I shall try to keep my remarks to a minimum, so that Back Benchers on both sides of the House can contribute fully to what will unfortunately be a much shorter debate than many of us would have liked.
The publication of the second report of the Pensions Commission in November marked the beginning of a major new phase in the ongoing national debate about the long-term future of our pensions system. I believe that its analysis is comprehensive and thorough, and that its recommendations are radical and far-reaching. That is why I believe that its proposals have given us an opportunity to build a consensus on the long-term direction that we should take.
Does the Secretary of State not agree—at least in retrospect, following the drama of the earlier part of the evening—that it would be wrong to suggest that the Turner report, given its potentially momentous conclusions for the whole population, can be dealt with adequately by Parliament in the hour and a half between now and 10 pm? Will he have a word with his right hon. Friend the Leader of the House to find out whether we can have a second session?
We have three hours for the debate, not an hour and a half. Perhaps the hon. Gentleman will make his own speech during that time. However—I mean no disrespect to Opposition Members or, indeed, my hon. Friends—I do not intend to accept many interventions. I hoped that the hon. Gentleman was going to make a point about pensions, but, sadly, he did not.
Given the importance of the issues, I think it is absolutely right for Members to have an opportunity to participate in, and lead, the debate. In all parts of the House, there is a depth of knowledge and expertise that may be enormously helpful as we prepare our response to Lord Turner's proposals. We are therefore keen to hear the views of every Member. In response to what was said by Mr. Davies, let me express the hope that we shall have another opportunity to debate the issues before we produce our White Paper in the spring.
I am glad that the Pensions Commission acknowledged the progress that we have made in reducing pensioner poverty since 1997. It was our first priority when we came to office, and rightly so. By targeting resources through the minimum income guarantee and then through pension credit we have ensured that there is help for the poorest pensioners, tackling the shameful legacy of pensioner poverty that we inherited in 1997. We now spend nearly £11 billion extra each year on pensioners, and almost half that additional spending goes to the poorest third. We have succeeded in helping nearly 2 million pensioners to escape from the poverty line. As is shown by figures from the Institute for Fiscal Studies, we are now in an almost unprecedented position in which pensioners are no more likely to be poor than any other group in society.
No one is keeping the hon. Gentleman here. He does not have to stay to listen to anything that he does not find comfortable or worth listening to, but I point out the reality of pensioner poverty that we inherited in 1997. He can go on disputing that. He just needs to check the historical record.
We have taken measures in the Pensions Act 2004 to tackle the loss of confidence in the private pensions market, including addressing the pensions mis-selling scandal, and the impact of a falling stock market and rising longevity on occupational pension schemes. The introduction of the Sandler suite and stakeholder pensions have been important steps in facilitating low-cost private savings.
All those were critical and necessary measures, dealing with the most immediate and serious challenges that we faced when we came into office, but now we must go further to build a system that will enable us to meet two significant challenges. The first is the unprecedented demographic changes that are taking place in our society. Soon, for the first time in our country's history, there will be more people over the age of 80 than under the age of five. The second challenge is the extent of under-saving, which the Pensions Commission calculated as leaving nearly 10 million people not saving enough for their own retirement.
It was to meet those challenges that we established the commission. We must now build on the progress that we have made in tackling poverty and in promoting equality and security, reduce the complexity of the current system and ensure that people can plan and save with confidence. We are looking for the widest possible cross-party consensus on those reforms.
In my statement to the House on the publication of Lord Turner's report, I said that our response would be based on five key tests. The first is personal responsibility. As my predecessors have made clear, the primary responsibility for security in old age must rest with the individual and their family. An active welfare state must provide a floor below which no one should be allowed to fall, but its primary role must be to enable people to provide for themselves, giving everyone the opportunity to build a decent retirement income that will meet their personal needs and expectations.
Of course, to achieve that, we need to achieve two of Lord Turner's central objectives: first, strongly to encourage individuals and their employers to provide for a pension that will deliver at least a minimum base load of earnings replacement; and secondly, to enable all people to have the opportunity to save for a decent pension at the lowest possible cost.
Lord Turner saw a major expansion of workplace savings as being fundamental to achieving both those objectives, recommending that all employees should be automatically enrolled into either a high-quality employer pension scheme or a newly created national pensions savings scheme. The principle of personal accounts has been widely welcomed, rightly, because I believe that that is the right way forward. Not unreasonably, the pensions industry is keen to explore alternative ways of achieving Lord Turner's objectives. That is why my hon. Friend the Minister for Pensions Reform has invited all those in the industry who believe that they can produce a better model for personal accounts to work up the details of their alternative approach.
There are three priorities for all of us here. First, any model must be able to achieve a radical extension of pension coverage, including lower and moderate earners, the self-employed and those working for small employers. Secondly, it must achieve a radical reduction in cost in terms of both low management charges and reduced administration costs for business, boosting in the process the value of any pension that will be paid out. Finally, it must be portable and reliable, adaptable to lifestyle choices and tailored to the personal needs of consumers.
Thank you, Mr. Deputy Speaker. That may have been a married woman listening to the debate and wanting to urge me to make this point. There are demonstrable benefits to society from women staying at home and bringing up their children, but many of those women lose out later in life because they do not have adequate pension savings.
I broadly agree with the hon. Gentleman. I shall say something about the position of women under the current system, and how they fare quite badly, in a few moments.
A moment ago, the Secretary of State said that it was important that people take responsibility for their pensions, and the public increasingly accept that. However, does he agree that contributions to the state system should be made on a fair and progressive basis? The cap means that a person earning just over the average income of £30,000 pays 9.2 per cent. in national insurance, whereas someone earning £100,000 pays 3.7 per cent. and someone earning £1 million pays 1.3 per cent. That cannot be fair. Surely there must be some scope to make the contribution system fairer?
Matters to do with national insurance are, of course, for my right hon. Friend the Chancellor of the Exchequer.
Finding the right approach to achieve the objective of a personalised, flexible tool that can enable people to save at low cost is a key part of any long-term pension reform. We start with a clear view about our objectives, but we have an open mind about how they can best be achieved.
However, one thing is clear, and it is that employers have an important responsibility to fulfil. Many employers already contribute much more than the 3 per cent. proposed by the Pensions Commission. For those who do not, the question is whether some form of compulsion is necessary and appropriate.
In 2004, nearly 80 per cent. of funded pension contributions came from employers. An employer contribution adds value to the pensions saving of an individual, as the figures make clear, and it can also act as an important catalyst for employee participation in the first place. However, the Government must be aware of the economic burden that adding costs to employers through any form of compulsion would impose.
That is especially true for smaller businesses. Clearly, a compulsion on small employers to contribute to pension schemes could have a disproportionate impact. We must be mindful of all such considerations before we proceed along this path.
The second test is that any proposals for reform must be fair, as Mr. Hollobone said. Any reform package must continue to protect the poorest people, so that the poverty that blighted the lives of millions of pensioners at the end of the last century will never recur. The package must be fair to those who have saved, reward those who have contributed and incentivise those who can save to do so. Crucially, it must be fair to women and carers, correcting past inequalities and reflecting those people's changing role in today's society.
May I press my right hon. Friend on the issue of fairness? The Turner commission had very little to say about the massive inequality that exists between those who receive very significant tax relief on pension pots of up to £1.5 million and those at the bottom of the income scale who receive very little in the way of support. Will he put that disparity at the centre of his considerations of fairness when he comes to decide the shape of any future system?
Obviously, we will look at all such matters in our White Paper proposals. It is not true that Lord Turner was not concerned about correcting inequalities in the pension system, especially as they affect women. He proposed a number of solutions, to which I shall come in a moment. Moreover, the tax simplifications introduced by my right hon. Friend the Chancellor will come into effect this April. They will offer significant improvements and advances in the current tax arrangements. We are making progress, and my hon. Friend may have an opportunity to explore his own proposals later in the debate.
We have already introduced a range of measures to improve the position of women pensioners in particular, both in the labour market and in terms of income in retirement. The minimum wage and the pension credit regime have been especially beneficial to women. Two thirds of the pensioners lifted out of absolute poverty since 1997 are women. The introduction of the state second pension means that the proportion of women now accruing significant state pension rights is similar to that of men, while almost all of the 1.9 million carers, and two thirds of the 5.8 million low earners, who have been helped have been women.
My right hon. Friend makes a powerful point, as there is no doubt that this Government have helped women pensioners hugely, especially through the pension credit. However, if a women does not have a full basic state pension she will not, by virtue of the state second pension, come out of the pension credit limit. Is not the real difficulty, therefore, the fact that only 17 per cent. of women have a full basic state pension when they retire?
Yes, those figures are broadly right. It is worth bearing in mind that we estimate that over the next 20 years men and women will accrue an equal entitlement to state pensions. That is progress, and it is progress that some people thought would not happen. I agree with my hon. and learned Friend that the current system does not treat women fairly, and we will address those issues in the White Paper to be published in the spring. I wish to pay tribute, quickly but sincerely, to my hon. and learned Friend for the work that she has done, together with colleagues from both sides of the House, in campaigning for more equitable treatment for women.
My argument today is that we can and must do more. Doing so will, however, require making some difficult choices. One approach favoured by Lord Turner is the introduction of a new universal basic state pension for those aged over 75. Another would be to remain true to the contributory principle, but to make adjustments to the number of qualifying years—for example, removing the 25 per cent. de minimis limit and turning home responsibilities protection into a system of national insurance credits. In every case, there is more than one way to achieve the objectives that Lord Turner set out. Lord Turner himself judged, for example, that an evolutionary approach to state pension reform was preferable to adopting a more immediate citizen's pension. The citizen's pension would involve spending large amounts of extra money on helping better off pensioners rather than poorer pensioners, so while it offers greater simplicity more quickly—and a route to greater equality for women—it does so at the cost of helping better off pensioners. It also destroys completely the contributory principle and carries significant implications for the crucial third test of affordability.
Clearly any system needs to be affordable for taxpayers and the economy as a whole. We have an obligation, especially on the Government side of the House, to continue to manage public expenditure prudently and responsibly. Several of the commission's proposals raised the prospect of significant additional Government spending—in particular, the proposed re-linking of the basic state pension to earnings, which was of course scrapped by the last Conservative Government. Ministers have made it clear that there will be no relaxation in our fiscal discipline and we will not put the public finances at risk. So the affordability test is central. If we are to fund a more generous state pension, such as the one Lord Turner has proposed, the critical question will be how we pay for it.
The Secretary of State says that he is concerned about affordability in relation to the basic state pension, but is he also concerned about the affordability of public sector pensions? As a share of the national economy, the cost of public sector pensions is going up by 50 per cent. at a time when the basic state pension is static.
We have entered into arrangements that are sustainable. The new arrangements for public sector pensions that we have reached with the trade unions open up the prospect of significant savings for the taxpayer in the next few years. It is not clear to me that the hon. Gentleman is proposing what he suggests he is proposing in relation to public sector pensions. I suspect that we will hear more from him in due course, as we will from Mr. Hammond. If I may get my defence in before the attack has been delivered, I would point out that we have spent the past few weeks looking at what the hon. Gentleman and his colleagues said about public sector pensions during the election campaign. I tentatively suggest to the hon. Gentleman that he treads warily down the path of suggesting that the deal is not a good one for the taxpayer, because—as he will know— he made no proposals during the election campaign to make any changes to public sector pensions.
Lord Turner has suggested that the state pension age should rise broadly in proportion to the increase in life expectancy. While that raises questions under the fairness test, it is not possible to have the debate about affordability without seriously considering an increase in the state pension age. My view is that some increase from 2020 is inevitable, but we should consider very carefully all the options for how that can best be delivered.
The fourth test is simplicity. Any credible package of reform must represent a clear deal between citizens and the state, so that people know what the Government will do for them and what is expected of them in return. The state must be clear about its priorities: a decent pension for both men and women, which can act as a platform on which individuals can be encouraged to save even more themselves, with continued extra help for the poorest pensioners.
