Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 132 - 139)



  Q132  Chairman: Good morning and welcome, particularly Frank, you have spent more time in these chairs than you have sat down there, but it is good to have you with us and we recognise you have something different to say. If I can just kick off, do you think the Pensions Commission got things broadly right in terms of the proposed framework of reform?

  Mr Field: It got it right in one sense, Chairman, in that it emphasised that if we are going to help the poorest pensioners in this country and lay the basis for security for other reforms as well, then we need to get reform of the basic state pension right; there is no way that we are going to deliver decent pensions to the poorest pensioners by emphasising the role that the National Pension Savings Scheme might play. Where they have it wrong is that they are proposing that there should be a tax-financed reform of the basic state pension, and if we look at the record of tax-financed reforms, they do not last. Indeed, if the Prime Minister went down the route of implementing fully the Turner proposals he would be telling the House of Commons and the country that in fact here is a reform that will last, but by the way boys and girls I am actually winding up the state second pension which I introduced only four years previously. It hardly lays down the basis of confidence that the next set of tax-financed reforms will work and that is why the Pensions Reform Group has emphasised the importance of an investment-led reform, making the very most of this unique opportunity the Chancellor has given us by decoupling how we help the poorest pensioners, which the Chancellor has done through Pension Credit, and separately thinking of long-term reforms to the basic state pension which take decades to come into effect.

  Mr Reed: Our view on the Turner proposals would be that the Pensions Commission report is really good in terms of identifying the basic problems with the current system as it stands—over-complexity, lack of private pension saving amongst a huge proportion of the population and a growing trend towards means-testing, with all the problems that entails. We think that Turner gets things broadly right in one sense, in terms of the National Pension Savings Scheme, but on the more important question of how to amend the state pension system to secure getting as many people as possible out of the means test and reaching a sustainable settlement, we think it leaves too much of the current complexity in place and we would have preferred to see reforms to the flat rate basic state pension, a big up-rating to the pension credit guarantee level as soon as possible, and then a commitment to up-rate with earnings. I do not agree with Frank that that would be an unsustainable settlement, it actually would be a fairly straightforward and sustainable settlement.

  Q133  Chairman: We had Nick Barr from LSE giving evidence last week and he alluded to the equalisation of state pension age as having been foretold for about 20 years, as if it is going to happen without any particular difficulty or any comment. Could the same be said about any proposed increase in the basic state retirement age from 65 up to whatever, if it is announced 20 or 30 years in advance? Does that then become a non-issue or do you think it would still be controversial?

  Mr Reed: The fact that Turner says that increases in the state pension age have to be announced at least 15 years in advance is a good thing in that it means that you are not saying to somebody who is aged, say, 55 or 60, "Excuse me, you thought you were going to be able to retire at 65, but in fact it is 66 or 67"; you are not putting them in a position that close to retirement where they have to make a big rethink about their state pension eligibility. There is a broad consensus that because of increases in longevity, the state pension system has now got to a point where it is financing people for far longer periods of retirement than the original designers of the system in the 1940s would have thought possible or, indeed, desirable. We do not exactly know what life expectancy will be, say, 40 or 50 years into the future, but in terms of creating a system which keeps the ratio between years of working life and years of retirement roughly stable, the implication of that is obviously that the state pension age is going to need to rise. It can rise very gradually, but it is going to need to rise by, say, one year every 20 years or one year every 15 years or so. That bit of the Turner analysis is correct and basically unproblematic, although selling it to the population does create certain issues.

  Mr Field: Chairman, I think there is a real difference between a "getting away with it" approach when you are dealing with women and when you are dealing with the whole host population which includes men. I do not think it would have been so easy to raise the retirement age by five years if we had had men in that group, and it is one of the factors of our politics that the interests of women are still less effectively represented than those of men. I do not think, therefore, that it is natural to assume that because the Government got away with it for women they will get away with it when they actually put men into that equation. Secondly, there is clearly a case for over time raising the retirement age, given that people are living longer. After all, when Lloyd George introduced a means-tested pension for the over 70s life expectancy was 48 years and it was easier then, Chairman. I do think, representing a seat with large numbers of people who have worked hard manually, we do have to accept that many, women are literally burnt out long before the age of 65 now and, therefore, this reform of raising the state retirement pension must necessarily be considered with the Government's reform of incapacity benefit; if we are going to successfully raise the retirement age, we must have a benefit which people who cannot continue working know that they can draw and they are not penalised.

  Q134  Chairman: The Secretary of State has been fairly blunt on this issue—the need, as he sees it, to raise the retirement age possibly from 2020—and on that basis one assumes that something will be in the forthcoming White Paper. In the light of that is the Government's policy on public sector pensions still sustainable, of maintaining a retirement age of 60 for all current members of the scheme. Do you think that is still sustainable in the light of the broad architecture?

