My Lords, the Bill contains important reforms to both state and private pensions, as well as to bereavement benefits, and representsa fundamental step forward in tackling a number of significant challenges facing today’s working-age population.
Before I turn to the provisions in the Bill, I would like to commend my colleague, the Minister of State for Pensions, Steve Webb, who has been instrumental in delivering the Bill before us and who continues to make such an important contribution to improving the pensions landscape. I also pay tribute to the noble Lord, Lord Turner, and the noble Baroness, Lady Drake, whose work as former pension commissioners provides the framework for much of what we will discuss today. Pension reform has traditionally proved the ability of the legislature to build consensus on an issue, and I am sure that noble Lords will endeavour to continue in this vein.
Automatic enrolment is a product of this consensus and is creating a substantial shift in the landscape of pension saving. The latest figures from the Pensions Regulator confirm that 1.9 million people had been automatically enrolled into a workplace pension by the end of October this year, and we expect to see a total of between 6 million and 9 million people newly participating or saving more in a workplace pension by the time automatic enrolment is fully rolled out, but this Bill was introduced to Parliament because we should not stop here.
In the latest DWP report Attitudes to Pension: The 2012 Survey, only 21% of respondents felt that they knew,
“enough about pensions to decide with confidence how to save for retirement”.
No fewer than 17 Social Security Acts covering pensions since 1975 and thousands of lines of secondary legislation have meant that considerable complexity has built up in the state pension system over time.
At the core of the Bill, therefore, is the provision for the new single-tier pension: a flagship reform which will simplify the current state pension system and provide a firm foundation for pension saving. These reforms will replace the current, two-tiered pension system with a simpler single-tier state pension for future pensioners—those who reach state pension age on or after 6 April 2016.
The full rate of the new state pension will be set above the basic means test. This will help to clarify the incentive to save privately for retirement without the need for the complex savings credit element of state pension credit. The savings credit will therefore close to those reaching state pension age on or after 6 April 2016. The introduction of the single-tier pension thus reduces means-testing in the pension system, halving the proportion of new pensioners qualifying for pension credit.
There will be far less variation in state pension payments under the new system. We estimate that more than 80% of people reaching state pension age by the mid- 2030s will receive the full single-tier pension. Those who have historically done poorly in the current system, such as the self-employed, carers and those with interrupted work histories, who are often women, will benefit from the introduction of the single-tier pension. Around 650,000 women who reach state pension age in the first 10 years after the single-tier pension is introduced will receive an average of £8 per week more in state pension due to the single-tier valuation.
There will be a minimum qualifying period for entitlement to the new single-tier pension. This period will be set out in regulations, but I am able to advise noble Lords that the Government have today announced that this is to be set at 10 years, in line with the assumptions made in the White Paper and the impact assessment. Integral to the single-tier reforms is the closure of the state second pension for people reaching state pension age on or after 6 April 2016. Contracting out of the state second pension for defined benefit schemes will therefore come to an end in April 2016 and all employees will pay the same rate of national insurance and become entitled to state pension in the same way. As part of the simplification of the system, the outdated provisions which allow a spouse or civil partner to boost their state pension on the basis of the record of their partner or ex-partner will end. These provisions, introduced in the 1940s, are no longer appropriate for today’s society, where the vast majority of men and women get a full basic state pension in their own right.
In addition to reforming the state pension system to make it simpler, the Government are taking action on state pension age to ensure the system remains affordable and fair between generations in light of continuing increases in life expectancy across all socioeconomic groups. The Pensions Act 2007 set the original timetable for increasing the state pension age to 66, 67, and 68. Since then, the average life expectancy of a man reaching age 65 in 2013 has increased by over a year. We are therefore bringing forward the increase in state pension age to 67 by eight years, so that it gradually increases from 66 to 67 between 2026 and 2028. No one will experience a rise in state pension age of more than 1 year compared to the original timetable that was set by the Pensions Act 2007 and I can assure noble Lords that this will not affect anyone whose pension age was changed by the Pensions Act 2011.
The fact that people are living longer is to be welcomed. Yet continued increases in life expectancy place a great deal of pressure on the pensions system. The Bill therefore also provides for a regular review of the state pension age so that is it considered once every Parliament. This will ensure that the state pension age is examined in an open and transparent way on a regular basis and prevent future Governments from needing to take emergency action. As part of these reviews, the Government of the day will ask the Government Actuary and an independently led review to report on life expectancy and a whole range of other factors relevant to setting the state pension age. The Government will then consider what adjustments, if any, should be made to pensionable age. This is not an automatic mechanism for future increases, however, and any resulting proposals to change the state pension age would still need to be set out in primary legislation.
I turn now to Part 3 of the Bill, which provides for the abolition of the assessed income period in pension credit. The assessed income period was introduced as part of pension credit in 2003 and was a new approach to case maintenance for customers aged 65 and over. This was based on the assumption that pensioners were more likely to have relatively stable incomes with fewer changes in their circumstances and so a lighter touch maintenance and review regime was deemed appropriate. However, it has proved more complex than originally anticipated and the assessed income period has allowed inaccuracies to build up in the system. As customers with an assessed income period do not need to inform the department if they experience changes in their capital or the make-up of their retirement income, an increase—for example, a windfall—can legitimately be ignored until the end of the period. Many see this as unfair, particularly in the current economic climate. The Bill will therefore abolish the assessed income period from April 2016. Older customers will be protected through the continuation of existing indefinite assessed income periods for those aged over 75.
Moving on from state pensions, the Bill contains measures to reform the bereavement benefits system through the introduction of the bereavement support payment, which will both simplify and modernise the current complex payment and contribution system of bereavement benefits. The current system was introduced at a time when women were not seen as workers and when widows were left destitute. However, society has changed. Women are no longer expected to be dependent on their partners and we now have an expectation for people to work, with universal credit to support those who cannot.
However, we recognise that many working-age people, regardless of income, do not make contingencies for the loss of a spouse or civil partner and are unprepared for the significant financial impact in the period immediately following the bereavement. We have therefore designed the new payment to focus on this period. It will support people with the additional financial pressures associated with bereavement, helping them plan during the readjustment period and better understand what they will receive from the state while encouraging a supported return to work for those without employment. An additional £110 million will be invested in bereavement benefits during the first four years of reform, so that existing recipients are protected over the course of the next Parliament and those who claim the new bereavement support payment get the help they need when they need it most.
Finally, the Bill contains a number of private pensions measures. As I said earlier, 13 million people are currently not saving enough to ensure an adequate income in retirement. Furthermore, the number of employees saving into a workplace pension has declined from 12.9 million in 1997 to 12.1 million in 2012. It is expected that automatic enrolment will see between 6 million and 9 million people either starting to save or saving more into workplace pensions, and the introduction of the single-tier pension will ensure that the state provides a good platform for private saving. Measures in the Bill are therefore designed to build on these reforms and give people greater confidence in pension saving.
As a result of more people saving into a private pension we expect to see more dormant pension pots as people move jobs—up to 50 million by 2050. The Bill therefore contains powers to introduce a pot-follows-member system of automatic transfers of small pension pots. This will help people to better keep track of their pension savings and ensure that they reap the benefits of consolidating those small pots.
The automatic enrolment of people into pension schemes and the introduction of automatic transfers make it all the more important that schemes used for workplace pensions are well governed, well administered and offer value for money. The Bill therefore extends powers to set minimum quality requirements for workplace pension schemes and to limit or prohibit charges to allow the Government to respond to the recent consultations on these issues accordingly. In addition, the Bill contains a number of measures to clarify and strengthen existing private pensions legislation, including a power to prohibit the offering of incentives to transfer pension rights. Finally, the Bill gives the Pensions Regulator a new objective to minimise the impact on the sustainable growth of an employer when regulating defined benefit pension scheme funding, and it also makes changes to the calculation of the Pension Protection Fund’s compensation cap to reflect long service.
Following further work done by my department and the report from the esteemed Delegated Powers and Regulatory Reform Committee, I plan to bring forward a small number of amendments during the Committee stage. I will ensure that noble Lords are made aware of those in good time. I very much look forward to an informed and constructive debate on the reforms and measures in the Bill, both this afternoon and over the coming months. I particularly look forward to hearing the maiden speech from my noble friend Lord Balfe, who I am sure will make an erudite contribution to this afternoon’s discussion.
To sum up, this Bill introduces significant reforms to state and private pensions and will bring our pensions system into the 21st century. It will allow security in old age and provide a firm foundation for today’s working-age people so they can save with confidence for their retirement, an ambition with which I am sure noble Lords will wholeheartedly agree. I commend this Bill to the House. I beg to move.
My Lords, I thank the Minister for that introduction. This Bill builds on the foundations laid by the Labour Government and, for that reason, we support many of its provisions. I hope that with the Minister we can find some consensus around the major direction of travel. I also hope that he will work with me in seeing what we can do during the passage of the Bill to make pensions interesting. I do not promise that my contribution today will advance that cause greatly, but it falls to all of us, if we want to raise the level of saving in this country, to try to raise the level of interest in it as well. So far, when anyone asks me what I am working on and I tell them that it is the Pensions Bill, I find that they have looked at their watch before I finish the sentence. I look forward to all the speeches, including the maiden speech, and to seeing what we can do to advance “Project Interesting”.
Moving firmly away from that agenda, I may say that one reason why we agree with the idea of a single-tier pension is that it is very much the direction of travel that the previous Labour Government took. However, we have some significant questions about the way in which this Government are doing it and about the decision to go with what is known in the trade as a hard/fast transition. We agree, too, with the need to address the way the state pension age is raised, but we have different views on the best way to achieve consensus around that.
The project of overhauling both state and private pension provision is of crucial importance to the future of our country. We on these Benches will do all that we can to improve this Bill to ensure that it is fit for the job ahead. But that job is a tough one, made harder by the climate of mistrust which obtains at present—mistrust of the industry, which we must all address, and, I regret to say, mistrust of government. People can become cynical, and sometimes have, in the welfare area, when something presented as a reform turns out all too often to be really just a cut. It is popularly assumed that with financial services products the bad news and exclusions are buried in the small print. The same may be true here, of course. Parliament does not yet have the small print, or the regulations, as we call them, but I hope that the Minister can tell us how soon we can get them. But we must maintain an appropriate degree of scepticism until we see what the detail is. That is particularly important in the light of the 13th report of the Delegated Powers and Regulatory Reform Committee, to which the Minister referred, which has a great deal to say about how this Bill uses regulations. So I look forward very much to the amendments that will come forward from the Government shortly.
Before moving on to the detail, I, too, would like to say a few words about the context of this Bill and background. When Labour came to office in 1997, we inherited two challenges in relation to pensions from the previous Conservative Government. First, there were disgracefully high levels of pensioner poverty, much of it among generations who worked hard to rebuild Britain after the last war. The second problem was the degree of mistrust in the pensions industry, some of it caused by the mis-selling scandals of the 1980s and 1990s. Labour addressed both challenges head on. We introduced a minimum income guarantee for pensioners, lifting incomes from £68.80 per week in 1997 to more than £132 by 2010. Under Labour, pensioner poverty fell to the lowest level for 30 years. We pegged pensions to increase in line with earnings and brought in pension savings credit to tackle the 100% marginal deduction rate facing many savers. We brought low earners and carers into the state second pension and introduced legislation for auto-enrolment. I pay tribute to the Government for taking that forward and implementing it. Crucially, we reduced the years of national insurance contributions required for a full state pension from 44 years to 30 years for men and from 39 years to 30 years for women. We also set up the Turner commission, to which the Minister referred. I, too, add my congratulations to the noble Lord, Lord Turner, and my noble friend Lady Drake on the excellent work that they did.
Labour supports the creation of a simple state pension system, and we are committed to the goal of encouraging people to save into private pensions in which they can have confidence. But we believe there are three tests that this Bill must pass if it is to achieve those objectives. First, is it fair to all those who have contributed? Secondly, is it sustainable in the long term? Thirdly, does it create a decent standard of living for all and, within that, will it encourage the private pensions saving that the Government are banking on to ensure decent retirement income? We will apply those three tests to the Bill as we scrutinise it over the weeks ahead.
I turn briefly to each part of the Bill. The biggest challenge to understanding the reforms to state pension provision in Part 1 is figuring out who are the winners and losers. The Minister has graciously allowed us access to his officials so we hope to dig down into that before Committee. However, I wish to lay out some big questions, on which I hope he can come back. First, as the Bill goes through the House, the Minister will need to confirm the precise level at which the single-tier pension will be introduced. The reason for that is twofold. First, the Work and Pensions Select Committee recommended that, given the importance of the principle that the STP is above the level of the pension credit guarantee, the level should be on the face of the Bill. Furthermore, paragraph 3 of the DPRRC report said that the Bill is drawn in a way which means that,
“for the first time, the rate of the state pension will be specified only in subordinate legislation”.
Given that, the Minister needs to tell the House what the level of the STP will be.
Secondly, there is the issue of those 700,000 women born between 1951 and 1953 who will have to wait longer to retire but will not get the new single-tier pension, unlike men of the same age. While a line has to be drawn somewhere, I think the House will want to reflect carefully before concluding that, after a reform of this scale, a twin brother and sister should find themselves in such markedly different positions.
Thirdly, some people who are married or widowed will receive a lower pension because the derived entitlements to which the Minister referred have been taken away. In other words, they would have expected to get a higher pension based on their husband’s or wife’s contributions, and they will now not be able to do so. Although state pension rules of course change over time, this is a long-standing provision around which some couples have planned their retirement income. The Work and Pensions Select Committee recommended that women within 15 years of state pension age should retain that right, so I would be very interested to know why the Government decided not to accept that advice.
Fourthly, the move from 30 to 35 qualifying years could mean that a number of people, especially women and the low paid, are less likely to get a full state pension, and someone with 9.5 years of national insurance contributions will get not a penny in state pension. The House will want to understand more about the rationale for that and the consequences of that shift which reverses a significant Labour reform which reduced the number of years to 30. I would also be grateful if the Minister could confirm for the record what the safety net will be for those who do not have 10 years of contributions.
Then we have the issue of the abolition of the savings credit element of pension credit. We are concerned that that will penalise those who have savings and could discourage saving in future. We will want to understand who will lose out and by how much and whether there is an issue about passported benefits which are currently attached to that. I hope that the Minister can tell us more about that either today or as we go through Committee.
Finally in Part 1, we will want to examine the impact on both public and private sector pension schemes of the changes relating to the ending of contracting out. In addition, when these reforms are implemented, national insurance contributions for contracted out workers will rise, as will those for their employers. The Bill allows private pension schemes to amend their terms to take account of the increase in employers’ contributions but public sector schemes cannot do that, presumably to avoid destabilising the public sector pension settlements. That leaves an unfunded cost on the shoulders of public sector employers. Can the Minister tell the House whether the Government have committed to meeting that cost for those public sector employers, perhaps from the £5.5 billion windfall the Treasury will get as a result of increased national insurance contributions?
In Part 2 of the Bill on pensionable age, the major issue relates to the proposal to have regular reviews of pensionable age, at least every six years. We agree with the need for periodic review, but the Minister is right to say that everything around this needs to be consensual. We agree with the principle but we think that, done badly, this could be very bad and could remove certainty for future pensioners and damage trust in the system, undermining incentives to save for the future. It is vital that the way the state pension age is reviewed is not just fair, but seen to be fair, ideally delivering cross-party consensual support for reforms in which the public can then have confidence. We believe that the best way to do that is for the reviews to be overseen by an independent cross-party panel, including a Cross-Bench Member of this House, and for it to have a broad remit. It should be tasked to consider not just the latest trends in life expectancy and the long-range public expenditure issues but also, for example, differences in life expectancy for different socioeconomic groups and the degree to which health and ageing go hand in hand.
I will return to Part 3 on assessed income periods when we get to Committee.
