Select Committee on Work and Pensions Fourth Report


1.We applaud the Pensions Commission for its assessment of pension provision and recommend that it be regarded as a model of how to utilise expertise in the policy process. (Paragraph 15)
2.No reform of the pensions system will succeed unless it is able to transform individual savings and retirement behaviour, and employer and state contributions. For this to be achieved a political and then a public consensus must be reached. A consistent political commitment will then be required to make it stick. (Paragraph 22)
3.We understand the Secretary of State's argument that there may not be time for the flagship Pensions Bill to be subject to pre-legislative scrutiny. We regret that the timing would appear to preclude this. We ask for a firm commitment that any follow-up bill on personal accounts, where much of the detail has yet to be finalised, will be made available for pre-legislative scrutiny. (Paragraph 27)
4.We ask the Government to set out what form its periodically commissioned pension reviews will take and what their remit will be. We recommend that they be held regularly, the timings set in advance, and that they result in reports which are laid before Parliament. We also recommend that by the end of the next Parliament the Government commissions an independent review to analyse how implementation is progressing, broadly along the lines of the Pensions Commission. (Paragraph 35)
5.We recommend that the Government consider alternative ways of building additional stability into its proposed pensions reforms, to allow the new system to absorb external shocks and changes in political opinion more effectively over time. These could include predefined calculations akin to the Swedish 'balancing mechanism', to allow for changes in key variables such as longevity, rather than politically-based reviews, establishing an additional duty for the proposed personal accounts scheme trustees to analyse and comment on future proposed changes to the pensions system (from the point of view of maintaining the Government's published criteria for success over time) and enshrining any variables which may prove vulnerable to future political fiddling in primary legislation. (Paragraph 37)
6.We recommend that the Government consults on what proactive measures it could take to rebuild confidence in the pensions system and savings generally. (Paragraph 47)
7.The success of the new system of personal accounts will be critical to encouraging saving and delivering 'adequate' retirement incomes in the future for those on median earnings. This will need careful monitoring. (Paragraph 53)
8.The target group for the new system of personal accounts includes those on low to median incomes, many of whom do not currently have access to financial advice. For some people deciding to save for a pension will involve complex decisions regarding, for example, how to deal with existing financial commitments. Generic financial advice would assist people in doing this effectively (see para 453). (Paragraph 64)
9.In response to this report, the Department should outline its strategy for maximising participation in the new system of personal accounts, explain what targets it intends to set for participation in personal accounts, identify a level of participation below which it will review the policy of auto-enrolment and consider whether people should be compelled to participate, and outline contingency plans for coping with the work-load if participation is higher than expected. (Paragraph 72)
10.Small employers are more likely than large ones to offer no pension provision and there is concern among this group at the prospect of being obliged to administer and contribute to employees' pensions. The Government should outline its strategy for maximising participation among employees in small businesses. (Paragraph 79)
11.The White Paper does not provide the self-employed either with access to the State Second Pension or with an automatic enrolment process to the personal accounts system. This will make a strategy to maximise participation in personal accounts by this group critical. (Paragraph 82)
12.The Department should set targets for additional contributions above the minimum 8% and publish a strategy to deliver, and closely monitor, progress. (Paragraph 86)
13.We agree that the Government will need to monitor closely the impact of the new personal accounts scheme on existing occupational provision and guard against levelling down. This will need to be a key aspect of consideration in the regular reviews of the system and the further independent study that we have recommended (see para 35) should be instigated before the end of the next Parliament. (Paragraph 100)
14.The Committee welcomes the measures announced in the White Paper to support employers with the new requirements imposed on them by the personal accounts scheme. The Committee is concerned that employers should not encourage employees to opt out and recommends that the Government outline its proposed arrangements for monitoring and enforcing compliance with these requirements, the mechanisms for reporting breaches with compliance and the proposed penalty regime. (Paragraph 109)
15.Participating in the new personal accounts scheme should be as simple as possible. We believe that employees should be opted-in within three months of beginning employment. Care will need to be taken to ensure that arrangements for auto-enrolment are workable for firms with employees on 'non-standard' work patterns, for example, temporary contracts or more than one job. (Paragraph 117)
16.The Committee agrees with the Pensions Commission that the focus should be on keeping Annual Management Charges as low as possible in order to increase retirement incomes. The Committee notes that if charges cannot be driven towards or below 0.3% it would substantially erode the value of people's pensions. We believe that the option of fixed administrative fees should be considered but note that the impact of such a charging structure on those saving small amounts would have to be considered as part of that review. (Paragraph 122)
