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2.16 pm

Paul Flynn (Newport, West) (Lab): This is an annual ritual in which social security nerds get together and speak to each other in a language that no one else in the country understands. I feel that I have to contribute for the sake of tradition.

I have a few minor quibbles against Government policy, but I am certainly against the policy of Conservative Members, who constantly amaze us with their brass neck after years of ravaging the social security system, cutting the benefits of the poorest people and 17 continuous years of salami cuts to the basic pension. I believe that we can say to the country that the Labour Government have provided the best period ever for social security benefits and imaginative changes, and that for pensioners this has been the best period in recent history, in which benefits have increased by substantial amounts.

One of my regrets about the basic state pension—I raise the old chestnut again—is the link to earnings. If the uprating had been linked to earnings, the basic state pension for a single person would be 40 per cent. higher and for a couple 65 per cent. higher than now. It is a shame that we did not do so over a period in which the Government have engineered low interest rates and a steady economy, because we could have taken on the role of linking the basic pension to earnings with very little effect on the finances.

The hon. Member for Havant (Mr. Willetts) outlined the Conservatives' policy, which seems to be to link the basic pension to earnings. I believe that that is an admirable aim, for which many hon. Members on both sides of the House have asked over many years, but the downside is that the increase in the means-tested minimum would be at the level of prices. That is an extraordinary position, and for us old lags in the business it is so reminiscent of what happened throughout the 1980s when the link was broken. It would be a return to the Thatcher Government policy of allowing pensioners on income support to fall further behind the income levels of working people each year.

Getting people off means-tested benefits is a fine aim. We all want that to happen, but the Opposition proposals would make recipients of means-tested benefits relatively poorer, year by year. That is entirely morally indefensible. The hon. Member for Havant (Mr. Willetts) has presented a programme that would be aimed at that group of poorest pensioners. It is a cynical move: the Opposition want to grab a headline by saying that they would restore the link, but they do not make it

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clear that the other side of the coin is that they would cut what means-tested pensioners receive. People must not be taken in by what the Opposition say on this issue.

Another old favourite topic is the state of the national insurance fund. Its administrative costs might have increased for many reasons, but the fund is one of the Government's most successful enterprises, despite this year's seemingly disastrous news. It continues to be very profitable, even though income from contributions in the current year is expected to be £31.4 billion less than the Government Actuary estimated a year ago. That may be a surprising figure, but even so the fund's income is expected to exceed expenditure by a healthy £35 million. The balance in hand at the end of the year will be nearly £27.3 billion—three times the minimum working balance recommended by the Government Actuary.

To put it another way, the fund is supposed to operate on a pay-as-you-go basis, but it has an unneeded balance of some £18 billion—money that contributors have paid to meet the current costs of benefits, but which has not been used for that purpose. A written answer from my right hon. Friend the Paymaster General on 6 February showed that the whole of that £18 billion unneeded surplus had built up since 1997.

What will happen in the coming year, 2004–05? The Government Actuary's estimates show an increase of 5.6 per cent. in the fund's income, but an increase of only 3 per cent. in its expenditure. That produces another massive surplus of £32.4 billion. By the end of the year, the accumulated balance will be £1 billion more than the Government Actuary recommends.

It is often suggested that that is not real money, and that the fund does not really exist. It certainly does exist, however: nothing could be further from the truth than to suggest that it exists in some sort of parallel financial universe. The fund does exist, and an account of its investments is presented annually to Parliament. Those investments could be realised at any time if the money were needed for the payment of pensions or other benefits.

Although the fund exists, the Treasury treats it as an undifferentiated source of Government revenue. It is obvious that, in fixing benefit rates for the coming year, no account has been taken of the almost £20 billion needlessly held in the fund, although those who contributed the money assumed that it would be used for that purpose. Neither has any account been taken of the annual loss of £2 billion suffered by the fund as a result of reductions in employers' contributions to compensate them for the climate change levy and other "green" taxes.

That sum of money is rapidly becoming forgotten. I raised the matter in the Select Committee with one of the Treasury Ministers. I said that the climate change levy and other environmental taxes are being paid by the national insurance fund, through the reduced contributions for employers. Although those taxes are necessary and beneficial, why on earth should pensioners—the major beneficiaries of the national insurance fund—be the main payers? The fact that they are doing so is extraordinary, and a distortion of the fund's proper use.

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In another written answer on 6 February, my right hon. Friend the Paymaster General said:

That is true, as far as it goes, but it would have been more accurate to say that part of the contribution income is used to fund the benefit, and that the rest is used to help the Chancellor meet his fiscal targets. That is a long way from the original purpose of the national insurance fund, which was introduced by the last Liberal Government—some time ago.

Introducing his pre-Budget report on 10 December, my right hon. Friend the Chancellor of the Exchequer referred to the cost of restoring the earnings link. He said that

that is, by 2050—

Few people will be neurotic about the possibility of our finances being undermined by 2050. There was no mention of the fact that the basic pension is an insurance benefit, financed by contributions to the national insurance fund. If contributors are prepared to meet the cost from year to year, the sustainability of the public finances will be entirely unaffected.

What we really need is a radical review of the financing and control of the whole national insurance system, so that contributions can be seen to be used for the traditional purposes stated throughout the fund's history. In that way, account could be taken of all the principles on which the fund was based.

A paper entitled "Better Pensions" from the think-tank, Catalyst, proposed the establishment of a national insurance commission consisting largely of representatives of contributors and pensioners. Such a commission would provide a very good starting point for reform of the system.

The question of means testing has been raised already, and will probably run throughout the debate. We are told that it is no longer the means testing of old, and that we now have a new and cuddly version. That is fine, and there is some truth in that statement. People no longer have to supply details of their income on a week-to-week basis, which is a welcome change. We should also pay tribute to the unprecedentedly energetic and resourceful work of the pension services in tracing all those people who are entitled to means-tested benefits. However, the great condemnation of such benefits is that a huge number of people do not claim them.

My right hon. Friend the Secretary of State rightly referred to the poorest pensioners, but the poorest of all are those who are entitled to means-tested benefits but do not claim them. The problem has persisted under all Governments. The Government's target is to get at least 3 million households on pension credit by 2006. That will be an enormous undertaking, given that the number of pension credit households was little more than two

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thirds of the target figure. Ambitious as the target is, it would still leave 1.4 million pensioners not receiving the credit to which they are entitled.

It is not true that we have solved the take-up problem. We must do a great deal better in that respect, and I look forward to what my hon. Friend the Minister for Work has to say when he responds to the debate.

I turn now to the savings disincentive. The prospect of more than half the pensioner population being entitled to pension credit, not just in the short term but for the foreseeable future, poses a more fundamental problem. Those in receipt of the credit will find that its value is reduced by 40p for every £1 of income that they receive from an occupational or stakeholder pension. What sort of message will that convey to people of working age who are wondering about saving more for their retirement?

The problem is a growing one. I wonder whether those who push pension policies acknowledge that and make it clear that that is what will happen. As long as means-tested benefits exist, it will be hard to avoid the twin problems presented by low take-up and the incentive to spend rather than to save. However, we can stop the problem from spiralling out of control by keeping the gap between universal and means-tested benefits as narrow as possible, or at least by preventing it from widening. The simplest way to achieve that is to restore the earnings link, so that the basic pension rises in line with the means-tested minimum. That is a familiar plea in the House, but it is always valid.

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