Clause 15
Pensions Bill
1:30 pm
James Purnell (Minister of State (Pensions Reform), Department for Work and Pensions; Stalybridge and Hyde, Labour)
It is hard to know when one is not in a seminar with him. Life is one long seminar.
We took the approach of abolishing contracting out because we essentially agree with the Pensions Commission that it was making decisions for people too complex. The system was understood by few people, especially in defined-contribution schemes, and overall, rather than helping to support saving for a pension, it may have been discouraging it. Clause 15 and schedule 4 seek to achieve this abolition, and amendments that we have already agreed provide a regulation-making power to remove or vary the rules on protective rights.
There has been interest in the effect of abolishing contracting out on the national insurance rebate, so it is important that we should be able to discuss that now. We have already covered the fact that the abolition of contracting out would mean that more people build up rights in the state second pension, and that takes the form that we were discussing earlier. Therefore, the first answer to the question put by the hon. Member for Yeovil is that it will be broadly financially neutral. People who withdraw from contracting out are building up future rights in the state second pension and therefore those are set at a broadly actuarially neutral basis. That is the point that the hon. Member for Weston-super-Mare was making.
Some of the debate, which has been based on the assumption that there was a huge saving here is incorrect, because any reduction in the cost of the contracted-out rebate is paid for later through increases in S2P obligations. The way that this will operate in practice is that from the date of abolition, contracting out will cease to be available for schemes that contract out on a defined-contribution basis. The members of such schemes will begin to build up state second pension. Contracting out will continue to be allowed for schemes that contract out on a defined-benefit basis. That is the answer that I tried to give the hon. Member for Yeovil on the quinquennial review, but there were two slightly separate points. One was our proposal for twinning the date for the earnings link with that for abolishing contracting out for DC. The other is when the next quinquennial review will happen. That continues to be relevant, even if we abolish defined-contribution contracting out, because that review will set the terms for defined—benefit contracting out. So, that process continues to be relevant and those issues are quite separate.