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Mr. Hutton:
I do not accept that, because the White Paper confirmed that we would continue to uprate the pension credit in line with earnings beyond 2008. That has been a welcome decision. As I shall point out again later, that decision alone will ensure that up to 500,000 pensioners will not end up falling into poverty. It is not true to say that there is nothing for today’s pensioners. These matters are addressed by my right hon. Friend the Chancellor during the course of his annual review of public spending in the Budget. In the remaining years of this Parliament, there will be plenty of
opportunity for the Government to ensure that we do not forget the needs of today’s pensioners, but the White Paper was very much about the future and long-term reform.
It is not acceptable for us to duck the long-term challenge of reform, and we have tried to avoid doing so. When we came into office, we could have restored the link between the state pension and earnings, as many people were urging us to do, but if that had been our policy, 1.5 million more pensioners would be below the poverty line today. Instead, since 1997, we have spent three times as much on pensioners as it would have cost to restore the earnings link. We have targeted the bulk of that extra investment on the poorest pensioners, which was entirely right. Compared with 1997, we are now spending more than £10 billion extra each year on British pensioners. Almost half the spending is going to the poorest third. Two million pensioners have been lifted above the poverty line and, for the first time in a generation, pensioners are less likely to be poor than any other group. It is simply not true, as some have said, that progress is not being made in tackling poverty among the retired.
In our second phase of reform, we tried to address the loss of confidence in the private pensions market, to which the Conservative amendment correctly refers. That included dealing with the pensions mis-selling scandal and the impact of the falling stock market on occupational pension schemes. In 1997, fewer 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. The Pension Protection Fund and the pensions regulator are today helping to respond to the problems experienced by those in defined benefit occupational schemes and acting to boost security for scheme members. The significantly expanded financial assistance scheme, which we announced last month, offers a new prospect of help for those who have lost the most when the pension schemes of insolvent employers have been wound up.
Mr. Chris Mullin (Sunderland, South) (Lab): Will my right hon. Friend remind the House by how much that financial assistance scheme has been expanded? Does he share my disappointment that the spokesmen for those who have been affected, with whom everyone has sympathy, sometimes fail to acknowledge some of the changes that we have made on their behalf?
Mr. Hutton: I am grateful to my hon. Friend for that intervention. We originally set aside £400 million for the financial assistance scheme. We have now set aside a further £1.9 billion to address the problem more satisfactorily. That is a generous and proper response to the plight in which many people have found themselves, with which Members on both sides of the House have great sympathy.
Miss Julie Kirkbride (Bromsgrove) (Con):
It would be helpful if the Secretary of State were to clarify the liabilities in relation to those who might be eligible for the financial assistance scheme but who fail to be so at present because of the restrictions placed on the scheme by the Government. When he and the Prime Minister
originally made an announcement about it to the House, we were told that £15 billion would have to be set aside to meet the liabilities of those people who had lost their pensions. As I understand it, the Government have re-examined the figures, and the true amount is nearer £3 billion. Can he clarify how much it would cost to pay out to those people their rightful due?
Mr. Hutton: The cash valuation is £15 billion. That is what I said in my statement, and that is still my view of the cash required to meet the liability. The net present value is around £3 billion. However, such commitments are not funded through the Government making dowries, as it were, at the beginning of the period and using that as a basis on which income can be generated to meet expenditure commitments. It is therefore important to keep in mind the cash figure, as there are many Members present who are experienced in dealing with these issues. Cash is cash, and it is always important, when presenting public spending figures, that we do not forget that.
Miss Kirkbride: Will the right hon. Gentleman give way?
It is not true, as the hon. Lady has implied, that we have somehow changed our assessment of the valuation. She is not comparing like with like. [Interruption.] Obviously, she does not like my answer, as I can hear her chuntering. I have done my best to try to educate her, however, and to correct the mistake in her question.
Mr. Hutton: With great respect to hon. Members on both sides of the House, I intend to make a little progress with my speech and then give way later. I know that there is a lot of interest in the issue of the financial assistance scheme, and I am sure that my hon. Friend the Minister for Pensions Reform will deal with some of the points that arise when he winds up.
I want to turn briefly to the recent report of the parliamentary commissioner on pensions. While I have repeatedly made it clear that we disagree with the ombudsman’s finding of maladministration by my Department, and have therefore not been able to accept her recommendations calling for compensation along the lines that she proposed, we obviously have the greatest sympathy with those who have lost some or all of their pensions. I have met people who have been affected and am acutely aware of the difficulties that they undoubtedly face. They believe that they have been robbed of their pensions, and I entirely understand that feeling of injustice.
