioners out of poverty and in recognising the vital role that people—mainly women—play as carers. The Labour Government reduced the number of years needed to qualify for a basic state pension to 30, helping women, while more generous credits for carers have ensured that more people are now entitled to a higher level of the state second pension. Labour also introduced automatic enrolment, helping the up to 8 million people who previously did not put money aside for their pensions to save. Although we welcome the fact that the Government are continuing with automatic enrolment, we disagree with the watering down of some of those proposals.

Previous changes to the state pension mean that, based on new accrual rates and assuming 30 years of national insurance contributions or caring credits, a low-paid woman or someone in a caring role would be entitled to a basic state pension of £102.15 a week, plus £43.50 in the state second pension, totalling £145.65 a week, or more if she had 40 years of contributions. The figure of £140 a week that the Minister set out must be seen in that context. Pensioners and families must assess the proposals carefully to ensure that they are not worse off than they would have been under Labour’s plans. Can the Minister give some reassurances about the other benefits that pensioners receive, including free TV licences, prescriptions, eye tests, support with council tax, bus passes, the winter fuel allowance and cold weather payments? In the Budget we saw a cut in the winter fuel allowance, despite rising energy prices and two successive cold winters. Will the Minister explain how he will account for those benefits in the new system, or say whether we will see further cuts, by stealth or otherwise?

I have a few brief questions about affordability and fairness. The Chancellor announced in his Budget that the reforms would cost no more than the current system, yet the Pensions Policy Institute estimates that a flat-rate pension at a guaranteed credit level will cost almost 1% of GDP after 13 years. That must imply that although some will be better off under the Government’s plans, some will also be worse off. The Minister has spoken eloquently about the potential winners, but the distributional impacts are critical, so will he confirm who will be worse off under the new proposed system?

On fairness, the Minister has said that accrued rights will be protected. Forgive me for being a bit sceptical, but he said the same about the switch in uprating from the retail prices index to the consumer prices index. However, in this instance I will give him the benefit of the doubt. Can he guarantee that someone in their 50s who has worked all their life on average earnings and has never contracted out of the state second pension will still be entitled to a more generous state pension than someone who has not paid in? If not, does he think it fair that those contracting out and getting defined benefit pensions in retirement could receive the same state pension as their counterparts who have paid full national insurance contributions throughout their careers? If those who have paid in get more than £140, will the change really be cost-neutral? If some will get less than £140 based on lower contributions, will the Minister ensure that no one falls below the guaranteed credit level? In what way can that be called a flat-rate pension?

The Government’s proposals could have serious implications for the future of defined benefit schemes, because they will end the rebate for those on DB schemes. Given the importance of occupational savings for retirement income, as the Minister said, what are his estimates of the generosity of DB schemes—and, indeed, their overall survival—given the changes? The changes in contracting-out touch on a wider point. The post-world war welfare state is based on the contributory principle. We welcome the news that any new flat-rate system will keep contributions at their core, and that anyone with 30 years’ national insurance contributions will be entitled to the newly formulated pension. However, given the Chancellor’s announcement that the Government intend to merge tax and national insurance, will the Minister explain how the contributory principle will work in practice if that merger takes place? Will he also give a reassurance that taxes will not go up for pensioners, who of course do not pay national insurance?

The other, less briefed elements of today’s Green Paper include the automatic mechanism for increasing the state pension age to make future increases fair and smooth, with time for people to plan. The move comes too late for the 500,000 women who will have to wait a year longer before they receive their state pension and the 33,000 women who will have to wait exactly two years before receiving their state pension. Does the Minister now recognise that the accelerated timetable for the state pension age for women in their 50s does not spread the cost fairly or, with just five years’ notice, leave enough time to prepare?

