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In the face of these inter-linked problems the Pensions Commission proposed a twofold response: reforms to the state pension system to make it more generous, simpler, less means-tested and fairer to women; and a national pensions savings scheme designed to encourage people to make private provision in addition and to enable them to save at low cost. The Bill deals primarily with the first thrust of the Pensions Commission’s recommendations, with another Bill next year to legislate for the national pensions savings scheme, albeit in this Bill power is taken to establish the delivery authority.
The Pensions Commission’s recommendations received widespread, cross-party and cross-interest group support in principle, and so have the state pension proposals in the Bill. Criticism of the Bill, reflected, for instance, in amendments tabled in the other place, some of which may also be proposed in this House, have come almost entirely from those who wish that the Bill would go further and faster towards establishing a simpler and less means-tested state pension system. Indeed, the Pensions Commission’s own recommendations were criticised from exactly the same direction as right in principle but too little and too slow even before the slight watering-down of our recommendations through the shift of the date of earnings indexation of the basic state pension from what we recommended, which was 2010, to 2012. As that is the main thrust of the criticism of these proposals and of the Pension Commission’s proposals, I shall say a few words in response to the criticism that we should be going further still.
Concern has been expressed that the indexation of the basic state pension to earnings has not only been delayed until a likely date of 2012 but that the Bill itself, in a complex piece of wording which I would defy any non-expert to decipher, commits itself to make the change only before the end of the next Parliament. That concern has been expressed by the noble Lords, Lord Skelmersdale and Lord Oakeshott. Amendments were presented in Committee in another place to pin the date down more precisely.
In principle, I agree that it is unfortunate that we have ended up with this complicated wording rather than with a straightforward commitment to commence average earnings indexation from 2012. I also believe that whatever the wording says, indexation of average earnings will commence in 2012, because I cannot imagine any of the political parties going into the next election without making it clear that that is their intent, or any Government being willing to renege on this affordable promise. I have not checked whether it is allowable procedure in this House to offer wagers, but if it is allowable I would be willing to bet anyone that indexation of the basic state pension to earnings will start in 2012 if not before.
The more fundamental criticism says that even if average earnings indexation starts in 2012, Britain will still be left with too means-tested a state pension system and that disincentives to private savings will remain and that even with the proposed changes to the contributory system, with 30 years of contributions securing a full basic state pension, and a more generous system of carer credits, a small minority of women will still fail to accrue a full pension and women retiring before 2010 will receive no benefit. I have three responses to these more fundamental criticisms.
First, yes of course it would be more attractive to have a state pension system still simpler, more generous and less means-tested than now proposed, but all public policy is about trade-offs, and there are other claims on public expenditure. Achieving agreement to this package of reform involved what I might describe in retrospect as full and frank discussions with the Treasury. I do not criticise the Treasury’s role in those discussions. It is the role of the Treasury to challenge the many people urging on it increased expenditure on many different and equally attractive projects. Getting rid of means testing entirely is expensive—I suspect too expensive for any Government ever to deliver. With this Bill, we have argued through to a compromise which is affordable, sustainable and an acceptable balance with the other claims on public expenditure.
Secondly, it is vital not to make the unattainable best the enemy of the achievable good. It is vital to recognise that this Bill is a major step forward toward a more generous and less means-tested state pension system. Left indexed to prices, the value of the basis state pension would by 2050 be less than half of what it will be under these proposals. Without the Bill, the percentage of pensioners subject to means testing will increase from about 40 per cent to more than 70 per cent, but with the Bill it will fall. With the Bill, we will ensure that the proportion of women reaching state pension age with full basic state pension accrual, which is currently about only 30 per cent, will by 2025 be more than 90 per cent.
Thirdly, while it is true that there will be people still subject to means testing once these reforms are enacted, the number subject to withdrawal rates high enough to offset the benefits to saving of tax relief and the proposed compulsory employers’ contribution will actually be much more limited than the 30 per cent figure mentioned earlier. Crucially, the likely total private savings, in the national pensions saving scheme or elsewhere, of those people subject to very high withdrawal rates will be very small.
