UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 846 -i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Work and Pensions Committee

THE GOVERNMENT’S Pension ReformS

Wednesday 9 March 2011

Steve Webb mp, Ms Evelyn Arnold AND Mr David Haigh

Evidence heard in Public Questions 1 - 70

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 9 March 2011

Members present:

Dame Ann Begg (Chair)

Harriett Baldwin

Andrew Bingham

Karen Bradley

Alex Cunningham

Kate Green

Mr Oliver Heald

Glenda Jackson

Brandon Lewis

Stephen Lloyd

Teresa Pearce

________________

Examination of Witnesses

Witnesses: Steve Webb MP, Minister of State for Pensions, Evelyn Arnold, Head of State Pension Division, and David Haigh, Deputy Director, Workplace Pension Reform Division, Department for Work and Pensions, gave evidence.

Q1 Chair : Thanks very much for coming along and sorry for the delay in starting. We had expected to be in the Grimond Room until this morning. The TV cameras are in the Grimond Room-I do not know whether that is a good thing for you or not. I think this evidence is being webcast but unfortunately it is not being televised because, for some reason, the information about our room change had not reached not only us but the powers that be in the BBC, who are obviously working the cameras. Welcome anyway and thanks for appearing before us and, as I say, sorry for the delay in starting. We had quite busy agenda this morning. Brandon has got a declaration to make.

Brandon Lewis: I draw your attention to the Register of Members’ Financial Interests, and an SME interest that I have.

Q2 Chair : Thank you. Can I begin with something that, certainly if my email inbox is anything to go by, is quite controversial and it is about the raising of the state pension age, particularly for women. The raising of the state pension age is not as controversial as some people might have thought, but the acceleration of the equalisation of the state pension age in combination with the raising of it to 66 has created quite a serious anomaly for a group of women. I think half a million are affected by the fact that the pension age is going to go up by more than a year, and for 33,000 the pension age is going to go up by two years without very long to prepare for it. I am sure you will have had a lot of lobbying from all sorts of women across the country, and I just wonder whether any of that lobbying or any of that pressure has led you to change your mind on this particular aspect.

Steve Webb: First, thank you for inviting me to come today. I wonder if I might just briefly introduce my colleagues. On my right is Evelyn Arnold, who is our Deputy Director on state pension policy, and on my left is David Haigh, our Deputy Director on workplace pension reform. On the basis that Ministers come and go like the morning mist, we have got the experts in the room as well.

Q3 Chair : I think that is you, Minister.

Steve Webb: You are very kind. I suspect we will spend a bit of time on this issue so it is worth stepping back and saying, "Why are we doing this at all? What is the rationale for that?" We all know people are living longer but what I think has not been grasped is the rate of change, which is staggering. To give you one example, when the current timetable for raising the state pension age was set, the 2004 projections were the ones available and in 2008 new projections came forward, and in that fouryear period alone, men’s and women’s state pension age life expectancy had risen by more than a year in four years. It is as if we are constantly chasing our tail on this, and as you rightly say, there is almost no dispute about raising the state pension age; the issue is speed.

Some people have written to me, and, you are absolutely right, I have had a very large number of letters and I think everybody on the Committee has probably enclosed at least one letter from a constituent on the issue. Some people say, "First of all I thought my pension age was going to be 60, then it is 64 and now it is 66. This was not what I expected," but just to put that in the context of rising life expectancy: in 1990, the length of time a woman could expect to draw a state pension for was exactly the same as it will be in 2020, having added six years to women’s state pension age.

That just gives a feel for how dramatic this change is, and it would be tempting to go more slowly. I would say that women’s pensions has probably been the biggest single issue I have campaigned on in the last 10 years. So I do not take this decision lightly, nor do I diminish the impact, particularly on the 33,000 women that you mention, but the alternative is the challenge because the principal alternative that has been put to us is that we wait until 2020 before doing anything-that is the main option-and instead of taking £30 billion, we take £20 billion off the bill. That extra £10 billion has to be found from somewhere. People say, "Well it is not in the current CSR; it does not help with the deficit," but of course, by the end of the Parliament, we will have a national debt of £1.3 trillion. I know in the world of pensions that it is easy to say, "It is only £10 billion," but that really is very serious money, and so it really was a trade-off or a judgement call between reflecting rising life expectancies and the Exchequer position.

If I may add one more observation, one of the things we have had to look at is what the Turner Commission had to say, and they said that pension ages clearly have to rise and one of the things that we need to look at is the proportion of retirement spent drawing a pension. Even with the timetable we have adopted, which many people think is fast, the proportion of time spent in retirement compared with the Turner projections will actually be higher than they thought. Therefore, we have not even gone as fast as the status quo, relative to the Turner rationale. None of that is to diminish the impact on individuals, and I am sure we will talk about the mitigations, but I just wanted to set that context. The change in life expectancy is just very dramatic; it is ongoing; it is very rapid, and although there is always a good reason to go more slowly, from an Exchequer point of view, that is a challenge.

Q4 Chair : But the anomaly that is created falls purely on the shoulders of women. It falls on the shoulders of the women who are probably of the generation that has not necessarily had the chances to build up their pension contributions as much as their male equivalents have done. Younger women are in a slightly different position because they have had those chances. It has fallen on a generation of women that has not had those chances and they feel very aggrieved that that anomaly is falling on them and them alone. The question on that particular issue is whether you will change your mind or whether any things can be put in place. With five or six years’ notice, to discover that they are not going to get their state pension for another two years has put their financial calculations completely out.

S teve Webb: Yes and I think it is important to ask, "What are these women going to live on in this twoyear period? What are they actually going to live on?" Take the women we are talking about, so roughly 57-year-olds at the moment. Let’s ask ourselves what they are doing when they are 63, which is before what would have anyway been their state pension age: a good proportion of them will still be working. We do not know how many because obviously we do not know the working patterns of 63-years-olds in a world where the state pension age is higher than 63. So we cannot say with certainty. We know that 70% of these women are still working now, so if they are working at 63, the consequence of this change for that particular group will be to look at the possibility of working longer. If they do that, they will potentially build up more basic state pension if they have gaps in their record, and they will potentially build up more state second pension or more private pension. So although they will wait longer for a pension, it may be a larger pension when they get it. I think we would all agree that longer working lives are going to be part of the future.

If they are not working, what will they live on? Well, if they are not working because they are out of a job but trying to find one, JSA is there. I know people say, "I do not want to go on the dole," and I understand that, but workingage benefits will take the place of pension benefits. In that two-year period, they will be able to claim JSA if they are unemployed and looking for a job and ESA if they are unable to work. If they are disabled to the extent that they claim ESA and we would put them in the support group because there is no work expectation, that ESA is not time limited. So, it is not a case of going from a £97 pension to zero; for many people there will be the opportunity of perhaps a parttime job; for some there will be JSA of £65-odd; for others there will be ESA, which can be £90-odd. So again, none of this is perfect, none of this is ideal, but it is not all or nothing.

Q5 Chair : JSA lasts for six months; the bulk of people on ESA on the workrelated activity and the welfare reform will see that last for only a year. We have lots of individual cases of women, very often public sector workers, who, in the last six months, because of the changes with regard to the deficit, have been faced with offers of early retirement. They have signed the early retirement package in the belief that they would be getting the state pension and that they could fill the gap between when they retire and when they get their expected state pension. They may well be 62 or whatever and have signed those packages just in the last six months, based on the calculation that they thought that they would get their state pension at a particular time and now are finding that it is two years later. That group will not get any of the JSA or any of the contributory ESA because their income will be above those levels, but they had had an expectation of a particular income in those years between 64 and 66 that they will o longer have. To say, "Well, JSA is £65 a week-it is okay," is not what this group of women are actually expecting. We are not talking about the women who would then necessarily qualify; they certainly would not qualify for incomerelated benefits and, if they do, that was not part of their financial calculations.

Steve Webb: I think there is an issue about the plans that people make, but with any change, people make decisions based on the regime as it is at the time and subsequent Governments change them. You cannot not change things because people made decisions on the old scheme otherwise you would never change things. If they have made them in the last six months, this issue has been in the public domain; it has not been a secret that we have been looking at women’s state pension age. The proposed timescale was published last summer. That is not to be unsympathetic with the position, but this is a specific group of women who: a) have had a choice about this; and b) who will have a pension income, which, I am inferring from what you have said, is enough to live on year by year for, presumably they judged, the next seven years. It does not then stop at 64; they will go on having that income.

Q6 Chair : But they would have the state pension on top of their occupational pension. They were willing to accept that for two years in the knowledge that their state pension would kick in at 64. Now they are going to have to wait until they are 66, and with inflation and everything else, they will have a lot less money. Surely, as the Minister for Pensions, you want people to have security in their pensions so that they can do the longterm planning. Everything else-all the other aspects and the questions that we will be asking today-is about longterm planning so that people can have the security to know that, if they save, their money will not be wasted, either because it will be means tested or whatever. All the other questions are about that but, for this group of women, you have decided that none of that matters and they should have known six months ago. In fact, a lot of them did not know and a lot of us did not until we looked at the details of it. Even though it was in the public domain, we did not realise the effects on that particular group of women. There is that anomaly. They did not know, many of us in this place did not know and I think it is a bit unfair to say that suddenly they should know the details of the way that timetables work out with regard to the acceleration of the state pension age.

Steve Webb: I appreciate that if someone did not know things were changing, they are in a more difficult position. I would have assumed that if someone is making a judgment on early retirement, one of the things they would do is apply for a state pension forecast or look on the website.

