For example, there are those who favour a residency base for future accruals, as proposed by the Pensions Commission. However, that would offer no immediate help to the key group of women aged 45 and over who have poor contribution records and clearly no time to put that right. Changing the current rules from 2010 to
reduce the number of years needed to qualify for the basic state pension to 30, and improving the system of credits the better to reflect the different ways that people contribute to society, will result in an immediate and very significant increase in the proportion of women reaching state pension age with a full basic state pension.
The residency approach, like the current system, means that only 50 per cent. of women would get a full basic state pension in 2010, whereas our changes will immediately increase that figure to 70 per cent. By 2020, up to 270,000 more women every year will receive a full basic state pensionapproximately three times the number that would be achieved under a residency-based approach.
Of course, those who argue for a residency-based citizens pensionwhich I believe remains the policy favoured by the Liberal Democrats and the nationalist parties in this Housealso have to contend with issues of simplicity and affordability. As the Pensions Commission highlighted, it depends on the model chosen: there would either be an immediate and unaffordable increase in costs, peaking at £60 billion around 2040, orif a transitory approach were adopteda smaller increase in costs would be coupled with a dramatic and unacceptable increase in complexity during what would have to be a lengthy transition period. Hardly surprising, therefore, that the Pensions Commission rejected the notion of a citizens pension.
Some argue that we should introduce the earnings link sooner or delay the implementation of increases to the state pension age until 2030. In doing so, they, too, need to set out clearly what the public expenditure implications would be and how that affects the current crucial question of affordability. For example, under the White Paper, increases to the state pension age will eventually reduce the cost of the package by £30 billion a year, but delaying the timetable for the implementation of each increase in the state pension age by five years would by 2050 increase the cost of the reform package by £5 billion every year. Those who argue for such changes must first argue for how they would find the additional money that would make them affordable and still maintain our progress in tackling poverty and delivering fairer, simpler outcomes.
Some Opposition Members have expressed concern about the plans to accelerate the flat-rating of the state second pension and, in particular, the impact on middle-income earners of the withdrawal of earnings relation. The Pensions Commission explicitly recommended that the earnings-related element should be withdrawn. We accept that recommendation, but the savings will be reinvested in the basic state pension, ensuring that no one loses out, so it is nonsense to talk of hidden tax increases. There are none. Indeed, the effect of flat-rating for even the highest earners is more than made up by the earnings uprating of the basic state pension. For example, a high earner who worked from age 25 would get £102 basic state pension and state second pension under the current scheme in 2053, in earnings terms. Under our reforms they will get £140. A median earner would get £100 under the current system and £139 with our reforms. Yes, they lose £1 of state second pension because of flat-rating, but they gain £40 of additional basic state pension. Most people would not describe that as a bad deal at all.
Kali Mountford (Colne Valley) (Lab): I am grateful to my right hon. Friend for his explanations of the various schemes and the balance between them. I am sure he agrees, however, that fairness must include what happens to carers, so can he describe how he intends to help them, to ensure that the contributions they lose while they are caring are added to their pension when they retire?
Mr. Hutton: I will describe the changes briefly. As my hon. Friend knows, we shall consult on the detail, but in broad terms we intend to introduce a new credit in the state pension system for those who have caring responsibilities of more than 20 hours of week. At present, credits can be accrued only if a person is in receipt of carers allowance, which involves a minimum caring responsibility of 35 hours a week, so tens of thousands of carers will acquire new credits in relation to the state pension as a result of the changes that we propose to introduce through the White Paper and on which we hope to legislate in the next Session of Parliament. That is a significant reform, which many carers organisations have been pressing on the Government for some time.
Taken as a package, the reforms can provide a framework for pensions that can last for generations to comea future in which we give people the tools to take personal responsibility for building their retirement savings with confidence; and in which we deliver a system that is affordable and sustainable for the long term. That is the opportunity before the House today. In supporting our motion, the House can signal its support for the direction of travel set out in the White Paper, as I very much hope that it will. In doing so, it will help us all take a significant step towards a lasting pensions settlement, with a sustainable, affordable and trusted system that will meet the needs of those in retirement both now and well into the future.