Part 4 is very interesting, proposing, as it does, a complete overhaul of bereavement support. As I understand it, bereaved people under 45 without children will benefit, receiving a flat-rate grant for one year for the first time, but I think that bereaved parents with children will be the losers. At the moment, they can claim widowed parent’s allowance for as long as they claim child benefit, although in fact the average length of claim is just five years. However, in future their support will last for only a year, and that is a major shift. We have received strong representations from charities which work with families with children, particularly bereaved families, and which are worried about the impact of this reform on bereaved parents. It would be helpful if the Minister could explain the Government’s rationale behind this. Although there may be more investment in the short term, I understand that over the long term the measure will save money, or at least be neutral, and effectively it will therefore redistribute money from parents with children who lose a partner to people who do not have children. Understanding why that choice was made would be helpful.
We are also very concerned about the conditionality requirements. The Minister mentioned that society has changed and that people are expected to work. They are, but early widowhood is not just an ordinary time for someone to go out to work. When families lose one parent, the effect on the other parent can be very severe. I hope that the Minister will think again about the conditionality requirements so that a person will not be expected to go out to work just six months after losing a partner. That would be very difficult.
Finally, I turn to Part 5 on private pensions. The Government have explained to us the numbers coming into auto-enrolment. If we think about this, it is clear that the state owes a very serious duty of care to those who have auto-enrolled into the pension system. If we are going to ask people, at a time of wage stagnation and a cost-of-living crisis, to forgo spending on themselves and their family today in order to invest for the future, they absolutely must be able to trust their pension providers.
This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing.
We propose a number of ways in which the Bill could address the challenge of building a private pension sector that people can trust. The first is to improve pension schemes. We will argue for the full disclosure of all costs and charges, including the costs extracted by fund managers, and stronger trustee-based governance of savers’ pension money, including the extension of fiduciary duties to all intermediaries who handle pension savings and policies, with the aim of encouraging bigger, better, stronger, well resourced and expert pension schemes which are more able to provide value for money for savers.
The second proposal is better management of pension pots when people move jobs. We absolutely agree about the need to make sure that people do not lose track of pension pots when they move to a new job, but we absolutely disagree with the way that the Government have decided to do this. The Government have chosen “pot follows member”, as it is known in the trade, but that raises some really serious questions. The most important are probably, first, the potential for customer detriment if, for example, the new employer’s pension scheme is worse than the one that the person is leaving, and, secondly, the real concerns about administrative complexity and the cost of this way of doing things. We will need to drill down to that in Committee.
Our preferred solution would be for the pot, by default, to move to an aggregator such as NEST, or one of its competitors, rather than to the new employer’s scheme. That is not just a Labour position; it is backed by many key experts, as we will come back to in Committee. In fact, the DWP went out to consultation on this and, even though a majority of respondents preferred the aggregator model, the Government chose to plough on with “pot follows member” instead. I would be very interested to understand why the Government are so set on this mistaken path. I genuinely cannot see why they are so set on it. None the less, we shall seek to improve the Bill in Committee by bringing the aggregator model firmly into play.
Thirdly, pension charges have to be reasonable if people are to have confidence to invest their hard-earned money. I am sorry to say that it has taken the Government a long time to wake up to this issue. More than one year ago, my right honourable friend Ed Miliband raised the issue of pension charges and Ministers accused him of scaremongering. They said that no action was needed because the market was “vibrant”. In another place, the Pensions Minister ignored the evidence presented by experts. He stonewalled the determined efforts of my honourable friend Gregg McClymont as the Bill went through elsewhere to try to do something about pension charges. I am delighted to say that Ministers have now acknowledged that there is an issue and we are promised a consultation and a cap on charges. I absolutely welcome this change of heart. As I am sure the right reverend Prelate the Bishop of Derby will confirm, there is more rejoicing in heaven for the one sinner who has repented than there is for the 99 who have always been there. I welcome the Minister and the Government to the happy place which Labour has happily occupied for some time. However, we will need to drill down on this in Committee. We will need to understand exactly where the Government are going on this, the right level for the cap, whether the cap will include the full range of charges and deductions, and how soon action will be taken.
Finally, there is the means by which people turn their pension pot into an income for retirement—decumulation, in the jargon. Most people use their pension pot to buy an annuity. We are the annuity capital of the world. More than half of all annuities are sold in the UK but the annuity market has some serious issues and is badly in need of reform. Performance is hugely variable, charges are often unreasonably high and the margins are such as to raise serious questions about whether they are value for money for savers. We will seek to amend the Bill in Committee and on Report to ensure that people approaching retirement receive good quality, independent advice, something that is already best practice and available in many of the larger schemes.
In conclusion, there is much to do to improve the Bill but we very much welcome the direction of travel. At heart, pensions are about trust; trust that the system is fair and sustainable, trust for savers that their contributions are safe, and trust that the market is working fairly and in the interest of savers. People in Britain must trust us to ensure that, having contributed to pensions for their whole life, they will have the income to afford a decent standard of living and to enjoy their later years. We hope that the Minister will work with us in Committee and on Report to provide the House with all the information that it needs and help us all to make the Bill the best that it can be. That is what the pensioners of tomorrow expect and it is what they deserve.
My Lords, the noble Baroness, Lady Sherlock, has set me quite a challenge in making pensions interesting, although I might venture to say that the capping of pension charges has appeared on the front pages of a large number of newspapers in recent weeks. I must say to her that calling my honourable friend Steve Webb a sinner is perhaps a step too far.
This Bill will transform the state pension system by introducing its new single flat-rate pension. I, too, pay tribute at the outset to all those who have contributed to its happening. I particularly want to acknowledge the hard work and dedication of my honourable friend the Pensions Minister, Steve Webb, not just for bringing this Bill to Parliament but for bringing to fruition a policy which reflects my party’s long-standing aspiration for a citizen’s pension. We have worked for that for many years.
The new single-tier state pension will particularly benefit women and the self-employed. It will also make it easier for people to understand what they will receive from the state when they retire. It will help to promote private saving and build on the base of auto-enrolment, which in itself has had a most encouraging start. Under the current state pension, a woman on average receives £40 less a week than a man. The new single-tier system will treat men and women alike. The Institute for Fiscal Studies estimates that of women arriving at state pension age in the first four years of this policy—between 2016 and 2020—61% will see their pension income increased as a result, and that there will be further progress as time passes by.
The IFS analysis also shows that the gains are greatest for those who have spent periods not in work, caring for children, and for those men and women who have had long periods of self-employment. The new system will fully count time spent out of work caring for children, which is of particular benefit to women, who are still more likely to take time out of work as a result of starting a family. The new system also benefits self-employed people, who currently lose out as a result, among other things, of irregular working patterns and the difficulty of applying a means test to them.
The benefit of simplicity cannot be overvalued. Simplification is very worthwhile. It enables people easily to understand their future position in respect of a state pension, which in turn should act as a spur to help people save more for their retirement. Coupled with automatic enrolment, we should see the quality and cost of private saving schemes improve. That is why the Government’s proposal to cap pension charges is so important. It is a crucial part of the mix in creating a strong, good-value and sustainable future pensions offer.
Reading through speeches from the other House and responses from a wide variety of interest groups, there would appear to be broad support for the single-tier proposal, and in particular for where it will stand when brought fully to fruition. At that point, the vast majority of people will have 30 or more qualifying years, and they will get at least as good a pension from the single-tier proposal as they would had the current system continued. However, as with so many policy changes, transitioning from one system to another is where we find the most difficulties.
Of course, as pensions provision has a long timespan tail, transitioning becomes even more difficult. The Government have made significant changes to the transitioning arrangements from when they first appeared as a policy proposal, but I know that your Lordships’ House will wish to examine and probe to see if the best balance, in the light of all the circumstances, has been struck. This is a complex issue, but there are some broad issues in the Bill that I would now like to highlight.
The first relates to public sector contracting out in pensions. As it stands, the Bill provides for private sector pension schemes to be able to amend their rules to accommodate the loss of income from national insurance contribution rebates. These permitted scheme changes can go no further than recouping the loss of these rebates, but can be used more than once to achieve any objective—perhaps by staging changes according to the strength of their overall funds. But this ability to modify does not apply to public sector pension schemes.
Public sector schemes cannot alter contribution levels into their funds, nor can they alter the benefits offered. Yet there will be a reduction to these schemes in national insurance contributions, of 1.4% from employees and 3.4% from employers. Meanwhile, the Government retain this money—which some estimate at £5.5 billion a year from 2016 onwards—for, among things, forward-funding the requirements of this new pension.
A helping hand to employers has been introduced to allow them from next April to offset the first £2,000 against their national insurance bill. This means that many small companies will pay no national insurance at all. Some of the retained government finance has already been committed to meeting the financial demands of other age-related policies, such as funding the care proposal cap outlined in the Dilnot report. Roughly on a 5:7 to 2:7 ratio, two-sevenths of the retained money has been allocated and five-sevenths remains to be allocated. That is an annual unallocated multibillion-pound sum.
I recognise that this could be seen as a decision to be taken by the Chancellor of the Exchequer at some stage in the future, at the beginning or after the beginning of the single-tier proposal. However, just as the current Chancellor has allocated support in certain areas in advance of retaining the current national insurance contribution rebates, I would like to understand why the Government cannot go further at this time.
By way of example, if we were in times of plenty, with public sector pension funds running strong surpluses, pension schemes would be able to deal with the changes in contributions. However, many funds are not. I wonder if my noble friend would agree that without the power to amend their schemes, any shortfalls will have to be made up by the public sector organisations responsible; and that this could mean local authorities, who are currently so stretched for resources to meet the urgent demands of their communities, having to find the extra cash needed to sustain their pension funds. It would therefore make sense for the Government to give some forward commitment to pension funds to enable them to bridge the transfer to the new regime.
There are also mixed schemes, with both private and public contributors, which will be treated as a public sector scheme, and others with public and private sector contributors that perhaps will be treated as a private sector scheme. I will quote my own example, and declare an interest. I receive a pension from a public sector pension scheme, but my contributions are, and were, made by a charity—a company limited by guarantee—which obviously was not in the public sector. Some of these anomalies are not immediately obvious, and I believe that we need further clarification on this very important issue during the course of the Bill through your Lordships’ House.
I am sure that my noble friend will be pleased to note that I do not intend to press for a review of the overseas frozen pensions issue, as raised by Clause 20. I am well aware of the costs to the Exchequer, and of the European Court of Justice decision. However, this issue is an anomaly and I can understand the feelings of many UK pensioners living in those countries, where no agreement was reached so many decades ago. Will the Minister tell the House how many Governments of countries with whom there was no such agreement have expressed an opinion on this matter to the UK Government—and, if so, whether any of them had a deal to offer? I would be grateful if the Minister could make any such correspondence available.
This Bill, not unusually, has tacked on to it a measure that is only loosely related to its principle—that of bereavement benefit. The current system pays people a relatively small lump sum and then a taxable weekly benefit over a longer period of time. It also uses a complex system of contribution conditions that makes it difficult to calculate what people will receive.
We are told that the reforms in the Bill are based on what people have told the Government would provide them with the most support. I understand that the Government believe they are not about reducing entitlement or saving money. However, there is one part of the reforms that is particularly harsh—and, some might argue, cruel. The Government will expect parents of bereaved children to look for work just six months after the child’s mother or father has died. Kinship carers, by contrast, will be exempt from full work-search requirements for a year after a child comes to live with them, to allow the child to settle. As charities have pointed out, this could lead to the perverse situation where a father caring for his daughter after his wife's death would be required to work within six months, whereas if the child went to live with an auntie, a full year could be dedicated to helping her adjust. Subjecting widows and widowers to full conditionality at such an early stage in their grief may be counterproductive; it may increase stress and anxiety, which in turn may lengthen time away from work.
In most families, the current weekly payments of bereavement benefit assist with general living expenses, with many finding those essential to meet basic living costs. Where the person who died was the main breadwinner, the benefit goes some way to replacing their income, allowing some continuity with arrangements for looking after the children. For others, it allows the surviving parent more flexibility to work fewer hours or to change jobs or even sector to fit with their new responsibilities as sole carer of their child. Requiring bereaved parents to complete a readjustment in just six months is harsh indeed, and I hope that the Government will reconsider it.
We will have an opportunity to examine this matter as well as other matters related to transition issues during the Bill’s passage through this House. We on these Benches will not lose sight of the value of this measure to our country.
This Bill is to be welcomed. It sets in train a new pensions settlement for the people of this country. It treats men and women, employed and self-employed, equally. It is easy to understand and simplifies the complexities that are a huge fault in the current system. It will help people of working age to make sensible choices about the need for additional saving for retirement. Whatever changes are sought, I hope your Lordships will recognise that this vision of a better pension is a goal worth pursuing.
My Lords, it is always a pleasure and privilege to follow my noble friend Lord German on DWP matters, where his own knowledge shames my ignorance but reassures me that the Government’s position is being knowledgeably defended.
When we debate subjects other than specific legislation, there is a happy convention that we congratulate the noble Lord who has secured the debate on having done so, and we can normally find it in us to congratulate him or her on the manner in which he or she has opened the debate and developed the underlying issues. We then speak to a time limit that is rationed by the time available for the debate. The latter does not apply to Second Reading, where we receive polite advice, on some occasions, from the Captain of the Gentlemen-at-Arms as to how long individual Back-Benchers can speak, if they are as anxious as the rest of your Lordships’ House to conclude the debate by 10 pm. Ironically, the more speakers, the more likely it is that some individual speakers will exceed the ration suggested by the Chief Whip. Today, this privation does not apply and, perhaps equally ironically, I propose to make a very short speech.
As to the absence of the normal advance congratulations to the Minister opening the debate, I find myself in the position of congratulating my noble friend not only on having secured the debate but on his substance. He has of course secured it through his and his DWP colleagues’ persuasive logic in L Committee and I join your Lordships’ House in its commendation of the Pensions Minister himself.
I am not myself competent to take up the challenge from the noble Baroness, Lady Sherlock, to make pensions interesting, but I entirely welcome her challenge to your Lordships’ House at large. In the note from our Library on the Bill, I was struck by the reasoned explanation of how British state pension legislation had evolved over the past century since our noble friends the Liberal Democrats initiated this provision in their pre-World War I legislation. I am perhaps one of the rare Members of your Lordships’ House who can truthfully say that, as in the old saw, Lloyd George knew my father, as my noble kinsman arrived in the House of Commons at the first by-election after Munich.
The Library note goes on to describe the state of the state pension in 1945 when World War II ended. It goes beyond that to say that much of the relevant legislation since then has been attaching legislative barnacles to the good ship “Provision for Old Age”. When I say that I congratulate my noble friend on the substance of the Bill, I am congratulating him and his department not only on riding the two bareback horses of welfare reform and pension revision at the same time, but on the extent to which the pension revision in the Bill improves the hull of the good ship “Provision for Old Age”—to the extent that the Official Opposition in the other place, echoed today by the noble Baroness on the opposition Front Bench, have felt able to launch it in our House with their support, whatever continuing gaps they have identified.
I ask my noble friend, in his wind-up speech, not to omit to acknowledge what gaps still need attention. Ideally, he should identify how he thinks they should be tackled and refined, even if it may be in the next Parliament. If he can do that with candour, and avoid some of the things that have gone wrong since 1945, a grandchild of mine, especially if he or she reaches either House of this Parliament, may be able to follow the Lloyd George saw with his or her own version: “Lord Freud knew my grandpa”; and, in yet another place, I shall smile quietly.
My Lords, I draw your Lordships’ attention to the interests that I have declared in the register. I am an unremunerated non-executive director of Pension Quality Mark Ltd and advisory director to Dimensional Fund Advisors.
There is a great deal in the Bill that can be welcomed and supported. I genuinely believe that it takes forward much of the consensus that has recently been established in this country about the best way to ensure that more people retire with an adequate pension. That is a very important thing to be doing. There are some people—maybe even in this House—who recoil from the concept of a consensus in politics, but when it comes to pensions policy, consensus is a very important thing to strive for, in that it establishes the conditions for people to plan for the future with some confidence. The one thing that has bedevilled pensions policy in the UK in recent years has been the constant stop and start, chop and change, which has acted as a deterrent to people saving.
