I beg to move,
That this House
condemns the Government's continued failure to bring forward proposals to strengthen pensions and savings or to reform the welfare state;
takes note of the deeply worrying interim findings of the Turner Commission and of the contrast between the Commission's detailed analysis and the Prime Minister's empty and inadequate rhetoric on pensions and welfare reform;
further notes with concern the high levels of economic inactivity;
condemns the lack of incentive to make private pension provision and the failure to help 1.7 million people, including many of the poorest pensioners, who are entitled to the Pension Credit but do not receive it;
regrets the failure of the Government to address the crisis in state, personal and company pensions;
observes that the Pensions Bill is still widely regarded as poorly drafted and that the Pension Protection Fund does not provide the 'guarantee' claimed for it by Ministers;
and urges the Government to join the growing consensus of organisations representing pensioners, pension providers, employers and trade unions that the basic state pension needs to be significantly improved and that the spread of means-testing should be reversed so that older people can be assured of dignity and security in retirement.
I draw the attention of the House to my entry in the Register of Members' Interests.
It has been an extraordinary 10 days, even in the history of this Government's attempts to reform the welfare state and to tackle the pensions crisis. The week began with eager anticipation of what we were told would be a major speech by the Prime Minister on the subject. It was heavily trailed in advance by No. 10. We were told by the The Times that
"Tony Blair will on Monday promise to transform the welfare state in a Labour third term".
The Independent said:
"Tony Blair will set out plans for radical reform of the welfare state today . . . Mr. Blair is likely to announce a far-ranging reform of incapacity benefit."
The Daily Mirror said:
"Tony Blair will signal his return to the political fray next week by launching a 'war on welfare'."
That is what we were told in advance of the speech, so of course the loyal troops of the left-wing think tanks all marched up the hill to hear this great pronouncement, accompanied by the long-suffering lobby, who had been told to expect something big. What they got was
"a vision of a true opportunity society."
That was the great new programme for reforming welfare. I guess that we do want an opportunity society, and 10 years ago the Prime Minister could have got away with just giving us another of his visions, but in the past 10 years we have had "a decent society", "a creative economy", "a stakeholder economy", "a new age of achievement", "a partnership economy", "the third way", "a giving age", and of course my favourite,
"This is no time for soundbites."
We have had pledges and vows and covenants. Notice how the currency gets devalued and these commitments have to get ever more intense. What we have not had, and we did not get on Monday, are any practical policies either to reform welfare or to tackle the pensions crisis. An interesting question is: what went wrong? Why did this much-trailed speech fail to deliver? Explanations are already flying around.
The Blairite explanation is that the Prime Minister was about to deliver a very good speech but the Chancellor got at it. He was just about to do it, but sadly it was copied to the Treasury over the weekend and all the stuff on incapacity benefit was removed by that guy at No. 11. The Brownites say that the Prime Minister does not have the faintest idea what to do, that their man knows what to do, but the Prime Minister has no substance at all.
I welcome the new Secretary of State for what I think will be his first speech in the House in that role, but I tell him that he will have a grim few months of being fought over by the Chancellor and the Prime Minister. It all goes back to that ancient international treaty known to political journalists as the Granita pact, which reserves economic and social policy for the Chancellor. The Secretary of State and his Department are in the position of one of those sad colonial outposts with two great imperial powers clashing over who controls it—one day it is the Chancellor and the next it is No. 10, and the poor Secretary of State is caught between them. The Kremlinologists will want to know when he speaks today whether he does so as the voice of No. 10 or of No. 11.
Meanwhile, as the Government are paralysed in this endless argument between Nos. 10 and 11, what is happening in the real world with the problems of people trapped on incapacity benefit, outside the labour market or worried about the security of their pensions? I shall turn in a moment to the pensions crisis, but as we are also talking about reform of the welfare state, let me refer the Secretary of State to the labour market statistics out this morning, which show that the Government are failing not only on pensions but on the reform of welfare and on tackling the problems of economic inactivity.
Will the Secretary of State confirm that today's figures show that the number of young people under 25 who are not working or studying or training has now risen above 1.1 million? Seven years after the introduction of the new deal, the number of young people out of contact with the labour market and neither working nor studying is as high as it was when Labour came to office in May 1997. The Government have made no progress whatever.
At oral questions on Monday, the Minister for Work—it is good to see her here today—seemed baffled when we cited these figures, and did not seem familiar with a table that Conservative Members have studied closely: table D4 of "Labour Market Trends", which is published monthly. —[Interruption.] I see my hon. Friends nodding. If the Minister studied that table every month, she would see clear evidence that, whatever the Government say about the new deal, it is failing to deliver.
Today's figures also contain new evidence on the number of people who are economically inactive—the number of people outside the labour market altogether. That figure has also hit a record high: 7.93 million, which is the highest figure since 1983, so we do need welfare reform. Even though the Government are bringing down official unemployment as measured according to the number of people claiming unemployment benefits, they are making no progress whatever in tackling the problem of those who are not participating at all in the labour force. If anything, as they reduce the number of people on unemployment benefits, the number claiming other benefits goes up. For example, the number of people on incapacity benefit is going up. That is why it would have been so good to hear some practical proposals from the Prime Minister on Monday.
Should not the hon. Gentleman tell the House the whole story behind these figures? Is it not true that fewer people are now claiming the very benefits that he is talking about? The problem is that the people who ended up on those benefits under the tenure of his Government have lost confidence and it is now very difficult to place them in jobs. The hon. Gentleman should tell the whole story. Is it not true that fewer people are now claiming such benefits?
The whole story is that the number of people on incapacity benefit fell from its introduction in 1995 until 2000. We know what happened in 2000. The Prime Minister had another one of his welfare reforms: he introduced means-testing of new claims for incapacity benefit. We warned at the time what the consequence of that would be. Such claimants, who are vulnerable and on the margins of the labour market, are reluctant to leave the benefit because they fear that if they have to re-claim, they will do so on less favourable terms than before. As a result, the length of time that such people spend on this benefit is going up. That is the problem—the stock of people on the benefit. It is no good simply focusing on the flow on to the benefit if people are remaining on it for longer—or for ever—once they are on it. Under this Government, the average length of time that people spend on incapacity benefit has gone through the five-year mark. That is a scandal. This is why everybody hoped that on Monday, the Prime Minister would offer some practical measures to tackle the problem. He failed to do so.
I am Kevin Brennan, Mr. Speaker; he is the naughty one.
The hon. Gentleman mentions past warnings that he has given, which presumably include his saying that raising the basic state pension in line with earnings is a wild and uncosted policy. He is a man of logic and he has mentioned the Turner report, which states that the implication of raising the basic state pension is that either taxation or the retirement age will have to go up. Which of those alternatives is the Conservative party proposing?
Let me now turn, then, from the Government's failure to reform welfare to their failure to tackle the pensions crisis. [Interruption.] I will touch on the issue raised.
I understand political foreplay when I hear it, and the hon. Gentleman is obviously enjoying himself. Now that he has got it off his chest, will he not recognise that the Adair Turner report is a rather special moment in time? It is the next best thing to a royal commission in terms of setting out the extent of the problem, so is this not a sober moment at which we should try to deal with the issues and the context in a more deliberative way, rather than exciting all this party political clap-trap?
Spoken like a true Liberal Democrat! They are so superior, so above the rest of us. I think that it is part of the real Opposition's job to hold the Government to account for what they have done on pensions, and that is what I am doing.
I want to remind Ministers of what they have said in the past, as set against the conclusions of what is indeed a very sober and important report. In the days of the Soviet bloc, one east European country had a law that made it a criminal offence to keep old newspapers. That made it very difficult for people ever to hold any Government to account for what they had promised or done in the past. Fortunately, in this country we can hold Ministers to account for what they have said or done, and I want to remind the Secretary of State of what we have heard from this Government on pensions since they took office in 1997.
In March 1998, a document entitled "New Ambitions for our Country: A New Contract for Welfare" rather rashly set out—I am sure that the Government would not risk this now—what they called their "success measures" for pensions. Success measure 1 states:
"At the end of the process of reform, there should be a guarantee of a decent income in retirement for all."
Success measure 2 is:
"An increase in the amount of money going towards savings and insurance, but without increasing the proportion borne by government."
Six and a half years later, we are entitled to ask Ministers how they are doing. Adair Turner's report states:
"Current state plans and private savings patterns . . . will only deliver a small increase and contrary to the government's stated aspiration, the balance of provision will not shift from state to private savings."
The Government have completely failed to deliver on what they said in March 1998.
We then had another attempt, in December 1998: "A New Contract for Welfare: Partnership in Pensions", with a foreword by the Prime Minister. He said:
"This Green Paper sets out our plans for radical reform of the whole pension system, to rebuild trust and ensure that everyone can look forward to a secure retirement."
"These reforms mean that the total income of pensioners will rise in years to come, mainly fuelled by rising private contributions. Public spending on pensions will rise too in real terms, but less sharply, and will fall as a proportion of national income. This will ensure that the pension system remains both fair and affordable.
This is our New Insurance Contract for pensions. This Contract will deliver the security we all want, now and for the future."
Six years on, what do we now have in the report that the Prime Minister himself commissioned? We have a completely different picture. It states:
"In the Green Paper on Pension Reform of 1998"— the very document from which I quoted—
"the Government projected that government expenditure on pensions would remain constant as a percentage of GDP, and set a target that the balance of pensioner income should shift from 60 per cent. public: 40 per cent. private to 40 per cent. public: 60 per cent. private. This aspiration is extremely unlikely to be met".
That is what Adair Turner now says about what the Government promised.
It gets worse for Ministers. I do not know whether the Secretary of State has ever read the pensions documents previously produced by his own Government, but I hope that they would cause him at least one or two blushes. The Turner report states:
"Britain's funded private pension system is in serious decline. The percentage of the workforce covered is not rising and the average level of pension provision is declining."
Yet as recently as December 2002, we had another of these outrageously optimistic documents. It stated:
"Overall contributions to pension funds increased by nearly 40 per cent. in real terms between 1997 and 2001".
I should tell the Secretary of State that I have a nice collection of letters of apology from previous Secretaries of State. His two predecessors had to write to me to apologise for their mistake in claiming that we are saving more than we really are. Adair Turner's report finally shows that all those assertions were false. It shows that the December 2002 assertion, on which rests the policy that is still being defended, was also false.
What they also said in December 2002 was that
"it has been reported that around a third of FTSE 100 companies have recently moved away from defined benefit provision".
They go on:
"But this trend should not be overstated. The latest figures . . . suggest that . . . only just over 1 per cent. of defined benefit schemes reported as having closed to new members. And only 0.5 per cent. closed to existing members."
That is what Ministers were saying. What do we now find? It is exactly the opposite. Adair Turner's report published this week states that
"active membership of open DB schemes in the private sector has fallen by 60 per cent. since 1995."
At last, a dose of reality.
I should like to remind the hon. Gentleman of two points. The first is that the Turner commission clearly concluded that the current problems that we face arise from the "cumulative impact" of the decisions and commitments made, often with unintended consequences, by Governments over "several decades". People outside the House would be interested to know whether the hon. Gentleman accepts his party's share of responsibility for what happened. In particular, will he now accept that when he stood in the 1997 election on the Conservative policy to phase out the basic state pension over the coming years, he and his party were completely and utterly wrong? [Hon. Members: "What?"] Those hon. Members who shouted out "What?" should have read the policy that was advocated by Mr. Lilley when he was Secretary of State, which was to abolish the basic state pension. They were wrong, and Conservative Members should accept responsibility for it. [Interruption.]
If the right hon. Gentleman wants to debate pensions and the 1997 election, it is about time that we received an apology from Labour Members for the way that they shamelessly misrepresented our views. Pensioners throughout the country thought that they were about to lose their pensions under the policy proposed by my right hon. Friend Mr. Lilley, but that was absolutely not his intention, as the right hon. Gentleman well knows.
I accept, of course, that the serious pensions crisis that we currently face arises from a range of factors. The right hon. Gentleman is quite right about that. Not everything is under the Government's control and not everything is the responsibility of the present Government. I accept that. The evidence in the Turner report shows that it is a complicated story. The fact that Governments cannot control everything makes it even more important that the factors that Governments can control and influence are got right. The trouble with the present Government is that they have made a complete mess of the factors that they do control—the tax regime on pension and the benefit regime on pensioners. That is the case against the Government and the challenge that they face.
On the subject of commitments given by parties, I seem to recall an interview recorded on Sunday night—I cannot quite remember the punch line—in which the hon. Gentleman was asked to confirm that the only pensioners who would benefit under his proposals were those who did not claim tax credit. Can he please remind me of the conclusion of that interview?
I am afraid that I am not wholly clear about what the hon. Lady is referring to. Is she talking about the Chancellor and the tax credit or the Secretary of State and his pension credit? The Prime Minister gets confused between the two, so I would not be at all surprised if the hon. Lady is confused.
I was talking about the tax credit that people used to enjoy in the pension funds, whereby dividends from British companies did not bear tax, and the Chancellor's decision in 1997 to withdraw it. That is what I am talking about. The discussion about that policy in the book that I mentioned is fascinating. For Labour Members who have yet to decide whether they are Blairite or Brownite, I strongly recommend it. I particularly refer them to pages 222–23, where this crucial incident that affected our pensions so badly is discussed. Under the heading, "The Chancellor and his Tax", it states:
"To those who warned that his policies would cause permanent damage to savers and pensioners, Brown retorted that the stock market was booming and the funds were now richer than ever"— precisely what Adair Turner describes in the report as "the fool's paradise" of the past.
"'Many pension funds are in substantial surplus', he repeated. It was 'the right time to undertake a long needed reform.' He dismissed any contradictory opinion . . . Blair was urged to restrain the Chancellor."
We learn from the book that the Chancellor originally wanted £8 billion. The report continued:
"Blair told Brown that everyone agreed that taxing pensions 'was not a good idea.' 'It is a manifesto commitment', replied Brown inaccurately."
We now know that the tax increase was got through by the Chancellor, despite the Prime Minister's concerns, by claiming inaccurately that it had been a pledge in the manifesto.
I do not know about defending the policy and I am not going to engage in fairy stories. I do recall that period and I recall going into the House of Commons Library for an independent assessment of the taxing pensions policy. If the hon. Gentleman wants to do his homework, he could get a copy of that document. The argument in favour of the tax was that the profits made from pension schemes were being paid out in dividends rather than being ploughed back into the schemes. How does the hon. Gentleman answer that one? I repeat that it was an independent report.
That was the argument that companies had to be stopped from distributing their dividends because it was bad for investment. It amounts to the constipation theory of investment—the idea that the only way to acquire investment is for companies never to distribute any cash. The whole purpose of having a modern financial system is that companies with a large amount of cash flow can distribute dividends, while others that want to invest can secure funds from the financial markets to do so. There is absolutely no reason to stop companies distributing dividends in order to encourage investment.
The hon. Gentleman has previously made clear his opposition to the abolition of tax credit dividends in the past. Can he therefore tell the House when the next Conservative Government will reverse the move? Will it be in the first week, the first month or the first year? I would be most grateful if the hon. Gentleman could tell us that.
We will be publishing our consultation document on tax reform in the near future. [Hon. Members: "Ah!"] I have to tell the hon. Gentleman that when it comes to tackling the burden of tax under the Government, we are spoiled for choice in identifying the areas requiring reform. Taxes on pension funds are one of many candidates for reform.
I have been listening to the hon. Gentleman for nearly half an hour [Hon. Members: "Too long."] and it does not really surprise me that he has made no comment on chapter 8 of Adair Turner's report, which relates to the huge discrepancy between women and men when they reach pensionable age. One thing that the pension credit has done is to help overcome that discrepancy. Failing to acknowledge that aspect of what the Government have achieved in their pensions policy is, I would suggest, a gross mistake from the point of view of any of the women pensioners—or women about-to-be pensioners—who might be watching or listening to the debate.
I accept that that chapter, like every chapter of Adair Turner's report, is well worth studying and I accept that there is a problem about women and pensions. However, I remind the hon. Lady that 1.7 million pensioners who are entitled to the pension credit do not claim it, and many of those are the women whom she fondly imagines the pension credit is helping. The problem with the means tests is simply that many people do not get the help to which they are entitled. That is one of the biggest single objections to the policy.
I now want to make some progress. What have we had from the Government? On Monday we had a grand vision, and on Tuesday a grim reality. What we lack are any policies to connect the Government's vision with the reality contained in Adair Turner's report. It is at this point that we all turn to the Secretary of State. It is his responsibility to be the missing link—
No, not the weakest link. I thought about calling the Secretary of State that but refrained from doing so. He may become the weakest link, but let us hope not.
The Turner report contains some very grim evidence about the seriousness of the pensions crisis. The Secretary of State has that report and a vision from the Prime Minister. His job is to come up with the policies that tackle the problem. For the past 24 hours, he has been using some rather colourful turns of phrase. For example, he said that there is no "fairy dust" or "silver bullet" in this matter. It is as though we all live in a fantasy world and that the Opposition have a fairy-dust policy manifesto. What we want are good, solid, practical policy proposals. That is not too much to ask for, and it is why we produced on Monday our eight-point action plan aimed specifically at tackling the pensions crisis.
In contrast, the Government have asserted that the question is so serious and difficult that they will produce their policies after the next election. Am I right to be just a little suspicious about that approach? I thought that a party put its policies in its manifesto in order to get elected. The idea that a party tries to get elected and then launches policies when in government is not the conventional way of doing things in a modern democracy.
I do not know whether the Government's approach strikes the Secretary of State as a bit odd. Does it mean that he has no idea or policies at all, or that the policies that he has are so unpopular that he dare not reveal them to the electorate before people are able to vote? After seven and a half years of this Government, it is not unreasonable for the Opposition to ask him to put some policies on pensions before the electorate in advance of the next election. That is all that we are asking for, and it would be extremely helpful if the right hon. Gentleman felt able to do so.
That is especially important as on Monday the Prime Minister had the cheek to say that the Tories did not dare fight the next election on policy or on what they would actually do in government. What about the Prime Minister's own Government, who say that the problem is so difficult that they cannot be expected to produce any policies until after the next election?
Does the hon. Gentleman admit that his action plan, which would link the basic state pension to earnings but the guarantee element of pension credit—the old minimum income guarantee—to prices would damage the interests of people on low earnings, most of whom are women? Would not his action plan have the effect of widening inequalities and redistributing wealth from the poor to the better off, and from women to men? Is not that one more example of the modern Conservative party's willingness to let the devil take the hindmost?
I am in a very odd position in this. I understand the arguments about what should happen to the pension credit and whether it should be uprated according to prices or earnings in the next Parliament. I have regularly asked successive Secretaries of State to set out clearly and authoritatively their plans for uprating both the guarantee credit and the savings credit by prices or earnings. As yet, I have never received an authoritative answer and I should be interested in doing so.
I am trying to get the Secretary of State to give us some policies today. Even if he will not do that—and I must say that I think we are entitled to expect some policies—I invite him to accept that there is a serious problem in our pension system and that the successive, complacent assertions made since Labour came into office in 1997 are now "no longer operative", as the former US President Nixon once said of his previous statements. Is the right hon. Gentleman going to abandon all those claims that everything is fine and that there is no need to worry because people are saving so much, and dump them in the bin? If he were to withdraw all the assertions made in previous policy documents and say that there is a serious problem, that in itself would bring a breath of fresh air to the debate.
I will give way to the hon. Lady, provided that I am not criticised for speaking at too great a length; it is because I am accepting so many interventions.
I thank the hon. Gentleman for giving way. Does he accept that the Turner report acknowledges that the problems being described existed 20 years ago? Those include demography, savings and levels of pension. What was the plan of the previous Conservative Government who were in office at that time? Turner makes it clear that the policy changes should have been implemented 20 years ago. Where were the hon. Gentleman and his Government then?
Of course, these are long-term issues. The Government have been in office for seven and a half years now. They have told us endlessly that either there is no problem or that they have marvellous policies on pensions, but Turner makes it clear that there have been significant mistakes since 1997. One of those mistakes has been the mass spread of means-testing, of which the report is very critical.
No, as I want to make a little more progress.
Even if the Secretary of State is not going to give us any policies today, will he say to the House that he recognises that assertions by previous Secretaries of State in previous policy documents simply no longer apply? Does he accept the overwhelming evidence in the Turner report that we have a serious problem? That is the first thing that I want the Secretary of State to do. The second thing that I want him to do is to accept the need for reform. Does he accept that there is a need to change the current direction of policy?
The evidence about the effects of means-testing contained in the Turner report is very powerful. Turner states:
"Means-testing within the state system both increases complexity and reduces, and in some cases reverses, the incentives to save via pensions which the tax system creates. The scope of this means-testing would grow over time if current indexation approaches were continued indefinitely."
That is the warning over current policy. Where does the Secretary of State stand in the great argument about whether the pension credit should stay? Does he recognise that we need a different approach in the long term? I am not asking the Secretary of State to abolish the pension credit. We do not propose that: we want the basic state pension to rise in value so that fewer pensioners need to claim the pension credit. However, I am asking whether the right hon. Gentleman recognises that, in this territory, the tectonic plates are shifting. We believe that there is a debate going on in Government about carrying on with mass means-testing. It would be very much appreciated if the right hon. Gentleman were willing to share his thoughts on that subject with the House.
Does the hon. Gentleman agree that, in the real world, the pensioners who are most unhappy are those who receive a modest private pension? They do not qualify for the pension credit, but the state pension is a significant part of their income. Does he agree that they feel neglected and ignored? My concern about the Opposition's proposals is that although they would restore the earnings link with the state pension—which a previous Conservative Government abolished some time ago—the level that is being proposed would be too low. As a result, such a link could never represent the fair deal that many of us want for the pensioners to whom I have referred.
We could try to increase the basic state pension so as to reverse the spread of means-testing in a variety of ways. There are various thoughts about that, and the Liberal Democrat spokesman on these matters, Mr. Webb, has put forward his proposals. We could have a serious discussion about how far and fast we should go, and about whether we should start with older pensioners. My view is that, given the existence of the pension credit, the best way to make progress is to try and increase the basic state pension—especially as there is clear evidence that most pensioners have very modest incomes. There are not large numbers of very affluent pensioners, on whom such a policy would be wasted, so to speak. Only the top 20 per cent. of pensioners have anything like real affluence.
I recognise all the arguments, but the point is that a consensus exists. As my right hon. and learned Friend the Leader of the Opposition made clear in Prime Minister's questions only an hour ago, that clear consensus is shared by the CBI, the TUC, Age Concern, Help the Aged, the National Association of Pension Funds, the Association of British Insurers and the Opposition. We believe that the way forward is to reverse the spread of means-testing. The Turner report provides further evidence, if any were needed, that that is what needs to be done.
Turner criticises widespread means-testing, and I am asking the Secretary of State whether he believes in mass means-testing or not. It is clear that an argument is going on about this inside Government. For Kremlinologists, the most significant moment in Monday's Work and Pensions questions came when a rather unusual figure arrived. The former Foreign Secretary, Mr. Cook, was in his place, which was a rare honour for Work and Pensions questions. I wondered what he was doing there, but then I realised that it was because of those tectonic plates. The right hon. Gentleman turned up to give a robust defence of pension credit and means-testing. Why on earth would one of the Chancellor's new friends do that?
"Malcolm Wicks, the Pensions Minister, has said the controversial means tested pension credit, which tops up the incomes of the poorest pensioners, was 'a short to medium term policy only'".
The exit routes are being prepared. We are now in the extraordinary position that a former Cabinet Minister, who resigned from the Government because he did not agree with the Prime Minister's policies, comes along to Question Time to defend the Government's policies, and meanwhile the Minister responsible for those policies will not even defend them at the Labour party conference. That is a mad way to formulate pension policy.
We want to hear from the Secretary of State whether he agrees with his Minister that means-testing is a short to medium-term policy only. That is the hint we need—a recognition that they cannot carry on like this. We need a different and better approach. The Opposition believe in more incentives for saving, a higher basic state pension and reversing the spread of mass means-testing, which is the belief of the majority of right hon. and hon. Members. I am confident that it is also the belief of the majority of pensioners and other people, and that is why I moved this motion today.
I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
"welcomes the Pensions Report commissioned by the Government;
notes that it reinforces the conclusions of the 2002 Green Paper identifying the need for all to work longer or save more;
commends the Government's commitment to face the challenges of an ageing society and to tackle inactivity by helping those who want to work;
welcomes Pension Credit, benefiting over 3.1 million people, and the state second pension, helping millions build decent second pensions;
further welcomes new tax credits making a huge difference to saving incentives for 3 million lower earners;
commends steps to restore confidence in pensions through the Pension Protection Fund and the £400 million Financial Assistance Scheme;
notes the Government's commitment to tackling age discrimination, and to rewarding those continuing to work after state pension age;
believes both main Opposition parties' policies are unaffordable and do nothing for the very poorest;
notes that Conservative policies would create a £500 million deficit within four years and be unsustainable in the longer term;
commends proposals building on the Government's historic success in tackling pensioner poverty, which will continue to build a pension system with the basic state pension at its core, while still helping the poorest and offering saving incentives for hard-working families."
I was enormously disappointed by that contribution from Mr. Willetts, given the importance of this issue. It was gossip and innuendo. I had some knock-about stuff and I discussed with my officials whether to use it in the debate, but it would be inappropriate. The hon. Gentleman is a competent politician and he can be proud of his experience on these issues. I respect his long record in the area. However, as he was speaking, the old Scottish phrase came to mind, "If he was chocolate, he'd lick himself." There was so much of the clever sixth form debating society approach, which is totally wrong in the context of the report that we received yesterday from the commission.
I welcome the first report of the Pensions Commission. It is probably the single most comprehensive piece of analysis and evidence on the British pension system that has ever been produced. I want to place on record my thanks to Adair Turner and his fellow commissioners for all the work that they have done. I hope that I can say that with the support of the whole House.
I intend to concentrate on two areas. The first is the position that the Government have reached in tackling the problems that we inherited in 1997. The second is the difference that this Government are making now and intend to make in the future through an evidence-based approach, building consensus where we can, to meet the long-term challenges that we face as a society. I am happy to do that not just for pensions, but—in the spirit of the propositions before us—in the wider context of our welfare reform agenda.
In 1997, there were 2.7 million pensioners—almost 30 per cent.—living in absolute poverty. Many were on an income of no more than £69 a week. In addition, one child in every three lived in poverty; numbers on incapacity benefits had trebled; 585,000 adults and 85,000 young people were long-term unemployed; and there were huge barriers to work for disabled people, single parents and older workers. The cold shadow of poverty had been cast across the generations. Disadvantaged children became unemployed adults who eventually entered an impoverished retirement.
The eradication of poverty has been at the heart of our approach to government and nowhere has that been more important than on the issue of pensions. We have lifted 1.8 million pensioners out of abject poverty. The fact that pensioners were in that situation in the first place was the real and immediate pensions crisis that we faced.
We believe that we are also making a real difference to the lives of the 3.2 million individuals who receive pension credit. I accept the points made by the hon. Gentleman about ensuring that those who are entitled to it receive it. That is a different point from saying that the way to tackle that problem is to take pension credit away from everybody. The average pension credit is more than £40 a week, with average arrears more than £1,000. All told, compared with the 1997 system, on average the poorest pensioners are now £1,800 a year better off in real terms. That is a record to be proud of and we should defend it on every occasion.
