My Lords, I beg to move that this Bill be now read a second time.
The Bill implements the most ambitious reform of our pension system in modern times. It takes forward the key recommendations made by the Pensions Commission in 2005 to provide the basis for a sustainable and affordable system that strikes between Government and individuals a new balance of responsibility for security in retirement. It addresses past inequalities and inadequacies and embeds in our pension system the crucial values of fairness and simplicity. Above all, it is built on the solid foundation of consensus.
The Bill comes after 10 years of progress in reducing the poverty that had all too often become associated with old age. Since 1997, 1 million pensioners have escaped from relative poverty and more than 2 million from absolute poverty. We are spending around £11 billion a year more—nearly 1 per cent of gross domestic product—on pensioners than we would have done had we continued the policies that we inherited in 1997 and £7 billion a year more than we would have had we simply reintroduced the earnings link in 1997. As a result, pensioners have shared in the rising prosperity of the country and for the first time in a generation, they are now less likely to be poor than any other group in society.
The Bill will take the crucial steps needed to continue that progress, to meet the challenges ahead and ensure that security in retirement is a reality for generations to come. This year for the first time there will be more people above state pension age than children in the UK. People retiring today can expect to live more than five years longer than their parents' generation. The potential implications of this rapid, demographic shift are profound and nowhere more so than in terms of the pensions people receive.
In 2002 the Government established the Pensions Commission to consider the long-term challenges for our pension system and I should like to take this opportunity to express my thanks and admiration to the noble Lord, Lord Turner of Ecchinswell, for the formidable analysis and recommendations which he and his team produced. That work has genuinely shown us a way through some difficult issues and we are greatly indebted to him and his colleagues.
Alongside the implications of demographic shift, the commission identified three other major issues; first, that people are not saving enough for their retirement; secondly, that as a result of historical legacy, the current state pension system is complex and delivers unfair outcomes, especially for women and carers; and, thirdly, that if the current basis of indexation were maintained, the basic state pension would reduce drastically in value over the next few decades and by 2050 eligibility to pension credit could spread to more than 75 per cent of pensioner households. The Bill addresses all those challenges head on and, crucially, in a way that promotes personal responsibility for dignity and security in old age, with outcomes that are fair, simple, affordable and sustainable.
Part 1 of the Bill provides for a simpler and more generous basic state pension; a simplified state second pension; new rules on eligibility that will provide equality for women and carers; and a higher state pension age. As proposed in the White Paper on pensions reform last May, Clause 1 reduces for those reaching state pension age from
Clause 3 replaces home responsibilities protection with a new system of credits for carers. As we set out in the White Paper a year ago, the clause includes provisions for a new carer's credit which will be available for people caring for at least 20 hours a week for one or more severely disabled people, each of whom is entitled to attendance allowance, the middle or highest rate care component of disability living allowance or constant attendance allowance.
In addition, following discussion with the key organisations that represent carers, we are extending the carer's credit to those caring for people who are not entitled to one of these benefits. I am pleased to inform noble Lords that this was announced at the Report stage in the other place by my honourable friend James Purnell, the Minister of State for Pensions Reform. Those certified as caring for at least 20 hours a week by a health or social care professional will also be eligible for the carer's credit. This will give us some flexibility to recognise the small number who are caring for at least 20 hours a week but for people without a qualifying disability benefit.
We will determine how—not I stress, "if"—this certification process will operate through the review of the National Carers Strategy. The approach we are taking here and throughout the Bill is intended to ensure that those providing valuable caring contributions are recognised by the state pension system. Taken together, these clauses mean that, for the first time, a life of social contribution will be properly recognised and rewarded on an equal footing with work. In addition, they address the gender inequalities in our system.
Today, only around a third of women reaching state pension age receive a full state pension. In 2010, as a result of the Bill, that figure will be around 75 per cent. In 2025, it will be over 90 per cent. That is a hugely significant step forwards for women in our society.
We are determined to ensure that future generations of pensioners continue to share fairly in the rising prosperity of the nation. Clause 5 restores the earnings link in primary legislation and allows for this to happen from 2012, or in any event by the end of the next Parliament. As a result, by 2050, the basic state pension will be worth more than twice as much in real terms as it is today.
The clause also places in primary legislation the Government's pledge to uprate the standard minimum guarantee element of pension credit by earnings. The Government are committed to reducing the extent of means-testing in the future, ensuring that pension credit continues to be targeted at those who have been unable to make sufficient provision themselves. Clause 5 provides the means of securing this important outcome. We anticipate that by 2050, less than 30 per cent of pensioners will be eligible for pension credit.
Clause 4 will abolish adult dependency increases. Today's "dependency increase" provisions are a hangover from the immediate post-war period where single breadwinner households were the norm. We live in a very different world today. Furthermore, entitlement to adult dependency increases is based on an "all or nothing" earnings limit, which creates a disincentive for younger women who are married to men drawing a state pension. If these women's earnings are over this limit, their husband's state pension is reduced. The money saved from the abolition of ADIs will be reinvested to help provide the more generous state pension eligibility criteria, which, as I have explained, will ensure that women in particular can qualify for a full state pension in their own right.
Clause 9 provides for the introduction of a new carer's credit which will increase the number of people eligible to accrue entitlement to the state second pension. These new credits, aligned with the credits for the basic state pension, could see around 180,000 more people accruing entitlement to the state second pension in 2010 and we are exploring how we can use health and social care professionals to reach another 60,000.
As recommended by the Pensions Commission, we intend to accelerate the phasing out of earnings relation within the state second pension through provisions in Clauses 10 to 12. But we also intend to go one step further in simplifying the system, by replacing the current complex accrual mechanisms with a flat rate sum of an additional £1.50 a week, on top of the basic state pension, for each qualifying year spent working, caring or a combination of both.
One of the key concerns identified by the Pensions Commission was the complexity of the current state pension system and the difficulties that this presented to individuals attempting to plan their retirement saving. The Bill addresses that concern. Together with the basic state pension, this simplified state second pension entitlement will effectively provide a single state pension for most contributors, thereby giving people a much clearer understanding of what they can expect to receive from the state in retirement and what they must do for themselves.
Finally, Clause 13 legislates for a gradual increase in the state pension age—increasing by one year every decade between 2020 and 2050, and with each change phased in over two consecutive years in each decade. In committing to increase the state pension age to 68 by 2046, the Bill sets a course for 40 years. This is a major step for any Parliament, but I am clear that it is the right course to take. These gradual increases will not reduce the length of the period people can on average expect to enjoy in retirement. On the contrary, they keep the proportion of life spent in retirement stable between generations, by reflecting increases in life expectancy. Those who reached state pension age when the first contributory state pension was introduced in 1925 constituted a little over a third of their generation. Those reaching state pension age today comprise more than three-quarters of their generation, and by 2050, even with a state pension age of 68, this proportion is projected to rise to nearly 90 per cent.
The Pensions Commission was absolutely clear that the state pension age should increase to reflect rising longevity. The simple fact is that if we are not prepared to increase the state pension age, we will burden our children and grandchildren with the ever greater and unsustainable cost of a population spending longer and longer in retirement. Pulling back from this increase in the state pension age would mean either significant rises in personal taxation or cuts in spending elsewhere.
That is why an increase in the state pension age sits at the heart of this Bill, ensuring the sustainability of the whole reform package, and locking in the essential stability that is needed in any successful pensions policy.
Part 2 of the Bill implements a number of measures designed to support good quality existing employer pension provision by reducing the regulatory burden and making the existing system simpler for employers and providers. It also provides for additional levels of financial assistance for those who have suffered the loss of their pension due to the collapse of an occupational scheme.
Clause 14 allows occupational pension schemes to remove the complexities of the detailed rules on guaranteed minimum pensions by converting members' rights accrued between 1978 and 1997 into ordinary scheme benefits. I can assure noble Lords that members' interests will be safeguarded by a requirement for the new rights granted after conversion to be of at least equal actuarial value to those that they replace.
I should like to take the opportunity to signal the Government's intention to table in Committee a further amendment consequential to the current Clause 14. We have identified an unintended consequence of the conversion of guaranteed minimum pensions on the state retirement pension entitlement of a small number of individuals and require a further amendment to correct this. The proposed amendment will ensure that those already in receipt of indexation on their GMP increments as part of their state retirement pension will continue to receive this.
Clause 15 abolishes contracting out on a defined contribution basis, as recommended by the Pensions Commission. This change will offer greater simplicity for individuals by removing the difficult judgment as to whether they would be better off contracted in or contracted out. People will therefore be able to make clearer decisions about their additional pension saving options, building on a simple foundation from the state. I should also like to take this opportunity to signal our intention to table some minor, technical amendments to Clause 15 and to the regulation-making powers relating to occupational pensions set out in the Bill.
Clause 18 relates to the extension of the financial assistance scheme announced by the Chancellor in his Budget speech on
As noble Lords will be aware, this extension to FAS was made partly as a result of the recent judgment in the judicial review relating to the ombudsman's report. The High Court directed my right honourable friend the Secretary of State to reconsider his response to the ombudsman's first recommendation on the basis that maladministration had occurred; he did so on that basis, resulting in the extension that now appears as Clause 18. The extension increases the taxpayer's commitment from £2.3 billion in cumulative cash terms, to £8 billion, which equates to more than doubling the scheme in present value terms, from £830 million to £1.9 billion. Further, on
Part 3 provides for the creation of a Personal Accounts Delivery Authority. The creation of the delivery authority provided for by the Bill is the first step towards establishing personal accounts. We intend to legislate further on the detail of the personal accounts scheme. The delivery authority will be an independent body, which will draw on the wealth of expertise that exists in business, financial services and consumer groups. In the first instance it will provide advice and make recommendations, supporting the Government in understanding the operational and commercial implications of options, and advising on the design of the commercial strategy, including the financial, technical and commercial analysis needed for policy development.
The introduction of personal accounts will transform the savings culture in this country, offering a simple and affordable means of saving to millions of people who are currently without access to a suitable savings vehicle. At the same time, automatic enrolment will tackle the behavioural barriers to saving and secure economies of scale so that individuals can take the benefit from lower charges and higher returns. Simple, low-cost, flexible and portable, personal accounts may generate an additional £4 billion to £5 billion of new net saving each year, equivalent to around 0.5 per cent of GDP. They will help millions of people take greater responsibility for building their retirement income by giving them greater opportunities and incentives to save, building on the solid platform provided by the changes to the state pension in this Bill. However, the detail of these changes will be in a future pensions Bill. This Bill deals only with the setting up of an advisory body to help the Government in developing personal accounts and as such the remit of the body is limited to its role for this Bill.
Finally, Part 4 contains a number of smaller technical and financial provisions.
The broad consensus that this Bill has received in its passage so far reflects the fact that it is founded on a basis of agreement on the direction of travel. This is a comprehensive, integrated package of reform, but it has also involved difficult decisions—for the Government, business, individuals and the pensions industry. The progress of the Bill has shown that our reforms have been broadly endorsed by all of these groups, which is a significant tribute to the work of the Pensions Commission in establishing the principles behind these reforms.
Every Member of this House knows how important pensions are. When people today take out a pension, they are putting their money away for 20, 30, 40 years or more. They expect the framework in which they make that decision to remain as stable as possible over those years. Over the past 30 years, as the Pensions Commission highlighted, the pensions environment has failed to provide that stability. We owe it to future generations to take this opportunity to help them to save with confidence and to establish a pensions system that can truly stand the test of time. This Bill gives us all a chance to demonstrate strong resolve in addressing the pensions challenge we face as a country. In supporting this Bill we will take a major step towards a sustainable, affordable and trusted system, one that can meet the needs of those in retirement both now and in future. I commend the Bill to the House.
Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)
My Lords, the House will be grateful to the Minister for introducing the Bill so comprehensively—or as comprehensively as he could because, in large measure, it is a framework Bill. We know neither the timing nor the detail of much of it. The Minister's remark about carers, "I emphasise when, not if", exemplifies that. None the less, we on this side of the House agree with the policy, though not always the execution.
The Bill passed untrammelled through another place with one notable exception, which I will come to in due course. First, let us look at the parts on which there is no serious disagreement.
Pensions must be looked at as an entity, with the state sector complementing the private sector—an entity in which confidence is restored, and which does not conflict with current private sector provision. Is confidence not the one thing that we have seen diminish over the past 10 years? Certainly, in the private sector the Government inherited the best pension regime in Europe and, arguably, the world. However, for whatever reason—and there are many, which again I shall come to—it is small wonder that the Government needed to set up a review of pensions under the noble Lord, Lord Turner, whom I am delighted to see is speaking today. He at least recognised the seamlessness of pensions and, although the subject was not in his terms of reference, he had quite a lot to say about state pensions.
The Bill starts with state pensions. I welcome their future uprating in line with earnings, a policy on which my party fought the last election and was roundly criticised by the Government at the time. How things change. The problem here, though, is that we do not know when or how this will happen. We are given only an envelope from 2012 to the end of the next Parliament. Three million pensioners will die between today and 2012. How many more will lose out for every year that the Government dally? There is no comparison with the well defined uprating formula used for statutory redundancy pay. That is hardly confidence-building.
We approve of the decrease in the number of years needed to acquire a full state pension. That will help a whole army of carers and women, although I suspect that the noble Baroness, Lady Hollis, will say that the details of the scheme are insufficient. We shall see. Reducing the number of qualifying years to 30 will benefit women in particular, who are disadvantaged by the current system, mostly because of their changing lifestyles since the welfare state was formed, a point made by the Minister. No longer do they expect to live off their partner's or husband's earnings. Divorce rates are high, and single women of state pension age are much more prevalent. The results are found in the most recent survey on households below average income, which shows that almost two-thirds of pensioners living in poverty are women and 2.2 million women fail to build up full state pension entitlement.
What we do not know, or at least I do not know, is how many of the 1.7 million pensioners not claiming pension credit are women. I cannot help wondering whether the sheer complication of claiming pension credit, indeed means-tested benefits of all kinds, falls more heavily on women than men. According to Hansard, 3.8 million women do not receive a full state pension. If that were not bad enough, a further 1.1 million will retire on inadequate pensions between now and 2012.
There is no argument on the need to increase state pension age. Life expectancy is increasing in leaps and bounds, at a rate of three months a year over the past quarter of a century. It is over 20 years now since the last Conservative Government set in motion the increase in women's state pension age, with a long lead time to its start and a gradual phasing-in thereafter. I am glad to see that Schedule 1 makes the same provision today.
It is progress too that a married or civil partner's category B pension will no longer be dependent on the other partner with a category A pension retiring. Clearly, this is reciprocated by the abolition of adult dependency increases. Do the two sides of this equation balance out?
All this entails people working longer, and the Government have a policy to get 1 million older people back into work. Saga tells me that it has been working with others to set up an employment agency for the over-50s. This project has now collapsed, because of fears of illegality under age discrimination law. Can the Minister assure me that its worries are unfounded?