I, too, pay tribute to the noble Lord, Lord Turner, my noble friend Lady Drake and Sir John Hills—the three commissioners who made up the Turner commission —for helping us to focus our collective attention on two fundamental problems that we face in this country. If the goal is to ensure that more people retire with an adequate income, which I think is the right policy because we cannot ask the taxpayer to shoulder the principal burden in future years in the way that it has done in the past, we know that we have to address these two fundamental problems.
Not enough people are saving and what they are saving is probably not going to be enough to give them an adequate retirement income, so we have to address that. We are addressing that now with auto-enrolment. The speakers in this debate have already drawn attention to the progress that we are making. The Minister referred to the nearly 2 million savings accounts that have been established under auto-enrolment. That is to be welcomed, there is no question at all about that, but we need a reality check here. These are early days for auto-enrolment. The big challenge and the big test for auto-enrolment are still to come, but so far so good: we are making good progress.
However, we should never lose sight of one very important factor: it is wrong to say that we have an established or developed savings culture in this country. In fact, the opposite is true. We know from the Office for National Statistics survey of occupational pensions that in the year running up to auto-enrolment the number of occupational pension savers in this country fell by almost half a million—in one year. It is going to be a significant challenge to move from a culture that honours and pays homage to debt, consumerism and spending to one that puts a premium value on saving, but we have to make that transition. Auto-enrolment is the right policy to ensure that we make progress in that direction. The Bill makes some changes to auto-enrolment, such as the technical changes in Clauses 36 to 40. Some of those are to be welcomed. There is quite a lot of detail that needs to be fleshed out as we move to Committee and Report.
The issue of how much people are saving is altogether more complicated. Today is probably not the time for a debate about how much people are contributing via auto-enrolment into these new savings accounts, but the time is probably not far off when we will have to have a very honest debate in this country about whether 8% or 9% of earnings going into a defined contribution pension will be sufficient to guarantee people a decent and adequate pension in retirement. I, for one, do not believe it is.
The group of savers that we should be most concerned about are actually not those who are the lowest paid. They will do well in auto-enrolment, together with reforms to the state pension that I want to say a word or two about in a minute. The people we in this House should be most concerned about are those on median earnings, who are above the lowest threshold of earnings, who are almost certainly not heading in the right direction at the moment when it comes to ensuring that they have adequate pensions. That debate cannot be postponed for very much longer.
The second of the two big problems that we face in this country concerns the state pension. It has been clear to all of us—it was certainly clear to my colleagues in the previous Government—that the state pension has become far too complicated and far too wrapped up in means-testing, and there is a serious risk that it will act as a deterrent to people taking the principal responsibility themselves to save for their retirement. That would have been a major, mortal threat to auto-enrolment and the principle behind it, which is to shift over time the burden of responsibility for saving from the state to the individual.
Like my noble friend Lady Sherlock, who made an excellent speech from the Front Bench—to be fair, the Minister did too—I think that moving to a single state pension represents an historic opportunity to make sure that we avoid that car crash. Moving to a single state pension can complement auto-enrolment and not undermine it—and there would have been a good chance of that happening if we had continued on the path that we were on.
All I shall say about the single state pension today on Second Reading is that reform, very important and welcome though it is, is not going to be straightforward. I remember well the time when I had just become Secretary of State for Work and Pensions. I was going through a briefing with my officials on the nature of the state pension. We had a full discussion about that—there were pages in my briefing note about it and I hoped that I had got my head around it. When I turned the volume over to deal with the state second pension, there was nothing in the folder. I asked the Permanent Secretary at the time, “Where is the briefing on the state second pension?”. He said to me, “Secretary of State, it’s too complicated for us to explain it”. I was never quite sure whether he meant, “You aren’t capable of understanding it so I’m not going to bother with trying to do that”, or whether they were saying something which was actually true—that is, that it had become too complicated. I think that the latter is the case. There is no doubt in my mind that it has become complicated. As a consequence, there are some genuine transitional issues to sort out. I am quite sure that it is the right thing in principle to be doing. We know that some people will lose out; for example, people who due to their earnings would have built up a higher state second pension if these changes had not been made. It will be very important, although the principle is right, for Ministers to keep their minds open about how this change can best be implemented. However, as I have said, I think that it is the right thing to do.
Like others, I welcome Part 2 of the Bill, in particular the commitment to keep the pensionable age under regular review. This change will be necessary if we are to stay ahead of the demographic changes that have already had a tremendous impact on our society and that, if anything is true, are accelerating. Many think that at some point this trend for longer life expectancy will flip into reverse; I really doubt that to be true. There is no doubt that the pressures, both financial and societal, will build up unless we stay ahead of the process of demographic change.
That is easier said than done in many respects, and I say that for one reason: the age at which people retire, certainly for men, and for women in fact, had not changed for several generations. My grandfather would have retired at the age of 65. We have all come to expect as a natural order of things to get to that age and then retire. That is the old world and it has to be left behind, but it is sometimes difficult to persuade people to understand that. The good news is that I think that people have generally taken a very pragmatic view. If you compare the response in Britain to the increasing age at which the state pension is payable with the response to similar reforms in other European countries, you can detect a degree of welcome pragmatism here in the UK, and that bodes well for the future. However, further change is necessary and it is right that we make sure that the process is as objective and non-partisan as possible, which is why Part 2 is to be welcomed.
There is therefore a great deal to be welcomed in the Bill. I would like to say that the same is true of Part 5, particularly the clauses dealing with the transfer of pension benefits, but I really cannot say that to your Lordships’ House. The Government have made a significant mistake, or stand on the threshold of doing so, in their reforms around pot follows member.
The Minister made it clear that there could as a result of auto-enrolment be up to 50 million small pension pots being established. People will change employment fairly regularly, particularly early on in their working careers, and there is a danger of lots of small pension pots being developed and basically left dormant. We should not be complacent about that; we have got to decide what to do about it. The Government have come up with the idea of pot follows member. The other obvious course open to them, which my noble friend referred to from the Front Bench, to use aggregation as the default option, has been rejected.
I say to the Minister that I hope he can reflect on this with his colleagues. I think that a mistake is about to be made here and I hope that we can avoid it even at this late stage. I have nothing in principle against pot follows member—there is a logic to it—but making it the default option through legislation is the wrong decision. I say that it is wrong because it lacks ambition. It exposes some savers to the risk that they will move from well run, well managed, good value-for-money schemes into schemes that are less well run and provide less value for money. I am not entirely sure that the minimum standards will iron out or rule out that hazard.
When it comes to setting policy in this area, we must keep asking ourselves: what is the best thing for people who are saving? It is not necessarily the same thing to ask ourselves: what is the least risky reform for Ministers to make? The question is: what is in the best interests of savers? I accept that aggregation poses some significant challenges—there needs to be a clearing house, proper data, and so on—but that route genuinely offers the prospect of higher pensions in retirement than pot follows member.
The National Association of Pension Funds has made that argument very clearly. In my experience as a Minister, when the NAPF says, “You really need to think carefully about that”, Ministers really need to think carefully about the course of action that they have proposed. But it is not just the NAPF, it is other commentators, too. I am a great admirer of Michael Johnson and his recent pamphlet for the Centre for Policy Studies, which is not an organisation that I would naturally find myself standing up in the House to support. He has basically said the same thing to Ministers.
My noble friend is right to say that we need to debate those provisions in due course, and I am sure that we will. I hope that the Minister and the Government are open, even at this late stage, to taking a different perspective. The issue is: what should be the default option? I genuinely think that it is a mistake to offer pot follows member.
With that, I end my remarks. I look forward to taking part in Committee and on Report. I echo the congratulations that many others have offered to the Pensions Minister on taking forward these important historic reforms to the state pension. I am sure that it is the ardent wish of everyone in the House that the reforms work to support the savings culture that we so desperately need.
My Lords, in terms of the terminology in this debate, I am not sure if my opening remark will be interesting, but it should be of interest to everybody. That is that Steve Webb is not alone; we are all sinners. I can say that, from these Benches, we all have the hope of heaven. That, of course, may be another understanding of the term “universal credit” that the Minister may like to note.
I understand pensions to be providing stability and continuity in life through a time of transition and adjustment and offering proper responses so that people can continue to live their lives securely and flourish. I see the Government’s role as creating a frame for that flourishing, stability and continuity to happen.
I want to raise a specific point about Part 4 concerning bereaved parents and their continuing family life. The Minister rightly said that society is changing rapidly, but my contention is that bereavement does not change much at all, and we need to think carefully about the notion of bereavement.
The new proposals provide for a lump sum and then bereaved support payment for one year, instead of longer term support which could last as long as you have a child on child benefit, so it is a very radical change of provision for bereavement for families who have lost a parent.
We all know that bereavement is devastating and complex and most others here, I guess, have experienced it. In my work as a priest, as your Lordships can imagine, I have a lot of engagement with people at the time of death and immediate bereavement, organising funerals, follow-up visits and then supporting the family in an ongoing way.
I suggest that one year is a very short time within which to encapsulate bereavement. Many people who work in this area in the voluntary sector would concur with that. I propose to the Minister that we should consider a three-year term to provide the stability and continuity that family life requires. I am not an experienced politician so I am not offering three years and thinking that the Minister might negotiate down to 18 months, I am saying that, from my pastoral experience, three years would be the right kind of timeframe if pensions are about providing continuity and stability.
I want to give three or four brief reasons why I propose three years. The first is in terms of the pastoral situation of the family concerned. If this support ends after one year, that comes at a very raw time. I can tell your Lordships, from my ministry, that many people who have nothing to do with the church will come back on the first anniversary to light a candle, come to Evensong and pray with a priest. We could be giving people a double loss if this support was withdrawn after one year.
Secondly, if we stop after one year, many who would then be lone parents, with children to look after, would probably have to face the prospect of working more hours to make up their income. Some people project that 75% of new claimants will be worse off under these proposals. This is just when children need more care and attention because their bereavement happens in phases, not just over a few weeks or months. Two or three years is a fair time to enable children to adjust but just when they need more time, the person who would now be their single parent might have to look to spend more time away from them at work.
Thirdly, would this be a withdrawal of the net of support for continuity and stability, and are these proposals more like a death grant than care in bereavement? There is a big difference between offering a grant, even if it is extended over a year on death, and care and bereavement. Pensions are about ongoing care and stability at a time of change into a new life.
My fourth point is on universal credit, the provision that is offered in its place. Just as families are having higher costs as children grow older and more expensive, the universal credit system which would take over after the year, as I understand it, would mean that the now lone parent would have to be willing to prepare for work while their children are three or four years old, and be available for work when they are five. That may be well within the three years during which children need special care and attention for their bereavement. Can the Minister comment on that point? Is this proposal about bereavement or an extended death grant? Bereavement is a proposal that takes pensions seriously; a death grant is nothing to do with pensions but something rather different. If pensions are to provide appropriate stability and continuity in life through times of great change into another way of living, and especially if children are involved, is there a case for having a three-year support rather than a one-year support and universal credit?
My Lords, I refer to my interests in the register and mention that I am a trustee of both the Santander and Telefónica/O2 pension schemes. These state reforms accelerate the direction of travel set, with political consensus, under the Labour Government. The single tier is intended to be fairer, reduce reliance on means-tested benefits, provide a firm foundation for private savings and assist ordinary people to achieve a reasonable income in retirement. To achieve those intentions, it depends in part on the starting value of that single-tier pension and the uprating of its value over time.
The Government’s impact assessment assumes uprating will be by the triple lock but assumptions about pensions’ adequacy could be significantly different if it is not. I also note that the extent to which the single-tier pension is set above the guarantee credit is lower in the White Paper than in the Green Paper. I hope that we can explore these matters further in Committee because it is very important to understand where the consensus is settling on the value and uprating of the single tier.
The state pension age needs to rise in the face of increasing life expectancy. Five-yearly reviews by government will be informed by reports from the Government Actuary but it is less clear how much importance will be given to the report of the independent panel which will consider other relevant factors specified by the Secretary of State. Hopefully, these will include geographical, occupational and socioeconomic differences in morbidity and mortality. There is a need for greater clarity about the process and for clear public evidence to inform the debate.
The Bill also provides for the statutory override to allow private employers with contracted-out schemes to adjust members’ future pension accruals or contributions to recoup the employer’s loss of national insurance contribution rebates consequent on the abolition of contracting out. However, employers should not be able to make disproportionate adjustments. Will the actuarial advice of the trustee take precedence over that of the employer? What if adjustments disproportionately impact on one group of members compared to the other? What are the protections to be?
Many of the provisions on private pensions are to be welcomed: the abolition of incentives to induce a member to transfer their rights out of a salary-related scheme; the abolition of short-service refunds; the protection to workers’ pension contributions from the national insurance fund in the event of employer insolvency; and the granting of powers to the Secretary of State to impose requirements on work-based pension schemes on administration, governance and charges.
However, the question is whether the Government will be sufficiently bold in exercising these powers. Auto-enrolment utilises inertia, not active engagement, to get people saving. The employer chooses the pension product while employee choice is largely restricted to joining or not joining the employer’s scheme. The state harnessing inertia—together with the OFT finding that the demand side, the buyer, of the DC workplace pensions market is one of the weakest that it has analysed in years—raises the bar inexorably on governance requirements, especially as auto-enrolment drives a level of demand that the industry would not achieve under a voluntary system. Poor governance, a lack of transparency or scrutiny and conflicts of interest are to be found abundantly on the supply side. To quote the OFT,
“we have concluded that … competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Ordinary people are embracing auto-enrolment. Relatively few have opted out so far, and employers are fulfilling their duty. However, this places a reciprocal responsibility on the Government to protect ordinary people against poor standards and conflicts of interest. The challenge that the Minister is grappling with is apparent from the plethora of consultations and investigations: the FCA on annuity markets and asset management charges; the OFT on the workplace pensions market; the DWP on quality standards, governance and charges; the Law Commission on how the law of fiduciary duties applies to investment intermediaries, using pensions as an exemplar; and TPR on codes of practice. The imbalance between the buyer and the supplier sides of the pensions market, and the systemic inequalities of knowledge and understanding between saver and provider, mean that seeking an alignment of interests is not sufficient—the interests of the saver must come first. There must be a duty to act in the saver’s best interests and, where there is a conflict of interest, priority must go to the saver. No shareholder has a right to gain a dividend from selling or managing a pension product that fails to meet the interests of the saver. The product proposition cannot be designed with sub-optimal features simply to facilitate a profit.
I was therefore anxious to read that in investigating the workplace pensions market, the OFT had reached agreement with the industry to introduce independent governance committees to address the governance challenge, but before a wider community had had the chance to comment on that solution. As the Law Commission says:
“There are many difficult questions about how these committees will work”.
“will not have the power to change investment strategies or investment managers … Furthermore, it is not clear whether … the committees will be under explicit legal duties to act in the interests of”,
the savers. Achieving low charges and good quality in pensions must be inseparable. Sound governance will ensure their delivery. Complexity and lack of transparency put employers and savers at a disadvantage. The OFT identified no fewer than 18 different charges. Full transparency is essential to those who are to be the guardians of the consumer’s interest.
The Secretary of State’s new powers must also be applied retrospectively to cover legacy pension savings. MoneyMarketing, in reporting that the Association of British Insurers has missed the deadline for the pension charge cap consultation, suggested that it was because providers cannot agree on whether existing pension arrangements should be included and quotes Adrian Boulding, Legal and General’s pension strategy director, saying:
“This is all about legacy and the L&G view that existing pension schemes should be able to enjoy the 0.5 per cent charge level that is widely available for new pension schemes. We are morally uncomfortable with the concept that an employer buying new in the market gets one price but an employer that has already bought and is a loyal customer is getting a worse deal for their staff … a charge cap … should apply to new schemes and existing schemes”.
Even if Legal and General has its own competitive considerations for saying those words, they still capture the issue well. We will have to see in the ABI’s crafted response where the common denominator comes to rest.
