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Session 2006 - 07
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Pensions Bill

Pensions Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, David Taylor
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Banks, Gordon (Ochil and South Perthshire) (Lab)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Burt, Lorely (Solihull) (LD)
Creagh, Mary (Wakefield) (Lab)
Heppell, Mr. John (Vice-Chamberlain of Her Majesty's Household)
Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)
Keeble, Ms Sally (Northampton, North) (Lab)
Lancaster, Mr. Mark (North-East Milton Keynes) (Con)
Laws, Mr. David (Yeovil) (LD)
Penrose, John (Weston-super-Mare) (Con)
Plaskitt, Mr. James (Parliamentary Under-Secretary of State for Work and Pensions)
Pritchard, Mark (The Wrekin) (Con)
Purnell, James (Minister for Pensions Reform)
Selous, Andrew (South-West Bedfordshire) (Con)
Smith, Ms Angela C. (Sheffield, Hillsborough) (Lab)
Waterson, Mr. Nigel (Eastbourne) (Con)
Alan Sandall, Committee Clerk
† attended the Committee

Public Bill Committee

Tuesday 30 January 2007


[Mr. Roger Gale in the Chair]

Pensions Bill

Clause 10

Additional pension: removal of accrual band from 2010-11
Amendment proposed [this day]: No. 64, in clause 10, page 12, line 15, at end add—
‘(7) The Secretary of State shall publish estimates, no later than 1st April 2008, of how many people he expects to receive less than £135 a week in Basic State Pension and Second State Pension combined in 2030 and 2050.’.—[Mr. Laws.]
4 pm
Question again proposed, That the amendment be made.
The Minister for Pensions Reform (James Purnell): It is a pleasure to serve under your chairmanship this afternoon, Mr. Gale. I said in our previous sitting that I hoped today to provide the hon. Member for Yeovil with the figures that he has asked for in the amendment—I hope to his satisfaction—and therefore to remove the need to legislate to provide them at a later stage.
In choosing £135, the hon. Gentleman picks a key amount, to which we have referred in our publications on the issue. We have alighted on the figure of £135 because it is our current estimate of what a low earner in 2053 who has had a good working life would achieve by way of state pension, by working and/or caring. To be clear, we have assumed that a good working life would mean someone working or caring from the age of 25 to state pension age. In describing the objectives of the new state pension, we have focused on a couple of key amounts. The first is our estimate of the number of people who, at the point of retirement, will be clear of the standard minimum guarantee of about £114 in the 2050s. The second amount is the minimum amount that will be received by someone who has been working or caring for a good part of their life.
Those amounts are important, because they help to underpin the key objective of the state pension reforms, which is to provide a solid foundation for private saving. Making pension saving worth while to the point at which it is a routine part of organising personal finances depends on giving people decent returns on their investment. We have shaped the reform system to meet just that objective.
By extending the coverage of the basic state pension and the state second pension, the number of people building the foundation will increase and by increasing the state pension by earnings, we will preserve the value of the foundation. By simplifying the system, we will make it transparent, so that people can understand what they will get and, as importantly, will not take kindly to anyone trying to take it away from them in the future.
Just using the current information, and without taking account of greater employability or a fitter work force, I can give the hon. Gentleman the following information, in response to the questions that he sought to elucidate. Around 60 per cent. of those reaching state pension age in 2030 will receive at least £115 a week just from the basic state pension and the state second pension. More than 40 per cent. of those reaching state pension age in 2030 will receive £125 or more in their basic state pension and state second pension, and more than 30 per cent. of those reaching that age in 2030 will receive £135 or more in their basic state pension and state second pension. Those figures are of course not the same as the means-tested proportion of the pensioner population, because people would also have private savings and other forms of income on top of that. We forecast that in 2050 around 75 per cent. of people will retire on an income of more than £115 a week just through their state pension entitlement and that a quarter of pensioners will retire on a state pension of £140 or more in 2050.
Rather randomly, I do not have the relevant figure to give the hon. Gentleman for the £135, but I shall ensure that I give it to him in writing as soon as I have it available.
Given that the Department for Work and Pensions has produced significant material, as part of our long-term projections and continual assessment of the pensions system, and that that information will be made available in the normal way—including through any future parliamentary questions that the hon. Gentleman might seek to table—I urge him to withdraw the amendment.
Mr. David Laws (Yeovil) (LD): Welcome back to the Chair for this afternoon’s proceedings, Mr. Gale. You will be delighted to see that we have positively leapt forward since we last saw you, in terms of the number of clauses we have covered.
