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When people take out a pension, they are putting their money away for 20, 30 or 40 years, or even longer. They expect the framework in which they make that decision to save for their future to remain as stable as possible over that period. Today, we can make it clear that our intention is to help people to save with confidence. Over the past 30 years, as the Pensions Commission highlighted, the pensions environment has failed to provide that stability. On top of demographic changes and stock market fluctuations, policy has frequently changed, under numerous Governments, leaving us with what the Pensions Commission described as arguably the most complex system in the world. We owe it to our constituents and to future
generations to reach beyond the normal partisanship of party politics and to establish, through this legislation, a pensions system that can truly stand the test of time.
The Bill gives every Member of the House the chance to demonstrate, first, a strong resolve in addressing the pensions challenge that we face as a country, and secondly, the opportunity for all of us to make common cause with our constituents in helping them to plan for their own financial security in retirement. In supporting the Bill tonight, right hon. and hon. Members will take a major step towards a sustainable, affordable and trusted system that will meet the needs of those in retirement both now and in the future. That is why I commend the Bill to the House.
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Mr. Philip Hammond (Runnymede and Weybridge) (Con): The Bill before us proposes to create a more generous, more widely available, less means-tested and simpler package of state retirement benefits. It will address the worst elements of unfairness in the current system and provide a platform for a workplace pension savings scheme intended to rekindle the savings habit, particularly among those on average and below average incomes. We support those objectives and we support the principles of the Bill—although, as I am sure that the Secretary of State would anticipate, there are issues that we will want to examine in Committee.
As the Secretary of State acknowledged, the measures to achieve those objectives form a coherent package, and the reforms stand or fall together. Although the Bill contains the substance of only one part of that package—the reforms to state pension provision—and creates the mechanism for further development of the second part of the package, which is the personal accounts workplace saving scheme, we will need to consider the bigger picture as regards the problem that we are seeking to address and the Government’s proposed response to it.
The challenge that we face as a society is demographic change. In a nutshell, people are living longer, and in the future there will be fewer workers to support a larger number of pensioners under our pay-as-you-go state pension system. At the same time, with earnings outstripping increases in the basic state pension, the real value of the basic state pension in earnings terms has continued to erode. The Government’s response has been a dramatic expansion of the means-tested, top-up system of pension credit. On the Turner commission’s projections, if nothing changes by 2050, 75 per cent. of all pensioners will be on means-tested pension credit. That matters for two reasons.
First, although means-tested retirement benefits have undoubtedly succeeded in taking a significant number of pensioners out of poverty, for many, the system is complex, intrusive and inaccessible. There are 1.5 million pensioners who do not claim the pension credit to which they are entitled. Half of them live in poverty. For them, the combination of the falling real value of the basic state pension and complex, means-tested pension credit means a descent into deeper poverty.
Justine Greening (Putney) (Con): Does my hon. Friend agree that the complexity of pension credit adds cost to the system? It would be preferable to pass the cost on to pensioners and help alleviate their poverty rather than investing it in a complex system that is unwieldy for them to use. [Interruption.]
Mr. Hammond: I am sure that my hon. Friend intended to say that we should reduce the costs and pass the savings on to pensioners in the form of higher benefits. I am sure that all hon. Members agree that the goal should be to reduce the administrative cost of benefit payment systems in order to use more of the available money for the people who need it.
Mr. Redwood: Did my hon. Friend notice that the Secretary of State tried to imply that linking the standard pension only to prices was a Conservative, not a Labour policy? Is not it the case that, by 2010—the last date for an election in this Parliament that could remove the Government from office—the Labour Government will have enforced a state retirement pension that increases in line with prices for 13 years, never believing that changing it was affordable? We need to know why they believe that they can afford it if they stay in office thereafter.
Mr. Hammond: My right hon. Friend is right, and I shall deal with affordability shortly.
The second reason why the increase in means-testing matters is that, although its use has allowed poverty in retirement to be targeted at relatively low cost to the Exchequer in the short term, its expansion has a long-term cost—a reduction in the incentive to save. Since Labour came to office, the savings ratio in this country has almost halved. It is not difficult to understand why. An effective marginal 60 per cent. withdrawal rate acts as a major disincentive to saving for retirement for those who are either caught in that trap or believe that they might be caught in future.
Now the Government propose to change tack and halt the erosion of the value of the basic state pension. The Secretary of State knows that the 2005 Conservative manifesto pledged to link the basic state pension to earnings. At the time, the Government condemned that pledge as unaffordable. We therefore welcome the conversion to a commitment to the earnings link from 2012 and the simplified contributions rules, which mean that men and women who have worked or cared for someone for 30 years will be entitled to a full basic state pension in their own right. We also accept the increase in state pension age that will partly finance the changes.
The Government have taken major steps forward and the Secretary of State should be congratulated on his success in persuading the Chancellor to agree to the provisions, especially given the unconventional style of his charm offensive on No. 11.
