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Session 2006 - 07
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General Committee Debates

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 6 February 2007


[David Taylor in the Chair]

Pensions Bill

New Clause 2

Review of pension credit entitlement
‘(1) The Secretary of State may from time to time, and shall when required by subsection (2), lay before each House of Parliament a report by the Government Actuary or the Deputy Government Actuary on—
(a) current rates and coverage of pension credit entitlement;
(b) likely future rates of pension credit entitlement; and
(c) such other matters as he considers to be relevant as affecting the present and future take-up of and eligibility for pension credit.
(2) The Secretary of State shall lay such reports—
(a) five years after the coming into force of Part I of this Act, and
(b) thereafter at intervals of not more than five years.’.—[Mr. Waterson.]
Brought up, and read the First time.
4 pm
Mr. Nigel Waterson (Eastbourne) (Con): I beg to move, That the clause be read a Second time.
Welcome back to the Chair, Mr. Taylor. We come to one of the big issues in our deliberations. I make no apology for going through the new clause in some detail, because it deals with a crucial issue for the Committee and for the legislation before us. It replaces the possibility of oral evidence, so I am going to be the Punch and Judy man, giving the Pensions Policy Institute’s views on means testing and the Government’s views on means testing, in a kind of seaside show. We could have had the real thing had the Government taken a different view. However, we have the promise of another seminar, on 20 February, and Members will be keen to put that date in their diary—while tickets last. I, personally, am really looking forward to it.
Means-testing matters because it is on the increase. We are discussing a system under which we have large-scale means-testing, despite the fact that the current Chancellor said when Labour was in opposition that it was his party’s aim to reduce means-testing. Almost 50 per cent. of people now retiring are means-tested. I am on common ground when I say that if we carry on as we are, the figure will rise to 70 or 75 per cent. by the middle of this century. There is a sort of consensus that that cannot be allowed to continue; it was very much a theme of the Turner report.
People do not claim pension credit for a number of reasons. They may think that it is all too complicated or intrusive, or that they could not possibly qualify. If one reads across to the means-tested benefit with the worst claim record, council tax benefit, elderly constituents of mine who own their own homes, so they are capital rich but cash poor, do not imagine for a moment that they could claim council tax benefit.
There is a problem because a large proportion of people who are entitled to means-tested benefits will never claim them. When pension credit was introduced, in a massive act of cynicism, the Treasury itself calculated that 1.4 million people would never claim it. The Treasury has a shrewd idea about the limits of means-tested benefits.
Means-testing also makes it difficult, if not impossible, for people and their financial advisers to predict whether it is worth their while saving for retirement. That is a key issue. There is much discussion, quite rightly, within and outside Government about the buzz phrase “financial accountability”. Everything is relative, I suppose, but one of the gloomier aspects of those seminars that seemed to stretch over last summer was the average person’s dismally low ability to think through their financial options, particularly on pensions. I do not have the survey with me, but a recent study showed that if anything, the problem is becoming worse among younger people. The new generation that is coming up ought to be worried because they will live longer and save less, but they have even less understanding of the system. Means-testing makes it difficult, because it is a disincentive to save. That is why we support measures that are part of a package to boost the basic state pension. We concluded before the last election—I do not want to get into this debate again—that the only reliable way to get help to the poorest pensioners was to do just that.
Mark Pritchard (The Wrekin) (Con): On that important point, my hon. Friend is right. Apart from means-testing being a disincentive for saving, does he agree with Help the Aged, which suggested that it was, in fact, pernicious?
Mr. Waterson: The Americans would say that “pernicious” is a ten-dollar word, but I suppose that it covers the point. The word that I often use is “cancerous”, because means-testing eats away at private savings. Although other factors may be at work as well, much of the collapse in savings generally since 1997 is attributable to the surge in means-tested benefits. I cast no aspersions on those who are involved at the end of a phone or on home visits in trying to deliver means-tested benefits, but, with the best will in the world, there are natural limits to how far they can be pressed on those who need or deserve them.
Mark Pritchard: Does my hon. Friend agree that, while we can be technocratic about the details and discuss the minutiae of a Bill, means-testing helpfully draws us out from the details and reveals a fundamental philosophical difference between the positions of the Opposition and the Government?
Mr. Waterson: There is a philosophical difference. As my hon. Friend invites me on to that territory, let me deal with it. I believe that the Chancellor, who is about to be Prime Minister, actually likes people being dependent on the state in all sorts of ways, whether employed directly by it or dependent on it to earn a decent living through means-tested benefits and so on. As Conservatives, we take a different view. We believe that the more people are dependent on handouts from the state, the less likely some of them are even to claim them in the first place, and the more demoralising it is for people who do claim them. That is another extremely good reason for wanting not just to stop the increase in means-testing but to reverse it.
One of the issues that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) raised on Second Reading was how we start rolling back means-testing in a clear-cut manner. One way was to gain consensus on an aspiration to do so, which means that, as and when funding is available, whoever is in Government will boost the state pension above and beyond what is in the current package.
The Minister for Pensions Reform (James Purnell): Since we are on the topic, does the hon. Gentleman agree that another way to put the philosophical difference is that pension credit has managed to lift 2 million people out of absolute poverty, and 1 million out of relative poverty? It has in large part corrected the disgraceful situation that we inherited from the Conservatives. He said in response to my hon. Friend the Member for Northampton, North (Ms Keeble) earlier in this Committee’s proceedings that his party would not have introduced the pension credit. Does that not show clearly the philosophical difference between the two parties?
Mr. Waterson: The Minister is being a little selective. When I said that we would not have introduced the pension credit, I was responding to the allegation that we would scrap it. That is not our policy. The last thing that the pensions system needs is another period of turmoil and change. The key issue is reducing the amount of means-testing, and people’s dependence on it.
We can bandy figures around. The Minister is aware that there are still 2 million pensioners living in poverty, 1 million of whom live in deep, persistent poverty. On any view, he is not reaching the 1.5 million or 1.6 million who are not claiming the pension credit to which they are entitled. My basic point is that there are limits to means-testing.
I notice that the Minister did not respond to my point about a consensus on the aspiration to boost the state pension even further when fiscal circumstances allow. That, in the long run, must be the way to make a real difference to the amount of means-testing. Within the limits of this Bill, the issue is whether a particular level of means-testing will still prevail after the reforms and, if so, what it will be—I will come to that in a moment—and what effect it will have on the success or failure of the system of personal accounts.
As the Association of British Insurers points out in one of its briefings, the Government project that the figure for means-testing will fall from about 45 per cent to around 29 per cent by 2050 post the reforms. It says that this will be a
“welcome shift that would return means-testing entitlement to its previous levels.”
It is important, in parenthesis, to make the point, and I think someone made the point this morning, that there will always be some means-testing in the system. There will always be an irreducible minimum of people who need means-testing to deliver to them the top-up benefits of whatever sort that they actually need.
Mark Pritchard: It is very relevant that on Second Reading this issue was covered in great detail. The possible reduction in the number of people claiming means-tested benefits was mentioned. The googly in that is the fact that we are likely to see an increase in the number of economic migrants coming from the new European Union countries, which will completely throw out all the figures that the Government have suggested. We have had 2 million new economic migrants since 1997 and 0.5 million are expected in the next year. During questions on the Floor of the House the Secretary of State admitted that people coming from European Union countries would have their pensions topped up by pension credit.
The Chairman: Order. Interventions should be short. There will be an opportunity for speeches later on.
Mr. Waterson: My hon. Friend makes a perfectly legitimate point and we had a lengthy debate earlier on in the Committee about so-called frozen pensions. One thing is clear, whether people are coming from eastern Europe or going from here to other countries, there are enormous movements of people—both young people who want decent jobs with reasonable pay and older people who are looking to retire in other countries or over here. One of the issues that has to be addressed is to what extent they are likely to be in receipt of top-up benefits. That could be pension credit here. If my hon. Friend remembers, there was a discussion about whatever the equivalent is to top up the incomes of pensioners in Canada, Australia or wherever. That is an issue that we shall have to come back to.
