Clause 12
Pensions Bill
4:30 pm
James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge and Hyde, Labour)
I beg to move amendment No. 50, in clause 12, page 14, line 4, after ‘revoke’, insert ‘any provision of’.
Roger Gale (North Thanet, Conservative)
With this it will be convenient to take the clause stand part debate.
James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge and Hyde, Labour)
At this rate, we will have finished the Bill by the end of the afternoon.
David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)
No, I am speaking soon.
James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge and Hyde, Labour)
Ah, that is the difference. There was a certain amount of cognitive dissonance in the back of my head, which has now, thankfully, been cleared up.
Clause 11 introduces the new method of calculation for the state second pension, which will consist of a simple flat-rate component and a residual earnings-related element. I say residual because clause 12 brings in the relevant provisions for phasing out the earnings-related element. In our debate on clause 10, I explained that S2P was originally intended to be a short-term measure to increase the pension entitlements of low earners and certain carers, which complemented the introduction of stakeholder pensions.
Let me take this opportunity to correct a slight misapprehension possibly caused by hon. Members’ remarks. We do not intend to abolish stakeholder pensions with the reforms. They have had real success in reducing charges, as we set out in our White Paper on personal accounts, and we foresee them continuing to play an important role in both personal and company pensions. We have made it clear that we plan to remove the requirement on companies to have a stakeholder pension, because it will be superseded by personal accounts.
David Laws (Shadow Secretary of State for Work and Pensions, Work & Pensions; Yeovil, Liberal Democrat)
Is the Minister telling us that the Library is wrong in its assessment of the lack of success of stakeholder pensions?
James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge and Hyde, Labour)
We are very clear about the achievements of the stakeholder pension and we set them out in great detail in the December White Paper, which I am sure all hon. Members have read. In it, we highlight the significant reduction in charges achieved by stakeholder pensions.
As things stand, S2P will eventually become flat-rate in around 2056, when the low earnings threshold—the lower margin used for calculating earnings-related S2P: the £12,500—finally catches up with the upper earnings limit. That would have happened anyway because the former is uprated by earnings and the latter by prices. In line with the Pensions Commission’s thinking, however, we want to speed that process up so that S2P becomes completely flat-rate around 2030. To achieve that, clause 12 provides for a new cap on the earnings-related component of S2P, which we have called the upper accrual point. The changes are contained in subsections (1) to (3), which amend sections 22, 44 and 122 of the Social Security Contributions and Benefits Act 1992.
The clause also applies the upper accrual point to defined benefit contracted-out pensions. That is achieved through the measures in subsection (4) and part 7 of schedule 1, which amend both the 1992 Act and the Pension Schemes Act 1993. In its year of introduction, the level of the upper accrual point will most likely be equivalent to the upper earnings limit for that year. I say most likely because because it may be necessary to vary slightly the level of the upper accrual point to hit our 2030 flat-rate target, as I said to my hon. Friend the Member for Northampton, North.
Unlike the earnings limit, which on current trends will continue to rise each year in line with prices, the upper accrual point will be fixed. That enables the low earnings threshold, which is the top end of the band of earnings on which the flat rate element accrues, to merge with the upper accrual point much more quickly—in 2030, rather than the mid-2050s.
Clause 12 provides, in addition, the necessary sunset order-making powers to abolish both the low-earnings threshold and the upper accrual point when they eventually merge and become redundant. That is provided for in subsections (5) to (9). However, the order-making powers set out in clause 12 allow only for the repeal of a whole Act or piece of subordinate legislation. Amendment No. 50 clears that up, allowing the necessary flexibility so that it will be possible to repeal individual provisions. The repeals made by order are subject to the approval of both Houses. That process will be carried out by an affirmative order, debated in both Houses.
From around 2030, the S2P will start to accrue on a completely flat-rate basis. Of course, any earnings-related S2P and SERPS a person has accrued prior to that point will be fully preserved and paid when they retire.