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The matter is that of the limit on contributions to personal accounts when they come in. My hon. Friend said that the Government were wrong to have a limit of £5,000 and that we should have a limit of £3,000—if I caught what he said correctly. I cannot see why we need a limit at all. The object of the operation is to encourage people to save and to maximise general savings and particularly long-term savings—savings designed to produce an income in retirement. It therefore seems to me that if anybody, whatever their circumstances or level of income, finds that when personal accounts come in they are the right vehicle for them and are a better deal all things considered—including the lower fees that we have been promised, which are an important aspect of the return available
on any investment—I see no reason why that person should not come in with any amount of money, whether it is £3,000, £5,000 or £10,000 a year, if they want to and can afford that. We do not have running Revenue limits any longer; we have one global lifetime limit from the Revenue. That means that there is no reason on those grounds to have a running limit. No doubt we shall have to come back to that matter when the second Bill is introduced. I hope that we have some debate in advance of that Bill being drafted, because I am not sure that either my hon. Friend or the Government are on the right lines in thinking in terms of limits.
I feel strongly that when we are designing a national public service such as a pensions system for the future, the House should not be in the business of taking into account the interests of a particular industry. We are not in the business of designing a pensions system for the future to suit the pensions industry. The pensions industry does a tremendous job and I have no reason to say anything against it as a whole. It is a large industry and includes independent financial advisers, pension funds, actuaries and so on and so forth. However, I do not accept that a limit should be imposed on the maximum contributions that can be made to a personal account simply because of the danger that, if there were no limit, undue competition would be created for other parts of the pensions sector. The creation of competition is a benign and good thing and should not be artificially restricted.
There are many welcome things in the Bill and I agree with much of what has already been said on the subject. There is one thing that I regret, although it may be a bit late to alter it. There are a couple of things that could be, and should be, changed, and I trust that that will happen in Committee. There is also one overshadowing problem that the Bill does not recognise and I want to dwell on that at slightly greater length.
I regret that we are taking so long to restore the earnings link. It was rightly said by a Scottish nationalist earlier that we are not actually restoring the earnings link—we are not restoring anything, because the system that prevailed until 1981 was a link to earnings or prices, whichever was the higher rate of increase. There was no choice about it. We are not restoring that; we are creating a new system, which for the first time is an earnings-linked system. That point aside, it seems a great pity, largely for reasons that have already been mentioned, that we cannot bring forward the introduction of that new system. The people whose interests the House ought to be most attached to—the oldest people of all; the world war two generation—are most unlikely to benefit if the earnings links does not come in until 2012 or even 2015.
I recognise that we must maintain the fiscal viability of any measure that we pass through the House. I would be in favour of bringing forward the increase in the retirement age. I am in favour of bringing forward a rise from 65 to 66 perhaps in the next year or two, and then bringing forward a rise to 67 much more rapidly than the Government envisage. As several people have said, there are other countries—I would add Germany to the list already mentioned by my hon. Friend the Member for Bournemouth, West (Sir John Butterfill)—that already have a pension age of 67. I see nothing shocking about that. The Government have missed an
opportunity—they could have done both things in a way that would be acceptable to the Chancellor, who I know is an overbearing presence on the Department for Work and Pensions. They seem to have missed that trick.
There are two more minor matters that I hope can be addressed in Committee. This is an obvious case of where we should just polish the existing text. There have been calls for that already from both sides of the House. I am sure that the Government, who are in a reasonable, consensus-seeking mode, will have taken account of them. However, one issue is the moment of introduction of the earnings link and, later on, the moments of introduction of the new retirement age, which will increase from 65 to 66 and 66 to 67 and so forth. As things stand, appalling unfairness will be created. The other issue, which is important, is the introduction of a new system under which 30 years of contributions will qualify for a full pension, rather than 44 and 39 years, which is the rule at present. The Government propose to go in one jump, on one day—6 April 2010—from requiring 44 years, or 39 years in the case of women, to 30 years. As has already been said, somebody who is 65 on 5 April 2010 will find that he or she has a pension that is considerably less than somebody who happens to have been born a day later and becomes 65 on 6 April 2010. If someone loses out on roughly a third—that would be the gap between 30 years and 44 years—of his total pension entitlement, which is about £84 at present, that would mean that he was losing about £27 or £28 a week simply by virtue of being born on one day rather than another. That cannot be right. Similar unfairness and anomalies will be created when the new retirement ages come in if the whole of the disbenefit is suffered on one particular day.