I have been invited to comment on that by the hon. Member for Havant and I will get to that question in due course. Hon. Members will have to wait with bated breath.
One of the major issues that has been raised by the Opposition is the fact that 1.7 million pensioners do not claim pension credit. Does my right hon. Friend agree that the longer we continue to talk about means-tested benefits, the more difficult it will be to encourage people to take up their entitlements? Should we not develop a consensus that pension credit is an entitlement, not a means-tested benefit?
My hon. Friend makes an important point. Applying for the pension credit is a world away from people's experiences under the previous Government, let alone back in the 1920s and 1930s. People can make a free telephone call. At the other end of the line, a member of the Pension Service staff will do the work. There is no reassessment every week. Indeed, once the settlement is made it lasts for five years, and no prying questions are asked about irrelevant details of pensioners' incomes. We have to get the message across to all pensioners that it is an easy process. However, we should not talk in euphemisms. It is a means test. We want to target resources at the poorest. Our argument is that we could not tackle the terrible crisis of pensioner poverty that we inherited when we came to government without such an approach, and we should not be ashamed of that.
The Secretary of State mentioned the situation that the Government faced when they came to office in 1997. However, he will be aware that after seven years of a Labour Government one in five pensioners in Scotland still lives in poverty. Does he accept that the only way to end that scandal is to move away from means-testing and to introduce a decent basic state pension?
I do not accept that at all. In a sense, it is the response to the question from the hon. Member for Havant about how long means-testing should continue. It is a fair question, but in my view we have to target resources at the poorest pensioners, precisely because some still live in poverty, as the hon. Lady points out, in Scotland and the other parts of the UK. However, to suggest that the solution to that is a higher basic state pension is a delusion. It is a delusion mainly because 50 per cent. of women do not have the national insurance contributions that would get them even to the level of the basic state pension. I shall say more about the basic state pension, which is important, but to suggest that it can provide a simple answer to abject pensioner poverty is a delusion.
Given the centrality of the means-testing issue, it is perfectly reasonable that we discuss it, but does my right hon. Friend agree that it is also fair that we judge the comments of the Opposition by their record in office? Will he confirm my understanding that the decision to break the link between earnings and pensions in 1980 resulted in the basic state pension being £26 lower in 1997 than it would otherwise have been? Is not it reasonable to use that point to test the validity of Conservative criticisms?
It is wholly reasonable to point that out. It is also reasonable to point out that the hon. Member for Havant said that a return to the earnings link had not been properly costed and would leave a hole in the public finances.
The Secretary of State made the perfectly correct point that simply putting up the state pension, while it continues to be based on contributions, will be prejudiced against women. The weekend newspapers reported that the right hon. Gentleman was rather positive about the idea of a citizenship pension based on residence rather than on contributions. Can he give us a sense of his approach to that? Does he have an open mind? Is he positive about it or does he rule it out?
I have an absolutely open mind, veering towards being very positive about it. That is as much as I can say at present.
The issue is how to tackle the problem that we want women to undertake caring responsibilities while their national insurance contributions cannot possibly match up, bearing in mind the fact that retirement age for women will move from 60 to 65. There is a real argument for me to look carefully at that matter—
I just wanted to check on what the Secretary of State said when he talked of going from an open mind to being positive. Is he saying that he no longer believes in contribution additions and the contributive principle and that we shall be going over to a different basis for pensions? He has just said something very significant.
Of course I said something significant. This is a policy debate and I try as much as possible to give straight answers to straight questions. The universal pension idea is really interesting and deserves much closer examination, which is, incidentally, why, during the passage of the Pensions Bill, my hon. Friend the Minister for Pensions accepted the suggestion that we have a separate report on women next year, to supplement the chapter in the Turner report.
As I said to the House on Monday, we have not merely helped the poorest pensioners. There seems to an idea that lots of money is going to the poorest pensioners and that pensioners who are not as poor receive no additional help from the Government—a point made in an intervention. That is unfair criticism. We have helped all pensioners. Compared with the 1997 system, the average pensioner—not the average poorer pensioner—is £1,350 a year better off, with an extra £5 billion being spent this year on universal benefits. Let us consider, for example, a single pensioner, over 80, living alone but with a very good private pension and a full basic state pension, who would thus not be entitled to any means-tested benefits. To return to the point that putting the earnings relationship back into the basic pension would solve the problem, such an uprating would give her £9.90 extra a week. Instead, this year, as a result of our reforms, she has a basic state pension that has increased in real terms by 7 per cent. since 2000, a £300 fuel allowance—tax-free, of course—and a free TV licence worth £121 a year. That adds up to a gain of £13.55 a week, so even that pensioner, who would not qualify for pension credit, has set aside some savings and receives a full state pension, would be £3.55 a week better off than if we had simply restored the earnings link.
Does my right hon. Friend agree that by proposing to increase the basic state pension, but not extending the increase to other pensioners, and retaining the means-tested minimum income guarantee, the Opposition would in fact be retaining means-testing, with all the pressures that involves for the poorest and most vulnerable pensioners, especially women? As he said, the real issue is the universality of pension entitlement and that is clearly reflected in the report.
My hon. Friend is right. I shall come on to some other aspects of the policy of Her Majesty's official Opposition, but that point is important. If we were to go down the route they suggest, the poorest pensioners would start to fall back again—from 21 per cent. of average earnings to 16 per cent. In the main, those people do not have a hugely influential voice in society and sometimes that is the problem in debates such as this. However, they are individuals, they live in all our constituencies and they are entitled to continue the advance in addressing poverty that we have begun.
Does my right hon. Friend recognise that the pensioners we are talking about often make some of the greatest contributions to society and to the health of their neighbours and families? Part of the reason why they are left at pensionable age with no proper means of support is that they have had caring responsibilities, perhaps for more than one person.
My hon. Friend is right. It is healthy that we are spending some time talking about such individuals. In the main, they are elderly widows who depend on their husband's national insurance contribution record. It was impossible for them to put in the full number of pensionable years. They have not been left in poverty because they were frivolous or because they did not try hard to put money to one side; it is due to the circumstance that they were bringing up our generation. That is a really important point.
Although it is clearly true that large numbers of poorer women could not achieve the full insurance record because they were caring for others, many other women took the married women's option when they could have paid a full contribution, so would not my right hon. Friend's life be easier if we had had a little more compulsion in those days? If everyone who could have done so had paid those contributions, he would not have to make the judgment of Solomon by trying to decide which groups are more deserving.
I accept that if some decisions made in the past had been different my life would have been easier. However, my life is not easier and I am in the current situation.
Even those people who are not receiving targeted support can be significantly better off through our help for all pensioners than they would be through the simple earnings link. The proposals of the hon. Member for Havant to restore that link are unfair to the poorest pensioners, for the reasons I have stated, and their relative position would worsen. His proposals would also impose an unsustainable burden on future generations. Even on his own figures, which I got straight from Conservative central office, a £500 million funding gap would develop in year 4, if there were a four-year Parliament; by year 5, the situation would be worse. That is another reason to question the policy.
How would a future Conservative Government—if there were one—pay for those proposals? The hon. Gentleman said that he would abolish the
"useless schemes and wasted money" of the new deal. That is the new deal which has helped nearly 1 million people to find work and increased our gross domestic product by £500 million a year. That includes the new deal for young people, without which, according to independent evaluation, youth unemployment would be almost twice as high as it is at present.
We believe that work is the best benefit that Government can provide. As this morning's labour market statistics show, we have a record number of people in work, with a further increase of 220,000 in the last quarter. Also germane to the debate and the Turner report yesterday is the fact that those statistics show that the growth in employment among people aged 50 and over—a crucial part of the equation—has been faster than average. Since 1997, employment among older workers is up by nearly a quarter, and 1 million people are already working beyond the state pension age. This morning's statistics bring good news in relation to the messages that Turner gave to us yesterday.
We have increasingly focused support on the most disadvantaged groups: lone parents, those previously written off to become the passive recipients of incapacity benefits, and disabled people. We have removed the barriers for disabled people in particular, with much resistance from Conservative Members, especially in respect of the Disability Discrimination Act 1995. That Act, together with the measures that will be included in the disability discrimination Bill, will radically address the great emancipation issue of our time: civil rights for disabled people.
My right hon. Friend has just discussed the plans of Mr. Willetts to finance his policy, but my right hon. Friend did not mention that, in abolishing the new deal, the hon. Gentleman would of course abolish the new deal for lone parents. Is the hon. Gentleman not planning to discriminate against women three times over? He would freeze the guarantee element of pension credit, which mainly benefits women; he would concentrate the resources on the basic state pension, from which all too many women do not benefit; and he would fund the increase in the basic state pension by abolishing the new deal for lone parents, which is the policy that helps women into work and to build entitlement to a pension.
My right hon. Friend makes an absolutely superb point. Incidentally, the latest figure for single parents in work is up to 54 per cent., whereas, in 1997, unlike any other European Union country, we had a deep-seated problem with lone parents stigmatised by certain elements of the previous Government—not the hon. Member for Havant, who apologised for the stigmatisation of lone parents under the previous Government.
We should also acknowledge the fact that we have seen the first small reduction in the number of those who have received incapacity benefits for a long time. The figure is down by 4,000 on last year. That decrease is probably statistically insignificant, but the number has levelled off for the first time in many years. If the trend for people to go on to incapacity benefit under the previous Government had continued, 4 million people would now be claiming incapacity benefit—1.3 million more than the current figure.
Does my right hon. Friend agree that the pathways to work pilot shows an increase in the number of people who are coming off incapacity benefit and going into work? If the Government are allowed to continue with that project and it is not put at risk by the Conservative party, there will be a big downturn in the number of people who receive incapacity benefit.
My hon. Friend is absolutely right. On Monday, I announced to the House the very positive early findings of our groundbreaking pathways to work project. We are already seeing improvements in recorded job entries for people in pathways to work areas throughout the country. The number of people going into jobs is twice the average. There is also a sixfold increase in the number of people taking up new deal programmes and training for work. That is another significant development.
In fact, the pathways to work project is proving so successful that, as I also mentioned on Monday, people who have been on incapacity benefit for more than a year—the experiment relates to that cohort—are knocking down our doors to take part in the project. They are saying that they have been left for years with no help, and they view the project as a significant step forward. So the Government have made a huge difference to millions of lives across the country, by acting across the whole welfare reform agenda, to tackle the pernicious problems that we inherited in 1997.
We are proud of the fact that we have lifted 700,000 children above the poverty line, virtually eradicated youth unemployment, transformed disability rights, halved unemployment and cut pensioner poverty by two thirds, but we need to go further. There is no bigger long-term challenge for domestic policy than that highlighted by yesterday's Turner report. There is no area of domestic policy in which there is a better case for examining the evidence in detail, avoiding knee-jerk reactions—as Adair Turner virtually pleads with us to do, as politicians—and working towards a plan for the long term. I hope that there is at least consensus on the approach urged on us by the Pensions Commission.
I want to concentrate on what the Government are doing to meet the challenges set out in the commission's report and to talk about how we intend to move towards a long-term, evidence-based approach that seeks to attract the consensus for which the commission pleaded. The report builds on the analysis of our 2002 Green Paper, which showed that many people ought to be saving more or working longer if they want to realise the kind of lifestyle to which they aspire in their retirement. Although the report deliberately does not draw conclusions at this stage, it emphasises that more people choosing to work for longer must be a crucial part of the response to longer lives. That is a difficult message. There were many difficult messages for politicians on both sides of the House, individuals and employers, but it is right that we address the issues that Turner raises in that analysis.
We believe that, given our age discrimination legislation, we are already committed to giving people greater opportunity to work for longer if they wish to do so. Crucially, in the Pensions Bill, we are increasing the rewards for working beyond state pension age. Our policy of state pension deferral will increase the increments for deferring to 10.4 per cent. a year, which will produce a basic state pension of about £120 for someone deferring until 70. Under measures in the Finance Bill, for the first time people will be able to continue to work while drawing an occupational pension from the same employer. That is an important contribution as well.
Of course, part of any increase in average retirement ages can come from increasing employment rates before state pension age. Our problem at the moment is that two thirds of men are out of the employment market by the time they reach 62, let alone 65. The report shows that those employment rates are rising, so there is cause for optimism. The rates have increased by 8 per cent. in the past 10 years, but the report says that they "could rise significantly more". So the Government are already taking steps to maximise the possible impact of people choosing to work for longer. Helping people to build up pensions is the other half of the equation.
I will give way in a second.
A crucial reform that has been barely mentioned in any of the coverage that I have seen is that, under the state second pension, for the first time women, carers, the long-term disabled and others with incomplete contribution records—to return to the problem that we were talking about earlier—are no longer losing out on building up rights to the state pension. The state second pension is up to twice as good as its predecessor—the state earnings-related pension scheme—so 20 to 30 years down the line, pensioners could retire with double what they would get under the basic state pension.
I interrupted the right hon. Gentleman when I did because I thought that he might move on to the private pension sector. Before he does so—I accept entirely both Adair Turner's point about not rushing into hasty decisions and the right hon. Gentleman's agreement with that statement—will he say whether he is considering whether to raise the state pension age above 65 and, if so, whether that will happen before 2010, or after 2020?
I have said—my predecessor said this, but I will say it again—that Government policy is not to insist that people have to wait until they are 70 before they draw their state pension. We will have the debate, but our view is that people should have the choice. We should offer the inducements in terms of the increment to the weekly pension and the lump sum of between £25,000 and £30,000. However, if we insisted that people had to wait until they were 70 before they got their state pension, many people—who had spent their lives in heavy industry, who are not as healthy and fit as the rest of us and who cannot look forward to the longevity that, as Turner pointed out, actuaries underestimated in the past—would have short lives on their state pensions. The choice agenda may unite us in consensus. It is important not to introduce a level of compulsion in the age at which one draws the state pension.
Choice is better made when informed. Given the announcement that my right hon. Friend made at the Labour party conference, would he inform the House further on his ideas about how people can be better informed about the choices that they make and at a much earlier stage in their employment, so that their retirement can be comfortable?
I will come to my hon. Friend's point in a second. It is crucial to what will be the major aspect of the second report from the commission, which is whether there should be compulsion. Informed choice is important to that.
We believe that there is real potential—in fact, I come to my hon. Friend's point straight away—in revitalising the voluntary private approach. The newspapers erroneously said last weekend that I had ruled out compulsion in respect of whether to contribute to private pensions. I did no such thing; I have an open mind on the issue. I will wait for the Turner commission report. However, it would be strange to move to compulsion without properly exploring the voluntary private approach. It must be right to consider that further.
To that end, we are already pursuing policies that seek to restore confidence in private pension saving, create greater incentives for people to save and activate people to take advantage of the provision that is already there, making decisions based on clear, tailored information. The informed choice agenda and trying to wipe away the complexity that Adair Turner rightly identified as inherent in our pension system are issues that we must approach.
I would like to finish by saying a few words about each of those three aims: restoring confidence, creating greater incentives for people to save and activating people to take advantage of the provision that is already there.
I try to give straight answers to straight questions, but that does not mean that I always succeed. My view, which I mentioned earlier, is that the pension credit and means-testing should be there until we have solved the problem of abject pensioner poverty. It should not be the only part of our solution and divorced from a decent basic state pension, but it must remain a part of it. My hon. Friend the Minister for Pensions rightly asked, as Adair Turner asks in his report, whether we are planning to continue the policy indefinitely. I can say that there are no such plans to continue it indefinitely, but it has a role to play. I do not think that it has solved the problem of pension poverty yet. That is why we need to do more.
I return to the three aims that I mentioned earlier. First, it is critical that pensions are secure and it is crucial that they represent good value. Having cleared up the mess of mis-selling that we inherited, we went on to develop a groundbreaking approach to bringing security to members of final salary schemes who were losing their pensions when their company became insolvent and their pension scheme was wound up. I refer to the pension protection fund.
Next we had to act to protect employees whose accrued rights had been cut while working for solvent employers by introducing full buy-out regulations so that trustees can require a solvent employer who wants to wind up their pension scheme to buy out members' rights in full. We also need to implement the new Sandler pensions, which can be bought without expensive advice and with fees cut by one third compared with the old personal pensions. These and other changes in the Pensions Bill, which is currently in the other place, are crucial contributions to the pensions challenge. They will make a real difference, both now and in the future, to restoring confidence in pension saving and ensuring that pensions are secure and represent good value.
My right hon. Friend will be aware that issues such as the Turner and Newall pension fund are highly complex, but such events shatter confidence in pensions generally—both public and private. Although we should consider ways to ensure that such things do not happen again and protect those funds, is not the key long-term aim ensuring that those funds do not stand a risk of failing in the first place? Will he ensure that that message is taken forward not just for the individual cases that we seen so far, but for the totality of pension provision in the public and private sectors for the future?
I will, indeed. I understand my hon. Friend's concern about Turner and Newall. We picked up the recommendations in the Pickering report on the regulator's role, and that is another central element of the Pensions Bill.
As well as greater confidence, we need a revitalised voluntarism, and that means people need incentives to save. We are therefore, first, radically simplifying the taxation of pensions by replacing the existing eight separate taxing regimes, which are placed on top of each other, with one single lifetime allowance. That measure appears in the Finance Bill and has been widely welcomed. Secondly, we are also giving firms tax exemption on up to £150 worth of advice for each employee each year. Thirdly, for about 3 million lower-income working adults who are on the new tax credits, our reforms mean, as Adair Turner has pointed out, that they get 37p extra tax credit for every pound that they contribute to a pension.
Revitalised voluntarism means activating people to take advantage of what is already there. On this, we appear to have unanimity and consensus with the two Opposition parties. The commission pointed out that 4.6 million people work in companies in which the employer makes a contribution to their pension, but they have not joined the pension scheme. I cannot believe that that is a matter of informed choice. If it is, that is fine, but it is not and we need to find measures to deal with it. For example, auto-enrolment was one snappily titled approach. Its name does not send the blood pulsing through the veins, but it is an important contribution to that debate. We set out other issues that we think are essential to take forward in our Command Paper on informed choice. We are also taking steps to give people clear, tailored information about the choices they face today in relation to their prospects for retirement.
As a society, we need to end the head-in-the-sand culture, and the Pensions Commission report, uncomfortable as some of its evidence is for all of us, provides a major contribution. I will take the rap for the phrase "a pouch of fairy dust", but I believe that Adair Turner needs to take the rap for the phrase that there is no single magic bullet to solve the longer-term pensions challenge. However, the Government will build on the difference that we have already made in tackling the pernicious evil of pensioner poverty. We will build on the differences that we are making now in increasing the opportunity and rewards available from working longer, radically bolstering confidence in pension saving, enhancing incentives to save and empowering people to be able to make informed decisions about planning for retirement.
Just as we have evolved the state system in the past, so we will in the future. However, this evolution will be based on evidence and consensus where possible, and it will ensure that we strike the right balance between tackling pensioner poverty, helping all pensioners and ensuring the right incentives to save. I believe that yesterday's Turner report has really helped us with that debate. I look forward to engaging with the issues further over the weeks and months ahead.
The new Secretary of State is a breath of fresh air and I hope that his candour will not diminish in direct proportion to his length of service in office. He said something important and significant this afternoon, as Mr. Willetts pointed out, and his contribution raised the tone of the debate from an argument about whose fault it is that we are in such a mess to one about how we will sort it out, which is what the focus of today's debate should be. I salute him for performing an important service for the House by taking us away from the puerile debate about who said what to whom and whose agenda we should pursue towards a consideration of how we will serve the needs of today and tomorrow's pensioners. I shall engage with him on the citizenship pension because it is an important way to reflect on where we might go from here.
The Conservative party initiated the debate and its motion outlines some of its proposals for reform, so it is appropriate for me to begin by examining what it says. We tabled an amendment to the Conservative motion because although we did not object to anything in it, there was an important omission. The Conservatives consistently and repeatedly fail to recognise the problems of women in the pension system. If hon. Members read the motion, although I trust that they have better things to do, they will discover that it makes no specific reference to the pension position of women.
I suspect that I am alone in the House in that I listened to the entire conference speech made by the hon. Member for Havant, but I heard no explicit reference in it to women's pension problems. Perhaps the most damning thing of all is that although the Conservatives have come up with an eight-point plan to tackle the pensions crisis, and despite the fact that the majority of pensioners are women and a greater majority of the poorest pensioners are women, that plan makes no mention of women's pension problems. When challenged on the issue, the hon. Gentleman says, "Yes, we must have a think about that." The problem is important, so he should not think that something should be done about women after the plans have been drawn up. The problems for pensioners will not be solved unless the problems facing women pensioners are tackled, so the Conservative party's consistent failure to address the matter represents a glaring omission. I think that the hon. Gentleman is aware of the problems, so I am disappointed that he has not come up with any concrete solutions.
Alan Howarth highlighted the fact that simply linking the present national insurance contributory pension to earnings at its present inadequate level in proportion to what people are already getting is a policy of giving less money to women. We would start from a position in which women get less and reinforce our plans to tackle that problem with a link to earnings. I hope that the Conservative party will come up with proposals to tackle the problems, but they have been sadly lacking from the debate so far.
I can give the right hon. Gentleman a clear answer to that question. The first point in our first Parliament plan is a proposal to link the pension for over-75s to earnings. We intend to do that on the basis of a pension paid to citizens, rather than a contributory pension, as a result of which women will benefit equally to men rather than in proportion to their contribution records. When we extend that pension from the over-75s to all pensioners, it is our intention that the citizenship pension will be linked to earnings. It is almost a quarter of century since the earnings link was broken and the state pension has become devalued to such an extent that increasing it to a credible level and linking it to earnings in one go would simply not be plausible, so we have reluctantly had to prioritise people. We will start with older pensioners, who tend to be women and the poorest pensioners.
The hon. Gentleman says that the pension will be paid regardless of contributions. Would that not lead to the anomaly that women who had worked and opted to pay the full contribution would be no better off than those who opted to pay the lower married woman's contribution? Would that be fair?
The hon. Gentleman makes a perfectly fair point on which I can reassure him. One of the advantages of our phased approach is that women who retired today would receive an enhanced pension for the next 15 years because of their additional contribution. By the time that we extended the pension from over-75s to all pensioners, the married woman's stamp would have worked its way through the system because as he will know, no new women have been able to opt to pay that stamp since 1977. There would be a transitional problem with the system, albeit one that would last for perhaps a decade or more, but women who paid the full stamp would continue to benefit from that. We think that we must begin to end the penalty on caring that is inherent in a contributory system.
The Secretary of State referred to the funding hole in Conservative proposals. Just as the electorate will not accept the Government saying, "Mr. Turner will come up with the answers next summer, so vote for us and we'll implement them", they will not accept the fact that the Conservatives promise money for pensions without being clear about where it will come from. To be fair to the hon. Member for Havant, he has produced a document including tables and figures to show how the money will be found. One of my colleagues asked me the other day how the Conservatives were being allowed to get away with such implausible costing of their policies, so I thought that it was about time that we had a little look at them—believe me, I know something about that subject. I am sure that the hon. Gentleman will contradict me at each step if I make a mistake.
The Conservatives propose that £7 will go on the pension on the basis of a real earnings growth of 2 per cent. The hon. Gentleman has costed his proposals and said that if real earnings grow at 2 per cent. throughout the next Parliament, he will be £180 million short, although that is actually a gross understatement. However, as the Secretary of State said, there would be a cumulative problem. When the hon. Member for Havant scraps the new deal, he will give himself £600 million in year 1, which is far more than he needs, but although he will still receive £600 million in years 2, 3 and 4, the cost of the policy will rise every year. Although he will have nearly £500 million more than he needs in the first year, he will have £500 million less than he needs in the fourth year. His policy suffers from a structural lack of funds. He would be £180 million short over a Parliament at the very least, but in the final year of a four-year Parliament, he would have introduced a structural deficit of £500 million. Where would the money come from? I was hoping that the hon. Gentleman would intervene on that point.
I thought that the hon. Gentleman was being rhetorical, although come to think of it he is never rhetorical. We have set out clear figures on offsetting savings through means-tested benefits, on savings involving the new deal and on savings from changing the rules on income support for lone parents, which would enable us to finance our policy throughout the first Conservative Parliament. I set out in the document—no one has challenged any of the figures in it—that as long as we can continue to identify savings, which I am confident that we can, we will keep on going. I think that that is a more serious attempt to cost a policy than his proposal of simply abolishing the Department of Trade and Industry. If we are talking about who has bitten the bullet on what must be done to finance a policy, the pot is now calling the kettle black.
It took a moment to get that response from the hon. Gentleman, but I note that he did not query the £180 million shortfall—perhaps I should call it the pots and kettles black hole. He did not do that because the Conservatives admit to that deficit, but the figure is far too small. He says that he will offset savings through means-tested benefits, of which I have taken account, but there are two other ways in which he will pay for his policy, although that will leave him £180 million short.
First, the hon. Gentleman will scrap the new deal, which will provide £600 million every year, but I thought that the Conservatives said at their conference that they would replace it with a scheme through which charities and private companies would help people to get jobs. Will they do that for nothing? Where will the money come from to pay for that after the new deal is scrapped?
A year ago, we set out in a document our policy on pensions and how that will be financed. I stand by the figures and no one has shown that they are wrong in any way. In the past few weeks, as a result of the exercise conducted by the James committee, further savings in the Department for Work and Pensions budget have been identified, so we will use some of those savings to finance the work-first policy that I launched at the Conservative party conference.
If it is not on our party's website, I am happy to send the hon. Gentleman the James committee report, which investigated the Department for Work and Pensions and identified further and different savings from the one that I used a year ago to finance our policy.
It is good to hear that the Conservatives are not going to use savings in other Departments to pay for their spending plans.
We have the new deal proposal and will have a closer look at where the alleged savings will come from, but another line has received almost no scrutiny whatever. The hon. Gentleman will say that there will be £100 million in the first year, £200 million in the second year, £300 million in the next year and £400 million in the year after that—nice round numbers—by requiring the lone parents of teenagers to look for jobs.
I suspect that most of us would not have a problem with the idea that lone parents whose youngest child is now a teenager should be thinking about the labour market, but where will the £400 million come from? It is necessary to make—dare I say it—heroic assumptions. The hon. Gentleman is assuming that half the lone parents whose youngest child is a teenager will get jobs. I do not know whether he has assumed that they will not get tax credits, or whether he has allowed for that. I do not know whether he has assumed that when they get a job, the person who would otherwise have got that job then goes on to benefits. Has he netted any of that off, or are they fantasy figures?
It is one thing to say that the Conservatives will give £7 a week to pensioners—although less to women—but it is another thing to make the figures up as the hon. Gentleman goes along. They are far less plausible than such documents give us reason to believe.
The figures are cautious. If the hon. Gentleman looks at the evidence on the distribution of lone parents on income support by age of child, he will be surprised, as I was, at the number of lone parents on income support who have older children of secondary school age. I expected to find the figures bunched, with most of the lone parents on income support being parents of young children. That is not the case.