17.The Government has set out a list of eleven criteria against which it intends to assess the two proposed alternative delivery models. We believe that two of these are particularly important: achieving a lower level of charges and simplicity for employers and individuals. For this reason, the Committee accepts the Government's initial view that this can be achieved through the delivery model proposed by the Pensions Commission. However, we await with interest the outcome of further work to establish whether similar objectives could be achieved through a limited multi-provider model. (Paragraph 127)
18.The Government has a responsibility for the running of the macro-economy and the regulatory framework for pensions. It does not have a responsibility for investment risk in the new system of personal accounts, but Government and regulators will have an obligation to communicate the risks and benefits clearly while still encouraging participation in the scheme. In response to this report, the Government should set out how it proposes to do this. We agree with the Pensions Commission that the default fund should be a 'lifestyle-smoothing' fund with a relatively high equity weight at early ages, and a gradual shift to bonds as people approach retirement. (Paragraph 134)
19.The Committee agrees with Which? and the IMA that governance arrangements - ensuring the scheme is overseen by trustees which are independent of government and have an overriding duty of care to protect the interests of savers - will be critical to the scheme's success. Independence will also be vital to ensure that corporate governance standards are not compromised. Political interference in investment strategy and on how the voting rights of the personal accounts scheme investments are exercised would be unacceptable. (Paragraph 137)
20.The Government and Pensions Commission have rightly recognised that establishing the infrastructure for the new system of personal accounts will be a challenge. We strongly recommend that Government involvement in the development of any necessary IT system is based on a clear understanding of lessons learned from previous government IT systems failures. (Paragraph 143)
21.We recommend that the Government should set a date when the future of contracting out for DB schemes is to be reviewed. This could form part of the further independent review we recommend should be commissioned by the end of the next Parliament. (Paragraph 165)
22.While we welcome the Government's decision to set up a rolling deregulatory review of pensions regulation, we note that it will have to maintain fairness to those who have already accrued pension rights and effectiveness in terms of ensuring that DB schemes do not close because of unnecessary costs and provision. We welcome the fact that a group has been established to make recommendations to the Government, including employer and employee representatives. We ask the Government to outline the timetable for this review including interim progress updates. (Paragraph 173)
23.We recommend that the Government considers whether more needs to be done to create an overall level playing field in which risk-sharing schemes, as well DC and DB schemes, can all develop to their full potential, and encourage higher levels of contribution to whichever form of scheme is chosen. (Paragraph 181)
24.The Committee welcomes the decision to re-link the Basic State Pension to earnings but is concerned by the inconsistency between the unequivocal statement that the link will be re-established by the end of the next Parliament "in any event" and the Secretary of State's statement that affordability will come first. We ask the Government to clarify this. In our view, the link should be restored as soon as possible, and certainly no later than April 2012. (Paragraph 200)
25.The Committee agrees that the focus should be on the outcome of increasing the numbers of people entitled to a full Basic State Pension. The Government has said that it is more practical to do this, with greater effect on outcomes, through changes to the current system of contributions and credits than through the introduction of a residence test. The reduction to 30 in the number of years required for a full BSP should go some way to providing people with more confidence about what they can expect from the state in the future. We therefore welcome the Government's proposals. (Paragraph 214)
26.We welcome the Secretary of State's undertaking that the DWP will do further analysis to establish which groups reaching State Pension Age after 2025 will not be entitled to a full BSP. We recommend that the analysis covers entitlement for those reaching SPA in 2010, and includes an assessment of the amount by which people will fall short of full entitlement. (Paragraph 217)
27.The Committee accepts that it might be difficult to apply the carer's credit retrospectively, but is concerned about those with interrupted work records reaching State Pension Age between now and April 2010 who will not benefit from the proposals to increase coverage. We recommend that consideration be given to mitigating the gap in entitlement of those born before April 1950 compared with those reaching SPA under the new rules. (Paragraph 221)
28.The Committee believes that those on the Employment and Support Allowance should be credited into the State Second Pension after the 13 week assessment phase. (Paragraph 243)
29.The Committee welcomes measures in the White Paper to improve coverage of S2P for carers and the simplification that would arise in the long term from moving to flat rate accrual. However, we note that inequalities in S2P provision are set to continue and the fact that, as the Secretary of State acknowledged, S2P will continue to be a source of complexity . DWP should provide estimates of how many people it expects to receive less than £135 a week in BSP and S2P in 2030 and in 2050. (Paragraph 245)