And in Bosnia and Herzegovina, or whatever it is called—
Mark Pritchard: Serbia.
Mr. Waterson: Indeed. I was saying that the ABI was concerned because, as it says, alternative modelling suggests that means-testing will not fall by as much as the Government have predicted. It also says:
“Any long-term forecast of this nature includes a large number of assumptions and so can never be certain.”
On that issue, I want to deal in a bit of detail with the assumptions made by the different warring factions on the levels of means-testing. Those assumptions are very important. The ABI says:
“The ABI believes that much greater clarity is needed on the impact of the Bill on future levels of means testing”.
We agree with that, hence new clause 2.
All that the new clause says—it seems perfectly modest to me—is that the Secretary of State should from time to time lay reports from the Government Actuary on rates and coverage of pension credit entitlement, likely future rates—projections into the future—and anything else relevant to the eligibility for and take-up of pension credit. The reports should be published every five years. Whichever party is in government, it is important that the Government focus, whether they like it or not, on the penetration of means-tested benefits following these reforms.
4.15 pm
The first view on all this is, of course, that of the Pensions Policy Institute, which disagrees quite significantly in its projections as to the range of pension credit eligibility under the Government’s proposals. The PPI’s document on pension credit, produced some months ago, states that
“future eligibility for Pension Credit is very uncertain.”
It therefore presents its estimates as a range and sets out how it has arrived at that range.
Just to be clear, it is not that I think that the Department is wrong and the PPI is right, or vice versa; it is simply that the PPI is working on a different set of assumptions. It is our job, in the absence of any oral evidence session, to try to work out which set of assumptions is more likely to be the case. I think that the PPI’s argument is that the Government’s assumptions are on the conservative side.
Let us consider the PPI’s assumptions, particularly in the modelling paper that it published alongside its report. First, income from the basic state pension is projected to grow in line with average earnings growth, reflecting the new policy. That seems perfectly reasonable. Secondly, income from the state earnings-related pension scheme/the state second pension grows considerably faster than earnings, as people receive more SERPS and S2P as the system matures, especially at the lower end of the pensioner income distribution.
Thirdly, private pension income grows by less than earnings, reflecting current experience of pension contributions not keeping pace with the increasing costs of private pension provision. That seems to me an important issue and one on which there is a legitimate ground for dispute between the PPI and the Government. How does one project the growth in private pension income into the future? I guess that, if personal accounts are a roaring success, those figures will have to be adjusted. We shall return in a moment to how the Government approach any assumptions to do with private pension income.
Fourthly, income from other sources—including non-pension saving, other state benefits such as disability benefits, and earnings—grows broadly in line with average earnings, reflecting growth in earnings and saving, but a decline relative to earnings in the value of other state benefits. We have heard in debates in Committee that some benefits will still be pegged to prices, rather than earnings.
The PPI says—I suppose that it would say this—that those projections seem reasonable
“compared to what we know about the likely trends in each of these components. They are equivalent to assuming all income grows at 2 per cent. a year, real, between 2005 and 2050”.
The PPI then says—this is the really important bit—:
“In this scenario, Pension Credit eligibility under the White Paper proposals remains roughly at today’s levels of 45 per cent. to 50 per cent”.
It has examined other models, and it concludes that its estimates
“give a range of the possible extent of Pension Credit...of one-third to two-thirds in 2050, with a base case of no change from today’s level of 45 per cent. to 50 per cent...This would mean between 4 million and 6 million households eligible for Pension Credit.”
The PPI’s document is helpful, because it sets out the basis on which it has approached the issue. In fairness, it has been in discussion for some time with Department for Work and Pensions officials, trying to narrow any gap between them. Certainly as recently as last month, when we contacted the PPI, it confirmed that it was
“still in discussion with DWP analysts to understand the differences between our respective projections of Pension Credit.”
It goes on to say that it is working not to “close the gap” between the projections,
“but rather to understand the different assumptions that drive the results and identify scenarios that are consistent with each projection.”
The PPI ends charitably by saying:
“Projections of this nature are inherently uncertain, and there is not a single right answer!”
The institute also tells me in a separate e-mail:
“We are unlikely to change our projections, because they still seem reasonable to us.”
A more recent item may have come under the umbrella of written evidence, but I think that all members of the Committee have had the benefit of the PPI’s latest briefing note, No. 36, which asks:
“Will the Pensions Bill solve the problems of state pensions?”
Answers on a postcard, please to the Minister.
The institute goes on in the briefing note to make certain projections, particularly in chart 4, which is headed:
“Incentives to save in Personal Accounts will depend on individuals’ circumstances.”
It is only fair to summarise the paper in a bit of detail. The institute makes the point that without reform,
“the proportion of households eligible for Pension Credit was expected to 70-85 per cent. by 2050.”
It states that there will be a reduction in the reformed system,
“although 30 per cent. of households being eligible would be historically high for Pension Credit and its predecessor benefits”
and that
“Government expectations of private saving were too high.”
I shall return to the Government’s approach and assumptions shortly, and I hope that the Minister will be even more helpful about that. The institute also comments:
“For other types of individuals—notably people in their forties and fifties in 2012 with no prior saving, and those who are likely to rent in retirement—incentives to save could be considerably lower”.
The document continues with a reflection, echoing our debate earlier today, about
“the importance of information to help people make the right choice.”
Concerns remain, therefore, and in a press statement only a couple of days ago in Pensions Week, the institute was reported as saying:
“The reforms will leave the state pensions system still too complex.”
The article also reported the institute’s
“concerns about the sustainability and incentives to save, as well as likely returns of the government’s new personal accounts, due to their interaction with means-tested benefits.”
James Purnell: We have already dealt with the issue of whether the self-employed, one of the groups that the hon. Gentleman mentioned, will automatically be involved—which they will not. Does he recognise that we are consulting on whether the other group—people who have reached their 40s or 50s without really having accumulated any saving—should automatically be enrolled? Does he furthermore recognise that people who do not have any saving by the time they are in their 50s are the ones for whom the kind of safety net that he, too, supports are designed? The safety net is to help people in that situation, who would otherwise, in time, be in penury.
Mr. Waterson: People who are getting to the end of their working lives and who have not made any savings may well need help from the state. I do not think that there is any contest about that. I am delighted that the Minister is consulting about that, and I look forward to hearing, when he makes his speech, whether the Government have moved at all in their projections of means-testing levels after the reforms.
I do not want to steal the Minister’s thunder, but I am looking at a summary from the DWP website about projections of pension credit entitlement. It projects that
“around a third of pensioners will be eligible for Pension Credit by 2050 under the reform proposals”.
Interestingly, it states that the estimates do not include the effect of personal accounts. On one level, I can understand that. We are debating personal accounts and we even have the joy of another Bill to look forward to in a little while, which will set out more of the details. However, it is something like “Hamlet” without the prince when we try to estimate the relevant levels without making some assumptions about the effect of personal accounts.
The DWP summary goes on to state:
“Pension Credit eligibility becomes primarily concentrated among single pensioners, mostly women”
and that
“hardly any pensioner couples are likely to be eligible by 2050.”
It would be interesting to know whether all those assertions had been agreed with the PPI as part of the continuing discussions. The document states:
“Eligibility is strongly linked to the higher Pension Credit rates for disability and caring; approaching a half of those eligible for Pension Credit in 2050 get higher rates of Pension Credit because they also receive disability benefits, are carers, or have additional housing costs.”
It also talks about capturing robustly
“changes in the projected distribution of pensioner incomes as well as changes in average incomes.”
