Pensions

– in the House of Lords at 1:59 pm on 17 November 2005.

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Photo of Lord Fowler Lord Fowler Conservative 1:59, 17 November 2005

rose to call attention to the current issues concerning public sector and private pensions; and to move for Papers.

My Lords, we welcome the noble Lord, Lord Hunt of Kings Heath, to what is his first proper pensions debate. The noble Lord comes from Birmingham, but that is not his only great distinction. I first came across him when I was Secretary of State for Health and he was director of the National Association of Health Authorities, forever issuing disobliging press releases about my policies. I knew that my turn would come.

He has been out of government for some months following his resignation and I fear that he may not find his new area the best inheritance in Whitehall. Indeed, if they were not such a nice bunch, I would almost suspect that it was the revenge of the Government Whips.

From this side, we were sorry to say goodbye to the noble Baroness, Lady Hollis, who has departed from the Front Bench. She was a formidable debater and at times was capable of arguing the most dubious of cases with enormous skill. I know that at this moment she is hurrying from a pensions conference to take part in the debate.

Also from this side of the House, we are very sorry to say goodbye to my noble friend Lord Higgins, who has done a tremendous service for this party in a whole variety of positions. But obviously we very much welcome in his place the noble Lord, Lord Skelmersdale.

I declare an interest in that I was in charge of pensions policy for six years in the Cabinet of my noble friend Lady Thatcher, and I am also a member of the funded House of Commons pension scheme, albeit before the newest, and I think very difficult to defend, accrual rates were introduced.

I will say one thing for this Government. Over the past eight years, there has been no lack of inquiries, no lack of commissions and, for that matter, no lack of Secretaries of State—we have had four in the past two years—taking a fresh look at the pensions problem. The Government have been rather like a company which has called in consultants but cannot bring itself to do any of the things that they recommend so it brings in more consultants. In the outside world, that process leads to bankruptcy, which is, frankly, just about where pensions policy stands at the moment.

Back in the heady days of 1997, the Government appointed Frank Field to think the unthinkable and then, a few months later, sacked him. In 2002 and 2003, they published Green and then White Papers on pensions and now, in 2005, as I will show, they reject their own declared policy.

As for action, the most important step was taken not by the Secretary of State for Work and Pensions but by the Chancellor of the Exchequer when he imposed the notorious £5 billion a year pensions tax. His takings from pensions now total something like £40 billion, and that has been one reason why we have seen the collapse of final salary schemes in the private sector, where, we might remember, 80 per cent of the population work.

But let me be more specific about government pensions policy and examine an area where the Government have direct policy and financial responsibility—that is, public sector pensions and policy on the age of retirement. There is little or no doubt about the demographic trend. The latest government inquiry by the Pensions Commission, headed by the noble Lord, Lord Turner, whom we certainly welcome to this House and whose report we saw today in the Financial Times some weeks ahead of official publication, sets out the position very clearly in its first report. The Executive Summary of that report states:

"Life expectancy is increasing rapidly and will continue to do so. This is good news. But combined with a forecast low birth rate this will produce a near doubling in the percentage of the population aged 65 years and over between now and 2050, with further increase thereafter".

That means that the ratio of the over-65s to the working population between the ages of 20 and 64 will increase from 27 per cent today to 48 per cent in 2050. In other words, the working population will have to finance not only their children but also an increasing number of retired people.

That, of course, is not a new message. Twenty years ago, when I published my own pensions White Paper, I set out the same kind of forecast, although at that time I was challenged by spokesmen of the party opposite, who then wanted a reduction in the retirement age.

Self-evidently, this demographic trend has a major effect on the Government, who, through the taxpayer, are financing public sector pensions. Many of the big schemes, such as that of the Civil Service and the health service, are unfunded in that they are not backed by marketable assets. They are run on a pay-as-you-go basis, and the taxpayer not only stands behind them but also picks up the bill. What is the size of that unfunded liability? The only disagreement is how vast the liability is. The last official estimate was £460 billion. The estimate of the actuaries Watson Wyatt is almost £700 billion, and the latest estimate from the much respected Institute of Economic Affairs is that it is more than £800 billion.

My own view is that we would be wise to veer to the estimates of bodies such as the IEA, which has a good track record and no interest in understating the liability. But we can all agree that there is a formidable liability and, as the Turner commission says more generally, unavoidable choices in the policies to be pursued. No one policy will meet all our aspirations for a decent pension system for both men and women in this country—I emphasise "pensions for women" because that is a vitally important area as well—and, at the same time, be just to all our citizens and be afforded. But on one point all the Government's advisers were united: future policy needs to include an increase in the retirement age. The summary to the Turner commission's report stated:

"Our response to the demographic challenge should include a rise in the average age of retirement", and that is confirmed by the reports today. The Government's own White Paper was even more specific on public sector pensions, where the normal retirement age is 60. In their Green Paper they had proposed raising the normal pension age to 65 and in the White Paper they confirmed that policy. They said that all new staff would be recruited on the basis of retiring at 65 and—this is the important point—negotiations would start with existing staff to see on what basis the policy would be applied to them. That was their statement.

Against the background of the vast unfunded liability, that was entirely sensible. Members of the public sector schemes could look forward to index-linked final salary pensions, which few of those who were financing those pensions could expect. It was entirely reasonable to ask for that. Let us be clear. No one has ever proposed that a man of 58 or 59 years of age would suddenly be told that his retirement age had just been increased to 65, but the plan would be to increase it by steps for staff in their 20s, 30s and 40s and perhaps even by a little for those in their early and mid-50s. That is what the negotiations were intended to be about and the Government said they were determined on that point. The White Paper not only said that explicitly but added:

"The Government has a responsibility in its role as a large employer to lead the way in addressing the social and economic consequences of demographic change".

And Mr Alan Johnson, the Trade and Industry Secretary, said only the day before the final negotiation that the case for raising the retirement age was "irrefutable". He went on:

"We are healthier, living longer. The problem is that there are fewer people working, funding more people in retirement. For us to say to the private sector, 'You have to work longer and save more money', and to the public sector, 'You stick with your retirement age', is impossible".

And so how did the Government pursue their leadership role? How did they argue this "irrefutable" case? The answer is that they did neither. The public sector unions rattled their sabres and the Government collapsed.

It takes quite a lot for the Financial Times, the Daily Mail and the Morning Star to use the same splash headline but they did so on the following day. The Financial Times said:

"Labour caves in over pensions".

The Daily Mail said:

"Labour caves in on public sector pensions", and the Morning Star said:

"Ministers cave in on pensions".

Only the Morning Star used the phrase in praise of government action, but all three newspapers were right in their analysis. For, although at some stage new employees will be recruited on the basis that their retirement age is 65, all those already in employment, be they in their 20s or 30s, will still have a retirement age of 60 in addition to their indexed final salary pension.

Lucky them. For in the private sector, final salary schemes are closing, and there is little prospect of new ones being created. And in the private sector, retirement ages are being increased. This does not show a Government leading but a Government abdicating responsibility and taking a decision they know to be both wrong and unjust.

It is not fashionable in this House to be passionate, let alone on a subject such as pensions. But in my view this ranks as one of the very worst decisions that the Government have ever taken. I will tell your Lordships why I feel so strongly. In pensions policy, there are obvious differences between the parties and those of us who take part in these debates, but there is also a bipartisan aim to improve and settle the position. This is not an area in which we slavishly follow party policies. I supported the pension credit, to slight disgruntlement on my Front Bench, not as a permanent benefit but as a means of helping now those people who did not have the opportunity of building up their own, and my support was quoted by Ministers in the other place. I also believe strongly in people building up a second pension outside the state system. I have always been attracted by the compulsory pension saving scheme in Switzerland, which, again, is not exactly the policy of my party.

Where are we left now in reaching sensible, agreed reform of pensions? The fact is that our plans have been torpedoed and destroyed by this baleful decision. How can you say to a man or woman in the private sector, "You will work to 65 but your colleagues in the public sector, who may well be better paid, can retire at 60 on a pension you can only dream of and, incidentally, to which you are contributing"? How can you say to the man or woman in the private sector, "We want you to save for your retirement and are even prepared to compel you to save more"? Might they not say, "No way. The state should provide, just as it does with public sector pensions"?

How on earth can the Prime Minister, as reported today and yesterday, contemplate raising the retirement age generally following the Turner report, having just run away from the decision with the public sector? Frankly, this is a public sector solution for the benefit of the public sector, agreed, I regret to say, by people who have no idea of what is happening in the labour force generally. Worst of all, they have no concept of the damage that they have done and are doing.

This is a major setback to sensible pension policy in this country. It goes against the advice of the Government's own advisers. It is a further kick in the teeth to the millions of people working in this country who do not have the benefit of an index-linked final salary scheme. Above all, it creates two nations in retirement: a privileged minority, ironically, are supported by a majority who do not have the same benefits.

It is unjust and it is unfair. It is a policy which must be changed, if not by this Government then by a new one. The position cannot rest where it is.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

My Lords, before the noble Lord sits down, is he not aware that in the private sector, many firms have adopted a very similar policy? They terminate their final salary schemes for newcomers while honouring the contracts for people who are already in employment. Final salary schemes have been phased out or discontinued for newcomers, but the present staff keep their contracts. It is a very similar situation.

Photo of Lord Fowler Lord Fowler Conservative

My Lords, the noble Baroness, who has a wide knowledge of pensions, is utterly mistaken in this respect. Staff are not retaining their benefits. The noble Baroness might also think of this: it is not me or my party urging that existing staff have their pension age increased but her Government in their White Paper. Factually, I fear she is wrong about the private sector, and I hope that when she comes to speak she will explain why the Government whom she supports propose in their pensions White Paper the exact policy that I have been advocating. I beg to move for Papers.

Photo of Baroness Pitkeathley Baroness Pitkeathley Deputy Chairman of Committees, Deputy Speaker (Lords) 2:15, 17 November 2005

My Lords, I congratulate the noble Lord, Lord Fowler, on securing this debate. The timing seems a little strange, given that we are awaiting the publication of the pensions review. The noble Lord has a very long and distinguished record in this area, as have many others who will speak in this debate. I would not be able to comment on many of the major issues that the noble Lord has brought to our attention, but I am sure that many others will. However, looking around your Lordships' House, it seems that any mandatory retirement age has very little relevance here.

In the brief time available to me, I want to concentrate on an issue about which I feel passionate. It is important to many in our country and in this House and was important to the noble Lord when he was Secretary of State of State and I had the pleasure of working with him. I refer to carers, those 6 million people who look after someone who is ill or frail or disabled, and who save our nation—as I never miss the opportunity of reminding your Lordships, for which I make no apology—£57 billion each year.

It is generally acknowledged that if you are a carer you are financially disadvantaged, not only because of the costs of caring itself but also because many carers give up paid work to care and thus build up poverty for themselves and their families in the future. I remind your Lordships that this is not just a women's problem, as is often mistakenly assumed. Although childcare is overwhelmingly performed by women, adult care is more evenly split, with 18 per cent of women fulfilling this role compared with 14 per cent of men.

I want to acknowledge the progress that has been made by this Government in recognising the needs of carers, who make such an extraordinary contribution to our society and who, for the most part, do it willingly and with love. Of course, many of the Government's initiatives to help older people have had a positive impact on carers, too, since many of them are over retiring age and have had some share of the extra £11 billion that will be spent on pensioners in 2005–06, especially since about half of that goes to the poorest pensioners. The tax and benefits changes which have been introduced since 1997 mean that the average pensioner household is £1,400 a year better off than in 1997.

I want particularly to mention the state second pension and how that is enabling almost 2 million carers, as well as 2.2 million long-term sick and disabled people, to build up entitlement to an additional state pension for the first time. In her absence, I pay tribute to the work that my noble friend Lady Hollis did on this issue when it was before your Lordships' House.