It is therefore likely that the remaining problems of disincentives to save could be significantly addressed by changes to the rules relating to the commutation of small pension accumulations into lump sum cash payments, and by changes to the capital disregard rules in relation to pension credit eligibility. I urge, therefore, that efforts to improve this package of reform, whether in amendments to the Bill or in subsequent policy debates, should concentrate on focused changes of that sort, which I believe could significantly address the remaining problems of means-testing. Similarly, some of the remaining problems relating to women’s pensions can be addressed by the sort of specific, focused proposals being developed and put forward by the Equal Opportunities Commission, for instance, without challenging the overall architecture of what is proposed by the Bill.
My overall theme is simple. We cannot have a perfect, entirely un-means-tested state pension system except at an unaffordable cost, but the Bill is a huge step forward in the right direction.
The Bill includes one element not related to the Pensions Commission’s proposals but to financial assistance scheme compensation. In the interests of time I will not comment on those proposals now, except to welcome the undertakings made by the Government in response to the debate in another place and to note, as I shall also note if I talk on this in detail in subsequent debates, that in relation to the winding up of pension schemes I have a declarable interest as a director of a life insurance company involved in the bulk buyout market.
One issue that the Bill does not deal with, however, is public sector employee pensions. I know the Government will argue that any attempts to discuss public sector pensions within this debate or to propose the establishment of a review of public sector pensions are irrelevant to the Bill before us. Strictly speaking, that is true, but I have some observations.
Following the Pensions Commission report there was an extensive, robust and, at times, heated debate about whether as a society we could possibly afford, over 50 years, to devote an extra 1.5 per cent of national income to the state pension system, on which 100 per cent of our citizens are to a degree dependent. At almost exactly the same time, it was accepted with almost no debate that public sector pension arrangements should remain in place, which implies that over the next 50 years probably an extra 1 per cent of national income—an increase from 1.5 per cent to 2.5 per cent—will flow as pensions to the 17 per cent of people who work in the public sector. That 17 per cent of the population owns about 35 per cent to 40 per cent, by value, of all the occupational pension scheme rights in the UK.
As it happens, I am a supporter of good occupational pension provision in the public sector, including salary-related schemes, but I think there has been an asymmetry in the rigour with which the different issues of pensions for all people—the state pension system and public sector pensions—have been addressed. There is an asymmetry when the state pension age is now, quite rightly, rising to 68 by 2045 while someone who joined the Civil Service before 2005, even if currently aged only 25, will retire at age 60. I suggest that while this Pensions Bill provides an agreed and sustainable basis for the state pension system, the issue of public sector pension provision cannot be considered as fully settled by the limited reforms introduced in 2005.
On the subject matter considered by the Bill, I remember that at a crucial stage in debates surrounding the Pensions Commission’s recommendations, the Chancellor of the Exchequer was reported as saying that he was 90 per cent to 95 per cent in agreement with what we proposed. I am happy to say today that this is a Bill with which I and my fellow commissioners are at least 90 per cent to 95 per cent in agreement, and I hope it will receive strong support from the House.
5.34 pm
Baroness Turner of Camden: My Lords, I welcome the opportunity to participate in this Second Reading debate. In doing so I declare an interest: I am a board member of the Pensions Advisory Service. Ever since Maxwell, which I well remember because I was a member of the Occupational Pensions Board at the time, we seem to have had regular pensions crises. After each one there is an independent investigation and report, followed by legislation and some new institutions established to oversee what it is hoped will be an improved system. This time, we have had the excellent report by the noble Lord, Lord Turner of Ecchinswell, some of which is reflected in the legislation before the House. What a privilege it is to follow him in this debate.
The Bill is an attempt to deal with some of the problems that have been identified: we are all living longer, we are not saving enough to provide for ourselves in retirement, there is a lack of trust in pension providers, final salary schemes are disappearing and the basic state pension is not providing enough to keep pensioners entirely dependent on it out of poverty without support from the benefits system. In the Bill the Government have made genuine attempts to deal with some of those problems. That is difficult; as usual with pensions legislation, it is complicated. I often wonder why that always has to be so. I believe it is because the basic state pension is insufficient for people to live on unless it is bolstered either by benefits, which are means-tested, or by private provision, which then has to be supervised by institutions established by the Government to ensure that the benefits promise can be guaranteed.