The Bill addresses the real problem of small, dormant pension pots by giving the Secretary of State power to provide for the automatic transfer of a worker’s pension savings to their new employer’s scheme up to a pot value of £10,000. “Pot follows member” cannot be implemented without raising quality standards or the Government risk transferring the savings of millions of ordinary people into myriad schemes over which they currently have little quality control. Generally, transfers take weeks, if not months. Lots of paperwork, bureaucracy, poor data and lack of standardisation combine to slow the process and increase costs.
All pension savers should easily be able to transfer and consolidate their pension savings, but some savers will never make an active decision, so an effective private pension system requires a series of efficient default arrangements over the life cycle of the saver. I have real concerns about pot follows member as the automatic default arrangement for small pots rather than the alternative of a scheme that can aggregate people’s savings.
I fear pot follows member does not accommodate people who leave the labour force or become self-employed as they have no employer to transfer to, but their ex-employer may nevertheless default them into a poorer personal pension because they do not want to provide for ex-employees in their existing scheme. PFM increases the regulatory burden to oversee the myriad workplace schemes into which automatic transfers would be made rather than focusing on leveraging extremely high quality in a few aggregator schemes. Pot follows member may prove complex for the industry to implement and increase risks to savers. Pot follows member increases risks of charges and transaction costs being incurred on the whole pension pot each time a worker changes their job and transfers rather than on the incremental amount of savings accrued with the previous employer. An efficient pot consolidation mechanism is needed, but I fear that PFM may not best meet this need.
Furthermore, many pots above £10,000 will be defaulted into a personal pension on which there is little quality control because employers increasingly will not let ex-employees stay in their workplaces scheme. The Government argue that significant sums accumulating in aggregator schemes will potentially disrupt the market, but in a dysfunctional market where competition cannot be relied upon to deliver value for money—the words of the OFT, not mine—the driver, as my noble friend said, should be the interests of the saver.
My Lords, I begin with a declaration of interest as a specialist director of the CERN pension scheme in Geneva, and as chair of the European Parliament members’ pension scheme. May I now move on to thanking your Lordships for the warmth of the welcome that I have received in this House? First, I thank my two sponsors: my noble friend Lord Plumb of Coleshill, who is in the Chamber tonight and whom I have known since we joined the newly elected European Parliament in July 1979; and my noble friend Lord Inglewood, whom I have also known for more than 24 years, since he similarly joined the European Parliament in July 1989. My introduction has been smoothed by many people, particularly my mentor, my noble friend Lady Fookes, and the staff of this House. I have discovered that the words, “I’m new here, can you possibly help me?” bring forth an instant and always helpful response.
This small area of London has played a very large part in my life. Foreign affairs have interested me, even from my schooldays. My working life began in January 1961 when, at the age of 16, I joined the Civil Service as a clerical officer in the Crown Agents for Overseas Governments and Administrations, based just across the road at 4 Millbank. I first came to this House because it was a nice, warm place to come to towards the end of the month when one’s money tended to run out and you needed some sort of intellectual stimulation that was free.
In the same month that I joined the Crown Agents, I first joined my trade union. I am proud to say that, from then to today, I have always been a member of a TUC-affiliated trade union. Subsequent to the Crown Agents, I went via the Foreign Office, of all places, to the London School of Economics, where I studied social policy and administration under the guidance of the late and great Richard Titmuss, with my first tutor being the noble Baroness, Lady Blackstone, who is in the Chamber tonight. I recall that on the first essay I ever gave her she wrote, “This is journalese”. You can tell how naive I was because I thought it was a compliment until I went to the tutorial, where I discovered it was not quite the compliment I had thought.
After that I went to the DHSS where, with the late Keith Joseph as Secretary of State, I served as research officer for the Finer committee on one-parent families. It was during this time that another interest, in statistics, which had started at LSE, developed. I recall that we were looking at the impact of work on women’s mortality. We discovered in a preliminary way that women subjected to the same work and life experiences as men had quite similar mortality and that the female differentiation then taken for granted was not, in fact, in all cases completely sustainable. However, the Government Actuary’s Department was not impressed with the finding and I must admit it was far from proven. It was, however, a straw in the wind and has been at least partially confirmed as time has passed. Today, differential mortality between sexes and social classes is an accepted fact, even if the contributing factors are still in need of further evaluation. My other achievement from this period was becoming a fellow of the Royal Statistical Society, which I remain to this day.
From the DHSS, I went to the Co-operative movement and simultaneously spent four years on the pre-Livingstone GLC where, for a time, I was responsible, as chair of housing development, for building houses for Londoners and in many areas outside. It was in that capacity that I learnt the full meaning of the word “nimby” and the extent to which specious community arguments could be deployed in support of personal gain. Then, for 25 years, I was in the European Parliament. I am sure that that will be of relevance to other areas of my life in this Chamber. However, it does not form part of today’s narrative, other than to say that I acquired a reasonable knowledge of European trade unionism and was privileged to be in Bournemouth on 8 September 1988 when, in a single speech, Jacques Delors turned around the TUC to face and befriend the European project. That was indeed a memorable day; my good friend, the late Clive Jenkins, was in the chair at that congress.
From 2004 to today I have been a directoral trustee of a number of European pension funds and have done various things on the European pensions circuit. Having succeeded—as a lot of people have since succeeded—in being expelled from the Labour Party, I re-evaluated my life and joined the Conservative Party, where I am extremely happy. In 2007, however, the present Prime Minister, as leader of the Opposition, signed me up as his adviser on trade unions and co-operatives. That is how I come to be in your Lordships’ House. I believe I am the first Conservative Peer ever to have had in his citation from a Conservative Prime Minister’s office:
“Envoy to the Trade Unions and Cooperative movement”.
I broadly welcome the Bill that is before us tonight. It is a tribute to my honourable friend the Minister for Pensions, Steve Webb, that this measure has a wide degree of support. I also welcome the stability of ministerial appointments that this coalition has introduced. After, I believe, 12 Pensions Ministers during the 13 years of the previous Government, the fact that the present Minister has been in office since 2010 is welcomed by all sides of the pensions industry. Again, I am sure that there is room for a debate on the stability of ministerial posts, but it has certainly benefited decision-making. I wonder whether that stability has lead to the current position. When I asked the TUC for its views on the Bill it was able to tell me:
“I am afraid we are not in a position to provide briefing on the Pensions Bill, as we currently have a staffing gap and are not likely to have a pensions policy specialist covering the role until the New Year”.
I put it to noble Lords that if there were major difficulties, the TUC would have found the capacity to cover the issue. The Minister has clearly achieved a degree of consensus.
I will briefly raise some points for consideration in the time ahead. The first picks up on a matter referred to earlier in this speech and in other speeches. Clause 26 makes provision for a periodic review by the Secretary of State of the pensionable age in the light of changes in life expectancy and other relevant factors. I referred earlier to differential mortality. It is now known beyond all reasonable doubt that there is a wide variation in mortality and that life experience is a key factor in that. What is often referred to as “postcode mortality” conceals a much deeper area. The Government have promised a review. It is envisaged that that review will be conducted by the Government Actuary’s Department. In addition to that, the Government must appoint a panel of one or more persons to consider factors relevant to the pensionable age. I ask my noble friend to consider appointing more than one person and, in particular, to appoint at least one person who, if not nominated by the TUC is at least acceptable to it.
I do not seek to speak at length on that, and realise that we do not enter into any controversy in maiden speeches. I look forward to taking part in the next stages of the Bill. However, I hope that we can get some stability and cross-party agreement on this issue, which lasts so much longer than pensions. I end with a quote from CERN, which noble Lords will know is the nuclear research institute. They say there, “It takes 50 years to decommission a nuclear reactor, but 60 years to pay out all the pensions in our fund”. I thank noble Lords.
My Lords, it gives me considerable pleasure to follow and welcome the maiden speech of the noble Lord, Lord Balfe, in this House. He has described the slightly circuitous political route that he has taken through his life, whereby he has ended up sitting on the government Benches. I have long and, by and large, fond memories of his activities when he was, perhaps, in a slightly different political place. When I was in south London, in the early 1970s, he was already a force in the London Co-operative and Labour movement. Eventually, he became my Member of the European Parliament. He probably does not mention it that much to his colleagues these days but, during my period as general secretary of the party and his time as an officer of the British Labour group, or the EPLP, as we now call it—for some reason, whoever was in control of the EPLP, whether it was the right or the left, pro-Europeans or anti-Europeans, Richard was always an officer—he was extremely helpful to me. I shall put it no more strongly than that. When I did a European job in Brussels and Strasbourg, he was extremely helpful to me, personally, and I am very grateful for that.
Obviously, the road to Damascus is dangerous, and the noble Lord has had a bit of a conversion, the full political and spiritual aspects of which I am not entirely clear on. I suspect that the noble Lord, Lord Plumb, is a bit unsure himself, given the past history. But it is clear that he has retained some of his early interests and commitments, particularly in relation to the trade union movement. I recognise the Prime Minister’s wisdom in giving him his remit. I have two regrets. On the one hand, not all leaders of trade unions were prepared to talk to him on the subject; on the other, it is clear that the leader of the Conservative Party has not entirely followed his wise advice. However, he maintains an unashamed interest in that field, I am very pleased to say.
In reference to this Bill, the noble Lord’s experience with the pension scheme of European Members of Parliament is instructive. If he can make improvements to this Bill that render similar conditions for the bulk of the population, I think that we will all be seriously grateful. I extend a very good welcome to him.
As regards the Bill, I share the general consensus of the overall direction and, in particular, the concept of a single-tier pension scheme, but I do have a number of concerns. My main concern is about the impact on employee members and employers who run occupational pension schemes, both private and public. I have concern for certain other groups, as well, which may well come up in Committee—for example, the cohort of women born in the early 1950s, who seem to miss out on both counts, as well as those who would have got a better pension under the old system than they will with this one. We can deal with those issues in Committee.
My main concern at the outset is about the cost that these provisions will impose on all existing occupational schemes. I spent an early part of my youth getting large swathes of manual workers and others into occupational pension schemes, and it is one of my great regrets in life that the security that that seemed to provide them with for the first time has disappeared in the private sector to a large extent and has been diluted even within the public sector.
As the noble Lord, Lord German, said, all occupational schemes will, as a result of this Bill, face increased costs of approximately 1.4% for employees and 3.4% for employers as a result of the national insurance implications. I have a special interest in the local government scheme, and I declare an interest as a vice-president of the LGA and a member of the GMB. In neither capacity do I receive any pecuniary benefit, but nevertheless I have taken an interest, until recently being a chair of one of the member schemes of the local government scheme.
As the noble Lord, Lord German, said, in the case of private sector occupational schemes, Clause 24 allows for the overriding of existing rules and benefits which had previously been negotiated or provided by the trustees of a scheme, in order to offset these costs. I think that that is quite a dangerous move and will cause difficulties in a whole range of private sector occupational schemes. I certainly do not propose that the Government should extend that to public sector schemes. However, there has to be some recognition of the size of the impact on public sector occupational schemes. I think that the local government scheme in particular is likely to suffer from this. Some public sector trade unions and scheme members have been given a bit of a nod and a wink and been told that departmental budgets will adjust to cover these schemes. I suspect that that assurance is not worth the paper on which it is not written, but they have been given some assurance in that regard.
However, no such assurance has been given in relation to the settlement with local government. The cost increase of the local government scheme for the average employee earning about £27,000 per annum will be £25 a month over a lifetime. The cost to the employers is an additional £700 million. For a small Welsh council, that would mean charging an extra £33 in council tax. For a typical northern metropolitan district council, it would mean withdrawing £2.5 million per annum from expenditure on public services. That is not an inconsiderable cost and the Government need to face up to it. The speed with which local authorities are expected to adjust their pension schemes is also an important factor. These provisions are to be brought in almost immediately. Local authority finance directors are already budgeting for 2016-17. To have such additional costs imposed on them, with the accompanying uncertainty, gives them a real problem.
Obviously, every local authority scheme and every local authority fund will suffer as a result of this measure, but it is not only local authorities: a very large number of private bodies—several hundred—are also admitted members to the local government scheme. They vary from outsourced companies as big as Serco, Mitie and Sodexo to relatively small charities such as the North London Hospice, the Norfolk Heritage Fleet Trust and various museums, and to bigger charities such as the Alzheimer’s Society, the Children’s Society and Barnardo’s. They include all sorts of bodies such as museums, the local citizens advice bureaux and parish councils with full-time employees and so forth. So this is a cost issue that hits many large and small private bodies and charities as well as local government itself. It is important that the Government, including the Minister’s department, CLG and the Treasury, face up to this cost.
There are other complications. For example, under the Bill, LGPS funds will suffer significantly from the fact that the payment of pensions increases in members’ guaranteed minimum pensions, which currently the Government pay, will be shifted on to the employers and the public sector pension schemes directly. So there are significant additional costs which fall on the Local Government Pension Scheme and all the participants therein.
I do not have a solution to this problem but the Government need to have one. We took the then Public Service Pensions Bill through this House with some difficulty. However, the employers and the trade unions very responsibly sat down and agreed on how it should be effectively implemented in the LGPS area. These new costs, as well as the possible knock-on effects on the level of contracting out, particularly for low-income employees but more generally as well, and the costs for the employer of running the scheme are likely to tear up that agreement very quickly. At the very minimum, we need more time to ensure that there is an effective answer to this.
Given the scale of the potential financial impact on public services and local government in particular, today I simply ask the Minister to commit with his colleagues to meeting the LGA at some point during the course of the Bill so that they can discuss this matter. A number of potential ameliorations, if not total solutions, need to be considered. The one thing that I therefore ask the Minister today is that he and his colleagues commit themselves to such a meeting.
My Lords, I believe that some humility is required when we consider people’s pensions. Trust in the pensions industry is low for a very good reason. What is decided in this Bill in 2014 has a 40-year horizon—that is, up to 2054. Does anyone really believe that this legislation will last for 40 years?
There are two things that I am absolutely certain about: Governments will tinker and the financial services industry will get away with whatever it is allowed to. The Government have said that their aim is to,
“better support people to save for their retirement”,
and that is surely welcome. I have no idea whether the proposals in the Bill will do that, although auto-enrolment is a very good start.
When SERPS was established in 1978 as an addition to the basic state pension, the thinking of the day was that those earning slightly more would expect a better pension. When SERPS was replaced by the state second pension, or S2P, no doubt the thinking was the same. If it all disappears next year, the additional state pension will have existed for 36 years, so it nearly qualifies for the 40-year time horizon but not quite. Does anyone really believe that a flat-rate state pension will last for more than 10 years? I very much doubt it. That is not to say that clarity and simplicity are not welcome, but they are only two ingredients. If someone realises that they are clearly and simply going to be poor in retirement, it does not take us very far.
My first encounter with pensions was in 1970 when, as a NALGO branch secretary, I campaigned for an occupational pension for university non-teaching staff at the University of London. The existing schemes were college-based and run by insurance companies with very high administration costs. It took five years to establish the Superannuation Arrangements of the University of London—or SAUL, as they are called—and it now has assets of more than £1 billion. It was an uphill climb because the majority of staff were women. The assumption was that women were not going to stay in the job very long and would probably get married, so why would they want an occupational pension? Those on the lowest grade and part-timers were not even allowed into the college-based pension scheme, presumably because it was felt that they would not stay at work for very long.
That was the era when men could ask, “What’s a nice girl like you doing being passionate about pensions?”—I am trying to make it interesting—and suggesting alternative ways of expending that energy. It was the era of smiling through gritted teeth. It is where the 700,000 women born between 6 April 1951 and 5 April 1953 started their working lives. They probably had to struggle to join an occupational pension scheme, and they were probably advised to pay the lower national insurance stamp and rely on their husband’s pension. They had to fight every step of the way for employment equality, and now they are told that they are not eligible for the single-tier pension.
