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16 Jan 2007 : Column 664

Clause 5 will restore the earnings link and allow for that to happen from 2012 or, in any event, by the end of the next Parliament. As a result, by 2050 the basic state pension will be worth twice as much in real terms as it is today. The clause also places in primary legislation the Government’s pledge to uprate the standard minimum guarantee element of pension credit by earnings.

The Government are committed to reducing the extent of means-testing in the future, thus ensuring that pension credit continues to be targeted at people who would otherwise have been poor in retirement, or those who have only small and modest savings. The clause provides the means of securing that important outcome. As a result, by 2050 less than a third of pensioners will be eligible for pension credit, with only about 6 per cent. receiving the guarantee credit alone, and it may be possible for small savings to be taken as a lump sum through the process of trivial commutation. In the vast majority of cases, those receiving pension credit will be continue to be rewarded for saving for their retirement.

John Bercow (Buckingham) (Con): The restoration of the earnings link and measures to increase both simplicity and intelligibility are welcome. I think that the right hon. Gentleman would accept that the overall litmus test or yardstick for the Bill should be whether means-testing will be reduced. What is his estimate of the scale of the prospective reduction over a 10-year period and a 20-year period?

Mr. Hutton: We think that means-testing could be significantly reduced. As I said, if we do nothing now, it will reach about 75 per cent. of pensioners by 2050. With these reforms we can get the figure down to about 30 per cent., so there would be quite a significant reduction. I am trying to make the point that the majority of people in receipt of means-tested additional financial help will be those who have saved for their retirement, so they will be given a reward for saving.

There is an argument to be had about the role and extent of means-testing in any pension system. The Liberal Democrats would remove it entirely and adopt a universal citizens pension at a totally unaffordable cost of between £10 billion and £20 billion a year. I think that we can dispense with that solution as a rational contribution to the debate, but there is an argument to be had about precisely how the balance should be struck. It is right and proper that we have a system that encourages people to save and rewards those who do so, and that is what means-testing will increasingly achieve in the future.

Miss Anne Begg (Aberdeen, South) (Lab): The Secretary of State mentioned trivial commutation. Has he given any thought to the level at which that should be set, especially when the new personal savers accounts come in, to ensure that the Government give the message that it always pays to save?

Mr. Hutton: My hon. Friend makes a good point. At present, the limit on trivial commutation is set at £15,000. It is right that that should be subject to ongoing review and continual analysis. We in the
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Department will do that, together with our ministerial colleagues in the Treasury. I assure hon. Members that we are aware that the matter needs proper scrutiny.

Mr. Laws: The Secretary of State will know that Lord Turner’s aspiration for the personal accounts was that for every £1 that a person saved, he or she would get £2 back because of other contributions. Is the right hon. Gentleman in a position to tell us what proportion of the target audience for personal accounts he expects to get that two-for-one return or better?

Mr. Hutton: I think that the figures are set out in a document that we published when we produced the second pensions White Paper, but I am afraid that I do not have them to hand. If they are not in the document, perhaps we can return to the matter in Committee. We believe that the vast majority of people will be able to look forward with some confidence to receiving £2 back for every £1 put in.

Clause 4 will abolish adult dependency increases. The existing dependency increase provisions are a hangover from the immediate post-war period when single breadwinner households were the norm. We live in a very different world today. There is no justification for the taxpayer subsidising couples when only one member has reached pension age, no matter how young the other member of the couple may be. Furthermore, entitlement to adult dependency increases is based on an all-or-nothing earnings limit that creates a disincentive for younger women who are married to men drawing a state pension. If those women earn over that amount, the state pension of their husbands is automatically reduced. The money that we are saving by scrapping ADIs is being reinvested, under the reforms, to provide more generous eligibility criteria for state pensions, so that women, in particular, can qualify for a full state pension in their own right. There is no adverse impact on those with low or modest incomes, as the increases are taken into account on a pound-for-pound basis in calculating pension credit.