The document addresses an issue that is taken up in the regulatory impact assessment about the “modelling approach”. I believe that some of the modelling has changed in recent times. It says that the Government have used the Pensim 2 model because it enables them
“to generate a more plausible future distribution of pensioner incomes than is likely to be possible from a static simulation model, and to assess the effect of varying key assumptions.”
The document goes on to say:
“The reduction in Pension driven in part by a projection that incomes in the bottom half of the pensioner income distribution (which is most relevant to Pension Credit entitlement) are likely to grow faster than average. This primarily reflects projected increases in state pension entitlements.”
Again, it would be interesting if the Minister pinpointed where the PPI’s analysis varies on some of those issues.
I move to the regulatory impact assessment. The Conservatives do not have the Pensim 2 model to play with, but I imagine that the Minister whiles away many a tedious evening by feeding some assumptions into it in the DWP basement. The RIA tells us that the Government’s projections of pension credit are
“based on the Pensim2 dynamic micro-simulation model”—
which is presumably different from the original steam model—
“that has been developed in DWP.”
It tells us that the model
“builds up projections of income from a series of equations and assumptions that generate labour market and pension histories for a representative sample of the population. It simulates the accrual of...pensions”
and so on.
The RIA goes on to this key point:
“Projections in the White Paper were based both on Pensim2 and a more traditional ‘static’ microsimulation modelling approach”—
an abacus, presumably. It continues:
“This reflected that Pensim2 was a relatively new model and so it was important to validate its findings against another model. In the light of further analysis...analysts now consider that Pensim2 provides more robust projections of Pension Credit entitlement, where the distribution of individual pensioner incomes is the key determinant. In particular, Pensim2 provides a technically superior approach to projecting future changes in the distribution of incomes from state pensions when entitlement to these is widening considerably over time.”
There we have it. It rather looks as though the Government are now more confident about their projections than they were before. I assume that it will be part of the Minister’s case that because they have Pensim 2 and the PPI does not, they are right and it is wrong. I am not in a position to make a judgment on that Mr. Taylor, and nor, I suspect, are you. I do not spend a lot of my time on dynamic micro-simulation, but I dare say it has its up side.
James Purnell: You should try it.
Mr. Waterson: Yes, it certainly sounds exciting.
I return to the Parliamentary Brief cover story that we discussed earlier, “Would you buy a pension from this man?”, and the comments of Mr. Steve Bee, who is a well-respected expert in this field. I reiterate that I shall not get into an argument about the meaning of the word “tax”. Steve Bee is content to describe it as a tax, but the Minister takes umbrage about that. I have no desire to get into what seems to be a purely semantic argument.
Mr. Bee’s central point is that for savers,
“the Pension Credit system will leave them just £11.70 a week better off than a non-saver. That is slightly more than a 40 per cent. tax on saving and is exactly why millions of people on modest earnings should be very wary indeed about this proposal for a National Pensions Savings Scheme.”
He then touches on the issue of how much people have to save, saying:
“If the loss of £8.30 in weekly income doesn’t sound much”—
and it does not—
“it is worth reflecting that the typical capital cost of that amount of weekly income for a 65-year-old is around £7,000 today.”
James Purnell: Does that mean that the hon. Gentleman’s policy is to abolish the savings credit? As he knows, that is what he has just described. Does he recognise that that would lead to an increase in the number of people on 100 per cent. withdrawal rates? That was the situation under the previous Government, when there were twice as many pensioner families on 100 per cent. withdrawal rates as there are now.
Mr. Waterson: No, I am not saying that that is our policy; indeed, if the Minister is patient, we will come out with our policies in due course, as I have explained before. What I am trying to find out from him, as the guy who is trying to introduce the system, is how he will deal with means-testing and, crucially, how it will affect the likely success of the personal accounts system.
In his article in Parliamentary Brief, Mr. Bee said that £8.30 of weekly income was the equivalent of about £7,000 today. He went on:
“A £7,000 investment that yields not one penny’s worth of value is a rather disastrous investment for anyone to have entered into voluntarily, let alone to have been swept into through the process of auto-enrolment.”
In conclusion, he said:
“The problem with a pension system where so many people could be potentially penalised by saving is that no financial adviser would ever recommend that saving for a pension was either suitable or advisable for everybody.”
What it comes down to is this: we are trying to help the Minister clear the ground. If personal accounts are to have a chance of succeeding, various things must happen. As I explained on Second Reading, they include restoring confidence in the existing pension system and sorting out the issue of levelling down. Crucially, they also include controlling and, if possible, reducing means-testing, the effect of which on pensions saving is bound to be pernicious—the word used by my hon. Friend the Member for The Wrekin—or cancerous, to use my own phrase. There is also the issue of potential mis-selling, on which we touched in a separate debate.
4.30 pm
Mr. David Laws (Yeovil) (LD): Mr. Taylor, thank you and welcome back to the Chair for this afternoon’s proceedings. As you will know, I have not spoken for about 10 clauses, so I might be tempted to speak for a very long time to make up for that. However, as you might also be aware, I said a few things about means-testing on clause 19, so I might also be tempted simply to refer hon. Members to my earlier speech and to sit down. However, I am sure that hon. Members would not want me to do that, because this issue is crucial to the Government’s pension plans.
We know, from none other than Lord Turner himself, that it is crucial. In the commission’s final report, he said:
“Lower rates of return for individuals”—
he meant in relation to means-testing—
“and the possibility in extreme cases of negative real returns, would make it dangerous to proceed with an automatic enrolment system without individual advice, but introducing individual advice would substantially increase costs”.
The issue is therefore clearly critical.
We know from this morning’s sitting that the Minister has promised us some information on 20 February, but we still have not heard from him on a narrower point: even given the Department’s assumptions about the number of people on means-testing in 20, 30, 40 or50 years’ time, what proportion of the target audience for personal accounts are likely to be subject to means-testing? The suspicion must be that the proportion will be an awful lot higher than the Government’s base figure of 30 per cent. If there are the fantastic models in the basement of the Department that the hon. Member for Eastbourne talked about, with all sorts of newfangled additions, it must be possible to come up with some sensible estimates.
James Purnell: I am afraid that I shall have to disappoint the hon. Gentleman. We are looking into that issue and we shall publish the findings in due course—we have steam pumping out of the DWP basement as we speak. He will note that in the target group people earning below £5,500 or so will not automatically be enrolled. He might want to take that factor into account.
Mr. Laws: That is extremely helpful. We shall wait for the Government to publish those figures, which will add a lot to the debate about the risks of people being automatically enrolled in personal accounts. I hope that those figures will be available on 20 February, when we have our seminar.
As we discussed earlier, the issue is important precisely because people must have a clear sense of what the returns will be before they decide to be automatically enrolled in personal accounts. At this morning’s sitting, I mentioned the apparent confusion in the Department over what the returns will be for people who are automatically enrolled in personal accounts. A new piece of information has become available since then. On Second Reading, the Secretary of State said in response to a question that I put to him that
“the vast majority of people will be able to look forward with some confidence to receiving £2 back for every £1 put in.”
That was the Secretary of State’s opening bid. Later in the debate he came back and clarified that he was talking about only
“a large majority of people with a good work history, saving from the age of 25”.—[Official Report, 16 January 2007; Vol. 455, c. 665-92.]
However, that is not the same thing at all.
The DWP then issued the paper entitled “Financial incentives to save for retirement”, which clarified 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...for...£1”.
That is hardly an impressive payback at all, and will considerably change the financial incentives that people who are thinking of saving and personal accounts will face. That is particularly so if they are individuals with large amounts of debt, as many of them could be, who might therefore need to decide whether to pay that off before going on to save in personal accounts.
I thought that we had got to the Government’s bottom line on the issue—that £1 gives £2 in certain circumstances and £1 gives £1 in the majority of circumstances—until this morning when I received an answer from the Minister which was dated yesterday. I asked him what estimate he had of the proportion of the target audience for personal accounts that could be expected to receive a return greater than £2 for every £1 invested. The Minister’s answer actually says £2 million for every £1 invested, which would be extremely impressive, although I would want advice on the funds proposed. Assuming that the reply is an answer to the question that I put to the Minister about £2 for every £1, the answer is now:
“Information on the proportion of individuals who can expect particular payback rates is not available.”—[Official Report, 5 February 2007; Vol. 456, c. 660W.]
