James
Purnell: I meant
5p.
Mr.
Laws: Does the Minister agree that the last time we heard
the suggestion that pension proposals would lead to an extra 5p on the
standard rate of income tax, it came from the Chancellor of the
Exchequer’s own advisers when they tried to abort this very
reform? Given that, should we really take such suggestions
seriously?
The
Chairman: Order. May I guide the Minister back to the
subject of the amendment on the amendment
paper?
James
Purnell: Absolutely. In fact, the very policy that the
hon. Member for Yeovil proposes was rejected by the Pensions
Commission, which he mentioned, so we notice that yet again he has
failed to answer the point. Until he does, we will not take him
seriously on the subject of
means-testing. The
amendment is important. It gives us an opportunity to talk about the
right way to do earnings uprating. That has been a hot topic for
Governments for many decades. The previous, Conservative Government
broke the link between the basic state pension and earnings. During the
past few years, the present Government have come under pressure to
increase the basic state pension in line with earnings, and we are now
doing so through the Bill, but only because we are able to take the
difficult decisions on the state pension age that make an increase
affordable for the long term. We can discuss that under later
amendments. This
amendment opens up what will be a recurring theme throughout our
morning, which is affordability and sustainability. The Bill is part of
a carefully constructed package of reforms that we believe are
affordable and sustainable in both the short and the long
term. The Pensions
Commission emphasised the importance of uprating the basic state
pension in line with earnings. It wanted that to be done to give people
a clear and stable set of incentives and certainties on which to build
their private saving. The commitment that we gave in the White Paper
was to link the basic state pension to rises in average earnings, and
the Pensions Bill delivers on that commitment. However, the effect of
the amendment would be to apply that to
the value of any additional pension, and I am afraid that the hon.
Member for Eastbourne is right in that regard. I know that that is why
it is a probing amendment—my hon. Friend wants the principles
behind what we are doing to be understood. It would add a further
£14 billion to the annual pensions bill by 2050, which is 0.4
per cent. of GDP, but even setting aside the cost, neither we nor the
Pensions Commission think that it would be the right thing to
do. The
essential question is whether, within one envelope of public spending,
we should set the pension, at the start of people’s retirement,
at a level that wecan uprate in line with earnings throughout
their retirement, or whether we should give them a bit more at the time
of retirement and then have it going up faster than inflation, but a
bit slower than earnings. We and the Pensions Commission believe that
the latter is better. When pensioners explain to us how they want to
spend their money, they say that they prefer to have a bit more when
they retire and then have an increase in line with a mixture of
earnings and inflation.
9.30
am The Pensions
Commission said that pensions in accrual should track earnings and that
in retirement, pensions should maintain pensioners’ purchasing
power, but not necessarily rise beyond that. The commission also made
it clear that in retirement it is appropriate to maintain overall
pensioner incomes, which includes the state second pension, somewhere
between earnings and prices. The Government agree with this view
because, when one looks at the spending pattern of pensioners, one
finds it is reflected exactly by what they
do. Where people have
a choice at retirement they invariably choose a higher income over
protection against inflation. For instance, when people annuitise their
pension pots, most opt for the highest income possible—many do
not even buy price indexation. However, it is not just evidence from
annuities that demonstrates that. Evidence from research carried out by
the Pensions Commission, and from independent research commissioned by
us, supports that view, showing that it would be more appropriate to
have a higher initial state second pension that is uprated by prices,
rather than a lower initial state second pension uprated by earnings.
To put it another way, to achieve what the amendment sets out in the
same spending envelope, we would have to reduce the amount that people
got at retirement, which is not what the evidence suggests that people
want. Qualitative
research shows that the pensioners who feel worse off are those who
have most recently retired and have seen their income fall, compared
with the amount that they received in employment. The Pensions
Commission’s first report shows that older pensioners are likely
to spend around three quarters of their income. Therefore, our proposed
reforms match the profile of pensioner spending. When pensioners
retire, they spend about 90 per cent. of their income, and they spend
about 75 per cent. of it when they get older. Our reforms match the
profile of that spending, which is highest at the point of retirement,
and uprated between inflation and earnings after
that.