The Government have turned their attention in the first instance to the state scheme and the many criticisms that have been made of it. The majority of pensioners in poverty are women, as has been frequently stated in this debate. Because of its contributory nature, many women do not qualify for a full pension. The Bill attempts to deal with that by reducing the number of years necessary to qualify for a full pension, and there are attempts to improve home responsibility protection. The basic structure, however, remains a contributory one, and that may still disadvantage some women. My noble friend Lady Hollis has today given examples of where that may apply. Nevertheless, there are real benefits in the Bill for women and for carers, and we should welcome it on that basis.
It was originally intended that the basic state pension should be increased in line with the wages index. That was the Castle plan in 1975, but it was revoked by the Thatcher Administration in favour of the less generous RPI. Despite repeated attempts to persuade them, notably by the late Lady Castle, the present Government have until now refused to reinstate the link with the wages index. As a result, the basic state pension is very much less than it otherwise would have been. Lady Castle would have been pleased that the Government have at last accepted in principle that the wages index link should be reintroduced, but would have been disappointed that this will not take effect for several years, and that present pensioners will not immediately benefit but will have to wait until 2012, at least, for it to be implemented.
The Government have attempted to deal with the problems they envisage as a result of the projection that everyone will live much longer, by increasing the age at which the state pension becomes payable. Eventually it is proposed that that will rise to 68. I have grave doubts about that, and so, I understand, have the trade unions. While it may be perfectly acceptable for some jobs, for heavy manual labour it does not seem a very good idea. In certain industries it could well be dangerous, not just for the employee himself, but for others working with him. The construction industry comes to mind. I do not like the idea of ageing employees working upon scaffolding. There will no doubt always be jobs in which there is an element of some danger, and we therefore ought to look at the matter further in Committee.
The Government have sought to deal with the problem that people are not saving enough for retirement by the introduction of the personal accounts scheme. Workers will be automatically enrolled in that scheme, unless they opt out, and will pay 4 per cent of their salary, while employers will pay 3 per cent and the Government 1 per cent. It is of course true that many people do not see contribution towards pension provision as a priority. The main concern for many people is to ensure that they have adequate housing, and for many getting on to the housing ladder is desperately difficult and very expensive. Therefore, automatic enrolment in a scheme such as the one envisaged is about the only real possibility.
There is however one difficulty that the Bill does not contemplate. It would appear that there is an interaction with the benefits system. According to briefing I have received from Royal London, by 2050 about 650,000 UK pensioners will not receive a penny from their accumulated personal account due to the interaction of savings and means-tested benefits. Once it becomes clear that what amounts to a 4 per cent cut in salary could produce no benefit, the scheme is not likely to attract support. I would welcome any comment the Government have to offer on this proposition.
There is also the possibility that employers may not want to shoulder the cost of the scheme and might give salary inducements to persuade employees to opt out. Furthermore, we need to know more about the delivery authority. The TUC has said that it supports the idea of a delivery authority but wants to ensure that there is consumer involvement in the governing authority. I understand from the Minister that we shall have the opportunity to discuss this further against developing legislation. The scheme is certainly well intentioned but it deserves some further discussion.
It is of great concern that the occupational pensions sector, once a source of pride in this country, has in many cases ceased to provide the security it once did for thousands of employees. Employers who belong to final salary schemes once believed that they could look forward to security in retirement. Apparently many existing schemes have been closed to new entrants, who are offered much less generous money purchase provision. No new final salary schemes have been opened for a very long time. I agreed to some degree with my noble friend Lord Skelmersdale when he referred to the problems created by the Government’s action on ACT. I protested about it at the time. I am sure he would also agree that that was not the only factor involved; there were other problems such as contribution holidays which employers probably should not have taken and, of course, the collapse in the stock market at that time. Nevertheless, it was a factor and I regret that that action was taken. But we are where we are and we have to deal with the situation that now faces us.
The Government have attempted to deal with the very real crisis faced by employees whose pension contributions have disappeared following the collapse of the companies for which they worked. There is the Pension Protection Fund, and more recently the FAS, designed to deal with employees not covered by the PPF. I understand that the benefits available under the FAS are being improved, and the Minister made some reference to that in his speech this afternoon, but in the debate in the other place it was pointed out that there are about 125,000 employees who do not know whether they will in any way be compensated for the loss of their contributions and the pension expectations they once had. We have heard from the Minister that the intention is that they should at least get the benefit of 80 per cent of what would have been their original entitlement. Amendments to that effect are apparently to be before us. Again, this is something which we need to look at further and we will no doubt have the opportunity to do so in Committee.
