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25 May 2006 : Column 1647
Mr. Straw: I am in favour of open scrutiny, and I have already said to the right hon. Member for Wells (Mr. Heathcoat-Amory) that I want the House’s scrutiny of European and other business strengthened. Some Select Committees need to meet in private some of the time, which does not necessarily undermine their scrutiny—it may improve it—but I understand the point that hon. Members are making and I will work on it.
Mr. John Hayes (South Holland and The Deepings) (Con): As it is adult learners week, I was going to ask the Leader of the House for a debate on those matters so that we can consider why we lost 150,000 adult learning places last year. Given the right hon. Gentleman’s earlier comments, however, I am going to ask for a debate on crime. Gun crime is soaring and knife crime up 36 per cent. on last year, so we need a debate to test the bizarre idea that dysfunctional clients excuse dysfunctional Ministers.
Mr. Straw: On places for adult learners, investment in further education, including for adults, has been dramatic. On crime, I am happy at any stage to set our record on fighting crime against the record of the previous Conservative Administration. The simple fact is that in 18 years of Conservative Administration, crime doubled and by 1997 police numbers were going down.
Mr. Denis MacShane (Rotherham) (Lab): Say it again.
Mr. Straw: Under 18 years of Conservative Administration, crime doubled and police numbers were going down. Under the Labour Administration, crime has gone down, not up, by 35 per cent. and police numbers have risen by 14,000.
Pensions Reform
12.21 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 future of our pensions system.
Our first priority has been to tackle pensioner poverty. Compared with 1997, we are spending more than £10 billion extra each year on pensioners, and almost half that spending goes to the poorest third. We have raised the minimum income from a totally inadequate £69 a week in 1997 to more than £114 today. As a result, for the first time in a generation, pensioners are now less likely to be poor than anyone else.
We have also tackled the loss of confidence in the private pensions market. We have legislated to clear up the pensions mis-selling scandal, created the pensions regulator and the Pension Protection Fund. We established the financial assistance scheme to help some of those who stood to lose most from schemes that collapsed before 14 May 2004. I know that many Members have been concerned that the scheme is limited to those within three years of retirement.
My right hon. Friend the Prime Minister announced in March that we were expediting a review of the financial assistance scheme and I am delighted to announce today that it will be extended to cover eligible people who were within 15 years of their scheme’s normal retirement age on 14 May 2004. Under that extension, the Government will top up to 80 per cent. of the expected core pension for those within seven years of scheme pension age, to 65 per cent. for those within eight to 11 years of scheme pension age and to 50 per cent. for the remainder.
We have made real progress on pensioner poverty, but despite those improvements, significant challenges remain. We established the Pensions Commission in 2002 to consider what reforms might be necessary to meet those challenges, and I am grateful to the three commissioners—Lord Turner, Jeannie Drake and John Hills—for the work that they have done. In its report last November, the commission made it clear that there was no immediate “pensions crisis”, but that there would be one if we did not act soon. They identified four major challenges.
First, the Commission found that between 9 million and 12 million people are not saving enough for their retirement. Secondly, it estimated that, by 2050, there would be 50 per cent. more pensioners than today and that the ratio of people in work to those in retirement would halve over the same period. Thirdly, as a result of historical legacy, the current state pension system is complex and delivers unfair outcomes, especially for women and carers. Of those recently reaching state pension age, 85 per cent. of men have a full entitlement to a basic state pension compared with only 30 per cent. of women. Finally, it found that, if we maintain current indexation, the basic state pension might be worth in today’s earning terms only £35 by 2050 and that more than 70 per cent. of pensioner households could be eligible for pension credit—never the
Government’s intention. The Commission urged the Government not to duck the long-term challenge of reform.