The labour force participation of lone parents is still much lower, even when their children are older, than mothers in couples. There is clear evidence from research at the London School of Economics that the best outcomes for the children of lone parents, especially the daughters, are if the parent is in contact with the labour force when the child is of secondary school age. We have made relatively modest assumptions for the savings once we take into account the large number of lone parents who have secondary age children.
It was an interesting intervention, which highlighted the extent to which the numbers behind the Conservative pension plans have not been explored—apart from by me, of course.
In a sense, I do not disagree with the hon. Gentleman. There are good reasons to think about whether the lone parents of teenage kids should have closer contact with the labour market, but if it is in their interests, we must ask ourselves why the lone parents are not already getting jobs. Is it because there are barriers, such as child care, which simply requiring them to look for jobs does not overcome? Is it because some of them are in parts of the country where the labour market does not work well, so requiring them to look for work does not give them jobs?
Many lone parents of teenage children are probably in the wake of relationship breakdown. That may be a significant number of people. Do we want to put pressure on people who have just got divorced or separated and who are finding life difficult by telling them that we will take their money away unless they start looking for a job on day one? There are many unanswered questions and assumptions that have not been probed. I hope that we will have the chance to do that nearer to the election.
I am listening with interest and the hon. Gentleman makes a powerful point about Conservative policy. In terms of lone parents, will he also bear it in mind that the labour force participation rate is 54 per cent.? Most lone parents are women. The labour force participation rate of women is approximately 72 per cent., so there is not much room for pushing up participation and there will be costs associated with it, as he points out.
The hon. Gentleman raises a fair point about how far we can go with such a policy. One gets the feeling that the figures have been plucked from the air. I almost wonder whether the £400 million was the difference between the two numbers and was what was required.
Let me make just a couple of other observations on the Conservative approach. I listened in full in a studio to the speech by the hon. Member for Havant. The rhetoric was credible and convincing. He gave a realistic description of the problems. He has likened the pensions crisis to global warming and the war on terror. He is trying to tell us how serious he thinks it is. However, it is clear from the eight-point plan that it is a good job that we are not relying on him to deal with global warming because we would already be flooded. It is so limited in scope. There is a huge problem and what are the Conservatives going to do? They are going to give people £7, if they are lucky, by the end of a Parliament, still leaving the basic state pension £18 below the poverty line. How does that address the scale of the problem?
The hon. Gentleman has spent about a quarter of an hour mainly analysing the Conservative proposals. We are meant to be discussing Adair Turner's commission, which warns us all that the proportion of people aged 65 or over will double between now and 2050. As I understand the Liberal approach, it is to abandon the contributory principle on pensions, extend pensions entitlement wider than it is now, raise the value of the basic pension for everyone as soon as possible, and link it to earnings thereafter. Does he think that that is facing up to the difficulties of the challenge we face? Has he given any thought at all to the appalling level of unfunded obligations that he proposes to land on our children and grandchildren if the Liberals are ever let loose on the subject?
One of the ways in which the world has moved on since the right hon. and learned Gentleman was a senior Minister is that in those days future liability was a price-linked unfunded basic state pension and a price-linked unfunded means-tested system. We have moved to a situation in which, on current policies, we have an earnings-linked means test, which will apply to between three quarters and four fifths of all pensioners. If that is the current projection—
That policy is projected to involve a modest increase in the share of national income going to pensioners. That is the projection of the Government's policy. If we are to have a system in which four fifths of all pensioners have to jump through a means test and have an earnings-linked income at the end, a policy of one decent earnings-linked pension—perhaps thought incredible at the end of the '80s—becomes a mainstream sensible approach, which as the Conservative leader said at Prime Minister's questions is becoming part of the wider consensus.
I have huge respect for the right hon. and learned Gentleman, but he has criticised me for spending too long on his party and I want to make one further observation.
The hon. Member for Havant makes the proper point that as well concentrating on state systems, we have to think about incentives for private savings. He proposes the lease of a lifetime savings account. As I understand it, he is saying that the answer to the problem of people not saving enough for pensions is an instant access savings account. In other words, the Conservatives would establish an account that people can use in any way they like—to put money in or to take money out—and that that will solve the pensions crisis.
As someone who is just under 40, the idea that folk in my age group would put money into such an account and leave it in the hope that it will one day become a pension is implausible because without a tie-in we could take the money out at any time. The hon. Gentleman says that the carrot is that the Government will put money in if we leave the account untouched, but where would that money come from? Are the Conservatives going to touch pension tax relief? No. Are they going to touch rebates in the short term, because this is a short-term policy? Not as far as we know. So where would the money come from for the incentive to save? The hon. Gentleman stands up and says, "Buy one, get one free" and tells us to bog off—he said that to me mainly—but he has never said where the Government money would come from. It is another uncosted implausible Tory pension proposal.
The hon. Gentleman is an expert in these matters. We share many platforms and agree on many things. He carries great credibility with him. However, when one examines what he says, it is full of holes. The House and the country deserve a better alternative, which I shall set out, to the Government's policies.
Before the hon. Gentleman moves on, in the light of what he said about providing a basic state pension for everyone regardless of their contributions, how much does he estimate that that will add to the global sum paid out to pensioners in future?
We have costed our policy, including the citizenship component, the earnings link and the £25 for the over-75s, at roughly £3 billion year. The cost of the citizenship component is relatively modest, although it would increase over time as we extend it to more people. On the other hand, as the Turner commission says, some trends in women's pensions are going the right way, which means that in the medium term women's contribution records will improve anyway. The additional cost of filling the gap in the citizenship pension will therefore fall. The cost of the citizenship component is not huge, but it is an important way of valuing carers' work and so on. It is important to increase the £80 weekly pension to £105, as a huge shortfall has been allowed to develop.
I have enjoyed the hon. Gentleman's speech so far, and am glad that he is moving on to his own proposals. All pension proposals depend on a high proportion of people earning money, and pension contributions, whether state, personal or private, depend on people working. How do his party's proposals for the Department of Trade and Industry help that policy?
Interestingly, we propose that the DTI would not do some of the things that it does at the moment, such as subsidising arms exports. Some of its worthwhile responsibilities would be transferred to other Government Departments, and my hon. Friend Dr. Cable has estimated in our published spending plans that the amount spent on DTI-related activities by other Departments would be the same in real terms as in 1997, when the Government came to power. The suggestion that such activities would be decimated is therefore quite untrue.
Turning to the important issue of citizenship as the basis of pensions, coverage and commentary on today's debate will focus on the Secretary of State's interesting and encouraging response to our proposal. Previously, I feared that the Government's response to citizenship-based pensions was not warm. On
"At a stroke, the Liberals plan to scrap the national insurance scheme, which is the bedrock of pensions as they operate today . . . People who have contributed, in many cases for an entire working life, towards their national insurance pension would find that it was swept away."—[Hansard, 14 September 2004; Vol.424, c. 1231.]
In fact, that pension would still be there. However, I am heartened that a new broom has swept through the Department. Barely a month later, the Secretary of State has an open mind—indeed, he said that he was "veering towards the very positive"—on our proposals.
I am obviously a big fan of citizens pensions, as the Scottish National party came up with the proposal in the first place. However, having listened carefully to what the hon. Gentleman said about the scope of his party's policy, how many pensioners in Scotland will be excluded from the citizens pension, which he proposes to introduce on a targeted basis, unlike the SNP?
As the hon. Lady will be aware, our proposal will initially benefit pensioners aged over 75. She will know better than me how many pensioners under 75 there are in Scotland. She will know that our plans to scrap the council tax—I do not know whether the SNP has a similar proposal, as I sometimes lose track of its policies—would benefit pensioners under 75. The House attaches great importance to the credibility of Opposition promises, so it is regrettable that a fringe Opposition party should promise the earth on pensions.
The notion of a pension based on citizenship is an interesting one. I am sure that the Secretary of State has encountered the category D retirement pension but, if not, he can be forgiven. To refresh his memory, it is a citizens pension in the British pension system payable to people over 80 who do not have a pension or who have a very poor one. It is not means-tested and is paid regardless of contribution record to 23,000 people, three quarters of whom are women. It is based on a citizenship or residency test. Provided people have lived here for 10 years of a 20-year period they can draw the pension. Should the Secretary of State have to do battle within Government over a fundamental breach in the national insurance principle, I hope that he will remind his colleagues that we already have a pension that is based not on contributions but on a residency test. Admittedly, it is paid to older pensioners, and we propose that it should be paid to the over-75s, not just the over-80s. However, our proposals are not radically different from current arrangements, but are more generous. I hope that the Secretary of State is emboldened by the fact that the principle that some people claim is sacrosanct has already been breached, I assume by the Government who set up the national insurance system 50 years ago.
The Secretary of State asked why people do not make more of the state second pension that, he said, benefits carers. I would not want him to be under the impression that it benefits them to the extent that he believes. Although it is true that parents with children aged five or under receive credits, as soon as the children go to primary school they do not receive anything. A young mother, for example, whose children start at primary school, may work part-time, but if she is under the lower earnings limit she does not pay national insurance. She therefore does not receive credits for the state second pension, so that category of women is still excluded. Likewise, if carers work for 35 hours a week and draw carers allowance they receive help, but if they work for 30 hours a week they do not receive anything. Even with the improvements brought about by the state second pension, large numbers of carers continue to be excluded. The basic pension and the state second pension are still so limited in value that someone retiring on a full pension from both schemes, which are price-linked, will typically end up receiving pension credit. The Secretary of State is therefore right that there has been a marginal improvement for women, but it is much more limited than he realises.
If I understand the hon. Gentleman correctly, is it his party's policy to get rid eventually of the national insurance contribution system altogether that, presumably, would be subsumed by the tax system? Would that be welcomed by pensioners who continue to work, one advantage of which is that they will not have to pay national insurance?
We propose that revenue from national insurance contributions will be ring-fenced and spent on the NHS. It will be levied in exactly the same way and on exactly the same people as at present, so pensioners will not experience any difference in their liabilities. However, once we have got rid of contributory pensions it would be quite inappropriate, as the hon. Gentleman said, to levy a national insurance contribution to pay for them. We therefore advocate spending the money instead on the health service and using general taxation to pay for retirement pensions.
I shall conclude shortly, but first I want to ask the Secretary of State about the position of people who lost their occupational pension rights before the introduction of the pension protection fund. He will know that, after pressure from Members on both sides of the House, the Government introduced a financial assistance scheme of £400 million over 20 years, or £20 million a year. It is widely accepted that that sum will not meet the scale of liabilities, especially as pensions operated by Turner and Newall fall within its scope. However, there is an ambiguity about the scheme, which I hope the Secretary of State can resolve. Some people say that individuals who have lost their occupational pension since June this year, when the priority order on winding up changed, will not be covered by the financial assistance scheme. Some Government officials have intimated that when a scheme winds up the workers' position is slightly better than it used to be so the financial assistance scheme does not apply. That has created great anxiety among people who know that their firm is going to wind up its pension scheme before the pension protection fund is introduced. Will the Minister clarify whether they will be in or out of the financial assistance scheme?
The general stance of the Liberal Democrats is well known and well respected, so I shall say only a few words about our alternative approach to such issues. At our conference, a motion on a detailed package of proposals to deal with the pensions crisis was carried almost without opposition. At its heart was reform of the state pension system by making the pension universal and basing it on citizenship. It will be paid without means-testing and will be earnings-linked. We are the first to admit that we cannot do everything in one go, so we will phase our reforms, starting with our proposals to increase the pension for the over-75s by £25, lifting 1 million people out of means-tested benefits at a stroke. We believe that that is the right way to start.
We also have proposals to encourage private saving. Clearly, the higher the pension, the less the means-testing and the bigger the incentive to save. We propose an opt-out system for occupational pensions. I am glad that the Secretary of State mentioned that, and I think that it was the subject of an initiative by James Purnell. Under such a scheme, the presumption is that people are in a scheme unless they actively opt out, although they can still make an informed choice to do so. That would improve coverage and make a significant contribution, and I believe that it offers some scope for agreement.
Another suggestion that I want to put on the table—I hope that hon. Members will refer to it—is that of a National Savings pension. Whenever I talk to people about pensions, they tell me that they simply do not trust them. They have more trust in company pensions because of the pension protection fund and the opt-out rules, but they do not trust private pensions. They are worried about Equitable Life, and Standard Life is getting itself a bad reputation at the moment. They want a brand that they can trust—a company that is not going to rip them off with commission, try to make a huge profit out of them or go bankrupt. Why not have a personal pension whereby people can make a long-term investment through National Savings? They will not be ripped off with commission charges, the provider will not go to the wall, and they will know that their pension has a secure organisation behind it—to the extent that the Government can be regarded as such.
I think that the public would warm to that innovative idea. When I put it to the pensions industry, the principal criticism was that it might be too successful. I am regularly criticised for Liberal Democrat policies that have the potential to be too successful, and that certainly applies to this one in particular. The people in the pensions industry were afraid that such a product might undercut the market. However, the more I talked to them, the more they said that it would appeal to a section of the market to which the private sector cannot deliver—that it does not reach because it is not economic to do so. If people could go to their post office, if they can find one, to put money into a pension with a brand that they trust, that would help to provide security in old age.
The debate did not start on a positive note, but it has developed one. The Secretary of State gave an encouraging response that indicated some fresh thinking and openness to ideas. I have said in the past day or so that after seven years in office it is a bit late for the Government to start a national debate, but I withdraw that comment. If the Secretary of State is genuine and is willing to debate our ideas for a citizenship pension, we will accept that invitation. We will meet him privately, publicly, wherever and whenever he wants to, to take forward these positive ideas to benefit women and pensioners as a whole. Opposition and Government should engage in such dialogue in partnership, and I look forward to working with the new Secretary of State.
I congratulate the Liberal Democrats on adding new ideas to our debate, particularly their proposal on selling pensions at post offices. As Mr. Webb probably knows, Mr. Gladstone advocated that policy in this Chamber but was not successful in delivering it. I wish him luck where the grand old man failed.
I ask my right hon. Friend the Secretary of State to be careful in extending his goodwill to the variety of proposals that are advocated, particularly by Opposition Members. Mr. Clarke quickly exposed the fallacy on which the longer-term financing of Liberal Democrat proposals is based. The hon. Member for Northavon suggested that because Labour is committed to a means-tested pension credit that will rise with earnings, and because that will encompass an ever-growing proportion of the pensioner population—our Green Paper said that some 83 per cent. would eventually receive it—it is fair enough to transfer those funds into his citizenship pension.
The reason why today's debate is so important is that the pension credit, which we have committed on to the statute book, is not sustainable in the long run. In presenting it, the Government said that when 2050 arrives an 11p increase in the standard rate of tax will be required to pay the bill. I have never seen a shorter political suicide note. Although the pension credit is a valuable tool to help poorer pensioners now, it is not the basis for a long-term policy.
I want to make three short points arising from the Adair Turner commission's report, which was published yesterday and which I welcome, not only because it is written in very good English but because it helps us to centralise our ideas on where the debate should go.
My first point is a warning about the desirability of basing pension policy on evidence-based research. I challenge any hon. Member to stand up and say, "What new evidence is there in that report that we did not have before?" Let me go back to the Tom Ross report that the Government commissioned, which listed areas on which we need information if we are to take an evidence-based approach to pension policy. For example, we know how many people are in company pensions, but we do not know who is paying what contributions or, therefore, who will get what out at the end of the day. The report says that we cannot yet link people who happen to be paying contributions to a company scheme to any other wealth that they may have. It says, above all, that we cannot link knowledge about occupational pension rights and other wealth to housing ownership; nor can we produce a breakdown of the distribution of housing ownership in a way that is valuable in advancing the debate on pensions.
It is wonderful to have research—let us have it by all means—but nobody should kid themselves that if we only waited a little bit longer for even better research that would excuse us from having to make hard decisions, because that is what politicians are paid to do. As we go into the election, we will have to make a political judgment about what we advocate to the electorate in respect of pensions reform.
Now that I have heard it, I fundamentally disagree with the Liberal Democrats' idea of a citizenship pension. While no single measure will help to shore up our society, which is fast falling apart in too many of our constituencies, we cannot unthinkingly abolish the contributory principle, which gives ordinary men and women the right to build up a stake in society in respect of their pension. We cannot cast all that aside and advocate a system that says, "Irrespective of what you do, how worthy you are, how much you have worked or how effective you have been in putting your shoulder to the wheel, because you are a citizen you will get a pension." That is directly opposite to the way that we need to go when we consider how people earn their entitlements and subsequently draw them. The electorate will be very disturbed to hear about that proposal.
That is not to say that we do not want to help people who should be gaining a pension entitlement but have been unable to do so in the past. However, in reforming the state pension we must ensure that the contributions of people who do valuable work for the community, such as caring for young children and frail elderly people, are paid for them, and that we thereby salute them for their role. We must not demean what they do by saying, "Roll up, roll up—anybody who happens to be around can have a pension paid for by other people who have to work jolly hard."
We all want to salute the work that carers have done in the past, but saluting them is not enough if they are now retired and drawing a pathetically inadequate pension. Nor is it enough to increase the basic state pension, because they get a reduced percentage of it. The right hon. Gentleman does not want to means-test them, so what would he do for them?
Quite a few of those people will have had carers allowance, so we have the records and we could check them. Some flexibility is possible, depending on who they cared for and how. That seems a more appropriate approach than the suggestion that the whole national insurance system should go because we have not yet devised a way of justifiably paying additional pensions to those who have grown weary looking after other people.
There is no dispute about that anywhere in the House. It is just that some of us baulk at the idea that under the guise of helping a moderately small number of elderly women who have carried out caring functions, we should overthrow one of the real successes of the welfare state—the contributory principle. People do not think of it as taxation. They think it is being earmarked for them and they think it is their duty as citizens to contribute to the national insurance system when they can, and that they thereby have a right to draw from it. The electorate would not be keen that we should put that system aside without thinking.
I am grateful to my right hon. Friend for giving way on the contributory principle. In his thinking on the matter, has he considered what would happen if we moved from a pay-as-you-go scheme, which we currently have, to a funded scheme, which could be developed under the national insurance principle?
That will be my third point. It is the scheme about which I hope the Government will be thinking. My hon. Friend is right to highlight it. We cannot go into the election without laying down some outline plans for reforming pensions in the next Parliament. It would mean that almost 10 years had elapsed since we were elected, yet we still had not got on to the major subject of long-term reform of pensions.
It was a clever wheeze last year to set up the Pensions Commission and to toss the pensions time bomb into the long grass. We have now had a report from the Adair Turner commission, which has mowed the long grass. The pensions time bomb has not only been found, but it is ticking and people want to know what sort of approach each of the political parties will have when they go into the election.
It is an important call for the Government to make. If they continue to say that Adair Turner's commission will not make its final report until June next year, they will soon be trapped in that timetable. The timetable did not come down from Mount Sinai; it is the timetable that the Government gave the report in the first instance, and what Governments lay down, they can revoke. I suggest that they ask Adair Turner to make his report by the end of February next year so that all the political parties can study the detailed proposals and shape their election manifestos accordingly. I do not want us to go naked into the next election without putting before the electorate the main outlines of the kind of programme that Labour will support if it is returned in the next Parliament.
I come to that alternative and to proposals associated with the pension reform group, which tie in with the point just made by my hon. Friend. There are three main areas of policy within which the Turner commission says we will have to work if we are to have a viable long-term policy. First, I do not believe we can maintain the present retirement age. It was not Mr. Gladstone but that other great Liberal, Lloyd George, who first introduced old age pensions. He introduced pensions for those over 70, although life expectancy was 48 years. Since then, life expectancy has increased and we have endlessly brought down the retirement age. It is not sustainable.
As the Secretary of State said, and as we all know from work in our constituencies, there are a number of people—not just those who worked in heavy industry, but those who cared for their parents as the parents became increasingly frail and then died—who are simply knackered and who cannot work to the current retirement age, let alone to one that we raise. That is why proposals to reform incapacity benefit are crucial.
The original proposals for an old age pension came in when the trade unions, the friendly societies and the mutual aid societies realised that they were going bankrupt because there was no retirement income and people were claiming sickness benefit until they died. They therefore dropped their objection to a state retirement pension. If we are to raise the retirement age in the longer term, we must have a robust system of incapacity benefits for people who are genuinely worn out by the worries of this world and who can rightly draw an income from incapacity benefit. But the electorate will not buy that if we do not reform incapacity benefit. So we must raise the retirement age and link it with a workable and robust new incapacity benefit.
Secondly, the Turner report asks what we will do with the state pension. I do not believe that people will be prepared to accept, as the Institute for Public Policy Research is proposing, that we use the contracted-out rebate to put into a pay-as-you-go scheme so that we can immediately and substantially raise the state pension. That would mean transferring considerable sums that go towards a funded or investment-based pension scheme to a pay-as-you-go scheme, without any certainty that when those workers who were losing that substantial contribution to their funded or investment pension would get the same deal from taxpayers, many of whom are not yet born, so goodness knows how we can judge what their views would be.
Although there is a role for a pay-as-you-go scheme, that must be double-backed by a funded scheme. It needs to be a simple scheme and one that everybody is in. It should be looked after by trustees who are at arm's length from the Government. There would therefore be no possibility of the private market mis-selling, as everybody would be in the scheme. People who were in an additional form of provision would keep all that provision on top of the guaranteed minimum pension that they would get from the combined pay-as-you-go and funded scheme. I hope the Government would consider ways of accommodating the Conservative Opposition, who are very keen that in addition to making the minimum compulsory contributions, people should save.
If we are thinking about how the national insurance collection system can meet the future, rather than justifying its past record, then as well as collecting the contributions for the new funded scheme which in the first instance will be the contracted-out rebate, I hope the Government will start discussions with the private sector. If the private sector is successful in selling policies to those who want income additional to the new guaranteed minimum pension, I hope the Government will be prepared to collect those contributions through the national insurance scheme and pay them over to the companies, so the national insurance scheme would become a collection point servicing both the new funded scheme and the private sector.
That raises the big question, which no party has yet faced: what is the legitimate role of voters through their Government and of voters as individuals in providing for their retirement income? Labour has had a noble illusion—but it has been an illusion—that somehow we can use a collective state scheme to model the best of the private company pension schemes, and that we can deliver the resources that will give people an income of two thirds of their income before retirement. That is not on.
We must be much more modest about what we can do collectively. What we can do collectively is try to deliver that minimum guaranteed pension made up of a pay-as-you-go and a funded scheme. That goal is modest, but we have never achieved it in this country. The private sector's role will be to persuade people to make additional savings. It is not in taxpayers' interest either to legislate or to use huge amounts of taxpayers' money to try to bribe people to make additional savings. We know that the richest pick up the bribes—this is the first year in which more than half of all tax concessions on pension savings have gone to those who pay higher rate tax.
I want to make three points. First, although it is cosy to say, "Labour's approach to pensions reform rests on evidence-based research", at the end of the day we must make a political judgment about the policy on which we want to campaign. Secondly, it is highly dangerous for us to go into the election without suggesting the main direction of our reforms, if the electorate return us. Thirdly, in making such proposals, we must answer the three questions that the Adair Turner commission addressed to all political parties. What role will raising the retirement age play? What role will a modernised state pension play? What role should funding provision play in seeking, for the first time ever in this country, the approval of the electorate to guarantee a minimum but adequate pension for all those who have played their part. Whether people work or undertake other functions that we value, we should salute them not by giving them credits, but by saying that this year's workers must pay this year's contributions for those people who carry out vital functions on our behalf.
I congratulate Adair Turner and his commission on producing a substantial body of work. I also congratulate them on their optimistic assumption that it will oblige politicians of all parties to concentrate their minds and turn to the difficult problems that future generations will face unless we start tackling the pensions problem. I wish that I could say the same for the Government, whom I congratulate on having set up the Pensions Commission. However, the Government are losing control of the process because they did not think through the timing.
As Mr. Field said—as usual, I fear that I agreed with rather a lot of what he said—the commission has not told us anything terribly new. We all knew that we face a demographic time bomb, which we in this country tend to assume will hit us rather later than it hits some of our continental colleagues and the Japanese. However, the commission's authoritative work tells us that unless we make some difficult and tough decisions in the near future, future generations will not be able to finance the level of pension provision that we all think people should enjoy in retirement, if they have behaved with reasonable common sense and responsibility.
The Government's track record on pensions is poor. The situation has deteriorated through neglect and some bad decisions over the past six or seven years. The report says that something must be done soon on what the Secretary of State acknowledged in his speech as probably the biggest single social problem that the country currently faces. The Government's problem is that they have nothing new to say.
I agree with the right hon. Member for Birkenhead—he did not prompt me, because I had decided to start with this point before he made his speech—that the Government cannot put the report on the desk just before an election and say to the public, "We will decide our response to the report after the election. Vote for us, and shortly thereafter we will begin to enunciate some policies on the pension problem that will save future generations from difficulty and, incidentally, make every pensioner better off." No member of the public should believe that. It is absurd that we are meant to go through a period of purdah until just after May next year, when, having faced the electorate, the Government, if they are returned to the office, will say what they propose to do. In interviews this morning, I said that that point strikes me as today's oddest feature.
At moments during this debate, I thought that it might be best if we all went into purdah and did not start floating ideas until after the election because, as Adair Turner himself warns in his foreword to the report, the pre-election period is dangerous because politicians start committing themselves to some rather curious things. Those of us who have debated these matters for long enough know that politicians are never more prone to making incautious promises than in the run-up to an election and on the subject of pensions, and we heard a bit of that today.
The Secretary of State, whose appointment I welcome, can be excused because he is new to his post, but I was astonished when he cheerily hinted with a smile that he is tempted by the idea of abandoning the contributory principle. Has he read Adair Turner's report? Has he consulted the right hon. Member for Birkenhead, who probably knows more about the contributory principle than any other hon. Member?
The Liberals immediately pre-empted the Government. They offered us a vision in which the declining number of working-age people in this country paid for utopian pension provision for their elders. The vision included abandoning the contributory principle, much more generous pension provision for absolutely everybody and pensions rising in line with earnings, year by year. I sometimes wonder whether silence might be better until we all sober up and return to this House to face our responsibilities.
No Treasury spokesman from any party is present in this debate. Mr. Webb rightly says that times have moved on since my day, and since the days, to which neither he nor I will confess, when the right hon. Member for Birkenhead and I first started debating these questions, but the rules of arithmetic are one thing that has not moved on. The new Secretary of State and the hon. Member for Northavon should talk to whoever is supposed to be responsible for costing their parties' future programmes. I am neutral—I have never aspired to the leadership of the Labour party and am neither a Brownite nor a Blairite—but the Chancellor should be alerted to what is being said.
I participated in a debate this morning with Dr. Cable, the shadow Treasury spokesman for the Liberal party, who tried to persuade me that the Liberal party's programme for the next election is carefully costed. He only mentioned the proposals for pensioners over 75 and concealed the wider vision that has been unveiled today. I will send him a copy of the speech by the hon. Member for Northavon and ask him how on earth it squares with the responsible restraint that he tried to impress on me this morning. Today's contributions by Labour and Liberal Front Benchers failed to address the issue that Adair Turner has asked us to examine, and it behoves us all to do something about that.
