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8.46 pm
Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op): Like the majority of hon. Members who have spoken in the debate, I welcome the work of the Pensions Commission, which provides the basis of the consensus that we all know is required if we are to achieve a long-term settlement in pensions. At one point this evening, qualifications to a consensus were expressed that suggested to me that it might not be as easy to obtain as we had hoped, but I hope that after we have had the political debate, which clearly we must have, we do achieve it. We all know that the price of not reaching consensus will be not achieving the long-term settlement that we know is needed, and future generations will not thank us if we do not produce such a settlement.
I shall concentrate on some of the areas in which we have not reached consensus or in which the Government have not given detailed indications of their direction of travel. Before doing that, I wish to echo the comments made by my hon. Friend the Member for Colne Valley (Kali Mountford) during her eloquent defence of the Government’s strategy of making its initial priority tackling poverty among those pensioners with the lowest incomes through the income guarantee and the pension credit. I have frequently had the same experience as she has had of pensioners coming up to me after sometimes rather stormy meetings and saying quietly that they welcome the pension credit and recognise its benefits. I hope that, whatever proposals the Government eventually make on the future of the pensions system, they build on the success of the pension credit and ensure that we continue to use it to tackle pensioner poverty as one of our priorities.
I agree strongly with the general drift of the White Paper. Having initially prioritised steps to give more money to pensioners on the lowest incomes, it is right now to take measures to ensure that we do not end up with more and more pensioners relying to a greater and greater extent on means-tested elements of their pension. I say that for all the reasons that have been advanced this evening and that will be reinforced during the continuing debate on this issue. That is why I strongly welcome the proposal to reintroduce the link between pensions and earnings.
I would like to see that happening as soon as possible, and ideally even before 2012. I understand that there are many resources reasons why that may be unlikely to happen. However, I believe that it would be wrong to delay the reintroduction of that link to any later date. Earlier, we had a somewhat convoluted excursion into jam- making, appropriately enough by the hon. Member for Angus (Mr. Weir). I will not pursue him down that avenue. In my view, the position set out in the White
Paper on the date for the reintroduction of the link with earnings is one of its weakest points. Apart from anything else, it is politically unsustainable.
I ask my hon. Friend the Minister for Pensions Reform to consider the position that the Labour party would be in come the next general election if we were to say, “We will reintroduce the earnings link but, then again, we might not.” That does not sound to me to be a particularly attractive position in which to enter the next general election. I do not think that it would stand up to the scrutiny of an election campaign. I think that the Government ultimately would be forced to come forward with a date. It would be better to take the initiative rather than to leave the matter to the vagaries of a political debate prior to a general election.
I shall concentrate my remarks on auto-enrolment, which is at the heart of the reform proposals. There is clearly a tension in auto-enrolment. The more that we make opt-out harder, the less we have crafted a system where workers are genuinely making their own choices about future pensions and the more that we are turning the process into a quasi-compulsory system. If, perhaps by the awkwardness of opting out, we move towards something that is becoming almost quasi-compulsory, we will lose the advantages of having a system that is not increasing tax or national insurance contributions. We will be reducing the incentive of workers to take decisions about their financial futures into their own hands. If we make opt-out too difficult, people will not be in a position to make decisions about their own future with full financial responsibility. If we go along that road, we will almost be introducing SERPS by another name. Clearly, that would cause problems.
Assuming that we want to allow some meaning to the concept of opt-out—I think that that is implicit in the proposals from the commission and from the White Paper—it seems to me that a positive encouragement for opting in and discouraging opting out is to be achieved, above all, by a change in the culture of personal finance and a change in the culture of saving, so we bring about a situation where making a contribution to personal pensions of 8 per cent. across the relevant band is not the ceiling of the contributions made, but is more often than not the floor of such a contribution. People and employers will be encouraged and will want to top up contributions through the NPSS or whatever scheme is eventually introduced to operate personal allowances.
If we do not achieve that cultural shift, we will run a real risk of some occupational schemes, in which contributions are currently above the levels proposed in the White Paper, being levelled down so that pension provision is worse than at present. If the Minister has time when he replies, I shall be interested to know how he might respond to the difficulty that is presented by a possible levelling down in some existing occupational pension schemes.
There is also the risk, to which some hon. Members have referred, of a large-scale opt-out by individual workers. If we do not get the package right, there may be cases where it might be economically rational for an individual to opt out of the scheme. We must ensure that we get the package right and that we do not see such opting out. I accept the point made by many Labour Members that there is a danger that some
employers, having made an unscrupulous analysis of their short-term interests, will encourage employees to opt out. We cannot ignore that risk, and the Minister must address it carefully. We could restrict the period for which employees opt out, so that opting-out is not a process that lasts for ever but can be reviewed after a few years.