The Government seem to have forgotten entirely about the concept of a taper. Whenever we make changes to the tax or benefit systems that have a significant, long-term effect on people’s earnings, they should be phased in or tapered, simply out of sheer humanity. That would be the way to pre-empt the great sense of injustice that will otherwise pollute the new regime from the very moment of its introduction, which would be a great pity. I do not know whether I will be lucky enough to be selected to serve on the Public Bill Committee. If I am, and if no one else proposes an amendment along the lines that I have suggested, I will do so myself. However, I trust that the Government will propose such an amendment to deal with the problem.
My main worry is the overarching problem with which the Bill does not deal, namely, means-testing. There is no question at all that in the present circumstances, and in the circumstances that can be foreseen when the Bill reaches the statute book, there will be a large number of people who will have no motivation to make a voluntary pension contribution by way of a personal account or any other means.
Way back in the 1997 Parliament, when the Government first introduced the minimum income guarantee, which was the predecessor of the pension credit system, I happened to be my party’s spokesman on pensions. At that time, I made the calculation—I think that that was the first time that it had ever been
made, and it appeared in the following day or two in not just the specialised press, but the general press—that a person would need to save for a capital sum on retirement of £80,000, on the values of that day, to gain even one penny’s benefit from those savings from a modest income. At the time, £80,000 would have yielded an income of £5,000 a year on a 6 per cent. annuity, and £5,000, on the assumptions that I set out to the House—no one quarrelled with them—was the average value of the benefits that could be received in addition to the maximum state retirement pension, particularly housing benefit, council tax relief and the minimum income guarantee supplement. On the assumption that the person concerned had a full contributions record, I calculated that all the £5,000-a-year annuity benefit would be completely forgone because it would equal the amount of means-tested benefit available to that person.
Things have moved on since I made my calculation. The pension credit is worth more than the minimum income guarantee was at that time, and rents, and thus housing benefit, are somewhat higher. The relevant figure in the calculation is now certainly more than £100,000. A person would have to save more than £100,000 for there to be any benefit on retirement from those savings, if he or she was on a low income and otherwise eligible for means-tested benefits. That is a horrifying thought because to save an amount yielding a capital sum of £100,000 at the age of 65 would represent a pretty heroic savings effort for someone on a small income.
Miss Begg: The figure that the hon. Gentleman cites was considered by the Work and Pensions Committee in the last Parliament. The Minister for Pensions Reform and the hon. Member for South-West Bedfordshire (Andrew Selous), who is sitting on the Opposition Front Bench, were members of that Committee, so they will remember that we queried whether the £80,000 figure was correct. The hon. Member for Grantham and Stamford (Mr. Davies) failed to include in his calculation that someone who had managed to pay £80,000 into a fund that could be put into an annuity would have paid national insurance contributions, meaning that he or she would receive the basic state pension. The £5,000 would thus have been received on top of that pension and the person would not have lost pound for pound as a result of the pension credit. The figure of £80,000 was relevant only if a person had no other income whatsoever and qualified for the full amount of pension credit. The calculation—
Mr. Deputy Speaker: Order. I think that the hon. Lady has had more than her two-penn’orth today. That was probably sufficient by way of an intervention.
Mr. Davies: The hon. Lady misunderstands my logic and what I am trying to say. She certainly misunderstood what I said when I first made the point about eight years ago. I am comparing like with like—I am comparing comparables. For the purposes of my calculation, I am assuming that someone has a full contribution record and thus receives the state retirement pension. The question is whether that person will get anything more than that pension.
The figures have changed a bit since I first made my calculation, although not by much. At that time, the minimum income guarantee would have provided £20 a week more than the state retirement pension. Housing benefit typically would have provided about £50 a week, although now the figure would be £60 or £70. On top of that, council tax relief would have provided perhaps £10 a week, although the amount would now be £20 a week because of the dramatic rise in council tax since then. People at that time would thus have been entitled to some £5,000 a year by way of means-tested benefits on top of their state retirement pension, because, as I am sure that the hon. Member for Aberdeen, South (Miss Begg) knows, if people have only their state retirement pension to live on, they automatically get council tax relief, housing benefit and the minimum income guarantee—now the pension credit. All that benefit would be forgone by people who had some £5,000 of retirement annuity on top of their state retirement pension.