In other words, we have gone from £2 for £1 to £2 for £1 in some circumstances and £1 for £1, but now the information is not available at all, despite the dynamic and stimulating model in the basement of the Department, which the hon. Member for Eastbourne mentioned.
Mr. Waterson: Simulating.
Mr. Laws: It is simulating and stimulating. If the model is so good, how can it be that from the starting point of giving such categorical advice and assurance as the Secretary of State was able to on Second Reading, with the majority of people getting £2 for £1, we now cannot say anything at all about payback rates? The Minister’s answer finished with the following sentence:
“The figures that the Department has show that while the payback depends on factors such as investment performance, the vast majority of people can expect to benefit in retirement from saving in personal accounts”,
which could mean anything at all. The Department has got in a bit of a muddle over the issue. It has been rowing back rather fast and I think that it is nervous about putting on the record what the returns will be, in case it cannot deliver. That is not a good background for launching the accounts.
This morning, we had a debate about the individuals who might be particularly vulnerable to losing money in personal accounts. The thrust of the Minister’s comments in that debate, when he responded to the hon. Member for Eastbourne, appeared to be that the Department was perhaps going to shave off some of the vulnerable groups such as the self-employed, or women in later life. The problem with that is set out very neatly on page 9 of the Department’s paper, “Financial incentives to save for retirement”, where it says that
“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”.
In other words, there will be some fundamental uncertainties that will make it difficult in a mass means-tested system to filter out people who may be vulnerable. That is well highlighted by the PPI report, “Are personal accounts suitable for all?”, which helpfully goes through a series of categories of individual, described by contribution record, income decile and work characteristics, to figure out whether they would benefit from saving in a personal account.
Let us consider individuals with a full national insurance record, whether in the lowest income decile or the highest, which are categories that the Minister has not mentioned so far, and those individuals who are renting and likely to be receiving housing benefit. Even for a woman aged 40, the return would be something like 50p for every pound put in. There are a lot of vulnerable people who might go into personal accounts and not be better off. It is not only those with high debt characteristics who are paying high levels of debt interest. We know how difficult it must be to cater for that type of person; the Government would not easily know what debts they had and what interest they were paying. There are also others who might not be better off, however: the self-employed; older people; people who receive housing benefit, and people who receive council tax benefit. The proposed new clause focuses on pension credit, but it relates to a lot of other means-tested benefits as well.
Andrew Selous (South-West Bedfordshire) (Con): I am listening with interest to the hon. Gentleman, as always. Given the legal dispute about the guarantees in Government leaflets that is before the courts, has he given any consideration to the position of people who are auto-enrolled in personal accounts and later find out that that is not the best thing for them, and the sort of comeback that they may seek, whether against the Government, the board or the delivery authority?
Mr. Laws: The hon. Gentleman is quite right to indicate that people automatically enrolled in accounts by a Government who sell the scheme almost as a no-brainer saving scheme, because one gets £2 for every £1, would be very angry if they found that they were losing money as a consequence of investing in the scheme. They would certainly mount a claim for compensation and they would look closely at what Ministers and others have said about the benefits of the scheme. Perhaps that is why the Government are desperately rowing back. If those individuals were able to demonstrate that the Government were saying that the vast majority of people would get £2 for every £1 but that it had been shown later that that was going to be only 50, 40, 30 or 20 per cent., they would have a strong compensation case.
The Government will have to be very careful about what they say, and the more careful they have to be the more questions they are likely to raise in people’s minds about whether they should have personal accounts.
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James Purnell: I will answer the main points that the hon. Gentleman is making, but I feel that he is quoting the paper out of context. That is merely a disclaimer about the fact that it is a set of projections across the whole of the population, and one cannot foresee every single circumstance. That is not hugely different from the PPI paper, which says:
“This paper is intended as a contribution to the policy debate on Personal Accounts. It should not be relied on by individuals or their advisors as the basis for saving and investment decisions.”
We are trying to inform public debate. There is a difference between making projections for the whole population and giving individual bits of advice.
Mr. Laws: I am grateful. I am not sure which comment the Minister is saying that I was taking out of context, the one from the Secretary of State or the one on page 9 of the DWP paper, which says that:
“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”.
James Purnell indicated assent.
Mr. Laws: I think that the hon. Gentleman is nodding to show that that is the sentence, but I am not sure what his complaint is. It seems clear to me what that refers to. Surely it means that because we do not know at the beginning of somebody’s working life whether he is going to end up on housing benefit or council tax benefit, or for how long he is going to work—he might end up with caring and other responsibilities—we cannot just run the Pensim model and say for certain to an individual at a particular age that he will benefit. The more uncertainty there is about those characteristics, the less attractive it will be to save.
James Purnell: The hon. Gentleman must recognise that that will be the case for any projection over 50 years. It is perfectly possible that he will come into Government and get rid of housing benefits in 40 years’ time. Does that mean that anybody who has not saved on the basis that he might end up on housing benefit will have been mis-sold because he changed Government policy? Of course there will have to be a general qualification about projections over many years.
Mr. Laws: The Minister says that there will be a general qualification. There was not a lot of general qualification about the first thing that the Secretary of State said to me on Second Reading, when he said that the vast majority of people could expect £2 back for every £1 put in. If the message that the Government are sending out is “invest in this scheme with confidence; it is almost a no-brainer to get a decent return,” that is very different from an extremely qualified set of statements that point out to people that if they fall into five, six, seven or eight different categories, they might end up losing from saving.
My point, which I think the Minister understands, is that there is great risk in a system in which a large number of people who have personal accounts face means-testing, and there is much danger for the Government in giving general advice that appears to indicate to people that it is almost a no-brainer to go into the scheme.
Because, as the hon. Member for Eastbourne suggested, people have very low financial literacy, they will make decisions in a broad-brush way, depending on whether they think that going into personal accounts is an obviously sensible thing to do. The more they are advised—whether by the generic form of financial advice that the Government are talking about; by a leaflet; by what the Secretary of State says or by what the Daily Mail says—that the matter is complex and uncertain, the more likely they are to say, as many people seem to be doing at the moment, “I am not going to bother with this; pensions are far too complicated. Why don’t I just stick my money into a house instead?” That is the risk of building this type of personal account scheme on top of a low basic state pension with a lot of means-testing. Those are the issues that the Government have to clarify.
The hon. Member for Eastbourne put that case very well, but I have to point out gently that he is not proposing much that would make a great difference. He is entitled, as are the Government, to throw stones at my party for wanting to spend more on the basic state pension, partly to reduce means-testing. However, if he is not going to do that, the price that he and the Government have to pay is that there will be a lot of means-testing in the system for a long time to come. He offered a very vague hope, designed to be a key differentiator between the Conservative party and the Government, when he said that what he is after, unlike the Government, is a consensus on an aspiration for less means-testing. The hon. Member for Runnymede and Weybridge explained what that meant on Second Reading, when he indicated that he hoped that in 20, 30 or 40 years’ time there might be less means-testing in the system.
James Purnell: This has been an important debate and no worse for hearing it for the second time today from the hon. Member for Yeovil. I want to address head-on the points that both hon. Members have made.
I start by saying that what we are doing here is implementing the recommendations of the Pensions Commission. It produced some very well-thought-through research and evidence for its sets of proposals. Anyone who wants to move away from those needs to explain how they will afford to do so. There will, of course, be a balance within any system between the level of the safety net and the level of the universal benefits. Some people will think that there should be a contributory element. That is what the Pensions Commission recommended. We agree with that. We think that it strikes the right balance between benefits that go to people on a contributory basis and benefits that protect people against poverty or give them money if they have extra needs based on disability or caring, for example.