In any event, we need a cultural shift in attitudes both to saving and to saving for retirement. It is essential that we conduct a major UK-wide exercise before a scheme is brought into effect, whether or not it is the national pension savings scheme, so that we can make the case for the new auto-enrolment scheme to employees in the workplace and, indeed, encourage workers and employers to contribute more to the personal pension. If we are to achieve that objective, employees must have access to financial advice services that they can trust, and in which they are right to place their trust. They must be able to obtain advice that, bluntly, they do not have to pay for up front, otherwise many people who most need it will be unable obtain it.
I will not go into detail about the way in which that advice and wider financial education can be provided, but we must build on existing networks and agencies, including Citizens Advice, local money advice services, and independent advice centres. Trade unions, too, can play an important role. We must be very wary of setting up a plethora of new organisations that seek to offer advice, as that would increase the risk that individual workers would be put off by the complexity of choice. Moreover, some organisations that purport to offer independent and impartial financial advice but, in fact do nothing of the sort, may take advantage of people who are not as informed as they might be.
If employees make bad investment choices when they decide how to direct the savings accumulated in their personal allowances, it is likely that confidence in auto-enrolment will take a tumble, and a future Government will face a choice between a fall in pensioner incomes and the need to make auto-enrolment compulsory with no opt-out. The Government must look at the way in which they provide pensions information and advice. There has been a strong emphasis on encouraging the take-up of pension credit, which is all to the good, as the scheme has been a great success, but take-up could be further improved. It is sometimes difficult for people who most need financial advice and information about financial services to obtain it. The Pension Service relies heavily on the telephone and its website to provide information. In the early years after the adoption of a new pensions settlement, we must provide face-to-face advice so that people do not have to rely on call centres and websites for information and advice.
Finally, as the Pensions Commission and many commentators have pointed out, the implications of pensions reform extend far beyond pensions policy. If we are to develop a policy based on the reasonable expectation that people will live and work longer, there is a huge agenda to address. We must encourage and facilitate the employment of older workers, and introduce more flexible working, to cite just a couple of issues. As has already been mentioned in the debate, it is workers on low incomes, because of illness or disability, or sometimes because of their employees’ policies, who will be in danger of suffering badly, so there have to be measures to protect the least well-off, and of course to tackle the underlying health inequalities.
I know that the Minister realises that, as do many other hon. Members here today on both sides of the House, but it is worth emphasising how those wider issues have to be kept in mind as we decide how to draw up a new settlement for pensions. If we do not do that, we will end up with a settlement that makes the real winners in retirement those who have already been the financial winners in their working life.
9 pm
Mr. Brooks Newmark (Braintree) (Con): I should like to address three concerns that arise from the Government’s proposal for pension reform. Reform is, as we are all acutely aware, urgently needed in order to jolt us out of what, as Lord Turner told the Treasury Committee, has become “a collective fool’s paradise”.
None the less, my first concern is that the Government are pursuing what appears to be an attempt to reinvent the wheel by suggesting that they are merely reintroducing the contributory principle. That particular principle would not need to be reinvented if the Government had first not undermined it.
My second concern is the Government’s caveat on the uprating of the basic state pension being
“subject to affordability and the fiscal position.”
That statement is itself characteristically nebulous. But more importantly, Lord Turner’s remit and the subsequent White Paper also failed to include a review of public sector pensions, where affordability and long-term fiscal position are most uncertain.
Lastly, I want to address the danger posed by any reform that does not tackle head-on the purpose and scope of means-testing within the pensions system. There is a danger that a lack of fundamental reform of the scope of means-testing will undermine public confidence in the benefit of the proposed savings scheme, and consequently undermine the purpose of the reform.
First, I come to the contributory principle. The pensions White Paper declares:
“We are creating a system which establishes a new contributory principle for state pensions.”
The fact that part of the statement appears in bold type does not unfortunately mean that it is boldly going where no one has gone before. The rhetoric is over 60 years old and any new substance is somewhat lacking. National insurance contributions were originally intended to be hypothecated—or reserved—for certain purposes. Sixty years later, what was envisioned as a national insurance fund is more hypothetical than hypothecated. The Government’s return to the something for something rhetoric of the contributory principle is disingenuous, because uprating the basic state pension apparently remains dependent on future affordability. Those who are contributing today, and may have done so for their whole lives, will still depend for their retirement income on the Chancellor’s assessment of the fiscal position over the next few years.