I am grateful for the Minister’s response, which, apart from a missing figure—or rather, perhaps a missing page of his speech—was extremely helpful. For that reason, I do not need to press the amendment to a Division, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Mr. Nigel Waterson (Eastbourne) (Con): Welcome back, Mr. Gale. I am not sure whether it is easier for me to set out my concerns and then for the Minister to deal with them, or for him to set out what the clause is about and then for me to comprehensively rubbish what he has said, but let us try this way round.
We are grateful to the Minister for taking us through the enchanted forest of low earnings thresholds and lower earnings limits. We are now on flat-rating S2P—no wonder nobody understands pensions in the real world. To assist the Committee to make good progress it might help to say that my comments will cover aspects of clauses 10, 11 and 12 together. That should obviate any significant discussion of the subsequent two clauses.
The first point is the redistributive nature of this part of the reform package, which is something that the Government, for obvious reasons, did not trumpet themselves—we had to draw it out in our examination of their proposals. That was thrown into sharp relief by the amendment of the hon. Member for Northampton, North, which sought to go even further than the Government in terms of redistribution.
In fairness, these proposals come on top of reforms made shortly after the Government were first elected, which were redistributive in nature. As I say, the hon. Member for Northampton, North and her group of amendments have shown that there is an appetite, at least from Labour Back Benchers, to go even further than proposed. Back in 1998, the Government’s Green Paper, “A new contract for welfare: partnership in pensions”—Green and White Paper titles really roll off the tongue—made it clear, in fairness, that they always intended in the long run that S2P should cease to be earnings-related and become a flat-rate scheme. The Child Support, Pensions and Social Security Act 2000 contains a regulation-making power to that end. This is one of those occasions when explanatory notes are probably more revealing than the legislation itself. The Library research paper points out that
“the explanatory notes on the Act”—
that is the 2000 Act—
“explain that the Regulations will not be made until stakeholder pensions have established themselves”.
As the Library brief goes on to say with admirable understatement:
“However, stakeholder pensions have not been as successful as the Government hoped in attracting the target market of moderate earners”.
It is worth noting in passing that this reform package—the basic direction of travel of which we, on these Benches, support—signals the last rites for stakeholder pensions. That is an experiment that has clearly failed in terms of encouraging greater participation.
As the Minister will I am sure go on to explain again, the subsequent clause and schedule 2 bring in a weekly rate of £1.40 on deemed earnings below the low earnings threshold. I am told that that figure is designed to be cost-neutral. Concerns have been expressed by outside bodies. The TUC has advised caution about moving to flat-rating S2P too quickly and has said:
“We suggest that before any final decision is taken on reforming the S2P into a flat-rate weekly top-up, the NPSS”—
that is personal accounts—
“should be up and running, and have been subject to an independent review of levels of opt-outs and contribution rates.”
Our old friends at the NPC have also expressed concerns and talked about
“the decline in availability and weakening of private occupational pension schemes”,
which is something that in any view has happened on this Government’s watch. The NPC have also said that that
“underlines the necessity for the second-tier state pension to be strengthened and made more offers defined and predictable benefits, low administrative costs”.
The NPC also talk about the “burden of savings risk” being placed on the individual. Moving beyond that, the Pensions Policy Institute, of which we shall hear more when we get to the great means-testing debate, in its pamphlet, “State pension simplification? makes the point that there will still be some significant differences between S2P and the basic state pension. It lists four differences:
“S2P may not become flat-rate for all individuals until 2030”—
The Minister may want to come back on that point—
“Some people may qualify for BSP but not S2P, for example, the self-employed.
S2P will still be uprated in line with prices when it is payment”,
while as we have heard BSP in due course will be
“uprated in line with earnings”,
“Some of S2P will be delivered by private pensions, through contracting-out”.
The Pensions Policy Institute goes on to say that
“there will still be uncertainty as to the amount of S2P that individuals will receive. Amounts of S2P in payments to individuals will still vary according to lifetime characteristics, and by age”.
It refers to a specific example:
“a woman with exactly the same contribution record as her younger sister will receive less S2P each year than her sister does”.
It concludes by saying that
“many of the differences that currently exist between BSP and S2P will remain”.
If that is in part designed to be a simplification measure, there are concerns from the PPI about whether that will deliver a great deal of extra simplicity.
As I said in my intervention on the hon. Member for Northampton, North, we have referred to the problem of those people—anyone earning over £18,000 a year, as I understand it—who will still continue to pay national insurance contributions at the same level even though the amount that they get from S2P will be significantly reduced. The hon. Lady, with admirable honesty, asked whether it was better that the money should go to people who were poorer. There is a philosophical argument there that I am not going to approach. I respect her position from an intellectual point of view, but is that the Government’s position and may we hear something from the Minister about the redistributive nature of the proposals?