I have to confess that I am not so sanguine about changes to the state second pension. Simplifying accrual rates is extremely technical. Merging bands 2 and 3, in April 2010, would appear to be yet another stealth tax, but the Minister will probably tell me I am wrong and that there is no saving here to the National Insurance Fund. He cannot, however, say that when the additional earnings component of the state second pension is withdrawn by around 2030, as the very comprehensive Explanatory Notes say, leaving a flat-rate benefit. Although I do not want to be a conspiracy theorist, I cannot help but wonder whether the Government's long-term objective is abolition altogether.
For years it has been possible to contract out of the state second pension in its various guises. That concession is to be repealed, resulting in yet more income into the fund. I mentioned earlier that there was one significant change to the Bill in another place. Your Lordships know well that the financial assistance scheme was invented to provide assistance to those employees who stood to lose all or most of their private sector contributory pension because of their pension scheme winding up when their employer was insolvent. It was set up, against the Government's initial will, because of enormous pressure in another place, not least by their own Back-Benchers.
It has proved an expensive fiasco. So far it has cost £8.8 million to run, but has only paid out £3.2 million, to—I ask the Minister to confirm this— 1,114 qualifying members. Part of the reason is the design of the FAS, which, with the exception of terminally ill people, only pays out when the aggrieved person gets to the current state pension age of 65 rather than when the scheme into which they were paying said the pension would be paid. Even then, the aggrieved former employees only get 80 per cent of what they expected.
All this happened during proceedings on the last Pensions Bill in 2004. Is it not ironic that history is, in a sense, repeating itself? There has been such an outcry in the past three years that limited changes are to be made. This outcry has been occasioned by an accumulation of factors, which, although your Lordships know them well, bear repeating.
The first was the Chancellor's decision in his first Budget to remove advance corporation tax and, as a quid pro quo, to reduce corporation tax—I can tell the Minister that I do listen when appropriate. Overnight, the Treasury benefited to the tune of £5 billion, which has continued year after year. Thanks to the Freedom of Information Act, we now know that civil servants in the Treasury warned him before the Budget that this tax change would damage private pensions, especially, although not exclusively, final salary schemes, which are now becoming rarer than hen's teeth. Defined benefit schemes have suffered markedly, too.
The Treasury officials were not alone; the CBI said the same thing, although the Chancellor has disputed that. Ministers tell us, as the noble Lord told me the other day, that this had no effect on the stock market, in which pension funds invested, which maintained a healthy level for the next two years. That could be true, although at the time the enormous interest in information technology kept the level up. Two years later, there was a distinct downturn and it is only in the last year or so that we have seen the FTSE rise, although to nothing like the dizzy heights of the 1990s.
We are also treated to a children's tea party argument: "You started it", they say. However, far from restoring the reduction of ACT, or even continuing to reduce it gradually, which the pensions industry could accommodate and which would be one thing, the Government removed the remainder in one fell swoop, which is quite another. To pension schemes, that came as what I can only describe as a tsunami, from which it will take years for them to recover, if at all.
The facts are incontestable. Mercer Human Resource Consulting has calculated that the pension deficits of the FTSE 350 companies rose to £93 billion in 2005. More than 60,000 occupational pension schemes have either wound up or begun the process since 1997. Five-sixths of final salary schemes that have closed have done so since 2000. Again, these figures come from Hansard.
On top of all this, the DWP's leaflets encouraging people to take out occupational pensions gave the impression that they were as safe as houses. As the situation developed and pensions got into more and more difficulty, the leaflets continued to be issued.
"The boy stood on the burning deck", comes to mind. Small wonder, then, that the Parliamentary Ombudsman produced her damning report. Stonewall Jackson had nothing on the Government's response. Small wonder, too, that a brave group of pensioners took the Government to court using the ombudsman's reports to back up their case. The High Court found that, if the ombudsman was right in her facts, the Government must act. Needless to say, the Government have appealed.
I doubt that legal proceedings will be complete before this Bill completes all its stages, but I have no doubt at all that the changes to the FAS proposed in the Bill are so mean as to be morally indefensible. That is why my right honourable and honourable friends moved amendments to set up a lifeboat fund, to help the 125,000 worst-hit pensioners by topping up their income at the earliest possible opportunity to PPF levels.
Setting up an inquiry into the availability of frozen pension assets only delays the time when action will be taken—and action will be taken; there would be no point in setting up an inquiry otherwise. We need proper action now and will seek to alter the Bill to that effect. This is even more pertinent now that another court case is looming on a judicial review of the reformed FAS. We must—I emphasise that—restore confidence.
I have long had a bee in my bonnet about the portability of personal pensions so wisely brought in by my noble friend Lord Fowler. It is not unusual these days for young people to try out several jobs before settling into permanent employment. My belief is that many pension schemes allow transferability only after two years, which is too long. Either the pension pot is subsumed into the scheme and the youngster gets nothing towards his pension or he builds up myriad small pots, which we call deferred benefits, which, with luck, will accrue to him at the various schemes' retirement ages. Neither is satisfactory, especially when, as frequently happens, joining the firm's pension scheme is a condition of employment. I will develop this argument in Committee.
We debated compulsory annuities long and hard during the 2004 Pensions Bill. I have no doubt that we will return to them over the next few months, especially as the Government remain wedded to them. Do they still believe that annuities are appropriate for the new personal pensions scheme? Moreover, now that the state pension age is to be increased, do the Government intend to raise the age at which annuities must be taken?
So far I have not mentioned the other major part of the Bill: the setting-up of the Personal Accounts Delivery Authority. I will leave the detail on that to my noble friend Lady Noakes in her winding-up speech.
I referred to the Bill as a framework Bill. Nowhere is that more apparent than in the functions of the new authority, the chairman and chief executive of which are to be appointed shortly. At least the Explanatory Notes come clean on that. Paragraph 348 states that,
"the Authority may do what it"—
I stress the "it"—
"thinks appropriate to prepare for the implementation of, or for advising on the modification of, any relevant proposals about personal accounts".
We later learn that "relevant proposals" are those made by the Secretary of State, which presumably are those in the White Paper. The ability to modify these obviously gives the authority carte blanche, which is a strange way for the Government to allow it to operate. My noble friend and I will look at these proposals extremely carefully to see whether we should add extra duties on to the authority or modify those in the Bill. To quote the gracious Speech,
"other matters will be laid before you".
As I have shown, we are starting a journey on which there is a large measure of consensus. However, it is only stage one—getting on the train, if you like. Unless we get this part right, we will fail to arrive at the destination that we all want to reach.
My Lords, I declare my interest as a pension fund investment manager for the past 30 years. I remind the House of Winston Churchill's wise words in the war, and shall amend them slightly. This is not the end of the pensions crisis—it is not even the beginning of the end—but this Bill may, at least, mark the end of the beginning. The Government are starting to face up to the problem; at last they are facing in the right direction. Their aims are worthy and we share them. But they are going to achieve them and make pensions fairer much too slowly, because they are trying to solve Britain's pensions crisis on the cheap.
The key both to ending pensioner poverty and giving millions of people real incentives to save for a pension is the same: a much higher, non-means-tested, earnings-linked, basic state pension. We Liberal Democrats call it the citizen's pension—as did the Turner commission, which recommended it—starting at the age of 75 and subject to affordability; however, the Government ignored that final recommendation. You can call it a universal pension or a people's pension—the name does not matter. What matters now is that we end the erosion of the basic state pension, which according to the OECD has slumped to 26th out of 30 as a percentage of average earnings in the developed world today.
Certainly, it was Mrs Thatcher who originally cut the earnings link but it has slumped even further under 10 years of Labour government. Today, a single person gets only £87.30 a week and a couple get £139.60. Pensioners have to claim means-tested benefits just to reach £119.05 a week for a single person and £181.70 for a couple. As the noble Lord, Lord Skelmersdale, pointed out, 1.7 million pensioners are lost in the means-test maze and do not even get these benefits to which they are entitled. He raised an interesting point about how many women are in this position. I press the Minister to give us what information he can about these 1.7 million people who are falling right through the net. A citizen's pension is by far the best and simplest way to give women and carers a fair pension deal, and they are the people who do worst out of the present system.
As we have seen throughout the shocking saga of tax credits more generally, Gordon Brown is hooked on means-testing, and on pensions he cannot see the simple solution staring him in the face. If you raise the basic state pension to the level that the Government themselves say pensioners are entitled to claim through means-tested benefits and pay it to all pensioners who have lived here for at least 20 years, you will cut straight through the jungle, pay every pensioner a pension they can live on as a right and send a clarion call to the people of this country that they will keep every pound they save for a pension.
Clearly, that cannot happen overnight, but I say to both our Labour and Conservative opponents that it is affordable. Britain's state pensions are the worst in western Europe. They take only 6 per cent of national income against an average of 15 per cent for our European neighbours. Our public sector pensions are planned, even on the Government's own head-in-the-sand accounting, to take a one-third higher share of national income in 50 years' time than they do today. That simply must be stopped.
Also, as the Labour MP Rob Marris pointed out to the Chancellor at Treasury Questions only last Thursday, £18 billion a year is spent on tax relief on pension contributions. We agree with him that that is incredibly regressive, and an £18 billion giveaway, mainly to the rich. Almost two-thirds of that tax break goes to top-rate taxpayers, but we would limit that relief to the standard rate of income tax. That would also more than offset the gain that better-off people received from a higher basic state pension without the complex nonsense of means-testing.
We support the raising of the state pension age proposed by the Government in the Bill in line with rapid rises in healthy life expectancy over many years. However, the logic of that applies just as strongly to public sector retirement ages and the requirement for people with private pension pots to buy compulsory annuities at the age of 75. The Bill should set up a public sector pensions commission to review and make recommendations on the affordability of public sector pensions and the changes needed to ensure that the string of long-dated blank pensions cheques, issued with such gay abandon by Gordon Brown over the past 10 years, do not bounce. I am sure the noble Lord, Lord Turner, will not mind my saying that public sector pensions were the missing link in his terms of reference, and his commission's very valuable report was undermined by the Government's surrender to public sector unions on pensions shortly before the report came out. A public sector pensions commission is now essential to complement and complete the work done by the noble Lord, Lord Turner.
We recognise that we will not achieve a citizen's pension through this Bill, but we will support any moves to pave the way for it by establishing a record-keeping base so that it could be brought in by a future Government. It may be a little unkind to say that we will work to make the best of a bad job on the Bill, but we will work to improve it as far as we can and to strengthen the Government's initial efforts to reduce means-testing. However, we shall do so in a way that simplifies rather than complicates the present hotchpotch. Therefore, we will fight to bring back the earnings link to the basic state pension as soon as possible and to end the Government's wriggle room on restoring the link to average earnings and on the precise way in which this link is calculated.
We will be working hard—as we did in this House on the previous Pensions Bill, which set up the Pension Protection Fund and the outline of the financial assistance scheme—to scrutinise and improve the clauses setting up the Personal Accounts Delivery Authority. How I wish the Government had been prepared to engage with us then on the financial assistance scheme, but they resolutely refused to discuss it when we tried to press them to go into the details of how it would work and to set it up. I suspect that they wish they had in the light of subsequent events and the living nightmare that they now have to endure because they have been so mean. We and the Conservatives stand shoulder to shoulder, as we did in the Commons, in our determination to bring justice to the 125,000 robbed pension fund members who have been cruelly let down by the miserable financial assistance scheme. We will jointly table an amendment, with all-party support, on similar lines to the one that failed by only 22 votes in the Commons. I ask this House to pass it with a thumping majority to encourage the other place to think again long and hard and, if necessary, repeatedly.
Gordon Brown has been telling us a good deal in the past few days about how there will be no more spin when he walks through the door of No. 10. He is certainly still spinning like a top before he does that. On breakfast television this morning he was going on at some length about the claim that he will be paying 80 per cent of pensioners' lost income, to which the Minister referred today. But it is not what it seems. The financial assistance scheme will not pay 80 per cent of the pension that these people were expecting. It is 80 per cent, minus the benefits of their tax-free lump sum, minus inflation protection, minus a proper widow's pension, minus ill-health provision, and in many cases, with five years pension wiped out altogether. As the indefatigable Dr Ros Altmann said, the £8 billion figure is spin, and the 80 per cent is even more spin.
The House fought hard in the previous Pensions Bill to raise the age of compulsory annuitisation from 75, and our amendment was the last to fall in the final game of parliamentary ping-pong. I am sorry to say that the Conservatives lost their stomach for the fight, although it was their amendment. We will again seek to raise the age, which was last fixed nearly 30 years ago—the noble Baroness, Lady Hollis, will remember our exchanges—and I believe that average life expectancy has risen by more than eight years since then. I trust that this time support for this long overdue reform will be solid from all round the House.
We will also move amendments to reduce the injustice to British pensioners who moved abroad, often many years ago, and whose pensions have been frozen. I apologise on behalf of my noble friend Lord Jones of Cheltenham, who is not well and is unable to be with us today. He has been raising the issue, and I know that he will return to it in our proceedings as well as the issue of the small number of frozen pensioners, if I may call them that, in the British Overseas Territories.
I turn to the Government's own figures of 30 per cent. I heard the Minister say that it was less than 30 per cent, but the figures that he sent on Friday referred to 30 per cent of pensioners who will still be subject to means-testing in 2050. That is far too many. We shall be pressing for regular progress reports and future forecasts to reduce the number of pensioners subject to means-testing, and how that will interact with the returns that the different age and income groups are getting, and are likely to get, from auto-enrolment and personal accounts. The whole thing is critical, and cuts in very awkwardly together. We on these Benches support a low-cost, independent personal account system and auto-enrolment. We suggested such a scheme—we called it national savings pensions—a few years ago, even before Turner, and we strongly support the principle.
However, the Government may not like our warning about the potential for mass mis-selling of personal accounts, but as long as the level of means-testing is so high, generic integrated debt and pensions advice is so patchy, and the financial literacy of most people in this country is so poor, I am afraid that that will remain a problem for many years. The Government should not listen only to us. We know a little about how pension funds are run and how private pensions are designed and sold. I remember having to point out to and press on the Treasury the fiasco of allowing tax relief on second homes, fine wines or vintage cars put into self-invested pension schemes. Eventually the Government were forced into a humiliating U-turn.
They should listen to the pensions and insurance industry—people like Steve Bee of Royal London, or Legal & General. They are real experts, dealing with hundreds of people buying pension products every day of the year. They know what they are talking about. The Government should listen to them, learn, and take their worries seriously. They are not talking their book. Like us, they want a long-term sustainable pensions settlement, both public and private, that helps millions of lower and middle-income people to save for a pension and rebuild the shattered trust in our once proud private pension system.
That will never happen until we really rebuild the value of the basic state pension. The key to affording that is to make the vast public sector pensions bill more affordable and fairer for taxpayers as a whole.
My Lords, I start by declaring an interest as president of the Pensions Policy Institute and congratulating the Government on their intentions in introducing the Bill. I also add my thanks to the noble Lord, Lord Turner, and his colleagues who have done so much to get us here today through their work on the Pensions Commission.
It is essential that the Bill gives us an integrated approach. The aim is to create a new pensions culture, so the disparate parts—working longer, saving more and getting a better pension at the end—must mesh together. The idea must be to balance the incentives with a fair amount of individual responsibility. The Government need to be bolder. There is a great deal of support for meaningful change in our culture and for the way that we achieve the aims of the Bill. That means public investment. We should ask whether sticking to the current percentage of GDP is realistic in the circumstances.
