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I will come back on the technical points raised by the Minister, unless he wants to intervene now.

Lord McKenzie of Luton: I am grateful to the noble Baroness. I want to make clear that the amendments we referred to earlier in regard to adjustments resulting from the 10p rate abolition are to be tabled on Report, as the Chancellor indicated to the Treasury Select Committee. I want to get that clear and on the record.

Baroness Noakes: That is very helpful. I will make sure that my colleagues in another place realise that. This morning they had not done so, but perhaps they had not caught up with the small print of the Chancellor’s evidence to the Treasury Select Committee in another place last week.

The Minister has pointed out the issue of weekly versus annual, which I accept. Getting around it is not insuperable in drafting terms. I also accept the no de minimis limit; that is much the same point and is also easy to get around, as is Northern Ireland. The technical objections to the amendment can easily be got right between now and Report if we choose. The Minister is basically saying that the Government want to do what they want to do at any time with as little interference as possible, and in the mean time they wish to create as much power as possible under the Bill. We think the Bill goes too far, and we have to consider between now and Report how far we allow them to go with it. The Minister should not think that he has convinced me one jot with his arguments. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 agreed to.

Clause 3 [Additional pension: upper accrual point to replace upper earnings limit from 2009-10]:

On Question, Whether Clause 3 shall stand part of the Bill?

Baroness Noakes: I shall speak on Clause 3 stand part because it is an entirely disreputable clause. I entered the Government’s world of harmonisation

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and simplification for the last two groups of amendments, but when we come to Clause 3 there is no amendment that can mitigate it or ameliorate its status as a smash-and-grab raid on pensions, and the Treasury’s only reasons for doing so are financial. It is simply a tax-raising measure. The Treasury has had to dig pretty deep to raise this particular bit of revenue.

I shall remind the Committee of some of the history. In 2006 the Pensions Commission of the noble Lord, Lord Turner, produced its weighty final report, which set out a package of changes to pensions that the commission wanted implemented by 2010. Since then the Government have set about implementing the report by cherry-picking the things they liked and deferring or changing the things they did not like much.

The Government like to talk about “consensus” on this package of changes. To a degree there is a broad consensus about the changes that are being introduced, but the Minister will be aware from Second Reading of the Pensions Bill last week that the consensus is not complete and absolute. It does not extend to much of the detail because so much is still inchoate. We have warned that consensus may not survive the detail, or indeed the lack of it, around the Bill. Consensus is vital to a project like long-term pension reform. If the whole package is not robust now—and it is not particularly robust—it is unlikely to inspire the sort of confidence that is needed for successful implementation. The kind of cherry-picking that the Bill indulges in simply goes in the balance against consensus. The Government are playing a dangerous game with these reforms.

The first thing that the Government did was virtually abandon the Pensions Commission’s 2010 timing of the reforms. The national pensions savings scheme, now called personal accounts, will not be ready until 2012 at the earliest. The uprating of pensions in line with earnings will not be introduced until 2012 at the earliest, and possibly as late as 2015. The Treasury has inserted its own deadly caveat of “affordability” around the introduction of the earnings linkage. Since the Pensions Commission’s report and the Government’s White Paper, economic circumstances have, by common consent, deteriorated. It is a fair bet that affordability in 2012 will be even harder to establish than it was when the Government issued their White Paper.

In the context of the Pensions Bill, the Liberal Democrats have signalled that they wish to see the earnings link established in 2010, which was the original proposal from the Pensions Commission. I am not sure where the money is going to come from, in the context of the current fiscal position. From our perspective, we need some certainty about timing. We will be pressing that in relation to the Pensions Bill and, depending on what the Minister says today, possibly in relation to this Bill too. The Bill picks one bit of the Pensions Commission’s recommendations about the flat-rating of the state second pension. That flat-rating is not entirely to our taste because it means that those who pay more into the National Insurance Fund get nothing back for it. However, we accepted it as part of the total package of reforms. The Pensions Commission said that S2P should be flat-rated by 2030 but that was predicated on starting flat-rating in 2010.

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4.30 pm

The Government did not buy into 2010 for starting the package, and in particular the earnings link, but they said in their 2006 White Paper that,

Therefore, the flat-rating was going to start in 2012 at the earliest and possibly as late as 2015. Having slipped the start date, the Government nevertheless estimated that flat-rating would be completed by,

By keeping the 2030 date, the Government inevitably implied that the line for achieving the flat-rating would be steeper than suggested by the Pensions Commission, but it was not a magical date because it was qualified by the words “or shortly afterwards”. However, the date of 2030 now appears to have achieved a sort of mythical status.

The Bill allows the flat-rating to be started on a date even earlier than that posited by the Pensions Commission. It is now to start in 2009, so the curve will be even steeper if it is achieved by 2030. In practice, this means that the Treasury will screw more money out of employers, as contracted-out rebates in the early years will be reduced to the tune of around £450 million each year.

