Nigel Waterson (Shadow Minister, Work & Pensions; Eastbourne, Conservative)

Welcome back, Mr. Gale. I am not sure whether it is easier for me to set out my concerns and then for the Minister to deal with them, or for him to set out what the clause is about and then for me to comprehensively rubbish what he has said, but let us try this way round.

We are grateful to the Minister for taking us through the enchanted forest of low earnings thresholds and lower earnings limits. We are now on flat-rating S2P—no wonder nobody understands pensions in the real world. To assist the Committee to make good  progress it might help to say that my comments will cover aspects of clauses 10, 11 and 12 together. That should obviate any significant discussion of the subsequent two clauses.

The first point is the redistributive nature of this part of the reform package, which is something that the Government, for obvious reasons, did not trumpet themselves—we had to draw it out in our examination of their proposals. That was thrown into sharp relief by the amendment of the hon. Member for Northampton, North, which sought to go even further than the Government in terms of redistribution.

In fairness, these proposals come on top of reforms made shortly after the Government were first elected, which were redistributive in nature. As I say, the hon. Member for Northampton, North and her group of amendments have shown that there is an appetite, at least from Labour Back Benchers, to go even further than proposed. Back in 1998, the Government’s Green Paper, “A new contract for welfare: partnership in pensions”—Green and White Paper titles really roll off the tongue—made it clear, in fairness, that they always intended in the long run that S2P should cease to be earnings-related and become a flat-rate scheme. The Child Support, Pensions and Social Security Act 2000 contains a regulation-making power to that end. This is one of those occasions when explanatory notes are probably more revealing than the legislation itself. The Library research paper points out that

“the explanatory notes on the Act”—

that is the 2000 Act—

“explain that the Regulations will not be made until stakeholder pensions have established themselves”.

As the Library brief goes on to say with admirable understatement:

“However, stakeholder pensions have not been as successful as the Government hoped in attracting the target market of moderate earners”.

It is worth noting in passing that this reform package—the basic direction of travel of which we, on these Benches, support—signals the last rites for stakeholder pensions. That is an experiment that has clearly failed in terms of encouraging greater participation.

As the Minister will I am sure go on to explain again, the subsequent clause and schedule 2 bring in a weekly rate of £1.40 on deemed earnings below the low earnings threshold. I am told that that figure is designed to be cost-neutral. Concerns have been expressed by outside bodies. The TUC has advised caution about moving to flat-rating S2P too quickly and has said:

“We suggest that before any final decision is taken on reforming the S2P into a flat-rate weekly top-up, the NPSS”—

that is personal accounts—

“should be up and running, and have been subject to an independent review of levels of opt-outs and contribution rates.”

Our old friends at the NPC have also expressed concerns and talked about

“the decline in availability and weakening of private occupational pension schemes”,

which is something that in any view has happened on this Government’s watch. The NPC have also said that that

“underlines the necessity for the second-tier state pension to be strengthened and made more inclusive...it offers defined and predictable benefits, low administrative costs”.

The NPC also talk about the “burden of savings risk” being placed on the individual. Moving beyond that, the Pensions Policy Institute, of which we shall hear more when we get to the great means-testing debate, in its pamphlet, “State pension simplification?” makes the point that there will still be some significant differences between S2P and the basic state pension. It lists four differences:

“S2P may not become flat-rate for all individuals until 2030”—

The Minister may want to come back on that point—

“Some people may qualify for BSP but not S2P, for example, the self-employed.

S2P will still be uprated in line with prices when it is payment”,

while as we have heard BSP in due course will be

“uprated in line with earnings”,

and

“Some of S2P will be delivered by private pensions, through contracting-out”.

The Pensions Policy Institute goes on to say that

“there will still be uncertainty as to the amount of S2P that individuals will receive. Amounts of S2P in payments to individuals will still vary according to lifetime characteristics, and by age”.

It refers to a specific example:

“a woman with exactly the same contribution record as her younger sister will receive less S2P each year than her sister does”.

It concludes by saying that

“many of the differences that currently exist between BSP and S2P will remain”.

If that is in part designed to be a simplification measure, there are concerns from the PPI about whether that will deliver a great deal of extra simplicity.

As I said in my intervention on the hon. Member for Northampton, North, we have referred to the problem of those people—anyone earning over £18,000 a year, as I understand it—who will still continue to pay national insurance contributions at the same level even though the amount that they get from S2P will be significantly reduced. The hon. Lady, with admirable honesty, asked whether it was better that the money should go to people who were poorer. There is a philosophical argument there that I am not going to approach. I respect her position from an intellectual point of view, but is that the Government’s position and may we hear something from the Minister about the redistributive nature of the proposals?

We have done some figures but I am always open to correction on figures from the Minister as he has all the clever people working for him. We estimated that by 2033 someone earning more than £35,000 a year would be paying £2,119 in national insurance contributions for a pension benefit that they would no longer receive; and someone on £18,000 a year would be paying £468 a year for the same lack of benefit.

When that was put to the Department at the time we made an issue of that point and an unnamed spokesman for the Department said that this loss would be partly compensated by an increase in the basic state pension. I accept and can understand that,  but it is always interesting to dive into the Government’s regulatory impact assessment.

See this speech in context