However, there is a further
problem with the amendment, which is that those contracted out of the
state second pension would also face considerable difficulty. We would,
in effect, require defined benefit schemes to provide earnings
indexation for that part of the occupational pension derived from the
state second pension, and the rest of the pension would be indexed in
line with inflation. No private scheme could face the burden of such
commitment and it is clear that additional funding would be required
through the national insurance rebate to provide for future
pensioners. In
addition, it is very difficult to imagine the sort of administrative
process we would need in place to identify and uprate the
contracted-out equivalent of the state earnings-related pension scheme
or the state second pension for current pensioners, or how we would
reimburse occupational pension schemes for paying an earnings uprated
element on the Government’s behalf.
I hope that I have explained to
my hon. Friend the Member for Northampton, North the reasons behind
what we have done, and why the Pensions Commission recommended it. For
those of us who think that the state second pension is an important
part of the contributory principle and do not want to take it away from
millions of people, the provisions represent the right way of uprating,
and I hope, therefore, that she will be satisfied and withdraw her
amendment.
Ms
Keeble: I am grateful for that explanation, which sets out
the practical problems and the costs very clearly. I hope that the hon.
Member for Yeovil has not been totting up my bill, thus making it
£15 billion that I have spent. It would be helpful if the
Government would give assurances that they will monitor the impact of
the provisions, particularly on women. If women have only the state
pension and state second pension on retirement, it is important that
they do not find that their position
deteriorates.
James
Purnell: I am very happy to give my hon. Friend that
assurance.
Ms
Keeble: I am grateful to the Minister for
that,and with that I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Mr.
Laws: I beg to move amendment No. 28, in
page 5, line 26, at end insert
‘including those claimed by
British citizens living
abroad’. I rise
with enthusiasm and some trepidation to speak to this amendment. I
should point out that I was criticised—scolded, even—by
the hon. Member for Northampton, North the other day for speaking too
briefly on one of my amendments. She encouraged me to speak for longer
periods. I think it was Oscar Wilde who said that there are two
tragedies in life, one is not getting what you want, the other is
getting what you want. He said that the latter is the real tragedy.
Today, I am afraid that the hon. Lady may get what she asked for,
because the clause covers many important issues on which we may want to
spend more time.
I have not only taken the hon.
Lady’s advice about the length of my speeches, but learned
tremendously from the way in which she presents her expensive
amendments, which gives me extraordinary cover for my modest proposals.
She describes her amendments as probing, and apparently those words
mean thatthe Minister cannot attribute any excessive public
expenditure to them.
James
Purnell: Does the hon. Gentleman propose a probing
manifesto when he goes to the
electorate?
Mr.
Laws: I do not propose a probing manifesto; today I
propose a probing amendment. I want to encourage a good debate by
reassuring Members from all parties that I shall not press for a
Division. I hope that we can have a constructive and intelligent
debate, without people worrying about having to vote one way or the
other. At the end of my speech I shall discuss the financial issues
that relate not only to the amendment, but to the financial issues
behind amendment No. 28 and some of the other proposals that we have
tabled for discussion today.
I hope that at that stage,
Mr. Taylor, you will feel that my comments have been in
order, and I hope also that my strategy will have saved time in the
later debate on amendments to the earnings link. I shall of course bow
to your judgment about what is in order and try to keep strictly to the
financial issues that relate to the amendment before us.
I promise the
Minister—and other Members who want to discuss the financial
issues that relate to the amendment and to the different
proposals—that I shall spend time at the end of my speech
discussing those issues. Following that would be the obvious time for
the Minister to make the points that I know he will make.
I hope, however, that we can
have a sensible and constructive debate. I am conscious that this is
not a single-party issue. Members from all parties have spoken
passionately in the Commons and in another place about the injustice
that the amendment seeks to address. When I sat on a Delegated
Legislation Committee recently, to which the Under-Secretary responded,
the hon. Member for Worthing, West (Peter Bottomley) made an excellent
speech about the injustices and consequences of the way in which UK
pensions are uprated. I am also conscious that many Labour Members have
spoken about the issue. The hon. Member for Tooting (Mr.