Q7 Chair : Many of them did, and they got it, and it was under the old system because the DWP website was not updated after the announcement was made. You must get the same emails we do, and that has been the problem. They have actually done everything that they should have done and they are still being caught.

Steve Webb: I have looked at the website and obviously what we have to do is give a forecast saying, "This is the law as it currently stands," because obviously the Pensions Bill has not gone through. We have worked to improve the website-because I accept that it could have been clearer-and it is now very clear in saying, "This is the law as it currently stands but changes are going through. Click here for details." When you get your state pension age on the website, it now says, "This is going to change."

I do not belittle any of this. The fundamental challenge-and I will bring Evelyn in in a second-is that we could wait, but the male state pension age was set at 65 in the 1920s. On the old timetable, it would be a century before we changed anything and there is always a case for waiting. There is always someone who is near enough to pension age to make you say, "Oh, that is too close," and successive Governments have probably waited and waited because it is always a difficult decision to make and sometimes you have got to bite the bullet.

Evelyn Arnold: Having been through the last set of pension reforms under the previous Government, there is always this question of the line being drawn and there are always some on the wrong side of it. I have to declare an interest here because, frankly, I am also on the wrong side of this particular line, although not in the worst affected groups. It is always hard to make that judgment-to get that balance-of how you actually go about things and where you draw that line. But where the line is drawn, there is always someone on the wrong side of it. That is not to say that we do not think about that, but in the particular instance of the 33,000 women, we are nevertheless still talking about 1% of the women who will be affected.

Chair : But these women already thought they were on the wrong side of the line having to work until 64 instead of 60, and they had accepted that. This is another line; it is a double line that they find themselves on the wrong side of.

Q8 Teresa Pearce: As you have just said, it is only 1%. It is a small number and as it is such a small number, can there not be any mitigating circumstances? Can nothing be done to mitigate the effects on this small number of women?

Steve Webb: One of the challenges is that you could just take that 33,000 and have a fix for that group, but actually there are half a million women who are over a year, and as soon as you do the 33,000, the people who are born in February or May will say, "Hang on, I am 19 months, what about me?" or "I am 17 months." We are just drawing another line in another place. I take your point about 33,000 people but what is instructive is: suppose you took those 33,000, and suppose, for the sake of round numbers, they were going to get £100 a week. So £3.3 million times 52 weeks is £150-odd million, times two years is £300 million. Although it sounds like it is only 33,000, just that is £300 million. Even a socalled small fix is actually serious money.

Chair : But this generation of women are not the ones who were responsible for the financial collapse or indeed, the demographics; they are just living their lives. The feeling out there is very strong and we are beholden as a Committee to make you aware of just how strong the feeling is for that particular group of women. We have more general questions on the increase in the state pension age.

Q9 Mr Heald: You have answered my first question but my second question is about pension credit, because currently it can be claimed at the time when a person reaches women’s state pension age. The Bill proposes to raise the age of eligibility to when both members of a couple reach their own state pension age. I just wondered what estimate you have made of the number of people who will be affected by this, what the scale of loss will be and what the particular implications are for the women in the category we have just been discussing?

Steve Webb: By the time these changes come in, we will pretty much be in a universal credit world; this is essentially going to be the backdrop. One of the challenges was, in a situation where, for example, somebody is over women’s state pension age and somebody is under, what do you do? Take the example of a 58-year-old man, whose wife is 64. Do you say to the man, "Because your wife is 64, you are now a pensioner couple so we have no work expectation of you as a 58-year-old man," in a world where male state pension age is going to be 66? Do you say, "Forget the next eight years. As a couple, we will pay you £200, all your housing costs and all your council tax benefit, because your wife is 64"?

We took the judgment, as you will appreciate, that the focus of the new Government is very much that work is the best route out of poverty. Rather than pay £200 a week, less what pensions they have coming in, put a work requirement on the 58-year-old man. The goal is not that they then claim JSA but actually that the man goes out and tries to find a job. The Work Programme will support him if he is long-term unemployed and so on.

In a sense, you asked quite properly about losers, and Evelyn may want to add a bit about this in the detail. The idea is not that they lose all that money and just live on JSA; the idea is that we support, encourage and help them so that they actually end up better-off because he is working. That in turn means that he builds up a higher pension and they end up better off in retirement as well. Obviously we can supply you with detailed figures on that particular point but that is the philosophy behind it.

Q10 Mr Heald: A lot of the commentators are concerned about this gap. NAPF says: "Against the backdrop of plans to increase state pension age, the unemployment situation is particularly worrying. If people in their 60s cannot find work, then they will become poorer and without adequate pension support, they will cut back their discretionary spending, impacting the economy negatively." We know of course that the Work Programme is not going to be dealing with people in their 60s, so what is the way forward here? Pension credit fills a gap and so what is the scale of loss?

Steve Webb: We are happy to write to you with the figures and the specific stats on that particular aspect of the change. Take the abolition of the default retirement age, for example: we think that the idea that someone hits 65 and is thrown on the scrapheap because of their date of birth is nonsense and that is why we are getting rid of it. The idea that we would structure the system around the idea that there should be no expectation of work from a 57-year-old man and that we should just say, "Times are hard, jobs are difficult to come by, you are in your late 50s, we will just pay you a benefit for the next eight or nine years," just does not seem right to me.

The Work Programme is certainly available to older workers and the challenge to us is to try to make sure that people in Jobcentres are giving extra help to older workers if, for example, it has been a while since they have been for a job interview and that kind of thing. Although it is true that unemployment is 2.5 million, there is a lot of churn. As you well know, many of the new jobs that have been created are parttime jobs and would perhaps work for someone who has health problems, for example. I would not diminish the issue of finding a job when you are an older worker, but I do not think we can premise the system on the assumption that once someone is married to someone over the pension age, suddenly that is it, they do not need to work anymore. That could not be the basis.

Mr Heald Thank you very much.

Q11 Alex Cunningham: Older manual workers, and others who become unfit to continue with their work but who cannot find alternative employment, will also be hit by the new limit of 12 months for claiming contributory ESA, as well as the rules under universal credit preventing those with a working partner or savings over £16,000 from claiming any benefits. Is this combined impact of the pension and benefit changes on these people not disproportionate, particularly as they may have earned a lower income throughout their lives and have therefore been able to make little provision for their retirement? In their written evidence, the TUC actually talked about lower income pensioners and people like this and their shorter life expectancy, which means that they lose a greater proportion of their state pension. They talk about the fact that they often start work earlier and therefore work longer until retirement. They are often totally dependent on state pensions and they also talk about the fact that they are more likely to have health issues or physically demanding jobs that make it harder for them to work longer. To help address this, wouldn’t the Government consider building an illhealth retirement option into the state pension in a similar way to occupational pensions?

Steve Webb: I think you raise number of serious points because all these policies have differential impacts on men and women, manual and nonmanual workers, and so on. One of the more encouraging things that has been happening for manual workers, for example, is that, along with the rest of society, their life expectancies have been rising. If you just take the last five years for which we have figures, for example, which is the 1997-2001 period to the 2002-05 period, the increased life expectancy at pension age of nonmanual workers was 0.8 years and for manual workers, it was 1.2. There is still a gap, a significant gap as you rightly say, but it is not an inevitable that these gaps will always be there.

I quite agree that one of the challenges for us is to do more to reduce those gaps, but the question is whether you do it through the pension system or at source, tackling, for example, occupational illhealth-you rightly mentioned the sickness issue. At the moment what happens is that someone goes off sick, and for six months they will get statutory sick pay and the money just gets paid. Then they claim ESA and our first contact with them is after they are six months sick, six months out of working routines, nobody has done anything and once you have been out of work for six months, you are much more likely to be on for the long term. One of the things the Department is looking at is getting to people early in that six-month period and saying, "Hang on a minute-if we had the right intervention early on, they might never get to that six-month or 12-month period."

Q12 Alex Cunningham: There are still people who will suffer a serious illness-they might suffer a stroke or a heart attack-and they may never work again. It is all very well having early interventions, I do not disagree with you, but there are large numbers of people who will never be able to work again and yet this system is stacked against them.

Steve Webb: On the people that will never work again, they are entitled to claim ESA, which is the new version of incapacity benefit, and if they are in the support group, which, as you say, is the people for whom there is no work expectation, which is about a quarter of the over-55s on ESA, they have indefinite entitlement to ESA up to pension age. The support rate of ESA is only a few pounds short of the state pension rate. So, actually we are providing quite significant support for that group, for the very reasons that you give.

Q13 Alex Cunningham: But then we still have the people who you are expecting to go back to work, even if they are in ill health, who will lose out on their pension if they do not go back to work.

Steve Webb: Sorry, I am not quite clear which group you are talking about.

Alex Cunningham: Sorry. I am talking about the other people, the people you are talking about early intervention for-the six month earlier intervention. If we do not manage to get that larger cohort of people into work, they will pay the price through their pension in later life.

Steve Webb: Obviously, we credit people who are unable to work into the basic state pension, but if people are actually unable to work, we put them in the support group. If they are able to work, we give them workrelated activities through the ESA system, so there is support in place. Although ESA will be time limited to a year, the contributory bit, the means-tested bit, will be unlimited. So if you are in a household on a low income, and provided you do not have a lot of money in the bank, you can go on getting ESA indefinitely. There are a lot of safeguards.

