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It must be concluded that this is simply another example of the Chancellors wish to have the last word on every single subject: of the clunking fist insisting on stamping its mark on every step that the Government take. Rather than a graceful move allowing the Prime Minister and the Secretary of State to take the credit for having the good sense to adopt our policy of an earnings link for the basic state pension, an elaborate, confusing andif I may say so to Labour Back Bencherspolitically costly contortion has been performed, so that long after the present Prime Minister and, I suspect, the present Secretary of State are gone, the Chancellor can be the one to announce that the earnings link will definitely be introduced in 2012. That, I suggest, is the worst kind of manipulation for party or, in this case, factional political reasons.
We understand that every commitment any Government make is always implicitly subject to affordability, but given the long-term framework for public expenditure decisions, that caveat can be intended only to protect against a catastrophic and unpredicted downturn in the economy. Therefore, unless the Chancellor knows something that he is not telling us, we need the Government to be much clearer about 2012 and to say explicitly that that date will be delayed only in the most extraordinary and extreme economic circumstances. Anything less will introduce an element of doubt and confusion that will undermine one of the fundamental purposes of the whole reform package: to create stability upon which people can plan their own futures.
Lynne Jones: Although the hon. Gentleman makes many political points, it is clear from what he is saying that his party has no aspiration to reduce the level of means-testing faster than the Government proposals. I ask him to respond to a point I made earlier about higher level rates of tax relief on pensions contributions. I asked the chair of the Pensions CommissionAdair Turnerabout that, and while my right hon. Friend the Secretary of State was correct in his statement about Adair Turners view, Adair Turner said that one way of being able to release money for improving the basic state pension would be to hold down the size of the total pension pot that is available for tax relief. Would the hon. Gentleman like to comment on that suggestion?
Mr. Hammond: The hon. Lady is absolutely right, and Lord Turner is absolutely right to observe that that would be one way of doing that. However, as the Secretary of State said, Lord Turner went on to say that it would not be the right way of doing that, and I agree with his analysis.
Let me respond to the first part of the hon. Ladys question. She said that my party did not have any proposals for reducing means-testing any faster than the Government. I have made it clear that we accept that there is no quick or easy way of reducing means-testing in the short term that is both fiscally affordable and does not increase pensioner poverty, but
Mr. Hammond: Perhaps the hon. Lady will let me answer her first question before she seeks to ask another. I hope in this debate to get Ministers to establish whether the Government, while recognising all the difficulty that there is and the impossibility of doing anything more in the short term, none the less harbour an aspiration in the medium to long term, when it becomes possible, to reduce means-testing further; or do they, as some Opposition Members suspect, think that means-testing of between 30 and 40 per cent. is a desirable status quo that they would want to preserve in the long term? I simply seek to establish that we are all on the same page in respect of the long-term wish list.
The second area of concern relates to the transitional arrangements for moving from the existing required years of contribution to a blanket period of 30 years of work or qualifying caring in 2010, because, to be blunt, there are no transitional arrangements. As the Bill currently stands, there will be a sudden step down, from 39 years to 30 years for women, on 6 April 2010. Therefore, a woman with 30 years-worth of contributions who reaches the age of 60 on 5 April 2010 will spend the rest of her life on approximately three quarters of a full basic state pension, while her neighbour who reaches the age of 60 a day or two later will enjoy a full basic state pension. The average life expectancy for women at 60 years of age is 24 years, so the difference in terms of current earnings over the remainder of those womens lives would be something in the order of £26,000. That cannot be right and is bound to lead to a real sense of injustice. It offends one of our basic principles, accepted by the Government, for the assessment of the pensions reform package: that it must be equitable, and be seen to be equitable, between different groups in society. It should not be beyond the wit of a competent Government to devise a cost-neutral phasing approach that avoids the perceived injustice of a cliff edge in 2010.
