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There is a whole range of issues to be addressed. Assumptions are made about take-up rates, the likely success of personal accounts and the whole question of behavioural reactions to the new policy. This is not an easy task, and we have always said that we did not necessarily expect it to be resolved within the lifetime of this legislation. We did expect, however, that the process should start off in a serious fashion, and in a way that we could sign up to during the passage of the Bill. So far, so good. There is clearly a lot of work still to be done, however, and we might not agree on all the parameters and the options and how they should be looked at.
I hope that the Minister will say a few words on this issue in a moment, but I think that I am right in saying that the ultimate aim is to produce a document—perhaps a report that will be available to all and sundry—at the end of the process, possibly in the autumn, which will try to nail some of the uncertainties that are in the system at the moment. Perhaps it will admit defeat on the known unknowns, to go back to Rumsfeld, but it should at least set out some of the options more clearly and possibly eliminate some of them, if that will be helpful. This will not be a problem for this Government, but it will be one for future Governments of whatever political colour, and it is important that we tackle it now.
Jim Cousins: I am not trying to tempt the hon. Gentleman on to some rather difficult rocks here, but is it not possible that, unless we get this right, many people will seek to take a double advantage of the new system by using the trivial commutation rules? That could well involve the people who have very small pension pots because they have very small incomes, and a lot of unscrupulous people could target those people precisely to get them trivially to commute their small pension pots. We need to be clear about this point if we are to achieve integrity in the new system.
Mr. Waterson: That is an important issue that we need to guard against. Furthermore, it is clear from the work carried out by the PPI that there is a whole tranche of people—we do not know how many there are—who would be better off taking a lump sum and spending it as quickly as possible. That rather goes against the public policy aim that we all hold, which is that people should save for their retirement and have that money available for when they retire. The hon. Gentleman makes an important point, but that is just one of many issues that we need to grapple with.
I said earlier that there was now a kind of reverse consensus on this issue. It is a big issue that needs to be addressed and we have all joined up in addressing it. I was therefore just a trifle taken aback the other day when I saw the reported remarks of the new chairman of the Personal Accounts Delivery Authority, Paul Myners. In a speech to the National Association of Pension Funds conference in Edinburgh, he was reported to have compared this situation to the introduction of mandatory seat belts in cars. He is reported to have said:
“There are a small number of people whose injuries are increased and even some people have died because they were wearing seatbelts”.
He went on to make the point that that did not outweigh the point of having compulsory seatbelts. I think that we can all agree with that in the context of seatbelts. I took the trouble of finding out how many people are injured each year because of wearing seatbelts as opposed to not wearing them. According to the Royal Society for the Prevention of Accidents, about 1,100 people a year are injured in some way because they are wearing seatbelts rather than the opposite, but compared with the number of people with driving licences, that is a tiny proportion. I am a bit worried about whether anyone making the kind of assumption that Mr. Myners appears to be making would realise that such a tiny proportion was involved.
The real issue here is that nobody knows. The numbers in the at-risk groups could be hundreds of thousands or millions. I suspect—this is my own hunch—that the figure is in the high hundreds of thousands, but we simply do not know, and we will not know until the modelling has been properly done. We are all working to that end. This is not a problem that can be dealt with head on by saying, “Well, just because there is going to be some rough justice for some people, it does not mean to say that it is not a good idea.” Yes, the prize is that, hopefully, millions will be drawn into saving for their retirement, admittedly by the use of inertia in most cases, when they are not doing so now. That has to be a major prize, but it cannot be achieved at the price of large numbers of people, often on very low incomes, being worse off or no better off.
That is why the issue is important and why I greatly welcome the Government’s change of heart, if I may put it that way. I am looking forward to our playing our full part in the process. It does matter, not just to the credibility of and confidence in the new system of personal accounts, but to all these people, however many there are, who are involved.
Miss Kirkbride: I agree with what my hon. Friend is saying. Presumably, in looking at the flowcharts and projections for the numbers of people who will be affected by the means test, researchers will also have to make assumptions about the minimum income guarantee. In the past, that has also been an issue for means-tested benefits, as it poses the question of the reliability of the Government’s promises that the minimum income guarantee will continue to rise in line with earnings—until time ends or whenever it might be. I presume that that will make a big impact on the projections for how many people will fall foul of the means test.