I agree with the noble Lord, Lord Oakeshott, that, above all, we must tackle pensioner poverty and the low uptake of benefits. That remains a priority. The Government should look again at how reducing the qualifying working time to 30 years will be introduced in order to avoid the cliff edge in 2010 that is of particular concern to women. We must always remind ourselves that only 17 per cent of people receiving the full basic state pension are women and that 66 per cent of pensioners living in poverty today are women.
If the Bill fails to address poverty in the present generation of pensioners—women pensioners in particular—it will be a lost opportunity. I hope that the Government will do something to address that now. Again, I have a lot of sympathy with the points made by the noble Lord, Lord Oakeshott. We must remember other inequalities; for example, regional variations in life expectancy. If people living in the south-east are compared with those living in Glasgow, there is a 10-year difference in male life expectancy. As a fair society, we cannot tolerate that situation.
The Government have done a lot to recognise carers' rights, and their commitment is very welcome. However, they need to be even more flexible in their interpretation. It is not just full-time caring that erodes a person's access to paid work. Part-time carers, who are part-time workers in reality, must also be recognised. I was pleased with the recent announcement by the Minister, James Purnell. I hope that the carer's credit will be extended to all caring people who are not currently in receipt of benefits if they are validated as being eligible by their GP or another authorised professional. I also hope that the Government will move forward with this aim in the national carer's strategy and will look at how quickly they can introduce it in practice.
The personal accounts system is a cornerstone of reform. It has to work and address undersaving by low-paid, self-employed and part-time people, which are groups that are overrepresented in the older workforce. We must avoid certain groups losing out as a result of potential loss of benefits. This is particularly worrying in the case of people who are in work but who are on less than average wages and are vulnerable. I declare another interest as a trustee of the Resolution Foundation, which has done a lot of work with the Government on issues relating to these groups, especially with regard to giving people advice and information that is generic, easy to understand, comprehensive and crucial to the target group of people who have not saved before and who need to do so now. The data that such people and everyone else receive must be reliable, there must be advice on benefits and we must ensure that people do not lose out. As we know, saving in the personal account will mean less eligibility for means-tested benefits, especially the pension credit. Many people would agree with me that the state second pension should be linked to earnings and be credited over 30 years. Otherwise, the anomaly between that and the basic state pension will be very confusing.
The Government should and, I hope, will, set a definite date for the restoration of the earnings link as soon as possible. The end of a Parliament is not definite enough for people who need to find out what will happen and to make plans. However, in line with my opening remarks about creating a new work culture, we need to do much more to enable older workers to remain in work, to return to work and to be retrained and supported, if necessary. At the moment, lifelong learning and training for work tends to be for people under 40. The demographic change means that that is not adequate. We need an annual report or review on the over-60s in the workforce and on background demographics to ensure that we remain headed in the right direction.
Only if we get this right will we be able to celebrate the demographic revolution caused by the huge change in life expectancy in our society. That change means, among other things, that over half the children in this country will reach the age of 100 or more. As a society, we must rethink all our policies and practices in the light of that new longevity, and getting the pensions system right is the cornerstone of those policies—the one on which all the others can build.
My Lords, I had not intended to say anything about the dividend tax credit, but given that the issue has been raised by both the Opposition and the Liberal Democrat Front Benches, perhaps it may be appropriate to make some observations.
The removal of the dividend tax credit was associated with the reduction in the main corporation tax, the reduction in the rate of corporation tax for small companies and with increased incentives for investment, including increased capital allowances. Those reforms encouraged higher levels of investment. For example, since 1997, total business investment has risen by 60 per cent, compared with a rise of 34 per cent in the previous decade. Corporate profitability has risen from £136 billion in 1996 to £205 billion in 2006. Whole economy investment has risen in every year since 1997—a decade of rising investment—while in the previous 18 years, investment growth was negative for a quarter of that period.
The dividend income of pension funds was higher in 1999 than in 1996 and pension fund assets rose by £270 billion in that period. Dividends, employers' contributions, employees' contributions and total income rose in 1997, and all were higher in 1999 than they were in 1996. It is not often mentioned that pensions were hit by a series of problems from 2000, including the stock market fall in that year, which accounted for a reduction of about £250 billion in the market value of occupational pension scheme assets.
Increasing life expectancy has already been referred to and does not seem to have been taken into account as fully as it might have been. Many firms decided to take contribution holidays during the 1980s and 1990s, despite rising liabilities, in the belief that a bullish equity market was a long-term trend. Interestingly, many funds continued with those holidays after 1997.
It is also worth referring to what was said in the first report of the Pensions Commission. It stated:
"The underlying trend in private sector employer pension contributions has been downwards since the early 1980s, and the total level of funded pension saving is significantly less than official estimates have suggested. But irrational equity markets and delayed appreciation of life expectancy increases enabled many Defined Benefit (DB) schemes to avoid necessary adjustments until the late 1990s. As the fool's paradise has come to an end, schemes have been closed to new members, and a shift to less generous Defined Contribution (DC) schemes has followed".
I am not sure that the issue is quite as explained from the Opposition and the Liberal Democrat Front Benches despite the apparent expertise they have in the area.
Following the findings of the Pensions Commission, the Bill seeks to develop and implement what is hoped will be a broad consensus on pensions. Inevitably there will be many who want the Bill to go further and faster and there will be those who are not happy with all its provisions. In an ideal world it would be desirable if the state pension age could remain unaltered and not be increased. The current state pension age for men is 65 and has been unchanged, as has already been said, for more than 80 years. For women born on or after
At the beginning of the last century, only 5 per cent of the population of the United Kingdom was aged 65 and above. It now stands at 16 per cent and by 2025 it is projected to rise to 20 per cent and to over a quarter by 2055. Life expectancy for men at 65 on average has nearly doubled compared with some 50 years ago, from 11 years in 1951 to 20 years today. Over the same period, life expectancy for women at 65 has increased from 15 years to 23 years. By 2050, current projections indicate that men will on average enjoy a further 4.4 years of life after 65 compared with today, while women will have another 3.7 years.
Those who reached state pension age when the first contributory state pension was introduced in 1925 constituted only around one-third of their generation. Those reaching that age today comprise more than three-quarters of their generation and by 2050, despite increasing the state pension age by then to 68, this proportion is projected to rise to nearly 90 per cent.
The Bill provides for the state pension age to be gradually raised from 2024 to reach 66 by 2026, 67 by 2036 and 68 by 2046. This reflects the fact that improvements in health mean we are living longer and that for financial reasons the state pension age cannot permanently stand still while life expectancy continues to rise to the extent that a 50 per cent increase in the number of pensioners is projected by 2050, with two people working for every one person in retirement compared with four today. While spending on pensions remains constant at 5 per cent of gross domestic product from now until 2020, it increases to 6.4 per cent of GDP in 2050 under the proposals in the Bill.
There are issues related to this move, in particular the fact that, as people in manual occupations do not live as long on average as those in professional and managerial occupations, the impact of increasing the state pension age is likely to be more pronounced on one social group compared with another. I hope that the Government will continue to make every effort to address this fundamental inequality that exists over life expectancy rates. I hope the Government will also seek to satisfy those opposed to raising the basic state pension age that there are no acceptable means of raising the necessary finances to enable this to be done.
The Bill makes real progress towards indexing the state retirement pension to average earnings not prices in the next Parliament, which will further improve the position of pensioners and, as a spin-off, should also assist in achieving a welcome reduction in the level of means testing. Guaranteeing to link the basic state pension to earnings should mean that the state pension would be worth twice as much in 2050 in real terms as it would have been without reform.
The Bill also reduces the number of years it takes to build a full basic state pension from 44 years for men and 39 for women to 30 years for men and women attaining pension age from
Following the changes in the Bill, some three-quarters of women reaching state pension age from 2010 will be entitled to a full basic state pension compared with around half without the changes. In 2025, around 90 per cent of women and more than 90 per cent of men reaching state pension age will be entitled to a full basic state pension. These reforms will address the current discrimination in state pensions, reducing the income gap in retirement between men and women. I also welcome the commitment to implement a new system of personal accounts in 2012 to make it easier for more to save for their retirement. I trust it will be a system to which employers are required to contribute as well.
Ten years is a long time, and it is certainly a long time to remember in any detail what conditions were like a decade ago. Under the previous Government, one in four pensioners was living in poverty. Over the past 10 years more than a million pensioners have moved out of relative poverty and 2 million out of absolute poverty. The Bill marks a significant step forward in giving a much better deal for pensioners. The Government are to be commended for the actions they have already taken in this regard and for the further actions they now intend to take.
My Lords, I hope that the Minister is reassured by all the ex-Ministers taking part in this debate: former pensions Ministers such as the noble Baroness, Lady Hollis, and me, and ex-Ministers such as my noble friends Lord Hunt, Lord Freeman and Lord MacGregor, my ex-Treasury colleague. I assure the Minister that we have only one aim: to help him to improve this legislation.
Quite seriously, I congratulate the noble Lord, Lord Turner, on his report, which is an extremely skilful analysis of pensions issues. He has had rather more success in fighting off the Treasury than I had back in the 1980s with my own review. I say to the noble Lord, Lord Rosser, that we pointed out in that review the increased longevity of the population, the increased number of pensioners building up and the falling ratio of contributors to those pensions, and we sought to plan for it. It should not have come as a surprise to the Government in 1997.
I humbly suggest that Ministers of all parties leave out all these claims about following in Beveridge's footsteps. I acquit the noble Lord of that this afternoon, but we have all in our time made the claim. I plead guilty; in 1984, when I set up my own review of social security, I said that it was,
"the most substantial examination of the social security system since the Beveridge report 40 years ago".
I am sure that, before me, Barbara Castle said exactly the same thing.
There are good reasons for not invoking Beveridge, a great man though he was. First, the post-war Labour Government did not implement the Beveridge report. Beveridge wanted a system based on insurance. The Attlee Government introduced a pay-as-you-go system. Today's contributors pay for today's beneficiaries in the hope that, when their turn comes, future generations will do the same for them. It is not the insurance principle but the contributory principle.
Secondly, Beveridge reported in another age. The position of women, particularly working women, was simply not recognised. When my father and mother moved south in the 1930s, my mother, a qualified teacher, was refused a job in Essex because her husband already had a job. In this way, they almost—but I am glad to say not quite—prevented her from earning a teacher's pension. Clearly that position has changed radically, but still two-thirds of pensioners living in poverty are women. I hope that in the further consideration of the Bill we can spend some time on that, and I am sure that with the noble Baroness, Lady Hollis, present we will not be disappointed. I hope that we can have some sensible cross-party co-operation in these areas, as we did on the Communications Bill.
The third and most important reason to gently shelve Beveridge is that it gives the impression that there is one "big bang" solution to everything, and frankly I do not think there is. We would do much better to think in terms of step-by-step improvement. I acknowledge that in this Bill and the one that will follow there are some steps, like the increase in the state pension age and automatic enrolment, to be welcomed. I congratulate the noble Lord, Lord Turner, particularly on the latter. But the steps proposed by the Government are not sufficient even now to give everyone the maximum income in retirement that we all want to see.
That is why I am wary of all the talk of seeking a consensus between the parties on every conceivable point. Consensus gave us a state earnings-related pension scheme. I remember it only too clearly because I was the new shadow Secretary of State who took over with 10 days to go before Barbara Castle introduced the Pensions Bill. I inherited a policy that, I was told, was to give industry some stability, and we went along with it. Perhaps we should not have done; perhaps from the start we should have said that the original scheme was too expensive, quite apart from the state getting into the business of providing not only first pensions but also second pensions on that scale.
Our attitude should be to agree on those policies that are clearly sensible, like the pension age and encouraging more personal provision, while continuing to question and oppose the indefensible policies of this Government, such as those towards the public sector, which the noble Lord, Lord Oakeshott, has already referred to. We are in real danger of creating two nations in regard to pensions: one in the private sector and one in the public sector. We would do well to follow the noble Lord's suggestion of an inquiry into the cost of all that.
My view is that pensions policy should be on a twin-pillar basis: public provision together with personal saving. I have concentrated on personal saving, but I welcome the decision that the basic pension should become earnings-related. Having said that, the previous Conservative Government, of which I was a member, were altogether right to put the pension on a price-related basis in the context of the position in 1979. The economy was in a self-evident mess, we were getting arbitration awards for 14 per cent to 18 per cent salary increases in the public sector, and public spending was out of control. The Government were right to move, and my noble friend Lord Jenkin is to be congratulated on his determination in seeing that policy through. Equally, with the economy substantially restored after 20 years of recovery, it is right that the rewards of growth are shared.
I fear, however, that the new plans still leave behind a very complex system. That complexity, particularly permanent means-testing, will act against private and personal saving. There is no question about that. Take personal credit, for instance. As Ministers in the other place were and are fond of claiming, I supported pension credit—I still do. I introduced family credit for children who needed more support than that provided by child benefit. I saw pension credit as a means of bringing help to those who, through no fault of their own, simply had not had the opportunity to build up an occupational pension. I did not envisage, however, that when that opportunity came and the basic pension was improved, it should continue indefinitely to be part of the pension landscape, certainly not to the extent that 30 per cent of pensioners—perhaps many more—will be relying on it even in 2050. We need to look at those figures carefully in Committee.
The most serious development in pensions in the past 10 years has been the destruction of so many occupational pension schemes in this country. The debate continues on why that has happened. Most commentators and most in the industry think it had something to do with this Government introducing the £5 billion a year pensions tax at the wrong moment. The Government, Anatole Kaletsky and now the noble Lord, Lord Rosser, think otherwise. Mr Ed Balls, soon to be a Member of Gordon Brown's new Cabinet, thinks that they were pushed into it by the CBI. The noble Lord, Lord Turner, can doubtless inform us on that, although frankly this must make him a natural recruit for the creative fiction section of the Department for Culture, Media and Sport.
In fact, the explanation is very simple. It was one of the measures in the Treasury's bottom drawer to be shown to all new Chancellors as they took office. Ken Clarke rejected it and Gordon Brown accepted it. What is clear is that we now have to deal with the consequences of this collapse. We have 11 million people in work who are not making any contribution whatsoever to any private pension scheme. Final salary schemes are becoming the preserve of the public sector and very senior management in the private sector. In some companies in the private sector, schemes have been closed altogether; in others they have closed to new entrants. Since 1997, more than 60,000 occupational pension schemes have been wound up or are being wound up. We should make no mistake about this: very few companies will start new final salary schemes. Despite having once been the envy of Europe, we have declined to a position where all the evidence is that people are simply not saving enough if they want to enjoy a decent life in retirement.
The second pillar of private provision—personal saving for retirement—is seriously fractured and needs support. The proposal made by the noble Lord, Lord Turner, for automatic involvement should help here and is certainly a step forward from where we are now, but we will have to see if it works in practice and what the increase in private savings is. Personally, in the past I have favoured compulsion. I was glad to see from the consultation that on this I march arm in arm with the TUC. It has taken a long time but at last that day has arrived. To those who doubt compulsion on a theoretical, ideological ground, I would point out that compulsion was part of the private provision plan unanimously approved by Margaret Thatcher and her Cabinet for my pensions Green Paper in 1985. To those who doubt it on practical grounds, I point out that it has been worked successfully in Switzerland year after year. But I accept that it is not the Government's plan, nor is it likely to be, therefore the challenge is to make the new voluntary approach work.