30.Moving to a simpler, single-tier system more quickly than the Government and Pensions Commission proposed would appear to be possible, using the 'offset' method. It would, however, require difficult decisions to be made - for example, whether to abolish contracted-out rebates for Defined Benefit schemes. It also requires a judgement on priorities and the extent to which moving more quickly to a simple, single-tier flat-rate state pension should take precedence over other objectives. We recommend that the Government conducts further work on the costings and on the feasibility of the offset method. (Paragraph 267)
31.The Committee notes that there are some advantages in the model proposed by the Pension Reform Group, in that it might restore trust in pensions by establishing a guaranteed pension overseen by an independent body at arms length from Government. However, we consider that other means might be adopted to reduce the risk of parameters of the pension system being successively changed over time - for example enshrining those that are most important in primary legislation. (Paragraph 278)
32.The Committee recommends that the Government sets a date at which the feasibility of merging BSP and S2P should be examined, possibly as part of the further independent review we recommend should be commissioned by the end of the next Parliament. (Paragraph 281)
33.The Committee acknowledges the increase in pensioner incomes arising from the Pension Credit, and the contribution that this has made to reducing relative income poverty. It welcomes the commitment to continue to increase the Guarantee Credit in line with earnings beyond 2008. (Paragraph 283)
34.The Committee welcomes the fact that under the White Paper proposals the percentage of pensioners likely to be eligible for means-tested support in retirement would be expected to decline rather than increase, while the support available via the non-means tested pension will increase. The Committee notes that there is necessarily a degree of uncertainty in longer-term projections and welcomes the fact that the Government intends to produce analysis of the extent to which its proposals should reduce means-testing in the future. We recommend that this include the range of numbers of pensioner households likely to be eligible for Pension Credit in the future and the assumptions on which the figures are based.(Paragraph 289)
35.The Committee welcomes the fact that individuals with a full contributions record will be able to expect a retirement income above that provided by the Pension Credit Guarantee. In order to aid individual decision-making it would be useful if further details were provided on the types of individuals who might expect to receive a non-means-tested income below that of the Guarantee Credit. (Paragraph 293)
36.The proposals in the White Paper should reduce reliance on other means-tested benefits such as Housing Benefit and Council Tax Benefit. The Committee welcomes this, and would like the DWP to publish figures on the extent to which the proportion of pensioners eligible for any means-tested benefit would be reduced by the White Paper proposals. (Paragraph 295)
37.In order to get a fuller view of the impact of the White Paper proposals on incentives the Committee recommends that projections of the proportion of pensioners facing different withdrawal rates are published, and that the DWP commissions or carries out further research on the likely impact of the reforms on individual decisions to work and/or save. (Paragraph 300)
38.The Committee welcomes the Government's commitment to restricting the spread of means-testing over time through changes to the Savings Credit but recommends that care should be taken to avoid penalising those with modest savings who have not yet had a chance to build up a good base level of non-means-tested state pension. The mechanisms for achieving this should be placed in primary legislation to build confidence that they will be seen through. (Paragraph 305)
39.The Committee notes that recent attempts to increase Pension Credit take-up have had limited success in terms of making progress against the PSA target. The Committee concludes that achieving and maintaining Pension Credit take-up levels of 80% in the future looks challenging, and asks the Government to set out its analysis of how take-up programmes and procedures for claiming all means-tested benefits to which pensioners may be entitled could be made more effective. In this context the Committee believes that the Government should not completely ignore the Pension Commission's recommendation of considering a residency test for older pensioners, and recommend that it remain an option when considering simplification of the system in the longer term. (Paragraph 315)
40.The Committee recommends that the DWP publishes a breakdown of its spending projections into forecast spending on the Basic State Pension, the State Second Pension and means-tested elements such as the Pension Credit and Housing Benefit. These figures should be inclusive of additional spending on the State Second Pension arising from the abolition of contracted-out rebates for Defined Contribution schemes and the savings from the planned increases in the State Pension Age. The Committee also recommends that the DWP publishes separate estimates of the impact of its proposed reforms on (a) spending on working age benefits such as incapacity benefits arising from the increase in the State Pension Age; (b) Income Tax and National Insurance receipts from the increase in both taxable benefits and the State Pension Age and (c) National Insurance receipts from the abolition of contracting out for Defined Contribution schemes. (Paragraph 319)
41.We note that DWP forecasts suggest that the White Paper proposals would pass the Government's affordability test over the period to 2020-21 and recommend that, in order to clarify the tax consequences of the proposals for the period beyond 2020-21, the Government publishes updated projections for total public spending as a share of national income that take into account the proposals set out in the White Paper. (Paragraph 326)