Mr. Waterson: My hon. Friend is absolutely right. For the time being at least, the Government are committed to increasing pension credit in line with earnings, but a whole series of assumptions will, of course, have to be made and spelled out in the making when the calculations are done. One has to make assumptions some way out into the future about a range of things—not least the level of means-tested benefits available under successive Governments of the same or different political colours. That is an important issue, but dealing with it is a bit like trying to put up a tent in a high wind: unless we nail down one corner, we will not make a lot of progress, so a shared set of assumptions will have to be agreed so we can move forward. There will still be the known unknowns, but that is the way it is always going to be.
To make one final point, on the basis of all the research done so far, I am utterly convinced that the starting point has to be the at-risk groups identified and then refined by the PPI, and then identification, within parameters, of the numbers of people likely to fall into each of those categories, why they are likely to do so and what can be done to help them. Failing all that, we will have to see what can be done within the system of generic advice to ensure that people opt out if it is in their best interests to do so. There are some massive questions here, which makes this one of the two biggest single issues underlying this entire legislation. We are certainly keen to play our part in finding a solution if there is one.
Paul Rowen: I agree with the hon. Member for Eastbourne (Mr. Waterson) that means-testing is a vital issue. We need some clear answers on it before the legislation becomes operational in 2012. I need not remind the Government of the mess that they have got themselves into with the abolition of the 10p income tax rate to illustrate what happens when Governments fiddle with benefits and charges. When that cut was announced last year, we were not told that 5.2 million people would end up worse off. That is not the figure that we were given. I doubt that members of the Government would have supported the then Chancellor, now the Prime Minister, as readily had they known how many people would be affected.
As for the 5 million to 7 million people who may save for their pensions with personal accounts, it is vital for us to understand the impact of their benefits on their pensions. It would clearly be wrong for us to encourage people to enter into a scheme enabling them to save money and make contributions if, on retirement, they would find that the Government had given with one hand and taken away with the other. That often happens as a result of the current benefit trap, and it is a powerful disincentive for many people to go back to work. That is not the purpose of the Bill; it is intended to encourage more people to save and become prosperous in retirement. Cutting their benefits will defeat the object. I presume the Government can assure us that the Bill is intended not to save money for the Exchequer in terms of the benefits paid out, but to ensure that pensioners are better off.
I agree with the hon. Member for Eastbourne that we owe a great debt to the Pensions Policy Institute for its estimates in this vital area. The number of eligible pensioners who are means-tested to establish their entitlement has risen dramatically under the present Government, from 37 per cent. back in 1997 to around 57 per cent. today. We know what the effects of the means-testing system have been. Although the Government laud the benefits of pension credit, we know that a large number of pensioners—some 1.5 million—are not claiming it. We also know that council tax bills have already risen by 87 per cent. under the present Government.
Anne Main (St. Albans) (Con): They have risen by 147 per cent. in St. Albans.
Paul Rowen: I am giving a broad figure. At the same time, only 53 per cent. of pensioners who are eligible for council tax benefit claim it. If pensioners who have saved find that as a result of their saving, the benefits to which they are entitled are dramatically reduced, incentives to save will be eroded and the Bill’s objective will be destroyed.
Housing benefit can involve a high marginal deduction rate. We know who some of the high-risk groups are. Single people are likely to be worse off because they generally do not save as much for their retirement, and they may well rent their properties. There are medium-risk groups, such as those in their 40s and 50s who are not currently saving for their retirement. They could well lose out, although that will depend on what happens when they retire. Clearly, it would be wrong if people who put money into the personal pension scheme were to find that as a result they were worse off.