To give the Pensions Minister, Steve Webb, some credit, he did try to construct an argument as to why the 700,000 women would not receive the new pension. He compared them as a group to those who reached state pension age before April 2010 and those who will do so after April 2016. The Minister weighed up the good and the bad news and the “somewhere in the middle”, and argued that, on balance, the 1951-53 group was not being disadvantaged. That may look good on paper but, for a generation of women who have experienced every form of pension discrimination, it must look like more of the same. I ask the Minister to reconsider this decision. It he agrees to reconsider it, he will have the satisfaction of having 700,000 pleased and extremely surprised women on his hands.
I want to turn to the impact of increased national insurance contributions on public service pensions. I shall keep my remarks short because the noble Lord, Lord German, and my noble friend Lord Whitty have covered this area very well. Are the Government planning to pay these unbudgeted extra costs, which, if not met, could unravel a series of delicate negotiations with public sector workers? Is the Minister able to give us some assurance on this issue at this stage? If not, it will certainly come back in Committee.
I now turn to the issue of trust and transparency. The recommendations of the Workplace Retirement Income Commission, chaired by my noble friend Lord McFall of Alcluith, in 2011 really say it all:
“For consumers to have more trust in the pensions system, the industry needs to show it can reform itself to be trustworthy. An industry-led drive around disclosure, transparency, clear communication, and driving down costs and charges will help to achieve this … the Government and the Pensions Regulator should make it a priority to promote strong and consistent governance and employer engagement with workplace pension schemes, whether trust or contract-based”.
It is a good report and, in my view, it deserves further consideration.
A lack of transparency and overcharging, if not dealt with, will scupper this legislation or its potential good reputation. The Centre for Policy Studies said:
“In 2010, the City extracted some £7.3 billion in implicit charges, about which investors were told … nothing”.
The Royal Society of Arts, of which I am a fellow, referred to written evidence to the Work and Pensions Select Committee stating that from the time when the new Pensions Act is introduced,
“we can expect that many will be sold pensions where 50% or more of their potential pension disappears in charges”.
I am sure that we will come back to this in Committee, but limiting the “wrapper” charges is only a quarter of the story. It is the hidden charges for investing where the costs add up.
I have been a board member of two pension schemes—one as an employee representative and one as an employer representative, although not at the same time, I hasten to add. I lost count of the number of times I listened to presentations by investment companies which were trying to win the contract for investing the pension fund. You were drowned in glossy charts and sales-speak, and I would have liked a hot dinner for every time I heard, “And we aim to be in the upper quartile of returns”. If everybody was in the upper quartile, it would not be the upper quartile. Of course that was their aim, but if only the delivery had been as glossy and promising we would not be so apprehensive now.
Finally, I look forward to the Committee stage when we will have the opportunity to consider this wide-ranging Bill in detail.
My Lords, perhaps I may start by declaring a couple of interests. I am already in receipt of a police pension and I thought that I would be in receipt of the state pension in 10 years’ time until I received a letter from the DWP telling me that it will now be 11 years. Some noble Lords may be intrigued as to why, as a former police officer, I am contributing to this debate. My main concerns are about the reforms to welfare that this Government have introduced. However, I am slightly less concerned about this Bill. Noble Lords also may wonder why I am contributing when there has been such a big build-up in terms of how interesting this subject is. I have to say that the contribution of the noble Lord, Lord Hutton of Furness, was fascinating more than interesting. I congratulate my noble friend Lord Balfe on his maiden speech, which may sound a bit cheeky coming from someone who made his only five minutes ago, but his wealth of experience will be very valuable in this House.
I support this Bill and pay tribute, as others have done, to my honourable friend the Pensions Minister, Steve Webb, and his team. This is a difficult subject for any government to tackle. It is to his and his team’s credit that they have taken it on. As the noble Baroness, Lady Sherlock, has said, there are three tests; namely, that pensions must be fair, sustainable and provide a decent standard of living. I believe that that is what this Bill does. Of course, it is up to your Lordships to test that during our debates at this stage, in Committee and on Report.
When the state pension was introduced in 1926, only half of those who reached the age of 15 were expected to live to the age of 65. On average, people would spend just over 11 years collecting their state pension. In 2013, 93% of 15 year-olds are expected to live to 65 and 32%, almost one-third, have a chance of reaching 100. Clearly, in terms of sustainability, things need to change. The level at which the new single-tier state pension is set appears to be reasonable, as has been said by the Minister, and is above the current state pension means test. It allows people to plan for their future on the basis of understanding what, at least in today’s money, they are likely to expect when they reach pensionable age.
The automatic enrolment of workers in pension schemes requires safeguards. This Government appear to have worked hard to ensure that those safeguards, including, as has been said, the very welcome capping of fees, are in place. I will talk about the “pot follows member” issue at the end of my remarks. The noble Baronesses, Lady Donaghy and Lady Sherlock, expressed concern about women born between 1951 and 1953 who will not be eligible for the single-tier pension whereas men of the same age will be. My understanding is that these women need to make only 30 years of national insurance contributions, as opposed to 35 years for their male colleagues. In addition, those women will be able to draw their state pension earlier than men, at some time between the age of 61 and 63. Men in the same age group will not be able to draw their pension until they are somewhere between the age of 63 and 68. Clearly, that is not a straightforward issue. Swings and roundabouts are involved.
As someone who has more than 30 but less than 35 years of qualifying national insurance contributions, I also might be concerned that I do not appear to qualify for a single-tier pension, which is currently set to be £144. However, I am reassured that, if the new system gives me more than the current £110, I will get that amount. If I would have received more under the old system, I will receive that amount. In short, while others may be better off than me under the new scheme, at least I will not be worse off. I ask whether these changes are to be brought about because of the need to be sustainable.
Clause 25 in Part 2 would increase the age at which the state pension becomes payable from 66 to 67 between 2026 and 2028 instead of between 2034 and 2036, as set out in the Pensions Act 2007. That is eight years earlier than previously planned but it still gives a lead time of 13 years, which will enable people to make provision for it. Surely, this makes sense when one takes into account the fact that, at the moment, life expectancy, I am reliably told, increases by four hours for men and six hours for women every day.
Clause 26 introduces a review of the state pension age, taking into account life expectancy and other relevant factors, every five years or, allowing for some leeway, every six years as stated in the legislation. These are difficult but necessary decisions from which previous Governments have shied away. This legislation ensures that future Governments will not be able to duck that responsibility. The first report would be in 2017. The Secretary of State will have to commission reports from the Government Actuary’s Department on life expectancy and from an independent, appointed panel on other factors to be specified by the Secretary of State. This Government have indicated that the panel will be similar in nature to the Hutton inquiry. It seems eminently sensible that not only life expectancy but other factors that may arise or change over the years are considered by an independent panel, provided there is sufficient lead time to enable those affected by such changes to plan for their retirement.
As noble Lords have said, differences in life expectancy in different parts of the country or among different socioeconomic groups need to be addressed. Surely those matters should be addressed by other means to try to equalise life expectancy in these different areas, rather than trying to equalise through pensions legislation. Most importantly, these reforms will ensure that the state pension remains available not just for my nephews and nieces but for their children as well.
On whether “pot follows member” would be the right system, my understanding is that Australia, a country that is held up as an example of good practice as regards pensions, now considers that it should have introduced such a system. The suggestion that this is the way that the country will go is encouraging. As regards ensuring that there are caps on fees charged by pensions providers, it is hoped that the minimum standards to be applied should ensure that if pot does follow member to a new employer, the new scheme will be as good as the one from which the money is being moved. Clearly, employees will have to consider into what pension scheme their money would be moved when they consider all other aspects of the remuneration package provided by the new employer.
My Lords, I declare an interest as a board member of the Pensions Advisory Service. In that capacity perhaps, I suggest to the noble Lord, Lord Paddick, that he should consider buying some voluntary NICs to make good his shortfall and he will get a 25% return on his capital.
Private DC pensions are deeply problematic. Most people, especially poorer women, do not understand them. They do not trust them; they cannot afford them; they cannot access them; and they do not know what income they would get from them. Pensions for them are high risk. I think the Minister once said that the poor can better cope with risk as they have less to lose. In my view, the exact opposite is true: when you are a week’s wages away from going hungry, you cannot afford any risk at all.
For me, the great virtue of the new state pension, unlike private pensions, is that it removes risk. So my test of the Bill, not dissimilar to that of my noble friend Lady Sherlock, is: does it make pensions simpler, easier to understand and more transparent? Will it produce an adequate replacement income in retirement while being affordable both to individuals and society? Is the Bill fair, recognising women’s unpaid as well as conventionally paid work, and not leaving groups of women unfairly outside the system? Is it also fair in its assumptions about retirement age? Does it encourage savings where possible by removing means-testing, which inhibits them? My acronym is SAFER. The Bill must make pensions: simple; adequate and affordable; and fair; encouraging savings; and removing means-testing. Does it do so?
Is it simpler? Yes, although it is not yet simple. By bringing together the state retirement pension, S2P and pension credit into one single state pension, people can predict their state pension if they have full contributions. But they still have to work out whether their mix of contributions and credits will cover 35 years. Over time, it should do so given a full working age life, but it may not.
Is it adequate and affordable? Will the new state pension continue to address pensioner poverty? S2P, which redistributes to poorer earners, and pension credit, which especially helps older widowed women, were both in Bills that I took through this House. Together, they targeted pensioner poverty and succeeded. Since 1998, pensions have increased three times faster than wages. In 1997, pensioners were the poorest group of our society—the poorest of the poor. When we left, they were less likely to be poor than any other group in society.
But helping existing poor pensioners through means-testing has potentially the perverse effect of deterring future pensioners from saving. By building a stronger state platform, as the Bill does, we both target poverty and support saving. Is it adequate? A middle-aged couple, he on average earnings and she on a modest part-time job, might expect a replacement state pension in future of around 70%—adequate for them, yes. On top may come NEST, its value depending on their age, contributions and the markets.
Is it affordable for us? Given the raising of the state pension age, the capping of S2P and the overall £5.5 billion of NICs windfall from ending contracting out, which will go to HMRC, then, yes. Indeed, HMRC will make such a profit, no wonder we are bringing forward the new Bill by at least a year. In that case, some small fraction could be available for decent transitional arrangements.
Is the Bill fair? For me, that raises two questions. First, will all those who should do so get the new pension? No, it is not that fair. If I were the Minister I would want as inclusive a structure as possible. Those left out of the new single pension will continue to get pension credit, and the cost and confusion of running two systems for a further 40 years is clearly undesirable. Obviously, pension credit will remain as a residual safety net, but we want as few people as possible to fall into it. Who gets left out? Service wives do, possibly, depending on their age, and I will table an amendment on that. Women with several mini-jobs will also be left if they perhaps work 20 hours a week yet are not building their own state pension and are denied a future married women’s pension.
The problem in the past was the employers’ contribution and how we divvied it up. In 2007, the Government thought that there might be 15,000 affected women. We now think that it is almost three times that—40,000 women and 10,000 men—working above the lower earnings limit but still not coming within the NI system to give them a state pension. With real-time information—one of the bonuses of UC—and treated as self-employed as this Bill rightly does for all other self-employed people, we can and must bring those 50,000 people into the new pension.
Steve Webb said in the other place, in a slightly male way, that such women would not thank us for paying £2.70 a week NICs. How does he know? Has he asked them? He also believed that their situation was short-lived and that they should have enough contributing years. How does he know? Has he asked them? He said that they could pay voluntary NICs, but that costs five times as much and might not cover early missing years—that, we do know. I am not myself willing to see 50,000 or so excluded on the beliefs—not facts—offered by the DWP. Those 50,000 should be treated as self-employed unless they opt out. It would allow them to move seamlessly between mini-jobs and a longer-hours job, as we want them to do, as their caring responsibilities require.
The second question of fairness is around the state pension age. I am pretty fed up with people, usually in well paid, interesting, salubrious and physically undemanding jobs, pronouncing that as we are now living longer we must all work longer and what is more—the final insult—it is good for us. This House will know that we have three stages of older age. Most of us who reach 65 in good health can expect another decade of healthy retirement. From our mid-70s, we develop functional disability—mobility, sight, hearing and reach—which increasingly limits what we can do for the next decade. We need support. Then, in the last three to five years of life in our upper 80s, we need care. As the Government’s analysis in the ONS stats shows, between 2000-02 and 2008-10, male life expectancy rose by over two years. But—and this is key—only a third of that was healthy life expectancy. It was 0.7 of one year by the Government’s own stats. So we gain, as the noble Lord, Lord Paddick, said, three to four months every year, but only one month of that may be healthy.
Between 2007 and 2010, the most deprived fifth of the population had a healthy life expectancy of just 55 years—15 years less than the most affluent. The gender gap is narrowing, but the class gap is now widening. So those extra years that we are living are not, alas, years extending healthy retirement but additional years of increased disability and dependency, especially if you are poorer off. Every year that we raise the state pension age is deeply unfair on those who have had hard lives. They start work five years earlier than those who enjoy higher education, and they can expect 10 to 15 years less of overall life expectancy and of healthy life expectancy. By raising the state retirement age, we eat into and reduce their few healthy retirement years even further, all to subsidise the pensions of people such as me—the longer lived, healthier, better educated and better off, including those of us in your Lordships’ House. Our single-age retirement policy—one size fits all—is regressive and unfair. We do not need to shrug this off as Borisconi tough luck. We can do better than that, and I welcome the proposed independent review.
I proceed along with my SAFER acronym: simple, adequate, fair. Will the new state pension—E—encourage savings? Will it—R—reduce means-testing? Yes it should. It will do so by removing the perceived disincentive that having savings costs you benefit. Savings credit actually supported small savings, but under half of those entitled claimed. Its value is eroding and overall the doorstep line I always encountered when canvassing was, “I’m not any better off for saving”. There is one point here about AIPs—assessed income periods. We should not add to yet more means-testing for those on pension credit, which is what the Government propose, while stripping it out, rightly, for those on the new pension. I implore the Government to leave it alone.
The sums saved will be small—I calculate them to be £60 million a year net at best. The stress for older pensioners will rise. The implications for funding social care from equity release for the over-75s—over half of whom are owner-occupiers—on which the social care bill is premised will be catastrophic, overwhelming any savings that the Government may get. Do not go there. What you may save in pension credit, you will overwhelmingly lose in people not being able to co-fund social care. It is really not worth it.
Importantly, under the new state pension, auto-enrolment will be safe. Without the platform of a non-means-tested predictable pension we could, with some justice, be accused of mis-selling NEST. However, NEST was meant for women with low earnings. It originally kicked in at £5,700; from April it is £10,000. Every time you raise the tax threshold, another tranche—mainly women—drop out of auto-enrolment. There are 420,000 in 2013-14. Of course, consultation exercises show that employers like it. What is not to like? The last lift saved them £6.4 million. The losers—poor women—do not know and do not complain.
At the 2017 review we must reconsider NEST’s trigger, perhaps the PTT, and in the mean time strengthen opt-in arrangements. Some 1.1 million women have already lost the opportunity of auto-enrolment. Next spring, still more women will be excluded. Unless we intervene, NEST will lose the very group for whom it was designed.
I want also to register my disquiet at the proposed new bereavement benefit; the loss—proper stats, please—of the state pension lump sum; the interaction with other benefits, especially HB, after five years; the transitional arrangements for married women relying on the 60% pension; divorcees; and widows’ inherited rights. We can pursue all that in Committee.
Do I support this Bill? Yes. On the state pensions front, indeed I do. I even wrote a pamphlet calling for something similar before the last election, and was delighted to corral Steve Webb, then a Back-Bencher, into contributing to said pamphlet. All credit to him and the DWP team behind him for delivering the SAFER pension; I am really pleased. It will continue to reduce pensioner poverty; it will eradicate for very many the snakes and ladders of means-testing; it moves us closer to a decent state pension for all, but one rightly clothed in a contributory system. It will make it safe to save. Those are really valuable contributions. However, it can be improved. The Minister will be delighted to learn that there will be quite a few amendments in Committee. I look forward to them; I hope that he does, too.
My Lords, I start by declaring an interest: I am a trustee of NOW:Pensions, which is a subsidiary of the Danish pensions institute, ATP. Those noble Lords who know about pensions internationally will know that Denmark has an enviable record in pensions.