Simplicity also means clarity for individuals about the value of their savings pot. It means clear, credible financial education and advice and an important role for pension information and pension forecasts to show people how much they need to save to achieve the income they want in retirement. Of course, it means people understanding the nature of the risks entailed in any type of savings product. Pensions are never a risk-free business and they should never be presented as such.
Finally, simplicity means having a system that allows people to plan and which is sustainable for future generations and that is my fifth and final test. If we are to lay the foundations for a lasting pension settlement, it is crucial that any reform package must be underpinned by an enduring national consensus—a system that will stand the test of time and not be pulled apart by successive Governments.
At the beginning of my remarks, I said that securing consensus on the right way forward is our objective, which is why I shall welcome contributions from Members on both sides of the House in the debate. Let us all try to demonstrate a common purpose: to make proper provision for this and future generations of pensioners; to continue to reduce pensioner poverty and to take the long-term decisions on pensions that need to be taken now, building on the progress that has been made, and which are right for both our constituents and our country.
This debate was always at risk of being an anti-climax after events earlier in the evening, but it is none the less about a big issue, which is important for all of us—those of us already drawing a pension, those of us approaching retirement and even those of us at the beginning of our working life.
We are faced with some truly long-term decisions, which our adversarial party political system with its four or five-year cycle may not be ideally designed to address. We caught a little of that in the Secretary of State's tone of voice. He tells us that he wants to build consensus, and the Opposition have certainly come to the debate with that intention. The British people will expect us to lift the debate out of the party political arena and genuinely attempt to build a consensus that gives them the security to plan for the long term, knowing that the settlement we eventually reach will not be unravelled by a spin of the wheel of political fortune.
This is the first opportunity that we have had to discuss pensions since the publication of the Turner report and at this stage an Adjournment debate is a good forum in which to conduct our discussions. Such is the magnitude of the issue, however, that we shall need further debates, and I am pleased that the Secretary of State acknowledged that that would be possible. I want to consider some of the preliminary issues that we feel need to be addressed to allow us to hold a serious and open debate in the attempt to reach consensus about the long-term future of our pension system. My main focus will be Turner.
Turner said that there is no immediate crisis. Although there may be no immediate crisis in relation to the state pension or the public sector's ever-mounting liability in respect of its pensions, many people coming up to retirement, who are stakeholders in private pension schemes, are experiencing something that feels remarkably like a crisis. I want to deal with that issue, as I am sure that many Members will want to raise it.
There are several reasons for the real, current crisis in the private pension sector—significantly lower investment returns and rising life expectancy, which is good news for everybody except actuaries. Nobody, not even in our most rabid moments, could hold the Government responsible for those issues. There are other things for which the Government must take responsibility, such as the Chancellor's £5 billion-a-year raid on pension funds, which has wiped about £125 million off the value of pension funds.
I hope that the Minister will refer to one issue in particular that is outside the scope of the big, long-term debate, although the Government could address it in the shorter term. It is the extent to which the regulatory regime under the Pensions Act 2004, which is supposed to encourage and protect private pensions, is encouraging a retreat from higher risk, higher return assets in favour of liability-driven investment in gilts, with a series of self-reinforcing and rather negative outcomes that we are seeing at the moment. That has driven up demand for long-dated gilts, thus driving down yields. Pension fund liabilities are calculated by reference to the yield on the long-dated gilt, which in turn has increased the deficits of those pensions and fuelled the next round of liability-driven gilt buying. Meanwhile, the funds have missed out on a recovery in the equity markets and perhaps an opportunity to repair the damage that previous stock market downturns have done to their balance sheets.
I certainly subscribe to the view that politicians, especially Opposition politicians, should not lecture the Debt Management Office on how it manages the public sector debt, so I shall not offer the Minister any recommendation about how the Government should fund their debt, and I urge my colleagues to follow that lead. However, the Minister could look at the demand side of the problem. He could consider the regulatory environment that is driving the flight from risk to gilts. He could also consider the extent to which the regulatory regime and the risk-based pension protection fund levy, which is now anticipated, are reinforcing patterns of investment behaviour that are making it more and more difficult for companies to plug the holes in their pension funds. I should be grateful if the Minister said something about that very immediate problem tonight.
While the Minister is responding, he might just take a quick look at the financial assistance scheme, which was set up with a great fanfare nearly two years ago to provide a solution for the estimated 85,000 people who have been left high and dry by the collapse of pension funds. The financial assistance scheme has so far paid out to just 15 people, and that figure represents an advance. The latest published Government figure shows that 13 people have benefited, but we are grateful to the Minister for yesterday updating that figure to 15 people. If we could deal with those short-term, immediate issues, that would be great.
Let us go back to the long-term reform agenda. The Turner report represents a serious analysis of the twin challenges that the Secretary of State for Work and Pensions has spelled out, namely, of dealing with the demographic changes in Britain's population while maintaining Britain's world competitiveness, which is essential to the prosperity of all of us. Pensioners, those in work and those unable to work all depend on that international competitiveness for our future prosperity.
Whether or not the Opposition or, indeed, any other hon. Member adopts Lord Turner's recommendations in the end, we should treat his report with respect and use it as the basis of an attempt to build the great consensus that the Secretary of State spoke about—a consensus between political parties in the House, between generations in the country, between the sexes and between different groups in our society. The Opposition are formulating our response to Turner's proposals on the basis of the principles of fairness, sustainability, security and affordability. The settlement must be fair by embracing all types of pension—state, public and private sector—and it must recognise the differences in people's life expectancy and the need for flexibility to accommodate them. It must address the discrimination against women that is built into the present state system.
On security, people must be given a clear understanding of what the state will and will not do. That security must be based on a consensus that gives people the confidence to plan ahead and make their own arrangements, with an understanding that the settlement that is reached will endure for many years. On sustainability, the settlement must be durable in the long term. It must provide a solution for today's pensioners, as well as people in work and those who are not yet of working age. Of course, the settlement must be affordable, both now and in the future, against an objective baseline of the likely future cost of the present system, if it remains unaltered.
As we analyse and consult on the Turner proposals, which the Government are also doing, the big questions are becoming clear. Is the trade-off of a higher state pension age for higher state pensions the right one? Is it affordable and can it be made sufficiently flexible to be fair to those whose life expectancy will be different from the rising average? What degree of compulsion should be employed when encouraging people to save for a second pension? Should employers be required to contribute and, if so, how much? Should there be special arrangements—either subsidies or exemptions—for small and medium-sized enterprises? How should such a second savings scheme be managed and how will it impact on the existing pensions industry? As the Secretary of State said, the Government are actively pursuing answers to those questions and a lively debate has already begun. Is the balance between public and private provision that Turner proposes the right one for Britain in the 21st century?
The process is not competitive because we are not trying to get better answers than the Secretary of State. I genuinely hope that by separately pursuing the answers to those questions, we will find not that we get precisely the same answers—that would be too much to expect—but that our answers are sufficiently close to make it possible to build a genuine consensus across the political divide. If we are to have a genuine debate and a real consensus is to be formed, the Government must come to the debate with an open mind. They must be ready to engage in some give and take, because without that we cannot build a consensus.
The political reality is that if all bar one member of the population reaches a consensus and the one is the Chancellor of the Exchequer, we will not have a way forward. It was thus disappointing to those of us who want a consensus that the Chancellor tried to shut down the debate before it got started. He positioned himself from the outset as the road block to pension reform. If we are to have a proper debate, we need transparency, flexibility and impartiality. Nothing must be ruled out and nothing must be off limits in advance of the debate. I have to say that the Government's track record on that is not good, although that is no reflection on the Secretary of State or the Minister for Pensions Reform, because the culprits in this case are the Secretary of State's predecessor but one and the Chancellor of the Exchequer.
Although private sector pension stakeholders are facing tough choices and often negotiating against the constraint of the viability of their employers in the face of burgeoning pension deficits, public sector unions face no such constraints. Whether funded or unfunded, any gap in public sector pension provision must be met by the taxpayer. The Secretary of State's party fatally undermined any claim it could make to be addressing the matter impartially when it caved in to the public sector unions on retirement at 60 before the general election, and caved in again in October last year. If we are to have a serious debate and face up to the tough decisions that must be made, the burden of adjustment must be shared equitably. There can be no exclusions or favours for specific groups. We must all be in this together.
I had not intended to intervene on the hon. Gentleman, so I am grateful to him for giving way. Will he clarify whether he is suggesting that the Government should go back on the agreement that we reached with the public sector trade unions? If that is his position, will he explain why he made it clear during the election that he had no plans to change any aspect of the public sector pension deals?
The Secretary of State should talk to his right hon. Friend the Chancellor of the Exchequer. The Secretary of State for Trade and Industry said that the deal is done and that it is set in stone. However, according to the minutes recording the Chancellor's appearance at the Treasury Select Committee on 15 or
There is therefore a chink of light, and we need to understand what the Government's position is. Everyone needs to understand their position on this vital issue. [Interruption.] My position is that we are all in this together, whether we have a state, public, or private sector pension. A sometimes painful and difficult adjustment must be made if we are to achieve a sustainable settlement. May I tell the Secretary of State that it is not sustainable to say, before the debate begins, that any group in society should be excluded from facing up to the realities of demographic change, reduced investment returns and all the other factors—[Interruption.] The Secretary of State may talk about U-turns now that the election is over, but his Government took on the public sector unions only to back off for party political reasons when the election was called.
I am glad that the hon. Gentleman does not want anything to be ruled out or ruled in, and that he wants an equitable and fair arrangement. Will he throw into the mix the £20 billion of tax reliefs that go mainly to the richest 10 per cent. of the population, and thereby help the rest of the population?
I do not think we can honestly conduct a debate on the basis that we are trying to build a consensus if we rule anything out before the debate begins. We must consider every aspect, as it would be unreasonable not to do so. People outside the House would not understand what we were trying to do if we were not prepared to look at every aspect of the way in which our pension system works. On the table is a set of proposals from Lord Turner. No one will agree with all of them, but it is a serious piece of work, and it should be the starting point for our debate. I hope that the Minister for Pensions Reform can make it clear that while public sector workers, like their private sector counterparts, are entitled to expect fairness and proper recognition of the accrued pension rights that they have acquired during their period of employment, they, too, are part of the real world and cannot be insulated from the reality of rising life expectancy, which is the key factor underlying our debate.
Affordability is another critical issue. We cannot have a serious debate unless we are transparent about the financing assumptions underlying the proposals. The Chancellor has already dismissed Turner as unaffordable. A serious debate needs a clear baseline, and Lord Turner sets out his baseline on page 13 of his report. The Government should come clean. We need to know whether we are costing Turner's proposals against a baseline of a minimum income guarantee rising in line with incomes, or against one that rises in line with prices. If the Chancellor wishes to make his baseline assumption an end to the income link in 2008, let him do so and defend the decision publicly. He should not use de-indexing as a stick with which to beat Turner, or as a tool to undermine Turner's proposal, without being prepared to announce and defend that policy.
The Government must come clean, too, about the savings from the equalisation of women's pension age—a net £10.1 billion a year by 2020. Turner assumes that that money is available, but will the Minister confirm in his winding-up speech that the Government's position is that it is not available, because it has been spent on something else? Alone among Organisation for Economic Co-operation and Development countries, the UK will see the percentage of gross domestic product spent on state-funded pensions and state-funded pensioner benefits declining between 2010 and 2020. If that is the Chancellor's response to the pensions crisis, he should say so. If not, he should have the courage to acknowledge that Turner's assumptions are no more than realistic politics.
At a time when the private sector has been forced to acknowledge and confront its pension deficits through the Pension Protection Fund levy, FRS 17 and the explicit statement of pension fund liabilities on companies' balance sheets, we can no longer accept the Government shrouding the public sector pension liability in a smokescreen. We need an objective, independent, regularly updated assessment of public sector liabilities as an integral part of the public accounts. Perhaps the Secretary of State will have a word with the Chancellor to see whether the Chancellor can manage that in time for the Budget in March or April. If there is not time to work out the figure, an estimate has been published today, which is somewhat ahead of the Government's most recent estimates.