I believe that the proposals in today’s White Paper address the challenges that the Pensions Commission identified. We will therefore introduce a new system of personal accounts that will make it easier for more people to save. We will reform state pensions so that they are simpler and more generous. We will modernise the contributory principle and make the state pension fairer and more widely available. We will increase the state pension age, keeping the proportion of life spent receiving the state pension stable for each generation and helping to secure the long-term financial stability and sustainability of the state pension system. Let me take each of those in turn.
A new system of personal accounts will be introduced from 2012, providing more than 10 million people with the opportunity to save in a low-cost savings vehicle. Employees will be automatically enrolled into either their employer’s scheme or in the new personal account, but they will have the right to opt out. The accounts will provide a simple way for people to take personal responsibility for building their retirement income. Employers will be required to contribute 3 per cent. of employee earnings in a band between £5,000 and £33,000. Employees will contribute 4 per cent. on the same band of earnings and a further 1 per cent. will be contributed in tax relief.
I recognise that these changes represent a major change in our pension system. Accordingly, we are taking steps to help smooth the introduction of reform. Employer contributions will be phased in over at least three years and the contribution rate will be fixed in primary legislation. In order to minimise the burden on the smallest businesses, we will consult on additional transitional support and on whether a longer phasing period is necessary. However, the Government are clear that reforms to private pensions must go hand in hand with reforms to the state pension system.
During the next Parliament, we will re-link the value of the basic state pension to average earnings. Our objective, subject to affordability and the fiscal position, is to do that in 2012, but in any event by the end of that Parliament at the latest. We will make a statement on the precise date at the beginning of the next Parliament. That will help to preserve the value of the basic state pension. We will also simplify the state second pension so that it gradually becomes a flat-rate weekly top-up to the basic state pension.
That means that a person retiring in around 2050 who has been in employment or caring throughout their working life could receive a contributory state pension worth £135 a week in today’s earnings terms, which would be £20 a week above the guaranteed income level. Without those reforms, people retiring in 2050 would receive a total contributory state pension worth between £90 and £100 a week—well below the means-tested threshold.
We will continue to uprate the standard guarantee in the pension credit with average earnings from 2008, so the pension credit will continue to help the poorest pensioners, but we will also be able to limit the spread of means-testing. We will make an immediate start by
modifying the calculation of the savings credit from 2008. That gives a clear indication from the outset of our determination to make clear people’s incentives to save. As a result of that change and our restoration of the earnings link, we estimate that, by 2050, far from rising to 70 per cent., only about a third of pensioners will be eligible for pension credit.
Our reforms to the state pension must also achieve fairer outcomes for women and carers, but we do not believe that a residency test for future accruals, as proposed by the Pensions Commission, would be the right way to achieve that. It would offer no immediate help to a group of women aged 45 and above who have poor contribution records and, quite literally, no time now to put it right. That is why, from 2010, we will introduce radical changes to the current system, reducing the number of years needed to qualify for the basic state pension to 30 and improving the system of credits to better reflect the different ways in which people contribute to society. As a result, by 2010, 70 per cent. of women reaching the state pension age will receive a full basic state pension, compared with 30 per cent. today. By 2020, up to 270,000 more women will get a full basic state pension—approximately three times the number under a residency-based approach.
We propose to increase the state pension age in line with life expectancy. The state pension age for women is already due to rise from 60 to 65 between 2010 and 2020, to equalise with men’s state pension age. There will be a subsequent rise for both men and women from 65 to 66 over a two-year period beginning in 2024, and further increases—also over two years—to 67, starting from 2034, and to 68 from 2044. However, no one over the age of 47 today will be affected by these changes.
Finally, today’s White Paper proposes a number of simplifying measures that will streamline the regulatory environment. We will abolish contracting out for defined contribution schemes at the same time as we restore the earnings link. We will reduce the burdens on schemes by introducing legislation to allow them to convert guaranteed minimum pension rights into scheme benefits—reforms that will, I believe, be of significant benefit to employers and employees. We will introduce legislation to begin implementing these reforms in the next session.