For those on both Front Benches to have credibility in this debate, they have to say how they would fund a system that would produce a different outcome. We have already been through the proposals of the hon. Member for Yeovil. He cannot tell us either where he would get the 5p to get to £115 or what he would do about the majority of pensioners who would be above £115 in 2050. If he is telling them that he will improve their incentives to save by getting rid of the extra money they receive because they are disabled, I am not sure that that will have them chanting in the streets at the next election either. He has refused on a multitude of occasions to answer that question because he knows that it is the fatal flaw in his policy.
The hon. Members for Runnymede and Weybridge and for Eastbourne have slightly the same problem. They like to make this rhetorical case about means-testing in general, but when there is a proposal to reduce means-testing in practice—the changes that we are making to the savings credit—the hon. Member for Runnymede and Weybridge says:
“I want to highlight ... the proposed change to pension savings credit that will create a band of 100 per cent. withdrawal rate... Almost 1.5 million pensioners will be worse off... 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.”—[Official Report, 16 January 2007; Vol. 455, c. 680.]
The whole point of what we are doing here is to reduce the overall level of means-testing. As the hon. Member for Runnymede and Weybridge said, there are two ways of doing that. Either one can have universal benefits, in which case one needs to say where the money for doing so would come from, or one has to reduce the generosity of our current targeted system. We think that the savings credit needs to be altered so that we reduce the overall level of means-testing. Presumably the hon. Member for Eastbourne agrees with that objective. If so, I do not see how he can say that he does not agree with the changes that we are making to the savings credit.
It is no great help to the debate to talk about the problem of means-testing in general, but, when the Government come up with practical ways of reducing the amount of means-testing, oppose them on the basis that they are taking money away from people. The fundamental reason why the Government have brought in pension credit is to target the people who have the least resources and to strike that balance between redistributing to the poorest and making sure that pensioners share in the overall prosperity of the country.
Mark Pritchard: Given that the Government are introducing measures to reduce means-tested benefits, does the hon. Gentleman then by implication and even by definition agree with us that means-tested benefits are, to quote Help the Aged, “pernicious”?
James Purnell: No, I do not. The whole point is that we must get the balance right. We must have the right level of pension credit to target poverty, people with disabilities and people with greater caring needs. I am sure that the hon. Gentleman is not saying that he wants to take money from those people and the £30, £40 or £50 a week they receive for those extra needs and because they have lower incomes. The level of means-testing must be right, and that is the debate that we are having today.
If we had not changed the system, the percentage of people on means-testing would have approached 70 per cent. or more, and that would have been too high. We believe that the changes—both the savings credit fix and the changes to the basic state pension—will ensure that we have a pension credit system that is properly targeted, and works as an insurance system for people with unsuccessful work careers, by providing a safety net against poverty, and for those with greater needs in retirement, who should be given more help. If the hon. Gentleman wants to tell his constituents that he against that, he is welcome to do so when he intervenes.
Mark Pritchard: For the sake of clarity, will the Minister say what would be an acceptable level of means-testing—he has mentioned various percentages—and an unacceptable level?
James Purnell: It was never the Government’s intention to go to 70 per cent. or more of people on means-testing, and that is why the Bill ensures that the proportion falls from about 45 or 50 per cent. at the moment to the 30 per cent. or less that we believe the proposals will bring about.
Mr. Waterson: May I pursue the point made by my hon. Friend the Member for The Wrekin, because it is important? The Government’s view is obviously that 29 or 30 per cent. is about the right, or acceptable, level. Presumably, one reason for the fierce debate behind the scenes with the PPI is that they believe that 45 or 50 per cent. is unacceptable. Is that right and, if so, why?
James Purnell: We think the proposals are sensible. In 2050, for example, half of those on pension credit will be those with extra needs because of disability or because they are caring. It is right that they should be provided with help. We do not think it would be a great boon to humanity if we took money off them as a way of reducing the number of people on means-tested benefits. I disagreed earlier that means-tested benefits are a tax, because they give more money to people. It is a good thing, not a bad thing, if someone whose wife suddenly becomes disabled receives extra money from the state. It is not a tax that takes money from people. That is the point that I have been trying to make since this morning. I shall come to the detailed points that the hon. Member for Eastbourne made about the PPI, and with that slightly prolate preamble, I shall turn to my speech.
We have set out our long-term projections for pension credit entitlement. I shall deal with the comments made by the hon. Member for Yeovil under three headings. The first is the exact intention of his amendment and why we believe the DWP’s approach is the right one, and I shall set out the forecast that we intend to provide. The second is the overall number of people on means-tested benefits. The third is incentives to save, and means-testing.
We supplied our long-term projections for pension credit entitlement in the RIA that accompanies the Bill, and we published modelling assumptions underlying our projections and had them validated by the IFS. We have also published a document on financial incentives to save.
In response to the points made by the hon. Member for Yeovil, I should like to say that there is a balance between trying to answer people’s questions in parliamentary debates and publishing detailed 40 or 60-page documents. If he wants me to reply to his questions by saying that he can read our “Financial incentives to save for retirement” document, I am happy to go do so. However, if he wants me to try to be helpful, I hope that he will treat those contributions in the context in which they are given—as part of a parliamentary debate.
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Mr. Laws: All I was saying, which I think is a fair point, is that I cannot understand how the Secretary of State can say in the House that the vast majority of people will get a return of £2 for every £1 put in. He says in a parliamentary answer that information on the proportion of individuals who can expect particular payback rates is not available. If it is not available, how can he make that comment?
James Purnell: Later on, the Secretary of State made it clear that he was saying that the vast majority of people with a full working life would have those expectations. The point that we have consistently made is that means-tested benefits are there for people who do not have successful working lives to give them insurance against ending up in poverty. One could have a 100 per cent. incentive for everybody to save by saying, “Whatever you end up on through your own provision and saving is what you will get in retirement”. I do not think that the hon. Gentleman is proposing that system. He may want to say that that is what he is proposing, but even his proposals will have a means-tested safety net—he has acknowledged that previously.
Mr. Laws: It is an oxymoron.
James Purnell: Well, I shall turn to that later, when I shall make the point that the proportion of people on guarantee credit is virtually the same under our proposals and the Pensions Policy Institute’s proposals. That is really where the kernel of this debate lies.
New clause 2 asks for a five-yearly report on information on pension credit. I hope that we can do better than that as we already regularly publish that information—usually annually. The Department already publishes annual long-term estimates of benefit expenditure, which include pension credit. Those estimates also feed into the Treasury report on long-term fiscal sustainability. Estimates of current and projected case loads are used to calculate those expenditure projections. We shall publish those case load projections for the first time this month. As with the expenditure estimates, those projections will then be published annually. Rather than accepting an amendment that asks us for those figures every five years, it would be better to stick to the current practice of doing so every year.
Estimates of current pension credit take-up are included in the annual “take-up of income-related benefits” reports published under the independent national statistics guidelines. The number of pension credit recipients is published quarterly on the DWP website. I hope that the hon. Member for Eastbourne is satisfied that we are not shying away from publishing such information.
The hon. Gentleman also asked that the five-yearly report be produced by the Government Actuary. We do not believe that that is the right approach. The Government Actuary provides advice to Parliament on national insurance contribution levels and benefits, and provides oversight in relation to the national insurance fund. However, pension credit is not a contributory benefit; in other words, it is not based on a person's national insurance contributions. The Government Actuary's Department has never had responsibility to report on benefits that are income-related. Indeed, that is not just our view; it is the view of the recent Morris review of the actuarial profession, which recommended that, for policy and operational reasons, projections of benefits paid from and contributions paid to the national insurance fund should also be covered by the DWP and Her Majesty’s Revenue and Customs. Any suggestion to increase the remit of the Government Actuary's Department to include income-related benefits would go against that and other recommendations in the Morris review. Therefore, I see no reason for legislating to produce information less frequently or for removing those responsibilities to the Government Actuary. However, I realise, of course, that the purpose of these amendments is to elicit a general debate and I will now turn to that.