Q14 Chair : Do you not think that there is a mismatch between the state retirement age and the age that most people retire? The number of the people-and I find it quite difficult to get those figures from your Department-who work up to the state pension age at the moment is quite low and you are actually now putting the state retirement age up another year. Potentially, for that group there will already be another year’s inactivity. But there will be a year’s inactivity for an even greater group of people, simply because, for some people, while the average age and life expectancy is going up, that is not the case for everyone, as Alex just said. People will be unfit for work but will not fit into any of the categories that you just mentioned: they won’t get JSA, they won’t necessarily get ESA, they may not be disabled enough and if they are not disabled enough and they get ESA, it will be for only a year anyway. Then there are all of the other means-tested benefits. They are not going to qualify for most of these means-tested benefits because they might be in a household with another working adult.

Steve Webb: You are absolutely right. We can do what we like with the state pension age but, if people are already retiring well before it, it is slightly academic what we do with the state pension age from a fiscal point of view. However, effective ages of retirement are rising. The average age of retirement age is still lower than the state pension age, you are right, but average ages of retirement are rising. We do face an ongoing and important challenge in enabling people to have longer working lives, to tackle ageism and to give more support to older workers through things like the Work Programme. It is another classic one of how long do we wait? Do we wait until we have fixed it and then move state pension age? This has been a problem for decades. Do we just say, "Well we cannot touch state pension age because some people retire early?" No, we have to make sure there is support for people who can get into work, provision for people who are too sick to work and then a realistic state pension age. I cannot conceive that we would hold the state pension age until we have fixed that problem.

Chair : I think the question is whether the support will be there in the first place.

Q15 Glenda Jackson: Just to follow up on what you have been saying , Minister, the bottom line for all of this, for early intervention and support and everything else you have detailed, is that there is a job out there for somebody to actually get. What happens if there is not ? What if someone goes through absolutely everything that the Government says that they have to in order to have Job s eeker’ s Allowance , ESA and the other kind s of support and there is still no job at the end through no fault of their own? They are going to be punished. Is that not a correct assessment?

Steve Webb: Well what is the alternative?

Glenda Jackson: You tell me. You are the Minister.

Steve Webb: In other words, what we have to do is we have to provide a decent level of support for people who cannot work, which is the support rate of ESA, which is only a few pounds less than the pension. Then for those that can work, we have to make them effective participants in the labour market and not all of them will get a job, you are right. But that is true now, wherever you set the state pension age.

Glenda Jackson: No it is not true now - you have changed the ground rules.

Steve Webb: It is already true that there are plenty of people who, as the Chair says, stop work before state pension age who cannot find a job. That has always been a feature of the system, wherever you stick the state pension age. Clearly, the higher it is, the more that is an issue but again, the question is, what do you do? Do you say, "We are not going to change anything until we have fixed that problem"? There will always be unemployed people in later life. You cannot maintain the state pension ages on that basis when one-sixth of us will live to 100. Something has got to give.

Q16 Glenda Jackson: You have been arguing consistently that this is a situation that you are committed to changing, and that the changes that you are bringing in are going to alter that situation. You have made much of changing the point when people have to retire because you find it unacceptable, so there is an expectation on your part that, regardless of age-and I think we would all acknowledge that we are all going to work longer-that is central and essential to the changes that are coming down the pipe. I am asking you: what happens, given those types of changes, if the solution, namely a job, despite the best efforts of both Government and the individual, is not there?

Steve Webb: Let me tell you something very specific that we are doing to try to tackle that problem. One of the big challenges is precisely the people you are talking about: people who perhaps have a bit of a sickness problem-maybe a bad back or ill health or whatever-who have a fulltime job and for whom doing what they used to do, lifetime manual work, is just not an option anymore. So we need a benefit system that makes parttime work or shorter weeks, for example, viable and remunerative.

That is where the universal credit comes in, because at the moment the benefit system is very much predicated on whether you are a worker or whether you are unemployed, and it really does not do that bit in the middle. The great thing about the universal credit is that it will expand the pool of jobs available to the people you are talking about because hitherto, they would not have been able to take a parttime job because we would have just come along and said, "Everything bar the first fiver we will claw back," and they would have been stuck being unemployed. Under universal credit, they get to keep a big slug of their income, so a parttime job will be better for them than being on benefit. It does not solve the problem, it does not make it go away-unemployment is still there-but it gives whole new options to people who have never had them before.

Q17 Chair : But not if they have got a little nest egg of £16,000 or more. Then they get nothing.

St eve Webb: And then the balance is to identify the role of the state in supporting people who have substantial private assets.

Q18 Glenda Jackson: With respect Minister, I understand the Government has changed the proposal for the penalty that was going to be imposed on people on Jobseeker’s Allowance, who at the end of 12 months, having done everything the Government asked, would have an automatic 10% taken off their housing benefit. What is the difference between that and what is being proposed for older people? They are still going to be punished if there is no job at the end.

Steve Webb: As you rightly say, that proposal was dropped.

Q19 Glenda Jackson: So are you considering possible changes in this?

Steve Webb: You use this word "punished". It has always been the case for successive Governments that, whatever the pension age is, there is a set of people who retire beforehand or who are unemployed and who cannot find a job. We have a whole range of things that I do not imagine you want me to go into to try and tackle unemployment, but we cannot fix unemployment-we cannot hold the pension age until it is fixed. I do not see what else one can do.

Chair : We will move on to the further reforms.

Q20 Stephen Lloyd: Good morning Minister. As you know, the Secretary of State, yesterday or the day before, made the big announcement on the potential new flat-rate pension, which I know is close to your heart. You have been working on it a lot for the last few months. I have just got some specific questions on that. The Government has indicated that it is considering a more fundamental reform of state pensions, including a move to a flat-rate or universal pension. What would be the objective of such a reform and what problems with the existing system would you hope to overcome?

Steve Webb: Obviously, no final decisions have been taken on this and I will do my best to answer the question, but what I would like to offer to the Committee is that once a discussion paper or whatever appears, I would be more than happy to come back, if you want me, and to deal with a lot of this in a lot more detail.

Chair : We appreciate that this is all very new; it is obviously in the public domain so we need to need to ask the questions but we appreciate that.

Steve Webb: I understand that and I will do my best to answer them. Just to be clear about what the Secretary of State was saying yesterday in his speech to Age UK, he was focusing on the fact that, as a Government, our first priority was today’s pensions. Within months, we restored the earnings link, protected cold weather and winter fuel payments, free prescriptions, free bus passes, free TV licences and so on, but we also have to think about the next generation of pensioners. In answer to your question of what problem we are trying to solve, we are trying to make sure that we have a pension system fit for people to save on top of and to retire on.

I use the phrase "save on top of" particularly, because over the period from 2012 to 2017, we will auto-enrol the best part of 10 million workers, predominantly in the private sector, into workplace pensions for the first time. They will have to make a decision whether to stay in that workplace pension or whether to opt out. One of the big things we hear time and time again is people saying, "Is it worth my while saving?" and every one of us will have met the pensioner who said, "I saved and all I have done is deprive myself of meanstested benefits. My neighbour next door never did a day’s work in their life and they get all this stuff for free," that kind of thing. What we want to do is be in a position where, essentially, it pays to save. Therefore the idea of state pension reform would be to make sure that when people are deciding to stay in, they know that when they save, when they get the employer contribution and the tax relief, they will be better off as a result. That is one of the goals.

The second goal of any reform would be to try and do something about the poorer outcomes of women, particularly women who stay at home with children; obviously it will be relevant for men as well, but it is particularly the impact on women. Although there are protections-some of the coverage has implied there is no protection; obviously there is protection for women who stay at home with children-although they get credited into the basic state pension, the way they are protected in the second state pension is as if they were working but only on a very low wage. Essentially the protection for women is not very good. Historically-for example, before the STP came in, when there was no crediting at all into the state second pension-a lot of women who have in the past spent time at home with children were building up poorer state pension rights, yet were contributing to society every bit as much as someone on average earnings was.

Q21 Stephen Lloyd: That is an important point because again I have had a lot of emails and letters on this from a few constituents. So to be clear on that, Minister, what you are saying is that in principle, down the line, if I am a woman and I am at home for x number of years bringing up two or three children out of the 30-year work period-for the sake of argument I am at home for 10 years and I am in parttime work for 10 years, because often women who have children will go back into work parttime before going back fulltime-at the end of the 30 years I would receive the flat-rate pension because the key is residency as opposed to contributory?

Steve Webb: We think that the contributory principle is important and therefore, in any reform, we are working on the assumption that any contributions and credits will be the basis of any future system. The way that it works at the moment is that years of earning and paying NI are now treated in the same way for the basic pension as years at home with children under 12. In any reform, that is the kind of approach we would envisage, so years at home with children where the children are at primary school, essentially, or before would count towards your state pension, up to maximum of 20 out of the total of 30 years. That is the rough mix.

Stephen Lloyd: Okay, thank you.

Q22 Alex Cunningham: At a certain age, a person may have three or four children so they might actually have that home time for maybe 10 or 12 years. Does that give them 12 years of contributions towards their state pension?

Steve Webb: Yes it does.

Alex Cunningham: That’s great, thank you.

Q23 Stephen Lloyd: Yes, that is an important point. Minister, you have talked about some of the groups that will benefit from the flat-rate pension. With the modelling that the Department has been doing, could you tell me which groups are most likely to regard this as having a negative impact on retirement income, assuming that it is delivered in the way that you and the Secretary of State have been talking about in a few years time?