Pensions in this country have become an area where successive Governments in the main have sought a degree of continuity with their predecessors. From time to time, there has been an impressive degree of cross-party agreement; my noble friend Lady Hollis has just reminded us of one or two significant contributions made by the current Pensions Minister. There is a recognition that this is a long-term problem and that long-term approaches need to be taken to pensions. They should be taken rather more in other areas, which are perhaps more politically controversial. Given the uneven nature of pension provision in Britain, we certainly need a continuous effort to tackle some of the more glaring inequalities that abound. Still, the degree of agreement has been impressive. That stems from a report by the Pensions Commission, which the noble Lord, Lord Turner, chaired and of which my noble friend Lady Drake was a member.
Despite a general welcome for the main pillars of the Bill, there are problems that I want to touch on briefly. I will look first at the statutory override in Clause 24 and Schedule 14, which provides that private sector employers must make changes in their schemes that are commensurate with the higher national insurance costs that arise from the end of contracting out, and for that be done without trustee or member consent. Because the calculation will be done at the aggregate level, not per individual, many scheme members may well lose out. Despite the requirement in Schedule 14 for actuarial certification of scheme changes, we believe that these protections are not solid enough to make sure that people do not lose out significantly.
On the state second pension itself, the concern has to be that the majority of future pensioners could well be worse off under the single tier, because its accrual rate is lower than the current system for people not contracted out. Those retiring later are more likely to lose out and to lose out more. It is not fair that people close to retirement and not contracted out of the state second pension will be unable to accrue a state pension above the single-tier starting rate, despite continuing to pay full national insurance contributions.
There are also problems with the accelerated timetable for increasing the state pension age to 67 in Clause 25. My noble friend Lady Hollis has just spoken eloquently along the same lines. There has not been enough time to address some of the inherent inequalities that exist both regionally and between manual and professional workers. It seems that you have won the jackpot if you are a professional worker in Dorset; if you are a manual worker in one of the old industrial areas, you are in trouble. Yet it is “one size fits all”, and that one size does not fit some, for whom, in the years after retirement, the forecasts are pretty poor. I hope that these will be considered. Certainly, if the state pension age is to be changed again, I hope that this review will lead to some independent process, to give people confidence in the judgment about retirement ages.
Of course, there are some obvious losers in the changes. In particular, dependent relatives look as though they are getting a pretty hard deal. As we go through the Bill, I hope that we can take a good look at their position.
On private pensions and auto-enrolment, Clause 35 extends government powers to cap pension scheme charges. Lower charges are very important. From my Danish knowledge, the contrast between low charges there and high charges here, historically, has been extremely marked and I welcome what is being done to bring down the British level. The principle is good, but the worry is that the changes over a single year can distort the benefits that come with long-term saving. We ask that the Minister and the House take a look at perhaps having a cap over the lifetime of the scheme, which would offer greater flexibility. In the current consultation exercise, it is important that we do not rush this fence too fast, without looking at the longer period over which to compute the appropriate cap.
On the “pot follows member” principle, several speakers have already questioned whether there is a problem with making that totally automatic, when a person could be transferred to an inferior scheme—and there are plenty of inferior schemes around. What about the costs for workers who change jobs frequently? They are often the lowest paid, on insecure contracts, and will be vulnerable to this kind of process.
My next issue concerns Clause 34 and the extremely broad power to create exceptions from the employer duty to auto-enrol staff into a workplace pension scheme. For our part, we are worried about the risk of abuse and are looking for strong safeguards to be built into this part of the Bill.
It is a useful Bill, but I hope that we will find the energy and time, and make the effort, to see whether we can make it better as it progresses through the House.
My Lords, as we consider the detail of the Bill—many of those who have spoken have made very good points about the detail—I hope we will remember two things. First, a great deal of what actually happens will depend on secondary legislation. In essence, this is a framework Bill, and much will emerge as the regulations are produced. Secondly, as we go through the Bill, I want, from long private sector experience, to think a bit about other things that come on top of state provision.
Along with all other noble Lords, I fully welcome the move to a single-tier pension, which is an excellent thing to do. If I may venture an opinion, I would do it, in the end, with the smallest possible consideration of the difference between people and their experiences. I would eliminate, if I could, the idea that certain things should be taken into account, so that it would be a well established and very simple “that is what we are going to get” pension. As has been said before, pension legislation is a dense thicket, into which we venture sometimes but probably as little as we need to. We do not get very far and come out all scratched without really understanding the detail. Anything that simplifies what is going on out there must be welcome.
The departmental brief took us back to Beveridge and 1942. I remember the excitement when that report was produced. The terminology in Beveridge is very different from the terminology we use today. He referred to want, a subsistence minimum, savings on top and the avoidance of an intolerable financial burden. On that last point, we are probably in some form of denial, in that there is nothing which could be rightly described as an intolerable financial burden. Beveridge also said that we should do nothing that discourages the individual from doing the best he can for himself and his family. He was determined, in what he wrote, to make his progressive, reforming recommendations but, he hoped, without perverse incentives being contained in what was done.
Of course, between 1942 and today, very great changes have taken place. The brief refers, as all noble Lords have, to demography. In Beveridge’s time, 10 years of retirement would have been a pretty long time. I fully admit that this is a very theoretical point, but if we were, 10 years from now, to put up the retirement age to 70, we would probably be looking at more like 15 or maybe 20 years of retirement, which is a very big change. Because life is very uneven and unfair, that is only an average. I fully concede that averages can be very deceptive.
The brief referred to the much increased employment of women, something that has been completely transformed from what applied before the Second World War. However, other things are not in the brief which I think are very important and go to the point on confidence and trust, which has also been referred to many times this afternoon. There is the relative prosperity—real incomes today are probably three times what they were in 1942—but of course, alongside that, financial services have become immensely more sophisticated and much more difficult to understand.
Then there have been the rapid changes to the economy, including the disappearance of enormous industries. I come from the north-east of England, where there is not a deep coal mine left, which is almost unthinkable. ICI has disappeared, which is, again, almost unthinkable. Some of these changes have been created by the incredibly rapid progress of technology. Completely unimaginable things have happened, even in stable, long-running companies. British Telecom, for example, suffered the split from Royal Mail and the Post Office. When we were younger, all the equipment was electro-mechanical, but of course it is now digital and a completely different employment pattern is involved in looking after all the equipment in that business. Even in long-running and apparently very stable businesses, there have been enormous changes in the pattern of employment.
There has also been social change, with people wanting different types of career. The idea was certainly prevalent in the days of Beveridge that you joined a company and there you were: that was your life from coming out of school or university until you retired. That now is the exception and not the rule. In trying to deal with all these changes, we have tended to muddle the distinction between provision by the state and the top-up that Beveridge referred to, which is acquired privately. We have not thought carefully about the limits of state intervention or carefully enough about doing nothing that discourages individuals from doing the best they can for themselves and their family. Instead, we have got into a situation where there is an impenetrable thicket, which is not understood by many people and in which, therefore, very few people have confidence and trust. We desperately need to simplify wherever we can—not only in state provision but in private provision.
I turn to one or two examples. The linchpin of private provision was always the defined benefit system, which related to salary and service. Such schemes are dying on their feet. Company after company has gone out of defined benefit schemes after finding them impossible to retain. The promises made in those schemes were so long that the actuaries were unable to match their view of contributions and assets to the potential liabilities, and they kept getting the sums wrong. That is not at all surprising if you set that against the differences that have occurred in society and in business and commerce.
My own experience is of working for 27 years for an engineering company in the north-east, which was taken over, in a deal brokered by the Government of the day, by another engineering company in the north-east. That was in turn taken over by a big construction company, which was then taken over by a big shipbuilding company based in Norway with lots of other engineering industries. That company went bust. I am a pensioner—I should declare that as an interest—of a closed scheme where there are problems. There is now a separate, independent, ring-fenced company with all the funds that came from those different companies. If I told you all the companies that were in the current ring-fenced scheme, you would be amazed. It is nothing like four, and probably closer to 20. It is very difficult to maintain trust and confidence in schemes that are very long-term, if they are subject to such enormous change.
Moving from defined benefit to money purchase schemes, which of course is the solution in many cases, has also proved very difficult, because of the same sort of considerations. Promises have been made to the people in the defined benefit scheme, which is closed, under the contracts entered into with them, but newly employed people are put into a different mode. That creates two classes of employee. Many people have thought about some of these difficulties, and there are many others.
Just the other day, I was asked by quite a young self-employed person, “Why is it wise for me to have a pension?”. I said, “Is anybody else going to contribute to it or are you going to do it all on your own?”. That is the first question you should ask yourself. The second is: what are the tax advantages of putting whatever you save into a pension scheme, personal or otherwise? If you really think about it, the two reasons why we are so keen on pensions as a method of saving are: first, somebody else is going to contribute as well as myself; and secondly, it gives me tax capacity. For a lot of people, other forms of saving, provided that they have the tax capacity, may well be a better way of going about it than joining schemes.
Finally, I have a thought about fees. Of course, if a system is extremely complicated, I am afraid the fees will be high. They become high for two reasons: first, the complexity means that they will be high; and secondly, if you do not think through your own position as a member of a scheme, you contract it out to somebody else and do not pay close interest. In addition, there could be many regulations and rules. It was no surprise to get a letter from somebody involved in my self-invested pension plan saying, “Given everything that is happening now, you should expect fees of 2.5% per year”. I can tell your Lordships that I have been trying to ensure that that did not happen and it is not going to.
My Lords, this is a very important piece of legislation. It changes the way in which we shall have to think about retirement.
Of course, we all know that we are living very much longer, and the Government already insist that everyone will need to work longer before collecting the basic state pension. The Bill proposes a single-tier pension for those retiring from 2016 and, of course, contains provisions under which men and women will work to the same age—67—by 2026. The single-tier pension will be £144 per week above the basic level of means-tested support. As indicated, the pack provided by the Government sets out the ways in which it is proposed to transfer people to the new arrangements. That could turn out to be really quite complicated.
How does all this affect people, poorer people in particular? Many people in well paid jobs are quite happy to work for longer before retiring. Some actually want to do so. Things are often very different for those who have spent a lifetime in employment such as manual labour or cleaning, often very low paid work. A woman who has done that kind of work, such as hospital cleaning, over the years is very anxious to be able to give it all up at a reasonable retirement age.
Then there are workers in strenuous or difficult, sometimes dangerous, work. We should remember the fire service staff who threatened industrial action if their retirement age was raised, who were successful in getting what they wanted. Of course, there are other industries in which people will want to retire early. There should be provision for them to do so. A single-tier payment may be easier to administer but people are different and work patterns are different, and a good scheme should take account of that.
The Bill also deals with the effect of private pensions. These have changed over the years, as many people have said. I well recall my years as a trade union official, when we all aimed to have members in what were then called final salary schemes—now known as defined benefit schemes. These have to some extent disappeared, except in cases where there is strong enough union organisation to prevent that from happening. My own union, Unite, has had several successes in that direction. But generally speaking, the number of employees saving in workplace pension schemes has declined.
The previous Labour Government sought to deal with that through the introduction of workplace pensions with automatic enrolment. Many of us welcome that development and the information pack tells us that this is proving successful, with far fewer opt-outs than was at first imagined. The Government clearly accept that the state pension, even in the new guise of the single-tier pension, is not going to be sufficient to provide a reasonable living standard. People must be encouraged to save for retirement.
As we know, the reform of the state scheme is intended to provide a platform for private saving. It is accepted that the new workplace schemes with automatic enrolment must give people confidence to save. Therefore, the schemes must be good; hence the Bill provides for the establishment of a Pensions Regulator, presumably with the power to intervene in order to protect workers’ savings.
Then there is the matter of pension pots. People change jobs and could perhaps lose track of pensions from former employment. The Government propose a system of voluntary transfers—pot follows member. This was criticised in the Commons and a different system was proposed—the establishment of a sort of separate aggregator—but unfortunately this was not accepted. This was discussed earlier in the debate, particularly by my noble friend Lady Drake, who referred to the pots and what happens to them. There was, however, general agreement that the security of the funds—mostly money purchase, of course—was absolutely paramount.
It is clear that the Government’s view is that a good pension entitlement for the average individual would consist of the single-tier pension plus whatever is derived from the pot or pots from the workplace schemes under automatic enrolment. Therefore, the way in which this money is managed is crucial. How is it to be invested? Can it be left to the market? I think not. Then there is the possibility of annuities; again, these are not popular. This is a very important aspect of what happens to the money that is provided under these schemes.
As we know, wages have been virtually stagnant in recent years. There is evidence that many families are struggling to make ends meet between paydays. Workers on low pay may have periods of unemployment. Saving of any kind may be difficult for them. The last thing people think about in such circumstances is retirement schemes and saving for them. Low pay can possibly indicate penury during retirement—I hope not—and this we have to avoid.
The provisions in the Bill appear to provide some improvements in certain directions—on bereavement, for example—but this seems to be on a short-term basis and there could therefore be losers. I note that the present restrictions on the payment of state pensions outside the UK will remain in place for single-tier pensions. The provision is strongly objected to by people who paid their contributions while they were in this country but who have retired to countries where there is no reciprocal arrangement. This was also raised in the recent debate in the Commons, but again, no change was agreed.
There is little in the Bill about the disabled, except a reference in the information pack which seems to indicate that there will be no change in entitlement. However, some of it also indicates that you would have to be rather heavily disabled before that happened. That is very unfortunate and something that we ought to explore further because disablement is expensive and people who are disabled deserve special acknowledgement and special treatment.
As I have already said, there are a number of issues that must be further explored in Committee. The impact on poorer people, many of them women, must be examined. As indicated, many find saving very difficult, if not impossible. Schemes that rely on individual savings are unlikely to be acceptable to future generations. This is a very important Bill and we must spend a great deal of time in Committee looking at the issues we have raised this afternoon.
My Lords, as my noble friend Lady Turner has just said, this is an important Bill which covers a major area of public policy: how we provide for and treat our citizens in retirement, the extent to which we expect them to make provision themselves through their lifetime and how we value contributions made otherwise than through formal work by way of caring or nurturing future generations. It is about the intergenerational bargain.
As a number of noble Lords have recognised, despite major and progressive changes to the pension environment in recent years, we cannot claim that the state pension construct has yet reached steady state. We know that the proportion of women in Great Britain qualifying for a full state pension will not equalise with men for another six or seven years, and for S2P outcomes to equalise will take much longer. While the availability of means-tested benefits—pension credit, housing benefit and council tax support as it now is—has lifted millions of pensioners out of poverty, there remain problems of take-up and ongoing questions of the extent to which their potential availability undermines incentives to save. Despite progress, we have not eliminated pensioner poverty, but neither does the Bill—all this, of course, in an environment where life expectancy for men and women continues to increase at an accelerating rate. As my noble friend Lady Hollis said, we should look at healthy years.
The introduction of a single-tier pension pitched above the rate—just, in the illustrations—of the guaranteed credit is therefore an important development. It is built on the foundation of auto-enrolment which grew out of the Pensions Commission work on which my noble friend Lady Drake was so influential. It was the report of this commission which clearly concluded that the then state and private pensions regime would not deliver adequate incomes in retirement through changes to the state system alone. Reform to make it simpler to understand and less means-tested were essential to provide clear incentives for individuals and employers to build additional private provision.
In analysing the reforms necessary to the state system to underpin private saving, it was clear that abolishing S2P before establishing the success of auto-enrolment and a national pensions saving scheme would be risky. Since then, things have moved on. We legislated for auto-enrolment—my noble friend Lord Hutton was Secretary of State at the DWP at the time—and for NEST, and the coalition Government have brought them into being. It is still early days, but opt-out rates look to be below expectations, which is encouraging. While continuing to acknowledge that the coalition Government have broadly followed the consensus, we should continue to express concerns about raising the bar to automatic entry. Every time the Deputy Prime Minister talks to us about how many people have been taken out of income tax, he might complete the sentence and say how many—mostly lower paid women—have been denied auto-enrolment.