5.45 pm
We need some analysis of the scale of the problem. How many of the 5 million to 7 million people are likely to be worse off? There must be one of two options. I admit that it will be impossible to tell someone in their 20s or 30s, “By the time you get to retirement, it won’t be worth you saving,” but we need to be able to advise people in the medium and high-risk groups at the beginning that they ought to opt out. If we cannot do that, we will be misleading people. I do not agree with the hon. Member for Eastbourne, who said, “It’s a seat belt, and some people have got to be worse off.” We must give two pieces of advice. We must make amendments to the benefit system to ensure that people are not disadvantaged—and we must be clear in our analysis of what changes need to be made to deliver that—or we need to advise people that they had better not save through a personal pension scheme, because they would be worse off.
Mike Penning: The hon. Gentleman’s comments highlight a crucial point about all future pensions. It is to do with confidence. The people in the schemes, many of whom will be at the lower end of the income bracket, must have the confidence to look forward. This is a Government-sponsored scheme, and if they do not get this advice we may well find 20 years from now that the ombudsman is looking at Government advice yet again; we have already had the debacle with the occupational pension schemes. It is crucial that people have the information, in order for them to build confidence so that they are willing to invest in their pensions.
Paul Rowen: I agree with the hon. Gentleman; I am a member of the Public Administration Committee, which has championed the cause of those who lost out on their pensions through occupational pension schemes. We do not want people to lose out in this case. Therefore, I welcome what the Minister has done in response to the discussions we had in Committee, by setting up the working group to carry out the detailed analysis and by making that information available to all parties as the Bill progresses through Parliament. That is important.
Once the analysis is completed and we have a clear idea of what is happening, it will be important to have an agreement that changes will be made to the system over time. I accept that some issues may arise 10 or 20 years down the line, but we need to set in train those necessary changes. We also need to be flexible as time moves on. I appreciate that the Minister cannot commit future Governments, but we have to accept that market conditions change and so does the entire employment situation, and what we may be legislating for today may not be appropriate 30 years down the line. We need to
be aware that this is a problem—the benefits trap is a problem now in any case, as it is a disincentive to work—and we need to put in place the flexibility so that as more information becomes available the Department can respond to the issues and ensure that people are not worse off.
We all subscribe to the overall broad aim of the Bill—to get more people saving so that they have a more prosperous old age. When we address some later clauses and look at the earnings link, it will become clear that in terms of pensions this country is the poor relation in Europe. We are almost celebrating 100 years of the pension, but we are not delivering what our forefathers originally intended. So, I hope that the Minister will accept that we all have serious concerns about this issue. It is important that the information is shared and that, over time, we have a strategy that delivers the overall aim of ensuring that all pensioners are better off. It is unacceptable to say that small numbers might not be. Although we cannot legislate for every possibility, we must have the flexibility to be able to guarantee people that saving in this way will benefit them; if that cannot be delivered, we should not be encouraging them to save.
Sir John Butterfill: The Minister will know that I have supported the Bill in principle from its outset, but he will also know that this issue is the one area where we must take radical and courageous action. The Government must do that if they are to make this a worthwhile Bill.
I do not intend to reiterate the problems about which many hon. Members have spoken. It is true that we are dealing with a group of people who will not be able to afford to take independent advice, and thus will be reliant on generic advice. Generic advice will not be good enough to overcome the problem that we will encounter if nothing is done. We can all remember the mis-selling scandals of the past, and I fear that we might be sowing the seeds of mis-selling today, unless something certain is put into the Bill to deal with the problem.
The other alternative, if we do nothing, is that very large numbers of people will be advised in the media and elsewhere to opt out. That would defeat the whole object of the Bill; we want people to save for their retirement and to have better financial security. If they are being advised in their newspapers that they would be mad not to opt out, who would blame them for deciding to opt out? The hon. Member for Newcastle upon Tyne, Central (Jim Cousins), who is well versed in these matters, made it clear that even those who stay in the scheme may opt for trivial commutation, which would be almost equally bad as opting out in many cases. It is incumbent on us now to put into the Bill something that will deal with the problem.
There is only one way of dealing with the problem. We can play around with all sorts of formulae, but some element of disregard is the only true way to encourage people to save in that way. Only if they know that they will inevitably be better off staying in the scheme rather than opting out, and if that is reinforced by the newspapers they read and by television and radio programmes, will they not opt out. We can argue about how the disregard should operate—whether it is an absolute disregard, whether it is a mechanism,
whether it is phased, what the timing is and so on—but something must be put into the Bill that makes it clear that people will be better off staying in the scheme rather than opting out. Unless we include such a provision, the Bill will be worthless.