In November, I set out five tests for the reform of our pensions system: they needed to promote personal responsibility and to be fair, especially to women and careers, and they needed to be simple to understand, affordable and sustainable for the long term. I believe that we have met those five tests.
Today’s White Paper seeks to entrench a new pensions savings culture, whereby future generations can take increasing personal responsibility for building their retirement savings. While there will always be specific individual circumstances, such as debt or stock market performance, that affect people’s savings, fundamentally these reforms mean that people should be better off in retirement by having saved. Moreover, this package of reforms continues to protect the poorest pensioners from poverty and, for the first time, delivers fair outcomes for women and carers with a modernised contributory principle, operating within a simpler overall architecture.
Over the period to 2020, our proposals broadly keep spending on pensioners as a proportion of national
income constant at today’s levels, thus helping pensioners to share in rising national prosperity. In the long term, the rise in the state pension age will help to secure the long-term financial stability and sustainability of the state pension system. Altogether, this represents a comprehensive integrated package of reform. I believe that it can lay the foundation for a new and lasting consensus on a long-term solution of the pensions challenge that we face as a country. I commend the White Paper to the House.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I congratulate the Secretary of State on the safe delivery of his White Paper to the House. Frankly, there have been times over the past couple of months when we were not sure that it would see the light of day. We welcome the key elements of the package that he has just announced. The Conservative party fought the last election on a platform of a restoration of the earnings link to curb the growth of means-testing—[Hon. Members: “Oh!”] We fought the last election on a platform of a restoration of the earnings link to curb the growth of means-testing—something that the Chancellor said at the time was unaffordable.
We also welcome the package of measures that will address the unfairness suffered by women in the present system, but let us just take a moment to set the statement in context:
“when Labour came to power we had one of the strongest pension provisions in Europe and now probably we have some of the weakest.”
Of course, those are not my words but those of the right hon. Member for Birkenhead (Mr. Field)—Labour’s first Minister for Welfare Reform.
Since 1997 the savings ratio has halved, and 9 million people in this country are not saving enough for their retirement. Some 60,000 occupational pension schemes, with more than 1 million members between them, have wound up or begun the process of winding up on Labour’s watch. At least 125,000 people have lost some or all of their accrued pensions rights. Not all of that is the Government’s fault—[Hon. Members: “Oh?”]—but the Chancellor’s £5 billion a year tax raid on pension funds, the two reductions in the minimum funding requirement, the ever more complex regulatory regime and the pernicious affect of widespread means-testing on the savings culture are matters for which this Government are responsible, and that is the context of the statement today.
I should like to join the Secretary of State’s tribute to the work that the Pensions Commission has done. We do not agree with every detail of the commission’s proposals, but the key recommendations of its report clearly point the way forward. Cross-party consensus is essential to a lasting pensions settlement. Long-term savers want long-term stability, which needs a guarantee that the pension regime will not change every time there is a general election. So it is bad news for Britain that the consensus building that the Government promised us on the back of the Turner report has been a victim of the internecine warfare between the neighbours in Downing street.
It is bad news, too, that a degree of uncertainty has now been inserted in the equation by the Chancellor’s insistence on the caveat that the restoration of the earnings link in 2012 is subject to some subjective tests
of affordability. The start date for the restoration of the earnings link is pushed back into the next but one spending review—the fiscal equivalent of the long grass—and is subject to a get-out clause that reduces the very certainty about state benefits that was the cornerstone of the reform package that the White Paper was supposed to deliver. The Prime Minister’s legacy is left to a decision that will not even be taken until the next Parliament. No wonder the Government are now so keen to build that cross-party consensus to which they have devoted no time over the past few months.
We have set out our own five criteria by which we will judge the White Paper; they largely reflect the criteria that the Secretary of State has set out. Does it deliver pensioner dignity? Does it deliver fairness, not just between the generations and the sexes, but between different groups in society? Is it affordable? [ Interruption. ] Is it simple enough for people to understand? Perhaps most importantly of all, does it underpin self-reliance through the promotion of saving? [ Interruption. ] I am glad that the Chancellor is having such a good time this afternoon.