Clause 9 provides that people can accrue entitlement to the state second pension, based on new crediting arrangements. That means that about 180,000 more people, including 110,000 women, could accrue entitlement to the state second pension in 2010 through the new carer’s credit. As the Pensions Commission recommended, we are phasing out the earnings relation, through provisions in clauses 10 to 12, to create a clear space for personal accounts. However, we are going one step further by replacing the complexity of the current system with a flat-rate amount of £1.40 a week on top of the basic state pension for each qualifying year spent either working, caring or doing a combination of both.

Let me be clear: no one loses out because of the withdrawal of the earnings relation. The earnings uprating of the basic state pension more than makes up for the changes. Even the highest earners are better off—a high earner who worked from age 25 would get £102 from state pensions in 2053 under the current system, but under the proposals in the Bill, they would get £139, so the measure is not a stealth tax, as some have suggested. There are no overall losers under our reforms to the state pension system.


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Mark Pritchard (The Wrekin) (Con): What thought has been given to economic migrants—we know that there were more than 500,000 of them last year, from various countries—who settle in the UK and may become UK citizens, if they are unable to accrue 30 years-worth of contributions while they are settled in the UK? That does not appear in the Bill. Secondly, what discussions has the Secretary of State had with his counterparts in other European Union countries about the transfer of economic migrants’ basic state pension contributions from their home country to the UK pension fund?

Mr. Hutton: Entitlement to the basic state pension or the state second pension will be based on the number of qualifying years in which the person paid into it, as well as on where they live and what other rights they have when they retire. If they do not have 30 years-worth of contributions, but retire and are settled in the United Kingdom, they will be entitled to as much of the state pension as they have paid for, and potentially to a pension credit top-up, too. Those rights are portable, and it is important to remember, in the context of the European Union, that we have an obligation to pay pensions under the terms of various regulations, particularly the 1408 regulations. The system is relatively clear, and I am not really entirely sure what point of substance the hon. Gentleman was raising—

Mark Pritchard rose—

Mr. Hutton: No, I do not want to give way to the hon. Gentleman again. If I have not dealt with his point, my hon. Friend the Minister for Pensions Reform can deal with it in Committee.

Taken together with the basic state pension, the simplified entitlement effectively provides a single state pension for most contributors, giving people a much clearer picture of what they can expect to receive from the state in retirement. For example, by the 2050s, someone who had contributed for most of their life through working or caring would be entitled to about £135 a week from state pensions in retirement, instead of between £90 and £100, which is what they would receive today, before the reform is made. As they could be confident that the entitlement would lift them clear of pension credit, they could plan their private saving effectively, too.

Lynne Jones: Some of us argue that the improvements in the basic state pension should be greater, and should be made more quickly, to improve the foundation for private savings, but the Secretary of State points to the issue of affordability. Is he not concerned about the fact that a large proportion of state expenditure on pensions goes towards supporting the personal pensions savings of higher-rate taxpayers? Could not some of those resources be switched to helping people on lower incomes, by improving the basic state pension?

Mr. Hutton: In her previous intervention, my hon. Friend prayed in aid the Pensions Commission. The commission considered precisely that point and said that it was not sensible or possible to do the sorts of
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things that she argues we should do. In any event, let me make it quite clear that tax relief for pension contributions is not a matter for me.

Lynne Jones rose—

Mr. Hutton: I will not give way to my hon. Friend again on that issue because it is properly a matter for the Chancellor to consider in the normal Budget-making process.

Mr. Laws: Will the Secretary of State give way?

Mr. Hutton: No. If the hon. Gentleman does not mind, I would like to make progress. Perhaps he can make his points in his own speech.

Finally, clause 13 legislates for a gradual increase in the state pension age, which will increase by one year every decade between 2020 and 2050, and each change will be phased in over two consecutive years in each decade. In making a commitment to increase the state pension age to 68 by 2046, the Bill seeks to set a course for 40 years. That is a major step for any Parliament, but it is absolutely the right thing to do. Those gradual increases will not eat into the retirement that people can expect to enjoy, as they are designed simply to match the increase in life expectancy over that period. The Pensions Commission report made it quite clear that the state pension age should increase to reflect rising longevity, and our decisions are fully consistent with its recommendations on the issue.