The time bomb keeps ticking, and the situation has become more urgent over the past six or seven years because the Government's record is at best patchy and at worst damaging. Like the public, I am already fed up of hearing the mutual recriminations about who made which mistakes, but we should remind ourselves of some of the recent events in the Government's record.
With hindsight, the Chancellor's changes to the tax treatment of pensions were plainly scandalous. I was not the only. Member who criticised the Chancellor's first Budget on social grounds, because it was bad social policy to take away the tax advantage from pensions. The cumulative effect has been disastrous and, as far as I am aware, nobody is paying attention to how we can deal with it. Tax incentives to get people to provide for themselves on pensions are essential, and that therefore includes tax concessions for those who manage pension funds.
The Government have also greatly damaged the climate for savings generally. One of my criticisms of Adair Turner's report—to the extent that I have managed to get through it—is that I do not believe that we can consider pension provision wholly apart from savings provision. When examining the wider question of how to enable as many people as possible to take some personal responsibility for matters such as social welfare, health and care in old age, we must consider the extent to which a section of society can be encouraged to build up a stock of savings as well as providing pensions entitlement to give them income in old age.
The Government's record on savings is disastrous. I do not want to stray too far outside pensions, but let me remind hon. Members that the previous Government spent much time trying to encourage savings and spread the idea of savings throughout a much wider section of the population. Nowadays, not many people argue with Mrs. Thatcher's doctrine of, "Every man a capitalist, every man a saver."
We had personal equity plans and tax-exempt special savings accounts and we gave tax concessions to those who were prepared to make some savings each year. The Government's record is dreadful. They replaced both schemes with individual savings accounts, which were never as attractive as PEPs and TESSAs, and the Chancellor continues to squeeze out the tax concessions available to ISAs and ISA holders. He proposes to reduce the amount of tax-protected savings that people can make each year. In that and in other ways, the climate for savings has worsened.
The fact that the savings ratio has sagged so badly in the past seven years poses a serious economic as well as social problem for the country. In 1997, the savings ratio as a percentage of gross domestic product was 6.8 per cent.; it is now 4.2 per cent. The figure has been falling steadily, especially in the past three to four years. At the same time, household liabilities—household debt as a proportion of GDP—has risen year in, year out throughout the Government's lifetime. It has increased from 73 per cent. of GDP in 1997 to 95.7 per cent. now. My guess is that the figure continues to rise. Although that may have helped the growth of our economy in that people spending rather than saving keeps the economy going in the short term, it is not sustainable—and not good when viewed alongside the demographic time bomb and general pensions problem that we are discussing. The Government's record is, therefore, not good.
The Prime Minister said at Question Time that he inherited a calamitous situation. We have heard various descriptions of what happened in 1997, when the problem started. None of us perceived it in that way then. I admit that it is obvious now, when considering the position that the seeds of the problem were there, but I suspect that no hon. Members realised that. We did not know what would go wrong with company and personal pensions. Indeed, we were rather complacent as British citizens about the fact that we had licked the problem while the feckless French, Germans and others would have to keep trying to solve it. My Eurosceptic friends even said that we would have to pay for German pensions if we stayed in the European Union because when other countries realised that we had solved a problem that they could not, the British taxpayer would find himself paying for German pensions. I hope that the German pensioners listening to the debate are not waiting for the money because we now have our own problem.
In 1997, we all worked on the principle of a basic state pension that was reasonably affordable—that is why we broke the link with earnings; heaven knows what the fiscal position would have been if we had not broken it in 1979—and placing emphasis on encouraging the growth of funded occupational and private pensions to give people the living standards that they expected in later years. That was perfectly sound and I do not regret it.
My right hon. and learned Friend refers to breaking the link with earnings. Surely the Administration prior to 1979 paid no attention to that link. They paid heed to it when it suited them and neglected it when that suited them.
That Administration kept altering the rules of what they linked to, according to the financial crisis they faced. Interminable debates about whether one acted on forecasts of inflation or by looking back at inflation are buried in Hansard. My hon. Friend is therefore right.
We did not strictly stick to tying pensions to prices. The basic pension was worth more in real terms when we left office than it was when we started. However, we tried pretty doggedly to stick to prices. The Government have also doggedly tried to stick to that, but it is to their credit that they have not altogether stuck simply to linking with prices. The pension has increased a little more than that in real terms. However, no one in the past felt able to move to an open-ended commitment to continue to increase the basic pension in line with earnings. We all believed that the problem would be solved provided that we facilitated the growth of occupational and private personal pensions.
We know what went wrong and shattered that complacency. First, everybody underestimated the rapid growth in life expectancy of those drawing pensions. Of course, we all blame the actuarial profession more than anybody else, but everybody shared the delusion that life expectancy could not increase so quickly. We all overestimated the returns that could be got on investment. That was the flaw in the plan of my right hon. Friend Mr. Lilley to move the state pension to a funded scheme. We were considering that in 1997. Even my right hon. Friend was rather carried away with the idea that as long as the scheme was funded, the sky was the limit in terms of the growth of the funds each year.
We also slightly scuppered the funding of corporate occupational pensions by getting rid of inflation. I played a part in that, which I should like to claim. It was amazing how the finances of occupational and corporate schemes worked provided that the wages of those who contributed kept going through the sky and therefore kept up the nominal value of the fund while it was paid out to pensioners. All that has gone wrong and we realise that we now face a considerable problem.
My right hon. and learned Friend said that none of us foresaw the problem. If he refers to speeches that I made in 1995, he will realise that I severely criticised our Government for the component of the minimum funding requirement. The operation of MFR meant that we did not get the returns on the investments that we thought that we might.
I had already prepared a favourable reference to my hon. Friend for introducing a private Member's Bill, which I supported, two or three years ago. His expertise is considerable but he was a rare voice. Not many were heard in the Chamber casting doubt on our ability to proceed on the basis of private pensions.
I am following the right hon. and learned Gentleman's analysis with great interest and respect, but in fairness for the record, what weight would he give the Tory mis-selling of private pensions, which affected some 2 million cases and helped to undermine people's confidence in the system? Where is that in his analysis?
The mis-selling of pensions was a sad story. It is rather harsh to describe it as Tory mis-selling. Introducing personal pensions was an important proposal, which Lord Fowler carried through. No one will unravel the personal pensions provision. When the scheme was introduced in the brave new dawn, I regret that many companies and their salesmen who sold the new personal pensions were careless. A scandal occurred, and I agree that it has helped to damage confidence in financial institutions generally. That is one of the problems in increasing the savings ratio now. However, I would defend with considerable vigour the policy of moving to personal pensions as an alternative to occupational pensions. It was far-sighted and one of the policies, of which we had several, whereby we did what elected Governments rarely do: look to the future and try to anticipate what our children would like bequeathed to them. Obviously, I do not dismiss the seriousness of the mis-selling scandal that ensued. It was an unfortunate incident, and I trust that protections against it now exist.
Following the interesting remarks of Mr. Willetts, we must accept that the state pension will be the most important pension for a high proportion of the population. When talking about encouraging people to save—even worse, compulsion to save—the House should bear in mind that for the foreseeable future quite a large proportion of the population would be ill-advised to save in any significant way over and above the state pension for their own provision. They will not accumulate a big enough fund to make it worthwhile, whether or not we get rid of means-testing. People mostly do not go into a pension or save because they cannot afford it. That will not change, as we discovered with the abortive attempt to introduce stakeholder pensions, by introducing new and attractive schemes to encourage people to save if they do not have the money. That scheme got nowhere. The state pension is therefore important.
The state pension will from time to time be increased modestly in value. Like every other Member of the House, I hope to get elected in the not-too-distant future, so who am I to stand in the way of the almost universal agreement that the basic state pension is now due for a bit of a surge forward? For the sake of my taxpaying constituents, I hope that the bidding match going on between the parties does not get carried away, but of course it must go forward a little. Therefore, I am happy with the idea, which is part of the eight-point plan put forward, that we restore the link with earnings for a time. I am extremely glad that my hon. Friend the Member for Havant has not extended that into the future indefinitely. He will be criticised for saying that at the moment it is only for this Parliament, and that he will find the savings thereafter to do so. In times gone by, I have spent 18 years defending that difficult line, so I look forward to seeing how we finance it more than three or four years out. I caution everybody against timeless commitments, which we heard the Liberal Democrats giving, to earnings-related state pension for ever, which is complete nonsense; the future pattern of demography makes it wrong. A little surge, however, would be welcome.
Some means-testing is therefore required because, for as long as I can remember, we have not expected those for whom the basic pension is their only pension to live on that. We used to have, for instance, the supplementary pension, which was means-tested, and that is still a requirement. On occasions, for older people in particular who had no opportunity to make provision, or for some of the women carers who have been rightly mentioned, some means-tested and even some non-contribution-linked addition is perfectly justified if it is worked out carefully.
Means-testing is one of those ridiculous issues that get batted backwards and forwards across the entire welfare field, usually from one extreme to another. All three main political parties have been on both sides of the issue at various stages over the past few years. The means test is the obvious way of targeting the poor, and it also seems one of the most obvious ways in which to destroy incentives to save, work or doing anything else if taken too far, when it becomes unfair. Some means-testing is called for. I have the impression that the Minister for Pensions agrees, as he has a valuable quotation in his record—that the Government have realised that they have taken means-testing much too far in what they are contemplating for pension credit. They have completely and utterly overdone it.
I am still not wedded to the tax credit system: it is expensive to administer, it has an appalling record of take-up, and it is mainly contrived to improve the presentation of the public accounts compared with the means-tested benefits that we used to give. The Government have not made as big a mess of pension credit as they made of child tax credit, working tax credit and various other things that they have tried to administer, but there are still many people who have never taken it up and never will. Some modest means-testing is called for, but we really must unravel the current excessive means-testing because, as my hon. Friend the Member for Havant rightly said, it is acting as a disincentive to save.
My main point is that when considering Adair Turner's three alternatives—I accept that we probably must do some of each of them—as a Tory, I find myself most instinctively drawn to doing everything that we can voluntarily to improve people's ability to make their own provision through private pensions and to encourage them to save. We are a more prosperous country, and the range of the population that can do that quite sensibly is greater, but they will not do it unless we create the right climate and enable and encourage them to do so.
I do not see a short-term solution to the occupational corporate pension problem. It is not corporate wickedness that has caused people to bail out of defined benefit pensions that tie everyone's pension to their salary; it is a realisation that their actuaries have been up the creek, that the market has collapsed and that pensioners are living longer. When we step back, we are able to see that it is absurd for a company and its pension trustees to give an absolutely open-ended guarantee of such substantial commitments in the future, which they claim to be able to finance out of a fund whose performance can be variable and which has no guarantee of meeting them. We have seen the dangers of the risk being carried by employers and their pension funds. It is inevitable that the risk will be transferred to employees in most cases, and I know of no easy solution that will reopen that. We are therefore talking about personal saving and personal pensions.
One of the things in which the Government are interested is compulsion, and the Secretary of State plainly hinted that after the election, compulsion will be on the their agenda: compulsorily joining one's occupational pension or making some provision. It is in the terms of reference of the Pensions Commission to consider in particular whether voluntaryism is defensible. I have at times been attracted to the idea of making compulsory saving or compulsory pension contributions part of our system, but I always come down against it. One reason is that voluntaryism is more flexible, and leaving people to make their own provision as they choose takes more account of the huge variety of circumstances in which people will bring themselves to save.
People are saving at the moment. We should therefore ask ourselves: what is happening at the moment? They are saving by buying a house or flat. They think that they are saving by going into property. They do not trust pension funds, the stock market and investment funds. They do not trust insurance companies. They do not trust Governments. They do not think that they can rely on the state for a pension when they get older. An awful lot of young and middle-aged people think that their bricks and mortar are their pension—it is the only thing that they can think of which is bound to go up by at least 10 per cent. each year, which can be sold when they wish to dispose of it, and which will somehow look after them in old age. That is a real danger, and I think that it is the principal reason why we have a housing bubble at the moment, why housing is 20 or 30 per cent. over-valued, and why we are in danger of seeing values fall back. What we need to do, first, is to hope that that bubble is deflated by the Bank of England in a comfortable fashion, without too much disaster, and get back to deciding how on earth we encourage people to save properly.
Not all people would be well advised to put X amount into pensions each year. The Turner report says that if we are 40, we should be paying 20 per cent. of our income to provide a pension. I would not put 20 per cent. of my income into my pension were I a 40-year-old. I would examine my career expectations and how one maps things out. We are trying to encourage the middle classes and middle-income groups to save, and they have a much more complicated outlook in looking after their financial affairs. Most sensible middle-income people are not at their most broke when they are elderly. They are at their most broke when they are married, have young children, and one of the partners must give up work for the first time. That is when they go through a period of being really broke. They should not be piling vast proportions of their income into pension funds when they are bringing up children with a wife and trying to pay off the mortgage. Most of them expect to start really saving for their retirement in their 50s. An awful lot of people do that.
I will not go into the endless other varieties of provision that sensible people can make, but if we opt for compelling them to put a staggering amount of money into their pensions, it is not always in their best interests, and it is an inflexible form of saving. If we want people to save more than they would of their own volition, and if we want to tie it into pensions—which is one of the most unattractive forms of saving if someone is 30, because he can never touch the money until he is old, and he might die young and never see it at all—we have to give pretty attractive tax concessions to pensions. What we have now is inadequate.
Of all the ideas that have been suggested for extending tax relief and more favourable treatment for private and personal pension provision, getting rid of the annuity purchasing requirement is one of the most attractive and overdue. My hon. Friend Sir John Butterfill had a private Member's Bill advocating that three years ago, and I was pleased to be one of the sponsors from various parties who helped him with it. I am astonished that the Government have not changed the rules on annuity purchase, which would plainly get rid of one of the greatest deterrents to people putting up their pension provision to the full extent of the tax relief if that fits their personal requirements.
Our response to the Turner report should be a modest increase in the basic pension, some means-testing for those who have no chance to provide for themselves, but mainly incentives to save and make pension provision across the whole area, which can be done only through tax concessions.
Instinctively, I am against changing the retirement age. There are many men in heavy manual occupations who will not be able to make it to 65, and there will be personal and financial problems if we say that people cannot get the state pension until they are 70. We may be driven to it, and there are four western countries that have now raised the state retirement age from 65 to 67 in response to exactly the problems that we face, but I would like to see how they get on in Norway, the States and elsewhere before we go in that direction ourselves.
Those are my provisional views, but we must all have clearer views by the election. We should try to reach consensus. We nearly got consensus on the Castle Bill in the late 1970s, when I was our party's spokesman on pensions and we prevented Barbara from destroying private pension schemes altogether. Lord Fowler tried to get consensus when he introduced personal pensions in the 1970s. It is in all our interests to get consensus now, but it cannot be reached through a crazy bidding match in the run-up to the election. I think that the electorate will respond to a responsible reaction to the Turner report. They know that the parties cannot deliver the earth. If we do not grapple with the problems now, people in this Chamber in 20 years' time will curse us, because they will face a really, really serious crisis as a reduced number of working people try to maintain probably half the Members of this House in their retirement at a level that is unaffordable.
This is a serious matter that deserves a serious response, and it seems to me, in my unbiased way, that my hon. Friend the Member for Havant, with his eight-point plan, has come much nearer to the reality of grappling with the problem than the rival spokesmen from the other two parties.
I apologise for my brief absence earlier in the debate. I was required on other duties elsewhere, on the Committee Corridor.
I am delighted to follow Mr. Clarke, for whom I have great admiration, as do many of my colleagues. He has the dubious distinction of being the only person here to have served for the whole length of Conservative government, from election day in 1979 until election day in 1997. For political anoraks, there is only one other former Member to have achieved that feat: Malcolm Rifkind.
The right hon. and learned Gentleman can therefore hardly avoid any criticism or responsibility for the dreadful pensions mess that that Government made. He started by suggesting that the debate should centre around the general election campaign and that our proposals should be in our manifestos. Similar comments were made by Mr. Willetts. I disagree with them. This is too important a subject for us to turn our backs on the possibility of cross-party consensus, which will surely be best found in the aftermath of a general election and not in the few months leading up to one, if indeed we have one next spring.
The hon. Member for Havant made a valid point, for which he was barracked by some of my colleagues. I have to confess that his claim that some people in the Labour party tried to suggest in the 1997 election campaign that Conservative policy would result in the abolition of the state pension was correct. During campaigning with my predecessor, John Maxton, now Lord Maxton of Blackwaterfoot, we came upon two older voters in Mount Florida who were very suspicious of Government plans for pensions. I immediately got tore in, as we say in Scotland, and assured them vociferously that if the Conservatives got back in they would abolish the state pension. They thanked me for the information and moved on, promising to vote for John, who then took me aside and said that I should really not say such things, as that was not what the Conservatives planned. That was typical of John, as a very honest politician, and it was a lesson to me in our responsibility to tell the truth to voters.
The hon. Gentleman makes my point. As we are now in the game of demanding and offering apologies for everything that we have ever said in politics over the years, I certainly apologise for that particular branch of campaigning in 1997. However, that claim was pretty irrelevant given that we were 20 per cent. ahead in the polls at that point, and it does not take away from the fact that the Conservative Government made a pig's ear of pensions policy over 18 years.
We will need a further debate when the concluding volume of the Turner report is published next year. We need to take a strategic view of the problem. We have discussed the fact that we have an ageing population and a proportionately declining work force, with the possibility of moving from the current five working people to every pensioner to perhaps only three in 40 or 45 years' time—the so-called demographic time bomb. We now need to look at the wider issues. For example, we now have far more students graduating with student debt. That, I am afraid, is an inevitability, but when it is combined with the challenges facing young couples buying their first house at inflated prices it is not a surprise that fewer and fewer people are able to save as much as they should be saving.
The pressures from various aspects of modern life are so great that, as the right hon. and learned Member for Rushcliffe said, many people are putting all their money into property. Many people are putting their money into repaying the student debts that previous generations did not have to cope with. Having said that, there seems to be little indication on the high street that people's disposable income is falling in real terms. But it is worth making these points because we have to look at all the reasons behind the so-called pensions time-bomb, instead of simply concentrating on the increasing number of older people in the years ahead.
It is very tempting to look at the Turner report and some of the news coverage and conclude that means-testing has had its day. It would be a huge mistake to turn our backs on the pension credit, at least before it has done its job, which is to abolish pensioner poverty altogether.
As a Labour MP, I would find it very difficult to justify increasing taxes in order to reinstate the basic state pension at the level that existed when the link with earnings was first broken, and then to upgrade it every year in line with earnings. I would find it difficult to tell my constituents that they should pay significantly higher taxes in order to give extra money to richer pensioners such as Mrs. Thatcher, Peter Stringfellow and the many other millionaire pensioners. Someone said that they account for only 20 per cent. of all pensioners, but that does not justify our paying extra tax to give money to people who do not need it.
In fact, means-testing redistributes wealth in the right direction. Taking away the pension credit, reintroducing the link between earnings and the basic state pension and upgrading the pension for everyone also constitutes a redistribution of wealth, but in the opposite direction. It takes money away from the poorest pensioners and gives it to the richest. That is totally unacceptable.
The hon. Gentleman is making a very thoughtful speech. If his constituency is typical, a third of the pensioners in it who are entitled to the pension credit are not claiming it. We can all push harder to change that, produce more leaflets, and so on, but because of the nature of the beast, there will always be a substantial number of pensioners who get nothing. The only way to get money to the poorest of the poor is through the pension.
The hon. Gentleman makes a very valid point. The problem that he mentions is a serious one, and the Government must redouble their efforts to ensure that those people do claim the pension credit. I have heard the argument before that many pensioners are too proud to claim. Well, they are not too proud to claim in my constituency. I have not met a single pensioner who has said, "I know that the money is there, but I am too proud to take it." That simply does not happen. The fault probably does lie with Government agencies, and we need to find far more effective methods to deal with the problem. We know who these pensioners are—they already receive the basic state pension in some form or other—but we need to find a more efficient way to contact them and to help them through the process, so that the figure of one third of pensioners who are entitled to the pension credit but do not claim it can be reduced massively, and hopefully eradicated altogether. I accept the truth of what Mr. Webb is saying, but for reasons I have explained, we should not go down the route of redistributing wealth in the wrong direction.
Interestingly, the nature of the argument has changed out of all recognition. In the 1980s, re-establishing the link with earnings was seen as a great socialist left-wing principle. It is not, and it is no longer recognised as such. As the right hon. and learned Member for Rushcliffe correctly said, means-testing is about targeting. If we want to target the poorest people, the way to do so is not by increasing the basic state pension. It is a pity that Annabelle Ewing is not in her place. It is so typical that, just as everyone realises that re-establishing the link with earnings is not necessarily a left-wing policy, the Scottish National party decide to adopt it. When the Conservative party adopted it, the cat was surely out of the bag: it was surely clear then that it is not a redistributive policy—or not, at least, in the direction that we would like.
During Prime Minister's questions today, the Leader of the Opposition said—I cannot remember his exact words and I look forward to reading the text in tomorrow's Hansard—that pensioner poverty had not been reduced as a result of this Government's policy. No one seriously doubts that a huge number of pensioners have been brought above the poverty line, so I do not understand why the Leader of the Opposition said such a thing. The Government claim—the figures are open to examination by anyone—that 1.8 million pensioners have benefited from the pension credit and therefore now enjoy incomes that take them above the poverty line. None of the agencies dealing with old people seriously contradicts that figure, yet in the light of what the Leader of the Opposition said today, either he does not recognise it or he does not think that it matters.
I may be able to assist the hon. Gentleman. What my right hon. and learned Friend the Leader of the Opposition may have had in mind were figures about pensioner poverty showing that 1996–97 levels were almost exactly the same as the 21 per cent. of pensioners living in poverty in 2002–03. It is fully set out in "Opportunity for All", the sixth annual report of the Department for Work and Pensions, that that is indeed the case.
I would have to question the hon. Gentleman's arithmetic on that. Given the huge increase in the number of people who have reached pensionable age over the past seven years, saying that the same numbers were living in poverty seven years ago as are today does not mean that no pensioners have been taken out of poverty. It is still possible for 1.8 million pensioners to have been taken out of poverty. The proportion of pensioners on poverty incomes has undoubtedly decreased drastically. I do not understand why Conservative Members want to dispute that or what they have to gain by doing so, since their own policies will do nothing at all for the poorest pensioners.
My hon. Friend Mr. Tynan mentioned earlier how damaging it is constantly to refer to the term "means-testing" instead of "entitlement". Labour Members generously welcomed that comment, but my suspicion is that the term "means-testing" will be used even more frequently by Conservative Front Benchers. They are clear in their view that the fewer people take up the pension credit—and the more the Conservatives view it as a failure—the more it suits their particular political purpose. I believe that that is an incredibly cynical attitude to adopt. On both sides of the House, we should encourage our own constituents to persuade older people to claim exactly what they are entitled to. If we can adapt our language to use "means-testing" less frequently, we may be able to contribute to reducing the number of pensioners—currently a third—who do not claim their benefits.
In the aftermath of a general election, I hope that partisanship—I have to admit that I have just displayed it myself to some extent—can be put behind us, so that we can deal with the problem in an appropriately serious mode. I am sure that the official Opposition will take that into consideration next year and view the problem with the seriousness that it deserves. Whoever will be in government next year—it will be the Labour party—will have to take some tough decisions. This is not one of the matters that we can play about with or infinitely postpone taking tough decisions on.
There are three basic options that need to be considered: later retirement, which has already been mentioned; compulsory savings; and higher taxes or perhaps some combination of the three. Anyone participating in the debate who argues that we need not take account of any of those three options is kidding themselves and kidding the House.
Personally, I believe that a higher retirement age is inevitable. I was delighted to hear my right hon. Friend the Secretary of State say that he did not want to go down the compulsory route for a higher retirement age. At the same time, however, I hope that we do not rule out compulsion altogether, because when we enter the debate after the general election we need to have a genuinely open mind on all the options. Saying at the outset that we will not consider A, B or C is not conducive to producing the best conclusions.
However unpleasant the medicine, it is surely incumbent on MPs of all parties to recognise that, because an option is unpalatable, it is not necessarily avoidable. A week ago, at the Conservative party conference, the Leader of Opposition bemoaned the lack of trust that people have in politicians. How justified that lack of trust would be if we as politicians sought to avoid taking tough decisions in order to gain party political advantage.
I begin by declaring an interest. Like every hon. Member, I belong to the House final salary scheme. I am also a member of a private final salary scheme run by a company of which I am a director, and in which I am a shareholder.
I was interested in the speech made by Mr. Harris. He began by trying to argue that it was important for politicians to engage in honest campaigning during a general election campaign. I welcomed his apology for a misrepresentation of which he was guilty during the 1997 campaign, but he ended his speech by reasserting the proposition that honest campaigning was consistent with the principle that although the next Government will face "incredibly tough" decisions about the future of this country's pension system, it is reasonable to withhold from the electorate the nature of those decisions until after the votes have been cast. I must say that the justification for that escapes me.
Like my right hon. and learned Friend Mr. Clarke, I think that it is entirely right to say that tough decisions lie ahead of us. Honest politics requires that, in advance of the general election probably to be held in the first half of next year, we must be a great deal clearer than is at present the case about the subsequent direction that each of the three parties in England is likely to take.
There are three parties in England, but of course other parties will be involved in other parts of the country. As an English MP, I shall focus on the three parties in England. However, there might indeed be four parties in England, and I shall return to that point.
My right hon. Friend the Leader of the Opposition said earlier today that we need to establish a consensus in respect of the future evolution of pensions policy. The same point was made by my right hon. and learned Friend the Member for Rushcliffe. I agree, but the consensus that we need most urgently is one between Nos. 10 and 11 Downing street about where the proper balance lies when it comes to using mass means-testing as the foundation for pensions policy.
One key reason for the establishment of the Turner commission was to avoid the need to find a consensus on this matter between Nos. 10 and 11 Downing street. If the Labour party is to abide by the injunction for honest campaigning expressed by the hon. Member for Glasgow, Cathcart, the inhabitants of Nos. 10 and 11 must work out between them whether they favour the continued development of mass means- testing as the basis for UK pensions policy. On the other hand, the Prime Minister may succeed in persuading the Chancellor that that is an historic dead end, and that the emphasis of pensions policy needs to change.
An incipient consensus on this matter emerged before the 1997 general election and was potentially available immediately afterwards. We need to be clear about why that collapsed. It is not a matter of huge controversy that pensioner poverty was an issue in that election, but the huge difference between then and now is that at that time a system was developing to allow private funding to improve pensions.
That was especially true for the new generations of retirees who emerged through the Conservative Government's years in office. Pension provision improved for those new retirees, and the pensions that they enjoyed in retirement grew more generous as living standards rose. However, pensioner poverty was a problem for people whose private provision proved insufficient.