If one does the calculation today, the figure is rather higher, given that the value of the benefits has increased, so the capital sum needed from which to purchase an annuity on retirement would now be more than £100,000. If, after cashing in a capital sum of £100,000, a person had £6,000 from a retirement annuity as their only income in retirement, apart from the state retirement pension, they would find that they had wasted the whole £100,000, because the £6,000 that would be received would disqualify them from the means-tested benefits that they would otherwise get. There is thus a break-even point, which is now slightly more than £100,000, at which savings give absolutely no return.
I ask the hon. Member for Aberdeen, South not only to follow that logic, but to bear with me and go to the next stage. A person who had saved £200,000 would receive a return from that by way of an annuity that would be exactly half what the market return would be. In other words, that person would receive half what the market would regard as a reasonable return for deferring consumption throughout a lifetime and undergoing an investment risk by saving money. It is not unless a person expects to be able to accumulate an amount considerably in excess of £200,000 in a retirement fund with which to purchase an annuity on retirement that it becomes worth while to think about making personal pension contributions.
I am afraid that that is the overshadowing reality, and it means that someone who does not expect to be able to save that kind of money would almost certainly be much better off consuming their income—spending it on enjoying their life and doing what they want to do—rather than saving it, because they will know that when they reach 65 they will get not only a full state retirement pension, but the full pension credit, in addition to housing benefit, council tax relief and the other means-tested benefits to which they may be entitled. Such an uncomfortable reality means that anyone giving honest advice to a person in such circumstances would have to say, “How much do you expect to be able to save in your lifetime? If you can’t save beyond £200,000, it really isn’t worth it.”
Just imagine the effort required for someone with an income of under £20,000 a year, or even £25,000 a year, to save a sum that would, on reasonable rates of return,
amount to £200,000, £250,000 or more on retirement. It would be an heroic effort, and that heroic effort would almost certainly yield a derisory return. People who earn much more substantial amounts of money might be able to put aside £5,000, £10,000 or £15,000 a year, and for them it is very worth while to save that money, but unfortunately it is not worth while for others to do so in present circumstances, and the Government have hardly changed that at all. We must all be concerned about that.
The Liberal Democrats identified that problem and have come up with a solution that everybody else regards as simply not financially viable, and I share that view. Their solution is not realistic; it is funny money, and it is not a sensible way of moving forward. We must be able to afford what we propose for the British public. An alternative used elsewhere is compulsion. The hon. Member for Northampton, North (Ms Keeble) mentioned the Australian superannuation system, which I have considered, and it is an attractive system that runs extremely well. Compulsion means the state telling everybody that they will have to pay for what they receive in retirement. No doubt there is a means-tested safety net, so that people do not die in the gutter if, for one reason or another, they manage to avoid saving any money through the compulsory scheme. Nevertheless, in such a system, what people receive on retirement is seen to be the direct result of the compulsory saving. That, of course, was the original basis of the Lloyd George proposal introduced in the House exactly 98 years ago. Compulsion has not been mentioned at all in today’s debate, although just about every other aspect of the subject has been. It is something to which we will almost certainly have to return.
There are great problems with compulsion. People will say, “I’m compelled by the state to save; the state is forcibly extracting a certain amount of money from my salary. Even though it is supposedly being saved for my benefit, I regard it as a tax. It is an imposition and it is not voluntary.” I quite understand the political sensitivity of the matter. It would be a brave Government who decided to introduce compulsion, but I do not think that we should exclude the idea. I am not urging my hon. Friends to include the proposal in our next manifesto, but we should not exclude the idea from the debate, just as it has been excluded, slightly artificially, from our otherwise detailed and multifaceted discussion this evening.
Mr. Deputy Speaker: Order. Before I call the next speaker, I point out that the Front-Benchers’ speeches were very long, and so far only one speech by a Back-Bencher has taken less than 20 minutes. If all hon. Members are to contribute, speeches will have to be considerably briefer. I call Mrs. Janet Dean.
