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On one other practical point, I have a recollection that we were chided during the passage of the 2008 Act by the noble Baroness, Lady Noakes, who is not with us today, on our adherence to advice from actuaries. We had some discussion on whether the actuarial smoothing had to be effectively determined by the actuaries, or by Ministers on the basis of advice. Perhaps the Minister could remind me where we ended up on that issue. I beg to move.
Lord Freud: My Lords, I thank the noble Lord for the opportunities to speak to Amendments 14 and 15, which seek to define the latest possible group for whom the additional pension consolidation would be introduced. The amendments tabled by the noble Lord, Lord McKenzie, seek to fix the affected group in relation to a somewhat arbitrary date of 2025. It might be helpful if I provide some context as to why we have taken steps to replace the previous certainty as to the start date and the affected group with a power to define both by way of regulations. Clause 3 and Schedule 3 of the Bill provide flexibility around the implementation of consolidation, which, as provided for in the Pensions Act 2008, simplifies past earnings-related pension rights.
Before I go into why we need this flexibility, let me summarise the original intention behind consolidation. It served two purposes. First, it repackaged past rights to earnings-related pensions into a single cash value. Secondly, for around one-third of people with some contracted-out rights in private pension schemes, it smoothed the disparities in payment of additional pensions that occur during retirement. The redistribution of payments helps to overcome differences in indexation between additional pension and contracted-out schemes.
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None of the provisions in the Bill change the methodology for consolidation from that set out in the Pensions Act2008. Having reminded noble Lords of the basics, I will not take any more time going through details that are not relevant to this Bill, because a more digestible technical note is available in the Peers' information pack. Because I have forgotten the outcome of discussions between government Ministers and actuaries, I undertake to write on that. No, I can inform the noble Lord that the outcome of that debate was that it would be a ministerial, not a purely external actuarial, decision.
I return to the issue of implementation. The amendments tabled by the noble Lord and the noble Baroness would place a limit on our ability to specify the group for whom consolidation would apply. The previous Administration considered 2020 retirees to be the first suitable group for whom the state pension age would be equal. They also sought to link the start date for consolidation with the introduction of the flat-rate introduction year, whereby accruals to the state second pension will become a universal set cash amount. The current working assumption is that this date will be in 2012.
The assumption then was that people retiring from 2020 would enter a pension landscape of clarity and stability; and their complicated accruals from before the flat-rate introduction year would have been consolidated into a simple cash amount. However, the pensions landscape has since changed. In the light of this, the proposed legislation in Clause 3 and Schedule 3 would de-link the start date of consolidation from the flat-rate introduction year in 2012. It would also remove the definition of the affected group as those reaching the state pension age from 2020 onwards. The Government will instead have the flexibility to set the most appropriate affected group and start date by order.
These provisions give the Government space to review consolidation in the light of wider reforms. I regret that I am not at this stage able to talk more about the discussions between the DWP and the Treasury, to which I referred. That is one reason why it would be premature to pin down consolidation timing at this stage. We have time to consider the most appropriate timetable for introducing consolidation, and it is wiser not to rush into rash action on something that is, after all, meant to simplify our lives, both for individuals and for administration, when we do not know exactly how the system will develop. There would appear to be no clear reason behind the choice of 2025 as a start date, which I acknowledge was a probing suggestion. Until we have clarity on a new structure of pensions, if there is to be one, and the impact of these changes, it would not make sense to push ahead blindly with a simplification move that may end up not simplifying at all.
Lord Freud: Yes. At the early stages there are some years where the figure peaks at around £210 million and then comes back later, so it is a net early annual cost to the state with that maximum, coming down later to a net present cost that is neutral. From memory, the peak year was coming out at-was it 1925? Sorry, 2025. I will get the right century soon. The peak would be early in the 2020s until 2025.
Lord McKenzie of Luton: I am grateful for that response. I rather took from reading the literature that the cash flow issue was the real driver in all this, but from what the Minister has said there are obviously broader ramifications. I will read the record.
Lord McKenzie of Luton: I am grateful for that. I can see that it is meant to be at the start of the tax year. I suppose that I have a question about what makes it the start of the tax year, but perhaps we will leave that for another occasion. I am happy to beg leave to withdraw the amendment.
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