, recognises the importance of consensus in ensuring long-term, affordable and sustainable pension reform; and therefore welcomes the commitment of all major parties in the House to engage in the process of consensus building, while acknowledging that a number of concerns remain to be addressed in the course of that process, including the impact of the projected future level of means-testing on savings behaviour, the design of an auto-enrolled savings scheme, the need to strengthen existing occupational pension provision to reduce the risk of levelling down on the introduction of personal accounts and the need to restore public confidence in the fairness and security of the pensions system.
I welcome the opportunity to hold this debate today. The amendment seeks to reinforce the message of support for the key principles and to underline our commitment to the consensus-building process, but also, as the Secretary of State has acknowledged, to place on the record that there are a number of key issues that need to be addressed if a sustainable, affordable and lasting pension reform is to be introduced. We are clear that such a reform requires
cross-party political consensus. The underlying purpose of the reforms is to create a stable platform of state provision upon which people can plan their own private saving. It is clear to us that that places a heavy burden on the Opposition in rising to the challenge of forming a genuine cross-party consensus. However, it also places a heavy burden on the Government, because a lasting consensus is one built around a sustainable proposition. It has to be a hard-edged consensus, not a woolly one. The Secretary of State will know that the history of recent pensions policy warns us of the fragility of any consensus built around a flawed proposition.
In reaching for that consensus, it is essential that we analyse the details of the White Paper rigorously, and that we are prepared to challenge, without fear of ridicule by the Secretary of State, the areas where it is as yet unclear whether the proposals before us will deliver the objectives that we all share. There must also be a clear understanding that consensus is a two-way street. There is an obligation on the Government to listen to the concerns of the Opposition and others outside the House and to engage constructively in addressing them, working with us to explore alternative solutions where problems are identified.
I will be frank with the Secretary of State: we were disappointed by the level of engagement between the Opposition and the Government before the publication of the White Paper. It was effectively a fait accompli. However, we are pleased by the clear signals that the Secretary of State has sent that he is now ready to engage. We are certainly ready to do so. We hope that the willingness for dialogue will extend to dialogue about the drafting of the Bill. Our clear preference is to spend the summer talking about the drafting of the more contentious areas of the Bill, rather than to spend the autumn tabling amendments to what the Government have presented.
Our starting point for this exercise is a bout of realisma recognition of the looming crisis in pensions provision. Increased longevity, lower investment returns and changing demographics have all created a situation that has to be addressed, but so too has the Chancellors annual tax raid on pension funds, which was most recently estimated to cost about £7 billion a yearequivalent to about £175 billion wiped off capital value. Nine million people are not saving enough for an adequate retirement income. Half of all pensioners are eligible for means-tested benefits, and that figure is projected to grow to at least 75 per cent. by 2050. Some 1.6 million of those pensioners800,000 of them among the poorest pensionersare failing to claim what are supposed to be very well-targeted benefits. To cap that, 60,000 pension schemes, with 1 million members, have started wind-up since 1997.
As a response to that catalogue, the key elements of the White Paper, all of which we can enthusiastically support, include, as the Secretary of State said, the restoration of the earnings link, the raising of the basic state pension age over time, changes to the contribution regime to address the particular problems of poverty among women pensioners, and further encouragement of workplace saving. That has to mean workplace saving in existing occupational pension schemes, as well as through the tailoring of new arrangements specifically targeted at median and below median earners.
If we are to build a robust consensus around those key principles, it must be based on knowledge and understanding, not on ignorance. The Secretary of State is right to say that the package has to be affordable. That means that the consensus that we build, both here and among the wider public, has to be based on parts of the package that deliver savings, as well as parts of the package that increase expenditure. A real consensus must be based around tough decisions as well as easy ones. The financing of the package must be transparent and openly debated.
Mr. Redwood: My hon. Friend makes the extremely important point that whatever people today think about consensuswe would all like to find a consensusany variant of the scheme will work only if it proves to be affordable in the medium term. Is not the worrying thing about the scheme the fact that it is sketchy about how affordable it will be in the next decade, when compound arithmetic starts to work against both the Government and the taxpayer, as well as the people who are asked to contribute?
Mr. Hammond: My right hon. Friend takes me almost exactly on to my next point: there is no transparency in the financial data that support the White Paper. The key table on page 24 of the executive summary counts as a cost of reform the continued indexing of guaranteed credit to earnings, even though the Pensions Commission and everyone else who has examined the matter has always assumed that in their baseline case, because to do otherwise would, by definition, increase the percentage of pensioners in poverty. The £4 billion that the Government will save from 2010 by abolishing contracted-out rebates is not included in the table, although the costs associated with ending contracting out are.