There are now three Acts of Parliament on the statute book for carers. The most recent came into operation only last year, and focused for the first time on enabling carers to have access to, as one described it, an ordinary life. It focused not just on helping them to care better but on enabling them to participate in leisure, education and cultural activities, as the rest of us expect to do.

So a great deal of progress has been made, but much remains to be done if we are to stop carers in future being in the situation that Carers UK reports many of them are in today. One in five has to cut back on food, one in three has trouble paying utility bills, four out of 10 find the level of charges for services causes financial difficulties, and one in three has no savings at all. An increase in the carers' allowance would help; it is currently paid at the lowest rate of all benefits. But the surest way to keep carers who are pensioners out of poverty is to enable them to stay in or return to paid employment for as long as possible. This not only helps them financially now and in the future but also helps them socially and psychologically by removing the isolation that many carers experience.

In this regard, the work done by Action for Carers and Employment is much to be commended. I am delighted that the Prime Minister's early commitment to carers in the carers strategy has now been fulfilled in the introduction of flexible working rights for carers in the Work and Families Bill. These rights were first introduced for parents with children under six and disabled children under 18. They have proved a great success, so it is very fitting that they should be extended to carers to bring about better opportunities for them to plan their working lives with their caring responsibilities. If employees are pressured because of caring responsibilities, clearly, that reflects on their performance.

I know that the Government are also looking for other ways to support carers, including better pensions and packages developed with other departments. However, we must also bring about some changes in the benefits system, if such changes are to benefit carers' pension position by enabling them to build up entitlements. When someone approaches retirement age it is usual to them to look forward to drawing their pension but for people on carer's allowance the feelings are very different. Yes, they get their pension like anyone else, but overnight their carer's allowance disappears. The problem for carers is the overlapping benefit rule, which states that you can get only one benefit to replace lost income. Even though you may meet the criteria for both carer's allowance and other income replacement benefits, most income replacement benefits, including state retirement pension, are paid at a higher rate. You lose your carer's allowance, so you are not much better off. In fact, many carers feel very strongly about the unfairness and injustice of the overlapping benefit rule.

Carers UK is calling on the Government to rethink the status and purpose of the carer's allowance given the many changes in society since it was introduced—and very welcome it was—in the 1970s. I hope that those of us who are continuing to press for changes to provide proper financial recognition for the thousands of carers who continue to provide hours of care into their retirements will be heard. These problems, like many of the others that we will hear about today, are unlikely to go away. It has been estimated that while 6 million carers are active today, in 30 years we shall need 9 million because of the welcome increase in longevity and of people who once would have died enjoying longer lives, but with a greater disability than hitherto. Some 1.5 million carers are aged 60 or over and one in three of those cares for 50 hours a week or more. I spoke to a carer last week who was 92 and said to me apropos his wife aged 86, "Caring is tough, but she couldn't cope without me and I couldn't cope without her. She is my reason to carry on". We would do well to ensure we do everything that we can to make sure that he carries on.

Photo of Lord Kirkwood of Kirkhope Lord Kirkwood of Kirkhope Liberal Democrat 2:22, 17 November 2005

My Lords, it is a signal pleasure to follow the noble Baroness. As the former chairman of the Work and Pensions Select Committee I can testify probably better than anyone else in this House to the effectiveness with which, over a period of 20 years, she has been an effective voice for carers. Her speech will repay careful study and it is a pleasure to follow her.

Like the noble Lord, Lord Fowler, I should declare an interest. I am also a member of the contributory House of Commons pension scheme. I served my apprenticeship on the Standing Committee that considered the Social Security Bill in 1986. The noble Lord, Lord Fowler, was a very big cheese in those days. He was in charge of the honourable Member for Braintree, who is now of course the distinguished and noble Lord, Lord Newton. He was also in charge of a new Whip who joined the committee at a later stage who was the honourable Member for Huntingdon, and look what happened to him. The noble Lord, Lord Fowler, was a big cheese then and he is a big cheese now.

I start on a carping note, but I hope that it will be the only one in the next seven minutes. I am very disappointed that the Labour Administration ran away from a proper public debate on pensions at the last election. I believe—and I stand to be corrected—that the Turner commission was set up as a device to park the whole subject so that it would not embarrass Ministers. There is a political argument that says that pensions is such a complicated issue that perhaps the heat and tension of the hustings is not the best place to discuss such a subtly nuanced subject. However, it was a mistake not to deal with such a serious and fundamentally important subject, recognising the amount of ignorance—in the best sense of the word; I do not use it pejoratively—that people have about saving for their retirement. It was a sadly missed opportunity. I cannot help but say that and I feel better now that I have got it off my chest.

There are now important reasons for ensuring that Ministers do not miss this opportunity. All the demographic and economic trends and requirements for simplification are coming to a head. The moment for decisions is coming. Early next year, the Government will be faced with a signal opportunity to put some of these things right once and for all. If they do not take that opportunity and make proper use of it, we will all pay a price. As the Turner commission makes clear, if we do not get all of this right, we will end up with pensioners, on average, being poorer in future. That would be a tragedy.

The Turner commission did a valuable service. People think that a lot of new stuff was produced. It brought a lot of good information together and refreshed some of the evidence, but there is huge expertise and a body of knowledge in the industry in this country which was already aware of all these problems. The noble Lord, Lord Turner, brought that to the fore and brought it all together in a helpful way, but no one should think that any of the information was discovered for the first time as a result of his work. Noble Lords who have the time should look at page 173 of the noble Lord's report—that is to show noble Lords that I got as far as page 173 in the first report. Table 5.1 is a wonderful table headed "total personal sector balance sheet". It relates to total housing assets. The rubric at the bottom of the table says that the figures are correct to the nearest £50 billion—the noble Lord, Lord Turner, is no cheapskate. I would love to add my name to a report that had a table of that kind.

More seriously, one thing about the noble Lord's report that worries me and should worry us all is what has now become known as the funnel of uncertainty in terms of demographic change. He makes it quite clear—he is right—that official figures in the past have been substantially wrong about subsequent developments. The trends are based on best evidence and best judgment—nobody is criticising the GAD and other people who have done the figures—but there is still the real possibility that we could be underestimating the extent of this problem, and it is bad enough as it is.

The noble Lord, Lord Fowler, is quite right to say that the issue is technically complicated in the delivery and mechanisms, but it boils down to four simple things—pensioners, on average, will be poorer unless taxes go up, retirement ages rise or people save more money. Quintessentially, that is what this issue is all about. Therefore, it would be sensible to do bits of all three to avoid the fourth. In effect, that is what the Turner commission is actively considering. I would be happy to support the idea in the Financial Times leak today—if it is accurate—although I would be much happier if we did not go for realigning S2P and went for a single much more straightforward system of having a basic state pension which was clearly designed not only to be at a level that would guarantee against poverty but also to be a base on which second and third-tier pension provision could be built.

More than anything else in this debate, if the Minister were my fairy godmother and granted me a single wish, it would be that reform is now essential. No time is left for getting this wrong. The time is right. The system is too complicated. Simplification must be part of the proposal and education and information must also play a part. The long-term goal is clear—we need a higher, simpler, less means-tested pension for us all, which offers a base on which other things can be built.

The Government should strive to achieve consensus and consensus is out there now—it has been emerging for some time. There is certainly consensus on the broad, outline policy, but it will be harder to get detailed changes and everybody in the same tent on that basis. It is a goal that the Minister should work for as hard as he can.

I have two other things to say before I sit down. One priority must be the position of women. This reform will fail if it does not address the problem facing women. That is an established view now outside this place, and I hope that the Government will respond to that. Also, we must all start thinking much more positively about retirement after 65. There are ways that the Government can help with that too, but we should use this debate and the opportunities coming in the next weeks and months to promote the idea positively.

Finally, I believe that the Prime Minister in his Brighton conference speech was right when he said that on some of the reforms that he had made he wished he had gone further. I only hope that in the fullness of time he does not look back on pensions reform and think that he got that wrong by not going far enough when taking the big decisions on pensions later next year.

Photo of Baroness Greengross Baroness Greengross Crossbench 2:30, 17 November 2005

My Lords, I add my congratulations to the noble Lord, Lord Fowler, on securing the debate. He was always ready to speak with me and listen to my views and ideas when he was responsible for these issues, and I appreciated that very much. I declare an interest as president of the Pensions Policy Institute and vice-president of Age Concern.

Pension reform is essential if for no other reason than that the current system is not fair: it benefits higher earners and creates a huge amount of uncertainty. People do not know what they are going to get from the state; they may rely too much on the private pensions sector; state expenditure on pensions is rather low and the numbers of people over pensioner age, as we have heard, is increasing very rapidly. The Government have recognised that the state is the primary organisation to prevent poverty in later life, and the pension credit is therefore something that is very welcome; but the facts are that a fifth of all pensioners in this country are living in poverty, that women are much more at risk—14 per cent of single men and 21 per cent of single women are in dire poverty—and nearly one-third of those from ethnic minority groups are living in poverty as well. We know that among pensioner couples, women receive 34 pence for every pound received by men, and nearly 70 per cent of older people receive half their income from the state, while 9 million people are estimated to be saving too little for retirement.

I acknowledge that the Government have done a lot, with winter fuel payments, pension credit, help with council tax, local bus travel and so on. Cross-party agreements exist on the fact that pensioner poverty must be eliminated; the problem is to reach a consensus—and we need a consensus—on how best to achieve that. In the interim report of the noble Lord, Lord Turner, last October, he stressed that 12 million people are not saving enough and that their pension income would be slashed by 30 per cent in 30 years' time. That is an appalling amount. The Pensions Policy Institute says that government estimates for future state spending on pensions are not accurate and therefore should not be used as the basis for calculating the extra cost of reform. In a recent report that the Prudential company produced, it was said that the state pension would no longer provide the majority of pensioners' incomes, and that is going to start from next year. The company's data monitor service said that those who were now under 40 may have to work, if this is to be properly remedied, not until 67 but until 75. That is really unthinkable at the moment.

The PPI has estimated that more than 3.5 million households are now eligible for pension credit. That number is expected to increase by one-third over the next 10 years. The Government assume in those figures that 25 per cent of those eligible will not claim; that is a terrible estimate. They also seem to assume that GDP will be sufficient to pay for state benefits and pensions, but the number of pensioners will increase by 50 per cent over the next 50 years. The Government do not include tax relief on pension contributions of £16 billion a year when they estimate the costs. So I believe that those figures need to be looked at again.

We also know that some groups of older people within our society are particularly vulnerable to poverty and misery in old age. Those include people who are disabled; with the ageing of the population, we must take into account that many more people will suffer from acquired disability. I am very worried, too, about self-employed people—not those running a major business but the little people, the one or two-man or woman businesses, such as window cleaners. We must also think hard about part-time and temporary workers and, of course, low-paid women, as has been eloquently said by the noble Baroness, Lady Pitkeathley, who has always befriended and campaigned for carers. There is a scandalous amount of poverty among older women, and the undervaluing of carers, as the noble Baroness said, continues despite the many improvements in their status that the Government have brought in. After much consideration, I have come to the conclusion that compulsory contributions to state and private pensions are necessary in the longer term, if not now.

I turn for a moment to the Scandinavian system. Although we all say that people there pay hugely higher taxes, they have high concessions for parental leave, flexible work and higher taxation at 50.6 per cent compared to our 36.4 per cent; but all those concessions and taxation are tied very strongly to economic growth and to increased productivity, because it all depends on people being in the workforce. That system has led to huge numbers of women—much higher than here—being in the labour market, and a huge increase in national wealth and higher standards of living. So it is worth considering more closely.