As my noble friend Lady Sherlock said in her sparkling opening speech, the introduction of a single-tier pension deserves our support—our long-term support. I know that it will be music to the ears of my noble friend Lady Hollis, who has long campaigned for this approach. Of course, as proposed, the detail will not be unwelcome news to the Treasury.
We do not reach the sunny uplands of a simplified single tier overnight. There are complications along the way and we will seek the assurances of the Minister in Committee about the communications strategy to be adopted to explain what is going on. We also need to be assured of the capacity of HMRC and DWP to build and maintain the necessary systems which will give effect to all this. Without putting too fine a point on it, I suggest that the DWP has not covered itself in glory in managing change in recent times. It is a sobering thought that the transition to everyone being in receipt of a single- tier pension will probably extend beyond my lifetime. In the interim, there will be two systems running side by side. Those retiring before the single tier could receive the basic state pension, possibly uprated by the triple lock; S2P, uprated by earnings during accrual and CPI in payment; and the guaranteed credit, possibly uprated by earnings. On the single tier, the Bill provides for uprating by at least earnings, although the impact assessment assumes the triple lock. Protected payments under the single tier are to be uprated by price inflation. So it is hardly all simple and straightforward.
There will also be different access to benefits. Those retiring into the new system will be denied savings credit but not the guaranteed credit. They might also be eligible for housing benefit and council tax support, although the former could be affected by the withdrawal of savings credit. Those retiring before 6 April 2016 will be able to access benefits as now. There are complexities here, too, compounded by how passporting is to work. For some benefits, it is the guaranteed credit of pension credit which is the passport; for others, it is either the guaranteed credit or the savings credit. We need more clarity around all this.
Individuals retiring before 6 April 2013 will be able to defer their state pension under the current rules, including taking a lump sum. Deferral under single tier cannot involve a lump sum and will be more actuarially based and restricted. Qualifying conditions will be different for the two regimes—we now know that it will be 10 years for single tier—and both these changes contribute to the savings for the Treasury.
Over time, those reaching state pension age before single tier will comprise a smaller proportion of the pensioner population and it is important that their interests, too, remain protected. Those retiring in the earlier years of single tier will be better off than under the existing system—notionally, that is—although this reverses for those retiring later. The position of women improves, particularly because single tier benefits lower paid and part-time work.
Transition is not only about two systems running side by side. Provision is necessary for those who retire after 6 April 2016 but who have a contribution record prior to this—hence the need to grapple, as we doubtless will in Committee, with new concepts of “foundation amounts”, “protected amounts” and “rebate-derived amounts”. We should also test the transitional proposals for derived and inherited entitlement.
Perhaps a surprising fact to emerge from the various analyses that we have been sent is the extent to which means-testing will remain within the new system. While the amounts may have declined, the percentage of pensioners receiving housing benefit or council tax support in comparison to what would have happened under existing arrangements hardly changes. There is a significant fall-off of pension credit entitlement, but even 5% of those reaching pension age in 2060 will qualify. Overall, there is a reduction in benefit claimants of just 3%. Nevertheless, there is an improvement in the number having low marginal deduction rates, which is important for saving incentives.
In these circumstances, take-up remains an issue. If the rationale for the assessed income period—a degree of stability in the incomes and capital of pensioners—has not proved to be the reality, it could be difficult to argue for its retention, although I take the point that my noble friend Lady Hollis has just made. However, we think that the Government have done the right thing in retaining the current indefinite awards. Given the still significant scope of benefits within the system and the fact that take-up of pension credit is not high, the need for more regular reporting will bring its challenges. What assurances can the Minister give us about the support proposed for pensioners having to reconnect with the reporting system?
We should be clear that, because of this Bill, the state is going to do less than is currently planned. Over time, the share of GDP going to pensions will be smaller than currently predicted. At 2060, it will be 0.6% less—some £30 billion—but assuming the triple lock for uprating. Should uprating be as provided in the Bill, by earnings, the reduction is 1.5%. On top of those savings are the increased national insurance contributions which accrue to the Treasury from the abolition of contracting out—some £5 billion a year in the early years. More than 80% of that will be borne by public sector employers and employees. An additional 1.4% national insurance contribution is unwelcome news for scheme members at a time when incomes are being squeezed and household costs are rising. Costs have risen faster than wages in 39 of the 40 months since this Government came to power.
Notwithstanding the override given to private sector employers to recoup the loss of the 3.4% national insurance rebate—I share the concerns of my noble friend Lord Whitty about that—there is the risk that all of this will accelerate the decline in defined benefit provision. Public sector schemes will not be able to recoup the loss in that fashion. Following on from questions already asked, perhaps the Minister will say something specific about how those costs are to be met. On the local government schemes, specifically dealt with by my noble friend, as he said, the LGA estimates employer costs in the region of £700 million a year. Given the savaging of local authority budgets by the coalition, how does the Minister think that those costs can be found? Does he think that the new burdens policy should apply and that they should be met centrally? What analysis has been undertaken of the concerns expressed by the LGA that the Bill could undermine the agreement of the reform of the local government pension schemes due to be implemented next April?
The Bill is not only about state pension provision. It includes a raft of other measures, and it should be supported in its attempts to tackle some long-standing problems in the private pensions industry, including the prohibition on offering incentives and removal of short-service refunds. Although the focus on tackling small pension pots is to be applauded, like others, I regret that the proposed solution cannot be supported. The technical amendments to auto-enrolment look supportable, but is it not time to remove some of the historic constraints on NEST?
Finally, I have observed with admiration the work done by Gregg McClymont, the shadow Pensions Minister, aided and abetted by my noble friend Lady Drake, on the urgent need to restructure the UK pensions market, including the annuities market, to forge greater transparency and drive down costs for savers. Once again, we see the Labour Party, just as on energy prices, leading the way, standing on the side of consumers against the vested interests of dysfunctional markets.
Given the scope of the Bill, I hope that the Government will yet be able to pick up some of the amendments that will undoubtedly be moved. As for what is in the Bill, it should, sensibly amended, receive our agreement. I look forward to supporting my Front Bench to that end.
My Lords, as a number of fellow Peers have said, this is a substantial and important Bill. It deals with the state pension fund, but it also covers elements of private pension funds. After buying their home, most people’s biggest investment in their life is their pension scheme. The Bill will be important for the quality of life of the whole nation at the end of their working life, so it is important that we get it right. We have a chance to get it right because it is very much cross-party; the single-tier pension has general consensus. Compliments have been passed. The Minister was generous enough to recognise the work done by my noble friends Lady Drake and Lord Hutton.
So the Bill has a very good start with a lot of cross-party support. I would like to be the first to sign up for the campaign of my noble friend Lady Sherlock to make pensions interesting. They are very important but, unfortunately, when you mention pensions, people’s eyes go to the ceiling—until they find out just what is wrong with their pension. Then, their interest is alerted but it is too late.
What we are considering today is important, but the Bill is inferior in some respects to the Green Paper which the Government issued. The Green Paper said that the changes would be cost-neutral, but the Institute for Fiscal Studies stated that,
“these proposals imply a cut in pension entitlement for most people in the long run”.
I would welcome the Minister’s comments on that when he responds.
The Bill covers a whole range of issues, all of them in their individual ways important, but I shall concentrate my remarks on its impact on women. There is no doubt that the change to a single-tier pension is one of the biggest and best changes to state pensions for women in this country. In my view, the women who will benefit from it do not want to get those improvements on the back of the women whom the Bill does not treat fairly in the transitional stage. That is where my real concerns arise. I hope that we will propose to amend the Bill to deal with those anomalies.
It is established and generally accepted that women make up by far the largest number of those on pensions living in poverty. The number is substantially different; far more women than men are in poverty on pensions. The Bill does not change that for a whole group of women. It is also true that women pensioners have a lower income than men. The Bill does not change that in the transitional period. We must deal with those issues.
For instance, currently, a woman who has been married or in a civil partnership may be able to use their partner’s record to receive a state pension or increase the amount they receive of their own accord. There are some transitional protections in the Bill, but they do not cover everyone. For instance, in the years ahead, some would reasonably expect to receive either a married woman’s pension or a full basic pension, if they were widowed, or would not have had the time before retirement age to make up the contributions. Are the Government going to change the Bill to protect those people?
The Government said that in 2020, there will be between 20,000 and 40,000 married and widowed individuals affected by a pensions loss. I find that unacceptable. Given the magnitude of what we are dealing with, we could amend the Bill to deal with that. I am joined in that view by the Work and Pensions Select Committee in another place. The committee has asked the Government to conclude a solution by allowing individuals within 15 years of state pension age to be allowed to retain that right. That would be a transitional measure and, in the nature of things, would not be hugely expensive. Will the Government accept the Select Committee’s recommendations?
Another group of women has been mentioned in this debate several times: those born between April 1951 and April 1953. Those women feel that they are being subjected to a double disadvantage. First, their state pension retirement age will increase. That is an issue that would have faced any Government. Any Government would have had the unpalatable task of changing the retirement age; I fully accept that. However, this group of women will face a later retirement age but will not go on to the single-tier pension, as I understand it. Will amendments be brought forward to rectify that situation?
Another issue has come up several times. Because an element in the Bill deals with private pensions, I feel able to raise it. That is the issue of part-time workers. We had a long debate on the previous Pensions Bill about the fact that although part-time workers who do not earn up to the national insurance level cannot join a pension scheme, they may have two jobs which, put together, would take them through that barrier and they would qualify for a pension. Those in that category are predominantly women. It is grossly unfair that we are having a major pensions change in this country which, I think, will put it on the right path for the future—although I think that we will have to make further changes later—without dealing with that issue.
Indeed, the Department for Work and Pensions showed in its own analysis that in 2012-13, some 50,000 employees fell into that category of having more than one part-time job but not being able to have a pension cover because both jobs, or three or whatever it was, fell below that level. Of that 50,000 people, again, 40,000 were women. In a Bill which marks a substantial and improved change on pensions for women in this country, there are those anomalies which I believe we should deal with. It will be our responsibility to try and do that. They are all transitional issues, not issues which will last for ever and a day, and we should be about to deal with them in the nature of things.
There are other aspects of the Bill which obviously cause concern. On the bereavement provision, it is a bit cack-handed to withdraw the pension on the first anniversary of the death of the spouse. After the bereavement of your spouse, the first year is always the most difficult. We need to consider what it would be like to be reminded of it. There are also the pension charges. I congratulate the Government on their announcement this week that they are looking at those. It may be that we will have something to discuss on pension charges during consideration of this Bill. I look forward to taking part in debates on this Bill which, if we get it right, will be a landmark for British citizens.
Before my noble friend rises, my Lords, I should say that I realised after I sat down from speaking earlier, with something of a sinking heart, that I had forgotten to draw the attention of the House to my interests in the register. I am the senior independent director of the Financial Ombudsman Service—a remunerated position. In an unremunerated position, I also chair a charity which has employees in pension schemes that could be affected by the Bill. I apologise to the House both for that omission and for interrupting the debate now to have to rectify it.
My Lords, I am delighted to follow my noble friend Lady Dean and I learnt a considerable amount from her contribution to this debate, some of which I shall draw on in my few remarks. I think most noble Lords will understand that I rise to the Dispatch Box with the words of my noble friend Lady Donaghy ringing in my ears, not just because she is sitting behind me but because she urged us in her opening remarks to approach this subject with a degree of humility. I do just that, as this is the first time in 16 years in one part of this building or another that I have had the lack of wisdom to debate pensions, and to do so from the Dispatch Box is a daunting prospect.
I open my remarks by thanking the Minister for his introduction. I thought that he laid out in a helpful way what this Bill seeks to achieve and I look forward to hearing him build on that in his response to the debate and throughout further consideration of the Bill. I have some experience of engaging with him in debate in your Lordships’ House and I know that he will do his best to assist the House to understand and, if necessary, improve this legislation. I thank him, too, for engaging with Members in all parts of this House in preparation for this debate and for his promise of further briefings. I join him in commending the noble Lord, Lord Turner, my noble friend Lady Drake and Sir John Hills for the work they have done; I add to that my thanks to my noble friend Lord Hutton and the noble Baroness, Lady Hollis of Heigham. I was privileged to work with her for a short time when I was the Minister for Employment in the Department for Work and Pensions.
If all those who deserve some recognition for their contributions to this debate will excuse me, while I hope to give them some recognition during these remarks I single out my noble friend Lady Drake. With an economy of words that was a model, she went through the Bill in a way that identified almost all the issues that many months of my trying to understand it had identified, if not understood, and some others that I had not even thought of. I can appreciate why she was on the commission led by the noble Lord, Lord Turner, and why she has had such a significant effect on the direction of travel. I also commend my noble friend Lady Sherlock, whom I am privileged to serve in this cobbled-together team for this purpose. She knows how much I admire her and I thought that she made a sparkling and excellent speech.
I congratulate the noble Lord, Lord Balfe, on an accomplished maiden speech. I have no doubt that the House will value greatly what appears to have been his long and varied journey since the age of 16. It took him all the way from 4 Millbank, which is just across the road, to your Lordships’ House. He referred to Millbank and the noble Viscount, Lord Eccles, referred to the Imperial Chemical Industries, or ICI, in his contribution. Since I am the survivor of a man who was an employee and then, for a short period, a pensioner of the ICI—my mother, who was widowed, was a pensioner of it for a significant period—I recognised the Millbank address as being very significant to the ICI. Those buildings are still there and at least the noble Lord, Lord Balfe, is still with us although the ICI is not. That just occurred to me as a relevant coincidence in the debate before your Lordships.
Turning to the issues raised in the debate, I start with my noble friend Lady Sherlock’s first question to the Minister, which challenged him to confirm the level at which the STP—the simple pension which we are all discussing—will be set. I do that because it seems to be the essence of our understanding of whether this significant reform of the pension system will meet the challenges that the Minister and others have set for it. There seems to be agreement that it needs to be high enough to provide an adequate platform for saving and to reduce means-testing. The problem is that, as we understand it, these reforms will reduce means-testing only if the flat rate pension is set above the pension credit level. Indeed, the Select Committee recommended that there should be some clear blue water between one and the other and argued further that that principle should be built into the Bill. None of us will be able to get a handle on whether this will, over time, consistently meet that condition unless we have some idea of the rate at which it is to be set.
Perhaps I may say in passing, and with all humility, to the noble Lord, Lord German, that this is assuredly not a citizen’s pension. A pension that requires 35 years of national insurance contributions cannot be described as a citizen’s pension.
Moving on, I am encouraged to draw the Minister’s attention to the questions asked by a number of noble Lords, including my noble friend Lord McKenzie, about the fact that all the documentation we have before us, set in the context of the impact assessment, assumes that the single-tier pension will be uprated by the triple lock. Of course, we know that the triple lock is in place only until the end of this Parliament and I am not suggesting that it is reasonable to expect the Government, or indeed any party aspiring to government, to promise the triple lock going forward. One does not know what financial circumstances or degree of growth there will be in the economy in those times. However, I would argue that if we are to understand fully the implications of this policy, and whether it meets the tests that we are all generating for it, we have to have some information against which we can compare the performance of this policy going forward. It would be much more helpful if the Minister could provide us with additional information, other than that which is in the impact assessment and has that assumption underpinning it. If there were alternative calculations provided to us that showed the other ways in which could it be uprated, or not uprated at all, that would give us some sense of whether this policy is dependent on the triple lock or whether, on its own terms, it can be sustainable into the future.
I turn to the question of the continued review of pensionable age, which was raised by my noble friends Lady Turner of Camden, Lady Hollis of Heigham, Lord Whitty and Lord Hutton of Furness. The noble Lord, Lord Balfe, also raised it in his maiden speech. I make it clear that we on these Benches recognise that, as life expectancy increases, it is reasonable to consider extending working lives. However, along with many other Members of your Lordships’ House, we believe that it is very important to consider a range of factors. One of those is that there are differences in healthy life expectancy between different groups and varying employment opportunities for continued working in later life. A number of noble Lords made reference to that.