Ms Keeble: I take the hon. Gentlemans point about the need for smoothing, but in addition to the basic state pension, many people will have some private savings or some form of private income for a second pension, or there will be various top-ups. It is almost certainly completely inaccurate to focus on one element of peoples income post-retirement and say that they will suffer for the rest of their lives because of this cliff edge, and it is misleading for the many women who will benefit from these changes.
Mr. Hammond: The hon. Lady has eloquently made the case for our canning the Bill and all going home. She has just said that the basic state pension does not really matter because there are lots of top-ups. The whole premise on which the Secretary of State is working is that we have to stabilise the basic state entitlement in order to promote saving over the long term.
This is the point at which I was going to discuss the voluntary contributions that have been made and are still being madean issue that we have raised with the
Secretary of State on many occasionsbut as a result of his announcement today, he has, perhaps happily, reduced my speech by a couple of minutes. However, I should like him to clarify one part of that announcement. Will contributions deemed by the Treasury to be precluded contributionsthose that cannot increase someones entitlement to benefitmade from the conclusion of todays Second Reading debate be refundable? I think that that is the intention behind his announcement, although it was not 100 per cent. clear whether the measure will be effective from today or from some later stage in this Bills passage.
Mr. Hutton: I did not intend to interrupt the hon. Gentleman, but I am grateful to him for letting me in again. The refunds will be made from 25 May, which was the date of publication of the White Paper.
Mr. Hammond: Excellent. So the refunds will be retrospective, which deals with one of the concerns that, as the Secretary of State knows, we have raised. That has slightly pulled the rug from under the Minister for Pensions Reform, who said only last Monday at departmental questions that
contributions paid at the time should not be refunded.[ Official Report, 8 January 2007; Vol. 455, c. 16.]
The third issue on which I want to touch is the changes to the state second pension. We accept that these changes are part of the financing package that allows the introduction of the earnings link, while containing state pension spending within a given percentage of gross domestic product. However, there will be a distributional impact on different groups within society, and it is important that those affected by these changes understand them. Essentially, those earning above £34,000 a year will continue to pay national insurance contributions on a growing part of their earnings above that level, but will no longer receive any earnings-related element of pension accrual on those contributions. So the part of the contribution that pays for the earnings-related state second pension becomes a straight tax.
Many in this House will be thinking, So what? People on £34,000 a year and above can handle that. However, because this will be frozen in money terms, over time, the tax will affect everyone on £18,000 a year or more in todays earnings terms. As Amicus said in its briefing, it will affect people on average and below average incomes. For those who have contracted out of the state second pension into an occupational or personal pension plan, their contracted-out rebates will reduce or end altogether, depending on whether the scheme is defined benefit or defined contribution. So their contributions to their chosen DB schemes will be reduced, and those in DC schemes will be forced to contract back into the state second pension scheme at the very point where it is reducing the earnings-related benefits that it provides. Part of the package that may be, but it will strike many people as an odd way to promote confidence in long-term pension saving, and it has received little or no publicity outside the narrow confines of the industry and the Westminster village.
What of the huge cash saving to the Government from abolishing contracted-out rebates? Perhaps the Government could make it clear what the figure is. The White Paper originally gave an estimate of £4 billion, and the briefing that most Members will have received refers to that figure, but the regulatory impact assessment says that it is less than £2 billion. That is a slightly disconcerting lack of precision on the part of the bookkeepers. Whether it is £2 billion or £4 billion, it has not been taken into account in the Governments overall costing of the reform package. In other words, the Government have not taken into account that cash saving. The Secretary of State has said that it, or part of it, should be used to support pension saving, but we have heard no such commitment from the Treasury. I would be grateful, as would many people outside this place, if the Minister, when he winds up tonight, could make it clear whether the Government intend that that money, or a proportion of it, will be available to support the introduction of personal accounts and funded pension saving, and whether that position has been agreed with the Treasury.