Steve Webb: Obviously I have not been talking about it at all but some of the press speculation has suggested that. It is worth bearing in mind that we are heading in any case for a flat-rate state pension system, just very, very slowly. At the moment, we have a flatrate basic pension and then we have a state second pension that is a bit flatrate and a bit earnings related and over 20 years, the earnings-related bit will disappear and that will be flatrate. Then we will end up with two flat-rate state pensions: one indexed to earnings, one to prices; one built up over 30 years, one built up over 49; one with survivors’ rights, one without; and so on and so on-it will be a mess.

The principle of flatrating is embodied in existing legislation passed by the previous Government. The question is, do we have a 20-year evolution to a flat-rate pension or do we get on with it? The attraction of a flat-rate pension is that it is a foundation-though nothing more-on which people take personal responsibility and build. Clearly, if you work 49 years, you are still only getting the same pension as someone who has worked for fewer years. That is clearly the case. But obviously if you work for 49 years, in a world of auto-enrolment, you have 49 years in which to get an employer contribution, get your contribution, and get tax relief and so it will still be the case by a country mile that the people who work longer, retire on better standards of living. The state pension is redistributive; it is redistributive now. With the basic pension, you do not get any more rights after 30 years so it is redistributive towards lower earners, towards women, towards people who have been disabled, and that is an important part of the system.

Q24 Stephen Lloyd: So to be completely clear, what you are saying is that it is redistributive to the effect that, in a sense, wealthier people will be losing out because they would just get the flat-rate, so that people on lower incomes, broadly speaking, will benefit. Is that what you are saying?

Steve Webb: There are elements of that, although it is a bit more complicated. It is slightly more complicated at the moment, particularly with contracting out and what the higher earners tend to do and with caps on NI, but that is the basic principle, yes.

Stephen Lloyd: Thank you.

Q25 Glenda Jackson: If I can follow on to that, Minister, concerns are already being raised on the issue of a flat-rate pension but there is an endemic unfairness between the amounts of National Insurance contributions different groups of people will have paid. How are you going to allay that sense of unfairness?

Steve Webb: The situation you describe is exactly how the basic state pension currently works. You get a basic state pension for 30 years, and then if you have paid 40 years or 49 years, you still get exactly the same basic state pension. In a sense if what is being speculated about were to come to pass, essentially all we would be doing is building on the basic state pension, which I think most people feel has a mix of something for something-you do have to put 30 years in-but it is also doing what only the state rather than the market can do, which is redistribute, so it redistributes to lifetime low earners, disabled people and so on. Provided that is the floor, I think most people will build on top of that, and what they get on top of that will precisely reflect what they have earned and what they have put in, so it is a mix. The state is just providing a floor, a fairly basic floor, which is redistributive, and some people will put more in and get less out than others. That is the nature of redistribution.

Q26 Glenda Jackson: You mentioned earlier that you envisage that the raising of women’s pension age will save £300 million.

Steve Webb: That is just that one-month cohort. It is £30 billion for the whole change.

Q27 Glenda Jackson: As it exists, the pension system allied to the benefit system is hugely complex and very difficult to understand and navigate one’s way through. You are proposing major fundamental changes in both areas; how much is that going to cost? Is there any sense at all of how these fundamental changes will really bring about major changes as far as the country’s economy is concerned?

Steve Webb: For one thing, a single, decent state pension system, rather than the current very complicated one, would be massively cheaper to run and it would be easier for individuals to interact with. It is cheaper to run because you have less meanstesting and we all know that the cost of processing a pension credit claim compared with processing-

Glenda Jackson: With respect, Minister, and forgive me for interrupting you, I am not talking about after the event; I am talking about coming up to the event. What are going to be the actual costs of change? What are they?

Steve Webb: They are actually relatively modest because what you are doing is building on an existing infrastructure. We already keep people’s records of National Insurance; we already make payments based on that; you are calculating the payment in a different and rather simpler way and you are getting rid of complexity. There are all sorts of complex details about the system that you would not need in this world. There are, of course, always transition costs; you will always have to reprogramme the computers, as it were. But allowing the cost of transition to block us from simplification would be a mistake.

Q28 Glenda Jackson: But there are essentially two issues here, aren’t there? One is the actual cost of a change, which we all agree is going to be extremely complex, and there is also the cost of alerting us, the general public, the claimants, about what those changes are about how we will participate in that process. If I look at my own post bag now and the difficulties that people have in understanding the present system and the hours it takes them to go through it if they have a justifiable claim, it will be wonderful if that goes but there will still be a system that they will have to go through. What I am trying to get from you is, have you any idea at all of what these kinds of costs will be? Apparently you do not.

Steve Webb: The Department’s settlement in the Comprehensive Spending Review included administrative costs for transition to state pension reform, but they are absolutely tiny in the context of spending on pensions but also of the gain from a simpler system, as you rightly describe. I have brought with me, Chair, the letter that we currently send to people when they ask how much pension they are going to get, and if you would humour me to read three sentences from it, just to illustrate the problem we are trying to solve, coming back to Stephen’s question, we say this in the letter: "At some time, you chose to ‘contract out’ of the additional state pension by paying into an occupational or personal pension. Because of this, we make a contractedout deduction (COD) for the maximum amount of additional state pension we would otherwise pay you. We make changes every year to the additional state pension and the COD, but this may be at different rates. This means your additional state pension could be different from the amount we have estimated and could actually be reduced to nil." And the next paragraph starts: "As we have already explained, the pension you actually get could be different from this forecast." We have to do something.

Q29 Glenda Jackson: Well, I quite agree, but I have to say to you, I think you are somewhat avoiding the central issue of my question, which is what is going to be the actual financial cost? As a followon, are these changes going to apply only to future pensioners or will they apply to people who are claiming pensions now?

Steve Webb: I am grateful to you for asking that because a lot of the press speculation has been quite confusing and I think a lot of people are not clear on that. What we have said is that our first priority is today’s pensioners and that is why, before we got anywhere near state pension reform, we restored the earnings link after 30 years, we protected key benefits and that is our first priority. But then, as I said a moment ago, the Secretary of State made it clear yesterday that we need a system fit for today’s workers to save on to and that is what we are talking about in terms of state pension reform, so we are talking about future pensions.

Q30 Stephen Lloyd: Does it have to be cost neutral? Has the treasurer-the Chancellor-given any indication on that, or is that far too under the radar?

Steve Webb: I think the phrase "final decisions have not been made" is appropriate at this point.

Q31 Mr Heald: Obviously the people who tend to deal with the interaction between the state pension and occupational or works pensions are those who administer occupational pension schemes. Have you had any chance to consult with them about what their general attitude would be to this kind of reform?

Steve Webb: We have indeed and you are quite right because clearly any simplification of the state pension system has an impact on contractingout, for example, which is an administrative headache for occupational schemes. Therefore, we have talked to the NAPF and to individual pension schemes about the sorts of implications reform might have for them. Oliver will know that the NAPF has brought forward proposals for what they call a foundation pension, which is precisely this kind of flat-rate, simple pension on which people can build. Certainly, from the comments I have seen in the media from NAPF and certainly from our conversations, the occupational pensions industry is actually very supportive of these changes.

Chair : I am sure we are going to have you back on this subject once we have actually got the more concrete proposals because it is always difficult to ask questions on speculation.

Q32 Harriett Baldwin: Obviously this is a wonderful picture that is being painted of where the future might potentially move to, but would the Minister take this opportunity to put on record the steps that someone can take today before 5 April to improve their future pension?

Steve Webb: Yes and I am grateful to you for raising that. You will be aware that in April 2010 the state pension was improved with just a requirement for 30 years, and it was felt in Parliament that it was a bit unfair on people who had just missed out on that April 2010 change and who had retired in the preceding two years, and so a scheme was introduced to enable them to buy back up to six missing years of National Insurance and to have the benefit of those contributions backdated to their 60th birthday. But the deadline for that backdating is, as you rightly say, 5 April. I have been touring the studios and the airwaves trying to encourage people to take advantage of that, and people can still pay after 5 April but the backdating provisions stop at that point, so I am very keen to make sure people do that. Thank you.

Chair : So you do put in mitigating circumstances for certain things, so maybe you might think about the poor women caught in the anomaly for the raising of the state pension age. We have some questions now on the use of CPI for updating occupational pensions.

Q33 Teresa Pearce: The Government has said that the change to CPI has been made because it is a more appropriate measure of the impact of inflation on pensioners. What is your actual evidence for that assertion?

Steve Webb: There are actually two main differences between CPI and RPI. The first is the basket of goods and, indeed, the people whose basket of goods is included, and the second is the way the two indices respond to price changes. On the basket of goods, there are two reasons why we think CPI is more appropriate than RPI. First of all, when they look at people’s spending patterns, RPI specifically excludes the spending patterns of poor pensioners. It seems bizarre, doesn’t it? Everybody is telling me that RPI is the best thing ever for pensioners, and when they construct it they take the spending patterns of poor pensioners out of the mix, so that is one reason.

The second reason is that, as you will have seen in recent years, swings in the RPI have been dominated by changes in mortgage interest rates, so when I was first selected as a Minister in May 2010, my first post bag was from people demanding to know why their SERPS pensions and their public sector pensions had been frozen in April 2010. The reason was that RPI inflation was negative in the year to September 2009; CPI was positive incidentally. I have yet to meet a pensioner who thinks their inflation was negative in the year to September 2009, but that is what RPI said and RPI said that because mortgage interest rates were plummeting and they dominated the RPI. Actually, only 7% of pensioners have mortgages, and yet RPI was really being dominated by mortgage interest rates. CPI does not include mortgage interest rates; it does include rent incidentally, and more pensioners rent than have mortgages. So in terms of the basket of goods, we think it is a better fit.