On women's pensions, the state system in this country is more suited to 1945 than now. We need either total reform of the contributory system or a model based on residency. The reform of council tax is also essential, but not linked in any way to the ability to pay. Only 16 per cent of newly retired women qualify for a full basic state pension, compared with 78 per cent of men. The Government published a Green Paper on pensions in 2003, repeatedly promising action to improve the situation for women, but so far nothing much has happened. Alan Johnson also confirmed his enthusiasm for tackling the issue in October 2004, when he spoke to the Work and Pensions Committee. At the last Labour Party conference the Prime Minister also made similar statements. The solution, as we know, must be a higher universal state system, reducing the need for means testing. An alternative, recommended by Age Concern might be to reduce the years needed to qualify from 40 to about 25, which would bring most women into the system with entitlement to a full basic state pension. The EOC in recent polls showed that fewer than one in 10 women knew the facts of the situation that they face about being eligible for a state pension.

It is vital that the Government follow through on a number of vital commitments that they have made to deliver fundamental reform of the pension system. Muddling through, as up to now, is no longer possible; too many people have suffered, and they will continue to do so if this promise is not kept, and kept soon.

Photo of Lord Desai Lord Desai Labour 2:38, 17 November 2005

My Lords, I congratulate the noble Lord, Lord Fowler, on proposing this debate. I have spoken in previous debates that the noble Lord has introduced on pensions, and I look forward to many more that he will introduce in future.

I must apologise to the House that I shall not be able to be here at the end, not because of any frivolity but because the House of Lords bridge team faces the marauding hoards of the MCC, and I must be there to defend our honour.

As an economist, let me lay down a couple of ground rules. In a fundamental paper about 47 years ago, Paul Samuelson, a Nobel prize winner, showed that in all pension schemes the working generations' savings pay for the retired generations' consumptions. How you do it is your choice, but whichever way you do it, that is a fundamental proposition. So in a sense, while we concentrate quite hard on what I would call the stock of assets and the stock of liabilities, eventually it is the flow payments that are important.

That is for two reasons: first, eventually the payment has to be there, whatever your stock position; secondly, the stock positions are difficult to estimate accurately, especially if they are many years ahead. No more than 15 years ago we were proudly saying how we had the best pension system in the whole world, and we were ahead of everyone else in Europe. Given a stock market slump, the whole situation is reversed.

We have to be careful in claiming either a big shortfall or a big surplus. If there is a shortfall in private schemes and we make existing firms top up too quickly, that may harm their own viability as ongoing profit-earning firms. We have to be careful not to kill the golden goose. Whatever estimates we have about pension liabilities compared to likely assets must therefore be treated with not just a funnel of uncertainty, but a huge cave of uncertainty.

Having got that off my chest, I congratulate my noble friend on his new bed of nails. He arrives in this position when not only pensions are a problem, but also welfare reform. This is a great opportunity to link the two subjects. My noble friend Lady Pitkeathley pointed out how a silly rule about overlapping benefits actually has the opposite result from what was originally intended: people who are unable to afford it suffer when they move on to a pension from the carer's allowance.

What if we think of pensions, not as pensions, but as senior citizen's income? What if we say that every senior citizen—at a cut-off point of 60 or 65, as you like—is entitled to a state income, regardless of their work record or contribution? What if we roll up the secondary means-tested pension along with the basic state pension, pay women as much as men get, and allow people roughly £100 to £110 a week? That is not a great fortune, but it would avoid abysmal poverty for people in old age. If we do that, we should not cancel the carer's allowance, because they have an additional responsibility, not just for looking after themselves, but for caring—which has no retirement age, as my noble friend pointed out. There is all this fuss over the age of 65 or 67, but that is not a choice open to carers. We ought to look after the worst-off people.

Moving from pensions to a senior citizen's income will cost. Every time I get up, I cost the Government another few billion pounds. But this is the time to do it, and, if it is done, welfare reform for other entitlement incomes might become much simpler. We might think about extending the principle of a citizen's income to other entitlements.

I urge the Government to be cautiously bold in this one respect. If we can do this, at least the danger of poverty would be relieved. As to the retirement age, once again it is hard to forecast how behaviour will change. We are all assuming that in 30 years' time people will behave as they do now, and therefore x, y and z will follow. It is possible, however, that the way people work may change so drastically—working at home might become so much easier—that we may be able to suspend the notion of a retirement age. If we have converted a state pension into a citizen's income that accrues to people regardless of whether or not they are working at a certain age, the pressure to retire at a particular age will become that much less.

Photo of Lord Freeman Lord Freeman Conservative 2:45, 17 November 2005

My Lords, I congratulate my noble friend Lord Fowler on not only his speech but also the good fortune of being able to introduce this debate. I agree with his trenchant comments. I declare an interest as chairman of a large industrial final salary pension scheme. I want to concentrate, in the few minutes available, on the problems of final salary schemes in the private sector.

My noble friend drew the distinction between the plight of those blue-collar and white-collar workers in defined-benefit final salary pension schemes who are finding their schemes in deficit—some of them closing—and the public sector. Public sector schemes include judges, former Members of Parliament who have served long enough to get a full pension, senior civil servants and Bishops, all of whom will benefit from preserved decent final salary schemes. The private sector can in general no longer afford what used to be regarded as the hallmark of good pension provision. Why?

There are two reasons for this sudden change. First, there was the withdrawal of the benefit of reclaiming advance corporation tax on dividends. We were told at the time by the Government that we were not to worry; this would be compensated for by higher net dividend payments and, implicitly, higher stock market valuations for share prices. That has not happened, and therefore pension funds for defined-benefit final salary schemes have seen a black hole created in pension provision.

The second reason, which is arguably more important, is that the nation is living longer. The actuarial profession, together with trustees—and I accept my part—can be blamed for not identifying this trend early enough. I plead with the Government Actuary, through the Minister, to ensure that statistics are more up to date. If we are going to continue to live longer, actuarial provisions for pension schemes must take that into account. It is a welcome development, but it has caused a massive problem for private sector pension schemes.

There are three simple measures of amelioration—the creation of an oxygen tent for private sector defined-benefit pension schemes—which are needed urgently. It may be that a future government will reverse the tax on pension schemes, and I hope they do, but that is unlikely to happen under the present Administration.

As the noble Baroness, Lady Turner, indicated, many schemes are closed to new entrants. The schemes themselves are therefore maturing by definition, as no new members are entering. This means the trustees must shift their assets from the stock market to the gilt market—the debt market—in order to match liabilities. The Government have so far refused to recognise this, in my judgment, through the issue of substantial index-linked gilts available only to pension funds. I hope the Chancellor will take that into account in his Pre-Budget Statement, otherwise there will be continued pressure on the stock market, which will affect many people in this country and mean that trustees are unable to match liabilities with assets. That is the first measure.

The second is that I hope the new pension fund regulator will take a pragmatic view of the substantial deficits that are now prevalent in pension schemes in the private sector, particularly in the manufacturing sector.

We are talking about 20, 30, 40 or 50 per cent of the market capitalisation of many companies in the Financial Times index of the top 350 companies. When we debated pensions legislation a few years ago, we were told by the Government not to worry as the levy—I seem to remember a figure of £180 million per annum in that regard—upon pension funds to pay pensions to those whose schemes had collapsed or defaulted would be offset by the benefit of reducing the maximum level of indexation of pensions in payment. That has not happened. The cost of the pension fund levy is now several hundred million pounds—several multiples of what was originally estimated—and inflation is below the 2.5 per cent lower cap. It is a recurring problem for many pension funds that have to pay the cost of the levy to the regulator.

Help is needed in providing more information to those who work in the private sector regarding their potential pension benefits. I give the Government credit for introducing recent changes on that, which are much to be welcomed. However, what people in the private sector really need is a pensions health check at the ages of 30, 40 and 50 to explain what their accrued pension benefits are going to be. If you change jobs and go from a defined benefit scheme into a defined contribution scheme and then into your own personal pension scheme, it is difficult to calculate what your future benefits will be. We need Stelios to introduce some kind of easyPension benefit calculation, available on the Internet so that you can feed in the information—which is available from your pension fund's trustees—and obtain an aggregate figure. The private sector is in crisis and help is needed.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour 2:51, 17 November 2005

My Lords, I, too, thank the noble Lord, Lord Fowler, for giving us this opportunity to debate pensions. I welcome my noble friend Lord Hunt to the first major debate on pensions to which he will reply. He has a hard act to follow as we all recognise that my noble friend Lady Hollis was expert at handling her brief. However, I am sure that my noble friend Lord Hunt will do extremely well.

There has been much talk about a pensions crisis. While it may not be appropriate to describe the present situation as a complete crisis, there could well be a crisis in the future if nothing is done. Nevertheless some people today are facing acute problems because of the failure of the companies they work for and the consequent collapse of pension provision. In my years as a trade union official I was always keen to get members into final salary schemes. Indeed, such schemes were largely regarded as one of the major success stories of the previous century. For many people they have been an enormous success, enabling them to lead retirements free of financial anxiety. We did not, of course, envisage the collapse of the stock market several years ago, nor the bankruptcy of a number of major firms, leading to the disappearance of pension provision to which their employees had contributed believing their investment to be totally safe.

I agree that the Government's decision on tax in relation to ACT did not help very much. I disagree with the noble Lord, Lord Fowler, about the Government's recent decision on public sector pension provision because all the Government seem to me to be doing are honouring existing contracts and offering different contracts to new employees. That, of course, happens all the time in the private sector.

The Government have attempted to deal with some of the problems in their recent pensions legislation, a key element of which was the new Pension Protection Fund designed to provide compensation for employees caught in this situation. It did not at the time deal with the problems of employees who had already lost out, but some steps have been taken via the introduction of another fund to cope with those caught in the gap. I certainly supported all those moves but the major concern is that there may not be enough resources available in the funds to deal with all the problems that could arise. We also have a new pensions regulator with much wider powers than existed for OPRA. The Government are to be applauded on the steps they have taken to cope with that unfortunate situation. However, as many speakers have said, the problem remains the overall one that we have an ageing population. We are all living longer—which should be celebrated—but we may not be saving enough as a community, either individually or communally, via the tax system to provide adequately for future generations when they retire.

The trade unions support occupational pension schemes, which they believe should be brought about as a result of negotiation between unions and employers, but think that there should be a system of compulsory contributions. The report of the TUC's pensions task group recommends that contribution rates should be set initially at 6 per cent of all pensionable earnings in excess of £6,000 per annum, with a longer term target of 15 per cent. It proposes a 2:1 split in employer and employee contributions. There will no doubt be an opportunity for further discussion of this and other suggestions when we get the much awaited Turner report. I think, however, that compulsory contributions will be difficult to sell to the workforce unless there is more confidence in private occupational provision. People obviously will want to feel that their savings are safe. The Government have clearly realised that and hence we have the Pension Protection Fund and the financial assistance fund.

However, most commentators on private pensions regard the state system as being the bedrock of pension provision. It has long been my view that the basic state pension should be substantially improved, and then increased regularly in line with the wages index. The Government have sought to deal with pensioner poverty through the introduction of the pensions credit. This has had the effect of lifting more than 3 million pensioners out of penury, but there is one drawback in my view—it depends on means testing. As a result it is expensive to administer and many very vulnerable people do not succeed in getting it at all. They do not receive it even though the Government have made a commendable effort to publicise it. Nevertheless it does not reach all those who are entitled to it. I still think that improving the basic state pension for everyone is the best solution. The Government's fear that the money would go to pensioners who do not really need it can be met via the taxation system, as it is already—the better off would simply pay a little more tax, but pensioners would get the money as of right without having to make a case that they were poor enough to need it.

Probably the poorest group of pensioners are women. I am glad that the Government appear to be giving a lot of attention to the position of women. I am particularly glad that the DWP document, Women and Pensions, has been produced. Although it does not offer any solutions, it sets out some of the problems with a great deal of clarity. The problems are ones with which we are all familiar. In a contributory system—which is what the state system is—women often have an interrupted record because they take time out of the labour market to care for children and often elderly or disabled relatives.