The fourth issue that I want to highlight is the proposed change to pension savings credit that will create a band of 100 per cent. withdrawal rate for some of Britains poorest pensioners. Those with an income just above the basic state pension with, for example, a tiny occupational pension or small amounts of savings income will be hit the hardest. Almost 1.5 million pensioners will be worse off than they would be under the existing system. For example, by 2010, a pensioner with an annual income just £250 a year above the basic state pension will lose £145 of savings credit. The Government say that that is part of the package, but hitting the very poorest savers is an odd way to encourage saving for retirement among those on lower incomes, and I urge the Minister to look again at that provision. I guarantee that our colleagues on both sides in the other place will want to do so if he does not.
Part 3 of the Bill establishes the personal accounts delivery authority with a remit to work up the detail of the scheme that the Government have outlined or propose amendments to it. The promotion of pension saving to the millions of people who are not saving at all or not saving adequately is an essential element of this reform package. My colleagues and I had to think long and hard about Turners proposals to use auto-enrolment and compulsory employer contributions to provide a targeted workplace saving scheme focused on the lower paid. Despite the burden the proposals will impose on business, we took the decision to support them and, by doing so, allowed the debate to move on to one about the shape and form of personal accounts. We took that decision because we believed that it was in the national interest for us to do so. But as the debate has moved on, several problems have arisen. First, the level of means-testing projected for 2050 on either model represents a serious disincentive to pension saving. The Government envisage a model based on generic advice only, but it is clear that with 30 per cent. means-testing, let alone with 45 or 50 per cent., many people will be, understandably, confused about whether they would merely save themselves out of means-tested benefits to which they would otherwise be entitled. It is unclear at this stage who will take on the thankless task of giving that generic advice, and who will pay for it. Pension saving will not be right for everyone in a means-tested environment, and in a model
free from individual advice, we all have an obligation to ensure that Government do not promote saving that does not pay, with the potential for the mother of all pension mis-selling scandals.
The issue cannot be fudged or avoided. It must be confronted head on. The Government must stop making statements like the one that the Secretary of State made earlier or the one on the Minister of States blog that
even a part-time worker earning £6,000 could receive almost £2 in retirementgetting out double what they put in.
If any pension provider made such a statement, he could expect the regulators knock on the door about five minutes later. If we are to have an open and transparent debate about the value of personal accounts and if we are to convince people of their credibility as a long-term savings vehicle, the Government must be disciplined in the way they present the possible returns. When he winds up the debate, I want the Minister for Pensions Reform to give a commitment that the Government from now on will use the same regulated assumptions and restrictions to express projections of returns to savers in personal accounts that regulated pension providers are required to use. In that way, we will hear no more sloppy £2-for-£1 offers; instead, projections of returns to different groups of savers will be expressed in the industry-standard, regulated form.
Mr. Laws: I agree with what the hon. Gentleman says about the importance of accurate advice, but did he hear the Secretary of State say earlier that he believed that the vast majority of people going in for personal accounts could expect a return of better than £2 for every £1 put in? Does not that contrast with the Departments published research, which says that most people will get £1 for every £1 that they put in?
Mr. Hammond: I heard the Secretary of States earlier remarks, but I am not sure that the hon. Gentleman is exactly right in what he says. My point is that telling people that they will get back £1 for every £1 that they put in at the start of their working lives is very different from telling them the same thing in the last year of their working lives. They are two very different propositions, and that is why we have regulations that require investment providers to use assumed rates of return when they present a proposition to the public. My suggestion to the Minister is that the Government need to be equally disciplined.
Our second concern is an overriding one, and has to do with the risk of levelling down among employers who currently offer good-quality occupational pension schemes. The personal accounts system will allow an employer either to offer personal accounts with a 3 per cent. contribution, or to auto-enrol all employees in that employers own pension scheme, provided that it has an employer contribution of at least 3 per cent. The overwhelming majority of occupational pension schemes have employer contributions in excessand sometimes substantially soof 3 per cent. The evidence is that many employers faced with the prospect of much higher uptake of membership of
pension schemes as a result of auto-enrolment, and thus much higher costs, will compensate by reducing their contribution level over time. If they do not do that for all employees, they will certainly do it for new joiners. The achievement of more savers but less saving would represent the ultimate failure of the personal accounts dream.