Immediately after the 1997 election, the Prime Minister famously appointed Mr. Field to think the unthinkable about how the issue should be addressed by the incoming Labour Government. The Prime Minister made stirring speeches at the time about how the evolution of the welfare state was one of the great challenges that his new Labour Government would address. The right hon. Member for Birkenhead, as Minister with responsibility for pensions and welfare, pointed out early in the process that the best way to deal with pensioner poverty was to recognise that it could not be remedied exclusively through means-testing and that the time had come to revisit the decisions that had been made in the early 1980s to de-link the state retirement pension from earnings. He argued that if we were to address the issue of pensioner poverty in a way that was consistent with a continued incentive to save for future generations of pensioners, we had to have a more generous level of basic pension available to all.
The right hon. Gentleman makes a valid point. People now live longer than ever before and spend more time in education than ever before. There is a greater draw on the public purse than there has ever been. How does that square with the Conservatives' intention to cut public expenditure?
The hon. Gentleman may be aware that the shadow Chancellor has published some spending plans for an incoming Conservative Government that set out clearly how we intend to continue to deliver proper spending for health and education. We had a debate between my hon. Friend Mr. Willetts and the Liberal Democrat spokesman this afternoon about how the precise spending commitments that the Conservative party has made on state retirement pensions would be financed. If the hon. Gentleman chooses to research the issue, he will find that the arithmetic has been done.
I wish to confess a personal error, and this element of my contribution may appeal to the hon. Gentleman. The right hon. Member for Birkenhead was early in recognising the need to revisit the implications of the de-linking of the state retirement pension from earnings. I did not think that he was right in 1997, but I now fully recognise that he was. My hon. Friend the Member for Havant, who is an acknowledged expert on the issue, was among the first Conservatives to recognise that the right hon. Gentleman was right. My right hon. Friend Mr. Duncan Smith, when he led for the Conservatives on social security policy, also recognised that the right hon. Gentleman was right.
In fact, there is an emerging consensus that the de-linking of the state retirement pension from earnings has to be revisited. The consensus appears to include everyone apart from the Chancellor of the Exchequer. The consensus includes my hon. Friend the Member for Havant, the Liberal Democrats, most of the pensions industry, the right hon. Member for Birkenhead, who acts as the Prime Minister's shock troop on the subject, and even the Prime Minister himself. It does not, of course, include the Chancellor of the Exchequer.
The Chancellor is not part of the consensus because he is responsible for the great historic error in pensions policy over the past seven years, which had two key elements. The first was the huge increase in mass means-testing, and the second was the £5 billion tax increase on the pension funds. What people do not recognise is that a £5 billion hole in the revenues of pension funds is, because of the way in which they work, not a one-off. When expressed at a net present value, discounted at 7 per cent., it is a £70 billion hole in the capital financing of pension funds.
The Chancellor of the Exchequer was personally responsible for both those errors. They are not the only reason that we are in our current position, but both are huge contributory factors to the pensions crisis we face. It is because the Chancellor is responsible for those two historic errors that we face the need to build consensus from much further back than we would have been if the Prime Minister and the right hon. Member for Birkenhead rather than the Chancellor had won the argument at the beginning of the Government's period in office.
The Turner report provides a basis on which we can start to rebuild that consensus. The report is very good and, like all complex subjects, it can ultimately be reduced to some relatively simple, stark choices. As Members have said, there are three options. A fourth option is also listed—further pensioner poverty in the future—but we can dismiss that without dwelling on it for too long.
The three workable options are, first, increased tax revenues to pay for a tax-funded scheme; secondly, increased individual contributions for private funded pension provision; and thirdly, a longer working life. Those are the three variables open to us. The report suggests that it is unlikely that we will get through the crisis without some contribution from all three.
It seems inconceivable that the new consensus will not recognise what the right hon. Member for Birkenhead has been arguing since 1997—that mass means-testing must be substantially reduced. My right hon. and learned Friend the Member for Rushcliffe was right to say that we cannot eliminate means-testing—we are talking about balance—but the pendulum has swung much too far towards the means-testing option, so one element of the consensus must be less reliance on means-testing. I served as a junior Minister in my right hon. and learned Friend's Treasury team and as I listened to what he said I recognised the scepticism that he has always displayed, both in and out of office, about huge spending ambitions, but more generous basic benefits must inevitably be part of the overall package.
The area of uncertainty on which I want to focus my concluding remarks is the role to be played by the increase in retirement age. I agree with those who say that increasing the retirement age must inevitably be part of the total package. It is impossible to sketch a solution to the pensions problem that does not involve the majority of people contributing more to their pension scheme by working longer.
I have several points to make on the issue. There is a huge danger that we conduct an old-style political debate on it and imagine that the decision can only be collective, that we have to meet in Parliament and make a decision about the age at which people should retire in the world of the future. That is wholly contrary to the implications of the choice agenda that both sides of the House broadly agree should be part of our future social policy planning. We need to recognise that today's citizens expect to be able to make more of those choices for themselves and that our role as policymakers is to ensure that there is a structure that allows them to do that, consistent both with their objectives and with their wider obligations to the society in which they live.
At a quick reading, I think we still need to think through some of the implications of emerging pensions policy in terms of what the world will look like when voters and individuals expect increasingly to have a bigger influence on the decisions.
At one level, of course, this is very simple: if people retire early, they must expect a less generous pension; if they retire late, they expect a more generous pension because they have saved longer and will live for a shorter period in retirement. However, that is not good enough. It is based on a key assumption, which is simply not true, that all of us as individuals make decisions about how we provide for our retirement in a fog of complete ignorance about what our life expectancy will be in retirement and what the quality of life that we can enjoy is likely to be in retirement.
I referred in my declaration of interest to the fact that I am a director and a shareholder of a company with a private sector pension scheme. We are undertaking reforms of that scheme. One of the things that strikes me in talking to people about their plans for their own retirement is how realistic they are about their life expectancy and how it is influenced by a number of things in their lives that they know but are completely unknown to the actuaries—for example, how long their parents and grandparents lived, what life choices they have made in their own lives and whether they are smokers or non-smokers. Those are elements of knowledge that people have when they make such decisions for themselves, and they do, in fact, influence the choices that they make. For us to seek to make public policy on the assumption that it is not quite nice to think about those issues is to run the serious risk that we shall make policy that is unable to accommodate the choices that people want to make about their own lives.
My right hon. Friend is making a cogent speech, but is there not another element that has not yet been considered in the debate? During the past seven years, the Government have taken on a large number of extra public sector employees, who have significant pension contributions. We are all finding that our police and fire budgets are under pressure because of those increased contributions. Is that not something that we must consider very seriously in the future if we are to afford present pensions?
My hon. Friend makes an important point in referring to the multiplier in our public funding commitments. We must consider the funding implications not only of the choices that we make about the state retirement pension, but of what are essentially choices in the private sector in relation to other employment groups, because the groups to whom he refers are those for whom the public sector picks up the employer's obligation, which is privatised elsewhere, so he is entirely right.
In a world where people expect to make these choices increasingly for themselves, using information that they know and that we have traditionally not regarded as relevant to pension decision making, we have to extend our understanding of what it means to base pensions policy on individual choice. I want to mention something that is hugely sensitive, hugely dangerous and, to my knowledge, is never mentioned in the context of pension policy development: the impact of the improving understanding of genetics.
If we are to make choices about how long we will save and how long we expect to live in retirement, the idea that we can do so blind to the knowledge that is now available to us about genetically influenced life expectancy seems a bit like living in a world with nuclear arms and preferring them not to be there. That reminds me a bit of the Victorians who, it is said, used to put skirts around the legs of their pianos because it was not decent to look at them. I must say that I always suspect that that is a proverbial story.
If we are to make real choices, informed choices—to pick up a phrase that was used earlier—we must understand the reality that people in the real world use all the elements I have described to make decisions about how long they will work and how long they expect to live in retirement. If we work through the implications of real personal choice about when people will retire, we realise that we have a considerable way to go before we reach a workable set of policy structures.
It is a pleasure to follow Mr. Dorrell. He ended up referring to choice, and I, too, shall cover that issue later in my speech. Unlike the Opposition Front-Bench spokesperson, Mr. Willetts, the right hon. Gentleman put forward an intellectually coherent case and differentiated between the situation facing pensions and that facing pensioners. They are obviously linked but, for reasons of life expectancy and lifestyle choices that he and others have mentioned, the question as to the future of pensions as saving vehicles must be separated intellectually from the position of pensioners—both those today and prospective pensioners.
The debate is about an Opposition motion, but I shall begin on a point that the hon. Member for Havant did not cover when he opened the debate. Surprisingly for a man who is reputed to have two brains, his approach lacked intellectual coherence. For example, he castigated the Government about means-testing, but he wants to keep the pension credit. It appears that, under Conservative proposals, means-testing would wither, but the pension credit would stay. However, a key plank of the pension credit is means-testing, and rightly so.
The hon. Gentleman produced figures and a 10-point plan—I am sorry, an eight-point plan; there may be a couple of points more now—that he hardly dealt with today, except after questions raised by Mr. Webb, the spokesman for the Liberal Democrats. The hon. Member for Havant opened the debate on a Conservative motion and he is one of the authors of the eight-point plan, but he totally resiled from it and hardly mentioned it. He did not offer a coherent way forward and he did not defend or explain the plan. In particular, and perhaps for understandable reasons, he did not explain that some of the proposals in the eight- point plan would benefit the most well-off in our society the most. That is not a suitable way forward for pensions or for pensioners.
The hon. Gentleman said nothing about women pensioners. That is a huge problem, and it is very belatedly being recognised, partly through sterling work from my hon. and learned Friend Vera Baird.
The hon. Gentleman also gave figures on economic inactivity that struck me as extraordinary. I question them, to put it mildly. The labour force participation rate in the United Kingdom has gone up markedly in recent years, but the motion refers to "economic inactivity" and he spoke about growing or static economic inactivity. That is comparing an absolute figure—I think that he gave a figure of 7.39 million—with the relative figure that one should use because the work force have grown markedly, partly because we are an ageing population, as has been repeatedly said in the debate.
The Conservative party's proposals for restoring the link between pensions and earnings, attractive as the concept may be to many of us, do not add up. As I understood it, the hon. Member for Havant more or less admitted in response to questions from the hon. Member for Northavon that there is a £500 million hole, but suggested that we should worry about that in the second term of a Conservative Government, if we ever got one. In a way, he is right: there is a big question mark as to when there might ever be a second term of a Conservative Government. The pendulum swings and, no doubt, it will happen, but the pension debate will have moved on by then.
On his eight-point plan, the hon. Gentleman spoke about scrapping the obligation to use savings to purchase an annuity at the age of 75. I realise that it is a contentious issue. It was raised forcefully by Mr. Clarke in his excellent and interesting speech. Although I did not agree with all of it, he referred to the private Member's Bill introduced by Sir John Butterfill. People who have funds in retirement plans and hold the funds without an annuity after the age of 65 have had tax relief on the funds while they were accruing and on the contributions that they put into them. There is a risk that unless society says to them, as a quid pro quo, that they should buy an annuity, they could blow the money and be dependent on—hey, we are back to it—means-tested state benefits. That is the concern. It might or might not happen, but it is reasonable for society to say, as a quid pro quo, that at 75 they must get an annuity.
It is a pleasure to serve on the Work and Pensions Committee with the hon. Gentleman. Perhaps I can help him with the figures cited by my hon. Friend Mr. Willetts that he was questioning. The figures came from the Government's labour market statistics for September 2004, which were produced by the Office for National Statistics. They show that in the three months up to July 2004, the total number of 16 to 24-year-olds who were not in work or full-time education was 1.069 million. My hon. Friend was referring to the Government's figures.
The hon. Member for Havant certainly did refer to that figure, but I was talking about the figure of something like 7.93 million—I recall that from memory, so it might be wrong—that he cited regarding overall economic inactivity. I was not talking about the figure to which Andrew Selous referred. The fact that the hon. Gentlemen have been talking about figures from that three-month period shows a classic difficulty with the pension debate, given that we are talking about a possible pensions settlement and consensus for the next 30 or 40 years.
I shall be more specific and go back to the figure of some 7 million. The same September 2004 labour market statistics from the ONS showed that there were 7.6 million economically inactive people in 1997, but that that figure has now increased to 7.85 million.
I know from serving with the hon. Gentleman on the Select Committee that he is at least as adept at maths as me—he might have a calculator in his pocket, but I cannot do the calculations on my feet. He is talking about a situation in which the figure of 7.6 million people increased by 250,000 to 7.85 million over an eight-year period, although I hazard a guess—it is an informed guess, but it might be wrong—that the overall labour force has increased by a greater proportion over that time. Economic inactivity has thus fallen proportionately overall, although it might well be true that the absolute figure has increased from 7.6 million to 7.85 million. However, if we consider the whole work force and prospective work force in our society, which includes the economically inactive, economic inactivity has proportionately fallen in the United Kingdom over the past seven years.
May I reassure the hon. Gentleman about a point that he made regarding my party's policy to liberate pensioners from compulsory annuitisation? Our policy makes it clear that people would not be able to dissipate their pension funds below levels at which they would incur a charge on the public purse.
The hon. Gentleman referred to my Bill and said that people would be able to extract from their pension pots money that had enjoyed tax relief, and blow it all. They could not extract it without paying tax on it, so there is no question of people being able to receive tax relief at one end and not having to pay tax when money is taken out at the other.
I am grateful to the hon. Gentleman, because I was not aware of that fact, although I was talking about the general situation rather than the specific provisions of his Bill. I shall rethink the issue after hearing those two interventions, but I am not saying that I shall change my mind.
As I said earlier, the hon. Member for Havant expanded little on the official Opposition's eight-point plan, so I thought that I should touch on its suggestions. The third proposal is a lifetime savings account in which Government contributions would remain intact to help during retirement, although personal savings could be withdrawn provided that they were replaced. Such a system already exists, and I participated in it when I lived in Canada. The scheme is called the registered retirement savings plan, although I am not sure whether the Conservative's proposal is on all fours with it. Under the system, people receive tax relief on contributions made to a RRSP up to a ceiling. They may withdraw money from the fund before retirement, but in a similar way to that mentioned by the hon. Member for Bournemouth, West regarding annuities, they must pay tax on it at the appropriate marginal rate of income tax for the year in which it is withdrawn.
The scheme worked well for me. I put money in when I was earning a good wage and took it out when I was a student. I had a low taxable income and a low marginal rate of tax. That system can work, but it is not a panacea and there are difficulties, as those who look at the Canadian experience will find. In times of economic downturn, people tend to pull out loads of money from their registered retirement savings plan. That can cause problems with the investment market and so on, and can cause problems for them later on in their life when they might wish to use the money for retirement.
The fourth part of the Conservative's eight-point plant is for longevity bonds, which the Government would issue to help pension providers—the institutions—insure against the risk of providing a pensioner with an annual income for life. If I understand the proposal correctly, that strikes me as nutty. It asks the Government to underwrite huge amounts of private pension liabilities. It amounts to the semi-nationalisation of private pension provision, which is the last thing I would expect from a Conservative party and I do not think that it would work.
What I think would work is allowing companies to promote their pension schemes to employees, which is also a Conservative proposal. A strange situation arose from 1988, when the Conservative Government changed the legislation so that employers could no longer force employees, as a condition of their employment, to join the company pension scheme. Many of us said at the time that that was a mistake. Looking back on it 16 years later, it was clearly a mistake. I am glad that the Conservatives are proposing to reverse it to some extent by at least allowing companies to promote pension schemes. We should take it further by having an opt-out approach, which the hon. Member for Northavon mentioned and attributed to my hon. Friend James Purnell. Companies could assume that someone was in the pension scheme unless that employee specifically opted out.
A proposal in the eight-point plan with which I do not agree is having no limit on senior executive pension funds. The Government proposed a £1.4 million pot, as hon. Members will remember. That went up after discussions to a tax-free pot of £1.5 million. Even with today's annuity rates and the figures that people might aspire to save, £1.5 million is a huge amount. On today's rates, it would provide a 65-year-old man with £70,000 a year as a pension. Those people are the very rich, but the Conservatives, who as we all know have an affinity for the very rich—it is nice to see them being true to that every now and again because it helps socialists like me—say, "We should lift that; £70,000 a year for a pension? Not enough. Lift the cap." I disagree. The cap is too high as it is. It was extremely generous of the Government to budge upwards rather than downwards from £1.4 million.
The hon. Gentleman keeps picking out bits of our policies without explaining them in their context. I am sure he appreciates that in return for removing that cap, our policy is that the same scheme on the same terms should be available to all employees of a company. There is no longer the idea of senior executives having their own cosy little arrangement. It is what we call our fat kittens as well as fat cats policy.
Whoopee-do. Is not that a great balancing concession from the Conservative party? The hon. Gentleman is right that I did not mention it, but I am aware of it. I take it as being almost nothing. Fat kittens? Great. The tiny pitter-patter of kittens is not a balancing concession for what I regard as a social inequity and inequality, although he clearly does.
The eighth point in the Conservative proposals is—no doubt the hon. Gentleman will correct me if I have got this wrong—to do with orphan assets. They want to nick those as well, but there are two considerations. First, orphan assets belong to someone in a legal sense, although it may be impossible or extremely difficult to trace those to whom they belong. Secondly, they are one of those things that lots of people would like to get their hands on. It becomes a bit of a panacea: "We've got a problem here with financing. Let's use the orphan assets." That proposal comes from a party which, when in government, stole the bank to which I belonged—the Trustee Savings bank—and flogged it off. I never received a penny, as the Conservatives stole £1 billion from its members.
I did not have £1 billion personally, but members of the bank must have had that sum collectively, as that is was it was flogged off for. However, like many Conservative sales of the family silver, it was probably underpriced for a quick sale.
The history of pensions in the past 30 years shows that there have been questionable acts and mistakes by both parties. The dividend tax credit could, with the benefit of hindsight, have been introduced differently, although the £5 billion figure that is bandied about is suspect. When that tax regime was introduced, corporation tax was reduced. I am happy to be corrected, but advance corporation tax, which had been knocking around for years, allowed people to keep a chunk of money. The £5 billion figure is therefore not correct and neither is the £70 billion at a 7 per cent. discount, invented by the right hon. Member for Charnwood.
We should learn from past mistakes and problems, but we must also learn from our current circumstances. Our Government introduced a regime of increased means-testing, which I support, to address pensioner poverty. If we want to deliver resources to the poorest pensioners we must use means-testing. Of course, there is the problem of people who choose not to apply for means-tested benefits or who do not do so out of ignorance, but the solution is certainly not to abolish the whole system, as the Conservatives believe. In my constituency, the average pension credit is about £44 a week, and we need to try harder to find out why some people have not applied for it. They may have chosen not to apply—choice was an issue raised earlier in our debate.
Means-testing is a catch-up mechanism. The right hon. and learned Member for Rushcliffe talked about the condition in which his Government left the state pension system in 1997. He mentioned a pension of £69 a week, and said that affordability was key. I accept that it is important, but so is poverty. The Conservative Government placed too much emphasis on affordability, because they would not raise taxes, even though they were borrowing money like crazy and pushing up Government debt. To achieve affordability, they increased pensioner poverty, which has not disappeared. Figures on the extent of the problem have been bandied about today, but most observers—but not all, given what has been said in our debate—appreciate that in the past seven years, particularly the last four or five, pensioner poverty has been significantly reduced. There is still a long way to go, but the statistics show that the trend is moving in the right direction. That was not achieved deus ex machine, but was the result of conscious policy decisions by this Government that were put before Parliament and accepted before being enacted in legislation. I fully support those decisions to tackle pensioner poverty and abolish it if we can, just as I support our efforts to tackle child poverty. I accept that in both cases there is still a long way to go, but to say so or argue that we could have done more should not detract from how far we have come as a result of conscious policy decisions.
The expectations that people of my generation, who are in their 40s, have of retirement are unlikely to be fulfilled unless their attitude to saving changes markedly. We know people five to 10 years older than us, many of whom worked in public services, who retired on a full pension in their 50s. They benefited from an uprating to the sum they would have received at 65, as pseudo-retirement packages were used to disguise redundancies that were made in the 1980s and 1990s. People of my generation look at their older cousins and siblings who received such packages and believe that they, too, can retire in their 50s. That will not be possible unless my generation is prepared to save an awful lot of money.
Those of us who take an interest in pensions—I may hitherto have been in a minority of the population—expect that one's pension should provide two thirds of one's income in retirement: that is, two thirds of the income that one had while working, if employed. Nobody knows where that figure comes from—it may or may not be suitable—but it is treated as though it is written in stone. Personally, I am not sure whether I will need two thirds of my income when I am retired, but that should be my choice. The Government are at last, albeit belatedly, ensuring that age discrimination legislation goes on to the statute book by December 2006. I hope that this Government are re-elected in order to do that, because a Conservative Government would have a real problem with it as it is part of the Amsterdam treaty.
That will affect people's ability to carry on working if they choose to do so. The right hon. Member for Charnwood talked about retirement age. The average retirement age may rise, or may be rising now, but we need to separate that from the state retirement age. The Government have been clear—I fully support them on this—that the state retirement age should not go above 65. We are already starting to phase women's retirement age from 60 to 65. The state retirement age does not need to go above 65.
In today's climate, we must be aware that final salary schemes in the private sector will wither and die. The right hon. and learned Member for Rushcliffe adverted to that. They are sustainable in the public sector, although one has to look closely at their funding, but they are unsustainable, both politically and socially, in the private sector. A final salary scheme in the private sector says to the employee member, "You will have certainty as to how much you will get when you retire", but for many people, sadly, that certainty has already been done away with. Employees will increasingly wish to trade that supposed certainty for the certainty of a pot of money that has their name on it under a defined contribution scheme—or money purchase scheme, as they used to be called. That is part of the changing pensions landscape.
The question of compulsion looms because, according to Turner's excellent report, 9 million people are not saving adequately for their retirement. The reason he gives is that—as Labour Members, and probably those on both sides of the House, have long recognised but not necessarily translated into action—they cannot afford to save. That is not because they are wilful or profligate and want to blow all their money now. A tiny minority might fall into that category, but the vast majority cannot afford to save; it was ever thus. We already have some compulsory provision for those who are employed: national insurance contributions.
The Turner report talks about four alternative scenarios in relation to pension incomes in years to come: first, that pensioners will become poorer relative to the rest of society; secondly, that taxes or national insurance contributions devoted to pensions must rise; thirdly, that savings must rise; and fourthly, that average retirement ages must rise. As I understand it, it is not necessarily the case that only one will apply—there could be a mixture. For example, average retirement ages could rise at the same time as savings. Nevertheless, they encapsulate the kinds of choices that our society faces in relation to prospective pensioners who are mostly currently employed, although some are unemployed, self-employed or carers.
I will now—briefly, because I realise that other Members wish to speak—put forward an immodest proposal to sort out the pensions mess. [Interruption.] I know that my hon. Friend Mr. Turner has come in especially for this part of my speech. I am sure that my proposal will not command instant support, but it may prove to be a rolling stone that gathers moss.
The current private pension system is predicated on tax incentives for people to save for their retirement. If one asks the Department for Work and Pensions, as I have publicly done as a member of the Select Committee—it is in our proceedings from last year—what evidence there is that tax incentives actually encourage people to save, the Department replies that
"there is little evidence that tax incentives can significantly increase the overall level of saving".
It goes on to say that
"there is a degree of consensus in the research that there is little evidence of tax incentives increasing the level of savings."
To counterbalance that, the Department for Work and Pensions also told us in the Committee, following questioning from me, that although there was little evidence, as I quoted, that tax incentives increase the overall level of saving, they can significantly affect its allocation. So does an individual who is not one of the 9 million who cannot afford to save actually save in a pension fund or in some other form of savings? Well, tax incentives may direct savings into pensions.
The reason, as I understand it, that we as a society encourage people through tax incentives, even though they are not very efficient, to save for their retirement is that we do not want people living in poverty in their retirement. But those who are saving, by and large—not all of them—will not be living in poverty in their retirement anyway. The tax relief regime, which costs £14 billion a year in forgone tax revenue, is highly regressive, and I have to say to my Government as a progressive Government that we should not continue to support it. I have said it in the House before but it is worth repeating: half the benefit—that is, £7 billion out of that £14 billion—is received by the top 10 per cent. of taxpayers.
It is unlikely that more than one or two of the top 10 per cent. of taxpayers would blow everything deliberately and rely on means-tested benefits when they got older. They would be saving anyway for their post-employed life—presumably after the age of 65—just as many right hon. and hon. Members have savings outside their pension schemes. Because we are well paid, we can afford to save.
The other figure that shows the tax regime to be regressive is the £3.5 billion a year of forgone tax revenue—a quarter of that tax relief—that is claimed by the top 2.5 per cent. of earners. We can hardly get more regressive than that. My immodest proposal is to take it all off them, including all of us right hon. and hon. Members who are presumably getting tax relief, except perhaps my hon. Friend Mr. Purchase, who I think is already outside the pension scheme because he is above that age. Almost all of us are getting that tax relief. We do not need it. We are earning £57,000 a year, Ministers are earning more, and we are getting tax relief on pension contributions. That is crazy.
My immodest proposal will, I think, take a long time to gather enough support to go through the House, but I ask hon. Members to bear with me. If one added 2 per cent. to national insurance contributions by employees and 2 per cent. to contributions by employers, that would raise £14.2 billion a year. If one abolished the tax relief on pension contributions, which is coincidentally almost the same—£14 billion a year—that would make £28 billion a year.
The minimum income guarantee and pension credit cost £9.9 billion a year and the income tax relief, as I said, is £14 billion. If one got rid of means-tested pensioners benefits and put all those figures together—I am happy to go through them with the Minister—one could have a non-means-tested basic state pension, or a citizens pension as it has been called, not dependent on national insurance contributions or stamps, of £150 a week for a single pensioner and £250 a week for a couple. Other than that, the state could get out of the pensions market. Means-tested benefits such as pension credit could be abolished because the basic pension would be enough to live on.
The right hon. Member for Charnwood referred to choice, and I said that I would return to that subject. Under my proposal, people would have the choice of saving for a richer retirement than £150 a week, but if they choose not to do so, we, as a society, would say, "You will not starve in your retirement. You will get £150 a week." We can afford such a policy.
The Pensions Bill is going through Parliament, and the state is worrying whether eight regimes will become one or two—different parties count them differently. Under my proposal, all we would have to do is carry on regulating saving, which we have done with variable success. One would still expect people to save, but tax relief would not be available and savings would be regulated in a building society, stock market or bank, as they are now. However, the £1.5 million total fund, tax relief on pension contributions and the regulation of pension companies, which is necessary because of the tax benefits, would be cut, which would simplify the regime.
Pensioner poverty would be abolished on those figures. Yes, the cost would be great, but we are rich enough to afford a 2 per cent. increase in national insurance contributions for both employees and employers, which is double the amount that the Government successfully put through this House for the national health service in last year's Finance Bill. Leaving aside demography for one moment, a link with earnings rather than prices would be sustainable because the forgone tax revenue—£14 billion of almost useless tax relief that would go into the pot to pay for the policy—would otherwise rise with earnings, unless the saving rate dropped dramatically, and the 2 per cent. increase in national insurance for employers and employees would also provide increasing sums.
The structural question mark against the proposal is that demographic changes—I cannot remember the figures, but another hon. Member may want to provide them—mean that the ratio of workers to retired people will change adversely in the next 30 to 40 years, particularly as the baby boomers work through the system, as we are starting to.