We need something more than the minimum standards of automatic enrolment. We need more encouragement, somehow more incentive. In such a programme, we need to look again at the whole question of compulsory annuities at 75. Sometimes, often from the government Front Bench, that is written off as being only of interest to the rich. I do not agree; I do not think that the Government appreciate or see the potential. To give an analogy, you could likewise say that buying shares is only for the rich; yet when I privatised the National Freight Corporation, it was not just senior managers who took shares but also drivers, secretaries and warehouse staff, who turned up in their hundreds to the annual meetings. All the evidence suggests that people aspire to own their own pension, quite apart from what the state provides. In addition, the right to pass down the pension sum to their children would be a considerable incentive to many thousands of people in this country. I accept that many will still want annuities—that is their choice. I also accept that the Government will want some assurance that people who decline to take an annuity at 75 should not fall back on the state. But I see no justice in forcing someone to take an annuity at 75 when there is not the slightest prospect of that happening.
Rather than trying to make saving for retirement more attractive, the Treasury seems to do all in its power to close what it says are loopholes. It supports a policy of voluntary personal provision but insists on compulsory annuities. Unless that view changes, I have fears for what this legislation will achieve. Let me say to the noble Lord, Lord Oakeshott, that when we table amendments to this, I hope the Liberal Democrats will have the stomach to support us all the way.
Individual pension provision, far from growing, is in underlying decline. This is certainly not a healthy position for citizens, who will have their life in retirement reduced and constrained; and it is not a healthy position for the Government, who will be asked to come to their aid. The Bill goes some way to encouraging personal provision but I doubt whether it is enough. We need not just legislation but a change of attitude inside the Government so that millions more people in this country can have their own pension.
My Lords, the speeches that we have heard so far show what a high level of pension literacy there is in the Chamber, packed as it is with ex-pensions Ministers and other experts in the field. I shall buck that trend and demonstrate that I am almost illiterate in this area. However, I fear that I perhaps reflect the widespread ignorance there is in this country more accurately than those who have already spoken.
The pensions system is extremely complex—our Governments seem to be addicted to complexity in this field—and I have discovered that even clever people bury their head in the sand when the word "pension" is mentioned. This is particularly, but not exclusively, true of young people and falls into much the same category as the making of wills. The language of pensions is not user-friendly with its use of words and phrases such as "accruals", "annuities", "deemed this and that", "opting out of defined benefits", and so on. Therefore, it is not surprising that it is a language few ordinary people speak.
My first question to the Minister is therefore about this level of ignorance and what the Government plan to do about it. How will women, in particular, who are at home caring for children, the elderly and those with mental or physical disabilities, find out about their entitlements? People who are at home caring for others are often below the radar of central and local government. They can be isolated from the communities in which they live and cannot get out to join the WI, say, or the throng at the school gates. They do not pick up information from colleagues at work and many simply do not have a social life. It will need an imaginative and specifically targeted campaign to reach this group of carers. If government money can be spent on informing the public about the new smoking laws, surely it can be spent on something as vital as informing our citizens of the new laws on carers' credits and retirement options. This is particularly important when we cannot be sure that government computers have been talking to each other, as we heard at the weekend regarding the boost to their state pension that women should have received automatically when home responsibilities protection was introduced in 1978.
The Resolution Foundation has highlighted the importance of the availability of free generic financial advice to support pension reform, as the noble Baroness, Lady Greengross, said. This view has been endorsed by both the Treasury and the Work and Pensions Committees in another place. In fact, the Government themselves have acknowledged that high-quality information will be critical to the success of their reforms, but it is not clear whether they have any plans in this area. The Pensions Minister is reported to have stated in terms last year that simple generic advice to people about whether they should remain in a personal account should be given, but I wonder whether the Government believe that wider retirement income advice should be available, as in New Zealand. Such advice is particularly important for women, as they are the most likely group to be receiving only low to moderate incomes. The Government should act straight away to begin planning for the provision of such free and independent advice and I urge them to look at the experience of the New Zealand Retirement Commission—an entirely independent body which has over a decade of experience in informing and educating New Zealanders about their pensions options.
Initially, such advice here could be available from the network of citizens advice bureaux. If more direct funding were available for that admirable organisation, they could give specific training to advisers on retirement provision. That would ensure easy access for carers and women to get help with the complexities of carers' credits and second pensions. Government estimates show that approximately 7 million people are currently undersaving for their retirement—a very worrying figure. Money put into providing such a scheme of advice centres would reap dividends as, in the long term, there should be reduced expenditure on welfare benefits such as pension credit. Having got that off my chest, I shall concentrate the rest of my remarks on the needs of women and carers.
The reduction in the number of contributing years needed to qualify for the basic state pension from 39 to 30 is welcome. That will particularly help women. Currently, as we have heard, only 30 per cent of women reaching state pension age receive the full amount of basic state pension compared with 85 per cent of men. However, it should also be remembered that, even with the reforms in the Bill, one in 10 women may still not receive the full amount of basic state pension by 2025. Some people who will not benefit are those who are now over 45, particularly women, who may have an incomplete basic state pension and state second pension record by the time they reach state pension age. Why should it not be possible for those people to be able to continue to make national insurance contributions after reaching state pension age in order to complete their basic state pension contribution record up to 30 years and increase their state second pension? The latter still needs a minimum national insurance record of 43 years.
Women are particularly disadvantaged because credits for caring or parenting commitments were introduced only when SERPS was changed into the state second pension in 2002. Therefore, there must be many thousands of women who have spent years in a caring role who will end up in poverty in retirement. It is vital that people are given every opportunity to build up their state second pension record, so I hope that the Government will consider that proposition.
Another change that would particularly benefit women would be to link the second state pension to earnings in payment as well as in accrual so that its value does not decline during retirement. The declining value of the state second pension after retirement means that older pensioners could slip below the poverty threshold.
Another important concern which particularly affects women is the nature of much of the work that they do. This is likely to be part time and low paid, which makes it very difficult for them to build up their entitlement to a basic state pension. Four out of five part-time workers are women. Their earnings are not likely to be above the lower earnings limit, which means that they will not pay national insurance contributions and thus gain eligibility. We are talking about someone who might work as a dinner lady at a local school and then do a shift at the pub or village shop. As the Bill stands, the earnings from only one job can be taken into account. If those earnings could be combined, they might count towards the lower earnings limit.
Turning to the position of carers, it is welcome that, from 2010, the hours that carers must work in order to receive the credit for the basic state pension and accrual entitlement for the second state pension will be cut from 35 to 20 week. There was something of an outcry that the only carers who will qualify for the benefit were those caring for someone receiving attendance allowance, constant attendance allowance or the middle or highest rate of the care component of disability living allowance. I declare an interest as a recipient of that benefit. There could have been up to 40,000 carers ineligible for carers' credits, as they care for people who have not applied for any of those benefits. I very much welcome the news, which I heard only this afternoon, that it is now assured that our old friend from the Welfare Reform Bill—a healthcare or social care professional—will be able to certify that someone is a genuine and vital carer for 20 hours a week.
How will the proposal be taken forward? Will it be by regulation only or will the Bill be amended? Perhaps the Minister can tell us in his winding-up speech? After all, with an ageing population, the number of carers is going to increase and most will be women. They care for relatives at great cost to their social lives and often their health. They save the state an enormous amount of money by taking on the role. I am very pleased that the Government are to be more flexible about who should qualify for carers' credits.
That brings me to my final remark, about flexibility, which I believe is key to a workforce eventually having to work until 68. The right to request flexible working has recently been extended to more carers, but it might sweeten the pill of a longer working life if those reaching their final decade, say, had the right to request flexible working too.
My Lords, I welcome the Bill. Above all it contains the long-awaited recognition—if not yet quite fairly enough—of the contribution of women, as both employees and carers. Thankfully, too, the pensions' link to earnings is to be restored, albeit later than recommended by the commission, and automatic enrolment is to be introduced, recognising that far too few people currently save for their retirement. The most recent figures that I have seen suggest that some 7.4 million save nothing at all and another 4.8 million only small amounts, for which we have heard many reasons.
Be that as it may, most importantly the Bill directly addresses the double-pronged agenda that can simply not be escaped, as the Minister has pointed out. First, we have the consequences of an ever-ageing population with, as a result, longer—much longer—retirement and a relatively shorter working life. Unless we change that—my noble friend Lady Greengross and the noble Baroness, Lady Thomas of Winchester, have already made a very good case for such a change—there will be an ever-growing dependency ratio as between retired drones—however reluctant we may be to place ourselves in that category—and wealth-creating workers. It is especially for this aspect of our approach to future pensions policy that I join other noble Lords in paying tribute to my noble friend Lord Turner—and his fellow commissioners—for the clarity of the guidance that he continues to provide in this field.
When I was in my very first job, in the post-war years when the welfare state was still being shaped, one name was still on our lips. Despite what the noble Lord, Lord Fowler, said, that was none other than William Beveridge. Today's equivalent deserves to be Adair Turner. I say "equivalent", but, thinking about it, there has been at least one big change in the conditions in which those two gurus have been considering the problem. Beveridge did not have to worry too much about the one word that we, in this generation, have learnt to neglect at our peril: inflation. He was able to take for granted—or so he thought—the given of price stability. The average wage and the price of a loaf of bread or of a pint of milk did not differ all that much in 1945 from what it had been in 1918.
How very different are the conditions with which we have to cope today. The Bank of England's inflation target, set by the Chancellor of the Exchequer, is 2 per cent a year. None of us seems too dismayed that it is already bumping 3 per cent. That does not sound too bad, I suppose, to those of us who have had to struggle during our lifetimes with inflation at 10, 15 or even 20 per cent—but at 3 per cent a year over the next 20 years the pound sterling will have lost almost half its value and at the end of 50 years, with inflation at that rate, it would be worth no more than 22p. A change of that scale is obviously of huge significance in the context of pensions.
If the pound that a 20 year-old saves today for his retirement almost 50 years from now will be worth then no more than one-fifth of what it is worth now, how much more should that person be saving now and in the years in between? Perhaps the Minister will give me an answer to that. I cannot help wondering what the answer to that question does to all the arithmetic underlying the figures on which today's proceedings must be founded. In that regard, I hope that the Minister will not mind my asking what must seem a pretty naïve question. What are the inflation rate assumptions on which the arithmetic is founded and how much difference does it make to the reliability of the arithmetic if we get it wrong, even by just one or two percentage points?
Whatever the precise answer to that question, it certainly confirms my willingness to applaud what may be the single most important provision in the Bill—the proposed increase in the retirement age for male pensioners, which has been mentioned by other noble Lords—taking place alongside the other rise in the retirement age for women to bring them into line with men. We, or rather our younger colleagues, men and women alike, will look forward to an era in which the age of retirement and basic state pension entitlement will be set, regardless of sex, at 68 years old. That will at least reduce significantly the overall cost of this ambitious project. I suspect that it may turn out to be anything but the last step in that direction.
Two other questions follow from the recognition of that prospect. The first has already been raised by the noble Lord, Lord Oakeshott—and it is of course not unimportant. For just how much longer will or should our society continue to maintain the obviously two-nation concept, whereby most of those in the public sector will expect to start drawing a substantial index-linked pension a full five or more years ahead of their fellow citizens? Do the Government visualise taking action to tackle that unfair anomaly—and, if so, when and how?
The second question brings me to my central point, which noble Lords will have heard me raise before. It follows from the fact that women are being called on by this generally benevolent Bill, in at least one respect, over a period stretching many years ahead, to face a double disadvantage. First, their basic retirement age will rise by five years to come into line with that of men. Secondly, it will also have to rise in due course by a further three years to the common basic retirement age of 68 years. Against that particular background of female disadvantage, will a Minister standing at the Dispatch Box forever continue to defend the gross sex-based inequality that is still by statute applied to retirement annuities? I hear what the noble Lord, Lord Fowler, said about what should be done at 75 to ease some of these problems, but it does not address the point that I am making. Surely we must now put into practice the principle of equal opportunities for men and women on retirement annuities, agreed more than 30 years ago.
The law currently requires a percentage of the benefit of any private pension scheme to be taken as an annuity. Yet a woman with a pension entitlement that is identical in all respects to that of a male employee, except on the basis of sex, will receive by law in this context a smaller annual sum on the narrow basis that women live longer than men. Yet even that tiny life expectancy gap is narrowing, or at least fluctuating, if other noble Lords are going to disagree with me about the numbers. Surely it is time for this basic discrimination to be finally outlawed. I would love to hear from the Minister that some attention is at last being given to this quite pernicious situation.
I should not wish to close my remarks on this important Bill on such a negative note. I welcome the Bill as a necessary and intelligent, if far from easy, step forward. As I have made clear in earlier debates, I also welcome the legislation because of its proposed inclusion of all carers and non-lifetime employees. For historical reasons, the majority of people in both those categories are women. That too is changing, not least because younger men want to play a more active and involved role in bringing up their children. Thankfully, the Government have now recognised that this is important in keeping families together. As your Lordships will know, the UK does not have a very good record in this respect.
Whatever their sex, the role played by all carers is quite invaluable and the cost to the state, if they all chose to work full time, would be incalculable. The EOC, in its briefing, have put childcare provided by parents and grandparents at a cost of at least £220 billion. That is just childcare; think of all the other forms of care. Carers certainly deserve to be both appreciated and, much more important, supported in practical as well as financial ways. I am sure we shall be returning in Committee to that point, to examine some of the points raised by Carers UK in its excellent briefing to your Lordships. A particular concern is that a substantial number of carers' responsibilities will not entitle them to the new earned pension credits, unless entitlement is based on a carer's circumstances, rather than on those of the person they care for. I was not quite certain whether that point was fully answered by the Minister at the beginning of the debate.
For those reasons, among many others, I welcome this vitally important legislation and look forward to debating these and many other issues that will be raised during the latter stages of the Bill.
My Lords, I believe this is the fifth such Bill since that of 1994-95. Subsequent Bills, to my pleasure, have introduced the state second pension, pension credit, stakeholders and, in 2004, the pensions regulator and the protection fund. This Bill, which I very much welcome, responds to the key concerns of the admirable report by the noble Lord, Lord Turner, and will modify the basic state pensions and introduce personal accounts.
Each Bill, every two or three years, was meant to build a pension settlement for the next 25. However, they did not, of course, as the noble Lord, Lord Fowler, so admirably said. The 1994 legislation was introduced to stop a repeat of Maxwell-type fraud, except that funding rather than fraud was the longer-term problem, together with the need for a pension protection fund—a lifeboat, which the then Government rejected.
Moving on to the 1997 Government, pension credit was needed, despite the staunch defence made by the noble Lord, Lord Fowler. That was because, 20 years previously, government broke the link with earnings. Elderly women pensioners faced such profound poverty that we addressed the problem with a relatively generous pension credit. This resulted in extensive means-testing, which in turn has generated further problems of complexity, stigma and savings disincentive. So the Bill reintroduces the earnings link. Similarly, the state second pension was a generous restructuring of SERPS, but necessarily only because the previous Administration had halved the value of SERPS on the ground of costs—an economy that we have found was too expensive.
