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First, however, may I discuss the issue that has the greatest potential to hole the consensus on pensions? The previous consensus faltered after 1975 because
there were essentially two problems: the first was one of affordabilityno doubt, we will return to that laterand the second was one of political philosophy. In 1975, the House signed up to a formulation that required the state to be involved in the first tier of provision and to deliver a second tiernamely, the state earnings-related pension scheme. Differences over affordability and in philosophy led to the breakdown of that consensus.
I am not convinced that those are the two points on which the present reform will falter. It is difficult to see it faltering over the issue of affordability, at least in the next 20 years or so, because as the Secretary of State knows, the deal that he has done with the Chancellor involves a reduction in the share of gross domestic product going into state pensions between now and 2020. The Minister for Pensions Reform shakes his head, but if he looks at his own report, he will see that the share of GDP being spent on pensions goes down from 6.2 per cent. now to 6.1 per cent. in 2020. He is frowning again, but he will confirm those figures when he reads the detail of his report later.
Justine Greening: Is it possible that the Minister is confused because he has not used a net present value calculation? Something similar happened when the occupational pension fund cost was calculated for the ombudsman. That may be why the Minister thinks the proportion of GDP is going up instead of down.
Mr. Laws: The hon. Lady cleverly makes her point about the pension compensation. I cannot speculate on the reasons for the Minister not reading his own reports, but when he looks at them in detail and at the regulatory impact assessment for the Bill he will see, in black and whitewe are grateful for the statistics being so clearthat between now and 2020, the share of GDP spent on state pensions will fall from 6.2 to 6.1 per cent. So the reform is not in any sense an unaffordable solution. Indeed, it is an incredibly cheap solution, which is why there are the problems with means-testing.
I do not believe the reform will falter on philosophical grounds, either. There seems to be a relatively strong agreement, at least between the Front-Bench teams of the three political parties, and I think on the part of the nationalist parties as well, that the states responsibility is to focus on the first-tier pension and try to take people out of poverty. The Government rely to some extent on means-testing to do that poverty prevention work. There is an assumption that the second pension will be independent of the Government, will not depend on their good will in future to continue, and will involve private accounts which individuals own. That is a different approach for the Labour party, by comparison with both the state second pension and the state earnings-related pension scheme, but it is more likely to endure.
Mr. Weir: The hon. Gentleman is right. We also agree with the consensuspossibly the only part of the consensus with which we agree. However, in our view the private account will work only in conjunction with the citizens pension; otherwise the problems inherent in means-testing arise. Why save when one will lose some of the savings through the operation of means-testing?
Mr. Laws: I am in danger of agreeing too much with the hon. Gentleman before the Scottish and Welsh elections, so I will not flatter him unduly. Those are indeed our concerns. It will be much more difficult to persuade people to save in their own accounts if there is a large measure of means-testing.
The hon. Member for Runnymede and Weybridge suggested that there was a band of expectation for means-testing in the future, which even under the proposals is between 30 per cent.the Governments figureand the mid to high 40s per cent.the Pensions Policy Institute figure.
The Minister for Pensions Reform (James Purnell): The hon. Gentleman did not answer the point from the hon. Member for Angus (Mr. Weir) about the level at which he would fix his citizens pension. Does he recognise that even if he set it at the level of the guarantee credit, 80 per cent. of the people who are forecast to be on pension credit are above that level? Half those people are on disability premiums or carers premiums. Does he propose to take all those means-tested extra benefits, which give people £30, £40 or £50 a week, away from them? How will he explain that to people with genuine disability and caring needs?
Mr. Laws: What I recognise, and what the Pensions Policy Institute has already costed, is that the sort of proposal that we make would lead to a massive reduction in means-testing from the levels that the Minister is considering. I hope he will confirm that the band of expectation for means-testing for his policy is between 30 and 45 per cent.
I do not necessarily go as far as the hon. Member for Runnymede and Weybridge in casting too many aspersions on the Governments statistics on the matter. I have no doubt that there are some very skilled and able people in the Department who have come up with the estimates. But the hon. Gentleman will understand why there is a natural instinct to believe that the Government will have used assumptions that massage the extent of means-testing down as far as possible. The Secretary of State says that these are good people and that the statistics are reliable, but during the Bills passage we will want a much better assessment of the extent of the problem.