To conclude, the Green Paper does nothing for today’s pensioners, because a flat-rate pension will be for only new pensioners. Today’s pensioners are suffering at the hands of this Government, with an increase in VAT to 20%, which sees pensioners worse off by £200 a year, low savings rates and a £100 cut in the winter fuel allowance. Although a flat-rate pension of £140 sounds good in theory, the Chancellor says that there is no new money, so who will lose out? It is quite likely to be families on average earnings, or just a bit more, who have worked hard and brought up a family, paying their full national insurance contributions. Some people will be worse off under the reforms, yet the Government want to talk about only the winners. In the final chapter of the review, the Government suggested that a crude formula could be used for uprating the state pension age. They have already hit women in their late 50s with a two-year increase in their state pension age; now they want to use a formula that pays no attention to health in later life, so we will all be waiting longer and longer to get our pensions.

We welcome the intent behind today’s Green Paper. We want a more progressive and less complicated system, but I am yet to be convinced that today’s Green Paper will achieve that.

I did write the hon. Lady’s words down—in principle, she welcomed the Green Paper, so I am grateful for her warm comments about our proposals. She asked a number of specific questions, and I shall try to respond to them.

The hon. Lady seemed to imply that women would get £145 anyway, so wondered why we needed to do anything. That, however, is decades away. Equality between men and women in the state pension system is decades away, and we think that is too slow. Many women who did their child rearing in the ’80s and ’90s got no state second pension protection because it did not exist at that time. They will be retiring over the coming years and we are now bringing forward that protection for them. We do not want to wait 20 years for equality.

The hon. Lady asked an important question about passported benefits and we will need to consider the implications of these changes for those benefits. She had the cheek to suggest that the winter fuel payment had been cut in comparison with what she would have provided if she were in office. She will be well aware that we are sticking precisely to the budgets that her right hon. Friend the Member for East Ham (Stephen Timms), the former Chief Secretary to the Treasury, wrote. He will know perfectly well how much he put aside for the winter fuel payments, and we are doing exactly what he planned.

The hon. Lady asked about the Pensions Policy Institute and its estimate that a £140 flat-rate pension would cost 1% of gross domestic product. What she may have misunderstood from the report is that the question it asked was what it would cost if that amount were paid to everybody. That is where its figure came from. We are saying that we will create this for new pensioners, because new pensioners face a new world in which they will work longer, retire later and have fewer final salary pension schemes, so we need a system that is fit for them.

The hon. Lady sought reassurance on two points and the answer is yes to both of them. We will honour past service and we will make an adjustment, as I said in my statement, for contracted-out periods.

The hon. Lady asked about the future of final salary pension schemes after 13 years of decline under Labour. She will be pleased to know that the National Association of Pension Funds—the trade body for company pensions —welcomes these reforms and supports them, but we are in dialogue with those operating large final salary pension schemes to discuss how these changes will impact on them and how we can work with them to move towards the sort of simpler scheme that they and we want to see.

The hon. Lady asked about merging what the Chancellor referred to as the operation of the tax and national insurance system, which is certainly at an exploratory stage, but he has made it clear that pensions will be protected under these changes and that the contributory principle will remain.

Finally, the hon. Lady asked about the mechanism for raising the state pension age. She referred to a crude formula, but there are options in the Green Paper. One is to have an automatic mechanism for raising the pension age as longevity increases; the other is to adopt a more nuanced approach to take account of a range of factors. We would welcome feedback on that.

Overall, I think the hon. Lady welcomed our proposals, particularly the fact that they will benefit women and self-employed people and will lead to a fairer system. She said that she wanted to see a fairer system; in office, the Labour Government never delivered one, but through this Green Paper, we will.

In welcoming the statement and the Green Paper, I congratulate the Minister on achieving a long-held ambition in the pensions world of creating much more certainty and transparency about the state pension system so as to encourage saving in the longer term, as well as on helping the more vulnerable groups he mentioned, such as women, who will get help that much earlier. Will he say more about the time scale? He talked about the long distance we still have to go before achieving justice for women, so what improvement will these changes bring and what is the Minister’s time scale?