Despite home responsibilities protection, which gives some cover for years spent caring for others, women often still do not qualify for the full state pension. About 30 per cent reaching the age of 60 do not qualify for the full state pension. The problem is even greater for women from ethnic minorities, particularly those with a Pakistani or Bangladeshi background, as for cultural reasons many of them spend a great deal of time out of the workforce and therefore do not make contributions.

This excellent report sets out the problems, although no solutions are offered. There is, however, a case for looking at the possibility of a citizen's pension based on residence in this country rather than a contribution record. Of course, it would be rather difficult to introduce because something would need to be done in relation to those who had contributed and would obviously feel that their contributions should count for something. On the other hand, society may be changing very rapidly with almost all women involved in working for wages outside the home and men allowed more time off to participate in child support. It will be interesting to see whether the Turner report offers some solutions to those admittedly rather difficult and complex problems. I have found this debate extremely interesting and I thank the noble Lord, Lord Fowler, for introducing it.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative 2:59, 17 November 2005

My Lords, I declare an interest in this subject as chairman of the financial services division of Beachcroft Wansbroughs. I also welcome the noble Lord, Lord Hunt of Kings Heath, to the Government Front Bench. Once again, we are greatly indebted to my noble friend Lord Fowler for giving us this vital opportunity to discuss this important subject again. Listening to the speeches so far, I am greatly heartened by the potential for a consensus both within parties and between parties about the nature of the challenge that we face. I hope that the Government's response to the Turner commission will be well considered, brave and also—if it is in any way possible—underpinned by that broad, cross-party consensus.

However, there is excessive complexity in the market and confusion in the minds of the public. It inevitably starts with the lack of clarity about the one area of the pensions maze with which we are all involved; namely what the state will provide. I am not implying for one moment that it is easy to provide guarantees about what the hard-pressed taxpayer will be able to provide in 2050 or even 2015; yet it is incredibly difficult for citizens to make rational decisions about those important matters if there is substantial and widespread uncertainty. The nature and extent of state provision in the longer term are the Alpha and Omega of this debate; all else flows from them. That is the main reason for turning this into a cross-party matter rather than one forced to exist under the cloud of partisan debates. Otherwise, how on earth can citizens make the necessary decisions about the situations that they are likely to face in 20, 30 or 40 years' time? The situation of course is made far worse by complex products and complicated tax rules. All of that threatens to obscure the one, all-important fact; it does pay to save.

Looking at this morning's press reports, I offer one word of caution. Whether it is due to the commission or to the journalists' embellishment, there is a serious danger of not comparing like with like. Press reports suggest that BritSaver, as it seems to have been dubbed—the nationalised pension savings plan to be more accurate—would cost 0.2 per cent, while personal pensions cost 1 per cent to 1.5 per cent. That is a gross oversimplification; one of those includes the cost of advice and the other does not. BritSaver does not make the need for advice go away; the cost has to be included somewhere. Moreover, the true costs of large occupational schemes and group personal pension schemes are actually very similar; a figure of 0.4 to 0.5 per cent might reasonably cover both. I hope that we do not make important changes to the way society provides for its retirement on the basis of misleading and partial figures; we will need to get to the bottom of that.

As I pointed out, the principal role of the state must remain the prevention and alleviation of poverty. That surely requires a simplification of the state pension. Please would the state remove significant complexity from that provision? That would enable those consumers who can afford to save to see more clearly what steps they need to take if they aspire to a more comfortable standard of living in retirement. The state must encourage people to save on top of what the taxpayer is able to provide. The incentive must be strong, clear and unambiguous. That is why the system of tax relief on pension contributions is so important, and also why it is essential for the state to ensure that the system of regulation allows the private sector to flourish to the benefit of all.

I shall give some tests by which we should judge the Government's response to the forthcoming Turner report. First, how many more people will end up with sufficient retirement saving? According to the DWP, 12 million people are undersaving or not saving at all at present. The noble Lord, Lord Turner, apparently concludes that sufficiency for a high/average/lower earner means a retirement income that replaces 50 per cent /67 per cent /80 per cent, respectively, of pre-retirement earnings, which seems to me a reasonable thumb-rule. Lifting people off means-testing is worth while, but on its own it will not enable most to meet their aspirations for their retirement; that will require bold policy. Future generations will pay if the Government duck big decisions for tomorrow for fear of angering businesses and voters today.

Secondly, we should ask, as other noble Lords have already, what the proposals do for specific underpensioned groups, such as women, carers and self-employed people. Thirdly, we should be asking whether workplace pension provision will be revitalised. There is clear evidence and consensus that the link between working and saving for retirement should be exploited, not diluted. I would like to see targeted incentives to encourage employers to contribute to workers' pensions, tailored to reflect the fact that we cannot expect the same kind of behaviour from small and medium-sized enterprises and self-employed people as we might expect to see on the part of larger firms. Radical and urgent action in this area is desperately needed.

Fourthly, we should be asking whether the people of this country will engage much more positively with the proposition that they need to plan for the future. The people of this country need to change their behaviour fundamentally, and it goes without saying that there must be a limit to compulsion. Unless citizens of their own free will begin to defer a significantly higher proportion of their consumption, we simply cannot sort this problem out. That is why we need a Government and industry partnership for consumer engagement, based on sustained awareness-raising campaigns.

Photo of Lord Young of Norwood Green Lord Young of Norwood Green Labour 3:06, 17 November 2005

My Lords, I thank the noble Lord, Lord Fowler, for the opportunity to debate this vital issue; but given the imminence of the Turner commission's final report, I feel that this debate can fairly be described as a curtain raiser for future debates. Like a successful West End show, this one will run and run! I congratulate the noble Lord, Lord Hunt of Kings Heath, if congratulations are the right thing—it is a bed of nails. I do not think it is as comfortable as that; at least you can get off a bed of nails. I am not sure whether he can escape from his present position. I also congratulate the noble Baroness, Lady Hollis, on her former contribution in the department.

Pensions in the public and private sector cannot be discussed in isolation from developments in the state sector, and I hope that noble Lords opposite will not be suffering from a bout of collective amnesia when it comes to acknowledging their contribution prior to 1997. As a precautionary measure, we should remind them of the dire pensions legacy inherited by this Government. It was a Conservative government who abolished the earnings link, leaving millions of pensioners in poverty relying on a decreasing state pension in real terms, in a system that massively discriminated against women because they were the principal carers in a family. Their other masterstroke was the decision to allow people to opt out of first-class protected pension schemes, allowing them to become prey to the perpetrators of pensions mis-selling. Thousands of my members who worked in British Telecom and the Post Office were persuaded to invest in schemes that were vastly inferior to their final salary schemes. That is a fine example of what someone once described as the unacceptable face of capitalism.

I notice that the noble Lord, Lord Fowler, was more cautious when he attributed the collapse of final salary schemes to the abolition of advance corporation tax. The noble Lord, Lord Freeman, was perhaps a bit bolder in ascribing that as the principal cause. The Turner commission's first report, after a detailed analysis, did not come to that conclusion. It said that the collapse of the longest equity bull run that we have seen, certainly post-war, was a major influence. Of course, we cannot ignore the question of mortality. In the contribution by the noble Lord, Lord Freeman, he seemed to ignore the fact that companies had benefited from the reduction in corporation tax. I seem to remember that many companies enjoyed pension holidays, despite the fact that in my trade union capacity we tried to remind them that surpluses in pension schemes were no guarantee that they would exist over the longer term.

In addressing the current problem, it is true to say that the crisis is not with us now, as the Turner commission first report said, but it probably will be in 20 or so years' time unless we take action now. We should not over-egg that particular situation. Creating the conditions for a pension scheme that will last for the next 50 years is no easy task. Inevitably, the complexity of trying to achieve a coherent, integrated approach will be subject to the law of unintended consequences.

Can we square the circle of providing a good state pension for everyone while encouraging people to save for their retirement? We know that the demographics are an additional challenge that we should welcome. Due to substantial improvements in public health provision and the general quality of life, men and women are living longer with the inevitable impact on the provision of pensions and care of the elderly. With the number of people in work supporting an ever growing number of those in retirement, can we encourage people to work longer, albeit in a different capacity—either part-time or making a valuable contribution to society in the voluntary sector? Flexibility has to be part of the solution. The current cliff-edge approach to retirement is neither sensible nor efficient.

I welcome the Government's decision to seek a consensus approach, based on the work that the Turner commission will finally produce. I think that it was unfair of the noble Lord, Lord Kirkwood, to say that the Government ran away from the problem. Would we really have had a sensible debate on pensions during a general election? I wish it were true. Rather than them running away, I think that they took a sensible decision, as we would not have had a sensible debate.

As people have said, the Turner commission's first report told us about the unavoidable choices. Future pensions will be poorer unless we decide to raise taxes or national insurance. Someone has calculated that if you want to raise the pension to about £103, you will probably have to raise taxes and national insurance by 3 per cent. I wonder how popular that would be. We know that we need more savings. Do we have to increase retirement age—it looks like that is the conclusion—or can we encourage flexibility, which I hope has not yet been dismissed? My plea is for the Government to try to reduce the complexity if they can.

I praise the Government for their action in the interim. They have taken millions of pensioners out of poverty. Although we hear lots of talk about means-testing and its iniquities, the reality is that the Government have reduced its complexity. When they took office, we had a universal benefit form that was 40 pages long, but it has been reduced to 10 pages. My plea would be for the Government to look carefully at the Turner commission's recommendations, and imaginatively at what future work patterns could be like. People might prefer a sabbatical in the mid-term of their lives rather than retiring early. The Government should look at ways of encouraging employers to contribute and, if that does not work, we will have to address the question of compulsory contributions. I agree with the noble Lord, Lord Hunt of Wirral, that we have to get the figures right in these circumstances, which is difficult. Once again, I thank the noble Lord, Lord Fowler, for giving me the opportunity to contribute to the debate.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Spokespersons In the Lords, (Assisted By Shadow Law Officers), Spokespersons In the Lords, (Also Shadow Secretary of State for Scotland - Not In Shadow Cabinet) 3:13, 17 November 2005

My Lords, I too add my thanks to my noble friend for giving us a chance to debate this important topic this afternoon. I declare an interest as a trustee of two final salary schemes; I am chairman of trustees in one case. Both are now closed to new entrants. I have to say to the noble Lord, Lord Young of Norwood Green, that they have been closed not because of what the Conservative government did, but because of what the Labour Administration have done, for reasons that I shall explain in a minute.

Clearly the key challenge faced by pension funding is the question of increased longevity. That can be demonstrated from my own experience. When I became chairman of one of the boards of trustees five years ago, according to the Government Actuary a man aged 65 could expect to live until he was 81.2 years old on average. Now he expects to live to 84.6 years. That is an increase of 3.4 years in life expectancy over the five years. That may be only 4.2 per cent of his total life, but it is 21 per cent of his pensionable life. Any fund offering a defined benefit linked to a final salary would face considerable challenges. That is not the Government's fault in any way. That said, the Government's actions in the interim have, in almost every way, made a difficult position worse. My noble friends Lord Freeman and Lord Fowler have already talked about the raid on the pension funds. I shall say no more, other than to draw the Government's attention to Ernst & Young's study, which suggests that income guaranteed by investments has been reduced by 18 per cent as a result of the Chancellor's actions.