The Government have a prepared story for this about increasing the upper earnings limit, which is what the Bill is about, but we are not fooled by that. Just because there will be a higher upper earnings limit so that more people will contribute at higher NI rates, that does not mean that they should have their extra NI contributions confiscated immediately by an S2P flat-lining reduction. For us that is not logical, although I can see that it plays to the redistributive instincts of some in the Labour Party. However, that is not what it is about; it is just a convenient way to grab some money for the Treasury. It is a Treasury stealth tax aimed at squeezing employers and pension funds, which do not vote.

Having said that, we have accepted the flat-rating of S2P and, indeed, we would accept the acceleration of the flat-rating, but the Government have to come clean on the rest of the Pensions Commission package and, indeed, on their own White Paper package. The most important thing for pensioners is the question of when the Government are going to use earnings to uprate pensions, but the Government are saying absolutely nothing about that.

The Government continue to cherry-pick the things that raise money but will not provide any certainty about when they will start giving some money to pensioners through the enhanced uprating. Therefore, when replying, the Minister need not recite his version of why flat-rating is the right thing to do in 2009—we think that it is a fiction. The important thing is that, as the Government have chosen to accelerate this one bit of the package of pensions reform—the bit that suits them—they are now duty-bound to give undertakings about the rest of the reforms. It is that small but significant point that I wish to raise in this debate on clause stand part. I hope that the Minister can give us

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a proper indication of when indexation by reference to earnings will resume as some recompense for the tax-raising element of accelerating the state second pension flat-rating. I look forward to his response.

Lord McKenzie of Luton: The characterisation of Clause 3 as a stealth tax and as cherry-picking is completely wrong. I can understand from a political point of view why the noble Baroness would wish to project it in that way, but it bears no relation to the facts.

On the point that she pressed about restoring the link between pensions and earnings, there is a clear legal certainty around that. We made it clear in the legislation last year that our intention is that the uprating of the basic state pension will be relinked to average earnings from 2012, or, in any event, at the latest by the end of the Parliament, subject to affordability and the fiscal position. That is a clear commitment that it will happen by the end of the next Parliament if not from 2012.

This is probably not the occasion to go over again all the issues around pensioner poverty and the support that this Government have provided to pensioners, but we are spending something like £12 billion more each year than we would have done had we simply brought forward the policies of the noble Baroness’s previous Government. When pressed on matters of relinking the basic state pension to earnings, we might just remind ourselves who broke that link in the first place.

Dealing more specifically with the substance of the amendment, Clause 3 brings forward the introduction of the upper accrual point as the cap on earnings factors in the state second pension from 6 April 2009. This means that the upper accrual point will become the new upper threshold for the calculation of both state second pension and contracted-out rebates. It has been introduced early to ensure that the Government’s personal tax package announced in the Budget 2007, and the reforms to the state pension introduced in that, can be delivered as planned. We are making sure that we end up where we expected to be.

I am sure that the Committee would agree that the state second pension is poorly understood and that of those who are aware of it, few have any idea of how their entitlement builds up. In the current tax year, everyone who pays into the state second pension or is credited into the system is assumed to earn at least £13,500 whether they do or not, in effect providing a flat rate amount of benefit. In addition, earnings over £13,500 and up to £40,040 attract an earnings-related component. The Pensions Commission, as we have heard, recommended that the Government should focus resources on providing a more generous flat rate state pension and that the earnings-related component of state second pension should be withdrawn to make way for personal accounts. As the noble Baroness said, we had common cause on this at the end of our deliberations last year on the Pensions Act. Following the views of respondents to the White Paper on pension reform and to the Work and Pensions Select Committee, we also set about the task of radically simplifying the state second pension, and there is more to come in the Bill that we will consider shortly.

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The Pensions Act 2007 provides the mechanisms for both the withdrawal of earnings relation and simplifying the system. For a typical contributor earning above the lower earnings limit, earnings up to £13,500 a year and state second pension credits will attract the new flat rate amount of £1.60 a week for each qualifying year. The current earnings-related element built up on earnings over £13,500 will be gradually withdrawn, so that, by 2030, only the flat rate element will be left. Different rules apply where a person is in contracted-out employment.

As I said, these measures were welcomed during the passage of the Pensions Act last year and will simplify a greatly complex benefit. The savings from the gradual erosion of earnings relation will be reinvested over time in the earnings uprating of the basic state pension. In the 2007 Pre-Budget Report, the Chancellor announced that to ensure that reforms necessary to simplify the state second pension take place as originally intended following the alignment of the upper earnings limit with the higher rate income tax threshold, the start date for flat-rating state second pension would be brought forward to April 2009. The original intention was that measures to simplify and standardise accruals of state second pension would be introduced from April 2012 at the earliest through the introduction of the upper accrual point, among other measures. However, the above inflation increases in the upper earnings limit announced in the Budget have a knock-on effect on the timetable for delivery of a flat rate state second pension as originally envisaged in the Pensions Act 2007. This is because the state second pension accrues on the proportion of earnings between the lower earnings limit and the upper earnings limit. Increasing the upper earnings limit by more than inflation means that high earners would potentially gain.