On current trends, the projected population fall is 3 per cent. by 2050, but we could reverse that trend through immigration. There are enough people in the world—more than 6 billion—so we do not have to rely on the UK fertility rate. The history of the United States, along with that of other countries such as Canada and Australia, shows that net immigration is often beneficial for an economy, particularly—I realise that this point raises some questions—if the labour imported to work and pay for the older population is already educated. The demographic time bomb is not fixed, because it depends on millions of individual decisions by UK couples in the ensuing years. However, if the ratio of workers to retired people did not support my proposal, we could import labour.
I urge the Minister to examine my proposal. I realise that it has some political downsides, but it would provide simplification, get rid of means-testing, get the state out of providing tax incentives on private pensions, and provide enough for people to live on in their old age.
It is always challenging to listen to Rob Marris. I wish that he had not taken 35 minutes to speak, but at least he shows us old Labour philosophy: tax the rich and everything will be all right. We might as well go back to the days of 98 per cent. taxation, which I can remember. That was intended to solve everything, but it did not. It was interesting to hear Mr. Harris, who made a thoughtful speech that was worthy of his distinguished predecessor. However, both hon. Members made the mistake of claiming that means-testing was the best way of delivering to poorer pensioners.
All hon. Members are worried about the predicament of pensioners, who continue to be the poorest group in our society. Many are extremely poor and I share the concern for that specific group with everyone in the Chamber. The poorest pensioners also tend to be the oldest and there is a good reason for that. Those who are 75 and older lived through the last war and grew up in the post-war austerity period. People were unable to save for their old age then and we therefore especially need to look after that group. Pensioners who are over 75 should get a higher rate of pension than the rest of us because they could not save. The younger ones—people of my age who grew up in a period of greater prosperity—have been able to save for our retirement. If we have not done that, it is our fault. However, I repeat that we should especially look after pensioners who are over 75.
I disagree with some hon. Members who believe that we should have a higher rate for those who are 75 and over—
I should like to finish the point.
I disagree with hon. Members who believe that the higher rate for those who are 75 and over should roll on for ever, because that would begin to include people, like most of us, who do not need it. The higher rate should be fixed for those who were born in 1930 or before because it would thus be targeted at a special group. I shall give way to the hon. Lady.
That was prescient.
We also need to look after and provide special treatment for other groups, who, for specific and special reasons, may not have been able to save for retirement. Mr. Field mentioned them. However, I disagree with the hon. Members for Wolverhampton, South-West and for Glasgow, Cathcart and, indeed, the Chancellor, that means-testing is the best way in which to provide relief for the remaining poor. It is not.
Of course, the fact that universal benefits go to everybody means that a few very rich people benefit disproportionately. However, the tax system already deals with those people. If the hon. Member for Wolverhampton, South-West feels even more aggressive, he will probably want to increase their overall tax rate. The position can be tackled through the taxation system; such people pay a lot of tax in any case.
Means-testing has two specific problems. Many people do not go through the tests—approximately 2 million people currently do not receive the benefit. That is a serious number, despite the Government's best efforts—and I accept that they have made determined efforts to get people to claim. There is also a profound disincentive to save, which arises out of means-testing. We do not want that downside. Means-testing is expensive and requires many civil servants to administer it. If we scrapped the means test, I doubt whether the "wasted money", in the terms of the hon. Member for Wolverhampton, South-West, that goes to the very rich would even approach the cost of conducting the means test, with all the indignity that it involves for those who have to undergo it.
However we dress up the means test and call it an entitlement, it remains an indignity and I therefore do not believe that it is the right way forward. We should have a non-means-tested increase in our pension provision for everybody, to an amount that gives everyone reasonable dignity in old age, and then provide special help for special groups—the very old and others.
I understand the logic of the hon. Gentleman's argument. At present, however, the basic pension credit is at £105. Is not the logic of his argument therefore that the basic pension would need to increase to £105 before there would not be a disincentive to save?
No, that would not follow precisely, because if we were making special arrangements for special groups not everybody would need to go up to that level. Of course, such a level is being achieved already through the various benefits that are available. All sorts of other benefits are available for those on low incomes. If we add all those up, the money that we would save by not having all sorts of other special benefits—
The hon. Gentleman seems to be implying that the basic state pension is a universal benefit. We know that it is not—1.5 million people do not have complete national insurance contributions and do not get the basic state pension. What he proposes, therefore, misses out that whole group of people. The pension credit and income guarantee are particularly useful for that group of people, who are often on lower incomes than the basic state pension, and who would continue to need to be means-tested anyway.
The hon. Lady is absolutely right, and I have said that there are other groups to which we would need to make payments. The people who would not otherwise get anything would have to be included in those payments. The point is that we do not need means-testing to do that.
We should also consider the encouragement of pension saving. The hon. Member for Wolverhampton, South-West says that there is no evidence that tax relief encourages people to save. Human nature would lead us to believe otherwise. However, tax relief is not necessarily well targeted at the moment, and perhaps I can refer to that later.
On the problems with private sector pensions and pension funds—at this point I declare my interest because, as hon. Members know, I chair the parliamentary contributory pension fund and I am also chairman of trustees of the pension fund for the People's Dispensary for Sick Animals—[Interruption.] No, I do not think that it is a similar organisation.
A lot of people are making all sorts of allegations as to what is the cause of the private pension crisis. If we go back only about seven years, I remember the Chancellor saying what a wonderful pension system we had, how well funded it was, and how it could easily withstand his £5 billion a year grab. At that time, it did look pretty good, although some underlying problems were about to surface. But the fact was that we had a pension system that was the envy of most of the rest of the world, and it looked very well funded. Two things were wrong with that. First, the investments, which were largely in the stock exchange but were also elsewhere, were growing at an unprecedented rate. People thought that the stock market boom would go on for ever. Why they should think that I do not know, because stock market booms never have done previously, and never will in future. They will always be cyclical. Nothing that any Chancellor, however clever, can do will alter that sad fact.
When the stock market was high, pension funds, including our pension fund and the Treasury, were all getting valuations showing massive surpluses. Employers said, "Oh good, we won't need to put as much money in. We will take a contributions holiday." What my party should have done when it legislated in 1995, and what this Government should subsequently have done, is to say that such pensions holidays should not be lawful. If the scheme actuary says that a certain amount will be needed over time by the employer and the employee, where the employee makes contributions as well, that is how much should go into the fund. However big the temporary surplus, the contributions should continue, assuming that the actuary has got his sums right, which has not always happened.
Had people continued with the sums recommended by their scheme actuaries as opposed to looking at how much was in the piggy bank and thinking that it would be enough for all time, schemes would not be in the trouble that they now claim to be in. We recently had to vote an extra £25 million into the Members' fund, despite the fact that the previous valuation had shown a massive surplus. In fact, that was only a fraction of the saving that successive Governments of both parties have made in failing to put in the amount recommended by the scheme actuary. They thought that the public were getting a good deal, but in the end all these chickens come home to roost.
Successive Governments have created a further problem in attempting to meddle with the investment policies of those charged with looking after the funds. I fundamentally disagree with the structure of the minimum funding requirement introduced by my own party in the Pensions Act 1995. I also disagree with the way in which regulators subsequently, even today, have tried to move people in certain directions of investment. The general trend, fed by the actuarial profession, has been to say that the only safe place for pension money is in bonds—if schemes are in trouble, they should put more money into Government bonds.
Yes, when bonds are at the peak of their price and shares are at the bottom. Could anything be madder? Do we normally sell things that are on the floor and buy others to replace them that are on the ceiling? Not if we have any common sense—but that is what the regulators have been urging pension funds and the insurance companies that provide them to do. They have all had to restructure their portfolios in a way that is contrary to common sense if we look at the market as a whole.
Is not this a perfect example of why our pensions are far too precious to leave to the vagaries of fluctuating prices and markets? The stock market mechanism may allocate funds to deserving companies very successfully, but when it comes to our pensions, we should really consider what we could do in a safer, perhaps state-funded way.
I shall come to that in a moment, if I may.
Our system of regulation has of itself been pernicious. With a falling stock market, the regulators told people to get rid of their shares and buy bonds. What happens in that situation? The price of the bonds goes up, the yield from them goes down and the regulator then says that we have to buy even more bonds and sell more equities, and money is sucked into a black hole with ever decreasing returns and an ever increasing price for bonds. The cost of this is to aggravate the situation in the stock market, as people are selling equities that are already falling, forcing their price down still further and causing regulators to urge that more bonds be bought. It is the policy of the insane—clinically insane.
I am conscious that I am now beginning to intrude on other Members' time, so I hope that my hon. Friend will forgive me if I do not.
We need a far more sensible, broad spread of investment. Although they go up and down, the graph over 50, 60 or 100 years shows that equities continue to go up and are the best form of long-term investment. The difficulty has been that people have taken a short-term, snapshot view. When things are good they think them too good, and when they are bad they think them too bad. What we need is a sensible system of regulation. Sadly, we have not had that from previous Governments or from this one.
We must now encourage more people to save, and I will return to how, in my view, we should structure such tax relief as the hon. Member for Wolverhampton, South-West might be prepared to accept—or not. The problem—he correctly identified it, in a way—is that most of the tax relief goes to the richest. That happens because of the way it is structured. If tax relief went instead to everyone, but principally to those at the bottom of the pile, that would be a much better bet. Some people will never be able to afford to save; others will, but modest amounts. The big problem is persuading people who do not have a lot of money to save something. We can go either for compulsion or for giving them an incentive to save.
Although I applaud some of the well-thought-out initiatives of my hon. Friend Mr. Willetts, they do not deal with those people who make very modest savings, find themselves locked into buying an annuity and then pay tax on the small amount of additional income that they managed to save. Concentrating tax relief on the lowest portion of income—for example, by making the first £4,000 tax-free—would be of significant benefit to poorer savers and would give them an incentive to save. By applying the relief that way around, we would make a difference and provide a real incentive for poorer people to save. At the same time, we would remove quite a lot of people from means-tested benefits—if they are retained—so instead of having to come cap in hand to the state for their money, they would have their own. That would give much greater dignity to poorer pensioners and provide a real incentive for those poorer workers who have had the courage to save for their old age.
It is a privilege and pleasure, as always, to follow Sir John Butterfill. He made a thoughtful and interesting speech that has given us real food for thought. His suggestions on taxation and saving incentives were perhaps more progressive than even Labour Members sometimes dare contemplate, and I congratulate him in that regard.
I first heard about what has become known as the demographic time bomb in the mid-1980s, when I was examining high unemployment and the effects of unemployment. I did not do very much about it then, other than to attend a few conferences here and there and moan a lot. In 1995, I wrote a paper on unemployment and its effects. I also developed my thinking on the relationship between work and people's ability to save for their pensions, and the relationship between the age at which one might become unemployed, and what might happen during the rest of one's life. I considered such issues from the point of view of people in their mid-30s and 40s—in other words, those who were in work, or who could be in work. At that time, unemployment was very high.
The correlation between employment and people's ability to save for their retirement is pointed out in the Turner report. Unlike others, I have not scrutinised the report in detail. I congratulate those who have, as it involves quite a bit of reading. In fact, I have given it only a cursory glance, and it certainly deserves a great deal more attention than I have yet been able to give it. What I want to bring to today's debate is how my own thinking has developed over the years and how what is in the Turner report accords with my own experience. Something that we should consider—I have not so far found it in the report—is not just the relationship between work, retirement and our ability to save, but the other social changes that also impinge on people's life choices and what they decide to do.
When I first became aware of the problem—and, still earlier, when I was a young woman having my own children—people tended to start families early in life, but the decision to start a family is now taken much later. Those decisions affect people's ongoing life choices, their ability to save and the subsequent decisions that they take. We also find that young people—I certainly include my own family—want to stay at home for considerably longer than they used to, so that their mothers can continue to do their ironing and washing and can save on their behalf while they go out and have a very good time, thank you! I make no complaint—honestly, son! It is a fact that young people stay at home considerably longer than my generation would have considered doing. I recently heard of a son saying that he was not yet ready to make a commitment—and he was only 28.
Those sorts of considerations and social changes will obviously impact on people's decisions about their future lives. Many younger people are not thinking about what they may be doing in the immediate future and they are certainly not thinking in the longer term about what to do for their retirement. That is the group of people who worry me most. I believe that we have spent much time, quite rightly, thinking about people who are pensioners today and how we should provide for them. Some people were left out of the pensions decisions. Before the hon. Member for Bournemouth, West leaves the Chamber—
I want to agree with the hon. Gentleman on another point—that decisions about pension holidays reduced the available funds and affected some of the people in the greatest need. He made a genuine and fair point that we should consider using a particular date or time rather than a particular age as the basis for pension payments. His points were well made. We will all be affected—even those 21 and 28-year-olds that I mentioned earlier. It is right to say that we owe the older generation a great deal and that they should be cared for.
I disagree with the hon. Member for Bournemouth, West on one point. Adopting a targeted approach to pension provision for those who were unable to provide for themselves was the right and proper thing to do. I recall encountering old age pensioners in my constituency who were blue with cold. That was always wrong, and I am pleased that I do not have the same experience now. Some of my pensioners—including those in the age group that the hon. Gentleman mentioned—now tell me that they have never been so well off. I am pleased about that, though it does not mean that they could not be better off or that there is nothing more to do. What I fear now is the expectation among young people that the old-style pension schemes will continue for ever and that everyone of pensionable age will somehow be all right.
That leads me to a completely different conclusion from that of my hon. Friend Rob Marris. I believe that his socialist analysis of pension contributions misses out half the equation. The analysis was always "from each according to his means, to each according to his needs", but my hon. Friend is dealing with the needs and not the means. Let me explain the main problem with his analysis. With all rights must come responsibilities, so where are people's responsibilities to contribute? We already have a generation of young people who have not yet realised the significance and importance of providing for their own old age. They should already be doing so.
Simply saying that we can tinker a bit more with the state system is not enough, though I want to be fair to the Liberal Democrats, who have given a lot of thought to their idea of a citizen's pension. Some members of my own party have done the same. I think that there is a problem with that approach, however, and it has to do with responsibility. It is a question of means: how do we draw all that money together? That flaw is present in all the ideas presented today. We could go through all of them with a fine-toothed comb to work out whether all the sums add up, but even then what I perceive to be the central question—each individual's responsibility to contribute to state or to private provision—would not be resolved.
Does my hon. Friend agree that guaranteeing everyone a basic state pension would mean that the responsibility that she has described would consist of people providing extra income for themselves? She has said that people now expect a much higher standard of living in old age than a basic state pension could ever provide.
I have considered that proposition a lot, and my difficulty with it is that the present national insurance contribution system has become the consensus on which our pensions system is built. I dispute the earlier assertion that everyone has a fund on which they can draw, but people believe that the national insurance system is fair. They see a link between the amount contributed over a lifetime and the size of the pension received at the end of the process.
I have always felt that the national insurance contribution system was somewhat misnamed, as no fund actually exists under what is essentially a pay-as-you-go system. The present system has many flaws, and I have even toyed with the thought that it should be discarded, but its great value lies in the relationship between contribution and recipient. Over many years, people have grown attached to the perceived fairness of the system. We must be careful if we are going to play around with that connection.
I am very drawn to the proposal by my right hon. Friend Mr. Field that we should convert the present pay-as-you-go system into a funded scheme. That could offer a way forward that people would accept, as it takes with it the most important parts of the current system, on which the consensus has been built. Under my right hon. Friend's plan, each person would be responsible for contributing to the state pension, and for making any additional provision that he or she may choose.
I want to press the hon. Lady a little on this matter. Will she expand on the fate of the national insurance contribution? Does she expect that all of that contribution would be transferred into a funded scheme, or only a proportion? If the latter—and we must remember that national insurance pays for employment and sickness benefits, among other things—would a funded scheme such as she has described be sufficient to provide a comfortable retirement?
No, I do not believe that it would be sufficient. The hon. Lady makes a fair and proper analysis of the current national insurance scheme.
One problem with the proposal from the Liberal Democrats is that it would not be possible to devote funds to the NHS, for example, as we would not be able to see where the funding for a universal citizenship pension would come from. I therefore believe that only a proportion of the national insurance contributions could be used in the funded scheme that I have described, and that such a scheme would have to be carefully costed. It would take time for the funds in such a scheme to be built up to a sufficient level, and the scheme would not be able to provide sufficient funds for people to live on without additional income from some other source. I remind the House, however, that that is the case with the present state pension, which has only ever been the foundation stone for the rest of the pensions structure. It has never been enough for people to live on with no additional income, and anybody who did live in such a fashion would certainly be pension poor.
Nobody should be on that level of income, and no one needs to be. That is one of the messages that should emerge from this debate today. Although we must always make sure that people entitled to a benefit receive all of it, to deal with that argument simply by denigrating the benefit will not take us any further either. We need confidence in whatever system emerges from our lengthy considerations of both the state pension and the private pension system. The consensus that was built up lasted for many generations. It was built up before the second world war, and after the war a clear vision for the future emerged. Everybody knew where they stood and the system that was introduced stood the test of time. Whatever we do now must stand the same test of time as that system. I do not want to discard what was good in that system in one go. Instead, we should see how we can adapt and build on that system for a future pension scheme that is robust in the future.
Does my hon. Friend really believe that there has been a consensus? We have seen different pension Bills introduced by the parties after every election. Does my hon. Friend want to see a genuine consensus, instead of the posturing that is going on between the three parties before the general election? The eventual winner will make a decision that will be overturned before it reaches the end of its lifetime of some 30 years. There is a real need for a consensus, but we have not had one yet. Should we not use this debate to ask the three parties to agree on a consensus?
I stand suitably admonished and I shall clarify my point. The consensus is outside the Chamber. People agreed that the system was fair for decades. In the Chamber, we will always have political posturing, but we also have the possibility of a growing consensus. As we look forward to the next review and presentation by the Turner commission, we should reach some agreement on considering its findings together. The other parties claim that the Government are tossing the issue aside until after the general election in order to avoid making a decision, but this is far too important an issue for such an approach.
That approach has been possible in the past with other Government policies. I do not know if I dare mention Dearing, but the House came to a consensus view that Dearing would be considered after an election. Everyone signed up to that, but not everyone was happy with the interpretation after the event. In any event, it was possible for the House to consider a policy issue collectively. This is another issue that is important enough for the House to take that approach again. We should be able to take the next stage of Turner, together with the details that have been presented so far—they provide a good analysis of how we have arrived at where we are—and look at some clear pointers for the future.
Mr. Dorrell, who is not at present in his place, simplified the conclusions in the report neatly and elegantly. The report does not go through all the various social changes that affect decision making for families, but it does point out the glaringly obvious about the way forward. We must look at the age of retirement, the contributions we make privately or the contributions we make publicly. All of those factors interact with each other to provide a conclusion about the way forward. At this stage, we will obviously have a variety of views about how the cake can be carved up sensibly, but at the end of this debate it would be useful if the House could come to the common conclusion that Turner is a way forward. It has provided a good analysis as a basis for our decisions, as well as some clear pointers for the way forward.
We should say not that one of those three factors will be the cornerstone for pensions for decades to come, but that all of them will. In my report in 1995, I considered an idea that was popular at the time—I did not think of it all by myself—the flexible decade of retirement. We no longer need to talk about flexible decades, but we should look at flexible retirement. Why do we need a fixed date? Obviously, in respect of provision, we need a point at which entitlement should start, but it does not have to start on a fixed day. We could extend it a decade or so into the future so that people can make choices.
The crucial point, however, is that those choices must be informed, and the ability to make such choices has been severely limited for some time. The Government made an attempt to consider how we could provide people with information about their national insurance contributions—how much had been accrued and what that meant for their pensions—but we need to go further. We need to be able to inform people early in their lives not only about their national insurance contributions but also about their contributions to private, personal pension schemes. They need to know what it would mean if they retired at the age of 50, 60, 70 or 80, if that is their choice.
People need to know what their decisions will mean, when they choose between taking a holiday in Spain or putting a little more in their pension fund. Do they really need the holiday, especially if it is their second one that year? At present, some young people decide to take that second holiday in Spain, and I urge them carefully to reconsider such decisions. A small extra contribution to their pension fund now could give them extra comfort for a year or so in their old age. As they sit on the beach, they might not realise that they could be doing the same thing at the age of 70, instead of sitting over a two-bar fire wondering why they took that extra holiday when they were 28.
People need to be making these real-life decisions. Some are doing so already, but they are making some mistakes and we need to give them advice. I congratulate the Government on starting to think about how we can put money into a fund. At this stage, the Government are looking to trade unions to give that advice. There is nothing wrong with that, but I am concerned that some employers do not yet have trade unions on their premises. I hope that the trade union movement will sell the idea of pensions advice as a means of recruiting more members.
Such advice is certainly necessary so that people can make choices. I hope that they can make sensible, reasonable choices to maintain themselves. If they do not, compulsion will have to be the way forward. We should then have to make decisions a decade from now, when a decade's fewer people would be in a proper pension scheme, with a decade's less contributions. That would be folly.
As Chair of the Select Committee on Work and Pensions, I am privileged in that I have the chance to get access to Ministers and to discuss these matters more often than other Members. I realise that colleagues want to contribute and that it is an official Opposition day, so I shall save my speech for another day and quickly make a couple of points.
The debate has been interesting and fascinating. It is the first time I have heard socialist dialectic discussed—by the hon. Members for Colne Valley (Kali Mountford) and for Wolverhampton, South-West (Rob Marris), both of whom think about such things carefully. That was a first for me and I have been a Member for more than 20 years. It was certainly a good thing.
I apologise to Mr. Willetts in his absence for being a bit prickly in an earlier intervention. Earlier this week, when I heard that a day was to be devoted to pensions, I was overjoyed. I thought that a full-day's debate would be a good chance to discuss something philosophically and strategically different. We have a new Secretary of State and a new opportunity, with the most comprehensive report that I have ever come across. It is certainly not the first report on the subject but it is the most comprehensive, drawing together all the evidence.
The report may not tell those of us in the Chamber who have studied the issue for a long time much that is blindingly new, but it brings the information together most effectively. It also gives the public the chance to enter the argument. We all know too much for our own good and we need to be very careful about that. Explaining pensions in a way that people can understand is difficult.
Talk of £57 billion does not mean an awful lot in real terms to ordinary people. Screaming headlines about black holes here and there, huge sums and arcane terminology turn people off. People in my constituency are already reconciled to the fact that they must work for longer. That is absolutely inevitable, so we must be realistic about that.
The extent of change is shown by what has happened in the course of one generation—my lifetime. My father was a railwayman all his life. He went to work at 16 and stopped at 62, after some bad health. He received a railway occupational pension and then died. My son and heir has just finished two rather expensive Glasgow university courses, at the hands of his parents, and has started work at 24. He works in the financial sector, so he is planning to retire at 55, and he will then live for another 30 or 35 years. In the space of one generation, that is a huge change, and we must respond to the extent of it when trying to make policy now for the next 50 years.
I do not care who is to blame for some of the decisions—some good, some bad—that have been made, but one thing is common to them: most of the policies were piecemeal; they were responses to the things that were going on at the time that people felt had to be addressed. Certainly some of them had to be addressed. I think that some means-testing, which is an important element in all this, was essential and that the Government had to introduce it to cope with the problem, but whether it is safe to found the policy for all time coming on that—I was pleased to read the reported remarks that the Secretary of State for Work and Pensions made at the party conference—is a very different and separate question.
This is an important opportunity. Ministers can serve the House and the debate best by keeping an open mind. The Secretary of State's response to my hon. Friend Mr. Webb is an important sign of that, and we and, I hope, the rest of the House will respond to it, as this is an important debate.
We also have to use the election, although its timing is uncertain. The electorate have something say about the issue. We must try to get the job done of simplifying the argument into understandable concepts—I believe that Turner does so—such as whether the solution lies in more tax, longer working lives or greater savings. People can understand discussions like that. We politicians—Mr. Clarke nearly got there during his interesting speech—should be explaining our priorities by theme, schematically, almost in terms of the philosophy of pensions. We should be explaining where we want to be in 50 years, which of the three elements to which Turner has adverted we want to use and what priority we should give to them.
Of course, parties must have manifestos, and it is too late to change them. Our manifesto is already more or less cut and dried—I am not giving away any state secrets about that—and I guess that so is everyone else's, more or less. I am not daft or naive enough to think that there will be no party political exchange and party political advantage sought in the debate that we must have, but we must try to get the public engaged in a discussion that is meaningful to them and that can feed back into our debate and the decision making that will flow from the election.
My second point is the need for simplification, simplification, simplification. The job has been started. I did not serve on the Committee that considered the Pensions Bill, and I am grateful for that. I am also grateful for the content of the Pensions Bill in so far as it does simplify. I recognise that it is a good start, but it is only a start. If Ministers are to offer the best service that they can on this subject in the fullness of time, more work should be occasioned in that direction. Inevitably, trying to produce a system that people can understand, discuss and make reasoned choices about is an important part of that question.
This debate has been useful and I congratulate the Conservative Opposition on initiating it. I hope that we will have more like it, and I look forward to the Turner report informing such debates positively in future.
I, too, am pleased to take part in today's debate. Like the Chairman of the Select Committee on Work and Pensions—I keep thinking of him as my right hon. Friend—when I saw the motion on the Order Paper, I thought that this would be a chance to debate the future of UK pensions and something that would be robust, intellectual and possibly even provide us with some new thinking about a way forward, around which all hon. Members could perhaps begin to build consensus. This is something for the long term; it is not a quick fix.
I, too, was disappointed by the opening speech of Mr. Willetts. It was party political knockabout. I appreciate that that is part of the style of Opposition day debates but the day after the publication of one of the biggest reports into the structure of, and what is happening in, the pension system is the day to put such arguments aside and to consider what we might do for the future. We should consider the issues with which we should engage. Many hon. Members have begun to float ideas and, in the best possible sense, there has been disagreement even among Members on the same side as they have tried out new ideas. However, there has also been consensus across the Floor.
I commend the speech made by my right hon. Friend the Secretary of State, which was thoughtful and laid out the parameters of what we should be discussing. Much as it pains me to say something nice about the Liberals, Mr. Webb also made a thoughtful contribution to the debate.
The pension credit has come in for much criticism today, but it is worth remembering that it was introduced to deal with the specific problems that we inherited when we came to power in 1997. Old age pensioners were dying from hypothermia or going blind because they did not want to spend their money on eye tests. Some pensioners were struggling to feed or clothe themselves or even just to live. The Government had to do something about that, so we introduced the winter fuel allowance, which—thank goodness—means that we do not hear scary statistics every winter about the number of pensioners who have died because they were frightened to put a coin in the meter.
Pensioners can now go to high quality shops to buy their winter clothing if they so desire, because we have given pensioners the money to make such choices. I am sure that not all pensioners always use their winter fuel allowance for fuel, but that is their choice.
I visited a pensioner's house in a multi-storey block of flats at the weekend. A new combined heat and power system has been introduced, and that has kept the costs of the heating down. Previously, the block had electric storage heaters that were incredibly expensive to run, but this pensioner will now be able to heat her house and have money left over from the winter fuel allowance. I thought that "Heat your house for free thanks to this Labour Government" might make a nice headline for the next election. That, after all, is what has happened.