I am grateful to my hon. Friend, who brings his great knowledge of these issues to the House and to the Select Committee of which he is a member. As he says, we need a simpler system. He will appreciate that these things take time; we will need to consult and then respond. In due course, we hope to legislate to re-programme the computers and so forth. As the Chancellor said, we are talking about some years to implement the reforms, but we are clearly keen to move forward as fast as we possibly can.

I was listening hard to the Minister’s reply to the shadow Minister, my hon. Friend the Member for Leeds West (Rachel Reeves), and I noticed that he provided no examples, in response to her request, of those who would be worse off as a result of these changes. There must be some losers. Presumably, they will include the group who enjoy pension credit now, but have not paid enough contributions to justify the new flat-rate pension. What will happen to that group? As for women, surely if they have not made the contributions, they will not be any better off than they are now.

I am grateful to the Select Committee Chair for her questions. To be clear on the role of pension credit, we envisage that there will have to be a safety net under any system, and the Green Paper provides for consultation about what exactly that might look like. There will still be a guaranteed credit type system—a floor below which people cannot fall. In a single-tier pension world, the savings credit would no longer be necessary for new pensioners. In other words, the savings credit was invented by the previous Government to deal with the fact that 100% marginal tax rates were paid on any saving. Because we are not doing that any more, we will not need the savings credit for new pensioners, which helps to pay for the reform. It is less means-testing, more universal pension.

The hon. Lady rightly mentions the position of women and my point is that women under the current system, who often did their child rearing before the state second pension was introduced, have no protection at all, whereas they have basic pension protection. Under a single-tier world, they get protection at the full rate, so they will benefit from the reforms we are introducing.

My hon. Friend the Pensions Minister has not only this very month introduced the link between pensions and earnings, for which pensioners have been calling for years, but now makes a clear bid to be the most popular Pensions Minister for decades, in announcing the option of the citizens pension for which he and I have campaigned for ever. It is clearly fairer, simpler and particularly helpful to women and the self-employed. I urge my hon. Friend to be as bold and reforming as he suggests option 2 would allow. I urge him to go fully through the consultation process, but when midsummer’s day arrives—the last day of the consultation—I urge him to go for the single tier state pension so that this Government’s legacy for pensioners will be as radical in this century as the legacy of Lloyd George and Beveridge was for pensioners in the last.

My right hon. Friend puts me on the spot, but I am glad to respond positively. I have noted his comments down as being the first response to my consultation, making it 1-0 for the single-tier option—I will keep score as we go. He is right that the restoration of the earnings link after 30 years of breaking it is an historic event, although it has been rather overshadowed by other events in the world. We think someone retiring this year will, over the years, get an extra £15,000 in basic state pension through the restoration of the link. That is a real firm foundation for today’s pensioners as well as reform for tomorrow’s. I am grateful to my right hon. Friend in respect of the liberal heritage and to my right hon. Friends the Secretary of State and the Chancellor for their encouragement for the proposal to move forward.

It is humbling to follow a question from a “for ever” Member of Parliament.

May I ask about the mechanism for determining future changes to state pension age? Could this mechanism please allow for occupational and social class differences in terms of life expectancy? If we look at men who work in what are called routine occupations, such as van drivers, cleaners and labourers, we see that almost a fifth of them—19%, I believe—die before they receive the state pension at 65. If we keep raising the state pension age without allowing for those people who have been working since they were 15 or 16, we will certainly bring insensitivity into the system.

I am grateful to the right hon. Gentleman, who brings great knowledge of these issues to the House. He raises a vital point. Although it is true that life expectancy across the social classes has been improving, which is entirely to be welcomed, there are still very significant differences. One suggested option in the Green Paper is that the review mechanism should take account of a wide range of factors of the very sort that he mentioned. It is possible to have a too formulaic or automatic approach, but the right hon. Gentleman will have noted that the Chancellor referred in the Budget to a “more automatic” approach, taking systematic account of increases in life expectancy, but potentially of other factors such as those that he mentioned.