Kitty Ussher (Burnley) (Lab):
I am a little confused—perhaps the hon. Gentleman can enlighten me. My understanding of his party’s policy is that it would reduce the proportion of gross domestic product that the state spends. Although I welcome his talk of
consensus, I am confused about how he can agree with the broad thrust of our policy when his would reduce the finances with which his party could operate.
Mr. Hammond: The hon. Lady has not done her homework. She is not quite at one with the Secretary of State, who has urged us to form a consensus. She is apparently upset by our agreeing with much of the Bill.
Let us consider the costs. I think that it was the Age Concern brief that pointed out that, for all the Government’s grandiose rhetoric, what they are actually doing is putting in place a system that will, over 45 years, use approximately the same proportion of gross domestic product to fund a higher number of pensioners in retirement. The Secretary of State has always argued that this reform package must be affordable. It is affordable, and that is why we are prepared to support it, and why it will secure consensus in the House.
Mark Pritchard: I share my hon. Friend’s perhaps faint praise for the Government’s acceptance of the Conservatives’ policy of raising the basic state pension in line with average earnings. Does he share my concern, however, that the Government are not so enthusiastic about extending the abolition of means-testing? That might call into question the success of personal accounts.
Mr. Hammond: My hon. Friend makes an important point. Means-testing is at the heart of the debate, and if he will allow me, I will deal with that matter in a moment.
Mr. Russell Brown (Dumfries and Galloway) (Lab): The hon. Gentleman mentioned his party’s election manifesto pledge to restore the link between pensions and earnings. If my memory serves me correctly, however, it was not a full-blown commitment to restore the link for anything beyond one term. Does he not recognise that the pensioners of this country need and deserve a sustainable system? People are not looking for a policy commitment that lasts for only four or five years.
Mr. Hammond: The hon. Gentleman is absolutely right. The commitment that we made at the last election was the commitment that it was prudent to make at that time. We have already heard today that the Chancellor has insisted that the Secretary of State’s commitment will be effective only in 2012 or 2015. We believe, however, that restoring the earnings link to provide that stability is affordable now.
The Turner commission emphasised the need for a bipartisan approach to pension reform. We agree—but not because of a lack of evidence to make a partisan case. We know who is responsible for accelerating the collapse of Britain’s pension provision from the strongest in Europe to among the weakest, as the right hon. Member for Birkenhead (Mr. Field) has suggested. We also know whose decision it was to mount a £5 billion a year raid on our pension funds. We know who has presided over 60,000 occupational pension schemes entering wind-up, and who is
responsible for the Government’s lamentable failure to respond effectively to the challenges of the ombudsman’s report and to address the needs of the victims of the pre-Pension Protection Fund pension scheme failures. We still agree with Turner, however, because, whoever is responsible for having exacerbated the problem, it makes sense in the national interest to work together to pursue political consensus in trying to sort the matter out for the future.
The principal measures in the Bill will not be implemented until the next Parliament. Nobody knows which of us will be implementing them. The proposed changes will affect people’s long-term planning and savings behaviour over a 40 to 50-year time horizon.
Ms Sally Keeble (Northampton, North) (Lab): Does the hon. Gentleman accept that there was no point in restoring the link with earnings while so many pensioners, especially women, did not get the state pension anyway? We could have increased pension levels until kingdom come, but a large number of pensioners would have remained in poverty because they did not get the state pension at all.
Mr. Hammond: With respect to the hon. Lady, I have already acknowledged that by welcoming the proposal to standardise the contribution requirements for men and women at 30 years’ work or caring.
Consensus cannot mean a blank cheque for the Government of the day. The building of consensus, however important, does not excuse the Opposition of the day from their duty to scrutinise the Government and hold them to account. A lasting consensus will be one that is built on solid foundations, on transparency, on knowledge and on a widespread understanding of, and acquiescence in, the proposed changes. It will not be one that is based on ignorance. It must be a consensus that embraces all of our society, and not one that is built in the Westminster village behind the backs of the people whom we are here to represent. Even while supporting the Bill, therefore, we must debate the unresolved question of the level of mean-testing. We must carefully consider the changes proposed, identifying the winners and losers as the state pension pot is redistributed, and we must analyse critically the proposals for personal accounts. We will therefore approach 2012 as a society that has made a set of decisions openly, with a full understanding of what we are doing, why we are doing it and what we are seeking to achieve.
I am bound to say that we have been disappointed by the Government’s management of the consensus-building process. The country at large has little or no understanding of the state pension reform, beyond the headlines of the earnings link and the increase in the state pension age. Even more worryingly, a large proportion of employers—particularly smaller ones—who will face compulsory pension contributions under the package are completely unaware of the additional burden. Closer to home, I was surprised by the Secretary of State’s announcement today that he intends to incorporate new provisions in the Bill, which we are only now considering on Second Reading. We have not had any discussions about those new provisions, and know nothing about them. While we have appreciated the opportunity to have a couple of
briefing meetings with the Minister and his officials, it has been difficult to obtain some of the key information required to scrutinise the proposals properly.