At the time of the ombudsman’s report, we had already committed ourselves to a review of the financial assistance scheme. In March, the Prime Minister announced that we had expedited the review, and last month I announced that we had decided to extend the scheme to cover eligible people who were within 15 years of their scheme’s normal retirement age on 14 May 2004.
David Taylor (North-West Leicestershire) (Lab/Co-op): Will my right hon. Friend give way?
Mr. Hutton: I will do so a bit later, if my hon. Friend will bear with me.
In extending the financial assistance available in that way, we took proper account of the issues raised in the ombudsman’s report. The scheme will now cover some 40,000 people and—as I said in response to my hon. Friend the Member for Sunderland, South (Mr. Mullin)—it represents a substantial additional investment, taking the total cash funding from £400 million to more than £2 billion.
In making its recommendations, the Pensions Commission acknowledged the progress that we had made since 1997. Its report was designed to build on that progress. The commission made it clear that there was no immediate pensions crisis, but said that there would certainly be one if we did not act soon. It identified four principal challenges. First, there was the problem of undersaving, affecting perhaps as many as 12 million people. Secondly, by 2050 there would be 50 per cent. more pensioners than there are today. Over the same period, the ratio of people in work to those in retirement would halve. In fact, the latest research has revealed that during the past 20 years, life expectancy at the age of 65 has grown at the rate of about 15 minutes per hour.
Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD): It might feel much longer.
Mr. Hutton: I am only on page 6, so the hon. Gentleman had better make himself comfortable.
Mr. Hutton: I will not give way. I want to give the House some good news. Our life expectancy will have increased by about an hour and a half during the debate. Debate is a very healthy thing, after all.
Thirdly, as a result of developments spanning many decades, the current state pension system has become very complex. It delivers unfair outcomes, especially for women and carers. Finally, if we maintained the current indexation arrangements, the basic state pension might be worth only £35 a week by 2050 in today’s earnings terms, and more than 70 per cent. of pensioner households could be eligible for pension credit. That, of course, was never the Government’s intention.
I believe that the proposals in the White Paper address the challenges identified by the Pensions Commission. Crucially, they do so in a way that promotes personal responsibility and achieves outcomes that are fairer, simpler, affordable and sustainable. The introduction of personal accounts combined with compulsory minimum employer contributions and automatic enrolment will help to embed a new pensions savings culture in which future generations can take increasing responsibility for building their retirement savings.
Mr. John McFall (West Dunbartonshire) (Lab/Co-op): In the light of his comments about longevity, will the Secretary of State now extend his speech? I think we should look again at the statistic involving 15 minutes per hour.
As the Secretary of State will know, the Treasury Committee published a report on the national pensions saving scheme. We recommended two things: simplicity and minimum regulation. If we secure those, we can achieve what the Pensions Commission said would be 30 basis points for management charges. Can the Secretary of State assure us that the Government are considering that figure rather than, say, 0.6 per cent. or 1 per cent.? It is important, for the sake of the pot at the end of the day, that the minimum is charged.
Mr. Hutton: I congratulate my right hon. Friend on the Treasury Committee’s excellent report, which has helped our thinking greatly. He is right to say that at the heart of making personal accounts a success will be our ability to keep the costs and charges associated with them as low as possible. I recently returned from a trip to Washington, where a similar scheme has been in operation for about 20 years for federal employees. It operates not at 30 basis points, not at 20, but at five. I am not saying that we can get down to five as a starting point for personal accounts, but I think that the scale of the potential investment in personal accounts, along with automatic enrolment, present a prospect of considerable advances in scheme administration costs.
The proposals in the White Paper will address the principal challenges identified by the Pensions Commission, and that is particularly true in relation to personal accounts. As a result of the changes we propose, up to 10 million people could be saving in a new low-cost personal account. By retirement, their pension funds could be worth up to around 25 per cent. more because of the lower charges, to which my right hon. Friend alluded. It is estimated that personal accounts will generate an additional £4 billion to £5 billion of saving every year, equivalent to around 0.5 per cent. of gross domestic product.
We are consulting on the best administration model for the accounts, and particularly on whether there is value in offering consumers a choice of branded provider. It is perfectly proper for the Opposition motion to refer to that ongoing work and we will host a stakeholder summit as part of the consultation later in July, to which the main Opposition parties have been invited. We will publish a further document later this year setting out the detail of the approach that we intend to take. I hope that that approach will have the support of the spokesmen for both main Opposition parties.