The headlines about the White Paper painted a rather simple proposition: work longer for an earnings-linked basic state pension. There has been virtually no public debate about changes to the state second pension and the savings credit, and the withdrawal of adult dependency increases. Together, those changes will save tens of billions of pounds for the Treasury. That does not mean that they are wrong, but if public support for the package is to be durable, people must understand how all its aspects will affect them. Our message to the Government is clear: if we are to build a consensus, it must be a sustainable national consensus, not one formed behind closed doors at Westminster. It falls to the Opposition, in our role of holding the Executive to account, to ensure that all consequences of the package are understood by those who will be affected by them. I will make no apology for drawing public attention to aspects of the White Paper that will deliver savings for the Exchequer, but about which there has so far been little public debate.
Mr. Hutton: I genuinely did not intend to interrupt the hon. Gentlemans speech, but let me point out two things to him. On the state second pension, the argument in favour of moving to flat rating is clearly set out in the Turner reportwe have accepted those recommendationsso nothing is being done in a hidden or covert way. The argument is clear and profound.
Let me ensure that the hon. Gentleman understands the situation regarding ADIs. The proposal represents a way of funding what is effectively a redistribution in the state pension system and tackling the problem to which the hon. Member for Strangford (Mrs. Robinson) referred, thus ensuring that more women have a direct entitlement to a full basic state pension. The money is being not withdrawn from the pension system, but used in a more intelligent way that reflects modern family relationships and modern life. I hope that the hon. Gentleman will be able to support the proposal. We are not doing anything secretly or covertly, because everything is out in the open. If I had the reference for the pages of the White Paper that explain all that, he could find the detail there.
Mr. Hammond: The Secretary of State is right to say that everything is set out, say on page 299 of the Turner report, or in annexe 6 of the regulatory impact assessment. However, if he asks people on any high street in Britain what they understand about the Governments White Paper on pensions reform, they will tell himif they understand it at allthat it is about reintroducing the earnings link in exchange for raising the basic state pension age. I am saying that a sustainable consensus must be based on the dissemination of information, so I make no apology for trying to get the debate going in the public sphere. That means not that the changes that the Secretary of State wants to make are wrong, but that they must be debated and understood.
Sandra Osborne (Ayr, Carrick and Cumnock) (Lab): The hon. Gentleman makes a welcome commitment to trying to reach consensus on the way forward. We all accept that it is perfectly valid for him to wish to question aspects of the Governments proposals. However, if he decides to reject certain proposals at the end of the day, will he come up with viable alternatives that also promote affordability, with which he says he agrees?
Mr. Hammond: I am grateful to the hon. Lady for her intervention, and the Secretary of State is absolutely right, in that it is not open to anybody to reject all the elements of the package that save money for the Exchequer and then say that they would like to have all the elements that cost money. This has got to be affordable; we are fully signed up to that. The issue is about transparency and getting the debate going.
I reiterate to the Secretary of State the point that the hon. Member for Yeovil (Mr. Laws) made. If we are to have a consensus-building process, it must involve our being able to ask questions to probe the detailed arrangements being put forward as part of this package. The Secretary of State cannot say to us that no cherry-picking means no right to question the route that has been chosen to deliver the objectives. We must be able to look in a grown-up way at how the arrangements work.
My first point, then, is that transparency and openness in respect of the assumptions that lie behind the package and its financing are prerequisites for a durable consensus. But the other key concerns that need to be addressed, and on which I shall focus, are the impact of means-testing, the design of a workplace
saving scheme and its interaction with existing occupational pension schemes, the certainty of the timetable for implementation, and pubic perceptions of the fairness and security of the pension system.
The key purpose of the package is the promotion of saving among not just the 5.2 million people who are not saving at all, but the rest of the population, many of whom are not saving sufficiently for a decent income in retirement. The pension credit has created an expectation of growing levels of means-testing, with consequent effects on savings behaviour that we now collectively need to assess and address. We welcome the Secretary of States confirmation that it was never intended that means-testing should reach the 75 or 80 per cent. level predicted by Turner for 2050, but there remain major concerns about its impact on the proposed package.