Stakeholders were a decent attempt to provide an alternative, regulated, low-charge personal pension in the wake of the scandals of mis-selling of high-charge pensions in the previous decade. But we backed away from any soft or tough compulsion on employers, so 80 per cent of schemes have remained shell schemes, not reaching those most in need. Personal accounts are, in my view, the soft-compulsion, wider-coverage, better-value version of stakeholders, so are greatly to be welcomed.
The 2004 Act secured the safety of DB schemes at the very time when, outside the public sector and larger companies, those were giving way to much riskier DC schemes. Three years on, the markets have already virtually recovered, but under panicky pressure from actuaries, who had failed so abysmally to predict longevity, the pensions industry had moved out of equities, so the deficits have not recovered proportionately, and a flight to security has generated further insecurities in its wake.
All these Bills were well intentioned, pretty well drafted and reasonably well supported, especially by me. They sought to correct problems of previous pensions legislation, yet they have generated further problems, from widespread means-testing and perceived disincentives to saving, to employers abandoning their pension promises.
As the noble Lord, Lord Fowler, said, there probably cannot be a 25-year settlement, given the nature of risk, but that does not excuse any of us from the responsibility not just of trying to tackle yesterday's problems, such as pensioner poverty, which we all seek to do, or today's fallout from them—means-testing—which we also all seek to do. We also need to see what is coming up in the next lift, so to speak—the emerging problems—and we do not do that as well.
So my test for the Bill is threefold. To what extent does it address current problems, as identified by the noble Lord, Lord Turner? To what extent will its solutions generate further problems in turn? But, above all, to what extent does it embody sufficient flexibility to respond to the pensions problems of the low-paid, to which the noble Baroness, Lady Thomas of Winchester, referred, that may emerge during the next decade or two—those problems coming up in the lift?
To summarise, I think that the Bill does remarkably well in responding to today's problems: directing pensions savings towards those with modest incomes and unsupportive employers; reducing the contributory years; reforming HRP; extending credits to carers of older people; reintroducing the earnings link; and extending the reach of S2P on the one hand and introducing personal accounts on the other. Those changes are greatly to be welcomed. They will ensure that, in years to come, far more women will retire alongside men with an adequate, though modest, income. Personally, I would welcome more attention being paid to Conservative proposals for a lifetime savings account. We certainly have to introduce more flexibility than the Bill currently envisages into the NI system.
However, if we put up the gender filter, we note that men's contributions for a full basic state pension will come down from 44 years to 30 years, whereas women's will come down from 39 years to 30 years, offset by a saving of five years on HRP. Men gain by 14 years, whereas women gain by just five years. Equally, an earnings link benefits most those who have a complete BSP, which is 92 per cent of men but under 30 per cent of women. As the state second pension will still require 44 years of annual accrual, so those women who will rely on the 30-year BSP will get only two-thirds of a full state second pension, unlike men, who will expect to remain full time in the labour market. We need always to continue to put up that gender filter.
What are the consequences? Let me turn briefly to personal accounts. A third of those on personal accounts will be earning between £5,000 and £15,000 a year—some 3 million women. If she is single, over 45, without savings, potentially a carer, and ends up on pension credit, she will lose 40p in the pound of her personal account pension. If she rents, she will lose housing benefit and 90p in the pound. If she has an incomplete state pension, she could lose pound for pound. She risks much of her pension savings but how can she judge? Most men will not experience her dilemmas. I hope Thoreson will insist on proper financial advice and information, otherwise, we—all of us—risk charges of mis-selling further down the line.
As others have already said, given the growth of DC schemes we need a fresh look at the annuities-at- 75 rule, which is increasingly absurd. After all, a man on median earnings, contracted in, after 40 years on 4 per cent plus 4 per cent—a very modest scheme—will have a DC pot of £240,000, £100,000 more than necessary to float him off income-related benefits if he annuitised to that degree. At 6 per cent plus 6 per cent it is £360,000—contracted out, it is nearly £500,000. Those figures are on average earnings over 40 years. So this is not—I repeat, not—a matter only for the rich any more, but for those on average earnings and standard rate tax. I firmly believe, as others do, that more people would save if they did not carry both the investment risk and the longevity risk, subsidising the wealthier of us who live longer. Providing you annuitise to benefit level and adjust tax relief, the Government can have no further public policy interest in requiring annuitisation at 75.
As the noble Baroness, Lady Howe, said, we need to look at unisex annuities. Gender discrepancies in life expectancy are narrowing but social class discrepancies are widening. If we have to have any predictor, higher education rather than higher heels would be fairer.
I will touch on three of the emerging problems. First, a major one is the need to abate DC risk, especially the risks of governance and of market volatility. DC schemes are becoming the conventional pension vehicle outside the public sector. We must develop underpinning if we are not to see a lottery in which, depending on the year that you retire and the state of the markets, pension pots may be worth far less than the sums saved. A trauma of trust is waiting to come up the line which could be sufficiently painful to rival that of the DB schemes which have necessitated the FAS and the PPF.
Secondly, I do not think that anybody has mentioned that we are still ducking the issues of the self-employed. Among them are a growing number of the poor, especially women—we may think of women hairdressers, older men who can no longer work full-time, people in poor health with bad employment records, and ethnic minorities. Twenty-one per cent of Pakistani men are self-employed compared to 12 per cent of white men, and they are among the poorest. They cannot get state second pensions, probably will not get personal accounts, and are not usually able to afford personal pensions. We know that that issue is coming down the line. They are the new hidden poor. As far as I am aware the Bill does nothing to help them.
Finally, above all the Bill still does not engage fully with women's lives. Let me describe Sue's situation. She is in her early 50s. Her partner, Tom, works 40 hours per week in road maintenance. Sue has a part-time job at the local dry-cleaners for 15 hours a week and another part-time job at the newsagents for 10 hours a week. She fits that around her elderly and increasingly forgetful mum who needs 15 hours' help a week, as well as her single-parent daughter who to stay in work needs 10 hours of childcare a week. On top of her work, Sue looks after their home. Tom works 40 hours a week, will retire with a full basic state pension and a decent occupational pension. Sue works more than 50 hours a week—none of it qualifies her for a basic state pension. She does not get anything from Tom as she is not married to him, and she cannot get pension credit because Tom's income floats their household off it. So Tom retires with a good income; Sue will retire with not a penny. Would any of us say that hers was the less socially valuable or useful life? I think not.
What difference will the Bill make to Sue? Will she now qualify for a basic state pension? It will make not a penny piece of difference. She will be what she is now, working longer hours than Tom but, because she is not living in a male, tidy-minded, box-ticking way, it will not count. It will not count unless she acts like a man and abandons local part-time jobs that are friendly and flexible, abandons her mother and daughter, both of whom depend on her, clears the decks, and, instead, commutes to a full-time job. Unless, at the age of 50, she takes on the sort of lifestyle that most young men naturally expect to have at the age of 20 or 25 and she walks away from all her other responsibilities, we will continue to penalise her by denying her any pension. No men, and few younger women, will be living Sue's lifestyle; they will carry on in full-time work as best they can. Because pensions are, frankly, designed by men in full-time work for other men in full-time work, Sue, with or without the Bill, will go as a pauper into old age.
I think that our treatment of Sue is a disgrace. When people talk, as I am sure my noble friend will not, about the need for the contributory principle, something for something and all the vacuous platitudinous stuff, I hope they will tell me why Sue does not deserve a pension based on the life that she leads. She certainly contributes but, as we cannot count what she contributes, we do not properly value it. Therefore, I shall be tabling amendments to try to help Sue and others like her, and I hope to have the support of my noble friend and the House in so doing.
In my view, Sue's problems can ultimately be addressed only by a non-contributory basic state pension, as the noble Lord, Lord Oakeshott, argued, and I hope that, through the Bill, we can start to build the appropriate database to establish one in the future. We could have used the Bill to clean up the system and—despite what was said by the noble Lord, Lord Fowler—we could have transformed Beveridge, but we have not done so; instead, we have made the system more complex, which is very unwise.
In all sorts of ways, this is a really good Bill but I think that it could be made even better, particularly for the Sues of this world. It needs to be made even better for them and I hope that your Lordships' House will do precisely that.
My Lords, it is a pleasure to follow the noble Baroness, Lady Hollis, who is a fund of knowledge on all pension issues. She lobbied, in particular, on behalf of women, but I shall refer to one or two other things that she said. She mentioned the lifetime savings account. Some six years ago, I was on a working party that looked at the possibility of setting that up and I have been much attracted to the idea ever since.
I declare an interest in that, for a few more days, I will be a non-executive director of a life and pensions company and I am also the chairman of a pension trustee board.
The background to the Bill is clear—we have debated it often in this House over the past few years—and it is deeply troubling. It includes the rapid decline in defined benefit schemes, not to mention their prospective near demise for new employees, with only a minority of FTSE 100 companies now offering such schemes to new employees. A very interesting paragraph in the White Paper on personal accounts—paragraph 13—states:
"In 1979, 65 per cent of employees were members of their current employer's pension scheme compared to 57 per cent in 1995, and around 54 per cent in 2004".
That does not sound too dramatic a decline, but next it makes the point that:
"The percentage of private sector employees participating in occupational pensions fell from around 40 per cent in 1991 to around 25 per cent in 2005".
That says two interesting things. First, it indicates just how big the decline has been, particularly in recent years and, secondly, the comparative figures show very clearly that there has been a big decline among private sector employees. The overall figure of 54 per cent is held up because of the number of public sector occupation schemes. I am sorry that he is not in his place at the moment, but I very much follow what was said by the noble Lord, Lord Oakeshott, and also by my noble friend Lord Fowler about public sector schemes.
There is, too, the fact that employers contribute substantially less in defined contribution schemes. There has been a poor response to the stakeholder pension. There are deficits in defined benefit schemes, so employers are much more wary of continuing with them. There is the notorious £5 billion per annum in the Chancellor's first Budget, which has been much commented on, amounting to a loss of cash flow in defined benefit schemes almost as big as the deficits themselves. There is also the challenge of increasing longevity.
Perhaps most important is the fact that a high proportion of young people in their 20s and 30s, and even some in their 40s, know that the state will not provide what they seek as a reasonable retirement income but are doing nothing or too little about it. There are a variety of reasons for that. There is a much mistaken belief nowadays, which I find among the peers of my children, that owner-occupation is not only a better option than providing for one's pension but will, through rising house prices and equity release, provide a pension. There is the carpe diem mentality, enhanced by heavy debt that is easy in a period of low interest rates, and an assumption that a future generation of taxpayers will bail them out.
I warmly welcome the intention behind the personal accounts that future savers should take personal responsibility—I stress, personal responsibility—for building private savings. It is such a tragedy that we have seen the emphasis on personal responsibility and occupational and personal pensions so eroded in the past 10 years. There is much emphasis in the current debate on the need to simplify our pension system, not least because most people find the subject so confusing; hence, the emphasis on making the system for personal accounts as straightforward as possible. However much personal accounts are streamlined, there will always be the need for advice, which costs, and for improving the financial awareness of citizens.
When I was Secretary of State for Education I had to implement the national curriculum, and I was very keen to include financial education as a subject, but I was unable to do so because we were trying to get a quart into a pint pot at that time, and there was no room for it. I regret that I did not pursue this as rigorously as I should have done, and I welcome the recent government funding and the efforts of the FSA and ABI to improve financial education. But it needs to start early in schools, in a much bigger way than has happened so far, to go along with the personal responsibility required.
I welcome much in the Bill, especially provision for women and carers, but in the short time available I will not dwell on those aspects. I want to concentrate on three issues. The first is consensus. There is much emphasis on the need for national consensus, avoiding the constant chopping and changing of successive Governments. We have heard that often from people outside the Westminster and Whitehall village. The Secretary of State in his White Paper said:
"If reform is to be successful it needs to be built on the foundations of a strong national consensus".
The noble Baroness, Lady Hollis, clearly indicated that that has been a theme of successive Acts, and we still go on having to add to them. I support the aim of a national consensus and pay tribute to the Government's efforts to get all-party agreement. But—this is not said in any negative or churlish spirit but out of a desire to get the balance right and avoid false hopes—as the history of pensions shows, and given the political importance of the subject, there will almost certainly be differences of view and changes needed in the years ahead. Indeed, there will be new challenges as circumstances change, as they have in the past.
Even these proposals may fall short of their objectives and targets—I suspect that they will. Chancellors may be prone in the future to make tax changes whose consequences they fail to foresee, perhaps because they did not contact the Secretary of State responsible for pensions, which may have devastating effects. I was not going to refer to the £5 billion, but the noble Lord, Lord Rosser, did so himself. I should say in passing that I read the whole Commons debate of
Pension uprating by earnings will happen in 2012 or by the end of the next Parliament, which could, in theory at least, be 2015. In the debate on this issue in the other place, when he was probed on this matter the Secretary of State said,
"we will carry out the reforms when we believe them to be affordable".
I detect a battle in Cabinet committee with the Chancellor, who is fearful of the cost incurred before 2012. Given the wasteful expenditure on the working families tax credit, ID cards, consultancy and so on, it seems a bit rich to push the link between pensions and earnings back if it is a question of affordability. The only other explanation given was:
"Because it is linked with our policy for increasing the state pension age".—[Hansard, Commons, 16/1/07; cols. 661-62.]
I do not understand the link with the state pension age. Given increasing longevity, the different lifestyles of today's retired—we have talked about that a lot—and the fact that 1 million people over 65 are already in employment, I wonder whether we are not moving too slowly to increase the state pension age. I have supported it for some time, as have others in this House, but why are we waiting until 2020 to start the process and then doing it by only one year a decade? If there is a link between the increase in the state pension age and the start of the link between pensions and earnings in 2012, would it not be sensible to bring both forward to prevent a situation where many pensioners miss out on the increase in earnings until 2012 or, possibly, 2015? I would be grateful if the Minister would spell out the link and why it cannot be adjusted.
My last point is on personal accounts. I realise that much of this will come in the later Bill, but given that the delivery authority is looking at the whole system now, I think this is the moment to make some points about personal accounts. I warmly welcome the statement in the White Paper that the delivery authority will be independent of government, although we may need more guarantee of that. The reason given in paragraph 109 of the executive summary is that:
"The wealth of expertise in business and financial services is in the private sector".
The parallel with the Pensions Regulator is a good one because it is staffed largely by people from the private sector with expertise, and it has done a very good, pragmatic and sensible job so far. I hope that the delivery authority will be able to do the same, so I warmly welcome independence from government. I also welcome the fact that the personal account should complement rather than compete with existing good quality pension provision and that one of the delivery authority's objectives is to minimise the impact on other good pension provision and employers more generally. This is vital if we are to avoid one of the possible concerns about personal accounts, the risk of dumbing down; that is to say, employers settling for the minimum. There is quite a lot about that in the background papers. It will be vital if we are to ensure that existing very good schemes continue and, if possible, improve. We will have to look particularly closely at how the scheme is developed to avoid that risk of dumbing down, including the cap level, which is proposed to be £5,000.