Finally, a small but important request to the Minister—if we and others are going to engage in this debate at a serious level, we need the tools to do it. The Turner report contains a wealth of detail, but not the disaggregated data required seriously to examine the options. I have written to the Secretary of State requesting that the Opposition have access to the Department's software model, PenSim2, which was made available to Turner and other outside bodies, because only by using PenSim2 can modelling outputs be directly and robustly compared with Turner's conclusions. Surely the Department is currently examining a range of options, and even if it is not I assure the Minister that the Treasury is. Will the Minister take the opportunity in his winding-up speech to underline the consensual approach by sending a real message to people outside this House that this is not politics as usual and that we are trying to build something together by announcing that he will allow appropriately qualified researchers from the official Opposition and, indeed, any other parties that want to avail themselves of the opportunity, access to the PenSim2 model?
We are ready to engage in a real debate about long-term solutions to the pensions challenges facing Britain, and we are ready to work with the Government to build a consensus, which is what the British people want and expect.
I am concluding, and the hon. and learned Lady will have a chance to make her own remarks.
The future retirement security of the British people is too important an issue and too long-term a challenge to be allowed to become a political football. However, the debate must be genuine. The Government must act now to provide the transparency to allow the debate to be conducted seriously. They must rule out special treatment or exemptions for any group in society. In short, they must sign up to the notion that we are all in this together—then, together, we can find a lasting solution.
This debate is narrowly focused on the Pensions Commission report, which is not fit for purpose in three significant ways. Any one of the issues that I hope to raise this evening suggests that we should not go down the path advocated by Turner.
First, the Pensions Commission report ignores the golden opportunity created by the Chancellor for serious, long-term pension reform. Secondly, it does not examine the dangers to long-term security for pensioners posed by the proposed measures. Thirdly, the proposals simply will not last politically.
I turn first to the golden opportunity that the Chancellor has created for us. Every major pension reform put before this House in the past 30 or more years, by Governments of both persuasions, has been bedevilled by the fact that, while trying to think about long-term reform, the Government of the day had to deal with how long-term reform might help to deal with the immediate problem of rising pensioner poverty. Through the pension credit, the Chancellor has not merely redistributed more funds to the poorest pensioners than any other Chancellor since 1948—I say merely, but that is immensely important to our constituents—but opened the door for Governments to think carefully about the long term. They no longer need be tripped up by thinking that they should modify the proposals because of the mega-issue of desperate and rising pensioner poverty.
My disappointment with the Pensions Commission report is that it fiddles around with the furniture, which the Chancellor said he was not happy to do. Such fiddling is also against the report's original terms of reference and distracts our attention from the opportunity for long-term reform. Serious as that is, the report does not stop there: it also presents particular dangers for pension provision. Tucked away in an appendix is the devastating fact that five sixths of the final salary schemes that have closed have done so since 2000; in other words, they have closed under our watch. My worry is that the commission's soft option of trying to entice employers who are not currently contributing directly to their employees' pensions will result in many more employers thinking, "Thank God! We can get off this longer-term liability that our predecessors committed us to." Far from extending funded pension coverage, the commission's proposals, if implemented as drafted in the report, could mean the end not merely of final salary schemes, but of defined contribution schemes. Many employers will think that the way for them to remain competitive is to opt into the new national pension saving scheme.
There is another danger that Turner holds: mis-selling. In his charming and non-controversial way, the Secretary of State warmly shook the neck of the Opposition and reminded them of their responsibilities in respect of previous mis-selling. What will be the charge against any Government who introduce the national pension saving scheme? It is being set up with Government approval, the contributory agency may well make the collections and presumably, the Government will make some warm noises about its being an ideal way to save. They are having difficulties with the ombudsman's report, for which we are waiting, because they produced merely a leaflet telling people that occupational pensions are a good thing, so imagine the rumpus that will occur if one of the proposed schemes does not perform as well as the other savings products to be provided under this particular pension hat. That is not an avenue to go down.
In my efforts to build a consensus with the Liberal Democrats—I have not yet done so with the Tories—I, along with Matthew Owen, a Liberal Democrat, proposed a national pension savings plan back in 1993. We looked at the real strength of the national savings movement in this country. If the Government wanted additional savings, why not capitalise on that route and set up a national pension savings plan? There would be one product and it would be clear what that was. There would be minimal charges because it would be index-linked—a tracker fund—with trustees elected by the members to make sure the Government did not get their sticky fingers on those funds, and it would not leave the Government open to mis-selling charges.
The third disadvantage of the provision that the Pensions Commission proposes is that it ignores the huge risk to individuals when they save through individual pots of savings in the private market. I thought that Mr. Hammond would continue his analysis of the dangers that companies were facing. We all know what those dangers are, but private individual savers are facing even more horrendous problems than are companies. To say that a well-managed private pension scheme will advise people to move at the right stage from equities into bonds ignores the fact that that advice might be given just when the equity market has collapsed, so the money being moved into bonds which will buy the annuity has been devalued. For all those reasons, there are huge dangers in going down the Pensions Commission route.
Finally, I do not think it will last. A serious reform that tries to raise the basic pension significantly for all our citizens and which is on a pay-as-you-go basis will not last the course. We tried that model before. A previous Secretary of State asked me why we opted for SERPS to be pay as you go and not funded. I said, "Secretary of State, we were against capitalism then." "Ah," he said. "That explains why we went down the pay-as-you-go route."
For all the faults inherent in a funded scheme, it gives us property rights in the capital of the country, but we need to share the risks attached to property owning as a means of providing pensions. When the Government Actuary has costed the proposals with which I am associated—the pension reform group proposals—I hope we will have an alternative that takes as a starting point the chance of a huge breakthrough in this debate, by uncoupling the question of how we deal with today's poor pensioners from the question of long-term reform. To a huge extent, pension credit has done that.
We can therefore think genuinely about the long-term, which must be a funded provision. That, combined with the state pension, offers us a minimum pension that does not merely take means-testing for old people down to 30 per cent., but abolishes it for practically all. We ought to grasp that opportunity. We ought not to be concerned with moving the furniture about in a way that does not deliver that important objective. I ask other speakers in the debate to say, if they have time in their 10 minutes, to what extent their proposals aim for a future that ensures that all those who are part of any new reform will draw a minimum pension free of means-testing.
This is a short debate on a big subject, although we have already had some good contributions, including the thoughtful one we have just heard from Mr. Field. Given that we have only three hours, it is tempting to suggest that we should have more of these debates over the next few months and more time available for contributions, but we have had much consultation on pensions and pension reform, not only over the past year, but since the Government came to power in 1997.
Many in the House and in the country are desperate to see some proposals from the Government that arrive on the promised time scale, so that we can get stuck into a meaningful debate knowing that there is a clear position on the part of the Government as a whole and that we will not be strung along for a long time before we get some half-baked, small-scale proposals that command the support of the various members of the Government.
I will make some relatively short comments on the broad aspects of the direction of pensions policy. I hope that, in time, the Government's own pensions policy will turn up so that everybody, including outside groups, can engage seriously in the debate.
I join Mr. Hammond in congratulating Lord Turner on his contribution to the debate in his excellent and well thought through report. Liberal Democrat Members strongly agree with some of his principal conclusions, including his view that the existing pension system
"is not fit for purpose looking forward", that
"the current state system will deliver increasingly inadequate and unequal results" and that
"significant future growth of means-testing would . . . undermine voluntary private pension saving by the very groups of people . . . most in danger of under-provision."
Lord Turner's report was a powerful indictment of the future direction of Government pension policy. It clearly shows that, in his view and in that of the other commissioners, a fairly significant change will be needed if we are to have a pension system that the country can rely on in the decades ahead.
I welcome the contributions that the Secretary of State for Work and Pensions made to the debate. They have been modest and hedged with various conditions, but on the whole what I hear from him is promising, as is what I hear from the Prime Minister. The Prime Minister was rather quiet when Lord Turner's report emerged and did not take any opportunities to get involved in the rather sharp-edged debate that was going on between Lord Turner, the Department for Work and Pensions and the Treasury. However, his speech to the CBI conference on
"On any basis, we will need to spend more on retirement if there are more retired people".
That is an obvious statement that does not seem to have hit home in the Treasury as yet. He went on:
"We need a system that enshrines a decent basic state pension, funded by the tax-payer; that allows top-ups in a way that is easy to save; a retirement age that begins, over time, to reflect the changing demographic reality; and a proper balance between the obligations of the employer, the employee and the state. And, of course, any reform has to be affordable."
He also said:
"The basic construct of Turner is right; it addresses these requirements."
We very much agree with the broad thrust of those comments and with the broad thrust of Turner, although there is immense detail, particularly in the proposals on the basic state pension architecture, that people will want to debate further. Lord Turner has done a good job, the DWP has, cautiously, done a good job, and the Prime Minister has, very cautiously, done a good job.
It is tedious to have to go back to the issue that dominated Lord Turner's report—the battle between the Treasury and Lord Turner—but it is fair to say that the contributions of the Chancellor of the Exchequer and the Treasury to the pensions debate have not been very constructive. In particular, they have confused the issues of affordability, which any Treasury will be concerned about, and sustainability, which those who design the state pension system must be concerned about. At the moment, we have an affordable system that is not sustainable. Unless the Chancellor can hold both those concepts in his mind at the same time, we will have a problem. It is significant that, after Lord Turner's report was published, he had to publish a document rebutting Treasury allegations about his figures entitled, "Sanity in Figures". When The Daily Telegraph asked him in an interview on
"Yes . . . The Treasury has a legitimate role in looking at the cost implications . . . but we have to have a sensible debate about the figures."
He is right.
We must hold a sensible debate about the point that the Prime Minister made gently in his speech to the CBI conference when he mentioned that our pensioner population will increase by approximately 50 per cent. in the next three or four decades. Yet the Government forecast that the amount of gross domestic product that goes into the state pension architecture will remain roughly stable. As the Pensions Commission has pointed out for months, that can only mean pensioners becoming significantly poorer compared with the rest of the population.
It is unrealistic to believe that any party, let alone the Labour party, would allow pensioners at the bottom of the pile to fall behind the rest of the population by ceasing to link means-tested benefits to average earnings and reverting to prices. No Labour Member seriously believes that any Government would entertain that option for long.
We are left with several key issues. We must consider what to do with the basic state pension architecture. Our view is similar to that of the Prime Minister and Lord Turner: there should be a much better and simpler basic state pension. There is a big debate to be held about its nature, how women are dealt with, whether it is a citizens pension and whether the contributory principle will be respected. However, the basic principle is a much simpler state pension that everybody can understand and that lifts people out of poverty. The Government's job is to fund that properly to ensure that people can rely on it. We need as much consensus as possible across the political spectrum so that it lasts.
I am pleased that the hon. Gentleman says that lifting people out of poverty should be our goal. Given the generosity of pension credit, there is a huge hurdle to surmount if one is considering only a tax-financed retirement pension. Is he committing the Liberal Democrats to only a tax-financed basic state pension or is he considering both tax and funded provision?
I am talking about a tax-financed basic state pension. The right hon. Gentleman is experienced enough in the subject to know that there are several different methods of delivering that. Some try to tackle the issues that the Secretary of State mentioned earlier, including fairness, given the limited resources.
A better funded basic state pension or citizens pension requires better methods of funding it. We must not only consider the transition from our current position to where we want to be but seek savings elsewhere in our pension system and in public expenditure. That is why the amount of money that goes into public sector pensions is so crucial. The Government imply that we cannot possibly put more money into the current basic state pension architecture because that is unaffordable. Yet the cost of public sector pensions has increased and is projected to rise by 50 per cent. as a share of GDP in the next few decades.
If it is impossible to find the money for the basic state pension architecture, it is odd that the Government are allowing the cost of public sector pensions to increase so rapidly. As the right hon. Member for Birkenhead knows, the controversial proposals that have recently been agreed between the public sector unions and the Government make a small contribution to reducing the cost in the next few decades. We believe that any Government will eventually need a version of the Turner report that must tackle public sector pension reform. We appreciate that that is controversial but fundamental reform is unthinkable without objective analysis.