Paddy Tipping (Sherwood) (Lab): My right hon. Friend is right that that is important, and it is the right policy to pursue. What would he say to manual workers with hard jobs who will not enjoy the life expectancy that others enjoy after retirement? Is there a case for looking at their specific circumstances?

Mr. Hutton: I welcome my hon. Friend’s support for the policy and I accept his concern, which is shared by Members on both sides of the House. It is worth making two points. From an historical perspective, when David Lloyd George and the Liberal Government introduced the state pension in the early part of the last century, it was payable at the age of 70—the average life expectancy for the people mentioned by my hon. Friend was barely 50—so it was not a brilliant deal. We are not proposing anything as draconian. Secondly, the Pensions Commission identified that problem and suggested that the Government continue to make sure that pension credit was payable at 60. We are looking carefully at that proposal as one way of addressing people’s concerns.

It is worth bearing in mind the fact that life expectancy has increased for people in all parts of the United Kingdom, as well as for all occupational groups. We can all look forward to a longer period in retirement, but if we want the state pension to be simpler and more generous—that comes at a price, as we all know—we have a choice. Either we try to find a way of making the additional expenditure sustainable in the long term without the need for tax rises, or we go down the easier route that some hon. Members would advocate by loading it all on to tax rises and passing the bill on to future generations. I do not believe that it
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is prudent or responsible to pass that problem on to our children and grandchildren, who would pay the cost of the package in extra taxes. That is dodging the issue, and I do not think that we should do it.

While it is unpopular to talk about working longer, the simple fact is that if we are not prepared to increase the state pension age, we will create an unsustainable financial burden for future generations which, as I said, is the wrong thing to do. The increase in the state pension age is therefore at the heart of the Bill, ensuring the sustainability of the reform package and locking in the essential stability that is needed in any successful pensions policy. Part 2 implements a number of measures designed to support good quality employer pension provision by reducing the regulatory burden and making the existing system simpler for employers and providers.

Clause 14 allows occupational pension schemes to do away with the complexities of the detailed rules on guaranteed minimum pensions by converting members’ rights accrued between 1978 and 1997 into a new scale of benefits. The requirement for the new rights granted after conversion to be of at least equal actuarial value to those that they replace will properly safeguard members’ interests, while the fact that a scheme is allowed to adopt a unified and streamlined benefit structure will enable administrative savings and give members greater certainty about their rights in the scheme as well as greater flexibility to transfer successfully to other schemes.

Clause 15 abolishes contracting out for defined contribution schemes, as recommended by the Pensions Commission. During the Bill’s passage through Parliament, we intend to take powers to enable us to remove the complex rules governing rights accrued in contracted-out defined contribution schemes, following the outcome of the review of the open market option for annuities that we expect to be completed by the end of the year. The removal of those rules will simplify the management of rights for both schemes and members, reducing costs to schemes and supporting our aim of simplifying pensions regulation. In addition to the measures in part 2, our rolling deregulatory review offers the opportunity for further radical change, not merely to rewrite existing legislation but to cut red tape and make it easier to deliver workplace pensions.

My hon. Friend the Minister for Pensions Reform today announced further details of the institutional review that will consider how the functions of organisations involved in the regulation and protection of workplace pensions—such as the pensions regulator, the Pension Protection Fund and the Financial Services Authority—can best develop within our new pensions settlement. It will also extend to cover those involved in the provision of advice, mediation, dispute resolution or compensation for pensions.

Harry Cohen (Leyton and Wanstead) (Lab): My right hon. Friend has acknowledged that the private savings element is crucial. Can he give an assurance that in the years ahead, those who retire on a stock market downturn will get as fair a deal as those who retire on a stock market upturn?

