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Pensions Commission Report

12.32 pm

The Secretary of State for Work and Pensions (Mr. John Hutton): With permission, Mr. Speaker, I should like to make a statement on the publication of today's report by the Pensions Commission. In making its recommendations, the Pensions Commission has acknowledged the progress that we have made since 1997. Its proposals are designed to build on that success, and I believe it important to consider them in that context.

As Lord Turner has recognised, the Government's first priority on entering office in 1997 was to tackle pensioner poverty, which was absolutely the right thing to do. We have succeeded in lifting nearly 2 million pensioners out of absolute poverty and are now spending £11 billion extra each year on pensioners, with almost half of that spending going to the poorest third. Thanks to measures such as the minimum income guarantee, pension credit, winter fuel payments and a 7 per cent. real-terms increase in the basic state pension, we have ensured that pensioners will never again suffer the indignity of living on as little as £69 a week, which was the scandalous legacy of pensioner poverty that we inherited when we came into office.

In our second phase of reform, we took action to tackle the loss of confidence in the private pensions market. That included the pensions mis-selling scandal we inherited. In 1997, less than 2 per cent. of pension mis-selling cases had been satisfactorily resolved. By the end of 2002, more than 99 per cent. of consumers with mis-selling claims had been compensated, with total compensation reaching £11 billion. Through the pension protection fund, the pensions regulator and the financial assistance scheme, the Pensions Act 2004 is helping to respond to the problems experienced by defined-benefit occupational pensions and to boost security for scheme members. The introduction of the Sandler suite and the stakeholder pension has been an important step in facilitating low-cost private savings. I believe that that amounts to a record of achievement of which this Government can be rightly proud.

Despite that progress, we recognise that there are still significant and serious issues that we need to address. I believe that there are three. First, there are the demographics. When our grandparents reached 65 they could expect to live another 11 years in retirement. The 20th century's tremendous advances in science, welfare and health mean that today we can expect to live another 19 years beyond 65 and our children can expect to live another 24 years. In 1950, we spent 18 per cent. of our adult life in retirement; now, we spend 30 per cent. in retirement. By 2050, there will be 50 per cent. more pensioners than there are today. Critically, by the same time there will be two people of working age for every pensioner, compared with 10 people 100 years ago.

Secondly, we know that people need to save more. Our 2002 Green Paper first highlighted the need to enable people to save more or to work longer to achieve the income that they want in retirement. It also established the Pensions Commission to review our long-term savings regime. The commission has calculated that nearly 10 million people are not saving enough for their retirement. Some have suggested that
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that challenge could be averted by the growth in housing assets, but that offers, at best, only a partial solution. People would need to release £100,000-worth of equity to generate £100 per week of pension provision, which is far from easy given that the average house price is now £180,000 and people still need to live somewhere in retirement.

Thirdly, we know that the existing system is complex—yes, possibly the most complex in the world. It produces unfair outcomes for women and carers, and there remains the question of how to ensure an adequate and sustainable state pension for future generations. As Lord Turner said today,

Put simply, we cannot afford to ignore the problems that the Pensions Commission has identified. We must instead ensure that future generations can sensibly plan for their retirement. The choice is not between the status quo and reform; it is a question of how we act—not whether or when.

The Pensions Commission was very clear in its first report last year that there is not currently a pensions crisis, and it made that clear again this morning. But the pensions of tomorrow clearly depend on decisions that people make to save today. It has argued that a failure to respond to this challenge would lead to a crisis in 20 years' time. If we do nothing, future pensioners will be 30 per cent. worse off relative to workers than they are today.

The commission has put forward a comprehensive package of reforms to address those challenges. In relation to state provision, it recommends

It makes it clear that there are a variety of options to secure its objectives. Its preferred way forward is a higher basic state pension indexed to average earnings growth, ideally starting in 2010 or 2011 as the public expenditure benefits of the rise in women's state pension age begin to flow through. The commission has also proposed a universal basic state pension based on residency rather than contributions.

