 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Pensions |
Pensions Bill |
The Committee consisted of the following Members:Alan
Sandall, Committee
Clerk
†
attended the Committee
Public Bill CommitteeTuesday 6 February 2007(Afternoon)[David Taylor in the Chair]Pensions BillNew Clause 2Review
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
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.
The
Minister extolled the virtues of means-testing in a previous sitting,
saying that it put money into people’s pockets and that it was
therefore a good thing. However, it is a bad thing for all sorts of
reasons. It
does not necessarily provide help to those who need it most. For
example, about 1.5 million people who are entitled to pension credit do
not claim it, despite large expenditure on advertising campaigns, and
indeed, the sterling efforts of the Pension Service. I have visited my
local service, and it has pushed the boat out on home visits and so on.
I am sure that that has happened throughout the country.
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—
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 grow...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 Credit...is 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.
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.
However,
means-testing is an extremely important part of the issue, and my
concern remains that there is
still a yawning gap between the projections made by the Pensions Policy
Institute—a highly regarded independent body—and those of
the DWP. However, I am always open to reason, and the Minister may well
be able to take us through the differences in those assumptions and
modelling techniques and to satisfy the Committee that the Government
are more likely to be right, although I suspect that there is no right
or wrong, black or white, in any of this. That would be extremely
helpful; indeed, it would be almost as good as attending the seminar in
a week or two’s time or the even better option of having had
oral evidence from the PPI and the DWP’s boffins—had they
been able to take time out from changing the oil on the Pensim 2 model
to come along and talk to the
Committee.
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.
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.
4.45
pm
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”.
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.
I cannot
really think that that will be the basis for a particularly popular and
successful campaign that will sweep across the country. I can hardly
see pensioners chanting in the streets, “What do we want? A
consensus on an aspiration for less means-testing.
When do we want it? When it is fiscally prudent.” I understand
the points that the hon. Gentleman is making, but he is throwing darts
at the Government without having policy of his own that would achieve
anything different. The point here is that if this or any other
Government decide to scrimp on the level of the basic state pension,
they will have to accept the very high level of means-testing, which
may be the fatal flaw that undermines the success of these
proposals.
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.
5
pm
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.
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?
5.15
pm
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.
If
the position of the hon. Member for Yeovil is that automatic enrolment
will only be appropriate if every individual who is automatically
enrolled stays opted in,
he is parting company with the consensus. There will always be
individuals who do better at a particular time by not saving, such as
those who decide to pay down their own debt, and those who are
self-employed will have to decide whether to opt in to personal
accounts. That is why personal accounts will be voluntary, not
compulsory. Whether to stay in them will remain the individual’s
decision. On the other hand, if the hon. Gentleman believes, as we do,
that automatic enrolment is the right policy, as the Pensions
Commission recommended, we all need to apply a slightly different test.
Again, we can debate that over the next few months. My starter would be
that automatic enrolment would be justified if it would be in the
interests of a large majority of individuals.
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.
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.
That brings me back to the issue
of generic advice, how it is to be delivered, in what form and by whom.
Invariably, Ministers fall back on trivial
commutation
but it is not a great solution for people on low
incomes anyway who have been putting money into pensions for some time
to be told, “Well, at the end of the day you can always get your
money back if all else fails.” We need to consider whether there
are other ways in which they could use that money, to better financial
effect, during their working lives, and how they are to be
advised on doing so. Like the Minister, I look forward to what the
Thoresen review has to say; I forget its time scale, but we need an
answer sooner rather than
later.
On that basis, I
beg to ask leave to withdraw the
motion.
Motion and
clause, by leave, withdrawn.
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