In welcoming the Green Paper and particularly the emphasis it places on removing means-testing as a deterrent to saving, will the Minister confirm how he intends to treat caring responsibilities and their role in contributing towards the build-up of a pension?

I am grateful to my hon. Friend and I know of the expertise she brings to the Select Committee on these issues. We propose that bringing up the next generation or caring for an elderly relative will be valued by society just as much as a high-paid job. A year will be a year will be a year. If someone is contributing to society in that way or in paid work or in other ways, it will bring them one thirtieth of a single state pension. We think that is a big step in the right direction, which will be widely welcomed around the House.

We welcome the Green Paper and the consultation that will ensue. We agree that moving away from means-testing and complexity towards a universal flat-rate pension is greatly to be welcomed. The Minister says that this will not entail spending any more money. Given that so many pensioners today do not claim all the means-tested benefits to which they are entitled—this is a big factor in these reforms and should again be welcomed—does it not mean that more money will need to be spent to make up for the fact that people do not claim? If so, will the Minister guarantee that that money will be provided?

The right hon. Gentleman has made an important point, namely that under the current system many people are entitled to top-ups and do not claim them, whereas pretty much everyone claims the state pension. The new system will guarantee that a great many people will live clear of the poverty line for the first time. As the right hon. Gentleman says, a price tag is attached, and we have factored that into our costings. Although the prospective state pensions of the very highest earners will be lower than they would otherwise have been, many lower earners and people who would not otherwise have taken up their entitlement to pension credit will be in a better position, and we consider that to be a fairer system overall.

What the Minister has announced will be enormously welcome in my constituency. I know from correspondence with my constituents that they will be particularly interested in the raising of the state pension age, because they want a degree of certainty about when they can expect to retire. I urge the Minister to provide that certainty as rapidly as possible.

As my hon. Friend says, people want certainty about the future. We have said that we must move rapidly in respect of those reaching the age of 66. However, the new mechanism is designed not just to make changes more automatic, but to provide notice periods. Young people will not have that certainty, because life expectancy is always changing, but as people approach the state pension age, we want to be able to give them more certainty. That is part of our plans.

It is difficult to think of any statement that could be more important than one that commits a Government to paying a state pension above means-tested assistance level. The importance of this statement—which I welcome—stems from the fact that the income of many pensioners is below that level. Even if we take into account those who do not claim means-tested help, a large price tag will be attached to this reform. Will the Minister consider the contribution made by taxpayers through pension tax relief, which favours the wealthy over those who earn least, as one way of financing it?

I thank the right hon. Gentleman for his welcome for the proposed system. It will be financed on a cost-neutral basis within the system: we will spend less money on means-testing and, for instance, savings credit, we will withdraw some of the very small payments that we currently make to people who do not even live in this country, and we will remove some of the highest accruals for the highest earners. We therefore do not need to involve tax relief. As the right hon. Gentleman will know, the Government have refined the previous Government’s plans, so tax relief will be less concentrated on the highest earners, but we have no further plans to change tax relief.

It is always an honour to follow the right hon. Member for Birkenhead (Mr Field), who invariably speaks a great deal of common sense on these issues.

I thank the Minister for publishing the Green Paper, which, along with the introduction of universal credit, constitutes a seminal reform. We in the Government parties are sending the message that it always pays to work and it always pays to save. We are taking radical steps in regard to the choices that we give pensioners on annuities; may I ask the Minister to continue that work? After all, we are talking about the individual savings of pensioners who have worked all their lives.

My hon. Friend is absolutely right. There is a clear link between the major reforms that the Department is introducing for people of working age and those that it is introducing for those who will reach pension age in the future. “It pays to work” and “it pays to save” must be the right combination.