We believe that the Government must insert into the delivery authoritys remit a statutory obligation to seek to minimise the levelling down that I have described. They must set out, for the authority and for Parliament, the explicit criteria against which the schemes successful implementation will be judged. How much levelling down is an acceptable trade-off for how many extra savers and how great an increase in total saving?
Thirdly, personal accounts were presented as a targeted intervention to deal with the markets failure to provide pensions for people on lower incomes. The Turner commission specifically recommended a £3,000 annual contribution cap to prevent unfair, state-subsidised competition for the savings of higher earners. Like most of us, Turner thought that those people could be left to make their own arrangements.
The Secretary of State has asserted that cherry-picking Turner is not an option, but the Government have ignored his advice. They have said that they will set a cap at a minimum of £5,000 a yeara level that would embrace more than 95 per cent. of all current members of occupational pensions schemes. In other words, the Government have moved by stealth from introducing a targeted intervention aimed at a specific and under-served group of savers to making a grab for almost the whole of Britains occupational pension savings sector.
That would be a disaster for the pensions industry, for occupational pension scheme members, and for the political consensus in respect of a targeted intervention. It would also make it almost impossible to measure the schemes success in attracting its target audience of low-income savers, and I hope that that is not the Governments intention. The Government must revert to the original intention behind personal accounts, which was that they would be a targeted intervention to support people on average or below-average incomes, and that means that they must take Turners advice on the level of the contribution cap.
We support the principle of targeted intervention to promote workplace saving through auto-enrolment and compulsory employer contributions, but such a scheme will work only if it is based on political consensus. In trying to turn it into something other than the one Lord Turner recommended, and which the original White Paper proposed to introduce, the Government are pushing the boundaries of that consensus too far.
The details of personal accounts will be set out in a future Bill, but I hope I have made it clear that if the consensus underpinning this Bill is to extend to the Bill introducing the personal accounts scheme, the Government must address the questions I have raised. In particular, they must revert to targeting the scheme on its intended audience.
The need for pension reform is clear and the need for political consensus to underpin sustainable reform is even clearer. We are willing to play our part in building
a robust consensus based on a solid proposition and underpinned by open and transparent analysis of the challenges that have to be addressed. As my remarks about personal accounts have confirmed, we believe that, taking the package as a whole, we have some way to go in building such a consensus. The Bill makes a good start, by delivering reforms to the state pension system that will form the foundation on which the broader reform package is constructed.
In Committee, we shall ask the Government to answer the points about the implementation of state pension reform that I have raised this afternoon. We shall ask them to acknowledge our concerns about personal accounts by giving clear guidance to the delivery authority about the required outcomes, and to address the threat to the climate of confidence in personal accounts posed by the ongoing public relations disaster that is their record on occupational pension scheme failures.
We welcome the Bill and I sincerely hope that by the time the Bill to implement personal accounts comes before the House, the Government will have acted to address the serious issues that hang over the future of that project, and thus rebuilt the political consensus without which it cannot succeed.
David Davis (Haltemprice and Howden) (Con): On a point of order, Madam Deputy Speaker. On todays Order Paper there are three written statements from the Home Office: Criminal records update, Independent Race Monitor and Prevention of Terrorism Act 2005. As yet, none of those statements has been put in the Vote Office and we believe that at least one of themPrevention of Terrorism Act 2005refers to another piece of bad news; namely, the loss of another suspected terrorist under the control orders legislation. I am concerned that the Government, who should have published those statements by now, are trying to bury bad news. Is there anything you can do, Madam Deputy Speaker, to accelerate the release of those written statements?
Madam Deputy Speaker (Sylvia Heal): Ministers on the Treasury Bench will no doubt have heard the point that the right hon. Gentleman made. Written ministerial statements should indeed be laid in the House promptly, and I shall have the right hon. Gentlemans point investigated.
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