It is our argument that the Bill needs to provide greater clarity about that process. It is also essential that people have sufficient notice of any changes in state pension age in order to make or revise their plans for retirement. To meet the first objective, we proposed consistently in the House of Commons an amendment that would have ensured that the panel set up to assess rises in longevity included representatives from opposition parties and trade unions. We also have concerns about the methods of periodic reviews.
On the second of these objectives, I point out to the Minister that only this month the Government themselves published a document entitled Reshaping Workplace Pensions for Future Generations, in which they conceded that:
“Our current thinking is that employers would not be able to adjust the”,
normal pension age,
“of anyone within 10 years of the existing NPA in the scheme”.
That concession—that advice—that they published in their own document brings into question a five-yearly review and the consequences of such a review. At this stage I am not seeking to argue beyond the amendment that we tabled in the Commons, and will probably repeat here in Committee and perhaps on Report, but it raises a question about the consistency of the Government’s thinking when that document, published just last month, can strongly make that point while the Government expect that the review of pensionable age will be every five years.
My noble friend Lady Hollis of Heigham made reference to part-time workers—I think she called them people in mini-jobs. As she identified, there is a group of people, mainly women, who have more than one part-time job but are below the national earnings limit in each job, so are not building up the rights to a future pension. In fact, as she pointed out, recent analysis found that in 2012-13 50,000 people—40,000 women and 10,000 men—had two jobs with a combined income above the lower earnings limit but were not accruing qualifying years towards their pensions. My noble friend argues, I think with some authority, that this is unfair and could prejudice hard working people who are doing everything possible to provide for themselves and their families at a time when full- time jobs are acknowledged to be in short supply. Characteristically, she has an innovative solution, which, as I understand it, is essentially that they be treated as self-employed. That would ensure that all those in work with total earnings above the lower earnings limit were building up rights to a state pension. I commend this approach to the Minister, and we will be interested, as I think other Members of the House will be, in the Government’s position regarding this. I suggest that the arguments that have been put forward thus far do not meet the challenge that my noble friend has set out.
My noble friend and others have concerns about the phasing out of the assessed income period. She makes the very good point that the phasing out of this period generates challenges relating to equity release to pay for care and its impact on pension credit when changes to capital are taken into account. While I am not arguing that the release of equity should be dependent on administrative easement that was meant for other purposes and may not be sustainable in the long term, we on the Front Bench do not disagree with the phased abolition of an assessed income period but we wish to use Committee to probe the evidence base for this change. We know that some elderly people struggle with correspondence, particularly official communications, and we wish to be assured that there is support in place for those who need it, with the additional burden that these provisions impose.
A number of noble Lords raised issues reflecting the dysfunctionality of the private pensions market. It is at the heart of this reform that, from a base of a single-tier pension, people are encouraged to save. As my honourable friend Greg McClymont has made perfectly clear, this will work only if they are saving into pension funds in which people have trust and confidence. At the Bill’s Second Reading in June, Greg made clear that our focus on the Bill would be on the half of the Bill that was missing—essentially, the part that would make private pensions value for money for the saver. The Pensions Minister responded throughout the deliberations on the Bill in the Commons in a relatively dismissive way to these suggestions—the Minister smiles; I think that he recognises some of the phraseology that was used—and resisted all our amendments throughout Committee, despite the fact that he recognised consistently that they were relevant to existing serious problems. Throughout that time, he was able to take advantage of the alibi that the OFT report had not been concluded. However, as many noble Lords have said, the OFT reported in a devastating fashion, confirming all our criticisms of the dysfunctional pensions market and raising the sword of a market investigation reference, which is still hanging over the pensions market pending Parliament’s completion of the Bill.
In response to that and the fact that the report expressly, or by implication, supported every one of our amendments, the Government performed a U-turn, but only in response to a part of the problem with charges. The Government have listened to the OFT report on charges and have done a U-turn, and that is welcome, but perhaps now they should listen to the other OFT recommendations, which include the areas that we have tabled amendments on. Indeed, the OFT has gone further than we did to make our pensions industry value for money for savers. We encourage the Minister to consider some of these issues in relation to transparency and governance of the pensions industry, which we will continue to urge.
In anticipation of this debate, I wrote myself a set of notes that said, “No one supports the Government’s line on pot follows member except possibly the ABI”. That was before I heard the speech from the noble Lord, Lord Paddick. I think that he was the lone voice in this debate supporting pot follows member. I say to him, again with some humility, that the Australian example that he encouraged us to follow comes from an entirely different environment. In Australia, as I understand it, there are several hundred pension schemes, whereas there are over 200,000 pension schemes in this country. This is an entirely different environment and the Australian analogy does not quite work.
I am conscious of my time and I shall endeavour not to go through all this now, saving some of these arguments for Committee. However, I am sure that the Minister knows the arguments that have been put forward by many, including the Centre for Policy Studies, as my noble friend Lord Hutton identified. Reading carefully the briefing we all received from the ABI, I am not entirely sure that it is still as supportive of pot follows member as it was at the outset of the debates on this issue.
I commend the right reverend Prelate the Bishop of Derby for a measured and informed speech in relation to bereavement benefits. He made a very powerful argument for consideration of the effect that bereavement can have on children and the importance of the support of parents. I do not intend to go into any more detail on this other than to commend to the Minister the questions that were asked by noble Lords who also made this point. It is an issue that we will to return to in Committee and later during the passage of the Bill.
There are issues about the consequences of the phasing out of contracting out. There are significant potential impacts on public sector and local government pension schemes. There is a related but not directly analogous issue in relation to protected pensions. I also commend to the Minister the observation made by my noble friend on this Front Bench and by the noble Viscount, Lord Eccles, that this is a framework Bill and encourage him to give us some indication about when we will see some of the regulations that inform the Bill.
Unusually, I want to refer to an issue that was not raised, but I promised my noble friend Lord Dubs, who is well respected in this House, that I would indicate to the Minister that my noble friend will raise in Committee the issue of Jarvis and the small number of employees who have lost out very badly in its pensions.
My noble friend set three tests in her opening speech. However, there is a series of other tests that the Government have set that we will measure this Bill and these reforms against, because the Government claim substantial consistent consequences for them. I think the Minister has comprehensive notice of them, particularly from the informed contributions by my honourable friend Greg McClymont, who went over the detail of this with some care. I think he can expect interesting and engaged debates in Committee and on Report. I was very struck by the number of times the Minister used the phrase “very complicated” or “very complex” when I was speaking to him earlier and he and his officials were giving me an explanation of what we can expect in the Bill. He is right about that. I stand before your Lordships’ House confident that behind me I have a significant number of Members who are comfortable with that complexity. One or two of them will be talking to me quite a lot before the later stages of the passage of the Bill. This is a reform that we broadly support, but we will challenge it every step of the way.
My Lords, I expected an interesting and valuable debate and I got one. I congratulate my noble friend Lord Balfe on his remarkable maiden speech, which I know we all enjoyed. I hope we provided him with adequate intellectual stimulation this evening of a kind he will remember. Whether we met the challenge set by the noble Baroness, Lady Sherlock, in making the topic interesting, at least we will, as my noble friend Lord Paddick pointed out, have all gained an extra hour in our lives during this debate.
I shall focus first on the transition which many noble Lords rightly focused on. There are some tough issues around it. People who have contributed to or been credited into the national insurance system have expectations, so we cannot switch to the new system overnight. I assure the noble Baroness, Lady Sherlock, that this is not a hard, fast transition. It is pretty difficult to design a transition that strikes the right balance and takes account of people’s expectations as far as possible while also ensuring that those who are part of the transition—in other words, those who will retire over the next 50 years—will see the benefits of the single-tier pension. I believe this Bill has been successful in this difficult endeavour, and for that reason I expect it to outlast by a considerable factor the 10 years predicted by the noble Baroness, Lady Donaghy.
The foundation amount allows people to see the value of their pre-2016 national insurance record in one figure, which gives simplicity to the single tier but also recognises past contributions. It is a smooth transition. For the vast majority of people reaching state pension age in the years after single-tier is introduced, their outcomes are similar to what they would have got under the old system. Nearly three-quarters of those reaching state pension age in the first five years will see a change in their state pension of less than £5 a week. Of those who see a larger change, five times as many gain as lose. Those who see this boost are likely to be those who have traditionally been badly served by the state pension system: women, carers and the self-employed.
While moving to a modern system based purely on individual entitlement, the transition provides, for example, for inheritance of additional state pension where one member of the couple is in the current system. There is also transitional protection for those who paid the married woman’s stamp. Difficult decisions and trade-offs have been necessary to redesign the state pension within its cost-neutral envelope, and inevitably this means that while some people get more than they would have done under the current system had it continued into the future, some people get less.
I shall move on to as many of the specific points as I can—there were a lot. The noble Baroness, Lady Donaghy, said I would delight the 1951 to 1953 generation of women by moving. I think I might delight them a little bit. Ninety per cent of these women will get more in state pension and other benefits over their lives by drawing their pension in the current system at their state pension age than they would if we gave them a state pension at 65 and single-tier pension. The women in this cohort will reach state pension age between two and four years before a man born on the same day, which means that they will get between £13,000 and £26,000 more state pension than a man of equivalent age. To correct the point made by the noble Baroness, Lady Dean, it is not a double whammy. They have not seen their state pension age rise, except for the equalisation under the 1995 Act. The only change this group has seen recently is in the triple lock.
The noble Baroness, Lady Sherlock, raised derived entitlement. We will clearly go into this in some detail, but we estimate that in 2020 fewer than 30,000 married and widowed women—less than 5% of single-tier pensioners—will be affected by loss of derived entitlement to a basic state pension based on their spouse’s national insurance record. I know this is an area we will debate in great detail.
This is an area of some concern to a lot of us. Will the Minister be kind enough to give us all the stats he has, including how many of those getting the married women’s 60% were born or live overseas, do not have UK residence and so on, which was the argument in the Commons? We are very short of detail on this.
My Lords, as I hope everyone in the Chamber knows, I have arranged to run a series of briefings at the appropriate time—about a week ahead of every Committee session—particularly to try to go through this detail. It really is extraordinarily complex, to reuse a tired word. One needs to go through it with examples and graphs and so on, which is much better. We will get all the information that we can, but we will do it in that context and will then be able to look at it in Committee on the basis of that process.
The noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, asked what the start rate will be. We will need to decide that closer to implementation when the level of the pension credit standard minimum guarantee for 2016-17 is known. I am afraid that I cannot reveal all tonight.
The noble Baroness, Lady Dean, asked about cost-neutrality. The reforms are designed to be cost-neutral in terms of spending on persons. The spending on the single tier should be within 1% of projected spend on pensions until the late 2030s. In the longer term, after that, the single tier will slow the rate of increase in pension spending, helping to make it a sustainable system.
The noble Baroness, Lady Sherlock, raised the savings credit. One of the things that the single tier does is to clarify savings incentives, so that people will know what pension to expect from the state and be able to plan the additional provision that they want. The issue of passporting was raised by the noble Baroness and the noble Lord, Lord McKenzie. Clearly, passporting will be through the guarantee credit, not the savings credit, although in practice the numbers are not that different. On the difference between being on the single tier and being on a credit, and whether you get various passporting, that is always the case when you have a system of passporting. However, it is worth bearing in mind that when you look at the relative rates for members of a couple, the single-tier rate is much higher than the credit guarantee rate; the single tier comes out at £288 for a couple in 2012-13 prices, against £216.55 at 2012-13 prices. So there is a very big gap for couples on that passporting issue.
My noble friend Lord German asked me for the latest correspondence on bilateral agreements. I regret that I just do not have that information to hand right now. I will search the cellars of the DWP to see if I can do any better and write; it is probably very heavily buried there.
Several noble Lords—the noble Lord, Lord Whitty, my noble friend Lord German and the noble Baroness, Lady Donaghy—raised the abolition of the rebate and the costs that would go to the public sector employers. The noble Lord, Lord Whitty, asked whether we would talk to the LGA. The Chief Secretary to the Treasury has met with the LGA and I can confirm that Her Majesty’s Treasury is happy to meet with them.
We will spend a lot of time on multi-jobs in Committee. One point to make is that the effect of welfare reforms will naturally be to improve coverage. All adults on universal credit, many of whom will be the lower paid that the noble Baroness, Lady Hollis, is rightly concerned about, will get their pension correctly that way. In that way, the crediting system is extremely comprehensive. By the 2040s, more than 80% of people will receive the full single-tier amount based on the 35 qualifying years. Clearly, we will be reviewing the crediting arrangements in the light of reforms and will look at the position of these people as part of the review. The noble Baroness is as familiar as I am with the quite revolutionary opportunities which Governments can look at, now or in the future, around RTI when that is built in. I know that we will spend a lot of time on that.
A lot of noble Lords raised the age review and some of the relevant issues: the noble Baronesses, Lady Sherlock and Lady Hollis, and my noble friend Lord Paddick. Clearly, one point of having a review is that longevity on its own is not the only factor. That is exactly what is being realised here. We have debated that in the past, and I know that we will debate it further.
On equity release and the AIP change, income-related benefits take account of any income and capital generated by liquidating assets. However, equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital.
The right reverend Prelate the Bishop of Derby and the noble Baroness, Lady Sherlock, raised bereavement support. This is clearly driven substantially by the change in the welfare system when you have universal credit as a basic bedrock for people. Bereavement benefits were another way of producing that kind of income in an entirely different way. We are now targeting this support for the period of financial need, as we heard that it was required; we did a survey on that. One therefore needs to separate it from bereavement, and maybe the right reverend Prelate’s point about what we call it is relevant there. It is a financial support which is underpinned by the universal credit but, clearly, we do not offset it against universal credit which, if it went on for a long time, we would do. By not offsetting it, we are targeting help at those with the greatest need, whether they are a widow or parent or not. It is a very progressive structure in that way. It means that 62% of the very poorest are actually better off. We will go into this in great detail in Committee; I will not do so now. However, that is the structure and the thinking behind it.
The noble Baroness, Lady Sherlock, and my noble friend Lord German raised conditionality. The structure is that all recipients of bereavement benefits—not just partners, but also if you lose a child—have access to Jobcentre Plus, purely on a voluntary basis, for the first three months; no conditionality for the next three months; and at the end of the six months, advisers will use their discretion to ensure that individuals’ capability and requirements are taken into account.
We will have a major debate in Committee and, I suspect, beyond on the pot-follows-member approach versus the aggregator approach. At this stage I will make a few minor protests about why we have chosen the former rather than the latter. However, I will make an impassioned defence as we go through it in great detail. The pot-follows-member approach maximises the consolidation, is in the best interests of savers and will reduce by half the number of dormant pots by 2050. We estimate that an aggregator approach would achieve just half the cumulative administrative savings for the industry by 2050. We will spend more time on that.
The question from my noble friend Lord Brooke is a suitable last question: what more is there on which to legislate? We will probably have some open questions left after the Bill on how much people are saving. Quite a few noble Lords suggested that perhaps people are not saving quite enough for what they anticipate they will want to spend when they retire. There is also the nature of the savings vehicles—we talked about defined ambition. Those are the two big areas in pensions. I suspect that there are probably several more, but perhaps I would pick those two.
I close by thanking all noble Lords who contributed to the debate, which was informed, measured and interesting. As I said, we will hold a number of briefing sessions. I am keen that in this debate we deal with the real issues on an informed basis and do not waste time. That is what these sessions are for—so that we have full information. I will endeavour to make sure that noble Lords have all the information they need to make the contributions they want to make. In particular, I want to make sure that the noble Baroness, Lady Hollis, is able to table all the many amendments that we all look forward to.
The Bill does a remarkable job of creating a pension system fit for the 21st century—nine times as long as the noble Baroness, Lady Donaghy, thinks. It is a return to the simplicity of Beveridge’s model for the state pension, it strengthens the private pension system, and it will enable today’s and tomorrow’s working-age population to plan for and build towards a secure retirement income. I commend the Bill to the House and ask for it to be given a Second Reading.
Bill read a second time and committed to a Grand Committee.