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Session 1999-2000
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Standing Committee Debates
Child Support, Pensions and Social Security Bill

Child Support, Pensions and Social Security Bill

Standing Committee F

Thursday 10 February 2000

(Afternoon)

[Mrs. Ray Michie in the Chair]

Child Support, Pensions and Social Security Bill

Clause 28

Earnings from which pension derived

Amendment proposed [this day]: No. 201, in page 25, line 35, leave out `£9,500' and insert

    `£8,500'.—[Mrs. Lait]

2.30 pm

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are taking the following amendments: No. 188, in clause 29, page 26, line 43, leave out `10' and insert `20'.

No. 251, in clause 29, page 26, line 44, leave out `3LET-2QEF' and insert `2LET-QEF'.

No. 252, in clause 29, page 27, line 1, leave out `3LET-2QEF' and insert `2LET-QEF'.

No. 191, in clause 29, page 27, line 1, leave out `20' and insert `10'.

No. 229, in clause 29, page 27, line 3, leave out `2009' and insert

    `in the tax year immediately after the coming into force of this Act'.

No. 258, in clause 29, page 27, line 7, leave out `but not exceeding 3LET-2QEF'.

No. 192, in clause 29, page 27, line 7, leave out `10' and insert `20'.

No. 230, in clause 29, page 27, line 7, leave out `10' and insert `12½'.

No. 253, in clause 29, page 27, line 8, leave out `3LET-2QEF' and insert `2LET-QEF'.

No. 232, in clause 29, page 27, leave out line 9.

No. 254, in clause 29, page 27, line 9, leave out `3LET-2QEF' and insert `2LET-QEF'.

No. 195, in clause 29, page 27, line 9, leave out `20' and insert `10'.

No. 235, in clause 29, page 28, line 3, leave out from `and' to `QEF' in line 4.

No. 198, in clause 30, page 28, line 46, leave out `£9,500' and insert `£8,500'.

The Minister of State, Department of Social Security (Mr. Jeff Rooker): I welcome you to the Chair, Mrs. Michie. By the time that Mrs. Adams joins us, we shall have enough Chairmen to sponsor an early-day motion. I hope that you enjoy the Committee as long as you are here; we have clearly put off Mr. Winterton after one sitting.

I shall continue exactly where I finished, which was considering the combined effect of amendments Nos. 188, 191, 192, 195, 235 and 251 to 254. Everyone, no matter their earnings, would be given more in state second pension than they would have received under the state earnings-related pension scheme. Everyone would benefit from the higher accrual rate on the first £9,500 because there would be no clawback on band 2.

We assume that amendment No. 258 was intended to achieve that aim, but the way in which it was drafted would lead to higher earners losing out without any corresponding gain to lower earners. That is a small point, and I do not criticise it. With a smaller band-to-earnings bracket, the full increase would not be clawed back, even from someone at the upper earnings limit of £26,000.

Under our proposals, those earning £21,600 would receive the same in state second pension as they would have done from SERPS. I shall come to the point raised by the hon. Member for Tewkesbury (Mr. Robertson) in due course. Under the formula suggested in the amendments, people on £21,600 would receive 17 per cent. more than they would have done under SERPS. Money would be redistributed the wrong way, towards the higher paid rather than the lower paid. In contrast, lower earners would get no more than the extra help that we propose. It would all be for the long-term cost of almost £3 billion.

Most higher earners are already contracted out of SERPS. The majority are in well-funded occupational schemes and personal pensions. We would give added help to moderate earners who contract out into funded schemes such as stakeholder pensions. The moderate earner definition is roughly £10,000 to £20,000.

The amendments would make the decision about contracting out much harder for people. Indeed, I think that that was the thrust of the remarks of the hon. Member for Beckenham (Mrs. Lait) when she grouped some amendments. The idea was to give people an incentive not to contract out, but to stay in the second pension. We do not think that that helps. It is certainly contrary to the intention of the overall pension policy.

In contrast, amendments Nos. 230 and 232 would mean that, although moderate earners would receive more from the state second pension than under the Government's proposals, people earning more than £23,000 would receive less from the state second pension than they would have done from SERPS. We do not think that that is right either. So far as we can, we want to keep everything SERPS-neutral. The low earners—carers, disabled, those with broken records—need help to provide them with a decent income in retirement. Our proposals will do that while providing additional help to the moderate earners and maintaining the position of high earners, which is important.