My hon. Friend asked about pensioners’ savings. In a world in which we will enrol people in workplace savings, we need them to be confident that they will be better off when they save, and that is one of the specific purposes of the reforms. If my hon. Friend wishes to raise any further points, I will certainly respond to them.

Given that the introduction of a single-tier pension will be available only to new pensioners, will the safety nets to which the Minister referred in his answer to my hon. Friend the Member for Aberdeen South (Dame Anne Begg) include all the existing passported benefits, and will claimants still have to go through a means-tested system in order to obtain them?

We are not changing the system for current pensioners at all. It will continue as previously budgeted. As for new pensioners, we need to think what paying a pension above the guarantee credit implies for passported benefits, and what sort of system we need. I should be interested to hear people’s ideas, because the issue is important. Hitherto, we have simply assumed that pension credit means poverty and that we must therefore make all the extra payments. We may need a more sophisticated system now, but the role of passported benefits is important, and I am grateful to the hon. Lady for raising it.

I thank the Minister for his statement and for providing us with the rationale behind it. As he will know, people will want to establish whether the single tier really does offer the platform for fairness and adequacy that he has described. They will want clarity and confidence.

The Minister mentioned the need for people to save money for their pensions. What consideration have he and Treasury Ministers given to their ability to afford that, given the hits that they are taking as a result of the withdrawal of some child benefit, the entry of more people into the 40% tax bracket, and the huge challenge posed by tuition fees?

The hon. Gentleman has raised an important point about people’s ability to afford to save. One of the key aspects of automatic enrolment is the fact that an employee’s contribution will trigger an employer contribution of nearly as much, plus tax relief. If an employee contributes 4% of his salary, the employer’s contribution will raise that to 8%, so this is a very affordable form of saving. Of course we want to ensure that people who make such sacrifices in order to save will be better off as a result, and our reforms will make that outcome far more likely than it is at present.

Plaid Cymru has long campaigned for a living pension, and we welcome the Government’s single tier proposals. The current system does not ensure an adequate income for all pensioners. As Jackie Ashley wrote in today’s Guardian,

“On this issue of complexity Labour in power got it wrong, and should admit it.”

However, does the Minister accept that on the accelerated equalisation of state pension age, the Government are in some danger of getting it badly wrong for about half a million women in their late 50s? What assurances can he give about that?

I am grateful to the hon. Gentleman for expressing support for the proposal of the single tier on behalf of the Welsh nationalists. As for the issue of state pension ages, the Green Paper involves moves beyond the pension age of 66. The issue raised by the hon. Gentleman will be dealt with in the Pensions Bill, which will be presented to this House shortly, but, beyond that, we are trying to establish a more automatic mechanism that takes account of changes in life expectancy and, perhaps, of other factors as well, such as notice periods—which is, I think, the issue that he has raised—in a more systematic way than we or other Governments have done so far.

There is some good stuff in what the Minister has said, but every week my office—and, probably, the office of every other Member of Parliament in the United Kingdom—receives queries about small works pensions. Although they amount to a pittance, they remove people’s eligibility for benefits. Will the Minister assure us that such people will not be disadvantaged?

The hon. Gentleman is absolutely right. A small occupational pension can make the difference between living in poverty and living with a bit of dignity. Hitherto, given the low state pension of £97 a week, the first £35 or so of company pension has tended to offset £35 of guarantee credit, so people have been no better off. Then the savings credit has come along and given them a bit back, and it is all fiendishly complicated. The beauty of the single tier is that people are above the guarantee credit level from pound one, so the works pension is theirs to keep on top. There is still a housing benefit system and so on, but in principle the works pension will be worth more than it is under the current system.

I will have another go. We have made it clear that we are not spending more money overall, that there are significant gainers among women, the low paid and the self-employed, and that therefore, inevitably, some people who would have received higher state pensions under the current system will receive flat-rate pensions. Because the current system is earnings-related, the highest earners will tend to receive lower state pensions under this system. The Labour party used to support that sort of thing.