Let me start by saying that the PPI is a highly respected body and it is true that forecasts spanning 30, 40 or 50 years require a wide range of often quite bold assumptions. Depending on those assumptions, one can come out with quite different results. It would not be appropriate to think in terms of what is the right or wrong outcome as the question is what are the appropriate assumptions and what does the model allow us to do? The DWP and PPI estimates are the result of detailed underlying assumptions and the projections used to produce them. At a basic level, we are saying that the Government project that improvements in future pension incomes will tend to be more focused on lower-income pensioners and will push more pensioners clear of pension credit entitlement. The implication of the PPI’s findings is that lower-income pensioners will see less improvement and that therefore more will remain eligible.
There could be a number of reasons for the difference in projected outcomes. First, as the hon. Member for Eastbourne said, there is a difference in the assumptions that we make about private pensions. Both projections assume that private pensions income will fall relative to earnings, so our projection about private pensions is not hugely optimistic. The estimates are cautious; if personal accounts are successful, as we hope they will be, the amount of saving will be greater than that suggested by that basic case.
The key point, however, is that under our models we and the PPI agree that the amount of private saving makes a relatively small difference to the overall number of people on pension credit. Perhaps a more significant difference is how we assume the increase in spending on the state second pension will be distributed; the differences between our projections and the PPI’s largely revolve around S2P. There is no difference between us on the projection of total S2P expenditure in 2050, but it seems likely that we are making different projections about which pensioners receive the money and how much they receive. That is the crucial point.
Spending on S2P will increase more than fivefold by 2050 in real terms as more and more pensioners have the chance to build up substantial S2P records and as the improvements to S2P coverage in the Bill take effect. As the hon. Member for Eastbourne said in detail, the modelling approach of the Department for Work and Pensions uses Pensim 2, which directly models the build-up of S2P by people as they go through their working lives. We believe that that provides the most realistic projection of how S2P entitlements will be distributed in future. Pensim 2 is a very sophisticated model, and the one that the Pensions Commission used as a key tool for much of its analysis.
As I started to say earlier, the methodology and equations underlying Pensim 2 have also been validated by the IFS. Members with an interest in the matter can find the IFS findings and recommendations for further development in a working paper on its website; I am sure that Members will look at that with keen interest.
The Pensim 2 model makes projections based on people and their forecast likely S2P and other entitlements. PPI uses a very different approach. It takes information on current pensioners and projects the current distribution forward using a number of assumptions and adjustments. Clearly, we believe that the approach used by the Government and our analysts is robust, because it is based on the contribution histories and projected working careers of individuals. We therefore think that it is an effective way of modelling what will happen with S2P and who will benefit from it. It also fits closely with what we should expect to happen.
The Bill will substantially increase spending on the basic state pension by improving coverage and uprating in line with earnings. Spending on the state second pension will also increase, with better coverage and more focus on low earners. As I said at the outset, we are proposing to limit the scope of pension credit relative to general income growth. In that context, it is hard to see why pension credit entitlement would not fall below the levels that we see now.
We feel that our projections are good at modelling the distribution of S2P. Furthermore, it would be surprising if all the changes—the increased spending on the basic state pension and S2P, the greater redistribution and the fact that the coverage measures will particularly benefit low earners and those with interrupted careers—did not result in the kind of reduction that our model forecasts.
Mr. Waterson: I shall give the Minister a chance to gather his thoughts. Does the PPI accept that a large part of the difference is as he described, and does it accept that its assumptions are less sophisticated than Pensim 2? Has there been any discussion about allowing the PPI access to the Pensim 2 model to run its own calculations in order to see whether the gap can be narrowed between the two parties?
James Purnell: I do not think that the PPI’s assumptions are more, or less, sophisticated. It is just that it has a different approach to modelling. When the hon. Gentleman comes to our seminar, he can ask those very questions if he wants to.
Mr. Waterson: I hope that we will have a tour of Pensim 2, which I envisage as being like the Enigma code-breaking machine, in several Nissen huts full of whirring machinery with WRENs servicing it. That will all be very interesting and I hope that the working paper to which the Minister referred will be available, along with any others that there may be. It is important to establish whether it is accepted on both sides that the Pensim 2 model is more sophisticated and therefore likely to produce more accurate results. It seems such an obvious way to narrow the big gap between the PPI and the Government.
James Purnell: That illustrates the slightly difficult position that we are in regarding our response to the hon. Gentleman’s desire for a consensus between ourselves and the PPI. All we can do is explain to the PPI, or others, the basis of our forecasts and if it continues to be confident about its forecasts, we cannot countermand that and force it to reduce them. I am being very careful not to say that its methodology is any worse or better than ours—it just uses different methods. All I am saying is that our methodology has an advantage in the modelling of distributional effects.
Moreover, it would seem odd if, despite the changes I have suggested, one ended up with the same level of entitlement in 2050, compared with what we have now. Our forecasts have those methodological features and they also fit with what common sense suggests would happen based on the changes we are proposing.
Mr. Laws: The PPI figures obviously have a huge funnel of doubt in 2050, with a minimum means-tested figure of 30 per cent. and a maximum of 65 per cent. Will the Minister remind me whether his colleagues in the Department have a similar funnel of doubt in relation to the central estimate, or is there simply a point estimate?
James Purnell: As the hon. Member for Eastbourne said, we looked at two models when preparing the White Paper, which produced two slightly different results. Under Pensim 2, we came up with a figure of 27 per cent., and we got a figure of 32 per cent. under PSM—the pensions simulation model. I am sure that I shall be corrected if that turns out not to be the case.
I am sure that the hon. Member for Yeovil has read our document on projections of pension credit entitlement. It goes through a range of issues and assumptions, which, if varied, would affect the overall outcome. If he reads it, I think he will find that it makes a persuasive case that the projections are pretty robust and that changes in assumptions make relatively small differences to the overall outcome.
Mr. Laws: I am sure that I have, at some time in my life, read that document, but at the moment my memory is not working as well as it ought to. Would the Minister refresh my memory and tell me what the funnel of doubt is in the Government figures for 2050? What is the range that the Government have for means-testing in 2050, compared with the PPI range of 30 to 65?
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James Purnell: That is a slightly different approach from the one that we take. We went through various different components and different assumptions to see the overall effect that that had on the proportion in 2050. For example, the White Paper assumptions led to a 27 per cent. forecast under Pensim 2. We varied that when we considered a scenario dealing with high employment, lower life expectancy and higher private pension outcomes—a sort of more optimistic model—and the figure that came out was 25 per cent. Scenario 2 featured lower private pension incomes, which led to a figure of 28 per cent, so the funnel of doubt relating to those figures ranged from 25 to 28 per cent. The more assumptions one varies, the more the funnel of doubt will change. Adding together all the lowest scenarios will create a lower floor, and all the higher ones a higher floor. From memory, the outcomes that we projected were pretty robust under the scenarios modelled. I am sure that the hon. Gentleman can read the document happily and come back to it on Report if he so wishes. The key point of the document was that it demonstrated pretty well that our forecasts were robust under a range of different scenarios.
That is about as much as I can say on the different forecasts. We think that our figures are robust. We have discussed them in detail with the PPI and we will continue to discuss them, including at the seminar, which I know that you are looking forward to, Mr. Taylor, as are our colleagues on the Committee, all of whom are invited. We will have an opportunity for discussion there.