Personal accounts are the key to empowering personal responsibility. We estimate that by 2050 a regular saver, who saved from age 25 into a personal account with total contributions of 8 per cent. and on median earnings, could be up to £50 a week better off than if the system continues as it is today. That is, in part, the power of compound interest. So while there will always be specific individual circumstances, such as debt or stock market performance, that will affect people’s savings, fundamentally the package of reforms in the White Paper will mean that people should be better off in retirement from having saved themselves.
However, to achieve that result and enable people to save in personal accounts with confidence, it will also be necessary to make reforms to the state pension. Our reforms to modernise the contributory principle and enable more women and carers to qualify for the state
pension will deliver much fairer outcomes. And by restoring the earnings link and simplifying the state second pension so that it gradually becomes a flat-rate weekly top-up to the basic state pension—an already existing trend and a change recommended by the Pensions Commission—we will make the state pension simpler and more generous, while reducing the spread of means-testing and providing a solid foundation on which to build a sustained expansion of private savings.
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 is £20 a week above the guaranteed income level. Without those reforms, people retiring in 2050 would receive a total contributory state pension—including the basic state pension and the state second pension—worth between £90 and £100 a week, well below the current means-tested threshold. That would not be an acceptable outcome.
The White Paper announced our commitment to continue to uprate pension credit in line with earnings, locking in our progress on pensioner poverty and preventing half a million pensioners from falling into poverty between now and 2012. But we will also be able to limit the spread of means-testing. We will make an immediate start on that 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, by 2050 only about a third of pensioners, or fewer, will be eligible for pension credit, instead of some 70 per cent. if current uprating policies continued.
I wish to make one very important point. Of the third of pensioners who will continue to be eligible for pension credit, only about 6 per cent. will receive the guarantee credit alone, which means that in the vast majority of cases, those receiving pension credit will be rewarded because they have saved for their retirement, and that has got to be the right policy. So when people criticise the level of means-testing in our proposals, they need to reflect on that very important feature.
Mrs. Iris Robinson (Strangford) (DUP): What does the Secretary of State intend to do for the many widows who, on the death of their husbands, receive only half the value of their pensions? Those women often have to scrimp and save to keep a roof over their head. What will the Government do to alleviate their difficulties?
Mr. Hutton: To some extent, pension credit will cover women in those circumstances. I am sure that my hon. Friend the Minister for Pensions Reform will explain that in more detail later, but it is through pension credit that we will target additional financial help for people in those circumstances.
Mr. Frank Field (Birkenhead) (Lab):
I hope that my right hon. Friend will ask the Minister for Pensions Reform to deal with this question too when he winds up the debate. My right hon. Friend said that he expects the full implementation of the White Paper to reduce means-testing to about one third, the level that
the Turner commission suggested would be reached under its proposed reforms. I believe that he was right a moment ago to say that the Government were not going down the citizenship pension route because of the great cost, but that means that many people will not gain a full state pension who otherwise would if we had a citizenship pension. If national insurance rights are not to be extended to that group, how is he able to say that there will be the same number of people on means-tested assistance as would be the case under the Liberal Democrat policy proposed by the Turner commission?
Mr. Hutton: Turner proposed not a citizens pension but a universal pension for those over 75. We have taken on board a number of proposals, such as the change to the savings credit fix, that will produce the result that I have suggested. I shall return in a moment to the reforms to the contributory principle, but they were not supported by Lord Turner who, as my right hon. Friend will know, favoured the introduction of a residency test that would take time to have the desired effect. Our proposals mean that women will have a fairer pensions deal by 2010 and that, in combination with our other proposals, is how we arrive at the figures that I have set out.
By saying that we will aim to restore the earnings link in 2012, subject to affordability and the fiscal position, we have made it clear that we will not risk jeopardising the public finances. We have also ensured both affordability and sustainability over the long term.
Over the period to 2020, our proposals will keep spending on pensioners as a proportion of national income broadly constant at today’s levels. They take advantage of the savings realised by the decade of state pension age equalisation and will help pensioners to share in rising national prosperity. In addition, of course, the rise in the state pension age over the long term will match increases in life expectancy. That, and the other changes that we are making, will also help to secure the financial stability and sustainability of the state pension system.
Therefore, the four main elements of the White Paper form an integrated package. They introduce auto-enrolment into a low-cost scheme of personal accounts, and provide a firm foundation for private saving by linking the state pension to earnings in the next Parliament. Moreover, we will modernise the contributory principle the better to provide for women and carers, and gradually raise the state pension age to ensure sustainability.
As I said earlier—and I intend to labour this point today—we cannot pick and choose from within the package to avoid the tough choices that we have to make. Those who want to change some elements of the proposals need to explain how they could do so without jeopardising the key outcomes of fairness, simplicity and affordability.
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