We also introduced free eye tests for old age pensioners to remove their fear about having to spend money to have their eyes tested. We introduced the pension credit, and I am extremely proud of it and what it has done. I spent the summer recess going round most of the sheltered housing complexes in my constituency. As with the experience of my hon. Friend Kali Mountford, most of the pensioners I spoke to are incredibly and surprisingly happy. They were as nice to me as they have been in the seven years since I was elected. That said, the summer in which the basic state pension increased by only 75p was a rough one, but this summer I thought that the Government were getting somewhere.
Hon. Members on both sides of the House have agreed that a certain level of means-testing is essential and that it will play a part in any future system. I have the pleasure of serving with the hon. Lady on the Work and Pensions Committee. Is she happy with projections that some 83 per cent. of pensioners will end up being means-tested if we continue with current plans? It is the extent of means-testing that worries many of us.
It is interesting that the phrase "means-testing" seems to be thought of as such a derogatory term. I am interested in what pensioners are entitled to. If lots of pensioners are entitled to lots of money, I do not have a problem with it. I find it quite difficult to argue against a system under which pensioners get extra money for spending half an hour on one phone call every five years.
A lady whom I met this summer has been £78 a week better off since October 2003 as a result of the introduction of the pension credit. She did not receive that money before because although she received only £40-odd from the basic state pension, she had £17,000 of savings, so she was over the eligibility limit for the minimum income guarantee. Her savings were disregarded under the pension credit, so her income more than tripled. She told me that she would quite fancy a nice comfortable chair and I said that she could afford to buy one now because she is receiving extra money and because she feels that her savings are safe. That shows how the pension credit works in practice.
I am sure that the hon. Lady agrees that there are several ways in which we could get money to poorer pensioners. However, although I am not demeaning means-testing per se, will she comment on the unintended consequences for savings and incentives to save of applying it to such an extent? That is why many of us have deep worries about the future.
The hon. Gentleman has got a point, so I shall return to incentives when I address the wider debate of how we can encourage tomorrow's pensioners to save for their future.
One thing worries me about the official Opposition's position against means-testing: they seem to think that it is all right for people who are very poor to be means-tested, but that it is somehow demeaning to people with any money. If it is demeaning to people with some money, it is also demeaning to the very poor. The pension credit allows the poorest people to feel part of a wider spectrum of people who qualify for it, which perhaps takes some of the stigma out of the system. Why should it be all right to means-test people who are poor, but not those who are slightly better off?
Perhaps the biggest element of means-testing carried out by the state is the calculation of our taxation. Income tax is a form of means-testing. I am fairly sure that the official Opposition's position is not that means-testing is okay when the Government are taking money from someone, but not okay when used as a mechanism to give money to someone, yet that appears to be what they are saying.
We are demonstrating today the extent to which the debate on pensions has moved on. We are discussing today's pensioners because they are doing much better than before. Elderly women say that they are much better off than they used to be, and they often say that they are better off than they were during their working lives. One lady told me that all that she could afford when she was working was a bit of sausage meat, but that thanks to the pension credit she can now afford a bit of frying steak.
My hon. Friend rightly points out that pensioners are better off than they were under the previous Government, but if the Conservatives were to abolish the pension credit system, surely the worry is that people on that credit would experience a freeze for 20 years while the basic pension caught up, so real poverty would return in the meantime.
That is an enormous concern because, again, the poorest pensioners will have their income frozen. Those are the very pensioners who, for the first time in their lives, feel that they have enough of a disposable income to live comfortably. Their generation is not frivolous. They do not spend their money on sirloin steak. My constituent was buying frying steak. However, her expectation is that she will have a comfortable retirement, which is how it should be.
If we are to reform the pensions system, which I hope will come out of the Turner report, and seriously tackle the problem of women and pensions and poorer pensioners, we have to ensure in the meantime that the pension credit keeps it value. However, I accept that we may move away from that some time in the future because most things are not set in aspic. The pension credit exists to deal with the problem that has resulted from 100 years of a pension system that was structured to deal with working men with a dependent wife. We have to start looking at how we might want to restructure pensions. That is a long-term business and we have to consider long-term aims. I am glad that the debate has moved on to tomorrow's pensioners because it is important. The debate is not just about today's pensioners.
People in this country always associate pensions with old age. I have just come back from Australia. I was confused for the first couple of days when they kept talking about unemployment pension and disabled pension, but any welfare benefit there is called a pension, so it does not have the same association with old age. Whenever we talk about a pensions debate, we think that we mean the pensioners of today. The Government have done extremely well in dealing with the anomalies in our pension system and with the pensioners of today, but the real challenge is how we make provision for the pensioners of tomorrow, which all Governments must do. We need to debate that and reach some consensus.
It is simplistic for any political party to say that by merely increasing the level of the basic state pension, we will solve many of the problems. Many of them exist because of the structure of the existing state pension. It does not take account of women who have not worked—perhaps because they have cared for children or elderly relatives or have been dependent on their husband. The state pension system is based on the dependency of one person on another.
The system is unfair. A married man with a non-working wife pays the same national insurance contribution as an unmarried man or an unmarried woman with no dependent spouse. Yet the married man gets 160 per cent. back from the state, whereas a single person gets only 100 per cent. That was fine when most people were in marriages with a dependent spouse, but that is not how society is structured today. It is not how we live our lives. People have more than one relationship. Women are in and out of work and have their own pensions. Indeed, the married man whose wife has worked and has her own pension only gets 100 per cent. of the basic state pension, not 160 per cent. So the unfairness is not about married men, but dependency. We have to consider ways of breaking that dependency to ensure that people have a basic state pension in their old age to which they are entitled by dint of the fact that they have lived for 60 or 65 years. Perhaps this is the time to talk about whether we should raise the state retirement age.
The hon. Member for Havant said that there was consensus between the CBI, the TUC and other bodies about what should happen with pensions, but there is not. The CBI thinks that the retirement age should be raised to 70, but the TUC disagrees. The TUC thinks that the private and occupational pension sector should include an element of compulsion, but the CBI does not. There is therefore an absence of consensus on significant areas of policy. I agree with the Secretary of State that the retirement age should remain 65 for the foreseeable future, as it would be nice if most people worked until they 65. My mother retired at 60 and my father at 65, but they are in the minority. Most people retire much earlier, and I was frightened to learn that one of my friends has just retired at 50. Other friends are looking forward to retirement at 55. I hope that they will go on to do other things, but we need a pension system that allows people to retire from their main job and take another without a reduction in their pension. We must provide the flexibility and incentives to encourage people to work longer, as has been said. If everyone knows that they will receive at least the basic state pension they will have an incentive to save for their retirement.
With the best will in the world, the basic state pension is just that—basic. Hopefully, it lifts people out of poverty, but pensioners on the lowest level of pension credit of £107 are still living in poverty. The younger generation, however, want much more than the basic state pension and want more than any Government can afford. They expect to retire on the same disposable income that they enjoy while working. Even the most generous pensions are only two thirds of people's final salary, but when someone retires they pay less tax and do not have to pay contributions towards national insurance or their pension. They have probably paid off their mortgage, so the money at their disposal is not very different from their net income after housing costs and other expenses when working. To achieve that income level in retirement people must make extra arrangements on top of the state provision. Younger people quite reasonably expect to receive the income that their parents and grandparents enjoy in retirement, but they will not do so unless they are kicked into the realisation that they must start making provision now.
This is a big problem and needs a great deal of discussion. I am relaxed that the next phase of the Turner commission will not produce a report for another year, as there may be an election in the middle of that period, when there will be a lot of party political point-scoring. Pensions should have been the subject of an investigation 20 years ago.
I will be very proud of my Government at the next election when they start to answer these difficult questions and to equalise the pensions of men and women. As Sir John Butterfill said, we should not have special groups for whom we have to make special allowances. We must ensure that everyone has at least a basic level of dignity in retirement and a basic pension, as well as anything that we can do on top of that to fulfil their expectations of higher standards when they retire. It is a great challenge, but I am sure that this House and the country outside are up to it.
We have had an extremely interesting debate and we have before us an extremely interesting report. The report is an authoritative source of facts that will be the locus classicus of discussions on this matter for many months to come, and the debate will prove to be an authoritative and much-referred-to source on the range of arguments that have been exchanged.
I want to make a few brief remarks under three headings. First, I shall comment on the responsibility for the situation that we are now in, because the Government are getting away with it a little too lightly; secondly, I shall discuss some of the new ideas that have come out of the debate; and thirdly, I shall make a few suggestions of my own.
There is no doubt that the present situation represents a crisis—that emerges clearly from the pensions commissioner's report. It is actually a double crisis, which is the worst of all possible crises because one reinforces the other. The first crisis is that of occupational pension schemes, particularly defined benefit schemes, which were once the pride of this country. Only seven years ago, people felt very confident about the future of those schemes, but since 1997, as the report states, 63 per cent.—virtually two thirds—of existing schemes have been closed to new members and not a single new one has been opened. That is a disastrous sea change in pension provision. Our occupational pensions, which were the envy of so many places around the world, are now in crisis.
The second crisis is that of the collapse of the savings ratio. That, too, emerges clearly from the report. Those two crises reinforce each other in undermining our people's prospects for a secure retirement. It is a very serious situation.
The Government have tried to evade responsibility for all this by saying that it is caused by the strains placed on pension schemes by increasing life expectancy or by disappointing stock market performances over the past few years. They say, "It's nothing to do with us, guv; it's not the fault of Gordon Brown's pension tax." That argument will not wash. We have had steadily increasing life expectancies over the past 50 years or so during which the occupational pension movement gained strength. Figure 1.1 of the report is a graph showing that the curve of rising life expectancies between 1970 and 1990 was distinctly steeper than it has been since 1990 or is projected to be over the next few years. Occupational pension schemes have to face a greater hurdle in terms of dealing with increasing life expectancy and actuarial risk than they did over the past seven years when many of them were closed to new members.
The fact that the stock market has not behaved very encouragingly over the past few years is a problem, but we have experienced far worse stock market crashes before. The occupational pension movement managed to survive the appalling stock market crash of 1974 as merely a blip in its history. Equally, the 1987 stock market crash was a good deal more serious than what has happened over the past few years. I have to tell the Minister that those excuses will not wash.
As for the collapse in savings, the key factor is undoubtedly means-testing. There is nothing new about my saying that—I have been saying it since 1997. I recall saying, when I was pensions spokesman at the beginning of the last Parliament, that the Government could not get away with increased means-testing. They were means-testing everything that moved. They means-tested incapacity benefit, widows benefit and support for students. All sorts of benefits that previously depended merely on a contributions record were suddenly means- tested. I remember saying at the time that that could not be done without having a devastating effect on the savings rate.
On pensions, I remember saying in the Chamber some six or seven years ago that a financial adviser could not with integrity advise anybody on less-than-average earnings to save for a pension.
I will not give way, if the hon. Gentleman will forgive me. We have only a short time available.
I made the calculation then that a person would need to save £80,000 by the time of their retirement, whether in a pension fund or elsewhere, in order to get nowhere—in order for all that money to be wasted, because the £80,000 would produce an income of £4,000 or £5,000 at the then annuity rates, which would mean that the person would have to forgo all the means-tested benefits, such as housing benefit and council tax relief, not to mention personal care and so on. Saving £80,000 would require a heroic effect—I think I used that term all those years ago—from someone on low earnings, and the money would be wasted. Think what £80,000 could buy by way of increased consumption in the course of a working life.
It follows mathematically that if someone saved £160,000 they would end up with half the rate of return that the market would require, for the sacrifice of saving and the risk of saving. It was clear that people on small incomes would be deprived of every rational ground for saving. The crisis in savings was thoroughly predictable.
We heard this afternoon from Mr. Field. I remember debating with him when he was my opposite number six or seven years ago. I well remember a conference at Oxford when I first said that means-testing was not part of the solution; it was part of the problem. The right hon. Gentleman was in some consternation because he secretly agreed with me. He did not agree at all with what the Chancellor was doing at the time, but he could not very well say so in public. He told us this afternoon, and I am sure he is right, that half the tax relief on pension savings that the Revenue forgoes is taken up by people on the 40 per cent. marginal tax rate. The implication was that there was something wrong with the tax relief system.
There is nothing wrong with the tax relief system. What is wrong is that people below the 40 per cent. marginal tax rate have had their incentive to save destroyed by the means-testing policy. The responsibility lies fair and square with the Government. It would have been nice if we had had a higher savings ratio in this country in the 1990s. It was always low by international standards and certainly by European standards. I accept that, but the Government turned the situation into a crisis and they did so on two fronts—occupational pensions and incentives to save. That is a serious matter and they should not be allowed to escape responsibility for it. Those were the deliberate policies and the specific contributions of the Labour Government to occupational pensions and to saving for retirement and other purposes.
I shall deal with some of the interesting ideas that have been thrown out during the afternoon. One is compulsion. The right hon. Member for Birkenhead, for whom I have the greatest regard in every respect, seems to be in favour of compulsion. It would be disastrous, for the reasons so ably and lucidly set out by my right hon. and learned Friend Mr. Clarke, to which I might be able to add two. First, if the state gets into the business of compelling people to save, it takes on a moral responsibility for ensuring that the real value of that money is at least maintained, even if there is not a substantial savings return. That is a difficult position for the state to be in, given that moral responsibility and, conceivably, legal responsibility.
Another related issue is that it is enormously morally dubious for the state to tell people to save irrespective of whether it is in their interests to do so, particularly when the state, by its own deliberate action, has made it cease to be in their interests to save by, for example, means-testing, as I outlined. If, in those circumstances, the state said to people on low incomes, "You would be a damn fool to save now. You will make an absolute idiot of yourself if you save because of the way in which the means-tested benefits system is structured, but, nevertheless, we will compel you to save. Taking a sensible view of your own interests, we know that as a rational human being you will not save, but we will compel you to do so", it would not be compulsory saving; it would be a tax, and everybody would see it as such. Let us remove from our minds the temptation of trying to deceive the public.
I am interested in the hon. Gentleman's remarks about disincentives to saving. The Turner report points out that people have not saved enough for their pensions for the past 20 years, but the pension credit was introduced only last October. How does he explain the historical gap, when the measures that he describes as disincentives to save have existed only for the past year or, in the case of the minimum income guarantee, for slightly longer?
I do not know whether the hon. Lady was following my remarks about five minutes ago, but when I explained how the Government have increased means-testing, I did not talk about the pension credit for the precise reason that she mentioned—it was introduced only last year. I discussed other means-tested benefits and the minimum income guarantee, which has been in place since the beginning of this Government. Means-testing has increased substantially. A few minutes ago, I also made the point—perhaps the hon. Lady missed it—that I have been saying exactly the same thing since 1997–98. I do not make the point because of the institution of the pension credit, but the pension credit is another means-tested benefit and it has perverse and damaging effects.
I listened to Mr. Webb with great interest, because he is extremely well-informed and I admire his work. When I was a Front Bencher, he used to contribute to debates, and I have learned many things from him over the years and do not mind paying him that compliment in public. However, he made two points this afternoon with which I must take issue. First, he suggested that National Savings is a proper vehicle for pension saving. I have no objection to the Post Office collecting the money, but did he mean that those savings should be invested in National Savings?
No, he did not. I am greatly relieved, and the hon. Gentleman's high reputation in my eyes is at no risk of damage.
Secondly—he repeated this point on several occasions—he favours the abolition of the contributory principle. The most shocking and thought-provoking thing that came from the Government this afternoon was the new Secretary of State's implication that he is tempted in that direction, too. I was struck by the irony of the Liberal spokesman making that point, when Liberals invented the contributory principle—Lloyd George and Beveridge will be spinning in their graves. I agree with the right hon. Member for Birkenhead, who lucidly deconstructed that argument.
The economic arguments on contributory entitlements concern both incentives to save and to work. No one will work a day longer than they need to if they are working for benefits that they would get anyway, even if they did not work. That would be economically crazy and morally unjust. A civilised society cannot send out the signal that it does not matter whether one works because the rewards will be exactly the same. That message would corrode not only our economy, but our value system. I object to that and I want to place my objection on record.
I should like to make one or two suggestions. Despite the enormous damage that the Government have done to the occupational pensions system, especially the defined benefit aspect of occupational pensions, we should not give up on it. I hope that the next Conservative Government will make reviving such schemes a priority, but we must think carefully about how to do that. Tax and other incentives are always expensive and one must therefore be cautious. I hope that my Front-Bench colleagues will consider the possibility of following the example of the American employee retirement funds—the famous Employee Retirement Income Security Act, or ERISA, scheme. A central principle is that the tax benefits of the regime that applies to the funds are available only to a scheme that is open to all the relevant firm's employees. That breaks the distinction between special deals for top executives and provision for everyone else in the company.
There will always be a powerful incentive for members of top management to devise pension schemes that are good for them. As we know, defined benefit schemes are the best and impetus towards them will continue despite the difficult experiences under the Labour Government between 1997 and 2005. We should harness that impetus and ensure that there is an incentive to establish a defined benefit scheme with the same conditions for all employees. Clearly, the actual benefit will differ, depending on whether the person's final salary is £20,000 a year, £200,000 a year, or even £1 million a year in the case of a company chairman or chief executive. Nevertheless, the terms, conditions and principles will be the same for all employees.
The Americans have run such a system extremely well for many years. I believe that I am right—doubtless the hon. Member for Northavon will correct me if I am not—that the ERISA system was introduced in the 1960s. It is therefore not experimental or untried.
We need to go back on means-testing, which is a disease. Its appalling consequences are economic, social and, indeed, moral in the sense of injustice that it creates. I have already elaborated a little on that. How do we go back on it? Of course, some means-tested benefits have to exist—we all appreciate that we must have some sort of safety net if we believe in a civilised society, with nobody starving on the streets. There has always been an element of means-testing in the system. Even in the days of Beveridge, the system was not purely contributory.
However, we could and should switch the positions of the pension credit and the state retirement pension. The latter should be earnings related. My hon. Friend Mr. Willetts is right about that; his policies have been thoroughly worked out over several years. Indeed, he and I were shadow Cabinet colleagues when the proposal was introduced. It makes sense. Of course, one sets a programme for only the length of the next Parliament. At the end of it, we would have to consider the extent to which it was possible to continue with the earnings linkage. However, I am convinced that it is a sensible move.
The pension credit should not be abolished. We cannot abandon the poor pensioners about whom Miss Begg spoke with great and genuine feeling in a good speech. Although it possibly reflected a different political standpoint from mine, I genuinely admired it. We cannot leave people destitute. However, the pension credit should be linked to prices so that, instead of indexing at a higher rate the benefit that people who do not work or contribute get, we should reward best those who have worked and contributed, while providing something for people who have no contribution record. That is rational, economically sensible, prudent, fair and just, and therefore economically and morally sustainable.
I want to deal with the issue of age discrimination, which was raised earlier by a Labour Member. As life expectancy increases, it is generally expected that we will have a longer active life—to which I look forward, God willing, if my electors and the Almighty allow it to me. It is completely barmy to produce documents that say that we will need to work longer, and even to provide moral exhortation to people to work longer, and yet to have a situation in which the greatest form of discrimination in the job market is not with regard to sex, race or disability—from which we have suffered in the past, and which have been effectively dealt with by legislation—but age. All of us have people who come into our surgeries who are in their 50s, well qualified, motivated and keen, who have sent off 200 job applications and who do not get a single response. They know why: it is because they declared their age. Occasionally, I have told them to try not declaring their age, and it works. I have carried out some experiments, and I take full responsibility, having said it in the House of Commons. It is not deception; it is self-protection from a complete scandal.
The best solution would be an age discrimination Act. I do not want to blow my own trumpet too much, but I first proposed a private Member's Bill on age discrimination, under the ten-minute rule, under the Major Administration. Of course, I got nowhere. I tried again at the beginning of the first Blair Administration, and of course got nowhere. I asked the Prime Minister at Prime Minister's questions back in 1998 what he was going to do about age discrimination, as I thought that he was in favour of doing something. He said that he and the Government were still committed to that. After seven years, we are still waiting, so I hope that something can be done.
My final point is simple. It is a party political point, but it seems artificial not to say it because it is blatantly clear. The Government now say that they will not tell us their policy on pensions and pension-related issues until after the election. But they have been thinking about it for months—they have commissioned a report, they are talking about it now, and they have several months to go before the election—so that will not wash. I have great regard for the Minister for Pensions; he is a great expert, and he has said some very sensible things on the subject, about which we have been talking for many years in different contexts, on the Back Benches and the Front Benches. He probably knows more about the subject than most in the House, and I know that he has strong views. But what he is about to tell us, and what the Secretary of State has told us, is that they will not tell the public or the electorate what the Government's real views are until after the election.
Even were the Government's credibility much higher than it is, and their reputation for reliability, frankness, candour and keeping their promises much higher, people would still be intensely suspicious of a Government who went through an election saying, "We will give you the news as to what our policy is on this vital matter after the election, if we're elected." As the Minister for Pensions cannot acknowledge, but knows perfectly well, the Government's reputation for those qualities is far from high, and I am afraid that the policy on which he is embarking will be a disaster. Everybody knows what it means, en clair: some very bad news will be in the pipeline if the electorate re-elect a Labour Government. The Government know what it is, but they will not say it. It is so bad that they do not even think that they can spin their way out between now and polling day.
Not at this stage.
The Government hope to keep it quiet. That will not work. It should not work in an open society or a sophisticated democracy. The Government have hung a millstone round their necks. The Opposition will be delighted, and the Government will thoroughly merit the fate that they then receive.
It is a great pleasure to follow my hon. Friend the Member for Stamford and Spalding—[Interruption.] Sorry, I meant my hon. Friend Mr. Davies. Historically, I have always made a mistake with his constituency, even though I worked with him on various Pensions Bills and can endorse his attacks on the means-testing introduced by this Government.
I came to the Chamber today thinking that we would probably concentrate primarily on the Turner report. I was glad that Miss Begg differentiated the immediate crisis facing many pensioners today because of the actions taken by this Government—although I acknowledge that some pensioners are better off—and the longer-term view. I want to concentrate on the longer-term view. I see from a hasty reading of the Turner report that it reiterates most of the principles that have created the foundations for a long-term debate on the future of pensions. My age dictates that I am interested in this subject, and I share the concern of the hon. Members for Colne Valley (Kali Mountford) and for Aberdeen, South about the need for the young to learn to save as early as possible.
It was interesting to hear some big ideas exploded today. First, the Liberal Democrats and one or two Labour Members urged the ending of the insurance principle. Then it was suggested that we should have a nationally funded scheme for pensions through national insurance. That was the bones of one of our policies at the last general election, which I endorsed, but what bothered me slightly was the thought that it could be one huge national fund. I am sure that my hon. Friend the Member for Grantham and Stamford and others with City experience will know that the size of such a fund could distort markets—and especially if it became a politically correct fund, invested for reasons other than the best interests of the pensioners. Then it was suggested that reducing tax was not an incentive to save and that we would all be happy to pay an extra 2 per cent. in national insurance. That, I have to say, is not my experience. I hope that the Turner commission will not take that suggestion on board.
It is too early to draw any firm conclusions. Alan Pickering castigated us as mere politicians rather than statesmen if we were to have a knee-jerk reaction today, but there is general consensus about certain clear issues. We all agree that the system is far too complex in both state and private provision, and we tend to lump everything together rather than look at each aspect clearly, while recognising that there is an interrelationship.
In the last Parliament, we debated the introduction of the state second pension. My party objected to the principles entirely, apart from the suggestion that carers, and especially women carers, should have access to such a pension, which would go some way in the longer run to helping poorer women pensioners and carers. The state second pension is an additional complexity in a state system that is already so complex that most people do not understand it, beyond knowing that they have to pay national insurance.
We have barely talked about the public sector system and the need for the Government to be able to draw back from the unfunded liabilities of that sector. Luckily, we are not in the position that the French Government are in, where to fund the pensions for Electricité de France—and perhaps Gaz de France—alone has put them in hock to the tune of £57 billion, which is allegedly the total black hole for all pension provision in the UK. Our own Government face a huge future commitment that will have to be met one way or another. Someone will have to get to grips in the long run with the unfunded public sector pensions.
Direct benefit and direct contribution schemes are both complex issues and there have been mistakes, so changes are needed. We have the opportunity to stand back and ask what is the principle behind pension provision. At present, legally, it is an insurance. Occupational pension funds are definitely an insurance principle, but there is a question whether direct contribution personal pension funds are an insurance or a form of relatively tax-free saving.
If we were more honest about the direct contribution sector of private pensions, we might be able to resolve some of the associated complexities, including, indeed, the question of annuities. The legal position is that we have to have annuities because they are insurance rather than, as most people regard them, their own pot of money. I was honoured to be the person who officially announced our policy on this issue to the Conservative party conference, but I should point out that my hon. Friend Sir John Butterfill and other colleagues present have been very active in campaigning for an end to the annuity provision at 75. One of the easiest ways to solve this technical problem is to consider whether such provision should constitute an insurance policy.
We need to consider other issues, such as the housing market and people contemplating investing in housing as a way of replacing pension provision. We should think about what would happen if the Deputy Prime Minister were allowed to get away with his housing proposals. People need to be aware that a significant increase in housing provision would down bring prices, rather than increasing them, so it would not be sensible for them to rely on investing in housing as a way of replacing their entire pension provision.
The Turner report is the basis for extensive discussions and I am sure that we will have plenty of them in this Chamber. I look forward to participating in them in greater depth, and at perhaps boringly greater length. We must consider carefully what we do with pensions. The Government, however, are on a very pleasurable hook of their own making. We will accuse them, as my hon. Friend the Member for Grantham and Stamford said, of going into the next election with no pensions policy whatsoever. The voters will be buying, as usual, a pig in a poke.
It is finally dawning on many of our fellow countrymen that pension provision is an important issue, but I fear that there is a risk that the political class will regard it as an electoral issue and an electoral problem alone. In my view, the question should not be how to solve, spin or sweep under the carpet this issue in the next six and a half months; instead, we need to look ahead with real vision and leadership at how pension provision should develop in the next 20 to 30 years and beyond.
This has been a very interesting debate and I endorse the comments of Mr. Field. Looking ahead in pension provision is indeed very much a political judgment, rather than a question of amassing ever more evidence. A number of contributors have referred today to the need for consensus. If we accept that our collective—and, indeed, our individual—pension shortfall will be a major problem in future decades, we need to create a consensus among the political class on the correct way forward. We do, however, need to start by discussing with some candour how we have come to this pass.
I shall not reheat the arguments of my hon. Friends the Members for Havant (Mr. Willetts) and for Grantham and Stamford (Mr. Davies), other than to say that some of the blame must lie at the door of No. 11 Downing Street. I fear that, somewhat tragically, because the incoming Labour Government of 1997 was so committed to maintaining Conservative spending plans, the pensions "hit" became a very easy pool of money for the Chancellor of the Exchequer to draw on—or so it seemed at the time—in order to bring about his various spending plans.
I agree entirely; however, that is in the past. If I had longer, I would have said a wee bit more about that issue, but I want now to consider the future.