I have two other concerns. The first is the potential for mis-selling, which the noble Baroness, Lady Hollis, has already raised. As we understand it, 30 per cent of pensioners will still be entitled to pension credit in 2050. How many of those likely to take up personal accounts will be included in that 30 per cent? Is there to be a substantial number? I have been trying to follow the arguments in paragraphs 74 and 75, but I need some clarification because I do not fully understand them. Surely, some of that 30 per cent will have taken out personal accounts; if that is the case, there is an accusation of mis-selling to be made.
I am in favour of auto-enrolment, but I wish to put down a marker and ask whether that will be enough. I understand why this has been done, rather than compulsion, but I have two concerns. The first emerges in a footnote to page 28 of the White Paper. In defence of the link between automatic enrolment and increased levels of scheme membership, it states:
"Within private firms with 20 or more employees, the proportion of employees that were in a pension averaged 60 per cent ... where the firm used automatic enrolment",
The take-up for traditional opt-in schemes was only 41 per cent. I understand why that was given as a reason for automatic enrolment; however, it still means that 40 per cent of employees opted out of automatic enrolment, therefore I am concerned that there may be a considerable amount of opting out. Secondly, even if the employee has opted in or has followed up the automatic enrolment, he can opt out after entering the scheme. My concern is that that could apply to automatic enrolment. We know that there are comparatively poor levels of persistency in current personal pensions, with a substantial proportion of people starting and then failing to carry through, which affects much of the cost of these schemes. Automatic enrolment may not be the end of the road, as my noble friend Lord Fowler said; we must monitor it carefully.
I welcome the broad thrust of the proposals and stress that we need to create a positive climate regarding the value and benefit of private pension provision, which, sadly, has not often been the climate in recent years. For the reasons that we have rehearsed, it will take a long time to undo the damage done by the decline in final salary schemes, which has enabled their present beneficiaries to claim that they are living in the golden age of pensions.
My Lords, my preparation for this debate seems rapidly to have been made irrelevant by the previous speeches and that is not surprising, given the knowledge of many speakers, including the noble Baroness, Lady Hollis. For once, that degree of forensic ability has been mainly on my side. The Minister should note that many noble Lords have said that they agree with the general thrust and interests of the Bill—as they sharpen their knives. I hope that he will be his usual smiling self at the end of this process.
What is really happening is that we are finding common threads; one is the fact that the problems of certain groups are not being dealt with properly, although some effort has been made. For instance, my noble friend Lady Thomas and the noble Baroness, Lady Hollis, spoke about the fact that women's needs are not fully addressed by the Bill in terms of care, although some movement has been made. A point that best summed up the problem was that we are not creating something new, but are sticking new bits onto what is already there; we are trying to tag on, prepare, support and go through.
One measure that will be necessary if those who we are trying to help are to receive it is to ensure that they have sufficient advice and support on how to access the system—both as it exists and as it will exist after the passage of the Bill. Generic financial advice—a term that I had not previously come across—in a briefing note that I received from the Resolution Foundation, crystallised this. We have a complicated system onto which we will stick more regulation and, as the noble Baroness, Lady Hollis, suggested, we will probably stick something onto it again and again—and when one bit does not work, we will replace it with something else and then change it.
The process will have to ensure that more advice is made available to those groups of people who do not traditionally think they need it or even think they have the time to need it. A family with an income of, say, £23,000 a year or someone earning £10,000 or £12,000 a year are the kinds of people for whom most of the financial products available commercially will be irrelevant. They do not have enough spare income available for these services long term, and you do not worry about the long term if you are not coping now. When will the Government structure something into the process to give advice to these people and ensure that they get the best out of the system?
We have come across this situation in many other Bills from the department. The idea that we should ensure that people get support and help to claim the right benefits so that they are not left in poverty is an extension of that line of logic. If the Minister can give an assurance that, effectively, an aggressive approach will be taken by the Government to ensure that these people get the best out of the system, many of the problems which have been outlined here might be ameliorated to a degree. We need an ongoing process to ensure that the information reaches those groups of people who do not normally consider themselves to be in need of help and who are not big financial targets for the private sector. Such people are not like those in real poverty who are constantly on benefits and who automatically get attention, so can the Government give assurances that the information will reach them through the system? If it does not reach such people—even if the Government are right and their critics are wrong—much of the good in the Bill will be wasted.
My Lords, it will come as no surprise that I speak in favour of the Bill as it is in large part devoted to reforming the state pension system in line with the recommendations of the Pensions Commission.
The Pensions Commission identified two inter-related problems with the British pensions system: first, that our state pensions are too complex and too means tested; secondly, that large numbers of people—indeed it is a majority of the private sector workforce—not only are failing to make adequate private pension provision on top of this rickety state system but a majority of the private sector workforce is making no private provision on top of this rickety system. These problems are, to a degree, related with the relentless spread of means testing undermining incentives to private savings. But there are also problems with the state system which are quite separate from its consequences for private incentives, in particular its poor treatment of many women with interrupted job records or caring responsibilities.
In the face of these inter-linked problems the Pensions Commission proposed a twofold response: reforms to the state pension system to make it more generous, simpler, less means-tested and fairer to women; and a national pensions savings scheme designed to encourage people to make private provision in addition and to enable them to save at low cost. The Bill deals primarily with the first thrust of the Pensions Commission's recommendations, with another Bill next year to legislate for the national pensions savings scheme, albeit in this Bill power is taken to establish the delivery authority.
The Pensions Commission's recommendations received widespread, cross-party and cross-interest group support in principle, and so have the state pension proposals in the Bill. Criticism of the Bill, reflected, for instance, in amendments tabled in the other place, some of which may also be proposed in this House, have come almost entirely from those who wish that the Bill would go further and faster towards establishing a simpler and less means-tested state pension system. Indeed, the Pensions Commission's own recommendations were criticised from exactly the same direction as right in principle but too little and too slow even before the slight watering-down of our recommendations through the shift of the date of earnings indexation of the basic state pension from what we recommended, which was 2010, to 2012. As that is the main thrust of the criticism of these proposals and of the Pension Commission's proposals, I shall say a few words in response to the criticism that we should be going further still.
Concern has been expressed that the indexation of the basic state pension to earnings has not only been delayed until a likely date of 2012 but that the Bill itself, in a complex piece of wording which I would defy any non-expert to decipher, commits itself to make the change only before the end of the next Parliament. That concern has been expressed by the noble Lords, Lord Skelmersdale and Lord Oakeshott. Amendments were presented in Committee in another place to pin the date down more precisely.
In principle, I agree that it is unfortunate that we have ended up with this complicated wording rather than with a straightforward commitment to commence average earnings indexation from 2012. I also believe that whatever the wording says, indexation of average earnings will commence in 2012, because I cannot imagine any of the political parties going into the next election without making it clear that that is their intent, or any Government being willing to renege on this affordable promise. I have not checked whether it is allowable procedure in this House to offer wagers, but if it is allowable I would be willing to bet anyone that indexation of the basic state pension to earnings will start in 2012 if not before.
The more fundamental criticism says that even if average earnings indexation starts in 2012, Britain will still be left with too means-tested a state pension system and that disincentives to private savings will remain and that even with the proposed changes to the contributory system, with 30 years of contributions securing a full basic state pension, and a more generous system of carer credits, a small minority of women will still fail to accrue a full pension and women retiring before 2010 will receive no benefit. I have three responses to these more fundamental criticisms.
First, yes of course it would be more attractive to have a state pension system still simpler, more generous and less means-tested than now proposed, but all public policy is about trade-offs, and there are other claims on public expenditure. Achieving agreement to this package of reform involved what I might describe in retrospect as full and frank discussions with the Treasury. I do not criticise the Treasury's role in those discussions. It is the role of the Treasury to challenge the many people urging on it increased expenditure on many different and equally attractive projects. Getting rid of means testing entirely is expensive—I suspect too expensive for any Government ever to deliver. With this Bill, we have argued through to a compromise which is affordable, sustainable and an acceptable balance with the other claims on public expenditure.
Secondly, it is vital not to make the unattainable best the enemy of the achievable good. It is vital to recognise that this Bill is a major step forward toward a more generous and less means-tested state pension system. Left indexed to prices, the value of the basis state pension would by 2050 be less than half of what it will be under these proposals. Without the Bill, the percentage of pensioners subject to means testing will increase from about 40 per cent to more than 70 per cent, but with the Bill it will fall. With the Bill, we will ensure that the proportion of women reaching state pension age with full basic state pension accrual, which is currently about only 30 per cent, will by 2025 be more than 90 per cent.
Thirdly, while it is true that there will be people still subject to means testing once these reforms are enacted, the number subject to withdrawal rates high enough to offset the benefits to saving of tax relief and the proposed compulsory employers' contribution will actually be much more limited than the 30 per cent figure mentioned earlier. Crucially, the likely total private savings, in the national pensions saving scheme or elsewhere, of those people subject to very high withdrawal rates will be very small.
It is therefore likely that the remaining problems of disincentives to save could be significantly addressed by changes to the rules relating to the commutation of small pension accumulations into lump sum cash payments, and by changes to the capital disregard rules in relation to pension credit eligibility. I urge, therefore, that efforts to improve this package of reform, whether in amendments to the Bill or in subsequent policy debates, should concentrate on focused changes of that sort, which I believe could significantly address the remaining problems of means-testing. Similarly, some of the remaining problems relating to women's pensions can be addressed by the sort of specific, focused proposals being developed and put forward by the Equal Opportunities Commission, for instance, without challenging the overall architecture of what is proposed by the Bill.
My overall theme is simple. We cannot have a perfect, entirely un-means-tested state pension system except at an unaffordable cost, but the Bill is a huge step forward in the right direction.
The Bill includes one element not related to the Pensions Commission's proposals but to financial assistance scheme compensation. In the interests of time I will not comment on those proposals now, except to welcome the undertakings made by the Government in response to the debate in another place and to note, as I shall also note if I talk on this in detail in subsequent debates, that in relation to the winding up of pension schemes I have a declarable interest as a director of a life insurance company involved in the bulk buyout market.
One issue that the Bill does not deal with, however, is public sector employee pensions. I know the Government will argue that any attempts to discuss public sector pensions within this debate or to propose the establishment of a review of public sector pensions are irrelevant to the Bill before us. Strictly speaking, that is true, but I have some observations.
Following the Pensions Commission report there was an extensive, robust and, at times, heated debate about whether as a society we could possibly afford, over 50 years, to devote an extra 1.5 per cent of national income to the state pension system, on which 100 per cent of our citizens are to a degree dependent. At almost exactly the same time, it was accepted with almost no debate that public sector pension arrangements should remain in place, which implies that over the next 50 years probably an extra 1 per cent of national income—an increase from 1.5 per cent to 2.5 per cent—will flow as pensions to the 17 per cent of people who work in the public sector. That 17 per cent of the population owns about 35 per cent to 40 per cent, by value, of all the occupational pension scheme rights in the UK.
As it happens, I am a supporter of good occupational pension provision in the public sector, including salary-related schemes, but I think there has been an asymmetry in the rigour with which the different issues of pensions for all people—the state pension system and public sector pensions—have been addressed. There is an asymmetry when the state pension age is now, quite rightly, rising to 68 by 2045 while someone who joined the Civil Service before 2005, even if currently aged only 25, will retire at age 60. I suggest that while this Pensions Bill provides an agreed and sustainable basis for the state pension system, the issue of public sector pension provision cannot be considered as fully settled by the limited reforms introduced in 2005.
On the subject matter considered by the Bill, I remember that at a crucial stage in debates surrounding the Pensions Commission's recommendations, the Chancellor of the Exchequer was reported as saying that he was 90 per cent to 95 per cent in agreement with what we proposed. I am happy to say today that this is a Bill with which I and my fellow commissioners are at least 90 per cent to 95 per cent in agreement, and I hope it will receive strong support from the House.
My Lords, I welcome the opportunity to participate in this Second Reading debate. In doing so I declare an interest: I am a board member of the Pensions Advisory Service. Ever since Maxwell, which I well remember because I was a member of the Occupational Pensions Board at the time, we seem to have had regular pensions crises. After each one there is an independent investigation and report, followed by legislation and some new institutions established to oversee what it is hoped will be an improved system. This time, we have had the excellent report by the noble Lord, Lord Turner of Ecchinswell, some of which is reflected in the legislation before the House. What a privilege it is to follow him in this debate.
The Bill is an attempt to deal with some of the problems that have been identified: we are all living longer, we are not saving enough to provide for ourselves in retirement, there is a lack of trust in pension providers, final salary schemes are disappearing and the basic state pension is not providing enough to keep pensioners entirely dependent on it out of poverty without support from the benefits system. In the Bill the Government have made genuine attempts to deal with some of those problems. That is difficult; as usual with pensions legislation, it is complicated. I often wonder why that always has to be so. I believe it is because the basic state pension is insufficient for people to live on unless it is bolstered either by benefits, which are means-tested, or by private provision, which then has to be supervised by institutions established by the Government to ensure that the benefits promise can be guaranteed.
The Government have turned their attention in the first instance to the state scheme and the many criticisms that have been made of it. The majority of pensioners in poverty are women, as has been frequently stated in this debate. Because of its contributory nature, many women do not qualify for a full pension. The Bill attempts to deal with that by reducing the number of years necessary to qualify for a full pension, and there are attempts to improve home responsibility protection. The basic structure, however, remains a contributory one, and that may still disadvantage some women. My noble friend Lady Hollis has today given examples of where that may apply. Nevertheless, there are real benefits in the Bill for women and for carers, and we should welcome it on that basis.
It was originally intended that the basic state pension should be increased in line with the wages index. That was the Castle plan in 1975, but it was revoked by the Thatcher Administration in favour of the less generous RPI. Despite repeated attempts to persuade them, notably by the late Lady Castle, the present Government have until now refused to reinstate the link with the wages index. As a result, the basic state pension is very much less than it otherwise would have been. Lady Castle would have been pleased that the Government have at last accepted in principle that the wages index link should be reintroduced, but would have been disappointed that this will not take effect for several years, and that present pensioners will not immediately benefit but will have to wait until 2012, at least, for it to be implemented.
The Government have attempted to deal with the problems they envisage as a result of the projection that everyone will live much longer, by increasing the age at which the state pension becomes payable. Eventually it is proposed that that will rise to 68. I have grave doubts about that, and so, I understand, have the trade unions. While it may be perfectly acceptable for some jobs, for heavy manual labour it does not seem a very good idea. In certain industries it could well be dangerous, not just for the employee himself, but for others working with him. The construction industry comes to mind. I do not like the idea of ageing employees working upon scaffolding. There will no doubt always be jobs in which there is an element of some danger, and we therefore ought to look at the matter further in Committee.
The Government have sought to deal with the problem that people are not saving enough for retirement by the introduction of the personal accounts scheme. Workers will be automatically enrolled in that scheme, unless they opt out, and will pay 4 per cent of their salary, while employers will pay 3 per cent and the Government 1 per cent. It is of course true that many people do not see contribution towards pension provision as a priority. The main concern for many people is to ensure that they have adequate housing, and for many getting on to the housing ladder is desperately difficult and very expensive. Therefore, automatic enrolment in a scheme such as the one envisaged is about the only real possibility.