The trade-off would be a higher state pension age. That would be phased in gradually in proportion to the increase in life expectancy. For example, it could rise to 66 by 2030, 67 by 2040, and 68 by 2050. Those changes would not affect anyone aged 50 and over. Furthermore, based on the commission's assumptions, today's 41-year-old could face only one additional year of working age, a 32-year-old two years, and a 23-year-old three years.

Those changes are designed to underpin a major extension of workplace savings. Here, the commission recommends a new, simple, low-cost savings scheme. All employees would automatically be enrolled into either a high-quality employer pension scheme or a newly created national pensions saving scheme, but with the right to opt out. Employers would be required to make a matching contribution. The commission also makes proposals to tackle inequality in the pensions system, especially for women and carers.
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The Government welcome the broad framework of the Pensions Commission proposals and options and believe that they are the right basis for the debate to come. There is much to be discussed and decided about the detail of that framework. Our response will be based on the five key tests that I set out last week.

First, do the proposals promote personal responsibility? The role of the state is to provide a floor through which no one can fall but, as we have made clear, the primary responsibility for security in old age must ultimately rest with individuals and their families.

Secondly, are the proposals fair? Our future system must continue to protect the poorest. It must be fair to women and carers, employers and workers in the public and private sectors and those who have saved.

Thirdly, are the proposals affordable? Several points in them raise the prospect of additional Government spending. For example, there is the re-linking of the basic state pension to earnings, scrapped by the previous Conservative Government. There is also the proposal to make the basic state pension universal from the age of 75, which would benefit many women pensioners. We therefore have to test all the costings. We cannot make decisions without first determining the affordability of the proposals and there is no point in us or anyone else making commitments on anything other than a sensible and sustainable financial basis.

As the Chancellor has made clear, there will be no relaxation in our fiscal discipline and we will not put the long-term stability of the public finances at risk. That test will be central. A near 50 per cent. increase in the number of pensioners between now and 2050 presents obvious challenges and choices for the country about the proportion of its wealth that should be used to support retirement.

Fourthly, do the proposals simplify the system? Any credible package of reform must represent a clear deal between citizens and the state so that people know what the Government will do for them and what is expected of them in return.

Fifthly, are the proposals sustainable? People must have the confidence to plan for their retirement. An enduring national consensus must be our goal.

The Pensions Commission's first report last October was a comprehensive analysis of the UK pensions system. I believe that today's report is an important milestone on the way to a lasting pensions settlement. I should like to put on record on behalf of the Government—and, I hope, the House—our thanks to Lord Turner and his fellow commissioners Jeannie Drake and Professor John Hills for their work during the past three years. They have made a tremendous contribution to one of the most important public policy challenges that face the country today.

The publication of the Pensions Commission's second report today marks the beginning of the new national debate, not the end. As far as the specific recommendations are concerned, we are ruling nothing in and nothing out. We will welcome ideas and proposals from the political parties, employers, trade unions and everyone with an interest in the future of our pensions system.

In the next few months, we will examine in detail the commission's policy recommendations. The Pensions Commission has called for a national debate about the
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right way forward to start as soon as possible. I agree. We will therefore undertake a major consultation exercise, talking to people of all ages, in all parts of the country. I have asked the Pensions Commission to continue its involvement in the debate in the next few months as we move from diagnosis and analysis to proposition and decision. I want the debate to involve every section of our community as we work towards the publication of a White Paper in the spring.

Previous Labour Governments have risen to the challenge of securing long-term reform of our pensions system to meet the challenges of their time. From Clement Attlee to Barbara Castle, crucial decisions have been taken by politicians who could see the benefits of long-term reform. I believe that it is our turn now to see the scale and depth of the challenge in the way that previous generations of politicians viewed such challenges. This should be our benchmark in laying the foundations for reform in the 21st century.

The need to get it right is clear; the responsibility to do so is even clearer—for this generation and the next.

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