Much worse than that has been the way in which the Government have been reluctant to spell out and face the realities of the situation. That has damaged confidence, which is such an essential ingredient of long-term savings. Instead, the Government have fallen back on a round of consultation, filling up the gaps while consultation takes place with what can be described only as a subtle approach to the blame game. First in line to be blamed are, of course, the employers. We now have a massive Pensions Act and an associated large regulatory burden. As I foreshadowed in my speech on the then Bill's Second Reading, that is the death knell of final salary pension schemes. What company will want to look for and accept an open-ended obligation implicit in such a scheme? It is not only the question of longevity to which I have referred, but the powers of the Pensions Regulator as regards the level of contributions to the fund and of levies to the Pension Protection Fund itself.

One of the schemes of which I am a trustee is a smallish scheme, with £25 million to £30 million under management. It is a mature scheme. Our income from our employer is £750,000 a year. We are just being told that our assessment for the annual contribution to the Pension Protection Fund may be as much as £600,000 a year. That is our entire income swallowed up, pretty much, in one fell swoop. What does a sensible trustee do when faced with that problem? From the company's point of view, all this open-ended obligation has a deleterious impact on the value attributed to any company if it were to be bought or merge with another company.

There are difficulties for trustees, for who would be a trustee in those circumstances? Not me, for one. By 15 February, I am glad to say that I shall be history on both the schemes of which I am currently a trustee. My final decision to leave has been triggered by a case where we are, as trustees, in danger of being sued by a husband and wife. No one suggests that we are not paying out the right amount of money; it is a question of to whom we pay it. Under the new regulations, the issue of marital breakdown is controversial and not entirely clear in law. Therefore, both sides are saying that we should be paying the money in different proportions for each. I am a pension fund trustee, not a matrimonial adviser. So I and others will wish to cease to be trustees. Does that matter much? Maybe it does not. But there will be professional trustees in our place. That will incur increased costs, because those people must be paid and their tendency will be to sail in the middle of the convoy. There will be no readiness to break the mould, to avoid accepting the received wisdom of the moment, and in many cases they will not be particularly knowledgeable about the individual fund for which they will be trustees.

So there is much to be said for the continuation of the defined benefit fund, and I am sad that the Government have done so much to undermine confidence in it. If the employers are not at fault, the Government try to blame the actuaries; they have tried to blame the industry and there had been a tendency to blame individuals by saying that they should save more. If you increase the tax burden, savings will certainly drop. The Government may have avoided headline increases in certain taxes, but the cumulative impact of stealth tax increases has reduced the readiness of people to save. The complexity of new measures is another issue to which many noble Lords have referred, in particular the persistent refusal to be user-friendly and consider flexibility in annuity retirement dates.

So much for the blame game. The worst thing that the Government have done, as my noble friend said, was in their own dealings with public sector pensions. On Wednesday, 19 October, a headline in the Financial Times stated:

"Abject surrender over public sector pensions".

The article concluded:

"This surrender of a policy with an unassailable rationale is typical of Tony Blair's government—for all his claims he wished he had been more radical with previous reforms. It will also be the death knell of public sector pensions in the longer term, since sooner or later a government will have to have the nerve to halt an increasingly costly gravy train for a minority of the workforce that is paid for by the majority".

The Government have to face up to that issue and my noble friend has done the House a great service by drawing our attention to it.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 3:20, 17 November 2005

My Lords, I, too, congratulate my noble friend Lord Hunt of Kings Heath on taking up his role and thank my noble friend Lady Hollis of Heigham for her splendid work in government over a number of years.

Debates such as this do not always enhance the search for consensus that was called for by the noble Lord, Lord Hunt of Wirral, but it is the right message to give in advance of Adair Turner's report. After all, debates about pensions have one thing in common with debates about nuclear power stations: the timetable that we are talking about often relates to 2040 or 2060. It is not tomorrow or the next day, and the leak in today's Financial Times about increasing the retirement age to 67 mentions the year 2020. That is tomorrow in the world of pensions.

We are not unique in this country in having a problem. There are some dramatic figures on the support ratio. Our ratio in 1948 was five workers for every person who was retired; today that figure is three and will move to two by the middle of the century. In South Korea, that figure will fall from 9.1 today to 1.7 in 2050. In China, it will fall from 8.8 to 2.4. Those figures have been provided by the same sources that we have to believe in all such statistical questions, but we should bear the figures in mind when we consider that we may have a crisis—not today but, as with many other countries, we are at the benign end of the spectrum.

The fundamental problem of pensions was characterised recently by the director of the National Institute of Economic and Social Research, who said that people want something without having to pay for it. That may be a "square one" remark, but it is fundamentally true. That is why what we often call compulsion is another way of saying that we have to take decisions collectively, not only for the common good but because, left to ourselves, as my noble friend Lady Turner said, there is a lack of confidence in how to take these decisions ourselves. That is because, among other things, we lack confidence in what we have been sold by the financial services industry—although my noble friend did not put it that way. I am in favour of a mongrel, collective, public/private solution and I believe that Adair Turner and his two colleagues, my trade union friends Jeannie Drake and Professor John Hills, are the best people to give us a road map.

On compulsion, a point that has not been discussed, but which I believe is essential, is how much employers want to employ older workers. We seem to be debating this subject in an abstract world in which people want to employ those aged 67, 68 and 69. Over the years, I have been involved in Third Age Employment Network. Anyone in the House who has been so involved knows that that is far from the case. Next year will be a very important year because we shall have the EU framework of anti-discrimination legislation and it will be important that both sides of industry find a way to get that up and running.

The kindest way to describe the preaching from some employers, especially when one considers their record of dismissing older workers and not wanting to employ older workers, is that it is schizophrenic. In many cases, they want to sack people when they want to and yet they want to preach about later retirement. Apropos the stronger messages from the noble Lord, Lord Fowler, about the Civil Service, it was only in recent years that Civil Service employers wanted staff to reduce their retirement age from 65 to 60. That was not from altruism; they would save on the average pension that would be payable, given the turnover in the Civil Service.

I believe the noble Lord, Lord Fowler, referred to the privileged minority, although he did not use that exact phrase. If I were to ask Members of the House what was the average Civil Service pension in the past financial year, they might think it was £10,000, £8,000, £6,000, or £4,000. It was £2,000. Although the noble Lord, Lord Hodgson, made some very good points, there is a caricature of those at the top end of the Civil Service on the gravy train, but that will not be recognised by most people in the Civil Service.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am glad that he does not associate himself with any such sentiment. The noble Lord, Lord Desai, mentioned the fallacy that a trillion pounds is somehow a liability. I used to be a member of the Royal Commission on the Distribution of Income and Wealth. We considered national wealth statistics with and without pension liability, but one has to have both sides of the balance sheet. There is no immediate liability to pay out a trillion pounds. If one works out the logic of national income accounting—national wealth and income—my noble friend Lord Desai is fundamentally correct. I hope that at some stage people will get that into their heads and not produce this false comparison of apples and oranges.

Photo of Lord Evans of Temple Guiting Lord Evans of Temple Guiting Government Whip, Government Whip

My Lords, before we hear from the noble Viscount, Lord Trenchard, perhaps I can say that many noble Lords are straying into the eighth minute, creating a time problem. That means that we shall not be able to hear my noble friend Lord Hunt speak at length, as we would wish, at the end of the debate. Perhaps noble Lords could bring their remarks to a close as the figure seven appears on the clock.

Photo of Viscount Trenchard Viscount Trenchard Conservative 3:28, 17 November 2005

My Lords, I am grateful to my noble friend Lord Fowler for introducing the debate. The Motion refers specifically to both public sector and private pensions. That is entirely apposite given the very different conditions of the two categories. Of course, what they have in common is massive underfunding, but the difference between the two is that the vast majority of members of public sector schemes continue to enjoy final salary-linked, inflation-adjusted, defined benefit pensions, whereas most active members of private sector schemes no longer enjoy those benefits and have to make do with the vastly inferior money purchase schemes.

Furthermore, under this Government, the percentage of the workforce employed in the public sector has increased to more than one in four and continues to increase. The productive private sector and the taxpayers will have to pay the generous public sector pensions. That will represent a steadily increasing burden in future years. I agree entirely with what my noble friend said about the Government's deplorable decision to abandon their long-held intention to increase the normal retirement age for public sector workers from 60 to 65. On the other hand, the private sector workforce is told that it must work longer and put more money into its pension pots. Indeed, it is reported today that the Pensions Commission is shortly to recommend the raising of the state pension age to 67.

In 1997, our pension system was the envy of the world. Pensions are, for most people, the most important element of savings. This Government have attacked both pensions and individual saving schemes. I concede that pensions policy is not an easy area, but most of this Government's actions have either caused serious harm, such as the removal of pension funds' privileged tax status, as referred to by my noble friends Lord Fowler and Lord Freeman, or have made an already over-complicated system even more cumbersome and expensive. The levies payable to the PPF under the Pensions Act may, paradoxically, result in more companies going bankrupt. The financial assistance scheme is, and was always going to be, woefully inadequate. The stakeholder pension scheme introduced in 2001 is largely a failure. Most recently, the new provisions regarding SIPS will give help where it is least needed and are likely to distort the housing market, putting the acquisition of reasonably priced housing out of the reach of many young people eager to get on the housing ladder.

I return to the subject of the taxation of pension funds, already mentioned by my noble friends. In the past, pension funds have perfectly logically enjoyed a privileged status in that they were able to receive dividends from UK companies gross; that is to say, UK companies could effectively pay dividends to them without the deduction of corporation tax. The Government changed that with the Chancellor's decision in 1997 to abolish dividend tax credits. That was the notorious stealth tax, so called because it was not at all clear what the Government were up to, as very few people understood the system. I was interested to hear the noble Baroness, Lady Turner, accept that that act was probably not helpful.

The Chancellor got it badly wrong. He mistakenly believed that he could increase the tax on pension funds by as much as £5 billion a year without endangering the system. As the Association of Chartered Certified Accountants—to which I believe the noble Lord, Lord McKenzie of Luton, belongs—has stated,

"the withdrawal of the tax credit is, in our view, the most important single contributory factor to the problems that currently afflict schemes".

The noble Lord, Lord Young, reminded us that companies have benefited from the reduction in corporation tax, but he omitted to mention that the vast majority of that reduction was implemented by Conservative governments. Killik & Co, the private client stockbroker, has estimated that the Chancellor's stealth-tax raid destroyed around £300 billion of stock market value.

I believe that the cost of the Chancellor's raid is rather more than the £40 billion to which my noble friend Lord Fowler referred because we should consider its cumulative effects. We can assume that some 50 per cent of the stolen tax credits would have been reinvested in UK equities, yielding perhaps 3.25 per cent per annum. Taking that into account, the cost of the Chancellor's stealth-tax raid to pension funds rises to £56.6 billion. Secondly, we should also consider the fact that our stock market would today be much higher than it is if pension fund managers had not significantly reduced their weightings in UK equities as a result of the stealth-tax raid. This is the reason why, in spite of our relatively good economic performance, our stock market has massively underperformed in relation to the average of the American, German and French stock markets. If the UK stock market had performed in line with the average of those three markets, our corporate pension fund assets would be worth an additional £110 billion, which together with the £56.6 billion I mentioned, amounts to £166 billion.

I fear that the Chancellor made a huge miscalculation in his stealth-tax raid. Its cumulative effects, coupled with his other tax increases and the imposition of an increasingly expensive and bureaucratic regulatory and compliance regime, have undoubtedly harmed the economy and weakened our competitive position as an attractive financial centre. It is very likely that the stealth-tax raid actually resulted in a substantial net loss to the Exchequer because it has had such a huge negative effect on corporate earnings, on the level of the stock market and on tax receipts.

As the noble Lord, Lord Kirkwood, rightly said, there is no more time to get this right. I believe the two most important things that the Government must do are, first, to reverse their decision not to increase the retirement age for current public sector employees and, secondly, to restore the completely logical, and now badly needed, privileged tax status for pension funds. Once again, I thank my noble friend Lord Fowler for introducing this interesting debate and giving me this opportunity to speak today.