As Lord Turner hinted heavily in his report, although he was not allowed to examine the issue in detail, the current level of pension right accrual is deficient in total and increasingly unequal. His main target was clear.
Does the hon. Gentleman agree that there is something unexpected about the Government's apparent commitment to final salary schemes in the public sector, given that Lord Turner has said that the people who end up on high final salaries—typically the few most senior people in a final salary scheme—will have paid the smallest percentage of their lifetime earnings to achieve their final pension payment? That does not seem entirely fair and I am surprised that more Labour Members have not picked that up.
I agree with the hon. Gentleman. The Government have obviously tried to address that to some extent by looking at career averaging. However, in some public sector schemes—not all, in fairness; the local government scheme is clearly not comparable with some of the others—the effective contribution rates, which after all involve the taxpayer, are many multiples of what we see in defined contribution schemes, and even double some of the defined benefit schemes in the private sector. I would have thought that many people, even in the public sector, understood that unfairness. Of course they want to see decent pensions in the public sector, but they understand that we cannot rely solely on the taxpayer to pick up the bill. People in the public sector, including Members of Parliament, might have to decide whether they want to receive a less generous pension or to make larger contributions to their pension to ensure that it can be delivered.
Does the hon. Gentleman agree that pensions, particularly occupational pensions, are in effect deferred wages, and that any proposed changes to pension schemes should be introduced only after negotiation with the appropriate trade unions and with the full agreement of the scheme's members?
I agree with the hon. Gentleman that there are major issues involved and that remuneration needs to be looked at as a package. Often, however, the better pension benefits in the public sector do not look as though they are simply compensating for lower pay, although that seems to be what most economic evidence suggests today. Of course the hon. Gentleman is right to say that there should be negotiation on these matters.
Whenever I have discussed these issues with people in my constituency who work in the public sector, I have found that they are far more grown up than we assume. They understand that there are no blank cheques to be signed in this regard. Many of them, including people in the local government scheme, have suggested that they should be paying higher employee contributions. They ask why employee contributions have not risen over time, even though people are living longer. One of the mistakes that we make in politics is to treat people as though they are children who cannot understand these basic issues, but most people understand that there is no such thing as a free lunch, and that Governments of all parties have to grapple with these difficult issues.
Another issue that needs to be looked at if we are to afford a better basic state pension architecture is the state pension age. The Government appear to have made a significant change in their policy in this area; I think I heard the Secretary of State say today that he thought an increase in the state pension age was inevitable. That is quite a striking change in Government policy from that of the Secretary of State's predecessor but one, Mr. Smith—
I am most grateful to the Minister for updating me; it is difficult to keep up. I hope that I have not missed anything new today.
The right hon. Member for Oxford, East had previously put it clearly on record that the Government opposed any increase in the state pension age. Some of the concerns about that came from the Treasury. I do not know whether, when the Secretary of State spoke today about the increase in the state pension age being inevitable, he was speaking on behalf of the Government with the support of the Treasury, or whether he was simply speaking on his own behalf.
The right hon. Member for Birkenhead spent some time talking about the difficult issue of what any additional pension should be, if one were available in addition to the basic state pension or citizens pension. It is clear that no one would want simply to rely on a basic state pension in future, even if it were considerably higher and better than the state pension that people rely on today. We are still talking about a pension that would seek to protect people from poverty rather than to give them a life of luxury in retirement. We want most people not only to have access to the state pension but to have a second pension into which they put savings and to which their employer contributes. It would be right, particularly if we are to address the unfairnesses of the public sector scheme, to ensure that employees, employers and the state contribute to those second-tier pensions, although clearly that highlights particular issues for small businesses and others to which the Government will have to be sensitive. A partnership between those three seems to me to be sensible and the only way to get enough money in the pension pots of workers on low incomes to make a real difference.
There are some massive issues here, which the right hon. Member for Birkenhead highlighted very clearly. He was concerned about the impact on defined benefit schemes. Frankly, my view is that defined benefit schemes, in the private sector at least, seem to be on the way out anyway because of the economics of such schemes. How will we manage the risk transfers involved? We are talking, potentially, about an enormous transfer of risk from the Government—as we have seen many times, there is a risk in relying on them—and from employers, who have not been able to handle this risk recently, towards individuals, many of whom are completely unprepared to handle risk of this type. Indeed, I dare say that most people are completely unprepared to handle it.
I do not see many alternatives to transferring those risks to individuals and I think we will end up going in that direction whoever is in government, but I am under no illusion about people's preparedness to take on that responsibility. An enormous extension of financial literacy, starting from school, and of financial advice to people on low incomes is required. As the right hon. Gentleman correctly said, careful thought from the Government on maximising choice for those who want to be able to choose their second pension and structure it in a way that they, rather than the Government, think desirable is also required.
Careful consideration is required to deal with the issue that the right hon. Gentleman raised about risk and not ending up with people thinking that they have two Government-guaranteed pensions. The ingenious scheme proposed by Lord Turner must not be considered a Government-guaranteed second pension, because it is not that. No future Government could provide such a guarantee.
Those are the major challenges that the Government have to address on pensions policy. I genuinely hope that we can find a consensus across parties that lasts rather longer than consensuses have in the past. The experience of the 1970s is not encouraging in looking at the period for which a consensus can be held together. This is a big challenge for the Government, as is seeking consensus internally first. I look forward to the time—in the promised couple of months I hope, although such periods tend to expand, as we see with the Child Support Agency—when we have the opportunity to hear the Government's proposals and to know that they are agreed across the Government. Then we can engage in a serious debate, knowing that something will come out of it.
We on the Select Committee had the pleasure of the company of Lord Turner and John Hills at our hearing on
The key thing with Turner is that the analysis is superb, but the problems come with the solutions he offers. I do not think I am breaking any secrets when I say that I chaired a parliamentary Labour party meeting about a month ago where 31 people were present and 28 different solutions were on offer. That is the situation we are going to be in.
There is such a wide range of ways out in terms of how Turner analyses things and I am intrigued, but also concerned, by the use of the word "consensus". Who are we aiming to get consensus with and between? Is it with and between men and women, because that has never been there before? Is it between young and old? Is it between contributors and beneficiaries? Is it between the public and private sectors? Is it between professionals and manual workers? Let us not forget that if we move at some time to a retirement age of 69, a less than academically gifted child who leaves school at 16 will have to work for 53 years. A professional person, however, will have a working life of around 40 years. That is a huge difference in terms of retirement age.
Consensus between the various parties in the House is the most dangerous consensus of all. In 1975, we had that consensus across all parties in the House including the Scottish National party, and it lasted five years. With the best will in the world towards Opposition Members, it is an absolute betrayal to pretend that they agree with something and will stand by it should there be a change of Government. That is a pretence and a sham. The consensus needs to be among the public, consumers and those most affected by the issue, not between the Government and Opposition Benches.
There is no doubt that there is a crisis of confidence among consumers about the pensions and savings industry. Often, that crisis of confidence is used by individuals to justify not doing something that they had no intention of doing in the first place. We must recognise, however, that there have been successive broken promises, mainly by Governments but also by financial institutions—changes to the state earnings-related pension scheme, pensions mis-selling, low-cost endowment policies—
That lack of confidence is reinforced daily by various financial scandals in all sorts of spheres, not necessarily involving pensions and savings. Every time that someone sees a financial scandal, whether it is credit cards being ripped off on the internet or whatever, that loss of confidence is reinforced. Any measure brought forward by Government—this is where I take great exception to what Mr. Laws said—must therefore carry some form of Government-backed guarantee to people that any scheme that they enter into will not take away their money, and that they will not find out at 59 or 64 that the pension that they thought they had saved for has disappeared. Should we finish up with a model along the lines of the national pension savings scheme, it needs to be managed by a body such as National Savings and Investments, which has credibility and is semi-autonomous but has the backing of Government.
We can contract out investment management. I have been heavily lobbied, as, I am sure, many other Members have been, by the Association of British Insurers, the National Association of Pension Funds and others who are just vested interests scared stiff that if NPSS or anything similar comes about, they will lose business. They have little concern for the individual and the consumer, and are much more concerned about what is happening to their business. Within the benchmarks and costings, however, they can bid against anyone else for the investment management programme.
We need to be honest with people, and I suspect that the only source of such cost-free advice is Government. We need to be honest with people in different income bands about what is definitely right for them, and what is definitely wrong for them.
The hon. Gentleman should let me finish. He has not been listening.
Such advice would be along the lines of what is definitely in and definitely out for people in different income bands. For instance, anybody on less than about £13,000 should be in the state second pension and nothing else. People on more than £30,000 to £35,000 will always take care of themselves. My hon. Friend Kelvin Hopkins referred earlier to the 55 per cent. of tax relief that goes to 10 per cent. of earners. People in that income band are mad not to invest in pensions.
The big gaps are between those who are below the lower earnings limit—largely women—who are excluded, the self-employed, and those whose annual incomes are between £13,000 and £30,000. They are the people who have opted out. Ironically, they have reached the conclusion—by whatever convoluted means—that they need not be involved in the pensions system. That is silly. It is stupid and irrational. But would those people take any notice of a financial adviser who would charge them anything between £150 and £600? Under the current system, pensions are not bought; they are sold. No one wakes up in the morning and says "I will buy a pension today." Pensions are sold, through a friend, a contact or an advertisement. It is usually an accident, in that no one decides to buy a pension.
I hope that my colleagues in the Government will forgive me for saying that if the Government can give advice on animal welfare and how to look after cats, on how to wear slippers and on how to be safe going in and out of the shower, they can surely give some responsible advice on pension products.
I do not think we can ignore the fact that owing to changes made last year following the Pensions Act 2004 and the Finance Act 2005, we are giving higher-paid earners up to £600,000 in tax relief. That can never be part of the mantra "The many, not the few". The issue will keep coming back, as will the issue of contracted-out rebates, which time prevents me from exploring. Those are big issues, which the Government will have to address. We will certainly examine them during our Select Committee inquiry this summer.
In the new mode or fashion, my hon. Friend Mr. Hammond—who made an excellent and extremely well-informed speech—was very emollient and kind to the Government. I think I have a reputation in this place for calling a spade a spade, and I will live up to that. People must be reminded—and I reminded my constituents at the last election, although I may have been the only Conservative to do so—that since 1997 the Government have presided over nothing less than a dramatic and systemic pensions disaster.
In 1997 we had the strongest pensions system in western Europe, together with The Netherlands, and one of the strongest and soundest in the world.
I cannot, because of the time constraint. I hope that the hon. Gentleman will forgive me.
What has happened to the system since then? A third of the defined-benefit schemes that were operating in 1997 have closed altogether, and another third have closed to all new entrants. The same is true throughout the voluntary pensions sector. Let me quote from page 2 of the Turner report, no less. It states that
"voluntary private pension provision is not growing: rather it is in serious and probably irreversible decline".
That is a terrible indictment of a Government who should have regarded the maintenance, indeed strengthening, of our pensions system as an elementary, fundamental responsibility when they came to power.
Far from being prudent, as he likes to say that he is, the Chancellor has behaved with reckless irresponsibility. In 1997, the stock market was doing very well. The Chancellor thought "Fine: the stock market will go on for ever doing so well that it will be able to absorb not just the costs of increasing longevity—the actuarial costs that will be borne by these schemes—but another £5 billion a year in gratuitous tax." Of course, he was completely wrong.
The Government have compounded that with further mistakes. My hon. Friend the Member for Runnymede and Weybridge mentioned the regulatory regime, and the perversity of forcing pension funds to move from equities to gilts—
I really cannot. It is not my fault that we are subject to these time restrictions.
It is perverse to force pensions funds to move from equities to gilts. The only way that one can have a decent return on a pension fund, which is by definition a long-term investment, is by being substantially in equities.