  Mr Field: No, I do not, and I do think one of the areas the Government will have to attend to after it has done its White Paper is to seriously begin a review about public sector pensions and their financing, the different ways that they are financed and the impact on taxation and council taxation as well. I also think that in that review our own pensions, as part of the public sector, have to be put into the equation, and one of the questions voters will want answered is that certainly in the past the public sector rightly got what was thought to be more generous pensions because they had a worse pay deal. Is that currently true, has relative pay in the public sector caught up or in some instances advanced over the private sector? If that is so then it seems reasonable one looks at the other side of the equation as well. Given this is an area where people's prejudices can be paraded about quite easily, it would be very, very useful for the Government to start collecting the data so that we can have an informed discussion rather than merely shuffling our prejudices.

  Q135  Greg Mulholland: Turning to means-testing, the Pensions Commission estimates that around a third of pensioners would still be entitled to pension credit in 2050 once its proposals were implemented, but that this would only be across a "small element of their pension income." How worried should we be about this?

  Mr Reed: I would say that ideally we would want as few people on the means-test for pension credit as possible, and I do not think the Turner proposals go far enough in letting that happen. IPPR's preferred approach simplifies what Turner is trying to do; it is slightly more costly than the Turner recommendations: we recommend raising the basic state pension to the pension credit guarantee level. This means that anybody who has the necessary contribution record will be taken off the means test entirely; they may still have to be means-tested for housing benefit and council tax benefit, but that main part of the means test they will be exempt from entirely. 30% of the pensioner problem is still going to be quite a lot of pensioners that far out and the sheer hassle of pensioners having to fill in a means-test form of several pages and the sheer rigmarole that goes along with that I do not think is very dignifying for a lot of pensioners. The current expenditure information from DWP shows that only about 65% of expenditure out of the total eligible expenditure is actually taken up, so there is a lot not being taken up at the moment. Pension credit has therefore only been partially successful as it stands in eradicating pensioner poverty and I think we can do better by using the basic state pension directly at that higher level.

  Mr Field: I do not accept the point, Chairman, about pension credit; it has been much more successful and I would be very surprised if members of the Committee in their own constituency work have found many of their constituents eligible for pension credit for any length of time who are not claiming. There may be a real problem with very frail, very elderly pensioners whom we have less chance of meeting, and they also have less contact with the outside world, but I think pensioners rightly think that their savings are no business of Government so that when they fill in the family resources survey they do not actually complete that part of the data. It looks therefore as though many more pensioners are eligible for pension credit than they are, but I certainly have not found them in Birkenhead. What we do know is that Turner, if fully implemented, is not acceptable to the Conservative Party. The one clear statement that David Cameron has so far made is that he wishes to decrease the numbers on means-testing and therefore to have a Turner objective, when the whole thing is rolled out in 50 years time, with the same proportion on means-testing as currently, that is clearly not acceptable as I understand what David Cameron has said and therefore we would be expecting the Opposition to come up with proposals in addition to Turner to achieve that objective. The proposals of the Pensions Reform Group differ in two respects from Turner: one is that it is investment-financed rather than tax-financed reform and, secondly, unlike Turner where most of the £128 in today's money is to be found from the state second pension or accrued rights in SERPS, PRG says that that £130 should be achieved through the basic state pension itself. That necessarily benefits most the poorest, therefore our scheme does have redistribution within it and we believe that the investment way can be won in that higher paid people proportionately pay more for a universal protected pension, as we call it, or the basic state pension—whatever you want to call it—of between 25 to 30% of average earnings. That is a guarantee they could never buy on their own; that is the guarantee a community can offer but most people would not have the resources to buy that in the private market. It is therefore heavily in favour of the very poorest who are always the most difficult to get into a successful pension reform, but it is one which is paid for by redistribution but is sold on the basis that everybody gets something out of this that they have not got before.

  Q136  Greg Mulholland: Are you not worried that those pensioners will still be on pension credit?

  Mr Field: Because our reform is about the basic state pension, leaving aside all the business about the National Pension Savings Scheme and the rest of it, and that everybody is in this and contributions have to be paid that year for those people who are doing services to the wider society like caring, then fewer are going to be on means-tested benefits at the end of the day than any other proposal that you are considering.

  Q137  Greg Mulholland: Howard, you mentioned council tax and housing benefit. Again, I probably know the answer to this, but when we talk about means-testing the focus is sometimes exclusively on pension credits—or that is how the argument comes across. Why do you think that is and do you think we really need to broaden this discussion to housing benefit, council tax benefit and also to the disability addition to pension credit.

