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Although the Bill proposes to abolish the ratio, we would certainly want to examine in Committee whether there was any good reason why a new ratio could not be inserted, and why the Government should have the freedom that they are proposing for themselves to enable any changes to the upper earnings limit to be performed by secondary legislation. That seems to represent a weakening of Parliament at a time when the Government are professing to be in favour of strengthening it.
Here we have a Bill that will increase taxes, and do so stealthily. This story demonstrates incompetence and a failure of internal communications. It demonstrates that those saving for pensions will not be rewarded, and it weakens Parliament. Given that it is nearly Christmas, perhaps I may summarise the Bill as follows, as we hear: the same old things, more stalling words, a squeeze on pensions, tax double charge and a partial cut in S2P. [ Laughter. ] Well, it is Christmas, and if I can put a smile on the face of both the Ministers, I think I have achieved something this afternoon. However, we will oppose the Bill, because it is flawed, it will introduce yet another stealth tax, and it does nothing for the long-term good of Britain’s pensions.
6.25 pm
Paul Rowen (Rochdale) (LD): As the Financial Secretary said, the Bill has two purposes, and it is part of a package introduced in March by the then Chancellor of the Exchequer, now the Prime Minister. I accept that, in dealing with the Bill, we have to take the whole package into consideration. I also understand that there will be many proposals in next year’s Finance Bill that we shall be able to support. In particular, we would support proposals for any system that simplifies the tax and national insurance systems.
Mr. Redwood: I am grateful to the hon. Gentleman for giving way so early in his speech. I would like to probe him a little on what he has just said. This is not a package, because the Government are not prepared to offer the pensions part of the package at all, probably because it is not affordable. The Prime Minister knows that. Is not the hon. Gentleman being conned, because we are getting only the tax side of the equation?
Paul Rowen: As the right hon. Gentleman said, he has intervened on me right at the beginning of my speech. I intend to talk about the second part of the Bill and, in particular, the proposals to introduce the upper accruals limit. I think that he will find, when I get to that part of my speech, that there are points of agreement between us.
Kelvin Hopkins (Luton, North) (Lab): I welcome the hon. Gentleman’s comment about simplifying the national insurance system. Would it not be even simpler to introduce a standard percentage all the way up the income scale? That would generate a lot more income for the Treasury, which could then be given to pensioners, the health service or whatever.
Paul Rowen:
It is easy to say that, but I am not sure whether having such a straightforward system right at the beginning would work. My understanding of the principle of the contributory system is that it has always been graduated up to a point. We support the
Bill’s attempt to align the upper earnings limit with the national insurance contribution. The difficulty that I have, however, is that, rather than saying that this is about equalising and, yes, raising more income to be used for other purposes—which we find fair and reasonable—the Government are dressing the measure up as a simplification. It is a simplification, but it also means that some high and middle income earners will be paying more money. That is fair and reasonable, and we do not object to it, but I wish that the Government would just be straight with us and admit that that is what will happen. That was certainly not what the Chancellor said in his statement; he did not admit that that was one of the purposes of the Bill.
Kelvin Hopkins: The hon. Gentleman mentioned middle and higher income earners. The Bill will not do very much to higher earners, but it will do a fair amount to middle income earners. I welcome the Bill, but would it not be better to have a go at the higher earners in a big way as well?
Paul Rowen: The hon. Gentleman will obviously support some of our tax proposals, and I look forward to seeing him do so in due course.
The Bill will raise £1.5 billion, which is not an insignificant sum. When taken in conjunction with the tax proposals in next year’s Finance Bill, this will mean that some people will get a maximum gain of £325 a year, and that there will be a maximum loss of £223. We are not talking about huge sums of money, but, as the Financial Secretary said, that money will go towards increasing the amount of disregard for pensioners and taking more children out of poverty. My view, however, is that the Government are not going to meet their target for eliminating child poverty. The proposals so far have been put forward in a piecemeal way. Whether we are talking about this Bill or the Child Maintenance and Other Payments Bill, it means hundreds of thousands of children being taken out of poverty, yet there are more than 2 million affected by child poverty, which the Government should be tackling if they want to meet their target of halving child poverty by 2010. Notwithstanding that difficulty, we accept the point of the first part of the Bill, which we believe is sensible in setting out what it is trying to do, transparent and produces a clear link. As the previous Chancellor said, it provides two thresholds and two points of payment, which is acceptable.