7.43 pm
Mrs. Janet Dean (Burton) (Lab):
I promise to be brief; otherwise my voice might give out. I greatly welcome the Bill, particularly the measures that will benefit women and carers. The reduction of the number of qualifying years to 30, and the introduction of weekly credits in place of the current home responsibilities protection, will increase the percentage of women who will be entitled to a full basic state pension. Of course, we should recognise that home
responsibilities protection already brings benefits to many women, even though it is more restrictive than the proposed credit system. However, I will raise one problem with HRP that I hope will be avoided under the new credit system, and I hope that Ministers will consider how those affected by the problem can be helped.
In August 2005, I was contacted by my constituents, Mr. and Mrs. Cartwright, who discovered when Mrs. Cartwright received a state pension forecast that she had not been awarded home responsibilities protection. When my constituents questioned that, they discovered that their child benefit, which they had claimed since 1984, was deemed to have been paid to Mr. Cartwright, even though it was paid into their joint bank account. When they applied for child benefit, Mr. Cartwright’s name was put first on the application form, for no reason other than that his name appeared first on the bank account. He was therefore treated as the recipient of child benefit, and that qualified him for HRP. I believe that that may be a significant problem now that child benefit is paid into bank accounts. It would never have arisen under the old system of payment books, in which it was clear that it was the mother who received the benefit.
Mr. and Mrs. Cartwright should have received form CH718 for Mrs. Cartwright to complete, which would allow her to give her permission for Mr. Cartwright to receive child benefit and therefore the HRP. My constituents do not believe that they ever received that form, and the Child Benefit Office is unable to provide copies of returned forms. The onus is on the claimant to prove that they never received the forms, which is impossible after 20 years. There seems to be confusion on that point. My recent inquiries revealed that the rule is that if no completed CH718 form is received, the claim from the husband should be disallowed. However, while making representations in 2005, a member of my staff was told that although the forms are sent out, if they are not returned, it is assumed that the claimant received them, and that the first named person on the form is accepted.
Whatever happened regarding the form more than 20 years ago, it is clear that no one would knowingly waive their right to home responsibilities protection when they had been caring for their children and not working. My constituents were certainly not aware of the implication of putting the husband’s name on the claim form and the effect on the entitlement to HRP. It is difficult to find out how many people may be affected by the problem, and it is probably only when people draw close to retirement age and receive a pension forecast that we will know the true extent of the problem. Certainly, both my assistant and my constituents have been told by the National Insurance Contributions Office that it knows of many such complaints.
The Pensions Advisory Service produced a document entitled “Report on Women and Pensions Helpline”, which was the result of a pilot helpline available from 18 October to 10 December 2004. The report states:
“A recurring comment from many callers was that they were unaware of, or confused by, HRP and how it may apply to them.
Particularly relevant for couples, is the fact that HRP is only automatic when the child benefit is being paid to the non-working partner. Some enquiries came from individuals where the child benefit was being paid to the working partner rather than the partner who had given up work or was working reduced hours to look after the couple’s children. We were able to advise why they should be changing the payee details for the child benefit.”
I recently contacted the Pensions Advisory Service and was told that about 500 calls to the helpline concerned the subject of HRP, and the main problem was lack of understanding of how the system works. The issue highlighted in the report of the “wrong” partner receiving child benefit mainly concerned cases in which men stayed at home to care for the children, and due to ignorance of how the system works, their child benefit was paid to the mother, even though she was the working partner. As a result, the stay-at-home husband did not qualify for HRP.
Whether it is fathers losing out on HRP because they stay at home to care for their children, or mothers such as Mrs. Cartwright missing out because the husband’s name was inadvertently put on the form first, the situation is clearly ridiculous. No one would willingly lose some £32 per week in pension entitlement. In such cases, it should be reasonably easy to establish that the working parent has paid tax and national insurance during the years in which they were eligible for HRP, whereas their partner has not. It would therefore seem possible to transfer the right to HRP in those circumstances.
I am grateful to my hon. Friend the Minister for Pensions Reform for meeting me to discuss my constituents’ case. I hope that amendments to the Bill will be considered, so that we can address the problem that affected Mr. and Mrs. Cartwright and, I believe, many more people throughout the country.
7.49 pm
Mike Penning (Hemel Hempstead) (Con): I shall not waste 48 minutes of the House’s time, which is what the hon. Member for Yeovil (Mr. Laws) did. He lambasted the Bill, only to say that he would support it. I, too, support it, and it would have been much easier if he had said that he was going to do so at the start of his speech instead of waffling for 48 minutes.
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