In terms of the way that people respond to price changes, the CPI is generally accepted to be a better measure than the RPI. Both measures have their advantages and disadvantages; there is not a right number and wrong number, but we think that CPI is better. What happens when prices go up is, for example, people shop more at cheaper shops rather than more expensive shops, and within categories of goods they might go for cheaper types than more expensive types, so they might go for cheaper cuts of meat rather than more expensive ones, for example. That is how people respond when prices go up. The CPI takes account of that and the RPI does not. The IFS, for example, who looked at this, said that what is called the substitution effect was, and I quote, "a sound rationale" for the switch that we have made. So principally because of the basket of goods and the composition and the substitution effect, we judge CPI to be a better measure.

Q34 Kate Green: I just wanted to ask what evidence or information there is about the extent to which pensioners actually make that substitution and what concerns you may have about the impact on material living standards?

Steve Webb: In terms of the evidence, the substitution effect itself is based on econometric analysis of how lower income households respond to changes in prices. That is based on what real people actually do; it is not just sticking a finger in the air and guessing. It is fairly carefully constructed. But you quite properly ask the question, "Well, what is the impact of this change?" and I always couch the impact of CPI in the context of the changes we are making to the basic state pension because by restoring the earnings link-and on average over the long run earnings are going to be 1.5% more than prices-we are giving a significant boost. On average, CPI is about 0.8%, 0.9% less than RPI in the long run, and so only for those who have quite substantial occupational pensions will the net effect of those two be a lower increase.

Obviously we are not trying to pick a big number or a small number, we are trying to compensate for consumer price inflation. To that extent, CPI indexation is protecting people’s real spending power. Clearly on average it is a lower rise than it would have been, but I think what you should do is set benefit levels because that is what you think the benefit level should be, and you should measure inflation in the way you think accurately measures inflation, rather than pick a slightly higher inflation number just because it gives people a bit of extra cash. That does not seem to be the right basis.

Q35 Teresa Pearce: If I remember rightly, some years ago, there used to be a Pensioners Price Index. Are those figures still kept?

Steve Webb: Yes they are. The ONS does construct a Pensioner Price Index. It has a number of flaws. It is the answer to a question but it is not necessarily the answer to the question we are asking. One of the reasons is that it uses the RPI methodology not the CPI methodology in terms of the substitution effect, so it has this same problem in that it does not capture the way people respond. The other is that the Pensioner Price Index excludes housing altogether, and again it is a subsample of the pensioner population, so it is not for all pensioners. There is not a sort of off-the-shelf number that we could just have used.

Teresa Pearce: So those figures would be available to us.

Steve Webb: Yes.

Q36 Teresa Pearce: Some estimates suggest that individuals may see a reduction of up to 20% when they start drawing their pension as a result of this change. What are your own estimates of that, and does it mean that more retired people are likely to be dependent on state benefits as a result of the reduction to their private pensions?

Steve Webb: Let me take your second question first-and I will answer the first one, honest. Because of the earnings indexation of the basic state pension, for people with lower private pensions and, indeed, public sector pensions, the net impact will be positive. In other words, because we are earnings indexing the first 100, which is an extra 1.5%, and we are CPI-ing the rest at -0.8%/-0.7%, if you like, then exactly the sorts of people who might have been within the scope of the meanstested benefit system are just the people who get the net benefit from our two indexation changes. So if anything, the policy would reduce the dependence on meanstested benefits.

In terms of your issue-is it 20%, is it 5% or whatever-the answer will be different according to different sorts of pension schemes, and we are doing our research now to get more detail. We divide pension schemes according to whether, when you leave the company prior to the pension age, they revalue what you were earning in line with RPI or CPI, and then once you are drawing a pension, whether that goes up in line with RPI or CPI. The most common combination of schemes that we have found is those that revalue your past earnings by what is now CPI, but pensions in payment have RPI hardwired into the rules of the scheme. We took a judgment that we would not override the scheme rules. So if you are a member of a private sector occupational pension scheme that has promised you a retail prices index indexation and it is in your scheme rules, that is what you will get.

If we think about the impact assessments, and there is a detailed document, Impact Assessment, which I am sure you have seen, our working assumption was that 60% of schemes were CPI revaluation and RPI indexation. So for all those people, if you have already retired, it will have no impact. Another 20% of schemes are RPI RPI-RPI revaluation, RPI indexation-and again, that would have absolutely no impact. In a sense, we have got various figures for different sorts of people and for different ages, but it all depends on what your scheme rules say, but certainly 20% is not a typical figure at all.

Q37 Teresa Pearce: Did not public sector pensions have those scheme rules?

Steve Webb: Yes. You are right, the impact assessment that we have published is on private-sector occupational schemes. Obviously Lord Hutton will be reporting tomorrow with recommendations on public sector schemes, but you are right: for public sector schemes, indexation has been linked to SERPS, and SERPS is now on CPI and revaluation is now done on the same basis.

Stephen Lloyd: So will we get the detail tomorrow?

Steve Webb: I am not sure of the exact dates but I think it is very soon.

Chair : I think the press have been suggesting it will be tomorrow.

Q38 Karen Bradley: You have had a consultation on the difficulties with the change to CPI. I am just wondering if you could tell the Committee about the representations you have received about the difficulties the pension industry will face in implementing this change?

Steve Webb: Yes. It is a dilemma because a lot of pension scheme rules are different from each other. Every scheme was created at a particular point in time, within a particular legislative context, and often as a result of negotiations between employees and employers, so that is one of the problems. We have had to do a lot of research to find out what is going on because they are very different. Clearly, for schemes that are linked to statute, there is not a problem; we are just giving them a different number. So if their revaluation says, "In line with the statutory revaluation order," which is the most common, that is not a problem for them. If their scheme rules actually say the words, "Retail Prices Index," and they want to carry on with that, that is not a problem, so we are certainly not forcing anyone to do less. If they want to do less and we have reduced the minimum, they can do.

But you are right, everything I ever do is good news for pensions lawyers, and it is true that for some schemes they have to work out, "Well, could we change the scheme rules and whom would we have to consult?" and so on, so we have had representations. That consultation has just closed, so we are carefully studying the responses we have received and we will publish a report on that.

Q39 Karen Bradley: Some of our witnesses have expressed concern that this change could exacerbate the scepticism that is already there about saving and pensions. Again, do you have any comments to make on that to the Committee?

Steve Webb: Yes. We take the issue of confidence in pensions very seriously, which is why we chose not to override scheme rules. There was a lot of pressure on us to say, "Some schemes have benefited from CPI," from the point of view of the scheme. Everybody would like to benefit from CPI as an employer, but we took the view that, with Maxwell and Equitable, there are enough bad news stories out there. If we had come along with a big sledgehammer and overridden the scheme rules of private sector firms and their private sector employees and said, "We are going to override the deal you have done between yourselves," we felt that would have undermined confidence more than the change that we have actually made.

Chair : But didn’t you want to do that?

Steve Webb: No.

Chair : No, okay. We will move on now to some questions about workplace pensions, auto-enrolment and NEST.

Q40 Harriett Baldwin: Turning to auto-enrolment, obviously low takeup of pension provision has been one of the main reasons driving the change to auto-enrolment. What do you see being the provision for selfemployed people, for temporary workers, for casual workers and agency staff, and how do you see them being able to be accommodated by autoenrolment?

Steve Webb: Autoenrolment is based around an employment relationship, so the selfemployed are not within the scope of auto-enrolment. However, and slightly as an aside, one of the problems with the selfemployed in pension provision is that whilst their Class 2 NI brings them basic state pension rights, it does not bring them second state pension rights-SERPS and so on. If there were a single state pension, the selfemployed would be potential beneficiaries of that because then they would be part of the full state pension system and not just part of it. In fact, other reforms might potentially help that group, though of course, just like everybody else, selfemployed people will want and need to save for themselves on top of it. I think that state provision could be changing for the selfemployed as a part of any reform.

In terms of temporary, agency, casual workers and so on, the key thing will be the employment relationship, so if I am employed directly by an agency, for example, they will have auto-enrolment duty. If I work short term for anybody, the three-month waiting period will mean that, if I am literally casual-I do fruitpicking in the summer or something-I won’t come within the scope of auto-enrolment. One of the representations made to us as part of the review was that there is a set of folk that literally are only with you for eight weeks, they do Santa at Harrods for two months or whatever it happens to be, and so there was a limit to how fair it was on employers to expect them to bring very, very shortterm workers in. There is a tradeoff, because if people are shortterm workers for a lot of their life, they never get to build up a pension.

The general idea is that, providing you are with someone for three months, if there is an employment relationship, so if you are employed by an agency for example, or even if you are temporarily employed for more than three months, you are within the scope for auto-enrolment. But if you are literally there for eight weeks, you are not within the scope in the sense you do not have to be auto-enrolled, though you can opt-in on auto-enrolment-that is still an option-so you can trigger an employer contribution as well.

Q41 Harriett Baldwin: So if you are selfemployed, could you also use NEST as a way of investing?

Steve Webb: You can. Obviously employees will get the employer contribution, and in the case of the selfemployed, there ain’t no employer, it is you, but yes, anyone can use NEST.