We have more problems with the second part of the Bill, particularly the proposals to introduce the upper accruals point. We do not say—and nor am I about to say—that we wholly disagree with consensus on pensions. We believe that it is very important, especially for longer-term issues, to achieve a broad consensus about the direction of pensions policy. People need certainty; they need to be able to plan. We accept the principle of having the state second pension as a flat rate pension and we understand why the Government are making the change to introduce the upper accruals point at this point—in order to keep that alignment. That change nevertheless raises £290 million extra a year rising to £450 million a year—an extra tax take. Earlier, I asked the Financial Secretary what that money would be used for, because my understanding from reading the papers was that the proposals were broadly cost-neutral when taken together.
We are disappointed with the proposed change because, although we are moving forward the date for the introduction of the upper accruals point, we are doing nothing to tackle pensioner poverty. The difference between the Liberal Democrats and Labour has been the Labour Government’s insistence on using pension credit as a means of tackling pensioner poverty. If we compare child tax credit with pension credit, we find that the former is claimed almost universally by those who are eligible for it. It is a flat rate payment; it is not means-tested. We have had a long-standing aim—we want it to be met earlier than the Government do—initially to restore the link between earnings and pensions and secondly to introduce a citizen’s pension. We believe that the Government are taking far too long to achieve that and that far too many existing pensioners are in poverty. We would have liked the additional sums of between £290 million and £450 million to be used precisely to achieve that. In 1950, the pension was worth 18.4 per cent. of the average wage. Today, the pension is worth only 15.9 per cent., which means that today’s pensioners who rely solely on the state pension—and we should recall that up to 40 per cent. of those entitled to pension credit do not claim it—are worse off.
Kelvin Hopkins: The hon. Gentleman mentions the proportion of average earnings received by pensioners, but does he not recall that at the peak time when the link was in place, the figure reached 25 per cent. of earnings—a much bigger proportion. Does he not agree that we should aim to restore the pension at least to that figure?
Paul Rowen: I totally agree. As I explained, although the Government are committed to the proposal that I described, our difficulty is that it will not happen until 2012 at the earliest and it could be as late as 2015. While the Government are moving the upper earnings accrual point to keep the state second pension in tune, we would rather the sums raised were used to begin to restore the value of the state second pension.
Mr. Redwood: Why does the hon. Gentleman think that people on £40,000 a year are so rich that they can afford to pay all this extra tax? Does he not understand that in view of the current cost of housing, and inflation, they are under a lot of pressure?
Paul Rowen: I understand that, but this is about saving for a pension. I accept that the rebate will be smaller—
Mr. Heald: Is not the whole point of this measure that those earning between £37,000 and £43,000 will have to pay national insurance contributions at 11 per cent. of that slice of income, yet get nothing for it?
Paul Rowen:
I think that the hon. Gentleman is forgetting that this is part of a package. It is not my job to defend the Government, but I have quoted the figures, which range from a top gain of £325 a year to a maximum loss of £223 a year. Yes, there is a loss, but our argument—very different from that of the Conservative party—is that we would rather have seen the savings to the Exchequer of between £300 million
and £400 million being used to restore the link between the state pension and average earnings. We want that link restored immediately, which we believe would cost something in the order of £450 million to £500 million. The sums involved are therefore roughly comparable and we believe that it is an important point of principle to take serious measures to tackle pensioner poverty.
Angela Eagle: The hon. Gentleman has been saying that pensioner poverty is worse and that pensioners are worse off then they used to be, but will he admit that the Government have spent £11 billion a year more in real terms than in 1997, with the greatest help focused on the poorest pensioners? In fact, millions of pensioners have been lifted out of poverty by the huge amounts of extra money that the Government have spent on them.
