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The noble Lord, Lord Higgins, is right that FAS involves £400 million over 20 years. As he suspected, there have been no contributions from industry. I hope that that will change, but my understanding is that so far it has not.
As for giving false hopes, we are already, through a Statement to the HouseI did my best to ensure that the noble Lords, Lord Higgins and Lord Oakeshott, had a copybeginning to establish the contours of FAS, such as de minimus, a cap and so on. We have made clear that, as a result, we expect to be able to protect pensioners and those within three years of their scheme retirement age with a figure from FAS that will ensure that their pensions are 80 per cent of the full amount. Obviously it is less generous than under the PPF but it is none the less a substantial form of protection assistance given that the Government have no legal obligationbut, in my view, possibly a moral obligationto help. We expect in three years' time to review the appropriateness and adequacy of funding and the reach of FAS.
Lord Higgins: My Lords, a lot of concern is expressed by people affected by something that the noble Baroness has not mentioned: the fact that the amount is to be capped, even for those in the period immediately up to retirement.
Baroness Hollis of Heigham: My Lords, money is tight. It seems not unreasonable that FAS is capped at £12,500, which represents a 50 per cent pension before things such as entitlement to S2P, SERPS or the basic state pension are included. That represents a 50 per cent replacement income on average earnings. If money is tight, as it is, it does not seem necessarily appropriate, as the Secretary of State put it, that we should increase the money for those much better offfirst, for those who are possibly in a position to make savings for themselves, and, secondly, for the particularly well off, who frankly may have contributed to the failure of their scheme. If money is tight, as it clearly is under FAS, it is reasonable, first, not to have indexation, because if you index you reduce the amount of money available now, and secondly, to cap it at what would be effectively a replacement income of around 50 per cent of average earnings and 80 per cent of what your pension would have been at that point.
On top of that there is the basic state pension and in some cases SERPS or S2P moneys. That should produce on average, up to average or possibly slightly above that, replacement rates of 60 per cent or so50 to 60 per cent when you take into account the
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80 per cent cap. I do not think that that is ungenerous. I wish that it could be more but we are dealing with a situation of tight finances.
We have two considerations on indexation. First, some schemes that we are covering have indexation and others do not, and there is a question about whether we should treat schemes even-handedly. Secondly, there is a cost constraint. The noble Lord, Lord Oakeshott, picked up the point from Dr Ros Altmann about inflation cutting the value of pensions in half over members' lifetime. That depends on what you assume the level of inflation to be. It is certainly true that, during the previous administration under the Tories, had inflation been running at something like 15 per cent, then it would have halved the value of that pension in nine years. If inflation was running at about 10 per cent, it would have halved the value of that pension within about 14 years. If inflation was running at about 2 to 3 per cent, it would have halved in value over about 29 to 30 years.
There are obviously implications for the reduction in its real value if it is not indexed. Yet, as I am sure the noble Lord is well aware, what happens in DC schemeswhen people take annuities, up to age 75is that not only do three-quarters of them go for single life, nearly all of them go for flat rate. They do so, understandably, because they prefer the money up front. In that sense, FAS is making that same decision. Had we gone for indexation, there would have been less up front in order to have produced an inflation-proofed increase later on. FAS is thus operating in exactly the same culture and climate as nearly all of those who have to turn their DC money pots into an annuity. They choose a level scheme.
Lord Oakeshott of Seagrove Bay: My Lords, I agree with the noble Baroness that the principle of capping benefits is right, in a situation where money is clearly tight. However, there was no need to make a cheap political point, at the Conservatives' expense, as to what she might think the rates of inflation would be. The noble Baroness and I will both remember well that under a Labour government, in the 1970s, inflation actually reached nearly 30 per cent. It would be better not to be political with such a long-term thing.
If someone is on a modest pensionof £6,000, or £8,000, or £10,000being paid by the FAS, over 20 or 30 years it is a serious cut in that pension. The argument for not indexing at all is not nearly as strong as the argument for a cap.