The crucial issue is that of returns from the personal account. When I first saw the Secretary of State, as he was paving the way for the Bill, he said that he wanted to ensure that more or less everybody who had an account would be better off as a consequence. Over the past couple of months, the Government have had to water down that commitment by saying that some people may actually lose out. Today, the Secretary of State said that the vast majority of people could expect to gain £2 for every £1 that they put into the account, despite the effects of means-testing. I am baffled by that.
the system that we propose, in combination with the introduction of personal accounts, will see the large majority of people ... expecting a payback well in excess of £1 plus inflation for every £1 that they save, subject to factors such as investment growth and fluctuations in annuity rates.
Mr. Laws: Indeed. That implies that people who save money in personal accounts will start by going on an up escalator in relation to the value of their contributions, because they will get the employer contribution, the money from the taxpayer and, they hope, the investment returns that are no doubt built into the Governments figures, but will then start on a down escalator because they will lose the charges, lose the income tax on the pension when they draw it out and, in some cases, lose pension credit, council tax benefit or housing benefit, while those who are self-employed will not get the employer contribution at all. The great aspiration originally set out by Lord Turnerthat every £1 that goes in should be worth at least £2seems to have turned into the rather modest expectation of £1 for £1. Even more worrying is the apparent confusion about the issue. I will happily give way to the Secretary of State if he can clarify it, because it is pretty important. Unless I have misunderstood him, he is saying that the vast majority of people are going to gain £2 for every £1, yet his report says that it will be £1 for £1.
Let me clarify the issue. I am advised that a large majority of people with a good work history, saving from the age of 25, can expect a payback of about £2 per £1 in 2012. Of course, that crucially depends on for how long they contribute to the scheme. The research document that we published states, as we must, that these figures are for illustrative purposes only. We say very clearly that as specific circumstances change or underlying assumptions vary, that could of course lead to different results.
The hon. Gentleman criticises the levels of means-testing, but he has been unable to set the level of his universal pension. He has also been unable to find any way of explaining how he is going to fund the £20 billion to £30 billion a year that will be needed in extra public spending. As my hon. Friend the Member for Aberdeen, South (Miss Begg) said, he would need to set his universal pension at about the same level as the guarantee credit. His solution to the problem to which he draws the Houses attention is simply unaffordable.
I am delighted that the Secretary of State took the trouble to intervene. I have no intention of finishing my speech without tackling precisely the points that he raised. However, underneath the bluster he appears to be rowing back from his earlier
comments. Saying that many people with long work histories will get £2 for £1 and so on is different from his earlier comments. Then, he said that the majority of people who joined the scheme would get £2 back for every £1 invested, yet despite those remarks that is clearly not the Departments position, which is that the large majority can expect £1 back for £1 invested.
Perhaps there is a consensual way ahead and I therefore look forward to the winding-up speech of the Minister for Pensions Reform and his telling us the proportion of people in the target audience for personal accounts who will be subject to means-testing. The proportion is bound to be higher in the target audience for personal accounts than the cited 30 per cent. Is the figure 40 or 50 per cent?
There appears to be much uncertainty and I should like to know the proportion of the target audience that can expect £2 back from investing £1. That is critical. Our ability to persuade people that it is a no-brainer to save in the personal account depends heavily on the perception that for every £1 one puts in, one gets £2 back, because even without the investment return one gets the employer contribution and the taxpayer contribution. There are few other investment vehicles that can easily provide guarantees such as £2 for £1. It then becomes easy to sell personal accounts.
However, if all the Secretary of State can say is that the majority will get £1 for £1, that is hopeless. Many people will be especially vulnerable to losing much of their savings. They include older people, those on housing benefit, the self-employed and those with broken work histories.
Mr. Laws: I shall give way when I have finished my point. As the hon. Lady knows, some people have enormous debts, which they may be paying off at high interest rates. They will not want to save money in an account that gives them no return when they need to pay off debts on which they are paying interest rates of 30, 40 or 50 per cent. I apologise to the hon. Lady for keeping her waiting.
Miss Begg: The mention of housing benefit reminded me to intervene. The hon. Gentleman has still not made clear Liberal Democrat policy on, and attitude to, means-testing. All that he has said today and on previous occasions suggests that means-testing is bad and should not form part of the system of income that we pay to pensioners. As the Minister for Pensions Reform pointed out, doing away with means-testing would mean that the citizens pension would have to be considerably higher than the income guarantee simply because there are means-tested benefits such as housing benefit, carers benefit and so on. Do the Liberal Democrats want to do away with housing benefit, which is means-tested and important for pensioners, or does the hon. Gentleman claim that means-testing is dreadful except for the poor, for whom it is okay?