Photo of Lord Rosser Lord Rosser Labour 3:35, 17 November 2005

My Lords, I also congratulate the noble Lord, Lord Fowler, on securing the debate on this major issue. While, as has already been said, real progress has been made in the Government's provision for pensioners through the state pension and pension credit, the same has not been the case with some other parties. Some companies, to their credit, have maintained their final salary occupational pension schemes, sometimes with some changes, and have not joined the, at times, lemming-like rush either to bar entry to such schemes to new entrants or, in some instances, to seek to change the arrangements for future years of service for existing employees as well.

The move away from final salary schemes had started prior to 1997, as some companies sought either to obtain a competitive advantage or to restore a competitive position, and chose to do it by reducing the costs of their pension scheme arrangements. One common feature of the move away from final salary schemes to defined contribution schemes was that it reduced a company's costs, sometimes significantly, almost immediately, and was not even a case of adopting measures to contain pension costs at current levels. The same changes in pension arrangements, needless to say, do not seem to have been imposed with the same rigour on occupants of the boardroom as well. Leadership obviously has its limits.

The difficulty is that, once some companies choose to reduce costs by cutting the amount of money they provide for the pensions of their employees to achieve or restore a competitive advantage, other companies will be more likely to follow to keep their competitive position. In other words, there is a snowball effect, with only those companies that take a rather more enlightened, longer-term view of the situation and the value to them of a decent pension scheme for their employees standing firm against the trend.

Another feature of many companies' approach to the running of their pension schemes is the enthusiasm with which they embraced the short-term attraction of pension fund contribution holidays, particularly for themselves, although not so often for their employees. Many companies and their expert financial advisers, in their projections, chose not to take proper heed of increasing life expectancy and their own warnings that the value of shares can go down as well as up, as can dividends and interest rates. A lack of financial acumen was equally shown by the life assurance companies, resulting in high and unsustainable final bonuses, which have had to be slashed dramatically in the past few years to compensate, to the detriment of those whose policies have recently matured.

We were also told that a change in accounting arrangements had adverse effects on final salary occupational pension schemes as far as the balance sheet was concerned. Obviously though, it was not such an adverse effect that all companies concluded that they had to move away from final salary schemes.

As we know, the most widely advanced explanation of the move away from final salary schemes has been tax changes by the Chancellor of the Exchequer. However, bearing in mind that the move away from final salary schemes had started before 1997, that it was inevitably going to have a snowball effect once it started as other companies sought to maintain or restore their competitive position, and that contribution holidays by companies continued after the tax changes, that explanation is less than convincing.

I appreciate that my noble friend will almost certainly say that we must await the second and final report of the Pensions Commission, but I hope that serious consideration will be given to a requirement for companies to contribute a minimum percentage amount to providing pensions for their employees. I say that not just in the context of the approach of some companies in moving away from final salary schemes, but also in the context of the all-too-large number of companies that have never sought to provide for, or contribute towards, pensions for their staff. All too often those staff have also been doing the least well paid jobs, and are those for whom financial provision and security in their later years is a major worry.

If companies want to give examples of their social responsibility, proper pension provision for their employees is one way. To opt out or never to have opted in is to transfer all responsibility for providing financial security above the state pension in later years from those who have financial resources—namely, companies and those who own them—to those who, all too often, do not, namely the individual employee.

It is because I believe that an employer should contribute towards an adequate pension and should not change the rules adversely for existing staff that I welcome the Government's decision on public sector pensions. You do not measure the success of a negotiation simply on the basis of whether you achieve your opening position. The Government's agreement is in line with the more enlightened private sector firms, in that it increases the pensionable age for new entrants but protects the position of existing staff. I do not disagree with the decision that the pensionable age must be adjusted and that more flexible options should be provided for people to work longer if they so wish, to reflect the fact that life expectancy has increased and will continue to increase.

The Government's decision on public sector pensions has of course been criticised by some highly paid national newspaper editors and business leaders who are on highly attractive remuneration and retirement packages. There is a word to describe people like that, but I shall refrain from using it. The reality is that a large percentage of people in the public sector are by no stretch of the imagination well paid and those at the top end of the pay structure receive nowhere near the remuneration package of their counterparts in the private sector.

Finally, in the field of pension provision, the Government and the private sector, including the private sector pension companies, must continue to work together if we are to provide greater financial security for people in their later years. The need to encourage more saving for retirement is clear and further measures to provide that encouragement may well be needed. However, I hope that the Government will be as challenging and robust in that relationship as the private sector is with government. The mis-selling of pensions scandal of a few years ago—it was a scandal for which those responsible for the mis-selling have never been properly held accountable—arose because the government at the time were too trusting of a pensions industry that was badly let down by the activities of some of its number. I trust that no government in future will be quite so starry-eyed again in their necessary and, it is to be hoped, mutually beneficial working relationship with the private sector over pension provision arrangements.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Labour 3:42, 17 November 2005

My Lords, first, I profoundly apologise to the House for not being present at the beginning of the debate. I was unavoidably committed to speaking at the National Association of Pension Funds conference. I regret it the more because I have obviously missed some extraordinarily fascinating speeches. For those who have said kind things about me in my absence, it is clear that I should be absent more often. Thank you.

I want to start by talking about a woman whom I met called Brenda, because I want to talk about women's pensions. I was having jabs for travel in a private clinic last week and Brenda asked me what I was working on. I said, "Pensions". "Oh", she said, "my pension is not worth ninepence". I said, "How come?" She said—she was fairly knowledgeable—"Well, I have had three children, so I get that HRP thing, but I have been in this job for 15 years but it will not get me any national insurance contributions". I said, "Why not?" She said: "I work for 15 hours a week and my employer will not increase the hours, but, in any case, I job share and have to be available the rest of the week in case the other person cannot turn up". Then she said: "In any case, my mum is getting a bit frail so I need to be around for her and I like the job".

It meant that, at 57, she was going into retirement without a penny of basic state pension—her HRP is worthless because she had worked below the LEL—and not a penny of occupational pension. As far as I could tell between jabs, at every stage in her life she had made a decision that we would all applaud, but neither her waged work nor her unwaged work were recognised. By making those decent decisions at each stage, she had taken a pension hit.

Let me invent a mythical twin brother called Brian, who, equally, had married, had three children, was possibly divorced and re-partnered and had a frail mum. Not one of those events in his life would have stopped him working or affected his pension, although they may have made him miserable. He would have worked full time and built up a full-time pension.

In the minutes given me today, I want to make three propositions. The first is that unwaged work is as valuable as waged work. I know that my noble friend Lady Pitkeathley will have expressed that far more eloquently than I could; but Brenda, therefore, should have had a pension in her own right. Instead, we have a contributory system which is based on rights and responsibilities—something for something. But that is a myth because only 60 per cent of contributory years are paid for; the rest are credits. The result is that we get a system which, if you understand it, is complex and if you do not, is riddled with anomalies.

(24)Yes, people get something for something, but, equally, many people get something for nothing: for example, a well-to-do man retiring at 60 years old gets five years of free contributions, which he may not need; a married woman will get a 60 per cent contribution from her husband's pension, whether she has children or whether she has worked. So they get something for nothing. Equally, there are those who get nothing for something—like Brenda. They may have run together two caring jobs of 20 hours each, but they get nothing. They may have done three cleaning jobs at 15 hours each, but they get nothing. The difference of course between the something-for-nothing and the nothing-for-something groups is that the something-for-nothing group is relatively well-to-do—and often men—and the nothing-for-something group is usually poorer, hardworking women who have been knocked all ways round the system. We could all list additional anomalies—just do not tempt me.

My second proposition is that one would expect that if women have a shortfall in their basic state pension—as Brenda certainly would—they should be able to overcome it by rectifying it through an occupational pension. Yet, if Brenda had had a basic state pension of £50 a week and had put aside perhaps £8,000 savings into a pension pot to give her a private pension of £30 a week, she would have been not one penny better off than if she had not saved at all. The basic state pension, far from underpinning her second pension, would have undermined it. That is the system that we have constructed.

My third proposition is—even if Brenda had got an occupational pension—to think about the characteristics that an occupational pension demands from women. They must save early from, say, 25 to 30 years old, just the time when they are likely to have children. They should save enough—15 per cent—yet that is the time when they have probably got a mortgage. They should save steadily, but they are likely to be interrupted by their caring responsibilities. And it is advised that women should get an employer's contribution—but women are far more likely to be in part-time jobs or in jobs where there is no pension attached. They should be able to do that for 35 years—come divorce, disaster or whatever happens in their personal lives. At the end of all that, they are told, they would have a return that is worth having—even though, as I have tried to argue, an incomplete basic state pension subverts the very pensions that they are trying to build. That is before I get to means-testing. On top of that, I would ask that they also hope for a return that will, given the stock markets, be on their side.

Given all those risks and conditions that women cannot meet—certainty, saving enough, saving continuously for 35 years and not touching savings whatever happens—how many men, if they were lower-paid women in their 20s or 30s, would risk saving for an occupational pension, when they would not know whether it was worth having until the day after they retired? What sort of incentive is it to tell women to support themselves and to go into retirement with an adequate income when the basic state pension does not recognise their waged or unwaged work, when the interface between their basic state pension and their occupational pension undermines each, and when the very characteristics of the occupational pension scheme are devised for full-time work, not waged work, and not for the sort of life that Brenda will lead?

It is as though we have set up—this is the sort of thing economists talk about—a game of snakes and ladders, in which Brian, as he goes around the board, will hit all the ladders—promotion, a new employer, a bonus—and Brenda, when she has a child, if anyone becomes ill or she takes on a caring responsibility, hits all the snakes. No sane public policy would develop a system in which what the state wants women to do—to work full time—is at odds with what women themselves and society want—for women to be able to work part time. We should recognise that part-time work is a resource for our society and that women should not be berated for doing it.

I conclude by asking my noble friend not to tell us that things will be fine in 20 years' time because, arguing on the Henry Higgins principle of, "Why can't a woman be more like a man?", in 20 years' time they will be. That will not do because as women live longer, those caring responsibilities will increase rather than decrease. Moreover, I want men as well as women to be able to make the same sort of choices, balancing their work, their lives and their pension provision. So I hope that in the debate and arguments around Turner, we put the needs of two-thirds of our pensioners—women—at the forefront of the debate. I hope that all noble Lords will agree.

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Spokesperson in the Lords, Treasury, Spokesperson in the Lords, Work & Pensions 3:50, 17 November 2005

My Lords, I am happy to join the noble Lord, Lord Fowler, both personally and on behalf of these Benches, in his tributes to the noble Baroness, Lady Hollis, and the noble Lord, Lord Higgins, and welcome to the noble Lord, Lord Hunt. We have just heard in the speech of the noble Baroness, Lady Hollis, what a doughty fighter she is for women and what a loss she is to the Front Bench.

Although the noble Baroness did not put it in terms in her remarks, one can deduce from her speech that she was one of four Labour speakers in the debate, in addition to the noble Baroness, Lady Greengross, who has argued for a much higher basic state pension, particularly to help women. I include in that group, of course, my noble friend Lord Kirkwood. As we approach the Turner report, that is a powerful message which reflects the developing strength of the case on the other side of the House; indeed, in all quarters. My noble friend Lord Kirkwood certainly made an excellent and concise argument for a high, non means-tested basic state pension so as to aid women. We have also heard powerful speeches from three Conservative former Cabinet Ministers. The noble Lord, Lord Fowler, was on his usual coruscating form, if I may say, and as noble Lords will hear when I develop my arguments on public sector pensions, I agree with much of what he said. I refer also to the noble Lords, Lord Freeman, Lord Hodgson and Lord Hunt of Wirral, who all gave us insightful and powerful descriptions of the problems facing private sector pension schemes.