Q42 Harriett Baldwin: You are very confident that autoenrolment will overcome some of the barriers to saving towards a private pension?

Steve Webb: Yes, the evidence internationally is that schemes that have optout rather than optin have massively higher takeup, particularly amongst the groups that you have been most worried about: women, lower paid workers. It is clear; other people have gone there first and shown us the way.

I will just briefly say a word about NEST because I am grateful to you for flagging that. One of the things we think will help is not just auto-enrolling but making sure that there is a section of the market catered for that, frankly, has never been catered for before. So folk who are on perhaps relatively lowpaid work, people who in the past have been uneconomic for the pension industry, building on our predecessors-this is an allparty project-we have made sure that there is a low-cost provider there with an equivalent charge of 0.5% a year right at the lower end of the market.

The other thing NEST are doing is working very hard on communications, and I do not know whether the Committee has had a chance to have a trip down to Borough, but it is well worth having a session with NEST because, as they have been created for this section of the market, their mindset, their focus, their communications, are on people who have not had pensions. So they have a vocabulary document that says, "This is jargon, do not use it," or, "Use different words for these terms." Their website is designed to be friendly; they are going to have mobile phone apps and all that kind of thing. It is designed for that group and it is very exciting.

Q43 Kate Green: I just wanted to clarify something that I perhaps did not pick up exactly correctly, and also to ask one more question about people within the ambit of auto-enrolment. I appreciate that people won’t be autoenrolled before they have been in employment for three months, but I would be grateful if you could clarify whether it will be possible for people to opt in before three months?

Steve Webb: Yes it will, and let me ask David just to give any further detail he wants to, but yes is the short answer.

David Haigh: That is absolutely right. They will be able to opt in, and if they opt in, they will be eligible for the employer contribution.

Kate Green: Okay, so that could be from day one of even very shortterm employment?

David Haigh: Yes.

Q44 Kate Green: Thank you. The other question I wanted to ask was that you raised the threshold for autoenrolment-obviously there were some concerns expressed about that, although it was clearly welcomed by employers who were worried about enrolling people on very low incomes-but as I understand it that raised threshold has been linked to the tax threshold, and of course it is your party in government, Minister, that has secured within the Coalition Agreement the intention to raise that tax threshold to £10,000. Do you expect the autoenrolment limit to go up to £10,000 at that point, and if so, what would be the impact on the numbers affected?

Steve Webb: The thinking about alignment with the tax threshold is twofold. One is that if you are an employer, as things previously stood you could have to autoenrol someone for whom you were not deducting income tax. It was just an additional bureaucratic burden for someone who society deemed too poor to pay tax. The idea of linking it with the tax threshold is that having overcome the hurdle of employing someone, running a payroll, running PAYE, having to eventually put 3% into NEST by comparison-and I would not belittle it-is probably not that much incremental cost. The idea is that if employers are to deal with as few thresholds as possible, rather than "If you earn £100 more you come under this ambit", etc, it was tidier to use income tax.

One of the things that we have said is: that is the idea but clearly we will have a look at what is happening to the tax threshold and to other thresholds when setting these thresholds. We commissioned a very good and detailed report, Making Auto-Enrolment Work, which I am sure you have seen, which came out after three months of work, and they specifically addressed the point that you have raised. I will just read a sentence from it if I may. "In particular, we consider aligning the threshold at which a jobholder is automatically enrolled with the income tax threshold to be consistent with the Government’s stated aspiration to increase the tax thresholds to £10,000." In other words, they specifically said, "All right, the tax threshold is £7,500 now, but we know where it might be. If it were to go to that, does that fatally undermine what we are trying to achieve?" They judged on balance that, although clearly you do exclude more people-and I will ask David to give you a few numbers on that in a second-as ever, with all these things, it is a tradeoff.

The other reason why we wanted a slightly higher threshold is to get rid of what I think are known in the pensions industry as "piddling amounts". With the old threshold, you could literally earn £100 above the threshold, pay 3% and you could have employers deducting 6p a week and that would completely make a mockery of the whole thing. To have a gap between the threshold at which you are auto-enrolled and the threshold from which payments start was a vital part of making sure that people could actually build up enough to be worthwhile and for the whole thing not to seem absurd. If I may, I will just briefly refer you to David on the exact numbers who would have been excluded by that.

David Haigh: If you had a £10,000 earnings threshold, instead of having around 10 million to 11 million people automatically enrolled, you’d drop that by about 1.5 million people being automatically enrolled. It is worth reiterating the point that all those people will be able to opt in, and if they did opt in they would still get the employer contribution, so that is quite important.

Q45 Harriett Baldwin: Okay. Can I just ask, again going back to people who have maybe changed employers a lot throughout their lives and have lots of small pension pots with lots of employers, are they able to move all of those into NEST and start saving in one place?

Steve Webb: That is a very good question. The original thinking behind NEST was that it would fill a gap in the market and not simply be a state-subsidised competitor for the rest of the insurance industry. As part of the carefully stitched together compromises of the whole package, one of the protections that existing providers were given was that people would not able to transfer in or out of NEST. Having said that: a) we are looking at the whole issue of pension transfers and small pots, because you are quite right that there is a danger people end up with lots of small pots, and that is problem; and b) by legislation we have to review the operation of NEST at the end of auto-enrolment in 2017.

One of the things this review specifically said is, "Get rid of the ban on transfers in." My sense of the mood in the pensions world is that is more of an acceptable proposition now than it probably it was when it was all being set up, so I think there is a lot of sympathy with that point and it would certainly make things a lot tidier.

Q46 Brandon Lewis: Just thinking about this from an implementation point of view, I represent Great Yarmouth, which has a huge tourism base, primarily organised and run by SMEs, sole traders, family businesses, who have probably never been involved in this kind of thing before. I know the FSB have raised some concerns around this. What is the Government’s position at a time when we are trying to make it easier for businesses to grow and develop, particularly small businesses, and this could put another piece of regulation and administration costs on them, which could deter them from employing more people, certainly in terms of seasonal employment because it can be more than three months in a summer period? What is the response to how we stop this from being so onerous that it actually becomes counterproductive for the majority of small companies?

Steve Webb: You are quite right: the impact on a large employer with a large payroll department and computers and all the rest of it is much smaller per head; the biggest impact is on the smallest firms. The smallest firms are of course precisely the people who employ the people who do not have pensions. Again, this report, which is a very good, very serious piece of work, looked at the idea of excluding small firms altogether, and just to give you a feel, if you exclude firms that employ fewer than five people, you knock 1.5 million people out of auto-enrolment-just the people who do not have pensions.

So the question for the review team, and reflecting the Pensions Bill, is, "How can we make life easier for small firms?" We made several changes to make life easier. The first is-and this was not a change we made; it was part of the scheme-that the small firms are the last to come in. Auto-enrolment starts in 2012 with the very biggest firms. The firms employing 50 people or fewer do not even start to come in until 2014, so that is three years away. When they do come in, they come in at an employer rate of 1%. That is three years away and hopefully the economy will be on a firmer footing by then. It is a very low rate and it is only gradually phased in. The first thing is it is some years away and gradual.

The second is that any new business comes in at the end, so if I set up a new business tomorrow, I do not have to auto-enrol until 2016. People who are creating new businesses now are not auto-enrolled till the end. The third thing is that we have raised the threshold at which they have to auto-enrol people. For example, if it went up to £10,000, people who were employing fruit pickers on £7,000 a year would not be within the scope of the scheme. The fruit pickers, if they were alert enough, could opt in and trigger an employer contribution, but I suspect many would not, although some might. So raising the threshold will help smaller firms.

We have introduced a threemonth waiting period, so the old duty was day one. The Pensions Bill gives a threemonth waiting period, which again will help just the sorts of firms you are worried about. For the firms that run a pension scheme, we have made it easier to certify that their scheme is good enough for our purposes, rather than make their scheme fit a very particular mould that we have set down. So all of those were designed to try and help smaller firms.

Q47 Brandon Lewis: A couple of follow-ons from that. In terms of what you have just said, for a firm that does employ two or three people that has never done anything like this before and possibly even the owner themselves has not had one-they have just earned enough to not worry too much-will the administration of NEST be simple enough and easy enough that they are not going to have an oncost to their business that could mean that they want to employ fewer people because of the admin cost? Is the system going to be simple enough that it is not going to put off Fred Bloggs Ltd with their three employees?

Steve Webb: Yes, that is something I specifically raised with NEST when I visited them, and I have seen the website and I have actually gone through the process of putting an employee onto auto-enrolment and what steps you have to go through. Just to give you an example of the specific thought they have given to Fred Bloggs Inc, they have set up the website so that if you have to stop in the middle of what you are doing, you just stop, come out, come back in again and you are straight back where you were. So if somebody is trying to do it and the phone goes in a busy office and they have to stop and do not come back for hours, they can just resume so it is simple things like that.

NEST need the Fred Bloggs of this world to want to come to them to be viable, so a lot of thought is going into that. It will be an issue, but the flipside of that of course is if you had a threshold and said, "Only when you employ five people do you face auto-enrolment," then anybody who employed four would suddenly have a dirty great hike at five, so it is always a challenge but these are things we are mindful of.