Mike Penning: I promise not to delay the House for too long. I support new clause 2. I was fascinated to hear the common-sense approach that, yet again, the Minister took to the issue. The nature of means-testing means that we are dealing with the most vulnerable people in our society: those whom the state feels are below the threshold that we would all like people to be at, without needing a means-tested benefit. As a result, such people are the most ill-informed and cannot purchase the information that Members of this House and other members of the public could; such people will not receive independent financial advice.
My hon. Friend the Member for Bournemouth, West (Sir John Butterfill) just alluded to the fact that such people will rely extensively on the information that the Government and the schemes’ actuaries put out to the public. Above all—this is where I agree with my hon. Friend—they will rely on the tabloid press. If the tabloid press start saying that opting out is probably people’s best option because it will be safer, and that people should not worry because they can always fall back on means-tested benefits because they might not be better off, that would make this part of the Bill, at least, fall apart. The Minister would probably agree about that.
It is therefore imperative to put as much basic information as possible into the public domain as early as possible, to enable people to make a conscious decision to stay in the scheme, because there could be an exodus. I remember that back in the 1980s, it was “opt in, opt out”; lots of different schemes were in operation and things were very complicated. Financial representatives phoned people up to say, “I think you should opt out of SERPS,” or, “You should opt in to SERPS.” We made decisions about that specific matter, many of them wrong. I made wrong decisions, but I was persuaded to do so by a financial representative.
What worries me enormously is that because we are dealing with the most vulnerable people, who we are trying to get off benefits and into a pension scheme that prevents them from needing means-tested benefits as they reach their more mature years, all the hard work, everything that has been going on with all the different consortiums and all the consensus that has been built up could fall apart so easily, and even more people might end up on means-tested benefits. None of us would look forward to that situation.
Mr. Mike O'Brien:
I welcome the way in which the Front-Bench spokesmen for the Opposition parties, and, indeed, all hon. Members, have sought to deal with this issue. Some months ago, it was a matter of some controversy, but I think that we have found a way of at least examining what the hon. Member for Eastbourne (Mr. Waterson) rightly said is an enormously complex and difficult issue. Whether we are able to find ways of resolving it is another matter, but we envisage that the process we have set up will enable an examination of the issues. As he mentioned, we also envisage publishing
later this year a report that examines the parameters of the debate and establishes ground rules and understandings about the nature and extent of the problem, the policy ways in which it might be examined and the implications of some of those, without coming to a recommendation. That would be a matter for debate between the parties and between various stakeholders afterwards.
The debate was interesting not least for the various descriptions given. I believe that tents in high winds and seat belts were mentioned. I was reminded of the fact that, in evidence to the Committee, Lord Turner gave a further analogy, which is relevant to the discussion. He said that
“you cannot treat the fact that some people post facto will not have done well out of saving as proof that it is a bad idea to advise them to save. An analogy would be that if at the end of the year your house has not been burgled, it does not mean that it was bad advice to buy a household insurance”. ——[Official Report, Pensions Public Bill Committee, 17 January 2008; c. 98.]
We are examining a difficult issue. It is clear that we all have constituents who are on pension credit, yet they have a second pension. How we are able to predict which people are likely to end up in that position, whether we are able to do so and what advice such people should be given if the circumstances that they will find themselves in are not always predictable are complex matters. Personal accounts will not create such a new circumstance that we are not already, in a sense, facing it. A large number of people are automatically enrolled into a pension scheme. Tesco has its own automatic enrolment scheme—I understand it to be a reasonably good defined-benefit scheme—and it is therefore allowing people to build up pension pots. There is no guarantee that those people will be able to have an uninterrupted career at Tesco and that they will never fall on pension credit.
We have said throughout—the point was made by the Liberal Democrats earlier today—that personal accounts should not provide advantages over and above those schemes with which they will compete. Therefore, we are trying to set up a basic scheme that people can use if no better scheme is available. It will complement, rather than compete with, other schemes.
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