I intend to concentrate on the public sector pension issue, partly because otherwise we would be rather anticipating what we think the Turner report is going to say. I do not believe that it will be a central issue of that report, but I do believe that it is something we must face up to now. I should declare my interest as a pension fund manager for almost 30 years, and a member of my own small self-administered pension scheme, which is rather like a SIPP; that is, a private pensions pot.

With A-day for pension simplification looming next April, when I shall be 59 and thus almost of public sector pension age, I will probably decide to start drawing my own pension. How much will I need? I thought that I had better take a look and get a few quotes for what I can do with my pension pot. What about starting with the equivalent of an MP's maximum pension under the current House of Commons scheme? There an MP would retire now on £39,400 a year after 26 years and eight months' service, with an index-linked spouse's benefit at five-eighths of the MP's pension and unlimited indexation of pensions in payment. How much of my pension pot would I need to buy that pension from, say, the Prudential? I would need £1.2 million.

What about a Permanent Secretary with, say, 38 years in the Civil Service and retiring today at 60 on an index-linked pension of £62,000 a year? The man from the Pru would charge £1.9 million for that one, or £3.8 million for a pension of £125,000 a year at the top end of the Permanent Secretary's range. Doctors in London—though not just in London because my wife is a doctor, although part time—quite normally now earn £100,000 a year. At the end of a normal working life, the pension value would be around £1.5 million on those prices. I did not even dare to get a quote for a judge's pension because I know how sensitive our friends in that area are about their contractual rights. However, I am delighted that the Government at last seem to appreciate the absurdity of introducing a Bill to exempt only judges from a new tax on pension rights which is to apply to everyone else in the United Kingdom.

I give these examples not because I begrudge our dedicated public servants a decent pension—accrued pension rights must be respected and changes must have long lead times, but something like a 20-year lead time would be reasonable, not the 40 years the Government have now conceded—but because we must face up to the widening chasm between our two nations of pension provision. It is unfair and it will make it much harder for people to move between the public and private sectors over their careers. Not only will that be a loss to them, but a loss to the economy as a whole.

There is a growing sense of injustice as the unfunded liabilities of public sector schemes grow and people in the private sector anticipate both worsening pension provision for themselves and higher taxes. Almost all of the public sector, whether in funded or unfunded schemes, enjoys what nowadays can only be described as gold standard pension provision—defined benefit schemes with no limitation of guaranteed price indexation of pensions in payment to 2.5 per cent a year, which the Government introduced in the Pensions Act for private sector schemes; no need to pay possibly crippling insurance premiums to the Pension Protection Fund, as the noble Lord, Lord Hodgson, pointed out; and an open-ended guarantee of public sector pensions from taxpayers and council tax payers.

The noble Lord, Lord Turner, whom I warmly welcome to the House—I remember him as a very bright young man on the economic affairs committee of the SDP many years ago—referred to the memorable statistic that the public sector employs 18 per cent of the country's workforce with 30 per cent of the pension rights. On the present rates of closure of good quality DB schemes in the private sector, only the directors' schemes—and here I agree very much with the point made by the noble Lord, Lord Rosser—of some FTSE 100 companies and the main schemes of a few very big oil companies and banks will offer pensions remotely in the same league as the public sector in five years' time.

There might have been a case for these levels of public sector benefits when comparable benefits were common and when public sector employees earned less than those in the private sector—but now that is just not so. The Office for National Statistics last week published the results of the 2005 annual survey of hours and earnings. Median full-time weekly earnings in the public sector were £475 a week in April this year, up by 4.1 per cent from a year ago. Median full-time private sector earnings were £413 a week, up only 2.8 per cent over the year. The public-private sector pay gap had widened to £62 a week from £53 a week last year.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am grateful to the noble Lord for giving way. Is he not aware that the average income of a FTSE 250 chief executive is now £1 million-plus? Is he suggesting that is not different from the public sector?

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Spokesperson in the Lords, Treasury, Spokesperson in the Lords, Work & Pensions

Not at all, my Lords. With great respect to the noble Lord, I do not think he has been listening to the point I have made. I believe that pension benefits and pay at the top of the private sector are unfair, as I said when I referred to the point made by the noble Lord, Lord Rosser. But I am now talking about the total figures, and one has to accept that many millions of people in the private sector have no pension provision at all, or very poor pension provision, which is a separate point.

If we calculate the full cost of public sector provision properly, we could also give public servants genuine freedom of choice over their own pension provision. If we saw what the costs really were and the Government and employers had to pay a fair share of them, I believe that many employees in the public sector—I say this to the noble Lord, Lord Lea of Crondall—particularly among the low-paid, of whom, I accept, there are many, would prefer to have more pay and a less expensive pension option.

New entrants to the public sector could be offered three main options in a constructive and reforming way ahead. First, they could keep the current gold standard provision, the true cost of which is probably something like 30 per cent of salary, spread between employee and employer.

The second option could be a new kind of silver standard DB pension scheme, similar to some of the remaining good-quality schemes. It would involve limited indexation and some sharing of risk and the cost would probably be about 20 per cent. Thirdly, there could be a bronze standard DC scheme, much more like stakeholder schemes in the private sector, where the total cost would be about 10 per cent. Those would be the choices.

With any of those schemes, the pension age would need to rise gradually to make them affordable. But we cannot expect millions of people to work until the age of 67 for their basic state pension if public sector workers continue to retire at 60 until halfway through the century. That is just not fair.

Finally, I believe that the lead for public sector pension reform must come from the top. Members of another place may not welcome this advice from a Member of your Lordships' House, but I believe that both public and private sector employees will give a very rude answer if members of the most generous pension scheme in Britain in the House of Commons tell them that they have to pay more towards their pension and work longer to get it, if that is what they hear from Members of Parliament. The way to show Britain that we are serious about solving this crisis is for Parliament to put its own pensions house in order.

Photo of Lord Skelmersdale Lord Skelmersdale Deputy Chief Whip, Whips, Spokespersons In the Lords, Work & Pensions & Welfare Reform 4:01, 17 November 2005

My Lords, I begin by congratulating my noble friend Lord Fowler on achieving this debate against some opposition, muted though it was.

The House was no doubt surprised to find the subject of pensions on the Order Paper just days before we are promised the second report of the Pensions Commission. Whether this Motion appearing on the Order Paper caused the leaks that we have seen in today's Financial Times is a moot point. Nevertheless, as the noble Lord, Lord Young of Norwood Green, said, it is as a background for that report that this debate is being held. The noble Lord laid into the previous Conservative government, but I remind him that this Government have now had eight years to act. However many recriminations we have heard—I shall make a few—we should remember that we are where we are now, as the noble Lord, Lord Oakeshott, has just said. Thus, I was pleased that the noble Baroness, Lady Hollis, majored on that. Earlier in the debate there was a reference to beds of nails, and I observe that not one or two but four fakirs are speaking in this debate.

As many speakers have said, the Government are in a mess on the pensions issue. The result of the debate on the Terrorism Bill in another place last week has been widely remarked upon in the newspapers. But I regard the subject of the health and wealth of the nation's retired people to be even more important, and I am glad to know that, since I took this job, hardly a day has gone by without the thorny question of pensions being covered in one newspaper or another—not that any of them have any ideas as to what to do about the problem. However, they all accept that in 1997 the Government inherited the best pension position in Europe.

Today, eight years later, as the noble Lord, Lord Desai, pointed out, we are in the position so ably described by your Lordships today. I agree with the noble Baroness, Lady Greengross, that a consensus is required. But, as I shall say later, it takes two to tango. However, it is not true to say that the Government have done nothing. Last year's Pensions Act set up the insurance scheme for occupational pension schemes, known as the PPF. There are inevitable problems with the annual premium levels that such schemes should pay, and my noble friend Lord Hodgson spoke vehemently about the unfairness that is currently proposed. That said, I am sure that they will be sorted out in time.

In addition, during the passage of the Pensions Bill, the Government were forced by a threatened Back-Bench rebellion to set up a fund to give a small pension to retirees who had lost all their pension entitlement because their firms and final salary schemes had gone bust. Considering what they have missed out on, that is far from generous. Both these schemes help a little but do nothing for the myriad of people who have only their state pension, with or without pension credit, to rely on in their old age, which is lasting longer and longer. More curious in the Act was the provision of a lump sum option for members of the workforce who choose to carry on working beyond their retirement age and do not draw the state pension. That, of course, is an alternative to the enhanced weekly amount that the Conservative government brought in for such people.

I railed against that commutation at the time on the basis that pensions are a means of saving for retirement and are not intended to build up a "pot" which can be spent on anything—a holiday or paying for a new kitchen or whatever.

The only thing that can be said for that part of the Act is that it might—just might—act as an incentive for people to extend their working lives. We are now told that people must extend their working lives. When she was Prime Minister, my noble friend Lady Thatcher coined the phrase, "There is no alternative"; indeed, on this issue, there is not.

That brings me to joined-up government, which was mentioned by my noble friend Lord Fowler. It was around the time that the Bill was enacted that we had the Budget which, among myriad other matters, capped personal pension funds at £1.5 million. Any amount over that figure was taxed at 55 per cent. Of course, that affects only a small number of people. Shortly afterwards came the election and the gracious Speech, which proposed a Bill to take judges' pensions out of this regime. Last week, it was quietly dropped, infuriating the judges, who suffer a serious pay cut when they are appointed but can afford, during their time at the Bar, to build up a large pension pot. It was a proposal to divide the rich, and I am not surprised that we are where we are. The Chancellor of the Exchequer has stamped heavily on the toes of the noble and learned Lord the Lord Chancellor and those with large pension pots.

Another effect of the election was for the Prime Minister to move the former Secretary of State for Work and Pensions to the DTI, but asking him to retain control of public sector pensions. A few months later, he had several meetings with representatives of the teaching profession, the Civil Service and the NHS, and committed the Government to allowing those members already in work to continue to their current retirement age—usually, but not universally, 60—while insisting that new employees work until they are 65.

Can the Minister explain how overall public sector reform is intended to be implemented when the Deputy Prime Minister insists that his department is considered separately from the ongoing negotiations? How are reforms ever to be carried out if every time a strike is threatened, the Government return to square one? This does not appear to me to be joined-up government. And if the Government cannot persuade the public sector unions' members of the need to work until they are 65, how on earth are they to convince them to work until they are 67?

The noble Baroness, Lady Turner, whose expertise on pensions I recognise and welcome, does not seem to realise that the contract is not really being torn up. The existing public service employees have made their contributions on the basis on which they joined first their work and then their scheme. If they worked longer, it goes without saying that they will receive more in retirement.

Two other points arise. Why are the Government treating the public sector employees differently from private sector employees currently in work? They are encouraging private sector workers to work more and retire later to prepare for their retirement. However, they do not dare to say the same to public sector workers. Of course, certain jobs, such as those in fire fighting or the Armed Forces, must be taken into special consideration, but that need not stop pension policy being pursued equitably across all sectors.

What does such a policy do for recruitment in the public sector? I shall not go into detail, but the Government are not even applying the same standards of transparency to themselves as they apply to private firms. The Institute of Economic Affairs estimation of the Government's public sector pension liability is nearly twice as high as the Treasury's.

The Secretary of State for Trade and Industry has acknowledged that it is unfair for public sector workers to enjoy greater benefits than the private sector workers who fund them. Nevertheless, he has failed to follow through any reforms that will reduce the problem and is now proposing public sector reforms that will not be completed until after 2044. Why is he not following the well trodden and acceptable path that the previous Conservative government introduced for extending women's working life, another thing we are led to believe the Turner report will say?

When I left school, I could realistically expect to live until I was 77. Today, I can reasonably expect to remain alive until I am 81. In other words, for every 10 years that pass, I can foresee living for one extra year. The need for people to save and the Exchequer to have an achievable commitment to state pensions is therefore clear. The noble Lord, Lord Freeman, and my noble friend Lord Trenchard raised that matter, but that is not the only problem that the Government have visited upon us.