  Mr Reed: The reason that the focus recently has been on means-testing specifically in pension credits is because that is the area where you have seen the huge increase in means-testing. There has always been a large proportion of pensioners also on housing benefit and also on council tax benefit, but the main change that has happened recently is the big expansion in the generosity of pension credit and so you are drawing a lot more pensioners into the means-test. It would be nice to be able to reduce the amount of means-testing on council tax benefit or whatever if the Lyons review or the follow-up to that does come up with a replacement system, and it would be nice if it could be designed in some way as to means-test less pensioners. One of the most obvious examples of a system that would means-test less pensioners for local tax would be local income tax, but there are other problems with that local income tax system, so I am not going to say that I would recommend it per se, but it is an option that could be looked at, and there are other options around property taxes and so forth and you might be able to get away with less means-testing on them. On housing benefit it is very difficult because you have one section of the population who are owner-occupiers and another section who are renters, and renters on low income are always going to need some kind of means-testing support, whether it is flat rate or related to the rent they pay. Successive cohorts of pensioners are going to have less and less renters in that cohort, simply due to the expansion of owner occupation, so that issue will decrease over time as well. On disability benefits, there are a number of things you could do; you could move them all towards a non-means-tested system—you could expand attendance allowance for example, and there are similar benefits to that. Although that has a cost, if you are really serious about wanting to get pensioners out of every form of means-testing there are a number of reforms you can make which could be sold as part of the general pensions reform package.

  Mr Field: I think we will see reform of council tax shortly. If I was running a campaign for pensioners I would try and ensure there were 100 supporters who were not members of political parties who refused to pay and were put in prison, and if that view has occurred to me then I am sure it will have occurred to campaigners. I just do not think the public will actually put up with large numbers of pensioners being put in prison for refusing to pay the council tax which they feel is unfair.

  Q138  Harry Cohen: Can I pick up on your earlier point about David Cameron and means-testing in association with Turner. Although it is not for me to put details on the Tory policy, we have presumably members who could do that if they wanted to, but one thing Turner did say is that there is declining spending on contracted out rebates, partly as a result of people contracting back in. He says that will "produce very significant increased cash flows for government". Could that not be applied to increasing the basic state pension here and now? That would ease the way for reform and also perhaps have a little less means-testing as a result of that. Could that not be done?

  Mr Field: The Chancellor was understandably angry with the Commission in that it presupposed that extra monies coming into the Exchequer, which had long ago been financed into the general level of monies available for public expenditure, were now in a sense being diverted to pension reform. I do not think any of us will get anywhere by suggesting to the Chancellor that monies that he has long since in his head put down for other reforms should now be diverted into reforming pensions. He has obviously made a calculation because this is a long term trend of monies coming back into the Exchequer from the contracted out rebate; similarly, long ago he put raising the retirement age into the general pool of monies available for his public expenditure plans and I do not believe that he is going to give up those easily. We therefore have to look at other ways and we propose, using the contracted out rebate which is currently in existence to be brought into the scheme that we propose as the first tranche of contributions in an investment strategy to take very significant numbers of people above means-tested eligibility. I think it is reasonable to say to the Chancellor that if he raises the retirement age further over the 65 point, the monies thereby gained simultaneously should be used as ways of building pension reform. I would also hope it would be something the Committee might consider in that if one looks at the tax concessions to pension savings, which overwhelmingly benefit the richest—we have something like 5% of the population gaining over half of all the tax revenue lost through tax concessions on pension savings -to allow all of that at the standard rate again would give us very substantial sums of money to play with. In a sense the crunch point is that if we want better pensions we actually have got to put more money towards pensions and not less.

  Q139  Harry Cohen: I hear that point and I agree with it, but I am still a little alarmed. Turner says that this extra flow of money should be used for future pensions; a lot of other organisations say it should be used for the current basic state pension. You are in effect saying the Chancellor has put it away for reforms somewhere else and it has just got lost in the system, but surely money that can be generated within the pension account should be used for pensions one way or another, either the basic state pension increase or for future pensions. I wonder if you could explain your thinking a little bit further.

  Mr Field: They are being used for future pensions. If you look at the expenditure growth on the state second pension it begins to rise very significantly indeed, and my guess is that the Treasury line is this is a very useful way, the additional monies coming in from people contracting back in to the state second pension, to reallocate those resources to meet an increasing bill on second state pensions. More money is therefore going on pensions, but I do not think it is free money to use for additional reform. We have to think outside the system if we wish to achieve that objective, and it is one reason why I think at some stage a government might question the role of the state second pension, but that is another matter.

  Mr Reed: If I could just add something on that, one of the key elements of the IPPR package is to abolish the contracted out rebate completely which gives you an extra 0.9% of GDP which you can divert into higher basic state pension; that actually goes a long way towards meeting the initial costs of the reform. One of the weaker aspects of Turner is the way that the report says we do not accept that money raised by abolishing the contracted out rebate should be used to increase basic state pension in this way, but it does not really provide a rationale for saying that. He [Turner] is worried about reductions in national savings rates, but I would argue that the reduction in complexity of the system and the establishment of NPSS or a closely similar system will provide the impetus to incentivise private saving, will drive that forward and will increase the savings rate without the Government really having to do much else. Also, Frank's point about tax incentives is quite correct, they are overwhelmingly skewed towards higher earning individuals. There are certain fiddly things which the Turner Report goes through in terms of the difference between defined benefit and defined contribution schemes and why it is difficult to reform tax relief, but certainly a reform focusing specifically on key elements like NPSS, making tax support for that more progressive, more weighted towards lower earners, would I think be a very good idea and would incentivise savings for people on low to medium incomes.

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