Q48 Brandon Lewis: I appreciate that and then, to coin your phrase, looking at the flipside, what plans are there to deal with this or to make sure that companies are doing it so that we do not get either Fred Bloggs Inc just ignoring it completely-not telling their staff because they may well be the staff who would not necessarily read anything to alert them to this-or that there is not, behind the scenes, undue pressure put on staff to optout to keep their job or gain that job in the first place? What kind of regime or checks are there for that to be protected against?

Steve Webb: The Pension Regulator has issued a contract for enforcement on autoenrolment-if you like, add anything in a moment, David-and the idea is that the Pension Regulator will essentially focus on the sectors of the economy where noncompliance is going to be the biggest issue; in a sense, we would far rather have carrot than stick. So part of what we and the regulator will be trying to do will be making sure that people know what they are supposed to and know how to do it and get the help and support they need. But if somebody knows what they are supposed to do and wilfully does not comply, there is an enforcement regime and we have issued a contract-I am sure you know what I mean-on employers who do not comply. Do want to add anything further on that David?

David Haigh: Not really. The regulator’s approach is kind of a threepronged approach that focuses on education, enabling and enforcement. The education is primarily for the employers who want to do the right thing; we know there are huge numbers of those. Enabling is really about making it as easy as possible for employers to do what they are supposed to do, and of course you do need an enforcement arm because there will be a group of employers who won’t do what they need to do. It is all really premised on that. You need to get enough employers complying so that it becomes a social norm and so that it becomes an odd thing not to comply. The whole regime is really predicated on having high levels of compliance at the start in order to make sure that it is seen as the done thing.

Q49 Glenda Jackson: Could I just ask a followup question on the issue of the employees of small- and medium-sized enterprises and those companies and their staggered entry into auto-enrolment? What sort of protection is there for their employees? Can they be in a scheme before their company gets into a scheme, if you see what I mean? They do not want to lose their job, they do not want to lose the company, they like where they are working, but their employer does not actually begin to create the scheme. You used the final date of 2016 for when all companies have to be in it, so for an employee who is in one of those companies that does not have to become enrolled until 2016, what kind of cover is there for them, should they want to start this process of contributing to an occupational pension?

Steve Webb: People are entirely free to do that whenever they want to, so there is absolutely nothing stopping a worker who wants a pension from going out and getting one. NEST will be open for business for business later this year, so the product will be available. The thing that auto-enrolment triggers is the employer contribution.

Q50 Glenda Jackson: Well, yes exactly, so is there any kind of backdating of that for the individual employee?

Steve Webb: No there is not. Employers need certainty; this is a new duty on them, and they need to know the date at which that duty will apply. There is nothing stopping an individual, and as you say, if it is a bad employer, they are not going to get in early. But obviously if you approached many employers, and said, "I am going into a pension; how about a contribution?" some might do that, but there is no right to that until auto-enrolment.

Q51 Glenda Jackson: Just as a little addendum, we have already heard that there are certain industries, for example the construction industry, where they define their workforce as being selfemployed and they are not. Is there any protection to ensure that, once this scheme is up and running, employers will not be able to define their workforce as being selfemployed?

Steve Webb: We are drawing on HMRC definitions of employment, so we are trying to get compliance on all the issues that arise. For example, there is the same set of issues with employer National Insurance.

Q52 Andrew Bingham: The combined contributions under auto-enrolment are about 8%. The pension industry suggest that 15% is probably required for a reasonable pension income, so do you think 8% is enough or do you think it lends itself to this continual dwindling of contribution to pensions?

Steve Webb: That is a very important point. One of the things that people forget about auto-enrolment is that quite a lot of people will be autoenrolled into schemes that already contribute more than the minimum. In other words, for people who are not in a pension at the moment, it does not necessarily mean that their employer does not have a scheme; they are just not in it. Some employers will chose to autoenrol their workers who are not in the company scheme into the company scheme, and many of those will be putting significantly more than 8% in. Some people will just go straight into a higher figure.

The issue about the minimum: it slightly depends what the state pension is, but 8% is not going to get you much of a pension, particularly if you start later in life, so obviously we will be encouraging people to start earlier, and our language will very much be that 8% is the floor not the norm. As we have heard in our discussions already, at one level there are concerns about whether this is too onerous on businesses and it is all being phased in incredibly gently. The danger of saying, "Well, actually it is going to be 10%, 12%, 14%," or whatever is that you have got to get a norm in place because, for example, the employee contribution will end up at 4%, and if that is suddenly 6% or 7% or whatever and everybody opts out, it is 7% of nothing. That is really the trade-off.

Q53 Andrew Bingham: I think David mentioned before that the biggest challenge is persuading people that this is worthwhile, and whatever people think about pensions, they have had a bit of a reputational kicking over the last few years. How can the Government get this message across that this is a worthwhile scheme? I take the point you made about the balance of the numbers to get enough people in to give it the critical mass, to get the body of following, if you like. How can we promote that this is a good thing and that people will gain from it in the long run?

Steve Webb: You might think, "Why are you talking about state pensions?" but if we do not get the state pension that we are building on top of right, then when autoenrolment starts, I can write the national press stories now: "Don’t stay in because you will just be hit by meanstested benefit." So part of my answer to your question is that we want to pre-empt that by state pension reform that makes it worth saving.

Then in that world, people will have a much clearer idea of what they are going to live on in retirement. If there is a figure for the state pension that is x and you say to somebody in work, "Do you actually want to live on x for the rest of your life?" and they say, "I couldn’t possibly live on x," well, it is in their hands. We just cannot have that conversation with people because nobody has got a clue what they are going to get in retirement, so we want to simplify it.

Q54 Chair : If auto-enrolment is beginning in 2012, will we know exactly when reforms to the state pension are going to kick in so that somebody making that judgment will know in advance, so we do not get into the same bother that we were talking about earlier today? So will it be clear with plenty of warning? Financial advisers tend to advise on the position as it is today, not on the position that it is likely to be.

Steve Webb: You are quite right that we will need to be very clear what the state pension regime will be on which people will be automatically enrolled, and I hope we would have made some progress by then.

Q55 Harriett Baldwin: I particularly want to go back to the affordability point and you mentioned earlier that the charges work out to be about 0.5% a year, but in fact I believe it is an annual management charge of 0.3%, and then let’s say you put £100 in-1.8% is taken off the top?

Steve Webb: Yes.

Harriett Baldwin: That seems quite a lot to me.

Steve Webb: Yes, the reason I mentioned 0.5% is over a typical pension the annual amount is lower than that, but there is the upfront oneoff, and it is important to stress that it is a oneoff at the start. The reason for that is that clearly NEST is not yet commercially viable, because you have got all of the upfront costs of setting up this whole organisation and you have got a public service obligation to take anybody. Whereas another private provider can say, "Sorry, we are not interested in your business," NEST has to take everybody. It is a public service obligation and therefore it has been loaned money by the taxpayer to get going and the previous Government took the view that money ought to be recovered over about 20 years, but it depends on take-up and so on. That is why there is the upfront charge, and if I describe it as temporary, you might say that when it lasts for 20 years it is not very temporary, but it is a feature of the start-up.

I do think that 0.5% equivalent, which is what it is, would be a huge achievement if we could get the rest of the market in that territory because even then people who do not go to NEST will get a lot better value for money than they currently do. That could be one of the very positive side effects of what we are currently doing.

Q56 Harriett Baldwin: Let me see if I have got this straight: so for every £100 you put in for the first 20 years you are in the scheme, 1.8% is taken off the top?

Steve Webb: No, I was not clear about that. You put £100 in; 1.8% of that goes straight away and then that money is invested, and then 0.3% each year goes out. The 20 years is: every time you put a contribution in for the next 20 years, 1.8% of that contribution will go, but not 1.8% every year of the same amount of money; it is only each contribution.

Q57 Harriett Baldwin: So obviously they will make decisions about how it is invested, but at the moment you only get 0.5% on cash savings, don’t you?

Steve Webb: So these are charges; these are not rates of return. The first thing to say is that if you have a stakeholder pension, for example, you can have up to 1.5% and then 1% going in charges equivalent. We are talking about charges of half that, so you get your money, this bit goes out in charges, that is then invested on stocks and shares, bonds or whatever it happens to be, and not only do you get a rate of return on that but you put £4 in, the employer puts £3 in as well and the taxpayer puts £1. So you put £4 in but you are getting £8, and it is out of the £8 that the charge comes and then you get a return on the £8. So actually, compared with just putting money in the bank, you are getting the employer contribution as well, which for most people will be a very good deal.

Q58 Chair : Did you look at flat-rate charging rather proportional charging?

Steve Webb: The idea of an upfront charge was in the system that we inherited with a view, I think, that the taxpayer was lending money upfront and therefore ought to recover it over a fixed time period. One of the issues was EU State Aid; in other words, NEST had to be cleared because the taxpayer is subsidising a player in the private market and part of that mix was that a flat-rate charge would have meant it was decades and decades before the initial taxpayer loan was paid off, and I think that was part of the judgment for it to be front-loaded.

Q59 Chair : But could it change?

Steve Webb: Well it could, although one of the challenges is that there are probably 100 things about the scheme that you might want to think about changing, but one of the cries we have had is, "Please do not keep fiddling with it." So we have made some changes in the Pensions Bill; what we do not really want to do is change this bit, change the transfers rule or change the fee structure because people just want to know where they stand.

Q60 Chair : But I am thinking for the individual, once the Government debt has been paid in 20 years’ time, it would be a lot cheaper for the individual. It is still quite lucrative for NEST if they have a £10 a year charge as opposed to the 0.5%.