I come now to my second concern—that the Pensions Commission remit did nothing to address the mounting public sector pension deficit. If we are to be confident that the basic state pension will in fact be relinked with earnings, we must be reassured about the Chancellor’s assumption regarding affordability. But the Treasury has consistently understated the extent of public sector
pension liabilities. According to the consultancy firm Watson Wyatt, Britain’s underfunded public sector pension liabilities reached a total of nearly £1 trillion in March 2006. That is a one with 12 noughts after it. That is more than 80 per cent. higher than the most recent Government estimate and amounts to a whopping £40,000 per household in the UK.
Stephen Yeo, a senior consultant at Watson Wyatt, has described the Government as
“taking a rosy view of the cost of public sector pensions”.
The White Paper does nothing to address the cost of public sector pensions, which is a significant omission. Without action to address the long-term affordability of public sector pensions, it is difficult to have confidence in the Chancellor’s assessment of affordability and the fiscal position with regard to the basic state pension, which is to be re-linked to earnings.
Perhaps most significantly of all, I must turn to the seemingly ubiquitous burden of means-testing, which is certainly not a new concern. In 1942, Beveridge noted
“the strength of popular objection to any kind of means test”
before warning that “discouraging thrift” would be the inevitable result of a
“permanent system of pensions subject to means test.”
Yet Beveridge went even further in 1942 than the Government are prepared to go in 2006. He warned:
“The State in organising security should not stifle incentive, opportunity or responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.”
To propose a personal pension savings account without a radical reappraisal of the use of means-testing will continue to stifle any incentive to save.
The Treasury Committee heard time and again in the evidence provided in the course of its inquiry into the national pension savings scheme that the existence of means-testing would be one of the most important factors influencing the success of the proposed scheme. Lord Turner was adamant:
“A way forward has to be found which achieves affordable and sustainable reform of state pensions which makes sure that means testing does not grow in the way that it would otherwise grow and ideally reduces in extent.”
Yet it is still not clear at all that the Government are pulling in the same direction on the issue of means-testing. Worryingly, Lord Turner also said:
“We have not had detailed discussions with the Treasury over the course of the last few weeks which would clarify exactly where they stand on the issue of the spread of means testing.”
The Work and Pensions Committee received evidence from the Pensions Policy Institute stating that, even after the reforms proposed by the Pensions Commission, 45 per cent. of pensioners—not the 33 per cent. claimed by the Government—would still be eligible for means-tested benefit in 2050. The Chancellor was quite clear during his evidence to the Treasury Select Committee earlier this year that
“the long-term solution for pensions is that people are in a position to make their private savings over the course of their lives.”
His commitment to ending the means-testing of pensioners is much less clear, yet it is on that commitment that the success of the proposed reforms hangs.
It is not just important to encourage people to save; pensioners must also be freed from the indignity of means-tested benefits. Earlier today, I met two of my constituents, Phyllis Webb and Barbara Shillabeer, who are members of the Braintree pensioner action group. I want to be able to go back to Braintree to tell them unequivocally that the basic state pension will, in future, provide them with an income. Just as importantly, I do not want to have to tell my constituents that there is no point in saving because it will not leave them any better off when they come to retire.
Sixty years ago, Beveridge’s recommendation for the introduction of national insurance contributions noted:
“A revolutionary moment in the world’s history is a time for revolutions, not for patching.”
Perhaps we live in less revolutionary times but the lesson remains valid. If we wish to achieve a lasting pensions settlement, we must not deal in half-measures. Uprating the basic state pension and introducing personal pensions savings accounts must go hand in hand with a decline in means-testing to give people the confidence to save for their retirement.
Perhaps most important, the Government must take steps to account for their unfunded public sector pension liabilities to encourage greater public confidence in the future affordability of all state pension provision. After all, if the Government cannot properly account for their pension liabilities, they cannot hide behind the caveat that an increase in the basic state pension can come about only
“subject to affordability and the fiscal position.”
9.10 pm
Ms Diana R. Johnson (Kingston upon Hull, North) (Lab): I want to consider financial literacy, especially the financial education that our young people receive and how they make decisions about planning for their financial futures. I also want to discuss women and carers, and make some small points about the proposed retirement age in the White Paper and whether we need a body to oversee pensions in future.
Pensions is not a sexy subject. If we talk to young people about pensions, we see their eyes glaze over, as my hon. Friend the Member for Colne Valley (Kali Mountford) said. I remember finding my pension statements difficult to fathom. They are complicated and dressed up in language that is not easily accessible. When we are young and should start to pay towards a pension, there are other pressures on money and we think that we will never get old. That struck me forcefully because it is my 40th birthday next month. At such a time, one suddenly starts to get interested in pensions. Often, people start to take the matter seriously at an age when they are told that the contributions that they must make are fairly hefty.
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