The Prime Minister stated in February that he did not want the majority of people to be on means-tested pensions, but his policies have been predicted to achieve exactly that. Some 46 per cent of pensioners are subject to means testing now and that will rise to 64 per cent by 2025. When £1 of income from a private pension can lead to a 40p drop in one's state pension, is it any wonder that many people do not consider private pensions worth their while to save for?

Alas, time does not allow me to give my views on personal and occupational pensions mentioned by so many of your Lordships today. However, I point out to the noble Lord, Lord Rosser, that pension schemes had no option but to take pension holidays—the Inland Revenue demanded it at the time.

I hope that the forthcoming report of the Pensions Commission will be fully and completely costed, because from the leaks that we have heard and seen, its recommendations are potentially unaffordable. The important thing is that the report should spur the Government on to the necessary action and soon—not, as the Prime Minister has suggested, in the next Parliament.

Photo of Lord Hunt of Kings Heath Lord Hunt of Kings Heath Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions) 4:11, 17 November 2005

My Lords, I pay tribute to the noble Lord, Lord Fowler, for initiating this debate, which has been interesting and lively. I did not realise that he regarded my press releases as unhelpful. They were always meant to be helpful just as I am sure his speech today was meant to be helpful to the Government. I also pay tribute to my noble friend Lady Hollis. I paid tribute to her when I first took this job by saying that she would be a hard act to follow. From the speech that she gave today, noble Lords will agree with that sentiment. I also welcome the noble Lord, Lord Kirkwood. He was a splendid chair of the Select Committee in another place and I look forward to the many conversations that we will have about the Child Support Agency as well as pensions. I have to sit down at 4.27, so I shall try to pick up some of the main points from the debate. I was asked some detailed questions and I will undertake to write to noble Lords, particularly the noble Lord, Lord Freeman, who asked a number of specific points that I would like to answer.

Listening to the debate, the one thing that struck me was that, while we are clearly facing a considerable pension challenge, we should be wary about talking up the challenge in terms of an absolute crisis. First, we should start by recognising that many people will live a long and I hope happy life. Secondly, as the Pensions Commission made clear in its first report, which is the only report that I have seen—

Photo of Lord Hunt of Kings Heath Lord Hunt of Kings Heath Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, I try not to.

The Pensions Commission's first report made clear that the implications for pensioner income will be more serious in 20 to 25 years' time than in the next 10, although I fully accept the warning that my noble friend made about the position of many women. As my noble friend Lord Lea suggested, we face demographic change, but so does every developed country and the scale of change that we face is less than in most countries in Europe. I am not complacent; but there are some strengths to our current system that we must build upon rather than build the problem up into a crisis. Meeting older people, as I have done in a number of sessions to talk about pensions, actually makes them feel that they are a problem. That is wrong. We must look at older people as an asset to society. In all that we do in relation to pensions or encouraging people to work longer, we need to recognise the strength and contribution that older people can make in our society.

If I could summarise the comments made on the Benches opposite about the Government's record, I would have to say that they were not entirely complimentary. But I want to put that into context; surely, the root of our private pensions challenge lies back in the early 1990s. We all remember the mis-selling scandals, which started to create an air of mistrust in pensions—and I am sorry that the noble Lord, Lord Fowler, was rather quiet on that subject. There are a number of reasons for the recent problems besetting defined benefit pension schemes, but we cannot ignore the stock market fall, which is worldwide rather than just a British phenomenon.

I realise that a number of noble Lords here have taken part in pensions debates over a number of years, and clearly the withdrawal of payable tax credits is something that noble Lords have debated on a number of occasions. The Pensions Policy Institute, which we all respect, has estimated that the impact is significantly less than £5 billion a year. Indeed, as my noble friend Lord Young said, whatever the short-term effect of the measures on pension schemes might have been, it was small compared to the other factors that I have already mentioned, such as stock market trends. Surely, we cannot ignore the wider package of corporation tax reforms that took place at the same time.

We should not underestimate, either, what the Government have achieved for pensioners today. Again, I pay tribute to my noble friend Lady Hollis. The fact is that, over the past eight years, pensioners' incomes have grown, not only in real terms but faster than earnings. Since 1996, pensioners' incomes have risen by 21 per cent, compared to 13 per cent for earnings, adjusted for price growth. I do not want to be complacent, but surely noble Lords must acknowledge the progress that has been made.

Noble Lords have mentioned pension credit, which has made a huge difference to many pensioners. We now pay pension credit to 3.3 million pensioners in 2.7 million households, with an average award of £40 a week. I take the point made by the noble Baroness, Lady Greengross, and assure her that we are working as hard as we can to increase uptake; but we should not ignore the huge beneficial impact that it has had on many older people.

The noble Lord, Lord Hunt, in his constructive speech, said that basic state pension is the core of all pension policy, and there is much in that. My noble friend Lady Turner unsurprisingly made a plea for more generous basic state pensions; anyone who heard the riveting debates that she took part in with the late Lady Castle will know of her strong passion in this area.

The emphasis that the Government have given since we came to power has been to tackle pensioner poverty. The approach taken was to address and target resources at those who most needed them; simply increasing basic state pension would not have helped those without full records—a point that my noble friend Lady Hollis so persuasively made—and only 30 per cent of women reaching state pension age have a full contribution record. So increasing the basic state pension to the guaranteed credit level, for which a number of noble Lords have argued and for which a number of organisations have argued outside this House, if earnings were uprated in future, would cost £8 billion immediately and an additional £82 billion—2.6 per cent of GDP—by 2050, which is a very large sum of money. Clearly the Government's approach up to now has been to say that we should use the pension credit to ensure that the poorest pensioners share in the growing wealth of the nation while keeping spending on pensioners as a percentage of GDP broadly the same in future as it is today. Of course, we shall have to see what transpires from the Pensions Commission, but that is the Government's current view.

A number of noble Lords referred to the demographic changes that have taken place. It is true that whenever forecasts by government and the actuary are made, in practice they turn out to be under-optimistic. No doubt we should rejoice at that, as the noble Lord, Lord Skelmersdale, suggested. For instance, in 1980 decisions about public pension policy were being made on the basis of estimates that male life expectancy from age 65 in the year 2000 would be about 14 years. Now we have reached 2005, the estimate is 19 years. Looking forward, the current official base case forecast is 24 years of life expectancy for a man reaching 65 in 2050. However, many experts believe this will be revised upwards significantly as new information becomes available; indeed, figures in the high twenties are quite possible, and I agree with the comments made by a number of noble Lords about the need for this to be kept under active and regular review.

A number of points were made about the importance of savings with which I very much agree. I was interested in the pension health check mentioned by the noble Lord, Lord Freeman. As a young person, I would have welcomed that. The Government recognise that part of encouraging people to save and go into pensions when they have the ability to do so is to improve financial literacy. That involves schools, and I know that they are doing what they can to increase financial literacy. Alongside that, we also have a programme that provides both state and private sector pension forecasts. More than 6 million people, including me, have received such a forecast. I think it was helpful, and I know that many people who received it found it so. We are also working to develop an online pension planner that will provide the sort of information that the noble Lord is seeking. Individual pension schemes could also do much more in that regard.

The noble Lord, Lord Hodgson, made a point about annuities. We will consider issues like that in the light of what the Pensions Commission has to say.

I move to a somewhat contentious matter: the subject of public pensions. Noble Lords opposite were critical of what the Government have achieved, but they understated the fact that the unions have agreed that, for new entrants in the public sector schemes for the Civil Service, the NHS and teachers, the retirement age will be increased to 65. That is a useful achievement. We always made clear that public sector pensions would be reformed, and that we needed to do that on the basis of affordability as well as what is needed to recruit and retain.

We had always intended to provide existing staff with plenty of notice of the pension age change in order to allow them to adjust their retirement plans accordingly. Indeed, the agreement that has now been reached will be helpful to the condition and climate for pension change in the future. It has been agreed with the unions that the full savings we originally planned from reform will still be met. The question of how those savings are to be arrived at will be considered by the schemes when drawing up their further proposals on scheme design. This is a matter that has been discounted by many commentators because scheme-by-scheme negotiations will also consider whether schemes will move to a career-average basis, and all aspects of reform other than the pension age question.

The agreement will result in substantial savings—an estimated £13 billion to the taxpayer in net present-value terms. It is a sustainable solution for the long term, and noble Lords opposite have underestimated the achievement of the Government in reaching that agreement.

Photo of Lord Fowler Lord Fowler Conservative

My Lords, why therefore did the Government say in their 2003 White Paper, which I have here, that they would also apply a higher retirement age to existing staff?

Photo of Lord Hunt of Kings Heath Lord Hunt of Kings Heath Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

My Lords, they set out a position, and there have been negotiations. I am saying that the outcome has been of great significance. At the end of the day, for new people going into the public sector schemes from next year, the retirement age will be 65. Although the noble Lord refuted the intervention by my noble friend Lady Turner, I do not see that that stance is different from the position adopted by many private sector schemes which retained their current provision for existing members but changed from a defined benefit to a defined contribution scheme for new entrants.

I have two minutes left in which to speak. I acknowledge the points made by my noble friend Lady Hollis on women's pensions. She is absolutely right to express her concerns in that regard and we must consider them very seriously. My noble friend Lady Pitkeathley made some very important points about carers. As regards the Pensions Commission, I have not read today's Financial Times.

Noble Lords:

Oh!

Photo of Lord Hunt of Kings Heath Lord Hunt of Kings Heath Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions)

I tell noble Lords from this Dispatch Box that I have genuinely been engaged on other departmental business and have not read today's Financial Times. I entirely reject the suggestion of the noble Lord, Lord Kirkwood, that the Pensions Commission was a device to avoid the Government facing controversy over pensions during the election period. The Pensions Commission has done a marvellous job. Many people have acknowledged the quality of its reports. Its work has also engendered a very healthy public debate. Perhaps not everyone on the No. 50 bus in Birmingham is talking about pensions but there is no doubt that many people are. I do not know what is in the Pensions Commission report but I assure noble Lords that I hope in future to work with all colleagues here on a consensus basis. If we are to get this matter right, we have to work together, and we must get it right for the sake of our children, our children's children and future generations.

Photo of Lord Fowler Lord Fowler Conservative 4:26, 17 November 2005

My Lords, I thank everyone who has taken part in this debate for their speeches. I thank the noble Baronesses, Lady Pitkeathley and Lady Greengross. I also thank my noble friends Lord Freeman, Lord Hunt of Wirral and Lord Trenchard for their contributions. I thank my noble friend Lord Hodgson who set out the plight of the private sector and trustees. As he said, the noble Lord, Lord Desai, was not present to hear the Minister winding up the debate but that is cancelled out by the fact that the noble Baroness, Lady Hollis, who was not present at the beginning of the debate, is here for the wind-up. I thank her for that.

I address my next remarks to the noble Lord, Lord Lea, the noble Baroness, Lady Turner, and the noble Lord, Lord Hunt. I welcome the noble Lord, Lord Hunt, to his new position but I did not find his reply on public sector pensions at all convincing. I have to tell him that the policy to increase the retirement age in the public sector for existing staff was not my policy but the Government's. The Government have now retreated from that policy. As the noble Lords, Lord Kirkwood and Lord Oakeshott, and my noble friend Lord Skelmersdale said, the demographic message is beyond challenge: that means tackling the age of retirement. However—I say this to the noble Lord, Lord Rosser, in particular—you cannot change it for one group and not for another. You cannot change it for the private sector and not for the public sector. That is unfair and unjust.

We will come back to these issues with passion. I thank everyone who has taken part in the debate for their contributions. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.