Paul Rowen: I would make two observations. First, we do not believe and have never believed that pension credit, which is a means-tested way of paying pensioners, is the best way of tackling pensioner poverty. I return to my earlier point that 40 per cent. of eligible pensioners do not claim it. It is also a fact that even if we grant all the Government’s proposals, 50 per cent. of all pensioners will still be means-tested in 2030. I have already spoken about the importance of having a pensions consensus and I believe that my party and the Government have much more in common, but the Government need to move further towards accepting the principle that people are entitled to a certain level of pension regardless of the contributions that they have paid or the amount that they have earned. We need to get all pensioners up to a level where they can live with dignity without having to undergo what they consider to be the indignity of putting their income and all their savings through tests.
Secondly, we also know that pension credit is hugely expensive to administer in comparison with child tax credit, which costs virtually nothing.
Steve Webb: In her intervention, the Exchequer Secretary quoted the figure of £11 billion, but as we all know, both economies and numbers of pensioners grow. Will my hon. Friend ask her to confirm that the share of national income going to each pensioner in Great Britain has fallen under Labour?
Paul Rowen: I am grateful to my hon. Friend, who knows a lot more about the issue than I do. It is a sad fact that after 10 years of Labour Government, more money has gone in but there are still high numbers of pensioners living in poverty.
Rob Marris: The hon. Gentleman will be aware that in the past 10 years, the average pensioner’s income—I appreciate that he is focusing on one end of the scale—has increased by 37 per cent. in real terms, whereas the average wage earner’s income has increased by 18 per cent. in real terms. As for the pension as a proportion of the average national wage—I think he referred to a figure of 18 per cent. in 1950 and 15.9 per cent. now—will he say what the percentage is if one includes pension credit and the winter fuel allowance? That would be a more accurate comparison.
Paul Rowen: The hon. Gentleman knows full well that 40 per cent. of all eligible pensioners do not claim pension credit, and it is costly to administer, costing far more than child tax credit. The pension consensus should therefore be to give all pensioners, regardless of who they are, what they have earned in the past or what contributions they have made—thereby including many women who take time out to have a family—a decent citizen’s pension. [Interruption.] Well, the pension credit does not work. It is not being claimed. The test of the success of any benefit must be whether it is understood and claimed. Whether the Government like it or not, the reality is that pension credit is not understood or claimed as it should be.
While we have no qualms about accepting the first part of the Bill, and we applaud its simplification and redistributive elements, the second part of the Bill is inadequate, does not go far enough and does not address pensioner poverty. It is another example of a tax grab without a benefit. We are not prepared to support a Bill that does not deal with the fundamental issues, which we shall consider later in relation to the Pensions Bill, of ensuring that all pensioners have a decent and fair pension. As we have made clear, we are not against the pensions consensus, but we will not support the technical proposals in this Bill if there is a vote.
6.43 pm
Mr. Oliver Heald (North-East Hertfordshire) (Con): May I start in a Christmassy and benevolent way by paying tribute to the civil servants in the National Insurance Contributions Office who do such scrupulous and careful work maintaining complex records, especially those involved in the difficult work concerning pensions? The work concerning the winding-up of pension schemes needs to be particularly carefully dealt with.
When we consider pensioner poverty, it is important, as the hon. Member for Rochdale (Paul Rowen) said, to look at the reality on the ground. As he mentioned, a lot of people entitled to pension credit do not claim it. When pension credit was introduced, Members in all parts of the House were concerned about that issue. Take-up has never been satisfactorily dealt with, and that issue should be continually raised. The Government have signally failed to tackle an important issue for some of our poorest pensioners.
The Bill is part of the story of broken promises that is the history of the state second pension. Anyone who bought into the vision of Barbara Castle and contracted into the state earnings-related pension scheme would feel that they had been cheated over the years. They have seen reduction after reduction in their legitimate expectations of benefits: the loss of half the widow’s benefit; the loss of the 20 best years rule; and now the fact that above a certain level of income, they will pay national insurance contributions and get absolutely nothing for it.
I would be the first to agree that it was possible to form a consensus a couple of years ago about the way forward with pensions. There was the idea of having a more solid block of flat rate state pension at the bottom, better inducements to individuals to save, and some sort of personal account, which is undoubtedly needed to encourage low and medium earners to save.
Far too many people—7 million or so—do not save enough for the sort of pension that they want in retirement.