The Government's attempts to do something about that have been completely mishandled and misconceived. As I predicted when I was pensions spokesman for my party in the 1997 Parliament, the stakeholder pension did not work because it was running against the enormous weight of the extension of means-testing. That meant that, for people on modest incomes, it made no sense to go into a voluntary pension scheme. That is the fatal flaw in so many of the Government's calculations and so much of what they have been saying tonight, although it is no doubt well-intentioned. It will not work in those circumstances.
Of course not.
I calculated when I was pensions spokesman that, if one saved £100,000 a year in one's pension fund, one would gain no benefit at all. The result would be an annuity of about £4,000 a year, about the amount that one would lose in means-tested benefits such as the minimum income guarantee system, including housing benefit and council tax relief.
Those amounts have greatly increased. One probably has to save £150,000 a year before one even starts to make a return. That means that, if one saves £300,000 a year, one will get half the market return—half what one should expect for the sacrifice of consumption and for the risk. If one saves £500,000 or more, it is worth it but, by definition, that can interest only a small minority of our population. That is a fatal flaw that is not recognised in Turner. That is why I want to emphasise the point this evening.
What is the solution? Again, we have too little time to get into the subject, but let me set out four points that will be essential in any solution. First, we must maintain the contributory principle. The Government's emphasis on responsibility means nothing if we get rid of the contributory principle. That is why I strongly disagree with Turner on such matters as making the state retirement pension residential by qualification, rather than contributory.
Secondly, most importantly, we must reduce means-testing in our social security system. The indexation must be reversed. It is economically perverse and an insult to—
I am wondering whether it is really a point of order but I will allow the hon. Gentleman to proceed.
Bless you, Mr. Speaker.
Means-testing must be reduced and indexation must be reversed. It is both perverse economically and insulting to those who save to say that a less favourable regime will be applied to savings when one is working and contributing to a pension than when one has a means-tested, non-contributory pension. In my view, one cannot do anything about a second pension going above the basic state retirement pension until the contributory pension, if one is entitled to the maximum pension, is higher than the means-tested tax credit, pension credit or whatever one wants to call it. Only from that point on would it not be mis-selling to force people into a second-tier pension.
Thirdly, on that basis, we should go for compulsion. It is reasonable to do so. It is actually essential because there are enormous external costs in not having universal saving; people tend to fall back on the state unduly. That must be covered. There are also enormous internal costs in any pension scheme if it has to be distributed and sold. If we have compulsion, we will get rid of the major cost element in the pension industry: the cost of marketing, distribution and administration, which is very great if there is a voluntary system. I do not believe that the funds should be in the hands of the state. I believe that they should be in the private sector.
The best model that I have come across is the Australian superannuation scheme. That scheme introduced compulsory contributions by both employers and employees very gradually, and we should adopt the same approach. The process in Australia took about 15 years, and no single increase in contribution amounted to more than 1 or 2 per cent. of salary, for either the employer or the employee.
If employers are told that they have to set aside 1 per cent. of their wage bill for contributions in one year, with the same amount to be so allocated in the following year or the year after, they can often take that amount out of the increases in wages or salaries that they would grant in that period. In that way, compulsory contributions can be phased in without creating problems.
The Government and the Turner commission are alive to the fact that problems must not be created for employers, especially for those with small businesses. Such problems can drive people out of business or so raise the cost of labour that demand for it is reduced and unnecessary unemployment is created. The Australians have shown how that circle can be squared to a remarkable degree. Turner has in mind a scheme that would yield about 15 per cent. of beneficiaries' salaries by way of a second pension, but I think that we should be much more ambitious.
I have set out my four basic approaches, but there are more than 600 Members of this House and I accept that there will be at least 500 pet schemes to solve the problem. That is why I reiterate my earlier appeal for another opportunity to debate this matter. Moreover, the subject of pensions deserves a full-day debate. We should not require it to be shared with another big issue of the day, even one as dramatic and exciting as the one on which we spent so much time this afternoon.
I was interested to hear the previous speaker, Mr. Davies, say that he wanted to break the consensus evident in the Chamber in this debate. That was in direct conflict with the comments of the Opposition spokesman, Mr. Hammond.
One of the problems with Turner is the way in which pension schemes will be funded. If compulsion is chosen, what happens if someone loses their job? We have been here before. The Crossman proposals of 1969 or 1970 introduced expanded social services in this country, and proposed the introduction of SERPS. Conservative Governments since then have always wanted to move away from the SERPS system.
As I have told the House before, I used to work at Rolls-Royce. The previous Conservative Government encouraged people to opt out of SERPS and go into private pension schemes. That caused all sorts of problems. People would have what used to be called "pension holidays", when money that should have gone into their pension scheme did not do so. Moreover, it is important to remember that many occupational pension schemes formed part of the wage deals agreed by millions of people, some of whom have retired and some of whom are still in employment.
For example, people might have put in for a wage increase of 5 per cent. and settled for 3 per cent. The difference of 2 per cent. was either put into the pension or took the form of additional holidays. Many people enjoyed the benefit of that, but sadly the practice has disappeared over the past 20 years or so, mainly due to the activities of the previous Conservative Government.
My hon. Friend makes it clear that pensions are often part of an overall wage deal. Does he agree that that is especially true in the public sector? A substantial number of people with public sector pensions earn wages that are significantly below average, in the expectation that they will be compensated by a reasonable pension at the end of their working lives. Does my hon. Friend know why the Opposition attack that approach?
I was about to elaborate on that very point. The public sector includes the civil service, and the Government have been attacked for the deal that they made in that regard. However, we do not know how local government pension schemes will be funded, and that is a major problem.
I am conscious of the terms of reference for this debate, and do not want to digress too far, but in Coventry the problem of equal status has been around for seven or eight years and still has not been settled. Local authorities will be confronted by both issues—pensions and equal status—but they will receive no assistance to deal with them.
Only 17 per cent. of women have an occupational pension or a SERPS pension. Many of them have brought up a family and found, for a variety of reasons—in some cases, their husband has died—that they are not entitled to a pension. That is one of the reasons for pensioner poverty and why I welcome the fact that one of the first things that this Government did was to tackle that. It would have been criminal to leave those 3 million pensioners in the state that they were left in by the previous Government.
Does my hon. Friend agree that there has been insufficient recognition in this debate so far—certainly by Opposition Members—of the significant gains that have been made in terms of pensioner poverty? If we followed the advice of Mr. Davies and reversed indexation, we would put all those pensioners back into poverty, which would be an absolute scandal.
That occurred to me, too. Some people have been unpaid carers for people with disabilities or serious illness, and they lose out on pension rights. We also have the scandal of Federal-Mogul. Many people in Coventry—and some in Derbyshire—worked for that company but they cannot get their occupational pensions because the money is trapped in the American courts. When that is sorted out, the issue has to come back to the British courts, because Federal-Mogul has gone into liquidation. What should we say to those people when we ask them to contribute to private pension schemes?
I am a little old-fashioned, but I believe in a decent state pension. After we have got that, we can debate whether it should be linked to earnings or something else. It is not easy to achieve and will probably take some time, but it is one of the problems that we will have in implementing Turner.
Other hon. Members have mentioned the mis-selling of pensions. Opposition Members have poured scorn on the pension protection scheme, but at least this Government had the courage to set it up. We should ensure that there is less bureaucracy in the scheme and that the figures are accurate. The scheme also needs to be talked up.
The Opposition strategy is obvious—they are blaming everything on the Chancellor because they know that the Prime Minister is standing down. However, the Opposition spokesman made a good point when he said that pension funds are also invested. They are invested in various schemes, in this country and throughout the world. If there is an economic downturn, as there is in the rest of the world, pension schemes will suffer. We have to be careful that we are not in a Catch-22 situation.
This issue has been around for some 47 years now. We have had many debates and I look forward to many more, especially on Turner. We will see whether the Chancellor is right—it has not yet been proved that he put the blockers on Turner. A wise man would advise waiting until we decide which of Turner's recommendations we will pick. It is natural for the Chancellor to say that we will make an announcement on how we will implement the scheme at the appropriate time. The Opposition speculate about what he will say, but they do not know. As I said earlier, their attacks on the Chancellor are purely political in an attempt to discredit him. We have all read the insulting remarks that the Opposition have made about the Chancellor. However, if they want any consensus on the issue, they will have to bite the bullet as much as anybody else.
There are many issues involved in pensions, including how to fund care for people as they get older. Some pensioners have to delve into their savings to pay for that. I remember when funeral benefits were withdrawn. We have to address a range of matters, not only pensions. We must stop paying lip service and merely saying how much we value our pensioners; we must do something about a decent pension and decent care in old age.
Like my hon. Friend Mr. Davies, I did not approach the debate in a particularly consensual mood. I have a declared interest in relation to the pensions industry. Although the pension fund of which I am chairman is well funded and robust, it brings me into contact with a wide range of people in the pensions field, so I know of the distress and difficulty caused to them and to the employees of their companies by the difficulty in which the industry has been put.
Currently, a large number of people can live with some dignity in retirement—the high proportion of people who retired on final salary pensions. However, I do not share the sturdy optimism that seems to permeate the Turner report and I fear for the future pensions of people in their 30s and 40s. The situation will deteriorate, and badly.
Why? I have heard some people simplistically blame the Chancellor of the Exchequer for the impost of £5 billion a year on the pensions industry in 1997, but that does not put things into the correct context. The causes of this massive crisis—the shortfall of funding in the pensions industry—are more varied. The Association of Consulting Actuaries has estimated the deficit at £130 billion. That is a massive deficit and it is difficult to see how it can be overcome. Its first cause is longevity.
For continuous mortality investigation—CMI—actuaries normally use the mortality tables of the 92 series, which means that they are basing mortality estimates on the period from 1991 to 1994. They will not be using the 00 series, which covers 1999 to 2002, until much later; indeed, that series will not even be published until the late spring of 2006. The difference in projecting tables forward is dramatic. Forward projections using the 92 tables, making the assumptions on which the 00 tables are based—even those are not fully up to date—would be that a 60-year-old man in 2006 would live to between 85 and three quarters and 92 and three quarters, with a central assumption of 88 and three quarter years. That is one and a quarter to eight and a quarter years more than the previous central assumption of four and three quarter years. In case anyone writes to me after the debate saying that the sums do not add up, I point out that they are actuarial figures not arithmetical ones. The numbers are dramatic and they throw out of gear most of the previous calculations.
The second cause of the shortfall was stock exchange weakness, which has led to a rush into gilts. The gilts yield has gone down, thereby increasing the problem of covering projected pension costs, because of asset liability modelling.
Thirdly, FRS 17 accounting standards have caused companies to include pensions in their general accounts. Fourthly, the ACA says that the increasing regulation and cost of pension fund administration causes a considerable burden. Fifthly, there is the unreality of final salary schemes—defined benefits—and unsustainable benefits. To a certain extent, we all lived in a fool's paradise in the 1980s and 1990s, failing to realise that the aspirations of those who were due to retire could not be sustained.
Finally, there is the Chancellor of the Exchequer, who in 1997 failed to see the weakness of the pensions industry and kicked the patient downstairs. A range of measures were taken in the 1997, of which the then Financial Secretary said,
"this should benefit all investors—including pension funds".—[Hansard, 7 November 2002; Vol. 392, c. 766W.]
In fact, the Chancellor of the Exchequer imposed a £3 billion charge on pension funds and actuaries took account of that; they factored it in and adjusted their figures accordingly, so £3 billion a year has been taken out of the pensions industry since 1997, which has caused this massive crisis.
What are the problems to be faced? First, my hon. Friend Mr. Hammond, who spoke from the Front Bench, made the fair point that the Chancellor of the Exchequer must accept that the solution to the pensions crisis will cost public funds a great deal of money. When I first became involved in the pensions industry, I used to take a factor of 18 to multiply the amount that would be needed to generate a pension—so to generate a pension of £10,000 a year, for instance, one would need a fund of £180,000. Now I take a factor of 24 to 26. It would take £240,000 to £260,000 to generate a pension of £10,000 a year. There is no such thing as a cheap pension.