Mr. Hutton: There is a way of trying to manage risk in relation to equity investments, which is called
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lifestyling. It is a way of loading the risk early on in the investment programme and moving into bonds and safer investments later. The detail of how all those investment decisions are made is not properly a matter for Ministers and is not covered by the Bill. That is rightly a matter for professional fund managers to address in the way that they invest those pension investments to which we are all contributing.

Miss Julie Kirkbride (Bromsgrove) (Con): The right hon. Gentleman has been extremely generous in giving way. I ask my question on behalf of a number of constituents who are worried—that is, a clearly defined group of people who are finite in number, who took early retirement through a private pension scheme that has subsequently gone bankrupt. The Secretary of State knows that as a result of previous changes to legislation, such people get a much reduced income, although they could not have anticipated such a change in their circumstances at the time of making those arrangements. Will he therefore consider using the Bill as a vehicle to address the wrong done to that group, who could not anticipate the change in their arrangements, given that as a result of the PPF, anybody considering taking early retirement in the future will be well aware that their income in later life might be reduced?

Mr. Hutton: That is probably one of those interventions for which I wish I had not given way. The hon. Lady has made an important point. I raised the matter in relation to a point about the PPF that the hon. Member for Angus made earlier. The Bill makes no provision for the Pension Protection Fund. If the hon. Lady wants to table an amendment in Committee or on Report, it will give Ministers an opportunity to discuss any specific proposal that she has. The Bill makes no provision to deal with the issue that she raised, but we stand ready to consider any detailed amendment that she might wish to table.

Part 3 provides for the creation of a personal accounts delivery authority—

Ms Gisela Stuart (Birmingham, Edgbaston) (Lab): I am extremely grateful to my right hon. Friend for giving way. Has he considered giving that authority clear statutory objectives at the outset, one of which should be to minimise the effect that it has on good workplace pensions?

Mr. Hutton: Indeed; we will do that. We made clear in the White Paper that we published in December what the express statutory remits for the personal accounts delivery authority should be. We have chosen not to set them out in the Bill because the House has not given consideration to the legislation to set up the personal accounts system, and it would be pre-emptive if the Bill sought to make provision when the substantive legislation has not been brought forward. I can assure my hon. Friend that we will introduce legislation, I hope in the next Session, and that that will be one of the express statutory objectives of the new personal accounts authority.


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The authority will be an independent body with financial sector expertise that will, in the first instance, advise the Government on the design of the operational structure of these new accounts and prepare to put in place the necessary contractual arrangements with the private sector. It will then be responsible for beginning the process of creating the infrastructure to deliver the scheme from the contracted providers.

The creation of the delivery authority provided for by the Bill is the first step towards establishing personal accounts. Following the current consultation on last month’s White Paper, we intend to legislate further on the detail of the new low-cost personal accounts, which will be the catalyst for a new savings culture in our country. They will help, rather than compel, people to save for their retirement. The accounts will be transparent. It will be the people’s money, not the Government’s.

Savers will have choice over which funds to invest, and auto-enrolment will secure economies of scale so that individuals can take the benefit from lower charges and higher returns. Simple, low-cost, flexible and portable personal accounts may generate an additional £4 billion to £5 billion of new net saving each year—equivalent to about half a percentage point of gross domestic product. They will help millions of people to take greater responsibility for building their retirement income by giving them greater opportunities and incentives to save and building on the solid platform provided by the changes to the state pension system in the Bill.

Part 4 contains a number of technical and financial provisions and provides that the operation of the personal accounts delivery authority will extend to Northern Ireland.

Mr. Philip Dunne (Ludlow) (Con): The Secretary of State said that the delivery authority will be independent. How does he reconcile that with the provisions in schedule 6, whereby the appointment of the chairman and the deputy chairman is at the discretion of the Secretary of State?

Mr. Hutton: That will not compromise the independence of the delivery authority. The Secretary of State is the right person to make those appointments. I wonder who else the hon. Gentleman would entrust with that responsibility, given that the scheme is being set up by Parliament and must eventually be properly accountable to Members in this place.


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