The hon. Member for Eastbourne, I think, mentioned the latest PPI briefing, which said that pension credit levels would remain historically high in 2050. Our forecasts do not suggest that that would be true, because the levels would have fallen from 45 to 50 per cent. now to around 30 per cent. in 2050. We think that they would not be hugely different from the figures that applied in the early 1990s. Indeed, spending on all income-related benefits for pensioners would have fallen from about £1 for every £5 spent on pensioners now to 35p for every £5 spent on pensioners in 2050. That would be a significant reduction in the proportion of pensioner benefits spent on income-related benefits. One would therefore project that, by historical standards, the level was significantly lower than had operated at that time. Again, we will have time for discussion at the seminar.
The final issue is on means-testing and “it pays to save”, carried over from this morning’s debate. We have already published an analysis of the expected payback in personal accounts. We will continue to develop the analysis and give people the opportunity to look at our projections in detail. I hope that when we publish that information and go through all the particular cases, the hon. Member for Yeovil will use them in an appropriate way, because he is very fond of saying “mis-selling”. I think that he should try to define what he means, because “mis-selling” is a very specific word. I hope that I can address his concerns about the overall policy, because I do not think that his view is that, if there is any means-testing in the system, automatic enrolment will be mis-selling. He can correct me if he wants to, but if that is his position I do not think that he is part of the consensus.
Mr. Laws: I am sure that the Minister would agree that what would be mis-selling would be to say that the vast majority of people were going to get a return of £2 for £1, when that was not true.
James Purnell: Obviously, if the personal accounts board put that on its publicity, ignoring the regulation in place at the time, and knowingly said something that turned out not to be true, the hon. Gentleman would then be able to apply the word. That is very different from talking thus about the projections we have put forward and the overall policy. I think this is fair comment, but he sometimes likes to imply that if there were any means-testing in the system then automatic enrolment would be means-testing, and if there is anybody who is means-tested and does not get 100 per cent. of what they put in then that somehow would be mis-selling. Presumably that would apply to anybody who was taxed in retirement as well. I notice that he is not getting up. The point that I am trying to make is that his issue is not with the policy overall, but about the level of means-testing. I think that he recognises that we need to strike a balance there, and so does our policy.
Mr. Laws: Does the Minister understand my point that even the Secretary of State in the House of Commons needs to be corrected about what the returns are from personal accounts? Potentially, we have quite a big issue. Had I not corrected what the Secretary of State said, it would be on the record as an inaccurate statement of the returns from personal accounts.
James Purnell: No, the Secretary of State made the position clear. He said that the vast majority of people who saved throughout a full working life would get a very good return from personal accounts. That is quite right. If the hon. Gentleman wants, we can just stick to publishing documents. He can then stick to asking questions and we will stick to replying to them on paper. If he wishes to do that, the debate will not be very informative.
Let us see whether the hon. Gentleman really believes that “mis-selling” is the right term to use. I hope that I can convince him that, overall, the policy is not characterised by mis-selling and that he will stop calling it that. He must justify why he is using that word, because it echoes outside here and if it does not stand up to scrutiny there is a danger that he will discourage from saving those who should be doing so.
We need to start by defining what the hon. Gentleman means by “mis-selling”. For a personal pension, it means selling an individual a pension that is not the best option for them. To achieve the best possible advice the sale of personal pensions is highly regulated, which means that the sales process is detailed, complicated and therefore expensive. That has two effects. Because the process is complicated, fewer individuals take out a pension, and because the transaction cost is high, charges are high and returns are therefore lower. Many commentators have suggested that it is therefore not economical to sell to low to moderate earners.
Dealing with that problem was one of the Pensions Commission’s main goals. It wanted to create a system in which take-up was much higher and charges much lower, and it recommended that we automatically enrol employees into a personal account for their company pensions. It made it clear that for automatic enrolment to work individuals must be able to choose whether to stay opted in, based on generic rather than individual advice. That is my key point: that was the Pensions Commission’s recommendation, and if the hon. Gentleman does not agree that it is appropriate, or if he believes that the overall recommendations amount to mis-selling, he must say so. I am sure that he looks forward to defending his position at the seminar that is coming up.
Mark Pritchard: I do not want to be too helpful to the hon. Member for Yeovil, but he was trying to say that perhaps there has been misapplication of the facts, given that the facts are not yet known. Therefore they cannot, by definition, be facts; there can only be a presumption that they might or might not become facts. There is a great deal of difference.
James Purnell: I really did not understand what the hon. Gentleman said. He is obviously cleverer than Adair Turner too, and he can put that point to him when he comes to our seminar.
We are seeking to achieve the implementation of the Pensions Commission’s overall recommendations. We shall try to do so through this Bill and the Bill on personal accounts that we hope to introduce next year. We have made it clear that personal accounts will be regulated as occupational pensions, and we are considering which organisation will be responsible for that. As part of the next Bill we will debate the criteria for the regulation of personal accounts, including automatic enrolment, and the process by which people can decide what is in their best interests.
The Pensions Policy Institute, which the hon. Gentleman likes to cite in support of his arguments, came up with a pretty similar formulation of the appropriate test. It said, for example:
“If personal accounts are not suitable for everybody, then this would not necessarily mean that individuals should not be auto-enrolled.”
In fact, it said:
“There is a broad degree of consensus for the principle of auto-enrolment.”
It also said, and we agree, that if there were people for whom personal accounts were not suitable, that
“would have important implications for what information is needed to help people make informed decisions about whether they should opt out.”
That is where the debate goes next—to the subject of the provision of generic advice and how we can give people who are automatically enrolled the right level of support. That is exactly what we are doing through our pilot with the Treasury and through the Thoresen review of how generic advice could be made to work.
The key point is whether the hon. Gentleman agrees with the PPI or whether he thinks that automatic enrolment is not justified if anyone is means-tested. He answered that question earlier when he said that his concern was about the proportion of people who were means-tested. I wonder whether that is really what he thinks. For example, in the mid-1990s, 1.7 million families were on 100 per cent. withdrawal rates. Today, the figure is 800,000. That is in part because we have introduced the savings credit. It has a slower taker rate, which means that fewer people are on 100 per cent. withdrawal rates. Mathematically, he will understand, if one takes a benefit away more slowly, more people will be affected by the means test.
There is an inevitable balance between taking money away from people quickly but over a small range of income distribution and taking it away more slowly but over a slightly wider range of income distribution. We think that our policy—combining guarantee credit for the poorest and savings credit for those above that—is the right balance, and the National Institute of Economic and Social Research, which is a respected independent commentator, came broadly to the same conclusion when it considered our policy.
The key point is whether the hon. Gentleman thinks that people on savings credit have a good incentive to save or not—we do. As we said in the document “Financial incentives to save for retirement”:
“A long-term saver in personal accounts receiving Savings Credit (but no other benefit) in retirement, for example, could expect to get back around £2 in real terms for every £1 they have contributed after taking account of the benefit system.”
By and large, with all the caveats we expressed in the document cited by the hon. Gentleman—because, for example, we do not know what the performance of the stock market will be over the next 40 years; one always has to caveat such things because all sorts of saving involve some risks and he would not want to pretend otherwise—we believe that people on savings credit will have the returns to save that I have quoted and significantly better returns to save than under the current system.
I hope that I have dealt with the hon. Gentleman’s point about savings credit. I do not know whether he still thinks that people on savings credit would have been mis-sold pensions. The debate focuses on people on guarantee credit. Under our projections, about 6 per cent. of people end up on guarantee credit, where they could theoretically—I will say something about that later—face 100 per cent. withdrawal rates. It is interesting that that is roughly the same proportion as the PPI’s citizens pension model, which is the inspiration for the hon. Gentleman’s policy. We are dealing with two different policies—the first the citizens income and the second a situation where we still have a second tier in the state second pension that gives people more than that citizens pension. They both end up with broadly the same proportion of people on guarantee credit.