Secondly, I agree with my hon. Friend Mr. Davies in saying that, having considered the matter carefully, there is no alternative to compulsion. I cannot understand how we can succeed in persuading enough people to go in for the amount of pension that is needed without compulsion. That leads me to the third point: incentives or means-testing.
A couple of days ago, we who serve on the Treasury Committee had before us witnesses who gave evidence about the corrosive effect of means-testing. We were told that means-testing does not really have much effect on savings, because the people involved in means-testing would not bother to save anyway. In fact, means-testing has a corrosive effect, and we cannot continue with the present rate of means-testing. The percentage of pensioners on means-testing is now rising well above 50 per cent. and approaching 60 per cent. That is totally unsustainable. We must therefore have incentives.
The next point is defined benefits, and I accept with reluctance that defined benefits are now dated. It is most unusual for someone to start with a firm and stay with that employer—unless it is the public sector—for two or three decades. I therefore accept that defined contributions are the logical way ahead, but it is also a fact that employers have tended to put 12 to 15 per cent. of employees' wages into defined benefit schemes, whereas the amount going into defined contributions schemes will be much lower—6 to 7 per cent. or thereabouts and sometimes as low as 4 per cent.
The fifth point that we must face is the private-public gap. It is natural for those in the public sector to wish to hold on to their pension advantages and their great advantage of having the benefit of early retirement. Ministers have made much of the fact that the public sector will save £13 billion from adjustments to the age of retirement; but, in fact, that is a £13 billion adjustment between people who are fortunate enough to be on the escalator of earlier retirement and those who are unfortunate enough to come in later. That is most unfair.
My sixth point is the Pension Protection Fund. I recently attended a meeting with the regulator, David Norgrove, who was very charming, competent and capable—I wish him well—but the massive burden that the PPF will impose on business has been widely misunderstood and underestimated. It will be a major problem, and the classification of companies, which will cause some to pay many times more than others, will cause immense disadvantages and difficulties. It will drag down bad companies and, finally, it will drag down good companies. I fear that, in the medium term, the PPF will impose a burden on private sector companies that is simply not understood at the moment.
In summary, I accept the main thrust of the Turner commission. First, I agree that there should be a new earnings-related provision—it should be private—and I would not rule out the national pensions savings system. I suspect that such a system might well change its spots and evolve into something very different with time, so it deserves study. Secondly, the state pension must be reformed, with a consequent reduction in means-testing. Thirdly, everyone, including the Chancellor of the Exchequer, must accept that public expenditure on pensions will need to rise. Fourthly, the pension age must be addressed and, I think, raised. We need to face up to our problems. We need to be frank and open about the numbers and the problems, and I submit that Ministers have not always done so. We must encourage informed debate. That is the democratic way.
The Government have recognised, in a way that the previous Government simply did not, that women suffer from serious pension inequality. I fear that nothing has changed because Mr. Hammond, who opened the debate for the official Opposition, made not one single proposal for the 51 per cent. of pensioners who are women. Indeed, the only time the word "woman" crossed his lips was when he suggested that we should all profit from the fact that from 2020 women will work until they are 65. Women will not have missed the significance of that.
Much praise has been lavished on Lord Turner, which I share, but I want to mention another member of the commission, Jeannie Drake. She played a key role in ensuring that women's difficulties with pensions were analysed with the intellectual rigour for which she is well known.
Only 17 per cent. of women pensioners receive the full basic state pension of £84. The average woman receives £50, but that statistic hides the many women who have given a lifetime of service, such as Jennifer, who is my worker in Redcar. Jennifer was in full-time nursing and then cared full-time for two children, who are now highly productive citizens who have been nurtured exactly as we would want. She was then in part-time nursing and now she works part-time for me. For her lifetime of service, she has a basic state pension forecast of 28p a week—index link that. No wonder the previous Secretary of State but one—I hope that I have got the numbers right—called the situation a national disgrace.
If the basic state pension is a platform on which to build with one's savings, a lot of women are starting with something that is better characterised as a dark hole. That happens because the Beveridge system, which is in its dotage, or at least in serious need of multiple limb replacement, gives credit only for full-time paid work. Attempts to help women and carers have worked in only a half-baked way. Home responsibilities protection gives a sort of credit for every year that a mother is out of work and child rearing, but if she works for one week and earns more than the lower earnings limits so that she pays one national insurance contribution, she loses the whole credit and thus gets one contribution instead of the 52 that would be received under HRP. Two part-time job wages cannot be added up to bring a woman into the lower earnings limit so that she can make a contribution. If one wage is below the LEL, she can receive no credit. Many women in my constituency work as dinner ladies at lunchtimes and in convenience stores at night. Although they might work for 40 hours or more a week and look after kids as well, they get not a single credit towards their pensions.
Carers who look after people who are ill or old get a credit towards their pensions only if they serve someone who is getting disability living allowance for 35 hours or more a week. If they care part-time for up to 34 hours a week, they get no credit at all, irrespective of the damage that that does to their ability to work. Those situations show why the position of many women is so poor.
Women represent most pensioners, so let us face it for once that we must look at women first as a priority because if we get the situation right for them, we can get it right for everyone else. Labour market changes mean that 85 per cent. of women are likely to qualify for a full basic state pension by 2030. That figure is insufficient in itself and it hides many people such as Jennifer who do not want to work full-time because they want to concentrate on their children. Those people will never be ersatz Beveridge males in the form of modern females, so changes to the labour market will not put the problem right.
There is no doubt whatsoever that Opposition Members criticise means tests because they fundamentally do not know about poverty. They do not understand how many people in my constituency are now living an acceptable life, but did not do so in their pensionable years before the pension credit came into play. Of course the basic state pension is the important platform and it must be elevated, but I am worried that although the Conservatives say that they would make the basic state pension better by index linking it, they would do so by uncoupling the pension credit from index linking. That would lead to women watching a basic state pension that they did not receive going up while the pension credit on which they were dependent was going down because it would be linked only to prices. They would thus go back into poverty.
The Government now appreciate these problems and I am pretty satisfied that they are working hard to try to reconfigure the partial credits and the pension system so that more women and carers can be brought on to the basic state pension. That would mean that their caring was put on a par with working, which would be the right modern model. By making those adjustments, the Government will probably bring 95 per cent. of people into the basic state pension. My right hon. Friend the Secretary of State raised the question of affordability. The remaining 5 per cent. who will fall through the cracks of the improved credits will probably be poor, and will have be supported by the pension credit in any event. Does it make sense to undertake an elaborate reconfiguration of complex credits, or is it better to bring everyone into the basic state pension on the basis of residence? We would not sacrifice the contributory principle, as Mr. Davies suggested. I agree that people should get something for something—and not something for nothing—even if that is a matter of perception rather than reality. The contributory principle can continue in connection with the second tier of the basic state pension—the S2P. However it is configured, it can play a part in such an arrangement.
Turner's realisation that the pension should be paid to individual men and women is overdue. I want the rewards of my caring, my working or my residency to be paid to me. I do not want one pension to be paid to my husband, along with a 60 per cent. pension that is my entitlement as a dependant. That is an outdated model of womanhood that no one wants and which works only for the diminishing numbers of married people. As a woman, I pay a full national insurance credit, and I receive a full basic state pension. A married man pays national insurance credit, just like me, but he receives 1.6 pensions, which is a double inequity for women. In addition, increasing numbers of unmarried women receive only the poor basic state pensions that I have set out.
I applaud Turner's attempt to bridge the gap and help the poor make up for past poverty with his suggestion that we institute a universal basic state pension for everyone over 75. That excellent proposal will make up for past failures to some extent, but women will still suffer. If the Turner model is introduced in the two ways that I have set out, women who are halfway through their career would not receive credits for their past caring and part-time work. In future, they would be credited on residential grounds, but they would receive only half a pension because they would not be credited for their caring under the current rules. If those parts of the Turner report are implemented, it will be necessary to attend to those middle-aged women or a large number of female votes will be lost.
This is a short debate, and mine is a small contribution. If there were more time I would talk about the need for an enhanced state contribution to the excellent and redistributive S2P. If we get basic state pension credits right, and if the criteria become residential, women who are carers will, almost by definition, be low-paid and less able to save, whatever improvements we make. They need more help from the tax system if they are to be able to save on top of their basic state pension. They need the help from the tax system which top earners receive but simply do not need. That, however, is a debate for another day. Women's state pension position is the last bastion of institutionalised sex discrimination in this country, and I hope that the White Paper will announce that it will change very soon.
I offer the House an opinion:
"When Labour came to power we had one of the strongest pension provisions in Europe . . . and now we have some of the weakest."
That is not my view, but the view of the former welfare reform Minister, Mr. Field. A major cause of the crisis is the Government's decision in 1997 to remove the right of pension funds to reclaim dividend tax on the equities that they owned. That decision has created a loss of £5 billion, discouraged the country's savings culture and increased the spread of means testing.
"in 2002–03, 11.3 million people in work were not making contributions to any private pension scheme".
To compound the problem, in recent years, many final salary company pension schemes have been wound up, as has been said. The Pension Protection Fund and the financial assistance scheme were introduced to address the problems relating to the winding-up of pension schemes. However, the Government's response to the crisis has been inadequate. The financial assistance scheme, which involves the payment of £400 million of public money over 20 years, is welcome, but with only £20 million a year, it cannot live up to the billing that the Government gave it, hence the narrow criteria for entitlement to assistance. The Government presented the FAS as an answer to many of the problems of pension scheme wind-ups. In raising expectations so high, it is inevitable that many people will be disappointed when they face the reality of the FAS.
The Government also appear to be badly informed about the scale of the problem. In a written answer, they revealed that they do not know how many occupational pension schemes started winding-up in each year since 1997:
"Figures on schemes starting to wind up between 1997 and 2000 are not available as the register does not contain information on whether the schemes that started to wind up before 2000 started before or after 1997."—[Hansard, 20 July 2005; Vol. 436, c. 1821W.]
In a further written answer, the Government revealed that they do not know how many occupational pension scheme members face losses to their pension savings due to their schemes being wound up by their employers:
"We have not made any estimate of the total number of occupational pension scheme members who are facing losses to their pension savings due to their schemes being wound up by their employers."—[Hansard, 21 July 2005; Vol. 436, c. 2023W.]
In recent years, we have also seen plenty of debate, but little action, on the reform of the local government pension scheme. Much of the contention has been focused on the 85-year rule. The system allows anyone whose age, added to their number of years of service, comes to 85 or more to retire on an unreduced pension, even if they have not yet reached the age of 65. Last year, the Government attempted to standardise the pension age by removing the rule. However, on
Local authority employers estimate that that U-turn cost councils an extra £450 million a year, and private businesses have complained about it bitterly. Private businesses are outraged by the high cost of protecting public sector pensions, while private sector pensions face increasing pressure. David Frost, director general of the British Chambers of Commerce, has highlighted the disparity:
"On the one hand, we have the private sector workforce being told it must work longer and put more money into their own pension pot, but here we have the public sector workforce who can still retire at 60".
Sir Digby Jones, director general of the CBI, has also criticised the decision:
"This is a bad deal for the taxpayer. The government has capitulated to the threat of public sector strikes".
The crisis was reignited last week after union leaders, fed up with the lack of progress in the resumed negotiations with local authority employers, decided to ballot members. The unions are seeking a similar deal to that agreed between Ministers and unions last autumn, under which the pension age for public sector workers would be raised to 65 for new recruits but kept at 60 for existing employees. Dave Prentice of Unison has warned:
"The local government employers, the LGA and the Government should be in no doubt of how serious we are . . . The clock is ticking, but there is a window of opportunity and I would urge everyone concerned to make the most of it".
Long-term solutions are required. The people of this country want and deserve retirement security, and the Government must act quickly to deal with the issue.
I declare an interest, which is in the register. I am the director of an investment management company, which, while it is not directly involved in pensions, has some relevance to the debate.
I welcome the debate and the Turner commission's contribution to it. The lack of attention to the pensions crisis, which has been growing over the past eight years, is one of the major failings of this Government. I am delighted that they now plan to make some proposals, which we will study with interest when they are released.