We have done some figures but I am always open to correction on figures from the Minister as he has all the clever people working for him. We estimated that by 2033 someone earning more than £35,000 a year would be paying £2,119 in national insurance contributions for a pension benefit that they would no longer receive; and someone on £18,000 a year would be paying £468 a year for the same lack of benefit.
When that was put to the Department at the time we made an issue of that point and an unnamed spokesman for the Department said that this loss would be partly compensated by an increase in the basic state pension. I accept and can understand that, but it is always interesting to dive into the Government’s regulatory impact assessment.
Ms Sally Keeble (Northampton, North) (Lab): If the hon. Gentleman is going to set out what people do and do not get out of the state system in return for the money that they put in, which is a perfectly proper thing to do, will he say what income those people are likely to receive from their other pensions; and also the tax relief that they will obtain on the contributions to their private pensions, because if we are looking at how the state supports people in retirement it is important to look at the whole picture so that we can make a judgment on the whole picture. I should be very interested to hear the other calculations.
4.15 pm
Mr. Waterson: The hon. Lady gives me a tall order, which is beyond the scope of this clause, but there is certainly a debate to be had on whether the funds devoted to tax relief are being put to best use in terms of encouraging pension saving. I think that I am right in saying, although it may have a different purpose altogether, that there is a new amendment from the hon. Member for Yeovil on tax relief, to which we will come later, so there will be an opportunity to talk about that.
In a minute I shall come on to the Government’s figures, which split people into three indistinct groups: low earners, median earners and higher earners. I am not saying for a moment that there are not people who are better off. The basic statistics are very clear that the top quintile of pensioners is far better off in many respects than the other four quintiles—a quick bit of mental arithmetic there. That is a fact of life. If the hon. Lady wishes to tackle that reality, that is fine. If the Government wish to fight the next election on it, that is fine too, as long as they are fairly clear what they are about. If they were to do that, then “stealth tax” would be a perfectly legitimate phrase from us—although the Minister got a bit sniffy about that phrase earlier.
In the excellent regulatory impact assessment that accompanies the Bill, the chart on page 112 is significant. It helpfully compares the current system for higher earners with the reformed system, showing the basic state pension relatively constant under the reforms and a reasonably sharp decline in the value of S2P for the higher earner. The Government have said, by means of such figures, and informally to us as part of the consensus process, that no one would be any worse off. However, that is only true if one takes into account the value of the basic state pension as well. If one were to disaggregate that for some of the higher earners, they would be significantly worse off and would be paying national insurance contributions without getting the benefit.
Looking at the chart on page 112 for median earners, which is those earning £440 per week, there is an almost imperceptible falling off of overall benefit from 2010 to 2050.
Of course, there is an air of unreality about making projections up to 2050. I certainly do not expect to be doing this job then, but who knows?
Looking at some figures that we discussed with the Minister and his officials when all this was in the melting pot, again there is very much the same argument. The fixed rate of about £1.40 residual earnings-related amount would gradually erode by 2030. Everybody gains, compared with the current system rolled forward, from earnings-uprated basic and simplified second pension.
Simplification is fine, because what the pensions and benefits system cries out for at all levels is simplification, as long as people understand that simplification comes, for some of them, at a cost.
Again, abolition of the S2P and state earnings-related pension scheme rules would result in marginal reductions in second pensions for some older workers, but that is more than made up for by the earnings-uprated basic state pension. I apologise to the Minister if the projections are out of date, but some for outcomes in 2050 to 2053—including the BSP and the effects of an extra three years work—show everyone better off, but lower earners relatively much better off than higher earners. Outcomes in 2050 have a similar sort of projection.
We say to the Minister, if this is what he is doing, by all means be open and clear about what it is. May we hear not how higher earners will still be better off, but how they will fare if the increase in the basic state pension is stripped out? Perhaps he will spend a little time justifying how they can be expected to continue to pay national insurance contributions but receive little or no benefit from doing so. Those are legitimate questions. I look forward to the Minister’s response.