One of my great concerns about pensions is the real risk of a battle, almost, between the generations. History shows that almost every generation has been able to look ahead in the hope and confidence that, except perhaps in time of war, economic life gets better for progressive generations; but no longer.
Part of the problem is down to what has been described as the demographic time bomb, but there is also the perception that in order to maintain the somewhat unrealistic and often uncosted expectations of an older generation, those either in their 20s or not even among the work force today will have an increasing burden to bear. That applies not just to pensions, but to the increasingly irresponsible public-private partnerships favoured by an imprudent Chancellor. There is nothing prudent in his "jam today" policy with its off-balance-sheet financing, which will have to be paid for in the generations ahead. It strikes me that if public policy continues to be constructed on the basis of pitting the interests of one generation of taxpayers and electors against another, we are heading for some very serious unrest in the years ahead.
I was going to say that I was speaking as a 30-something, but I am not quite that any more, having celebrated my 40th birthday last week. I still consider myself relatively young and I believe that my generation lacks confidence in the whole area of pensions. My hon. Friend Mrs. Lait rightly pointed out that all too many people in their 20s and 30s feel that the only safe investment is that of property, particularly in London and the south-east, but it now looks as though even that market is over-heating so we are seeing the first signs of further problems there.
Some hon. Members have touched on the issue of compulsion. I must confess that after the mis-selling scandal—some of it occurring prior to 1997—it seems to me that the Government's refusal to take responsibility for Equitable Life makes it very difficult to make a supportable case in favour of compulsory saving. The lack of confidence among many would-be savers is tangible. Only if the pensions industry can be made much safer can we seriously contemplate compelling people to place their trust in it. If the law forces you or me to hand over an unspent surplus of our hard-earned cash to the unqualified or incompetent, there will be little incentive for anyone to save. I would reiterate the words of many Conservative Members—that experience shows that the Government, above all, are often the most unqualified and incompetent of savings vehicles.
Amid all the talk on compulsion, there is also a lack of appreciation of why so many people fail to make provision for their future. No amount of new legislation and no new initiatives will overcome the fact that the great majority of people in Britain today are too poor to make adequate savings for their retirement much beyond the state pension. I believe that compulsory saving can be only a small part of the solution.
There is an argument that goes against that. If the Government simply use taxation to spend for the future, it is in a sense the most compulsory vehicle of all, but I believe that there is a lesson to be learned from experience across the world that lower taxes may be the best incentive to save. The dismal and disappointing stock market performance of recent years in this country—it is poor compared even to many of the European bourses—has in large part been affected by the increasing tax burden. We should perhaps consider allowing people to keep more of what they earn and hope that they will put it into saving for their future.
Many contributors to today's debate have mentioned the possibility of raising the retirement age, and I must confess that I take on board some of the concerns of Labour Members about the difficulties of hard-working manual labourers. It is easy in a service economy, such as my constituency of the Cities of London and Westminster, to think of 65 and 70 as a relatively young age at which people could continue to work, but it is much more difficult for those who have carried out manual work either in the agricultural industry or manufacturing. We need to get that right. Younger people in the work force increasingly seem to appreciate—for the reasons set out today—that the retirement age will have to go up. Clearly, expectations of life have increased rapidly in recent decades.
We also have to ensure that those in retirement have realistic expectations. I do not wish to sound overly negative, but I believe that politicians of all parties have failed in the past to tell it as it is. Pensioners may well have paid their stamp, but they have not contributed anything like enough to justify receiving the state pension for the number of years that many require it, or their health care or other welfare benefits. However, we are where we are: clearly, we cannot expect pensioners to go back to work, but politicians of all parties must not raise unrealistic expectations as part of a Dutch auction aimed at winning the votes of pensioners and of people who are soon to be pensioners.
Many older folk feel insecure and very worried about what the future holds. All of us, as constituency MPs, will discover from the contents of our mailbags in the weeks and months ahead that many of our older electors are becoming very worried by what they read in headlines about a pensions crisis. Yet we must face facts. As a nation we cannot go on as we have over recent years. I hope that we will discuss this urgent problem in the months before the next election, and it is beholden on all parties to produce sensible plans for the future.
I entirely agree with the right hon. Member for Birkenhead, who made a plaintive cry to his colleagues on the Front Bench, but this matter in a sense transcends some aspects of party politics. We need to get it right, and politicians of all parties will pay a large penalty if we fail so to do.
I begin by thanking Mr. Field, who is my MP when I stay in London. However, he may not get my vote at the next election.
Life has moved on since Beveridge and the introduction of the welfare state. It is clear from today's debate that there are many different points of view around the House, but also that there is no consensus about what needs to be done. Consensus can be found on one issue only—that a pension crisis now exists.
All the different parties have produced different ideas. I was especially pleased to hear the Secretary of State open the door to the possibility that women might receive a pension that was not linked to the amount of contributions that they have made. Many women have spent their lives bringing up families or as carers and they will welcome what the right hon. Gentleman said, as do I.
Every week, I meet constituents who have worked all their lives who do not know what will happen to them when they retire. The more elderly of them have fought for their country, while others have watched children and grandchildren grow up. All the time they have thought that their pension would look after them in their later years. Those who have made contributions throughout their lives imagined that all would be well, but now they hear and read about the pensions crisis. As a result, many realise that they have been living in a fool's paradise—that they have not paid enough, worked long enough or saved enough.
For many, it is too late to make any change. When the state pension was first introduced, life expectancy was about 65. People live much longer now, but it is not possible to tell everyone to work longer. Those who have worked in industry or in any type of manual labour do not have a long life expectancy, so working longer is not an option.
People are being told to save more, and that is all very well if they have the cash, but many do not. Again, in an ideal world it would be fine to say that people should pay more into pension schemes, but for many it is not an option. Many people are also amazed to discover that, although they have saved for their pensions, their caution brings little or no dividend. Recent figures show that savings have to be very substantial if they are worth making at all.
Earlier, it was stated that some people may choose between taking a second holiday and putting money into pension schemes. However, if that money were to bring no gain because of the effects of means-tested benefits, people might be better advised to take that second holiday and go off to Spain.
Many of our old people feel dazed and confused. Perhaps they are not as fit as they used to be, and their memories may not be as sharp as they once were, but they are watching post offices close and their pension books being replaced while council tax goes up every year. The link between council tax and people's pensions is crucial, and many pensioners devote a huge proportion of their pensions to paying their council tax bills.
Means-testing produces many problems, but I shall concentrate on just two. The first is that many pensioners do not apply for means-tested benefits. That exposes as a lie the contention that the poorest pensioners are helped by targeting them in that way. The poorest pensioners are not those who apply for and get the benefits to which they are entitled. The poorest pensioners are the ones who do not claim the benefits to which they are entitled, and those people must be moved out of poverty and on to a decent basic pension without delay. At present, 125,000 Scots do not claim their benefits.
The second group are an as yet unknown number—those who know that they are entitled to means-tested benefits but have decided, for whatever reason, not to apply for them. That could be because they have never claimed benefits and do not want to start now, or it could be, like some of my constituents who attended the pension credit stall at a local shopping centre, that they feel that they can do without the additional benefit. If they did not claim it, they thought, more deserving people would get it. We know that that does not happen and it was explained to my constituents that that would not happen.
The system for many is confusing, complex and keeps many old people poor. Older people fail to claim £2.5 billion in benefits, and hundreds of thousands of them live in poverty. Pension credit is a benefit aimed at the poorest older people, but it is claimed only by half of those entitled to it. It has changed its name three times in the past seven years, and that only adds to the confusion. Many people do not know what they are entitled to and they see the system as too complex. Moreover, means-testing is just not popular. Many people also do not claim the amount of council tax benefit to which they are entitled. It has been estimated that approximately one in seven pensioners is entitled to council tax benefit, but do not claim it.
In Aberdeen, the Pension Service has done a lot of outreach work. When it did the calculation for pension credit, it discovered much under-claiming of housing benefit and council tax benefit. The whole process of claiming for pension credit has been beneficial to many pensioners who have received much more than just the credit. Many have also received attendance allowance as well.
It is still a huge problem. Pensioners paid a staggering £770 million too much council tax in 2001–02.
I am running out of time, but as I said earlier, it will be an improvement if the Secretary of State is prepared to give a fair deal to women who do not have a full contribution record. I also wish to mention the sometimes questionable behaviour by trustees of company pension funds, such as directors receiving large sums of money before they retire and bleeding pension funds dry. I hope that current legislation will ensure that people who have paid into a pension fund can be sure that the money will be there on their retirement. There is a real crisis in company pensions.
As many hon. Members have mentioned, we here are all right because we have a decent pension scheme. However, many hon. Members used to be councillors and in non-pensionable employment. There are many people, both inside and outside the House, who will struggle through retirement. As we approach the general election, it is vital that the report that was published yesterday engages the public in the debate. They will hear different views from different parties, but what they want to hear is a degree of honesty. The public also want politicians to think for the long term. Whatever happens, and whatever view we take of means-testing or ways of funding pensions in the future, the general public will not be impressed by a bidding war for their votes. Unrealistic promises will let the public down, and the lack of respect that they have for politicians of all parties will only increase. The debate must start now. Pensions are a long-term problem and we have to deal with it for the sake of this generation and of generations to come.
I am always taken by a Liberal Democrat talking about honesty in politics. I declare an interest, in that I have private pension provision.
This has been a fine debate. There have been many knowledgeable and interesting contributions, against the backdrop of the Turner report, which has informed much of the debate.
We now know that the Prime Minister intends to postpone his retirement from No. 10, but he did not make it clear at the time that he would be forcing millions of other people to work longer, too. Almost everyone agrees that there is a pensions crisis, except possibly Ministers at the Department for Work and Pensions. The new Secretary of State said:
"It is not a crisis happening now."
He said that it would happen in 10 or 15 years when, on any view, he will be doing another job—perhaps returning to delivering letters. He also asserted that we do not want what he described as a knee-jerk reaction. I have news for him: he is dead wrong about that. The crisis in pensions is with us now. There is no getting around that fact, even if Ministers are in denial.
Ministers are trying to shut down the whole debate. We shall not let them do that and nor will the country's pensioners. As Rodney Bickerstaffe, the president of the National Pensioners Convention, said, something must be done now. One example is the Government's financial assistance scheme for those who have already lost pension rights—at least 65,000 people. Faced with defeat in the House, the Government cobbled together a rescue package at the last minute, and it shows.
Everyone agrees that the allocated figure of £400 million is grossly inadequate to compensate even those people who are already in difficulties. Obtaining details of how the scheme will actually work and how the money is to be distributed is like pulling teeth, a point made in the Lords only this week during debates on the Pensions Bill.
The hon. Gentleman says that the fund is inadequate. Can he tell us how much additional money his party would put into it, and whence that extra money would come?
I shall come to the hon. Gentleman's distinctive contribution to the debate later on, when I put him right about unclaimed assets. I hope that he will be patient for a moment.
As I said, everyone agrees that the fund is inadequate, and we cannot obtain details of how it will work. The FAS was announced on
Will payments be means-tested? Will they be taxed? Has the Minister made any progress at all on extracting contributions from industry to top up the £400 million? Will he look again at our proposal to use unclaimed assets to top up the FAS to the necessary limit? For the information of Rob Marris, the Government are already using unclaimed assets. If he looks at the small print of the Budget, he will see that the Chancellor is trying to grab them for another purpose altogether.
The reality is that although pensioners are already suffering, the Government are moving as slowly as possible on this massive problem. Surprise, surprise! Their timetable seems to put everything off until next spring at the earliest. I wonder why.
Meanwhile, I understand that Labour Back Benchers, who have substantial numbers of affected constituents, people who have lost their pension rights, are being urged not to rock the boat and not to express in public their concerns about the inadequacy of the scheme. It would be shameful if that pressure stopped any of them doing so in the debate, although it is interesting that none of the Labour Members who has spoken, often eloquently, in previous debates has raised the issue today.
I have raised the plight of pensioners of the former British United Shoe Machinery Ltd., a Leicester-based firm in which many North-West Leicestershire people worked, and neither the Government nor the DWP have made any contact with me, private or public, e-mail or paper, that suggests what the hon. Gentleman implied a moment or two ago.
I very much hope that the hon. Gentleman has made contact with his own Government to make clear his concerns about the size of the pot that is being made available.
On the broader pensions policy issues, why wait to do something? During the debate, we all heard about the growing consensus on long-term pensions policy. We heard about that with great eloquence from my right hon. and learned Friend Mr. Clarke. Mr. Rodney Bickerstaffe, again, had this to say:
"The interesting thing is that a consensus is now emerging amongst many different and diverse groups, who all agree that we need a much bigger basic state pension for every older person that is linked to earnings and free from means-testing."
I could not have put it better myself.
The answer is obvious: the Government—having sat on their hands for seven years and presided over the collapse of pensions, both public and private—now want to put the whole thing off until after the next election. Assuming that happens in May or June next year, it seems terribly convenient that the final report of the Turner commission is not expected until next autumn.
To help the debate come the general election, is the hon. Gentleman confirming to the House that the Conservative party will include in its manifesto detailed proposals to shape pensions in the long term? In other words, will the Conservative manifesto pre-empt the final volume of Turner's report and include all the details that the hon. Gentleman accuses the Government of not putting into our own manifesto?
Yes, I can give the hon. Gentleman that categoric assurance, as he has asked for it. What is the point of an election manifesto if it does not deal with these matters? Indeed, Mr. Field made that point when he said that he did not wish to see his party go naked into the next election campaign.
I urge the Government, for once on pensions, to be bold. The Turner report sets out in painstaking and sometimes painful detail the scale of the problem, plus the only possible solutions. The Government should now come up with their own proposals, and it is no good the Secretary of State going on about a knee-jerk reaction. Seven years is hardly knee-jerk.
What about the perfectly sensible suggestion made by the right hon. Member for Birkenhead to bring forward Turner's final report to perhaps February next year? That would allow Turner some time to consult on the interim report. It would allow us all to digest his final conclusions. Perhaps more importantly, it would also allow the Government to go into the next election campaign with some clearly defined proposals on pensions—otherwise, what do they have in mind? Will they have a blank page in their manifesto where it says, "Pensions"? My right hon. Friend Mr. Dorrell made that point, again eloquently, as did my hon. Friend Mrs. Lait.
The Labour party was much less reticent on the subject of pensions at the 1997 election. I received a letter only today from Mr. Richard Sharp, who is the chairman of the south-east region of the National Pensioners Convention. He enclosed a briefing produced by the Labour party before the 1997 election and asked me to use it to
"publicly denounce them for the charlatans they are on the basis of pre-election commitments."
[Interruption.] Those are his words, not mine, and I hope that the lead charlatan is taking careful note. The document is headed, "The Tories have betrayed pensioners", so hon. Members will get the drift, and it includes the names of the current Prime Minister, the Deputy Prime Minister and the Chancellor of the Exchequer. It says:
"Millions of people face poverty in retirement."
As I said earlier, it says:
"The Tories propose to abolish the basic state pension".
That was a lie then, and it is still a lie. It says—this is the good bit—
"Labour will defend the basic state pension, without means-testing, and ensure that it remains the foundation of our pensions policy."
Hard as I look from one of end that disgraceful document to the other, I can find no reference to a promise to take £5 billion a year from pension funds if the Labour party won that election. [Interruption.] At least I have had an apology, which I am happy to accept from Mr. Harris, about that campaign. Members should have been there.
The plain truth is that, by putting off decisions now, the Government are condemning a raft of pensioners to penury in old age or utter dependence on degrading means-tested benefits. That is borne out entirely by the Turner report. That is why we need Conservative policies such as restoring the earnings link, rolling back means-testing and abolishing the annuities rule. We have been exhaustively through the eight-point plan, or the 10-point plan as the hon. Member for Wolverhampton, South-West described it when allowing for inflation. However, just as important is our lifetime savings account that is designed to encourage people not already saving—the 9 million whom we have heard about—to do so.
These are all well costed, well thought-out proposals. [Laughter.] They are designed to tackle the pensions crisis, but if they cause such hilarity among Labour Members, why do they not come up with their own ideas rather than having a self-imposed moratorium between now and next autumn that takes them conveniently, or perhaps not, through the election campaign?
We heard from the Liberal Democrats. Their policy is designed only to help the over-75s. They would scrap the contributory principle altogether, and that argument was effectively demolished by Mr. Webb told me in a previous debate, they intend to erode tax relief for those making pension contributions and, as usual with the Liberal Democrats, the figures are, of course, not properly costed. Perhaps it does not really matter, because their policy is about as relevant to who will be in government after the next election as the UK Independence party's policy to renationalise the railways. It deserves about as much attention.
Where is this Government's big idea on pensions, or even its small idea? The sad fact is that, where pensions are concerned, the Government are an ideas-free zone. The Secretary of State in his conference speech ruled out increasing the pension age, which is one of the main solutions set out by Turner. We had an interesting exchange at Question Time on Monday when I put to the Minister for Pensions his comments at a fringe meeting at the party conference. He seemed to take offence at the thought that he had referred to the pension credit as a
"short-to-medium-term policy only", but within a column, he quickly reneged on that and said of the pension credit:
"I repeat that we are proud of it."—[Hansard, 11 October 2004; Vol. 425, c. 18.]
His Secretary of State went on at inordinate length to say what a wonderful thing it was.
In today's debate, however, the Secretary of State has suggested that the pension credit will not be there indefinitely. It is clear that there is a debate going on within the Government, and we get occasional glimpses of it down long narrow corridors. However, it would be rather good if some of it could be put to the electorate when the time comes.
At the moment, we have to take it that the Government are as committed to expanding means-testing as ever, thereby deterring more saving in this country—again, saving is one of the Turner prescriptions to end the crisis. Let me remind the House of what he said in his report:
"Means-testing within the state system both increases complexity and reduces, and in some cases reverses, the incentives to save via pensions which the tax system creates."
That is a classic definition of the problem caused by means-testing in the system.
We had the false dawn of the speech by the Minister for Pensions to a fringe meeting at the party conference, but the Government seemed to have rowed back from that—an issue referred to by my hon. Friend Sir John Butterfill. They have also been quiet on compulsion, another issue on which the final report will presumably reach a conclusion next year. In fairness, the Secretary of State said that he had an open mind on this issue, but he seems to have an open mind on almost every issue affecting pensions in this country. It is probably time he began to reach provisional conclusions about what should happen.
What does that leave? Extra taxes—a point made by my hon. Friend Mr. Field—and I do not suppose we shall hear much about them this side of an election. How typical of the Government to heap extra taxes on individuals to pay for a decent pension! We are looking at yet more third-term taxes from Labour, but on the welfare state, as on so much else, it does not deserve a third chance, let alone a third term. If the Government are not prepared to take the action needed on the nation's pensions, they should make way for someone who will. I urge the House to support our motion.
We have had a good debate in which we have heard several serious speeches, although I did write that line 15 minutes ago. I hope that hon. Members will forgive me if I do not mention all the contributions that were made. We heard notable contributions from Labour Members, and I hope that Mr. Willetts will forgive me if I say that I especially enjoyed the analysis presented by Mr. Clarke.
Sir John Butterfill made a useful and thoughtful speech. He reminded us that he is the chairman of the parliamentary pension fund and also told us that he chairs the People's Dispensary for Sick Animals pension fund. If there is ever a black hole in the parliamentary fund, I hope that he will not decide to put some of us down. We are into joined-up governance, but that would be a step too far.
We once again thank Adair Turner and his colleagues on the Pensions Commission for what everyone has acknowledged as a fine and authoritative document. We greatly appreciate the further insights that the report provides, the opportunity that it presents for thorough and evidence-based debate, and the options that it offers for consideration to produce long-term solutions to long-term concerns. However, it is disappointing that in some, but not all, quarters, there has been such an immediate and highly politicised response to the report, despite the fact that both the commission and the Government are calling for a serious and considered analysis of the complexities of the issues at stake today and, more importantly, over the long term.
It was sad that the shadow Secretary of State entertained us a little too much tittle-tattle and one or two polemics that he has been reading over his long summer holidays because he does not usually do that. I am bound to say of the shadow Minister, Mr. Waterson, that rather than rising to the occasion, he managed uniquely to sink into it.
Mr. Webb knows that I always enjoy his contributions. I was interested that he spent some 20 minutes mainly attacking another Opposition party, which we enjoyed, although I was a bit embarrassed to be in the same room as them. However, given that there are three major parties in Britain—one of which comes fourth in a by-election—I understand that at least some of his speech had more to do with electoral psephology in parts of our country than pensions policy.
To those who encourage us to act in haste by taking the sound bites of the report and basing a policy on them—they know who they are—let me point out that the report itself states in no uncertain terms:
"it is more important to arrive at policy recommendations which are well founded, comprehensive and sustainable than to develop those recommendations this year rather than next".
We will not, therefore, provide a knee-jerk reaction just to make the headlines. Conservatives can knee-jerk if they want to, but we will not. We will not put forward unsustainable policies for political gain, and thus we will not jump to rash conclusions before the commission has completed its work and published its report next year.
We acknowledge that societal evolution over the late 20th century and the 21st century necessitates a concurrent evolution in pensions policy, so we welcome the commission's considered assessments of the challenges of voluntarism, of compulsion, of extending working lives for those who want that and of encouraging greater pension saving. There will be much more such consideration after the consultation and discussion in the next volume of the report.
The problems that women have traditionally faced in accumulating a decent pension income are acknowledged. The report states that we need to look at adjustments to public policy that
"should have been started in the last 20–30 years."
We should all bear some responsibility for that.
I shall outline our current strategy and also look to the future. The lack of action and the mismanagement of the state pension system under the Opposition left a terrible legacy. The situation in 1997 was one that we did not want repeated: a Britain in which 2.7 million pensioners were living in poverty and where, pound for pound, pensioners' savings were subject to a 100 per cent. marginal tax rate. Yet curiously those Conservatives who presided over that regime now lecture us on savings incentives despite pension credit now rewarding modest savings. It was also a Britain in which carers, disabled people and many women were excluded from accruing second state pension provision. Urgent action was required, and the Government acted.
Today's pensioners are significantly better off than they were under the last Conservative Government. Reforms to the state system have lifted 1.8 million pensioners out of poverty. Nearly 2.4 million people are getting extra money compared to what they would have got under the previous system, with an average gain of more than £16 a week. We are spending £10 billion extra each year on pensions compared with 1997. Restoring the earnings link would have cost just £3 billion.
Pension credit guarantees an income of £105 a week for single people over 60—it was £69 in 1997—and £160 for couples. These benefits are designed for the people who need them most, which inherently necessitates some form of income or means-testing. Despite constant accusations about the "humiliation" that the Opposition claim such an approach causes, when we asked people in our surveys—because we listen—70 per cent. of pensioners believed that the process was easier than the previous system and 85 per cent. stated that they would recommend applying for pension credit to someone else.
The Opposition would have us believe that pension credit degrades pensioners. On the contrary, it is poverty that degrades our elderly people. That is why we have made the reduction of pensioner poverty our highest priority. We now have a Pension Service, and many colleagues will have met our excellent staff in the local pension service who run advice centres and do home visits, of which we made more than 500,000, showing that there is a human face to the service. If people do not like the forms—many of us do not—they can apply over the phone for pension credit.
There have been a number of changes and pensioners have fewer changes to their circumstances to report. Whatever the important arguments about the advantages and disadvantages of targeting or means-testing—I know that there are advantages and disadvantages—let us at least acknowledge that what we are doing with the pension credit and the Pension Service is a million miles away from the folk-lore memory of old-style means-testing.
There is an important point about gender and pension credit. Getting on for 3.2 million individuals benefit from pension credit. It is no coincidence or accident that 2 million-plus of those are women. Women have not often accumulated a full national insurance pension because they either brought up children or were carers, which made them less likely to have occupational pensions.
The Minister talks about the pension credit. This is an opportunity for him to set out the Government's plans if they were to have a third term. Will he clearly state, for the record, that if they win they will uprate both the guarantee credit and savings credit by earnings, not prices?
I thought that the hon. Gentleman was going to talk about the important issue of gender, and I am disappointed. For this Parliament, we have made the commitment to index link with earnings the pension credit. He will have to wait until the election and our manifesto to see what happens.
Many things are already in place that will support future generations. The state second pension, which perhaps we do not hear enough about, is important for low to middle-income earners. It gives people the opportunity for further state pension income, not just for those who are in full-time work, but also, most importantly, for disabled people, carers and many women. Up to 20 million people will benefit from the scheme. Low earners will receive at least double the sum to which they would have been entitled under the state earnings-related pension scheme. We have recognised the need to increase confidence in private pension provision in our Pensions Bill. The financial assistance scheme provides £400 million to help people who face the reality of losing their pension rights. The pension protection fund, very much to the credit of the former Secretary of State, my right hon. Friend Mr. Smith, will be regarded in future as a major piece of institutional reform by the Labour Government, ending the scandal of workers who have worked hard all their lives and paid into a final salary scheme losing their pension rights when, through no fault of their own, their company goes bust. The pension protection fund will stop that scandal, and we are proud of that.
Of course we are looking at that difficult issue. Judgments are being made about many of those schemes. I hope that the hon. Gentleman accepts that there is an issue of moral hazard, as we do not want to force companies to behave wrongly in the operation of their winding-up schemes. Given our commitment on PPF and the financial assistance scheme, he and the House will understand that we want to do the right thing but, for reasons of moral hazard, we must be careful.
The informed choice programme is important, and combined pension forecasts are now being produced. The nature of the pensions problem is partly demographic. Forecasts suggest that in the next 50 years—the right hon. and learned Member for Rushcliffe made a strong point about this—the number of people over 65 will increase by three quarters, with numbers increasing more among the over-80s. As a result, the ratio of over-65s to people aged 20 to 64 will increase by 75 per cent. by 2050. There are therefore significant problems to consider, many of them related to demography. There are three main issues that will arise in future, and colleagues touched on them in their speeches. First, we are moving back to full employment, but too many people in their 50s, whatever the debate about the retirement age, are out of work. Employment rates are, however, moving in the right direction. Between 1997 and 2004, employment rates for people between 50 and the state pension age increased by more than 5 per cent. I am not complacent, however, as there are still too many people who are economically inactive. One million people on incapacity benefit would prefer to be in work, and we have policies to support them.
Secondly, ageism is an important problem. The Government will outlaw age discrimination. I have talked to constituents and other people in their early 50s who have been told that they are too old to work. Ageism can be as debilitating to individuals and as wicked and cruel as racism or sexism, and must be abolished. Thirdly, we are looking carefully at the state pension system. The Prime Minister said at our Brighton conference:
"We will . . . design a pensions system that has the basic state pension at its core, gives special help to the poorest and provides incentives for hard-working families to save whatever their wealth or income."
That is our strategy in outline. We must enable more people to have a decent second pension, and the state second pension is important. The Turner commission will look at the complex issue of whether we should maintain voluntarism in occupational pensions or consider compulsion. We need to debate that difficult issue, and we await the commission's report.
These are important issues. The way in which we respond to the challenge of an ageing society is a big question for the 21st century. We are determined to respond to it positively, looking at the commitment of older people, not negatively and pessimistically. The pension question is a major issue in any consideration of an ageing society, and we should all address it seriously.