A further effect of the Budget 2007 changes is a slight increase in the overall cost of the contracted-out rebate, because it is payable on the same band of earnings on which the state second pension accrues. It was never our intention for the personal tax package to have these effects on the state second pension. To cancel those unintended consequences and get us back on track with the abolition of earnings relation for the state second pension, we have decided to bring forward to 6 April 2009 the introduction of the upper accrual point, which was the rational thing to do. The Pensions Policy Institute has reacted by stating:

As I mentioned earlier, the Pensions Commission’s proposals and the consequent measures put forward in the Pensions Act 2007 reinvest earnings-related state second pension in basic state pension. As a result of the total package of reform measures, people will be better off in the new system than in the current system. For instance, under the current arrangements, high earners will receive total state pension of around £110 a week in 2050; under the reformed system, they will receive around £160 a week of state pension in 2053, taking account of increases in state pension age. Higher earners will also receive a slightly higher state

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second pension benefit or contracted-out rebate than in the outcomes above, as they are still likely to receive a small gain as a result of the increase to the upper earnings limit in state second pension in 2008 for the contracted-out rebate between 2008 and 2012.

I hope that the noble Baroness will accept that this is a technical adjustment to make sure that we are back on our intended track and that the package of measures that we discussed in the Pensions Bill last year was finely balanced and affordable. The changes in Budget 2007 upset that package so far as higher earners in S2P are concerned and this measure simply puts us back to where we should be.

I was asked whether 2030 was just an estimate rather than a target. It was always intended that S2P would eventually become flat-rated. The Pensions Commission in its second report set out as one option earnings-related accrual within S2P ceasing in around 2030. That is the best way forward as it accelerates progress of the state system towards a focus on flat-rate provision but maintains some element of earnings-related inflation in the system until personal accounts are well established and proven. Under provisions in the Pensions Act 2007, entitlement to S2P was built on a completely flat rate basis by around 2030.

I hope that I have dealt with each of the points that were raised. I am sure that the noble Baroness will come back to me if I have not done so.

Baroness Noakes: I thank the Minister for that wholly predictable response. It brings home to me that what the Treasury regards as rational is another man’s tax-raising, because we have to remember that that is what the Bill does. The Minister said that if the Government did not introduce this measure people earning more would gain. They do not gain: they are paying more national insurance as a result of the upper earnings limit going up. The Treasury lives in a funny world where it can see people paying more but gaining because something happening beyond 2030 might provide them with a little more pension.

Lord McKenzie of Luton: If the noble Baroness will forgive me, it depends on how you do your allocations. I can see that she would like to make the juxtaposition that she just has but, as we discussed earlier, changes to national insurance contributions were part of a broader package of measures relating to changes to the basic rate of tax and the withdrawal of the 10p rate. If you look at that for higher earners, both originally under the 2007 Budget proposals and still, they are gainers from that compendium of measures. It was not intended that a further gain should accrue to them as a result of the interrelation with S2P.

4.45 pm

Baroness Noakes: I think we could just say that it was not intended by the Treasury that they should not gain, as that is what all this is about. The other thing that the Minister said was that flat-lining the state second pension would help to pay for the earnings linking. Well, fine—let us introduce it at the same time. But we are not doing that; we are raising money

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from flat-lining it now, possibly six years before the earnings linkage is restored. That is the dishonesty at the heart of this particular measure.

The Minister said that the Pensions Commission had one version ending in 2030, which the Government then grabbed. But the Pensions Commission were going to start in 2010, not 2009. The Government said that it would do 2030 but that anything else that happened still had to end in 2030 and would start whenever the Treasury wanted. This is really about consensus on the Pensions Bill; it is not so much about this Bill. The Government are cherry-picking to raise taxes. We understand that they have to do that, because the fiscal position is so weak; but in doing so, by taking little bits here and there and not introducing them all together and still giving no indication of when the earnings linkage will be restored, I have to say to the Minister that the Government, through him, are endangering the consensus on the Pensions Bill. That is the burden of my remarks.

Lord McKenzie of Luton: I reject absolutely challenges of dishonesty around this matter. The Government have been very clear and open about how this package was put together and the consequences of changes made in the 2007 Budget. As for continual quotation of the Turner commission and looking at 2010 as a start date for the earnings link, the Pensions Commission judgment was that a short delay in introducing the

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earnings link beyond 2010 would not seriously undermine the overall direction of the proposed reform—although, if it were much later, then it might. A lot of work has gone into building a consensus. The Government are not trying to disturb this consensus; if anyone is trying to do that, it is the noble Baroness for the Opposition.

Baroness Noakes: The Minister has reminded me of another matter—that the Treasury kept very quiet about the impact when the original package of changes was introduced in the 2007 Budget. In fact, it released that particular impact only when this Bill eventually came forward. So while I withdraw the remark about dishonesty, which may be too strong a word, I would use a word very close to that in not giving Parliament the full information about what the Treasury’s intentions were when they first came across this point.

This is a stand-part debate in Grand Committee, so we go nowhere with it. The point that I want to leave on the record is that this is part of the Government not dealing properly with the issue of consensus. For us, this is an important issue.

Clause 3 agreed to.

Clauses 4 to 7 agreed to.

Schedules 1 and 2 agreed to.

Bill reported without amendment.

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