5.30 pm
Does that mean that automatic enrolment is not justified in either situation because a proportion of the population are potentially on 100 per cent. withdrawal rates? I do not think so, essentially for two reasons. First, people in that group would be unlikely to have accumulated significant savings, as they would not have been automatically involved for many years. It is likely that they would be able to take their pension as a lump sum, under the enticingly entitled “trivial commutation rules”, of up to £15,000. It is likely that even people in that group, who might be on 100 per cent. withdrawal rates in theory, would be able to take a lump sum of up to £15,000 and receive a benefit from their saving.
Secondly, and more importantly, the guarantee credit gives people money. The key point is that it is a safety net for people who, by definition, have had unsuccessful financial lives. Some 6 per cent. of the overall pensioner population will be on guarantee credit under our forecast. At the age of retirement, that is only one in 50, so about 2 per cent. of people will be on guarantee credit. We are discussing a particular part of the population: people who have not been able to provide for themselves because, for example, they were low earners, unemployed, had caring responsibilities, or would have contributed for less than 25 years out of the potential total of 50 years.
The guarantee credit recognises that that group has not been able to provide for their retirement, and it then lifts their income up to at least £115 a week. That cannot be described as mis-selling; it will protect people against those events in their working lives, and it would be exactly the same under the model that the hon. Member for Yeovil suggests. Given the difference between living on, for example, £80 a week or £115 a week, most people would choose £115 a week, even if that meant that they were in receipt of an income-related benefit.
I hope that I have explained why we believe that the system contains good incentives to save. It is worth remembering that we are discussing the poorer groups in retirement. The figures that we and the PPI have published are the harder cases out of the whole population. Our figures focus only on single pensioners; people who are in couples during retirement are unlikely to be on pension credit at all. Half of the people who receive pension credit in 2050 will be those who receive more money because of disability or because of caring responsibilities.
Although the hon. Gentleman will again refuse to answer this question, I doubt that he is saying that we should improve people’s incentives to save by taking that money away from them if they are disabled or have caring responsibilities. To do so would be to misunderstand the purpose of pension credit. It exists to insure people against certain events: either poverty during their working life, or disability or caring responsibilities later on. It gives them more money to meet those extra needs, and because of that, we have been able to lift millions of people out of poverty.
Those issues will remain whatever the hon. Gentleman proposes. Even if he could find the extra 5p on income tax to lift everyone to at least £115 a week, he would still have to tell the 70 per cent. of people who receive more than £115 a week in 2050 what he would do to them. Would he take money away from them, or would he have to find even more than 5p on income tax?
Overall, the proposals strike the right balance. They give people at the start of their working life a good set of incentives. The first time that someone is automatically enrolled at 22 years old, we will be able to say to them that if they work or care for most of their life, their state pension will give them about £135 a week—well above the level of guarantee credit. If they save over the long term, they can expect to receive well over £2 for every £1 invested—£2.50 or indeed more for many, as our document sets out.
If, on the other hand, their working life does not work out that way or they have extra needs in retirement, we will provide extra help. That is the right approach. Without reform, almost 80 per cent. of pensioners would have been on pension credit in 2050. Our reforms deal with that, although we have always intended that pension credit should act as a safety net for those who have not been able to provide for themselves. Because of these reforms, that is what it will remain.
I believe that is the right approach, and therefore hope that the hon. Gentleman will start to be slightly more sober in his use of language. If he believes that automatic enrolment with any means-testing is, by definition, mis-selling, then he should say so—and part with the consensus on the Pensions Commission’s proposals. If, on the other hand, he believes that there should be less means-testing, we can discuss that. He also knows, however, that there are only two ways of reducing means-testing; either by giving extra money to everyone, or by taking money off the people who receive pension credit. To have credibility in this debate, the hon. Gentleman needs to tell us which approach he intends to follow from now on.
Mr. Laws: Mr. Taylor, I know that we have already had a long debate, but I want to respond to one important challenge that the Minister has set me. I confirm that I am certainly sober—particularly at 20 to 6 on a Tuesday afternoon—but the Minister challenged me to describe what I meant by “mis-selling”. It is worth responding, as I mean two things by it. First, a serious misrepresentation of the likely returns from personal accounts; I mentioned the first statement that the Secretary of State made on Second Reading, when he said that the vast majority of people could look forward to the two for one return. I do not know whether that was a slip or misunderstanding, but if the most senior person speaking for the Government does not use the right language, there is a danger of misrepresenting.
The other thing that I mean by mis-selling is the automatic enrolment of large numbers of people in accounts from which they might end up experiencing negative returns—almost the definition used in his report by Lord Turner. We remain concerned about that danger, and by that I mean people who put in £1 and get less than £1 back. The Government have to address some of those dangers in their proposals and in the generic advice that will be made available.
James Purnell: What proportion does the hon. Gentleman mean by “large numbers”?
Mr. Laws: It would concern us to have any individuals not understand the risks; therefore, generic financial advice is important. I would, however, be concerned about the potential numbers when as many as 50 per cent. of the people going into personal accounts might be subject to means-testing. We will get clarification of those figures later from the Government, but the Government have to address that mis-selling risk. The Government also face risk in seeking to deal with that mis-selling risk; having told people the accurate returns that they may get in those accounts, they may find that the number deciding to go into them is much lower than they would otherwise have liked.
Mr. Waterson: The Minister’s message on this new clause seems to be “No More Mr. Nice Guy”. He is basically threatening to throw the hon. Member for Yeovil out of the consensus if he keeps using the word “mis-selling”, but the latter does not seem to be abashed by that and keeps using it. Presumably, his punishment will be not to be invited to any more seminars, so I will use the word “mis-selling” as often as possible in this debate.
With respect, the Minister had the argument completely the wrong way round by banging on about taking benefits off people with disabilities and other categories, and defending means-testing for people who clearly need help from the state—and probably always will need that help—rather than looking at our argument. Our argument is that the existence of mass means-testing is likely to undermine the system for personal accounts. The Minister might have avoided addressing that today, but cannot avoid doing so in the long run. The argument is not about means-testing as such, but about its real-world effect on this new system of saving for retirement, and whether it will work at all. We are concerned that we might inherit a system that is programmed to fail. With respect, that is the way to look at it in the context of this debate.
I am genuinely grateful to the Minister for explaining the different models so carefully. I have no way of knowing whether what he told me was complete gobbledegook or not, but I expect that we will hear more at his great seminar. Although the difference between a Committee and a seminar is that we do not have the benefit of a PowerPoint presentation, it seems to me that the biggest single factor in the difference between PPI and the Department for Work and Pensions is the matter of S2P, the projections of who will receive it and how much they will get. I have grotesquely summarised what the Minister was saying. That is very much a function of using Pensim 2 versus the projections used by the PPI.
We will return to the seminar, no doubt, and see whether we can achieve a consensus. Perhaps we can all be locked in, with the exception of the hon. Member for Yeovil, until a consensus is hammered out. Can the Minister promise us that there will be no question of having the Report stage before the seminar? That should not be difficult with the half-term break coming up. We need to test the robustness of the two positions, especially as both parties claim to have a very robust way of achieving their conclusions, which is always a bit of a worry if you are a layman in these matters, as I am.
I will not press my new clause to a vote. The Minister was good enough to point out that some of the information is already published, perhaps even more regularly than the new clause demands. I take his point about the relevance to the Government Actuary's Department; I was merely trying to inject an element of independence of provenance for these streams of data.
I was pleased but puzzled by what the Minister said about regulation—that indeed he was considering having a properly regulated system for personal accounts. There is a great fear in the industry that there will not be a level playing field, that personal accounts will be relatively unregulated, especially in view of our debate this morning about competing with existing pension provision, and that it would be unfair competition for that reason, given what the Minister said about rule 64 and the likelihood that that may be removed.
Finally, I have always had concerns about the rough justice argument, which asserts that because a large, relatively unquantified majority will be better off under auto enrolment into the system, we do not need to worry too much about what one assumes is the small minority for whom it will be exactly the wrong thing to do—people who should be opting out of the personal accounts system.
On that basis, I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.
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