I remind the Committee of the grand plan. When I began my speech, I mentioned that we wanted to change the ratio of state to private provision from 40:60 to 60:40, and this measure will fit with that. We have made no secret of the fact that, once people are no longer earning low wages, we shall want them to go into stakeholder or occupational pension schemes, or to make other second pension arrangements. We believe that that would be better. However, those who remain on the margin, for whom such decisions will be difficult, would lose substantially, and we believe that they would be better off with funded pensions.

I reinforce what I said this morning. The hon. Member for Beckenham said that our proposals would be a disincentive to earning more than £9,500. The chart from the Government Actuary's report that I have distributed to the Committee shows that people would still continue to gain, but at a lesser rate than if they were earning less than £9,500. Those who earn £10,000 would still continue to accrue more state second pension, but at a slower rate—10 per cent. instead of 40 per cent.—than on the first £9,500 of their earnings. It is not a hump.

We propose to provide a step up for everybody by giving the 40 per cent. accrual on the first £9,500, whether or not people earn more than that. Those who earn more will continue to accrue more state second pension. Overall, those earning up to the £21,600 limit will get more than they would have done under SERPS, and those earning over that limit will receive the same. As I said in response to the intervention of the hon. Member for Sutton and Cheam (Mr. Burstow), that is only the case in the first stage of the state second pension. In the second stage, those who contract out will continue to receive earnings-related rebates. The extra help for moderate earners will therefore continue, which is in line with the broad strategy.

The hon. Member for Tewkesbury asked about the chart that I distributed to hon. Members this morning. Up to £600 a week, which is about £30,000 a year, it still shows an apparent gain. One can see that SERPS has levelled out, because it has a maximum of about £124 a week. The chart is not misleading; it shows the assessments of the actuaries responsible. Before Christmas, my hon. Friend the Under-Secretary and I delivered a presentation in Westminster Hall on the state second pension and child support. I used some slides on that occasion, but I have not distributed them today because the Actuary's report is now in the public domain and that is more important. When we made that presentation, I showed the cut-off at £21,600, and I went no further.

By 2050, band 2 will have become compressed because its upper limit, which is £21,600, will have reached the upper earnings limit, which is price uprated, so there will not be a full claw back of the gain from the 40 per cent. band. It is possible that there could be ad hoc increases in the upper earnings limit above inflation as in recent Budgets, which could eliminate that effect. The problem is that some of the earnings limits are high, but the basic pension is calculated in line with prices. Even the limit of £9,500 is uprated in line with earnings. We are making assumptions. On our assumptions, we believe that there would be no gain from the state second pension for anyone earning more than £21,600, which is contrary to what the graph shows. That is based on the assumptions of the upper earnings limit and the compressing of the second band.

I am certainly not seeking to close the debate. I spoke in an earlier intervention about the totality of the Opposition's proposals. I say ``totality'', but one can mix and match, as the hon. Member for Beckenham said. I would not take a broad-brush approach and say that they would all work against the interests of low earners, but it depends on how they are compartmentalised.

Our intention is to shift the balance in favour of low earners, whereas the Opposition amendments would result in less provision for low earners, a bit more for moderate earners—people in band 2—and roughly the same, or slightly more, for higher earners, based on the latest figures. We do not believe that that is a better way to help lower earners.

I do not criticise the hon. Member for Beckenham. She said that her avowed intention was to provide an incentive for people with at least moderate earnings to remain in the state second pension scheme, which is directly opposed to our aim. Our intention is to ensure that the scheme is SERPS neutral and offers a bit more for moderate earners and no gain for higher earners, but provides a strong incentive for people who earn up to £20,000 to leave the state second pension scheme, with their earnings-related rebates, and join a stakeholder pension scheme.

Miss Julie Kirkbride (Bromsgrove): I am worried about how easy it will be for low earners to move to a different scheme when they become moderate earners. What will they be able to take with them, and to what extent will they be ghettoised because they have been on low earnings for some time, even though their earnings capacity has been transformed? How much flexibility will there be between the two systems to allow people to upgrade their pensionable rights?

 
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