I agree that there is a dire need to address the lack of savings in this country. The savings ratio has more than halved under this Government, from 9.3 per cent. in 1997 to 4.25 per cent. in 2004, according to the pre-Budget report. The UK has a substantially lower savings rate than our main European competitors—France, Germany and Italy—all of whom have a rate in the range of 10 to 11 per cent. The Secretary of State referred to the level of under-saving; indeed, some 10 million people in this country are not saving. It is clear that this group in particular need to increase their level of saving in order to make some contribution to providing for their old age.
My contention is that accelerating the means-testing of pension credit has significantly accelerated the disincentive to save that we have witnessed under this Government. I know that they do not agree with me because earlier this month, when I raised this issue with the Minister for Pensions Reform in this place, he said:
"There is very little evidence that means-testing, under the previous Government or this Government, has reduced saving on the part of pensioners, but since 1997 there has been much greater confidence in the economy . . . In 1992, when there was deep anxiety about the future of the economy, people saved more. Today they are more confident."—[Hansard, 9 January 2006; Vol. 441, c. 14.]
Well, I am pleased that the Minister is here to respond and I urge him to read, if he has not already done so, the contribution of the Association of British Insurers. A report that it commissioned from the Personal Finance Society
"shows that means-testing is already starting to have a negative impact on public attitudes to saving and on the willingness of financial advisers to discuss saving with lower earners."
In looking at Lord Turner's proposals, it is important that the Government are a bit more ambitious than Lord Turner has been in reducing the proportion of pensioners covered by the pension credit, given its means-testing nature. Currently, some 40 per cent. are on pension credit. That figure is supposed to come down by a mere 7 per cent., to 33 per cent., through the report's recommendations. I regard that reduction as insufficient if we are to change this country's savings culture.
I invite the Government, in considering the report's recommendations, to address the issue of consumer protection, which was touched on by Mr. Field. The Secretary of State mentioned in his opening remarks the difficulties that the pension mis-selling problems of the past pose for the culture of saving and for the credibility of the pensions regime. I agree that they undoubtedly contributed to a lack of public confidence in pensions and in saving for retirement. I also agree with Lord Turner that introducing greater simplicity into the pensions industry is a desirable objective, but simplicity does not equal suitability. Means-testing, by definition, gives rise to the need for a suitability test. As we have heard, individuals will need to be willing and able to save a substantial amount of money to be confident of an adequate return in their retirement—one that will exceed funds available from the state under the proposed arrangements.
I raised this issue with Lord Turner when he appeared before the Select Committee last month. I asked him whether he had consulted the Financial Services Authority regarding the mis-selling risks associated with his proposed national pension saving scheme. He said:
"We have not directly consulted the FSA on this."
I found that a very surprising response, given the diligence that he had shown in producing such a comprehensive report.
Consumer protection is, I assume, of considerable concern to all hon. Members. I therefore urge the Government to address the issue when they consider Lord Turner's proposals. We all know of people across all income groups, particularly the lower paid, who, at various stages of their lives, have other commitments and are not in a position to set aside money to save. For those people, some element of consumer protection and advice should be available.
Another problematic aspect of the national pension savings scheme is asset allocation. Who is to decide whether it is appropriate for some individuals to have their assets invested in predominantly fixed income returns, compared with equities? Other hon. Members referred to that earlier. It is difficult to produce a one-size-fits-all investment policy for the entire population. That is why I agree with other hon. Members who recommended a mixed approach. There may need to be some form of state-sponsored provider, but there must a role for private providers to come up with alternative schemes to allow choice. That again raises the question of suitability and advice. If suitability and consumer protection can be ignored, as Lord Turner suggests, is that appropriate Government policy? Does it not leave the Government exposed to the risk of mis-selling? It is a risk that the Government must consider carefully.
In the remaining few minutes, I shall highlight specific issues relating to the NPSS. In the absence of compulsion, the combination of auto-enrolment and a very low cost offering will replace existing pension schemes. That is not just my view; it is the view of leading consultants in this area, Cazalet Consulting, who were quoted in the Financial Times earlier this week. I shall read one conclusion from their report on pensions profitability, which states that
"the Turner NPSS system, if implemented, would be likely to cause a surge in life company pension plan lapses as consumers move to take advantage of the very low proposed pricing levels. We doubt whether the NPSS could ever work as planned, however, as the best case persistency assumptions used in that report anticipate a dramatic improvement in persistency, which is at odds with the current reality of steadily deteriorating lapse rates."
To put that in layman's language, the current average lapse rate of pension schemes—both individual and group corporate schemes—is about 18 per cent. a year. In other words, 18 per cent. of people contributing cease contributing. In the Turner report that rate is estimated to be 10 per cent. a year, and the heroic assumption is made for the NPSS that the lapse rate will fall to 2.5 per cent. a year. That seems an ambitious assumption, to say the least. It raises the question whether employers will put pressure on employees to encourage opt-outs from a voluntary system, and whether it is feasible to achieve adequate investment management skills to manage funds on such a low commission basis. With a 30 basis-point charge, at least 22 per cent. would go in administration costs, which leave only eight basis points—
I congratulate my hon. Friend Mr. Dunne on a powerful speech, especially his discussion of means-testing, which I shall touch on later. I came along to the debate tonight hoping that we would have a serious and constructive debate, and to a certain extent we have, but there was some tetchiness on the part of Government Members, perhaps because they lost two votes tonight.
Perhaps the Secretary of State attacked the previous Conservative Government because he is a little concerned about the pensions crisis that this Government have created. They came to power in 1997, and it is now 2006. Having had their head in the sand for nearly 10 years, they have only just pulled it out and realised that there is a pensions crisis. However, I will try to keep my comments constructive. I know that the Minister is very fair. He replied graciously to a Westminster Hall debate on pensions income in Wellingborough that the Speaker kindly granted me.
In 2001, I set up the Listening to Wellingborough and Rushden campaign because I believed that politicians of all parties had become a little arrogant, in that they were happy to preach at people and tell them what they thought, but reluctant to listen to what people were saying. I decided that through that campaign we would listen to what people had to say and then campaign for change based on their comments. My remarks will therefore relate to what people have been saying about pensions. There are more questions than conclusions.
Let me start with last Saturday's surgery, when three firemen came to see me about public sector pensions, particularly their own pensions. Ultimately, their point was that there is not much joined-up government on that issue. The police, for example, have their pension scheme protected by the Government. As a member of the Select Committee on Trade and Industry, I remember that when we looked into the Post Office, which has a £4 billion deficit on its pension scheme, its response was, "Don't worry—we're a monopoly, so we can put the price of stamps up to recover it." There was no suggestion of altering its pension scheme in any way. However, the Government have changed the scheme for firemen so that certain firemen will have to work for an extra five years before they get their pension. The firemen who came to see me were not saying that there should be no change, but that the Government's approach is not even-handed.
One of those gentlemen is caught in a trap. His pension retirement date is just a few days after what the Government have deemed to be the date of the change, so he will have to work for virtually five years longer than he had expected before he gets his pension. He has been paying 11.75 per cent. of his salary into pension contributions, which he regarded as a binding contract and part of his emoluments. He feels let down by the Government. He believes that they are being rather mean and that it is possibly to do with their trying to get back at the firemen for going on strike a few years ago. Can the Minister refute that by confirming that there is a joined-up approach to the way in which public sector pensions as a whole are being dealt with? People in the public sector would not mind if the approach was even-handed. They realise that there have to be changes to their pensions because people in the private sector are suffering a great deal.
A few years ago, I was visited by a Mr. Martin Sterrow—a pensioner in Wellingborough who had never before been involved in politics. He was outraged that his state pension was going up so little in comparison with his council tax. Hon. Members must be aware that Wellingborough has experienced the biggest increase in council tax since it was introduced. However, Mr. Sterrow could show that the increase in his council tax was more than that in his state pension. That cannot be right.
I said that if there was a genuine problem perhaps we should hold a public meeting. We therefore arranged it, and I expected 10 or perhaps 20 people to attend—I know how difficult it is to get people to public meetings. However, 100 people attended and they were outraged that their pension had not increased enough even to pay their council tax. That is not a criticism, but a fact that we must tackle.
Mr. Sterrow organised petitions, a shadow Cabinet member came to the constituency and the shadow Cabinet received feedback. We also conducted a listening survey in which we contacted every home in Wellingborough. We asked people to specify the issues that affected them and we received thousands of responses. I thought that health or perhaps law and order would come top, but the main issues were council tax and pensions. I even asked for the results to be recounted because I was so surprised.
That group of pensioners had never previously been involved in a political campaign. They were not Conservative or Labour but genuine constituents who were worried about the state of affairs. Of course, they did not want their council tax to increase by 20 per cent. or 25 per cent. year after year. However, the most striking point was that they wanted a decent basic state pension. They did not want freebies—they did not necessarily want a winter fuel allowance—[Interruption.] I repeat that they wanted a decent state pension so that they could decide how to spend their money. They did not want freebies and the Government telling them how to spend their money. I do not know what the answer is, but that was what they wanted.
They were sure that they did not want means-testing, which they hate. Those people have paid all their lives through taxes and insurance premiums, yet when they collect their pension, which they perceive as a right not a benefit, they are asked to fill in forms and declare all their personal income so that they can have a bit more. They hate that and many pensioners will not take up the money because they do not want the indignity of means-testing. The previous Member of Parliament for Wellingborough said that one problem was millions of pounds in unclaimed pension credit. Why cannot that money simply be added to the basic state pension? That would be a start.
Does the hon. Gentleman realise that my constituents have similar feelings about means-testing? The Turner report states that if we continue with the current system, by 2050, 80 per cent. of pensioners will be subjected to means-testing in some form for their state benefits.
I am grateful for that intervention. I thought that the figure was 75 per cent., but whether it is 75 per cent. or 80 per cent. it is ridiculous. The Minister for Pensions Reform and the Government probably agree that that is not acceptable.
The pensioners of Wellingborough want a decent pension without means-testing. I appreciate that the Minister might say that the matter comes down to cost. The pensioners had a few ideas about that. Since the Government have been in power for—in my opinion—10 years, we have paid £100 billion through our taxes to the European Union. Some pensioners suggested to me that it might have helped if we had been a little less worried about French farmers and a little more concerned about pensioners. That is a huge amount of money. However, I know that the Minister will say that we cannot do anything about the EU.
Let us therefore consider domestic savings. The TaxPayers Alliance says that £80 billion could be saved each year on Government waste. It gave a few interesting examples. The Government spent £225,000 on informing people not to wear ill-fitting slippers. They spent £40,000 on a 46-word definition of patients' experience in the NHS. That is nearly £1,000 a word. The best one is the £10,000 that the Office of the Deputy Prime Minister wasted on whether fire engines should be red. What a waste of money. Yet £80 billion is wasted in such ways. Let us have a decent pension for our pensioners instead.
I begin by declaring an interest, in that I have some private pension provision.
This has been an unusually thoughtful debate on almost all sides of the Chamber. We had a thoughtful contribution from Mr. Field, as one would expect, although I was a tad surprised by his apparent hostility to the Turner report and its central conclusions. Mr. Laws was right to talk about the transfer of risk that is taking place in the pensions world. That was something that Lord Turner drew to our attention in both his reports.
The Chairman of the Select Committee, Mr. Rooney, made a somewhat eccentric argument against political consensus, which was odd for a Select Committee Chairman, but he developed some other interesting points. My hon. Friend Mr. Davies made a red-blooded contribution to the debate. He had something to say about means-testing and is clearly not a consensus man.
Mr. Cunningham made an interesting and thoughtful contribution to the debate, as he always does. He recognised the importance of pension funds investing in equities. My hon. Friend Peter Viggers, who has great experience in real pensions issues, made some interesting points, particularly about longevity. I know all about that because I have a constituent, Mr. Henry Allingham, who will be 110 this year.