There is however one difficulty that the Bill does not contemplate. It would appear that there is an interaction with the benefits system. According to briefing I have received from Royal London, by 2050 about 650,000 UK pensioners will not receive a penny from their accumulated personal account due to the interaction of savings and means-tested benefits. Once it becomes clear that what amounts to a 4 per cent cut in salary could produce no benefit, the scheme is not likely to attract support. I would welcome any comment the Government have to offer on this proposition.
There is also the possibility that employers may not want to shoulder the cost of the scheme and might give salary inducements to persuade employees to opt out. Furthermore, we need to know more about the delivery authority. The TUC has said that it supports the idea of a delivery authority but wants to ensure that there is consumer involvement in the governing authority. I understand from the Minister that we shall have the opportunity to discuss this further against developing legislation. The scheme is certainly well intentioned but it deserves some further discussion.
It is of great concern that the occupational pensions sector, once a source of pride in this country, has in many cases ceased to provide the security it once did for thousands of employees. Employers who belong to final salary schemes once believed that they could look forward to security in retirement. Apparently many existing schemes have been closed to new entrants, who are offered much less generous money purchase provision. No new final salary schemes have been opened for a very long time. I agreed to some degree with my noble friend Lord Skelmersdale when he referred to the problems created by the Government's action on ACT. I protested about it at the time. I am sure he would also agree that that was not the only factor involved; there were other problems such as contribution holidays which employers probably should not have taken and, of course, the collapse in the stock market at that time. Nevertheless, it was a factor and I regret that that action was taken. But we are where we are and we have to deal with the situation that now faces us.
The Government have attempted to deal with the very real crisis faced by employees whose pension contributions have disappeared following the collapse of the companies for which they worked. There is the Pension Protection Fund, and more recently the FAS, designed to deal with employees not covered by the PPF. I understand that the benefits available under the FAS are being improved, and the Minister made some reference to that in his speech this afternoon, but in the debate in the other place it was pointed out that there are about 125,000 employees who do not know whether they will in any way be compensated for the loss of their contributions and the pension expectations they once had. We have heard from the Minister that the intention is that they should at least get the benefit of 80 per cent of what would have been their original entitlement. Amendments to that effect are apparently to be before us. Again, this is something which we need to look at further and we will no doubt have the opportunity to do so in Committee.
So we have yet another complex and difficult Bill about pensions with a new regulator and new organisations to try to promise greater security. Nevertheless, we are still left with a system under which many pensioners will have no recourse but to means-tested benefits if they are to stay out of poverty in retirement. This will continue to be the case while the basic state pension remains inadequate and while the private sector requires supervision to ensure security. These are all issues which will no doubt be discussed further in Committee.
My Lords, it is to my surprise that I find myself involved in this Bill because pensions are not a subject that I generally participate on. Before I say any more, I must beg the indulgence of the House for the fact that my contribution is a little more specific than is usual on Second Reading. I am restricting myself to just one topic—to one clause relating to an earlier Bill that I was involved in. I am optimistic that I may be pushing at a slightly open door and I hope that after he has heard me, the Minister might agree to resolve my problems in his response.
The marginal note to Clause 5, which is the one that I am concerned with, tells us that it is about:
"Uprating of basic pension et cetera and standard minimum guarantee by reference to earnings".
In other words, it is to restore the link between the state pension and average earnings, rather than the RPI in accordance with the pledge given in the White Paper. The principle behind this amendment is certainly accepted by both us on these Benches and industry, and probably by all your Lordships. However, the wording of this clause is entirely unsuitable for that purpose. I would like to explain my objections to the provisions in the order in which they appear in Clause 5, which seeks to insert a new Clause 150A in the Social Security Administration Act 1992.
Proposed new subsection (2) requires the Secretary of State to lay an order before Parliament upgrading the pension in accordance with the "general level of earnings". However, proposed new subsection (3) immediately contradicts that provision by excusing the Secretary of State from performing that duty,
"if it appears to him that the amount of the increase would be inconsiderable".
What this inelegant phrase means is that they do not have to bother to uprate the pension if the amount of the increase would be very small because the increased general level of earnings in the review period was also "inconsiderable". Inconsiderable to what? Who is to decide whether the general level of earnings has only risen inconsiderably? Suppose that a review does not take place. That lost increase is not made up when in a subsequent period it is considerable because new subsection (2) limits the review to a current year and does not permit retrospective increases.
I have some slight sympathy with the Government over the problem that they are seeking to resolve. Your Lordships may recall a few years ago the opprobrium that was heaped on the Chancellor of the Exchequer for his so-called meanness in offering pensioners a miserly indexed increase of 75 pence a week. I can understand the Government wanting to avoid a repetition of that farce. But if the increase is too small in any year to be worth while for the Secretary of State to bother with, what justification is there for not making it up in subsequent years to those pensioners who manage to live that long?
There are three subsections which are entirely objectionable because of the wide and entirely discretionary powers that they give to the Secretary of State. New subsection (3), to which I have just been referring, says the Secretary of State can ignore indexing,
"if it appears to him that the amount of the increase would be inconsiderable".
In new subsection (4), the Secretary of State can round the increase off, up or down,
"to such an extent as he thinks appropriate".
Not only is he given complete discretion, but there is no limit to what rounding off he may think is appropriate—to the nearest pound, to the nearest penny, to the nearest 10 pence, or what? And although the Secretary of State can round the increase down as well as up, there is no obligation, or even power, if he has arbitrarily lopped X pence a week off pensions to make up the loss in subsequent years.
The "general level of earnings" is defined as the key to the whole of the Bill's operation of indexing. In new subsection (8), the Secretary of State is to be empowered to estimate the general level of earnings,
"in such manner as he thinks fit".
He is not required to conform to any particular method of calculating it, or to accept the figures from any of the established publications of statistics on such matters, nor is it clear which trades, professions and occupations are to be included in his entirely personally calculated index. Will football managers, Premier League players and pop stars be included? What about nurses, teachers and police officers? What about the effect of artificially depressed below-inflation wage settlements imposed on public service employees? We could, in effect, find ourselves back quite close to the retail prices index.
I have on several previous occasions, in connection with other Bills which I conducted through your Lordships' House from the opposition Front Bench, protested and objected—sometimes successfully—against the attempts by this Government of control freaks to rule by ministerial decree. The objectionable provisions to which I am speaking are prime examples of that process.
On many occasions when I presented amendments to some Bill or other, I was met with the objection that they were unnecessary for some entirely specious reason. The arrangements for working out the general level of earnings contained in this Bill are not only wholly objectionable for the reasons I have just given, they are also unnecessary. Adequate arrangements have already been made and passed by Parliament to provide for what is called indexation of amounts in accordance with a strict mathematical, wholly independent and unarguable formula which does not depend on the whim of a Minister or the diktat of the Treasury.
In Clause 34 of the Employment Relations Act 1999, a precise formula is laid down for the indexation of sums payable to employees under two other Acts. Although that relies on the retail prices index, which we are all agreed should be eliminated as a factor in calculating pension increases, there is no reason why it should not be adapted to the average earnings index, published monthly by the Office for National Statistics. Its website claims it is the,
"key indicator of how fast earnings are growing".
Why is the Secretary of State not using this authoritative index, which is published by a government agency, at taxpayers' expense, but is instead proposing to produce a figure out of the air by reading the ministerial tea leaves, or some other unscientific method? Why should the method of indexing relevant figures be different between one Act and another? By adapting the tried and tested formula in the Employment Relations Act to the average earnings index, the Minister will, in one fell swoop, dispose of all my objections about the meaning of "inconsiderable"; the use of the Secretary of State's personal whims to calculate a competing index of the general level of earnings; and missing rises because of downwards rounding off. Incidentally, the 1999 Act also provides for rounding off but, unlike in this Bill, it is upwards only.
I believe that the Minister is a most reasonable man who will certainly appreciate the force of my objections to Clause 5 in its present form. I repeat the plea I made at the beginning of these remarks: I sincerely hope that before we reach the next stage of the Bill, he will save me the trouble of drafting amendments and writing speeches and will come back with government proposals to rectify the defects—the Government do not like defects—which I have detailed.
My Lords, I declare an interest: I am the chairman and chief executive of an insurance broking and financial advisory organisation. In principle I support the Bill, in regard to both the changes to the state pension arrangements and the establishment of the Personal Accounts Delivery Authority. Having said that, I am sure that the Minister will anticipate that there are issues which need to be examined further and addressed appropriately.
We need to take a holistic view of pension arrangements, both state and privately funded schemes. The wider perspective is necessary otherwise there will be deficiencies and the Bill will be a wasted opportunity. Our society faces the challenge of a demographic change. In a nutshell, people are living longer and in the future there will be fewer workers to support a larger number of pensioners under our pay-as-you-go state pension system.
I support the provision whereby there is a link between the state pension and earnings. I applaud this principle as means-testing is humiliating; it is also a disincentive for people to save. Her Majesty's Government should clearly state the plan for the reduction of means-testing, set a target, keep it under review and ensure that further measures are introduced. The pension credit is unpopular and complicated; up to 1.7 million pensioners are not claiming it and a substantial number are living in poverty. In an advanced country such as ours, that is not acceptable.
Some 3.8 million retired women are not receiving a full pension; two-thirds of pensioners are women who are living in poverty. It is therefore necessary to look at the plight of women; what further can be done to alleviate their predicament? There could be 5 million women who have already retired or will retire soon. Will the Minister consider some element of phasing in the reforming process for women?
The other category is people who are ageing. There needs to be a programme providing encouragement, guidance and advice to keep people employed longer, as by 2046 the pension age for men and women will be 68.
For many years, the Government have encouraged and supported people who would like to contract out of the earnings-related secondary pensions, or SERPS. That was proposed by Mrs Barbara Castle and I arranged one of the first schemes of this type in the country. The Bill intends to abolish contracting out for personal pensions, stakeholder pensions and occupational money purchase schemes. As a result, the Government's cash flow will be augmented by an annual figure of £1.6 billion, as those who contracted out in the past have paid less national insurance. There will, however, be an increase in the state pension liability in future. People who were previously contracted out will in future receive the state second pension in lieu. In view of that, it is necessary for Her Majesty's Government to explain and be clear about how the revenue released by the abolition of contracting-out arrangements will be utilised. I ask the Minister to comment on this point.
I turn now to personal accounts, particularly with regard to the costs and how that will be dealt with. It would be unfair for the taxpayer to pay for this; Her Majesty's Government should look into it further. I suggest that the costs should be met by charges on the personal account holders. Will the Minister comment?
We need to ensure that the Personal Accounts Delivery Authority is run on a sound and efficient basis. The executive needs to be of high calibre, and clear objectives must be set out. We need to ensure that there is good governance and appropriate accountability. Will the Minister comment on the make-up and governance of the authority and how it will be turned into a personal accounts board?
With regard to pensioners who have suffered because their occupational schemes were wound up, I should like to make two points. First, there ought to be provision in full for all pensioners, irrespective of the date when the schemes were wound up. Secondly, there needs to be an efficient way of making the payments. We need to undertake a robust awareness campaign and encourage more people to apply.
Finally, the pension tax introduced by Mr Gordon Brown in 1997 has cost pension funds £5 billion a year. It is estimated that it could reduce the value of pension funds by £100 billion. The tax has had a detrimental effect on pension schemes. Will the Minister clarify the future application of this tax? Is the intention to continue with it?
My Lords, I, too, welcome the Bill, which is the subject of enormous consensus in both Houses and in today's debate. It addresses many, but not all of the issues. Of course, I regard it as a partner Bill to the one that we will get next year on occupational pensions, because it is about overall income in retirement. What has become known as the Turner report is, in my view, an important element in the discussion that we are having today.
Pensions, as we all know, are long-term issues. We cannot pass a Bill this year and think that if we get it wrong we can do something about it in three years' time. We are planning for the long-term future income of our citizens, so it is important that we get it right and that we address the Bill's shortcomings. That said, I want to say to my noble friend the Minister that this is an enormous step forward and one that we would like to have seen before now, but all due credit to this Government for bringing it forward.
We welcome the return to increases related to earnings or prices, whichever is the higher. Although she is not with us today, I look at the Bench next to me and almost see the late Lady Castle from Blackburn, who continually hectored her own government over this very issue. She is certainly blessing the Government from wherever she is.
The more I read about the Bill and prepared myself for today's debate, and the more I read the many briefings that we all received, the more I came to the view—and this may be an unparliamentary thing to say—that, if the cards were reversed and the discrimination was against the male members of our population, we would not be discussing this today. The issue would have been dealt with at least two decades ago. Therefore, there is no excuse for passing the buck on this occasion. We have to deal with some of the shortcomings in the Bill, because it will decide for many years ahead of us, the income level and standard of retirement of our women citizens. Our actions should not be regarded as destructive; it is important that we make some changes to the Bill.
The reduction to qualify for the basic state pension from 44 years to 30 years for men and from 39 to 34 for women is a marvellous step forward and should be welcomed without any caveat. That said, the measure is predicated on a male lifestyle and working life. Generally, men do not have a life of part-time or broken employment—some do, but most do not. That is why the Bill falls down in this area. It presents a platform for the future, but because pensions are long term, we have a transitional period of not one or two years, but a substantial number of years in some cases. In that transitional period, many women in this country will still be living in poverty.
We need to look at a number of areas in this Bill. One is the backdating of national insurance contributions—the ability to buy added years of NICs. Women's lives are variable through work, having a family, or breaking off work to be a carer—sometimes a multi-carer. We should extend the period that a woman can buy added years. What is wrong with that? It is a progressive measure.
On the issue of women and multiple employment, we have a problem today involving women who work part time—four out of five part-timers are women. The income on each individual job does not reach the lower earnings level, so they do not qualify for basic state pension. Because of their multiple employment income levels, approximately 15,000 women today actually earn more cumulatively each week, each month, each year than the lower earnings level. If all their earnings were taken together, they would qualify. Some of those 15,000 women actually earn more than their male colleagues who qualify for basic state pension, yet the woman does not. I have read the debates in another place and I cannot find any principled objection to adding the incomes together. I do find the argument that it is too difficult. That is not an argument: it is an excuse.
Somehow, we must address this issue, because it is discriminatory. Over a year, 15,000 women earn sufficient to qualify for the basic state pension, but because the earnings are from different employers they are excluded completely. The noble Baroness, Lady Hollis, talked about an amendment on this issue and it seems from the Benches opposite that the question is, "Have you the stomach for it?". Well we have the stomach for an amendment with regard to multiple employment and we will push it, because it is long needed.
The carer's credit is welcome. It is an enormous step forward to go from 35 hours to 20 hours, linked with the fact that you do not have to be reliant on the claimant—the benefits of the person you are looking after—but can get signed off by the social worker. I am not an expert in this field, so when my noble friend sums up, will he please repeat the undertaking in this area? It is a key area and I want to make sure that I understand it, because I might want to amend the Bill if the understanding is wrong.