We are clearly saying that the amount of means-testing that appears to be built into the Bill is in danger of causing mass Government-sponsored mis-selling or deterring people from saving in the personal
accounts. I ask the hon. Lady to reflect on the sense of a position whereby as many as 50 per cent. of the target audience for personal accounts may lose money and have low investment returns. The report that I cited earlier, Financial incentives to save for retirement has several omissions, not only the hidden bit about £1 for £1, which make it clear how dubious the benefits will be for many people.
people may see a lower expected payback due to complex circumstances such as entitlement to housing benefit and council tax benefit, as well as pension credit.
Most people would not regard the entitlement to housing benefit and council tax benefit as involving complex circumstances. Many of the people in the target audience for personal accounts are on housing benefit and council tax benefit. The report goes on to show that the difficulties involved in the means-testing will be even more significant [ Interruption.] I am delighted that the Secretary of State is heckling me. I suspect that I am hitting a sore nerve. The report states:
However, a level of payback cannot be guaranteed, and the choices and characteristics which may leave a small number of people at higher risk of low payback may not be apparent to either individuals or Government during working life.
Not only will many people lose money under this scheme but, because of the degree of means-testing, many of the people who start personal accounts will not know at the time whether they will get a decent return. I would be happy to give way to the Secretary of State if he wishes to comment on that.
Those are not my factsthey are the facts in the Secretary of States own report, which he does not appear to have read. They make it increasingly clear that the rather sensitive and self-conscious statement that he made on personal accounts on 12 December to the effect that
We have already acted to make sure that the state pension provides a solid platform on which people can save.[ Official Report, 12 December 2006; Vol. 454, c. 739.]
is not true. When the Secretary of State [ Interruption.] I am coming on to how we will vote on pension legislation. I assume that he wants to encourage the process of consensus, but it does not sound like it, given the nature of his sedentary contributions.
I urge the Secretary of State to reflect on the report from the Pensions Policy Institute entitled, Are Personal Accounts suitable for all?. I have no doubt that he will have read it, and he will therefore know that it contains examples of some of the at-risk groups ending up, in extreme circumstances, getting only 5p or 15p on £1 back for £1 of saving. The extent of the means-testing that is embedded in the proposed system and the inability of the Government to say whether the vast majority of people will get a two-for-one return pose a serious risk to the consensus on pensions.
Our position is that, although we support the principles behind the Bill, we want to see serious efforts being made to deal with this problem before the Bill to introduce personal accounts comes before the House this autumn. I thought that I detected that view being expressed by the hon. Member for Runnymede and
Weybridge as well. We could not, in all honesty, warmly support that Bill if we had serious concerns that there was going to be mis-selling or that many peopleparticularly those on low incomeswere going to lose a large amount of their savings in personal accounts.
Ms Keeble: I am intrigued by what the hon. Gentleman is saying. He is arguing that personal accounts will not incentivise saving, but his proposed citizens pension would disincentivise anyone from doing anything at all. People would rest secure in the knowledge that, later in life, they would receive a high level of universal pension. However, my constituents do not believe in a something-for-nothing society. They believe that what they get out should reflect the contributions that they have made. Women argue that their home caring responsibilities should be acknowledged for the contribution that they make to society. Although the concept of a universal pension has attractive features, it is wrong in some of its political and technical aspects.
Mr. Laws: I understand the hon. Ladys point, and she is entitled to put forward that view. I must remind her, however, that her great commitment to the contributory principle is soon to be manifested in her willingness to vote with the Government on diminishing the significance of the contributory principle by reducing the number of years of contributions needed to get a full basic state pension. No doubt all sorts of other modifications will be put in as well.
The serious rock underlying the Bill is the means-testing. We can have our political debates in here, and the Secretary of State can heckle from the sidelines, but when he and the Minister for Pensions Reform go around the country, they will find that my concerns are exactly the concerns not only of the consumers who will have to make these judgments, but of the industry itself.
Mr. Hutton: I am grateful to the hon. Gentleman for giving way and I promise to stop heckling him, but only if he stops saying what he is saying. My hon. Friend the Member for Northampton, North (Ms Keeble) made a good point about how the contributory principle contrasts with the universal residence-based pension that the hon. Gentleman is proposing. He has suggested that he is unlikely to support the second pensions Bill [ Interruption.] Well, he said that his position on that was not clear. We understand that, but will he at least confirm that he will vote with the Government and the Opposition in support of this Bill tonight?
Mr. Laws: We made that clear right at the beginning of the debate. The principles behind the Bill are so in line with our thinking that the Secretary of State would be the first to accuse us of breaking the consensus [ Interruption.]
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