Khan) secured an Adjournment debate not that long ago.
This is a serious issue about
the way in which people who have lived in the United Kingdom and are
entitled to the basic state pension have it uprated when they decide to
move abroad. One group of pensioners receives the uprating in line with
the retail prices index, which everybody in this country receives, but
another group of pensioners in about 150 countries does not receive any
uprating at all. Their pension is frozen at that level while they
remain overseas. When they come back, it is returned to the level that
it would have been at had the pensioners remained in the United
Kingdom. I welcome
the fact that the Minister has met Mr. John Markham, who
represents a group of pensioners from several different countries. The
Minister will know how passionately they feel about that potential
injustice. The reason why it is so important is that the Bill will
change the uprating mechanism from prices to earnings. Unless I have
got it wrong—if I have, I hope the Minister will stop me now
before I make a fool of myself—it is proposed to uprate a number
of countries by earnings rather than by prices. The other lot, in the
other 150 countries, will be uprated at zero—they will not
receive anything atall. In other words, the existing injustice
will be considerably magnified. I shall discuss whether the current
situation is unfair and then turn to the financial consequences of
dealing with it, what the options might be, what is affordable or
unaffordable, and what might be a reasonable way forward. Since I have
had this portfolio—it is about 18 months, but that is a long
time in the world of work and pensions—I have raised this matter
several times, but I always receive an unusual response. Even the
Minister for Pensions Reform, for whom I have a great deal of
admiration, and his predecessor, who did an excellent job, seemed
mystified that I had raised the issue.
That is odd coming from a
Labour Government, because uprating arrangements for the pensions of
those who live abroad represent an enormous injustice. They are totally
arbitrary and illogical. The Labour Government committed themselves in
1997 to deal with unfairness in society. Indeed, a junior spokesman had
already made a commitment to address the issue if the party got into
power. The Government should be concerned; they should not respond as
if it was an oddity or the obsession of only a few Members.
I hope that those in the
governing party do not think that those pensioners are rather affluent
Tories who have gone abroad, and that they can be written off because
they are not going to vote for the Government or are not sympathetic to
their party, or because they do not have voting rights abroad. I do not
think that that is so. However, we are certainly talking about people
who may have different political views.
We should also
remember—I hope we do, if our debates descends into a
party-political knockabout—that many of those people can still
exercise their vote in the United Kingdom. Indeed, I hope that they
will make their voice heard in the debate on pensions. They also have
families in the UK who will have strong views on the subject. Indeed,
many in the UK who may think of moving abroad in future will want the
Government to put in place arrangements that give them the real freedom
to decide where to go.
Over recent years, a number of
Ministers have defended the existing situation, saying that people have
a free choice about where to go, and that they should go to countries
where we have special uprating arrangements. In the modern world, our
aspiration is for citizens to be free to make their own decisions; the
idea that they should be influenced by arbitrary historic arrangements
on whether the countries that they choose will allow their basic
pension to be uprated is ludicrous. As a Liberal Democrat, I feel
passionate about that, and I hope that other Members do too.
Although it seems a bit of an
oddity—it sounds as if it affects a rather small number of
people—it affects an increasingly large number. The number
drawing state
pensions and living abroad has risen rapidly. It was 575,800 in 1990;
and in 2003 it was 952,000. I do not have a figure for 2005-06, but I
suspect that it is more than 1 million. Only 11 million or 11.5 million
people are drawing the basic state pension, so we will pretty soon get
to the state when one in 10 of our pensioners live overseas. At the moment, more than half
of the pensioners who live overseas have their pensions frozen. It is
not a minor issue that affects only a few people. It affects many, and
because of the huge disparity in property prices between the UK and
abroad there will be an increasing pull for people to move
abroad.
Ms
Keeble: Would the hon. Gentleman accept that many of those
who retire and go abroad are not casting around for where the weather
is better and the living is cheaper? An awful lot are returning to
their families or to their countries of origin after spending their
working lives in this country. It is not quite the pattern that he
presents. 9.45
am
Mr.
Laws: The hon. Lady makes a powerful point, which I think
supports my
argument.
Ms
Keeble: I am making a factual
point.
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