The Government themselves say that there will be about 30 per cent. means-testing in the system by 2050. Other expertsnotably the Pensions Policy Institutedisagree with the baseline assessment and therefore arrive at a higher level; they suggest that as much as 45 per cent. of the pensioner population could be means-tested by 2050. Whether the proportion is 30 or 45 per cent., a serious question is being asked by expert observers: will means-testing at these levels, institutionalised as a permanent feature of the system, undermine the packages key savings-promoting objective? We must look at what impact this level of means-testing will have on the savings behaviour oftypically, but not alwayspeople on the lowest incomes. They are most likely to have interrupted work patterns throughout their lives, and are thus most likely to be entitled to means-tested benefits in retirement.
The fact is that we simply do not know what the answer iswe are in what I suggest is uncharted territory. This is probably the first time that we have had to consider behavioural responses to a long-term stable environment of moderately generous means-tested benefits. Historically, such benefits have been used as a safety net to catch a small number of people who have fallen through the system. Now, we are looking at a system that could be extensive enough to impact on peoples lifetime savings patterns. The irony is that we are having to grapple with the behavioural consequences of the very consensus that we are trying to build, which will give people the certainty that they can plan on the basis of those means-tested benefits being available to them in retirement.
This will be a key area of the debate, and the Government can help us in several ways: by giving a commitment to publishing the full range of outcomes of their modelling of the extent of future pension credit eligibility; by commissioning more work on the impact on savings behaviour of different levels of means-tested benefit eligibility; and by extrapolating beyond 2050 the projected outcomes for paid individuals.
The Secretary of State said that 2050 was about the limit of his predictive power, but I put the following point to him. In the case of the low-paid earner used in the regulatory impact assessment, the assumption is that someone will have contributed for 52 years of continuous work. A person who is 16 in 2012, when the scheme starts, and who contributes for 52 years will be looking for an outcome in 2064. It is therefore essential that we project further forward so that people in that
position can understand the likely scenario facing them. We also need to see a range of real world outcomes. The truth is that most people will not work for 52 years in unbroken employment. Many people who will be on the margins of the savings decisions will have broken work records, and will need to know whether saving will pay for them.
It is legitimate to rely on auto-enrolment only if we are sure that we are auto-enrolling people into a scheme that leaves them better off by saving. The Conservatives would have serious misgivings about an auto-enrolment scheme that brought people into a savings system that would leave them less well off, or no better off, than they would have been had they not saved. We need to be confident that it is safe to recommend saving for the overwhelming majority of people, including those whose employment record is discontinuous. More will have to be done to demonstrate that that will be the case.
Much of the public comment on the White Paper has focused on the changes to the state pension arrangements and the introduction of the auto-enrolled workplace savings scheme, but until very recently Britain had a first-class workplace pensions savings system. Changes in the environment, which I have already described, have greatly reduced that provision, and most commentators now accept that defined benefit schemes in the private sector are on the way to extinction; however, high-quality defined contribution schemes remain, with employer contributions well in excess of the 3 per cent. compulsory level proposed for the national pensions savings scheme. As the Secretary of State knows, there is a real risk that the introduction of the NPSS, or a similar scheme, will act as a catalyst not only of the final demise of defined benefit schemes, but of a downgrading of employer contributions to existing defined contribution schemes.
The White Paper contains welcome provisions for a review of the regulatory environment surrounding occupational pension schemes. It is vital that that work be done soon and that the outputs from it are implemented well in advance of the introduction of an auto-enrolled scheme, because history will judge our putative consensus harshly if what we deliver is a pyrrhic victory, with a national pensions savings scheme that results in the downgrading of many peoples employer pension contributions from higher levels to 3 per cent.
Mr. Laws: The hon. Gentleman raises a serious point. Given his partys general support in principle for the NPSS and for personal accounts, what policy solutions does he envisage that might deal with the problem of employer contributions to occupational pensions being downgraded to a very low level?
Mr. Hammond: The policy solution is to create a more attractive regime for occupational pension schemes so that employers can see that such a scheme is to their benefitthat a more generous occupational pension arrangement works for them as a recruitment and retention tool. It would be helpful if, when he winds up, the Minister of State made clear the scope of the review of the regulatory environment. Some of his recent statements on the record have been slightly ambiguous, and it would be helpful to know how wide he expects the review to go.