So we have yet another complex and difficult Bill about pensions with a new regulator and new organisations to try to promise greater security. Nevertheless, we are still left with a system under which many pensioners will have no recourse but to means-tested benefits if they are to stay out of poverty in retirement. This will continue to be the case while the basic state pension remains inadequate and while the private sector requires supervision to ensure security. These are all issues which will no doubt be discussed further in Committee.
5.44 pm
Baroness Miller of Hendon: My Lords, it is to my surprise that I find myself involved in this Bill because pensions are not a subject that I generally participate on. Before I say any more, I must beg the indulgence of the House for the fact that my contribution is a little more specific than is usual on Second Reading. I am restricting myself to just one topic—to one clause relating to an earlier Bill that I was involved in. I am optimistic that I may be pushing at a slightly open door and I hope that after he has heard me, the Minister might agree to resolve my problems in his response.
The marginal note to Clause 5, which is the one that I am concerned with, tells us that it is about:
In other words, it is to restore the link between the state pension and average earnings, rather than the RPI in accordance with the pledge given in the White Paper. The principle behind this amendment is certainly accepted by both us on these Benches and industry, and probably by all your Lordships. However, the wording of this clause is entirely unsuitable for that purpose. I would like to explain my objections to the provisions in the order in which they appear in Clause 5, which seeks to insert a new Clause 150A in the Social Security Administration Act 1992.
Proposed new subsection (2) requires the Secretary of State to lay an order before Parliament upgrading the pension in accordance with the “general level of earnings”. However, proposed new subsection (3) immediately contradicts that provision by excusing the Secretary of State from performing that duty,
What this inelegant phrase means is that they do not have to bother to uprate the pension if the amount of the increase would be very small because the increased general level of earnings in the review period was also “inconsiderable”. Inconsiderable to what? Who is to decide whether the general level of earnings has only risen inconsiderably? Suppose that a review does not take place. That lost increase is not made up when in a subsequent period it is considerable because new subsection (2) limits the review to a current year and does not permit retrospective increases.
I have some slight sympathy with the Government over the problem that they are seeking to resolve. Your Lordships may recall a few years ago the opprobrium that was heaped on the Chancellor of the Exchequer for his so-called meanness in offering pensioners a miserly indexed increase of 75 pence a week. I can understand the Government wanting to avoid a repetition of that farce. But if the increase is too small in any year to be worth while for the Secretary of State to bother with, what justification is there for not making it up in subsequent years to those pensioners who manage to live that long?
There are three subsections which are entirely objectionable because of the wide and entirely discretionary powers that they give to the Secretary of State. New subsection (3), to which I have just been referring, says the Secretary of State can ignore indexing,
In new subsection (4), the Secretary of State can round the increase off, up or down,
Not only is he given complete discretion, but there is no limit to what rounding off he may think is appropriate—to the nearest pound, to the nearest penny, to the nearest 10 pence, or what? And although the Secretary of State can round the increase down as well as up, there is no obligation, or even power, if he has arbitrarily lopped X pence a week off pensions to make up the loss in subsequent years.
The “general level of earnings” is defined as the key to the whole of the Bill’s operation of indexing. In new subsection (8), the Secretary of State is to be empowered to estimate the general level of earnings,
He is not required to conform to any particular method of calculating it, or to accept the figures from any of the established publications of statistics on such matters, nor is it clear which trades, professions and occupations are to be included in his entirely personally calculated index. Will football managers, Premier League players and pop stars be included? What about nurses, teachers and police officers? What about the effect of artificially depressed below-inflation wage settlements imposed on public service employees? We could, in effect, find ourselves back quite close to the retail prices index.
I have on several previous occasions, in connection with other Bills which I conducted through your Lordships' House from the opposition Front Bench, protested and objected—sometimes successfully—against the attempts by this Government of control freaks to rule by ministerial decree. The objectionable provisions to which I am speaking are prime examples of that process.
On many occasions when I presented amendments to some Bill or other, I was met with the objection that they were unnecessary for some entirely specious reason. The arrangements for working out the general level of earnings contained in this Bill are not only wholly objectionable for the reasons I have just given, they are also unnecessary. Adequate arrangements have already been made and passed by Parliament to provide for what is called indexation of amounts in accordance with a strict mathematical, wholly independent and unarguable formula which does not depend on the whim of a Minister or the diktat of the Treasury.
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