Vera Baird spoke powerfully, as she always does, about women's pensions. My hon. Friends the Members for South-West Norfolk (Mr. Fraser) and for Wellingborough (Mr. Bone) spoke eloquently about how public sector pensions should be addressed by any responsible Government. My hon. Friend Mr. Dunne made a thoughtful speech in which he examined issues relating to the proposed national pensions savings scheme, such as consumer protection and the regulatory framework. He rightly drew our attention to the thought-provoking comments in the Cazalet report, which was published only in the past couple of days.
The Government have presided over the pensions crisis for something like nine years. In that time, they have taxed pensions, undermined savings by increasing means-testing and heaped ever more red tape, cost and bureaucracy on to companies with pension schemes. They came to office with the avowed policy of, rightly, changing the balance between public and private pensions from 60:40 to 40:60. They have failed signally in that ambition. The first pension reform Minister, the right hon. Member for Birkenhead, was appointed to think the unthinkable, then promptly sacked for his trouble. He has said, memorably, that in 1997, the United Kingdom
"had one of the strongest pension provisions in Europe, and now probably we have some of the weakest".
Two million pensioners are still living in poverty and figures released only today show that the take-up of pension credit is still extremely disappointing. In the last six months of 2003–04, it was in the range of 58 to 66 per cent. by caseload. That means that a very large number of people, many of whom I presume are women, are failing to claim their entitlement. In spite of more than eight years in power, the Government have done absolutely nothing about the scandal of women's pension entitlement, except—I nearly forgot—to publish an annual report to tell us how bad the problem is.
The Government's flagship Pensions Bill, now the Pensions Act 2004, was introduced with great claims about how it would safeguard and encourage final salary schemes. The opposite has been the case. Final salary schemes are dead or dying. Most are already closed to new entrants; more and more are closing even to existing members. Recent examples include Rentokil and the Co-op. Experts such as the National Association of Pension Funds say that this is just the beginning.
In a powerful article produced in the last few days, Mr. Steve Bee, head of pensions strategy at Scottish Life, put it like this:
"It's simply a question of when and how the end will come, not if it will come . . . Final salary pension schemes in the private sector have got smoke coming out of the back—they're not going to make it back to the airfield."
The clearest and most pressing injustice is to those who lost all or most of their pension when their company schemes wound up with insufficient assets. We are talking about up to 85,000 people. Despite being unveiled as long ago as May 2004, the financial assistance scheme has only just started to make payments to people in trouble, as we heard from my hon. Friend Mr. Hammond. Yesterday, the Minister was good enough to confirm that, so far, a grand total of 15 individuals in only one scheme have received payment. It is a scandal that it is taking so long. That is just adding insult to injury.
Everyone except the Government recognised long ago that the sums devoted to the FAS are hopelessly inadequate. Even if the money holds out for the time being, the FAS is paying significantly lower benefits than the Pension Protection Fund. Those honest and decent people, some of them facing penury, are being treated as second-class citizens. As if the Government have not troubles enough, they are on the receiving end of a case in the European Court of Justice and an ombudsman's investigation.
As the House has heard, we have fairness as one of our guiding principles in pensions reform, as do the Government, but if that is so, how can they possibly begin to justify the sweetheart deal they recently struck with the union bosses? Surely a key aspect of fairness is that the public and private sectors should be treated similarly, yet private sector workers would be lucky to find a final salary scheme to join. Not so public sector workers. That is not only patently unfair, and seen to be so by a lot of people out there, but it has seriously undermined attempts by responsible private sector employers to maintain their pension schemes. Attempts by such employers to agree changes to entitlements with their workers, which would make the schemes more sustainable in the long run, will be much more difficult to make, as workers look to the precedent set for public sector employees.
Nor can we be encouraged by the Government's initial reaction to the Turner report. They sought to rubbish it before it was even published. The Chancellor warned Lord Turner that
"'you should not assume' that the current link of the pension credit to earnings 'will continue beyond 2008'."
The report has been drawn into trench warfare within the Government.
It has even been suggested that the Chancellor has already decided to snaffle the £10 billion a year saving on equalising women's pension age for other purposes. Surely—this, perhaps for the first time in our political relationship, is something that the hon. and learned Member for Redcar and I can wholeheartedly agree on—that money should, in all fairness, be earmarked for improving pensions, particularly if, over a relatively short period, we are to ask women to move from a state pension age of 60 to one of 67, 68 or even higher.
Finally, as is so often the case, our underlying principles on pension reform are not very different from the Government's stated objectives. It would be unthinkable, as the Secretary of State has acknowledged, to implement reform based on Turner without a broad measure of social and political consensus. I am delighted that the Secretary of State has made it clear today that he is looking for such consensus. We call on the Government to involve us closely in the process. We have much to contribute. By the time the effects of any reforms, or indeed of a failure to act, are felt, several different Governments will have come and gone, and many different Ministers. As we saw earlier this evening, Governments can lose votes. Governments can lose elections. We are every bit as keen as they are to see a lasting and durable solution to the pensions crisis that will deliver fairness as well as dignity and security in old age for all our citizens.
I want to thank all those Members on both sides of the House who have contributed to the debate for their thoughtful and constructive contributions.
There has been general agreement that the Pensions Commission has done an impressive job. It sifted a great deal of evidence, spoke to a wide range of people, weighed a great variety of opinions and carried out some impressive analysis of its own. As we have been reminded, there were three commissioners—a former director-general of the CBI, Lord Turner, last year's president of the TUC, Jeannie Drake, who was mentioned by my hon. and learned Friend Vera Baird, and a distinguished social policy academic at the London School of Economics, John Hills. In producing a unanimous well-thought-through report, addressing all the issues that people have been raising, they have done us an enormous service. We should put on record our thanks to them. They have succeeded in pushing the subject dramatically up the public agenda, causing many more people to reflect on these questions, thereby helping build momentum for reform. That opens up the chance of an enduring pensions settlement for the UK, which we all agree would be an enormous prize.
At the start of the debate, my right hon. Friend the Secretary of State for Work and Pensions set out the priorities for pension policy that we identified in 1997. We have dramatically reduced the extent of pensioner poverty, particularly through the introduction of pension credit in 2003, with especially large gains among older women—perhaps one of the most important of all the big social improvements that we have seen since 1997. He was right to make the point that that has made a big change to the landscape, which opens up new possibilities for pensions reform. We have taken steps to bolster confidence in occupational pensions through the Pension Protection Fund and the financial assistance scheme.
It is a pleasure to debate pensions with the Minister again after all these years. When he says that the pension credit has taken a lot of older people out of poverty, he is absolutely right, but does he see it as a one-off achievement, as I do? Do we not now need to return to a rational system in which the means-tested pension does not rise at a faster rate than the contributory pension? Or does he consider that this means-testing must go on—
I certainly do not agree that we should return to the arrangement whereby large numbers of single pensioners were living on £69 a week. Were we to go back, that would be the position. At the moment, every single pensioner is entitled to an income of at least £109.45 per week, and the Turner report proposes that auto-enrolling people into the national pension savings scheme will enable them to build up savings and a pension, which, over time, would reduce the extent of means-testing. We certainly must not, as Mr. Davies was calling for, go back to the time when large numbers of people were on extremely low incomes. I, too, am delighted to be debating these matters with him again. His earlier contribution took me back to 1999.
We have introduced the state second pension, greatly boosting the savings of those on low incomes and carers. We have also introduced stakeholder pensions, which the hon. Gentleman mentioned, of which there are 2.5 million, making an important contribution and enabling people who could not save economically in the past to do so.
We now have a foundation that opens up the chance of an enduring pensions settlement for the UK. I hope that the optimism expressed across the Chamber today will be fulfilled over the next few weeks as we move towards proposals for reform and a consensus about what we should do.
Mr. Hammond was right to draw attention to Lord Turner's statement that there was no immediate crisis for pensioner incomes. I think he was trying to make out that there was a crisis, but I believe that Lord Turner was right.
I welcome the hon. Gentleman's commitment to a constructive contribution on his party's behalf. He asked a question about something that he has mentioned to me a couple of times, about which I know he has written to my right hon. Friend the Secretary of State. He wanted to know whether he and his colleagues could have access to PenSim2. He will have a response from my right hon. Friend tomorrow. I believe that the position is not entirely straightforward, but my right hon. Friend certainly wants to be helpful.
My right hon. Friend Mr. Field expressed some clear views about what was the right way in which to proceed. He was very critical of the Turner proposals. He mentioned a worry to which a number of people have drawn attention, about the danger of levelling down. That is an important point, although given that many employers currently make significant contributions to defined-benefit and defined-contribution pension schemes, I do not see why, if we made 3 per cent. the minimum, employers would necessarily think it appropriate to reduce their contributions.
That will certainly be an important element of the debate that we shall all have over the next few weeks.
Mr. Laws described the challenges as he sees them. He is in a slightly difficult position. Shortly before the publication of the Turner report, he committed his party to the citizens pension. When the report was published, he read on page 8 that the citizens pension had been rejected. He tried to welcome the report and say that he agreed with Lord Turner, while still presumably supporting the policy that he announced two weeks before the report's publication. I understand why his speech did not contain a great deal of detail, but look forward to further discussions with him over the next few weeks.
My hon. Friend Mr. Rooney, who chairs the Work and Pensions Committee, rightly spoke of the need for a broad consensus, not simply across the House but across society. It will be important to secure consensus across the House as far as possible, as a basis on which to build the necessary confidence that the arrangement will endure. I agree with him that a settlement that lasted for only a few years would not be a successful outcome.
I know that the hon. Member for Grantham and Stamford follows closely what happens in the United States, where there has been a dramatic reduction in coverage of defined-benefit schemes, just as there has been in the United Kingdom. I believe that there has been an even faster reduction in Australia. I know that he heard the speech made by his hon. Friend Peter Viggers, who rightly cited dramatic and continuing increases in life expectancy and stock exchange volatility as the principal drivers of change.
My hon. Friend Mr. Cunningham was right to refer to the improvements in tackling pensioner poverty. He spoke for many in expressing concern about Turner and Newall. If Turner and Newall does become insolvent at some point in the next year or so, it will enter an assessment period for the purposes of the Pension Protection Fund. I know that that will reassure many people who are in the position that my hon. Friend described.
The hon. Member for Gosport spoke with authority on a number of matters. He suggested that the impact of the tax change in 1997 was £3 billion rather than £5 billion, and that is probably a more accurate figure. Like the hon. Member for Grantham and Stamford, he argued for compulsion, in contrast with the view that his party has advanced. I do not share his pessimism about the Pension Protection Fund. It is important that we keep an eye on the level of the levy that the fund will impose, but the levy will be capped at 0.5 per cent. of scheme assets. That step has reassured many funds.
My hon. and learned Friend Vera Baird made some important and valuable points about the way in which the pension system has dealt with women. She is right that home responsibilities protection is a cumbersome and odd construct. Her point that a week's work entails losing a year's HRP is not correct, but the way HRP works has all sorts of strange effects. I am certain that, not least because of her efforts and those of our hon. Friends, the question of how women fare under the reform proposals will be one of the main yardsticks in the public debate that will follow publication of the proposals in the White Paper in the spring.
Mr. Dunne spoke from the basis of a good deal of knowledge of investment management. I do not entirely agree with what he said about the savings ratio. At the moment in the UK, it is about the same as it was in the 1960s and it is twice as much as it is in the US. The question of what the savings ratio should be is quite a difficult one. I agree that we want more people to save for a pension, but do not believe that having an element of means-testing makes that impossible. Indeed, we have had means-testing of pensioner incomes in the UK since 1908, and it has not been incompatible with adequate pension saving in the past.
We have had a good discussion. The national debate will culminate with the large-scale national pensions day that my right hon. Friend the Secretary of State has announced, which we plan for March, when there will be the opportunity for a large number of people to engage with Government to discuss the commission's recommendations and to consider the choices that we have to make. I am very optimistic about what we can achieve over the next few months, but no Government can solve the pensions challenge on their own. Broad agreement will be key to securing the confidence that we need. I am grateful for the evidence in the debate that, across the House, hon. Members are willing to contribute to that goal.