We would all accept that there is a case for a simpler system that is more robust and has trust in it. That is why the Bill is a disappointment. Those in the pensions world are beginning to use terms such as “sleight of hand” and “conjuring” to describe the way in which the Government behave. The sort of dressed-up proposal in the Bill, which is really about trousering money for the Treasury, is not the way forward, and does not respect the agreement reached in all parts of the House.
Jane Kennedy: Before the hon. Gentleman moves too far away from the question of SERPS and represents history in a format that I do not recognise at all, may I tell him that my father was a blue-collar engineer for many years and still regards his investment in SERPS in the early ’70s and throughout his working life as one of the best that he made in his entire life? He would be the first to take issue with the hon. Gentleman, as he regards the mis-selling to persuade people to come out of that scheme in the ’80s and ’90s as one of the worst pieces of financial advice that people of his generation ever received.
Mr. Heald: Of course, we can trade histories. All that I would say to the right hon. Lady is that the original SERPS was presented as the way forward, and I agree that many people benefited from it, but she must accept, as it is what her Bill is saying, that it has ultimately proved unaffordable, and that promises have consistently been broken to individuals who put their trust in the scheme. I think that Barbara Castle would have had to be dragged kicking and screaming to the House to make the proposal that the Government are now making, because she believed in her scheme and her vision. I did not support it at the time, because I felt that it was unaffordable, but it is right to note that the Bill is an admission by the Government that the Barbara Castle scheme was unaffordable and not the way forward. It is typical of the Government that, having formed a consensus with other parties in the House, they should want to attempt this sleight of hand to trouser the money as I have described, and to put forward a Bill that is about something for the Chancellor and nothing for the contributor.
As the Financial Secretary has said, the Chancellor describes the Bill as part of a larger simplification and tax reduction package. Of course, they have to say that, but many will think that the package was designed to take £1.5 billion extra by 2009-10, and that the element of “conjuring” was to suggest that the package was a tax-cutting measure at all. What the Prime Minister relied on was the continuing public support for the contributory principle. As the authors of the leading text on the matter, Ogus and Barendt—the fourth edition, for the benefit of the hon. Member for Northavon (Steve Webb) who takes a great interest in the book—said recently:
“People are prepared to subscribe more by way of contributions, which they see as offering returns in the form of personal and family security, than they would be willing to pay by taxation, which might be diverted to a wide variety of uses.”
It is also clear that the public know very little about national insurance and are not very questioning about it. Tolley’s tax notes make the point that
“Nearly a century ago, David Lloyd George stood before Parliament and introduced...the novel concept of National Insurance...as a ‘temporary expedient’....It is a curious fact that despite the size and permanence of this levy, very many people know little about it”.
Of course, the people who do know about national insurance are Chancellors of the Exchequer. It allows them to talk about a low standard rate of income tax, while conveniently forgetting the very large tranche of money taken in the form of national insurance burdens. That follows the Colbertian maxim—which I thought worth mentioning at this time of year—that plucking as much as you can from a goose without its squawking is the key principle of tax collection.
The current Prime Minister has long had his eye on removing some extra money through the national insurance system. In the 1992 Labour manifesto it was suggested that the party should remove the upper earnings limit without allowing contributions above it to confer any additional benefit entitlement. On that occasion the public saw through it completely, which was one of the reasons why Labour lost the election so badly. The public did not want to undermine the contributory principle in that way. Ever since then, however, the Prime Minister has had on his mind taking more money from national insurance contributions. It was very noticeable that at the time of the 2001 general election, when asked to do so, Labour refused to rule out taking more money in national insurance contributions.
Simplification of taxes is to be welcomed, but not as an excuse for a stealth tax. My right hon. Friend the Member for Wokingham (Mr. Redwood), who was present earlier, has recently revealed the increased complexity of the tax and benefits system under the current Prime Minister. Simplification is indeed welcome, but it must be acknowledged that in this instance it is being used to mask a tax rise.
The original proposal was to introduce the new upper accrual point in 2012 at the same time as the start of the uprating of the basic state pension in line with earnings. I can tell the Financial Secretary that that was the deal. The end result of an early introduction of the upper accrual point in April 2009 is that we shall pay more national insurance up to the higher earnings limit, but receive none of the benefits that that should entail. As Taxation magazine has remarked,
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