42.The Committee believes that the Government should be explicit about how it intends to use the increased revenue arising from the abolition of contracting out for Defined Contribution schemes. In particular, if the revenue is not being used to reduce Government debt in order to part-finance the resources needed to implement the White Paper proposals over the longer-term then the Government should explain why it has deemed this course of action to be appropriate. (Paragraph 336)
43.We recommend that the Government responds to the Pensions Commission view that "pensions tax relief is costly, poorly focussed and not well understood", highlights whether it believes the relief could be targeted better, and whether some of the resources devoted to tax relief might be used to finance the increases in state spending on pensioner benefits. (Paragraph 343)
44.The Government has taken a bold step in proposing an increase in the State Pension Age (SPA), given the lack of public consensus on this point. We conclude, that the increase is justifiable. However, like many of those who gave evidence to the inquiry, we have concerns about the uncertainty of the projections on which execution of the policy is based, and we also fear that the policy will have a disproportionate effect on those in lower socio-economic groups, manual workers and those with health difficulties. We are also concerned at the potential lack of re-training packages and flexible job opportunities for those over 55. (Paragraph 366)
45.The raising of the State Pension Age must be associated with a vigorous pursuit of the health inequalities PSA target. It must not be the case that by the time the State Pension Age rises, health inequalities have further increased. In our view, the achievement of the health inequalities PSA target needs to be a condition of a rise in the SPA, at least for those rises timetabled for the 2030s and 2040s. (Paragraph 371)
46.Keeping at 65 the age at which Guarantee Credit could be claimed could mitigate some of the impact of increasing the State Pension Age. However, we note the Pensions Commission's view that it could create disincentives to work. We agree with the Government that the decision on whether or not to increase the earliest age at which individuals can qualify for the Pension Credit in line with the State Pension Age should be made nearer the time when SPA may be raised, in light of evidence on both socio-economic differences in life expectancy and differences in labour market opportunities at older ages. (Paragraph 379)
47.We conclude that the uncertainty around future life expectancy is a powerful argument for the regularly commissioned reviews described in the first section of this report. (Paragraph 384)
48.We ask the Government to set out the principal research programmes currently underway on ageing, life expectancy and healthy life expectancy, including work on differentials by social class and ethnic group, and their budgets for the next ten years. Improved co-ordination of research into ageing will also be vital to inform policy makers about future life expectancy and healthy life expectancy. We welcome the Government's commitments made recently in the House of Lords on these issues. (Paragraph 390)
49.We welcome the measures already taken by Government to provide more flexibility to people about the form in which they take their state pension. We also welcome the Government's decision to review the rules for state pension deferral with a view to, possibly, making the system more flexible. In our view this would be a sensible measure which would increase the options available to those nearing retirement. We recommend that the Government sets out its timetable for this review. (Paragraph 401)
50.Partly because of this complexity, and the importance of older workers, the Committee has decided to conduct an inquiry in the autumn into the Government's employment strategy and will include as part of that a detailed study of this aspect of labour market policy. We will therefore return to the matter later this year. (Paragraph 411)
51.We agree with the point made by the Rt Hon Frank Field MP that informed discussion, rather than "merely shuffling our prejudices" is necessary for a debate on the future level and terms of public sector pensions. We recommend that the Government commission an independent review, which includes involvement from both the private and public sectors, about the future terms, benefits and financing of these schemes. (Paragraph 418)
52.We think that there is scope to improve the format and the regularity with which the Pensions Service provides pensions forecasts and strongly believe that accurate Combined Pension Forecasting will be a key motivator for increasing retirement saving. While the Swedish orange envelope is not the complete solution to the problem, as it does not include information about private or occupational provision, it has two key advantages of being distinctive and simple and should be the starting point for reform. (Paragraph 438)
53.We were concerned to learn from a recent NAO study that some leaflets relating to pensions were not available at DWP sites and were difficult to obtain elsewhere. We welcome the assurance given to the Public Accounts Committee that from now on "key leaflets" relating to pensions will be displayed in every Jobcentre Plus outlet. (Paragraph 442)
54.We conclude that a strong case has been made for the provision of free generic financial advice to those on below median incomes and recommend that DWP, DTI and the Treasury continue to work with organisations such as Citizens Advice and the Resolution Foundation to develop a model to meet the needs of this group and make the necessary resources available. (Paragraph 453)
55.Identifying information and advice needs and developing an appropriate strategy for meeting them will be essential to ensuring the reforms are a success. This strategy must encompass a number of different elements, including pensions forecasts, DWP leaflets on the pensions system, the marketing of the new personal accounts scheme, building financial capability and giving people access to face-to-face generic advice. The crucial point is to ensure that the key messages in all these media are consistent and targeted towards key groups of undersavers. (Paragraph 454)

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