Steve Webb: Oh I see what you mean, yes. I am sorry. I misunderstood. The problem with the flat-rate charge of £10 a year is that it disproportionately hits low earners; £10 is not very much if you put it in 8% of £35,000, but if you put it in 8% of the bit between five and 10, £10 is quite a chunk-that was the argument.

Q61 Glenda Jackson: We are essentially talking about small companies here and the majority of employees of small companies in many instances are women and they are parttime employees. Can they still opt in and will the employer still have to pay into that as well?

Steve Webb: Yes, as long as they are over what will be the National Insurance floor, so that is the lower threshold for being in any of this, they can opt in and trigger an employer contribution.

Q62 Harriett Baldwin: On the consultation the Government is running at the moment about the possibility that you will be able to access some of the funds before retirement, can you give us a sense of what kind of responses you have on that?

Steve Webb: Yes. The Treasury put out a consolation document on early access to pension funds and there were various models in that document about whether you take the lump sum, whether you have a feederfund and various other permutations. That consultation closed and responses are being studied. I think a few of the organisations who responded have published their responses, so they are in the public domain, and I would say there was caution in the responses. For example: worries about cost and a bit of a worry, as I said a moment ago, that we are going into big pension reform in 2012, and do we want a big structural reform of pensions? For example, would the NEST scheme have to have early access? Who would pay for it? I think I would say that the tenor of the responses, certainly the ones that have been published, is caution on that. Obviously the Treasury will consider them all and respond formally, but that would be a fair reflection.

Q63 Harriett Baldwin: And when will they make the decision? Will it be at the Budget?

Steve Webb: I do not know, but obviously the consultation literally only just finished and they will probably want time to reflect on their findings.

Q64 Chair : We talked a bit about the advice and the importance of the easy access to NEST’s website for employers and things, and hopefully we will visit NEST and the Pensions Regulator and all that. But what about the employee? We are pensions anoraks and know about these things, but large numbers of people won’t know what their rights are. The trade unions will be doing quite a bit of work to make sure that their members are aware, but again the kind of workers we are talking about are not in trade unions, they do not have access to that independent advice, and whilst compliance is very important, there will be employers who won’t say anything about it although they know about it because they just do not want to be bothered with it and their employees won’t know about it. What is NEST or the Government doing to get to the very people that will benefit?

Steve Webb: You are absolutely right, we are trying to reach the "unpensioned", as it were, and how do you do that? It is hard to overstate the cultural shift that auto-enrolment will be. For example, we will be autoenrolling 22 year olds. They will all be there on Facebook saying, "I am in pensions-what do I do, who do I talk to?"

Chair : Are you going to be on Facebook?

Steve Webb: I will be lurking somewhere on Facebook.

Chair : You can be tweeting it.

Steve Webb: I will be popping up and saying, "Go for it. Go for it." Awareness will be a lot higher than with many schemes. We talked a moment ago about the scope for boosting you state pension age if you are in this bit here and very niche things. This is going to be mass market, all over the papers, all over the media so I think awareness will be high, but an awful lot of work is going on within the Department, with the Regulator, making sure that people know about these things.

One organisation I just want to flag to the Committee is something called TPAS, The Pensions Advisory Service, who are an excellent organisation, rely a lot on voluntary expertise and who people can just ring up with pensions questions. If someone is completely baffled, The Pensions Advisory Service is on the phone and so on. I rang them up with a pension query the other day and the person on the phone said, "Well, actually, I know the person who wrote the legislation; I’ll get back to you." I should have gone through my officials obviously; I was acting as a constituency MP at the time I should add.

Joking aside, there will be mass awareness but there will always be groups who miss out and an awful lot of effort is going in to publicity and NEST and the wider industry. Of course all the private firms are going to want to get this business as well so they will be going to employers and it will be talked about a lot.

Q65 Chair : With Lord Hutton’s Report tomorrow, and alongside the fear of dumbing down to 8% for existing schemes, the expectation is that Lord Hutton will be saying that there has to be some change to public sector pensions. Isn’t all that actually going against what you want to do about people’s confidence in their pensions? Actually, despite everything you have said this morning, despite the changes you have put in place, people or certain groups of people will have less money in retirement as a result of the link to CPI, the downgrading of public sector pensions, the fact that NEST is only 8% and not the 15% to 16% that many other pensions are, that private employers will take their contributions down to the NEST level. All that will actually have the opposite effect to the one you are trying to achieve, and those that are already well pensioned and well provisioned, they will actually have a lot less in retirement.

Steve Webb: The impact of auto-enrolment will be overwhelmingly positive in that million upon millions of private sector workers are not getting 8%; they are getting 0%. Being levelled down to 8% would be great.

Q66 Chair : I accept that for the 40% that have no pension, absolutely. I am thinking of the 60% who already actually have made private provision or they are public sector workers and one of the social contracts that we had with public sector workers was that they had quite a good pension. I am thinking of the teachers and the fireman and the others; that was part of the deal they did with Government and those are the groups that are going to be angry, these are the groups that are going to be most vocal, because these are the groups that already have the good pension provision but they could be the ones that lose out.

S teve Webb: Two points, first, on levelling down. Obviously we have looked at that, we have done a lot of very careful research and actually there is relatively little evidence of most firms levelling down and there is a good reason for that, which is, "Why do they run a pension scheme at all?" They run it for recruitment, for retention, as part of the deal. To go to your existing workers who you are paying 10% for and saying, "Sorry guys, we are cutting your money," is not an easy conversation. There is a bit of a natural break on that.

Q67 Chair : Yes, but aren’t quite a lot of employers and indeed the Government themselves using the economic downturn as an excuse to do just that?

Steve Webb: There may be an element of that, firms are under pressure, they squeeze their contributions, although, interestingly, the latest figures from the NAPF report out today show that DC contributions by employers are on the up. Although they are much lower than DB contributions, there is an upward trend, which is actually very encouraging, because what we are interested in is quality provision, regardless of the benefit structure. Overwhelmingly, we do not have evidence of large scale levelling down, and for most people it is levelling up from 0% to at least 8%.

On public sector and obviously that is a matter for the Treasury and Lord Hutton, but first of all, clearly Lord Hutton’s terms of reference said "honour existing accruals", so particularly for public sector workers later in life, any reform will be about what happens in the last few years of their working life, but what they have built up to date is honoured, which is very important. For younger workers, there is an understanding that we are living in a different world of longer working lives and so on.

Chair : Apart from the indexation of course. The indexation is not going to be on there.

Steve Webb: No, but it will be maintaining the real spending power in consumer prices terms obviously. There is obviously a tradeoff because, of course, where you have unfunded public sector schemes, one of the fastest rising numbers in Government is the gap between the yield from contributions made by public sector workers into their schemes and the costs of paying out public sector pensions. That gap is rising very rapidly and has to be filled by today’s taxpayers, who are the same people who do not have good enough pensions. If we can tackle that, they will have more spending power to put into their pensions. It is an issue of fairness.

Q68 Kate Green: One of the arguments that has been put to us by some witnesses, whatever the reservations people may have about CPI or uprating generally, is that it is particularly inappropriate for people who are deferring the pension because there can be a long gap during which the rise in earnings is not reflected in terms of the pension pot that they can then access when they reach retirement age. Is that a concern that you have given any thought to and what would your be your comments on that?

Steve Webb: Do you mean early leavers?

Kate Green: Yes, I do.

Steve Webb: Only in a sense of: why do we do revaluation at all to preserve the real spending power of the pension? If I thought CPI was not a proper, decent measure of inflation, I would say, "Yes we are devaluing their rights." Clearly it is smaller than it would have been but the question is, "Is it fair to revalue by the headline measure of inflation used by the Bank of England properly constructed?" and I think it is. You are right: if you have already retired, early indexation matters to you; if you have not retired, it is revaluation.

Q69 Kate Green: I guess because we know that, over time, the difference between RPI and CPI is wider, there is a particular concern that while the difference might be quite small at the moment, when you start to draw your pension it can be quite a substantial fall in the value over time.

Steve Webb: But when you reach state pension age, you will be drawing a state pension that has been earnings linked for that longer period, and therefore will be that much bigger.

Q70 Chair : One last question and then I am definitely going to let you go. The voluntary sector are only just waking up to the fact that they will be involved in the auto-enrolment, and a lot of them have not necessarily made provision. At the very time when their funding is being squeezed, they have got the new obligations as employers that are coming on them. Have you given any thought to that in particular and how you can alert them to it and help them through what might be quite a difficult time?

Steve Webb: We have. Many of the considerations that came up in my response about smaller firms would apply to the voluntary sector as well. So, on the whole, a small local charity, for example, won’t even be auto-enrolled until 2014; at that point it will be only 1%; it won’t be if they do not earn above the tax threshold-all of the mitigations that we put in place will benefit the voluntary sector as well. Again, the challenge is, is it right that somebody who works for voluntary organisations for most of their lives ends up without a pension? It is trying to get that trade-off right.

Chair : We know it is not, but they do have the limited funds and cannot always do it anyway. That is all our questions for you, so thank you very much, Minister, for coming along. You said that you had brought your officials because they are the experts, but actually I was not joking when I said that you were the expert. I was going to ask you what it is like to be in charge of the sweetie shop, but not in public-you can tell me another time.

Steve Webb: It does not feel like a sweetie shop I can assure you.

Chair : Or the other analogy was what it was like to be poacher turned gamekeeper, but I will leave all those things. Thanks very much and we will be back in touch.