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Baroness Hollis of Heigham: I am puzzled by the remarks of the noble Lord. Perhaps he could help me on this point. If he says that for those earning £9,500 we should move from a pay-as-you-go scheme to a funded scheme, how will he respond to the argument that that generation would then have to pay twice over, both for the pay-as-you-go scheme for older pensioners as well as the funded commitments for themselves? I do not see how this method will avoid the problem of double payments, in this case payments to be made by some of the poorest people in work in the country.
Lord Higgins: It would depend on what was done about debts. It is possible for the Government to incur debts and to project for them. However, I believe that I am moving far too wide of the amendment. Perhaps I may return to this matter on another occasion. Indeed, it may be more appropriate to address it when we come to the Government Resources and Accounts Bill rather than in the present context.
Noble Lords have put forward these amendments which would boost some people's entitlement to the state second pension during the period when it is building up to maturity. They would provide an element of retrospective entitlement to S2P for certain people for years prior to its introduction, based on years of entitlement after its implementation, in order that individuals could build up greater amounts of additional pension.
Under the amendments, for each year of entitlement to state second pension, someone could choose to gain retrospective entitlement to state second pension for a previous year under SERPS. This would be achieved by allowing people who have accumulated entitlement to additional pension under both schemes to trade one for the other; effectively, to choose the better buy by giving up a year's entitlement to SERPS in return for doubling the value of a year of their state second pension entitlement. I hope that I have understood the detail here.
Furthermore, in order to ensure that as many people as possible would benefit from this proposal, Amendment No. 124 also requires that anyone to whom it would apply should be identified and notified of how they could maximise their additional pension entitlement in this way; namely, by trading in low-earning SERPS years and replacing them with the low earners' boost, still related to low earnings but now related to the higher earning S2P years.
I shall not revisit the reasoning behind what we are trying to do with S2P except to remind the Committee that under SERPS it is possible for someone to pay contributions on earnings just above the lower earnings limit for the whole of their working lives yet still retire on a state pension which is below the level of the minimum income guarantee. This will not happen when the state second pension has built up. From 2038, anyone retiring with a full working life of employment behind them, or periods of caring or disability, will receive a total of basic pension and additional pension above the MIG.
When the noble Baroness, Lady Greengross, said that she was dismayed to learn that under these proposals one in three would still be required to fall back on the MIG, perhaps I may tell her that that was a misguided assertion made by the noble Lord, Lord Higgins. The fact is that without the scheme in place it will be one in three; under the scheme it will be one in five. In part that is because of the greater generosity of the MIG at ages 75 or 80. Without that, even fewer people would fall back onto the MIG at those ages.
The state second pension will focus help on 4.5 million low earners and 2 million carers. Under our proposals, people will remain above the MIG for a considerable time. Someone who had earned as little as £3,500 throughout their working life will retire on a combined pension of £85 a week and they will stay clear of the MIG for nine years. Couples will do even better. A couple where both had lifetime earnings of £3,500 a year would receive a large enough pension to keep them both above the MIG for 21 years, which I believe is good news.
I acknowledge that the benefits in S2P take time to build up. Inevitably, that is a part of the long-term nature of pension provision. However, many of the lower paid can expect to see a significant boost to their pensions within 20 years or so. I believe that that improvement may have been rather underestimated by noble Lords when they made their contributions to these amendments.
For example, someone retiring in 2025 with earnings of just £6,500 for a full working life would get £76 per week under S2P; £18 a week more than they would have got under SERPS. Or to take a couple retiring in 2025--he earning £180 and she earning £120 a week but also caring for children for 20 years, 10 of which with carer's allowance--under SERPS they would receive £5 more than the MIG; under S2P they will have £35 more. That shows just how significant and generous is the increase in terms of accrual rates and the low earnings boost that will come with S2P over SERPS. Perhaps I may give the Committee a third example. A woman retiring in 2051 would get £85 in today's earnings terms--£10 above the MIG levels in 2051.
I have tried to give examples to show that, although by definition this is a state second pension for those on lower earnings and therefore that pension is not as generous as many of us would wish if resources were unlimited, in comparison with having in place no state second pension, or in comparison with SERPS or the drop down onto income-related benefits, the long-term position of those who are poorer will be infinitely better than is currently the case.
Under Amendments Nos. 123 and 124, for each year of entitlement to state second pension, someone could choose to gain retrospective entitlement to state second pension for a previous year under SERPS. That would represent a more generous increase for some, but it would do little to help those working as carers and the long-term disabled. Furthermore, it would be unfair to existing pensioners, who would not be able to benefit. Of those who would gain, people retiring in the short term would be helped least because they would have the smallest number of years entitlement under S2P to be increased.
Leaving aside arguments about unfairness, the additional complexity of the amendment would be huge, both for the department and for the individual. The Benefits Agency would be required to identify and notify anyone who might benefit from this measure and then explain how such a person might use it to maximise their entitlement to additional pension. The individual would then have to decide whether they wished to take advantage of the option and, if so, which years of SERPS they should give up and, conversely, which years of state second pension they should seek to increase, looking backwards over an earnings history of perhaps 40 years. Those with years of moderate earnings under S2P would benefit the
The element of pick-and-mix, which would depend on records that may not be kept adequately, along with the potential for giving people the wrong information or mis-selling, seem to me to be mind-bogglingly complex. I believe that our previous decision was right. Not only is retrospective cover for certain groups unfair to others; it does not provide the help necessary for those who form our priority groups. Furthermore, the operational difficulties, disproportionate costs and dependence on records which may be 20, 30 or 40 years out of date or which may have disappeared would mean that the proposal is simply not viable.
For those reasons, we have chosen to direct resources to the most vulnerable through the MIG as well as other measures that we have already discussed. In the light of that response, I hope that the noble Lord, Lord Goodhart, will feel able to withdraw his amendment.
Lord Goodhart: My Lords, I recognise that this is an amendment of considerable complexity and that the noble Baroness's argument has some force. Nevertheless, this is undoubtedly a serious problem. The delay before the state second pension becomes fully operative will be a matter of concern and, indeed, threatens its future--one knows how short the life of the average pension arrangement is and we have seen the number of changes that have already taken place.
There is a problem in this area. The noble Baroness has shown that in a few cases there will be substantial benefits, even by 2025; nevertheless she has not attempted to dispute that, overall, the average benefit to the lowest 20 per cent of earners will be only around £1.30 in real terms. That arises because this is an average and the specific example, for instance, of somebody earning £6,500 a year depends on somebody earning that sort of figure every year over a lifetime of earnings. As we know, average earnings vary greatly.
Baroness Hollis of Heigham: If the noble Lord will give way, this is a point I should have picked up and I apologise to the Committee for not doing so. The figure of £1.30 is the difference between the income of the bottom quartiles of pensioners in 2025 with or without the introduction of the state second pension. But this is across all pensioners--we accept that it is an average--including the poorest, oldest pensioners who retired before or shortly after the reduction of S2P and therefore have no benefit from it at all.
I have tried to argue for those who have any period in S2P by building up entitlement. They quite quickly will see an increase. But it is not reasonable to ask the Committee to talk about £1.30 which includes people who have already retired and therefore would never come within the S2P proposals.
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