On the basis of what the Secretary of State said and an initial trawl through the White Paper, we have a number of detailed concerns, which I will address—but first I want to say something about affordability. We share the Government’s determination that the proposed settlement must be affordable and sustainable. No party that seriously aspires to be in government when these changes take effect can take any risk with the public finances or the stability of the economy.
Conservative Members will certainly not make promises that we cannot deliver, but if there is to be an affordability test, there must be transparency about the cost and the financing of the package of measures in the White Paper. Without transparency, affordability will remain a matter for the Chancellor’s subjective judgment. Given the challenge of longevity, change is essential, and I believe that the British people will be willing to shoulder the burden of change, provided that it is fairly distributed—but if change is not seen to be fair, it will not be durable.
This package will improve the situation of women with broken contribution records and those who have committed time to caring responsibilities—we very much welcome that—but is it fair that a woman who retires one day before the changes take effect should spend the rest of her life living on a partial basic state pension, while her neighbour who retires a month later with the same contribution record will have a full basic state pension? Is it fair that tucked away in the small print is a provision that will freeze the maximum state second pension at today’s level, but will not freeze the contributions that people pay towards that pension? That issue has been neither properly understood nor properly debated.
The Secretary of State has said nothing at all about public sector pensions. Can the Government really look the British public in the eye and tell them they have to work until they are 68 to gain their basic state pension rights, when the Government have cravenly surrendered to pressure from public sector unions and
agreed to their demands for retirement at the age of 60 on a full final salary indexed pension for the next40 years?
Public sector workers deserve fair treatment, just as everybody else does, but median public sector pay is now higher than private sector pay and growing faster, and public sector workers are benefiting from the increase in life expectancy. They, too, must share in shouldering the burden of adjustment. In the interests of fairness, the Government must reopen the public sector pensions debate. We cannot be bound by a deal based on favours, not fairness.
The acid test of this package is the extent to which it promotes saving. The proposals that we have heard about today will halt the growth of means-testing, but only after another six years of expansion. It is far from clear to us that, with 30 to 45 per cent. of the pensioner population remaining within means-tested benefits, savings behaviour will change, as is required to deliver the Government’s objectives.
There is also a huge concern that the introduction of the auto-enrolled state-sponsored scheme along the lines of the national pension savings scheme, together with the abolition of contracted-out rebates, will be the death knell of many more generous occupational pension schemes. I hope that the Secretary of State can confirm that the Government are committed to a review of the regulations around occupational schemes that will support them and make them less onerous for employers to develop.
We will support the NPSS proposal, including the proposed compulsory employer contributions, because we believe that that will help to ensure that saving pays, but we need to hear the Secretary of State say very clearly that that cannot be at the expense of Britain’s economic competitiveness, and that as employers pay those contributions on behalf of their employees over time, that will be reflected in slightly lower pay increases, as remuneration is transferred from cash wages to pension contributions. That is essential to ensuring the affordability of those proposals.
Finally, I want to refer to the Secretary of State’s announcement on the financial assistance scheme. We welcome the broadening of the eligibility criteria, although there is no indication of the cost of that or of how it will be funded.
Will the Secretary of State also tell the House what he will do to ensure that the financial assistance scheme works more effectively? In its first year, it has managed to pay out less than £127,000 to fewer than 50 beneficiaries while spending more than £5 million on administration. This is a question not just of broadening the criteria or of pouring extra money in, but of reforming the system to make it work more effectively.
The White Paper has been long awaited and will be widely welcomed. Whatever our separate party political motivations, it is now our duty as elected representatives—all of us here—to do what is right for the long-term interests of Britain. In this case, that involves building that cross-party consensus, however late in the day it is to start that process. We are willing to engage in that process, if the Government are now, at last, willing to do so with us.
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