James Purnell: The debate goes to the heart of whether there is consensus on this aspect of the reforms. The changes stem from the reforms to the state second pension and the introduction of flat-rating, which would have happened by the 2050s in any case, and from the view expressed in the Pension Commission’s report that the Government should not be in the business of providing earnings-related second pensions and that that should instead be done through a system of personal accounts. As I understand it, the hon. Gentleman and his party back that principle, but he has a habit of complaining to the Daily Mail and the Daily Express that we are introducing a stealth tax. Indeed I think that he was quoting from our response to one of those stories.
The key part of the reform that removed the relation to earnings was the move towards the state second pension, away from the state-earnings related pension scheme. I do not think that the hon. Gentleman is proposing that we go back to that system. To do so would cost a significant amount of money: we would be talking about a cost of £10 billion a year over the long term. If that is not his proposal, I hope that he will not confuse people by making them think that he is against this part of the reforms, because I think that he supports it.
The key question is not whether we should go back to the old SERPS system, be it that which existed in the 1970s or the amended, less generous one that was brought in by the previous Government in the mid-1980s. The question is whether there should be flat-rating. The Pensions Commission was clear on that matter and I assume that the hon. Gentleman supports it as well, given that he is not intervening. People will not be any worse off under these proposals, because any savings from flat-rating will be recycled into the package of reforms.
Lest there is a further press release, I should like to set the hon. Gentleman’s mind at rest. Prior to reform, a lower earner, on wages of about £330 a week after a good working life, would have got about £89 from a combination of the state pension and the state second pension in 2053. Under these reforms, that figure will be £134. A medium earner would have got £100 before the reforms; that will now be £138. A high earner would have received £102, which will now be £139. I hope that there will be no further allegations that we are taking money away from high, medium or low earners.
Mr. Waterson: Perhaps the Minister could confirm that the figures that he is quoting, which I think are the figures that I was looking at, include two elements, namely the increase in the basic state pension and the requirement to work an extra three years.
James Purnell: Yes, that is right. The figure is for 2053. That does not change the fundamental point that all categories of earner will be better off as a consequence of the reforms. I think that the hon. Gentleman was alleging that they would take money away from higher earners, but they do not. Savings are recycled to make the combination of the state pension and the state second pension more generous.
We could have a system in which higher national insurance contributions were completely tracked only if we went back to the old, state earnings-related pension scheme. If that is the hon. Gentleman’s policy, it represents a different approach from ours and that of the Pensions Commission and is a Liberal Democrat-style spending commitment. The hon. Gentleman probably knows that but wants to preserve the impression that in some way the issue is different from how we describe it. I hope that I have answered his point.
My hon. Friend the Member for Northampton, North asked when we intended the flat-rating to come in. We intend it to start in 2030-31, in accordance with what has been predicted about the gradual moving together of the two thresholds in question, which I shall not try to specify from the top of my head. There are provisions to adjust the date if the economic trends differ from what we have predicted.
The clause restructures the state second pension by removing one of the three earnings bands used in calculating how much S2P a person has accrued in a given year. A person’s annual S2P is currently accrued by reference to earnings between the lower and upper earnings limits for national insurance contributions. This tax year, those limits are £4,368 and £33,540 respectively. As I have explained, S2P is based on the existing SERPS framework in respect of how pension entitlement is built up over a person’s working life.
The introduction of banded earnings allowed us to target additional resources on low and moderate earners. In calculating a person’s S2P accrual for a given year, earnings between the upper and lower limits of national insurance are currently split into three earnings bands, each of which builds up at a different rate. The third accrual band of 20 per cent. is a part of the transition from SERPS to S2P and is designed to erode from about 2011. The amendment would bring that forward by one year.
Removing the third accrual band is the first step towards providing a flat-rate benefit. Together with the provisions in clauses 11 and 12, to which we shall turn shortly and which would introduce a weekly cash amount of £1.40 and a fixed upper accrual point, that will enable us to achieve flat-rate accrual by 2030, as I have said. The measures are in line with the Pensions Commission recommendation. Combined with our change to the basic state pension, they will make all earnings bands better off. They simplify the system.
Question put and agreed to.
Clause 10 ordered to stand part of the Bill.
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