Baroness Hollis of Heigham: My Lords, I accept the point and I have not tried to challenge in any way the contention that if you fail to index, depending on the rate of inflation, the value over time will diminish in real terms. While I do not want to make a cheap point about open purses, the point is that if you were to index within the same financial envelope at around 2.5 per cent instead of going for 80 per cent, you would almost certainly have to opt for a substantially lower figure. I cannot do the sums in my head, but it could be as low as 60 per cent. I do not know, but it would be of that order.
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When people who are annuitising their money purchase pots make the decision, they choose to go for level rather than an inflation increase. All I am saying is that they make such choices and it is the choice the Government have made. It is not wrong. Basically, you are taking a punt on both inflation and longevity. It means that if we had produced a lower level of FAS in order to provide indexation protection, those who do not enjoy relative longevity and die before they reach the age of 80 would be much worse off. I suspect that the crossover point would not be reached until the age of about 85. As I have said, this is not the choice that other people make.
We are dealing with a financial envelope and, given the financial constraints, this seems to be the right decision. As a result the poorest in our society with the shortest life expectancy receive more money than they would have done if they had taken a punt on longevity and therefore the need to protect against it through inflation proofing. We may disagree about it and I can see the arguments on both sides. It is an honourable dilemma. On balance, however, I think that the Government have it right.
The noble Lord, Lord Oakeshott, went on to talk about the citizen's pension of £109. He was absolutely right to criticise the Tory policy of having an earnings-linked basic state pension while pension credit would be largely linked to RPI. It would mean that the poorest among us, mostly women, would see their standard of living fall back relative to earnings while men qualifying for the full basic state pension would see their incomes increase. I cannot think that such a whammy on women is something that the noble Lord, Lord Higgins, in his more contemplative moments, would wish to support. Perhaps I may say that I think it is a profound mistake on the part of the Conservative Front Benches.
The problem with the proposition set out by the noble Lord, Lord Oakeshott, for a citizen's pension of £109 per week is that in order to keep it within reasonable cost constraints, it presumes the rolling into the basic state pension of S2P. That would be the only way you could afford to fund a basic state pension of £109 per week across the board.
Lord Oakeshott of Seagrove Bay: My Lords, that is not the position. We have made it quite clear that we would finance the citizen's pension by making savings in government expenditure elsewhere. We would not find the money from the state second pension.
Baroness Hollis of Heigham: My Lords, I shall not develop the argument any further, but while I am sure that the noble Lord is no party to it, I think that this is Alice in Wonderland finance. Certainly, outside of this House, the usual suggestion made by organisations considering the financing of the £109 basic citizen's pension is to roll S2P into it. The result of that would be the effective end of contracting out for DB schemes, which in turn would destabilise them. So there are real problems about how to pay for such a pension without ending S2P, offsetting that with the end of contracting out for DB schemes and thus further destabilising final salary pensions.
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The noble Lord has reminded us, as if anyone needed reminding of it, that the pensioner vote is 35 per cent, of which around 70 per cent are women. That is right, but that did not lie behind government policies. Over the past few years this Government have introduced pension credit, of whom three-quarters of the recipients are women; they have introduced stakeholders, a very considerable number of whom are women; and have introduced the state second pension which ensures that even if you earn only £5,000 or £6,000 a year, you receive a state second pension as though you were earning £11,600 a year. Again, the bulk of those beneficiaries are women.
Throughout our policies we have sought to address the problems of poverty among women pensioners today. I hope that we can achieve consensus on trying to ensure that the poverty currently faced by so many women pensioners is now being successfully overcome for the first time. The Institute for Fiscal Studies has said that if two people are considered at random, one of whom is a pensioner and the other not, the pensioner is no more likely to be poor than the other person. We have made huge strides, but we have to ensure that the problems of poverty faced by women pensioners over the past 10, 20, 30 and 40 years will not recur in the future. Part of that is ensuring that women can enter the labour market and build up a pension. Another part is to encourage the building up of a good second pension. A further part is to ensure that the basic pension is reviewed to ensure that it works fairly for women as well. I hope that, with those remarks, noble Lords will feel able to accept the orders before us.
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