I tabled a dozen or so parliamentary questions in July, seeking information about the proposed changes. Those questions fell unanswered at Prorogation in November—no doubt the victim of the Minister’s traffic light scheme. Despite a ministerial promise on 15 November to answer them anyway, not one had been answered to me a month later— [Interruption.] The Minister says from a sedentary position that they have all been answered now. When did the answers arrive? This morning. In the meantime, typically, as soon as the House resumed for a new Session in November, the hon. Member for Yeovil (Mr. Laws) re-tabled all of my questions word for word. He has had a bit more success than I had; so much for consensus-building.
To return to the substance, hanging over the debate is the unresolved difference in projections of the level of means-testing that will remain in the system and its impact on savings behaviour and thus on the likely success or failure of personal accounts.
Lynne Jones: I agree with the hon. Gentleman about the need to reduce means-testing as much as possible. There are two ways of doing that: one is to improve the value of the state pension and its universality as compared with means-tested benefits; the other is to hold down or reduce in real terms means-tested benefits. Can he assure the House that Conservative policy is no longer to do the latter, because the Conservative party was advocating that at the last election?
Mr. Hammond: I assure the hon. Lady that we accept the pension credit regime put in place by the Government, including the statutory uprating of pension credit to which the Secretary of State referred. I will deal with her point in a moment.
The Department for Work and Pensions and the Secretary of State have said today that means-testing will be limited to less than 30 per cent. of the pensioner population by 2050. However, the Pensions Policy Institute, a respected independent think tank, believes that 45 to 50 per cent. of pensioners could be affected. That is an important difference and, on balance, most people in the pensions sector appear to trust the PPI’s modelling more than the DWP’s. Confidence in the DWP statistics is perhaps not enhanced by, for example, the use of one figure to project the growth of state second pension income in the means-testing model, and a lower figure to project state second pension income in the model for the future cost of Government spending programmes.
Since September, we have been urging the Government to try to reach an agreed position with the PPI so that Parliament and the country can understand the nature of the platform that the changes in the state pension system will provide as a base for the personal accounts savings system. It is hugely disappointing that the Bill should come to Parliament today with such a large discrepancy between the different projections of the future level of means-testing unresolved.
We recognise that whichever figures are right, there is no quick or easy way of reducing means-testing. Having introduced extensive means-testing of benefits for pensioners, neither this nor any other Government would be prepared to see an increase in the number of pensioners in poverty. That is the answer to the question from the hon. Member for Birmingham, Selly Oak (Lynne Jones). No Government would be prepared to see a de-linking from earnings of the pension credit threshold, which, as it is defined, would push more pensioners into poverty. Nor is it possible for any fiscally responsible party to promise to erode means-testing by massive increases in basic state entitlements, as some have been tempted to do.
Conservative Members, however, have a long-term aspiration to see the level of pensioners means-testing gradually reduced. I invite the Minister to commit the Government to the same long-term aspiration, so that collectively we can send a clear signal to potential young savers that the major political parties are committed to a long-term reduction in disincentives to save that might otherwise deter those savers from seeking to provide for their own well-being in retirement.
Mr. Laws: If I heard the hon. Gentleman correctly, he said that although he was very concerned about the issue of means-testing, he would not propose to do anything to diminish the Government’s own projections of the level of means-testing. Is that really his position?
Mr. Hammond: What I have said to the hon. Gentleman—and I do not imagine for a moment that he would do anything different—is that we do not intend to attack the pension credit threshold, which would be one of the two ways of closing the means-testing gap in the short term. It would be a case of either reducing the level of means-tested benefits or increasing the level of basic state pension entitlement in a way that would be fiscally unaffordable. But the fact that there is no short-term ready way of dealing with the position does not mean we should not aim, over 20, 30 or 40 years—a time scale which is relevant to incentivising young savers—to send a clear message that we aspire collectively to reduce the level of means-testing in the system over time.
Lynne Jones: Will the hon. Gentleman give way?
Mr. Hammond: I want to make a little progress.
In a moment I shall deal with the part of the Bill that introduces the personal accounts delivery authority, and with the wider elements of that part of the reform package. First, however, let me draw attention to some issues that need to be addressed in the interests of transparency.
There is a great deal of concern about the element of uncertainty over the starting date for the earnings link in 2012 which the Chancellor has introduced into the equation. We have a long-term framework for public-expenditure projections. The Treasury, we are asked to believe, cannot take a view on whether the earnings link will be affordable in five years’ time, but is apparently quite happy to enter into 20-year private finance initiative contracts and the ordering of military equipment for delivery in a decade.
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