Like many Members of this House, I have received numerous letters from people who were hoping for support from the financial assistance scheme who feel that they have been let down, for two reasons. First, the scheme seems to be dragging its feet on payments. I do not know why, but it seems to be slow in making payments. Secondly, we return to the complication of pensions. People think that they will get 80 per cent of their pension, but they will not. They will get 80 per cent of their core pension, which in some instances will mean a substantially reduced pension. That cannot be right. Although, strictly speaking, the issue is not related to this Bill, I am sure that we will discuss it in our debates. I look forward to that.
I welcome the personal accounts that have been provided for, but they will be no use without good advice. That good advice must be freely accessible and independently given. Women would certainly welcome that, not because women are any less able than men, but because women have different lifestyles and do not have the same kind of access to advice as many men.
The noble Lord, Lord Turner, mentioned commutation levels and a number of us nodded in agreement. I certainly did, because the present level is below £15,000, which is a very small amount. It would help if we could do something there. There are many areas where something could be done to help with the transitional period, which particularly affects women.
My last point is one that a number of Members will have heard me address before—the issue of annuities. We really are behind the game here. There is no proper competition in the annuity field. The age level for it is wrong and it is outdated. Some people have tried to project the tale that annuities are only for the wealthy; they are not. I certainly look forward to discussing annuities with the noble Lord, Lord Fowler, and others in our deliberations on the Bill.
I sometimes wonder what the Minister sitting on the Front Bench must think. He brings forward a Bill of which he is very proud, and rightly so, because it is an enormous step forward. But nothing is perfect and it is our job to try and knock the rough edges off it. I assure my noble friend that we will certainly be trying to do that in this Bill.
My Lords, it is a pleasure to follow the noble Baroness, Lady Dean, and to have listened to other noble Baronesses contributing to the debate simply because I acknowledge that consideration—certainly in the private sector—is male dominated in occupational pension schemes, both defined benefit and defined contribution. I have already learnt a great deal in the debate and look forward to further proceedings. Pensions are such a complicated issue that we very often do not appreciate whole sections of the problem, as revealed in this afternoon's debate. I am grateful to the noble Baroness and others.
I declare an interest as chairman of the trustees of a large, industrial pension scheme. I have been chairman for six years. I feel personally responsible—legally, I am directly responsible, together with the other trustees—for the pensions of many thousands of workers and also of those who are in employment and face changes, not only of our scheme, which will undoubtedly come as we follow industrial and commercial trends, but also of provision by the state.
I should like to associate myself with the remarks of my noble friend Lord Skelmersdale in his excellent opening of the debate from our side, of my noble friends Lord Fowler and Lord MacGregor and of others who have contributed and are likely to contribute from our side. I shall not repeat the points made by my colleagues but I shall focus on one or two new issues, the first being the personal savings pensions introduced as a result of the Turner commission. I add my congratulations to the noble Lord, Lord Turner, whose excellent contribution to the debate I listened to with great interest. I very much welcome that feature of the Bill.
Before I move on, I should like to ask the Minister about one point on which I would appreciate his clarification. According to some of the briefings we have received, the state pre-empts about 5.2 per cent of gross domestic product for the provision of state pension benefits. Under the Turner commission report, that is likely to rise to 6.7 per cent of GDP in the years to come, which is up 30 per cent. The noble Lord, Lord Turner, referred to this increase of 1.5 per cent of GDP. If I am not mistaken, the number of pensioners is going to rise by more than that percentage increase—by 50 per cent. Therefore, simple mathematics would indicate that, with more pensioners, they are not going to share in the growth of that overall provision. That is not a criticism but a point for clarification. I would appreciate the Minister's response to that point.
I very much agree with what the noble Lord, Lord Turner, said, both in the commission's report and in his contribution to the debate. We are simply not saving enough. The Bill goes some way to increase the provision of state pensions and encourages additional private provision, but frankly it is not enough. My noble friend Lord Fowler, and others, put his finger on the point when comparing this country with other countries. An excellent brief from the Resolution Foundation quotes the Financial Services Authority report of March 2006:
"The Financial Services Authority's survey of financial capability showed that, while 81 per cent of people feel that they will not have enough to live on in retirement, only 37 per cent of them have made any additional provision for later life".
There is a mismatch between that realisation and a sort of lurking concern in the hearts of many in employment that they will not have made sufficient provision. They are neither enabled to do so efficiently enough nor do they have the required motivation. The reverse of the increasing propensity to consume is the smaller provision, as a percentage of national income, for retirement.
I want to comment on what I regard as the Banquo's ghost of the debate, which is the rather unpleasant reminder that has occasionally been referred to of the problems of private sector provision in occupational pension schemes. I should like to make one or two suggestions to the Minister. Let me remind the House, as the noble Lord, Lord Fowler, did, of the statistics coming from the National Association of Pension Funds. Only one-third of the 10,000 remaining defined benefit occupational pension schemes are still open to new staff. I am concerned that some occupational pension schemes will close to future accruals of existing members of the schemes. That is in growing contrast with the public sector where, for many, defined benefit schemes remain. We must stop the rot now. I have four brief suggestions.
First, on longevity, frankly, the actuarial profession missed a trick here. I am not blaming it. The tradition of government statistics on how long we live is to relate them to different cohorts of those born in certain years. Forecasts are made. When the latest figures became apparent, many trustees reacted with alarming haste. We should now move to a calmer situation of forecasting the inevitable—we are all going to be healthier and live longer in the future—and not make such abrupt changes as have happened in the past three years. The new Board for Actuarial Standards, set up by the Financial Reporting Council, will, I hope, set high actuarial standards and must be independent of the Government. I would appreciate it if the Minister could confirm what I understand to be policy. We want sensible, reasonable, regular and timely actuarial advice, rather than the brakes being suddenly slammed on in terms of adverse actuarial valuations.
My second point relates to the importance of proper training and encouragement for the trustees of private sector schemes. Frankly, we have an enormous way to go to improve the performance of trustees in the private sector. I suppose the absence of any further changes means we will have to await a new Bill. However, Paul Myners was right in some of his recommendations from three years ago. We must consider paying trustees. This is not an amateur job. Trustees and private schemes have a direct personal responsibility for making sure that pensions are properly provided for. They must be properly elected. Is the Minister aware that we are living in the middle ages, with no provision of rules to those who wish to stand for election, no direct encouragement, no provision of the electoral roll and no canvassing for election as a member-nominated trustee? We need legislation. Trustees have to be trained properly. I am glad that the Pensions Regulator has drawn attention to the fact that leveraged buy-outs by private equity firms can often result in a reduction in the quality of the covenant to the pension schemes of the company bid for. Trustees are not fully aware of the implications of those bids, and I am glad that the Pensions Regulator has begun the process of warning trustees.
Thirdly, on actuarial valuations, we seem to swing from massive deficits to surpluses, then back again to deficits. I understand from today's Financial Times that a survey by Aon, which is large in the insurance industry, shows that the total deficit of the 200 biggest schemes is down to £14 billion, against £60 billion at one point in 2006. What a massive turnaround. The lesson is that we have become far too slavish to the three-yearly or indeed annual—under financial accounting standards rules—snapshot valuations of pension fund deficits or surpluses. For heaven's sake, let us take a calmer, longer-term view, which would be in the best interests of the members of pension schemes.
Finally, we need from the Government an assessment of the impact on defined benefit schemes of the ending of contracting-out of the second state pension scheme. It is very vague and it is difficult to calibrate and measure the impact, so we need more information.
I conclude by asking the Minister whether the Government will reconsider the recommendation of the noble Lord, Lord Turner, that there should be a permanent Pensions Commission independent of government that would look at the progress of reform and report regularly to Parliament. The Government's policy seems to be to have ad hoc reviews occasionally. That is not good enough. This is a very important subject, which we should keep under constant review in your Lordships' House.
My Lords, I declare my interest as chairman of Beachcroft Regulatory Consulting and the other entries in the Register of Lords' Interests—and the fact that next Monday is a significant birthday, as I become entitled to draw the state pension.
Like many other speakers, I offer the Bill a broad welcome in the sincere hope that it will be effective and not too little, too late. Today is a Second Reading debate, so we are discussing the broad underlying principles, but on these matters there is a consensus. We all agree that something urgent must be done to induce people to put more of their money aside for old age. At present, citizens are distorting and unbalancing their asset portfolios by overstretching on their mortgages and undersaving into pension schemes and other financial vehicles that effectively defer income. That the Government should have seen fit to address that is something that we all welcome—on that there is a consensus.
So far, so good. But when we look at some of the details—and there have been some powerful speeches in this debate, highlighting key areas—I hope that Ministers will recognise that a consensus has to be earned; it cannot be taken for granted, nor can it be imposed, even with a "big, clunking fist". If Ministers truly listen, we shall make this journey together.
The spirit of our age is one of borrowing, spending and living for today, which does not encourage people to exercise discipline by putting money aside for the rainy days of senescence that most people now expect to experience in the fullness of time. One may think—looking at it from the point of view of the Minister—woe betide the politician who goes against that grain by preaching the doctrine of deferred gratification and calling for a more self-denying, longer-term approach to human existence. That would be a courageous policy, as Sir Humphrey might have it—hence the general reticence about compulsion.
It is good that the Government are addressing a pensions crisis to which, as my noble friend Lord Skelmersdale pointed out, they have themselves contributed. I believe that there is now even a consensus on that, with the possible exceptions of the Chancellor of the Exchequer and one or two of his close colleagues. However, even soft compulsion is likely to meet with some resistance. That is why it is all the less surprising that Ministers should want us all to steep our hands in the gore.
There is no getting away from the fact that consensus suits Ministers better than it suits the Opposition, so the onus is very much on Ministers. We on these Benches certainly accept our share of the long-term responsibility for the well-being of our fellow citizens. This House is customarily less partisan and frenetic than another place and I hope that we shall be so on this Bill. But there can and will be no blank cheques on consensus, and I shall now touch on some areas that cause concern.
In doing so, I regret that in the other place timetabled Motions have prevented discussion on important parts of this Bill and some of the important issues. We have come to accept that, but it does not mean that we cannot complain about it from time to time.
If this measure is to be successful, it must achieve comprehensive take-up with minimal collateral damage. By that I mean that we must act to minimise the phenomenon known as levelling down. On take-up, using inertia in the form of auto-enrolment is a clever device that may work for those who really want to do the right thing and just need a helpful nudge. But we must not underestimate the difficulties that so many households face. When the car breaks down, the washing machine is broken or the children need new shoes, stopping pension contributions to fund higher credit card repayments is the way to remain solvent in the here and now. Being auto-enrolled again in three years' time may induce people only to repeat the cycle. Auto-enrolment attacks a symptom but not the underlying cause. It cannot by itself turn a spending culture into one of saving.
It is not only retired politicians, civil servants and senior company executives who adopt portfolio careers. The less well-off often need to take two or three jobs, whether full-time or part-time. Sometimes they hop rapidly from job to job. They will not be well served by the arrangements under this legislation.
I am also concerned that there is so little clarity about how the new system will interact with state benefit structures. There is a dangerous whiff of moral hazard hanging over all this. I think that I understand why Ministers have rejected the notion of a flat-rate citizen's pension, but I remain unconvinced about how incentives to save or dis-save will operate under the new system. There is now plenty of research available demonstrating that levelling down is a clear and present danger, but we see little or even nothing in the Bill to address it. It would be a very sad day indeed if serviceable money purchase schemes were closed and their members dumped into personal accounts simply in the name of efficiency. It may be argued that all this will be dealt with in due course, as and when Ministers come forward with their second pensions Bill, but I make the point that this Bill gives us an opportunity to address some of these issues. The terms of reference of the proposed delivery authority are sketched out in the Bill, and there is a powerful case for setting out in it the duty of the authority to focus its efforts on its identified target market.
There are other outstanding issues with regard to the proposed authority. I ask Ministers to reassure this House that they recognise the scale of the challenge that the authority will face and that the board and senior management chosen to lead the authority will be up to the job. Many of us would also like to know whether the door is still open for public subsidy of the set-up and running costs of the authority.
Some very challenging points have been raised in this debate, and I look forward to hearing the Minister's response. In a way, we have kept up the standard of debate that was achieved here in this Chamber on Saturday, when, under the careful guidance of the noble Baroness, Lady Hayman, the Lord Speaker, we had the finalists from the 800 schools who competed for the English-Speaking Union Schools Mace. The standard was very high but, in this debate, we have managed to match it.
I offer two cheers to this Bill: one for the fact that it exists at all and one for its broad outline. But the third cheer must be withheld until the process of parliamentary scrutiny has taken place. I hope that there is a consensus on that.
My Lords, I am glad to follow the noble Lord, Lord Hunt, in this preliminary celebration of his birthday. He made a very thoughtful speech.
We should judge the Government's policy on pensions against two criteria: is it realistic and is it fair? We are all immeasurably indebted to the Pensions Commission, chaired by the noble Lord, Lord Turner of Ecchinswell, for its information, analysis and recommendations. The intellectual and moral quality of its work is impressive. The Government have done well to establish the Pensions Commission and to be guided by it.
As the Pensions Commission said,
"the fool's paradise has come to an end".
The baby boom permitted Governments to persist in the illusion that funded private pensions would allow the state to get away with minimal provision. People continued to trust that the welfare state would provide, even as the world of Beveridge faded away and state provision more and more inadequately matched new social patterns such as: the end of full employment; women, usually lower paid and often in part-time work, juggling part-time paid jobs, raising children and other caring; and rising divorce rates, new cohabitation and singledom.
Optimism persisted, even as policy and events became more chaotic. While many of the better-off contentedly claimed their salary-related pensions, the earnings link was severed to keep the basic state pension affordable and poor pensioners became relatively poorer. The 105 per cent rule on overfunding and ill judged contributions holidays ensured that when stock markets fell, numerous pension funds found themselves underfunded. Policies contradicted each other: tax relief encouraged savings, while means-testing and the requirement to commute funds into annuities at 75 discouraged saving. Pensions savings went into decline. The old culture of saving, battered by inflation, government promotion of mortgage-funded owner occupation, and indiscriminate peddling of credit by a deregulated banking sector, had in any case given way to a culture of borrowing.
When mis-selling by the pensions industry plunged people into disaster, layer upon layer of impenetrable regulations left them even more at sea. The actuaries went to sleep and by the time they woke up to demographic reality, defined benefit schemes were on the skids. Government information literature was of such sloppy quality that people remained as gullible and vulnerable as before. The Parliamentary Ombudsman propped up the culture of delusion when she gave people to understand that the Government should be expected to underwrite the private occupational pensions system—no matter how prodigiously trustees might screw up, the taxpayer should come to the rescue—and the court reiterated that.
The latest illusion among our fellow citizens, mentioned by the noble Lord, Lord MacGregor of Pulham Market, is that houses will substitute for pensions. It is believed that property values will keep going up, so your home or your buy-to-let property will be your pension nest egg. The trouble is that the relation of supply and demand may well scupper that. If more and more people at retirement want to realise the cash value of their bricks-and-mortar pension fund, and relatively fewer people of working age are available to buy their properties, house prices would seem likely to fall. The retired people have to get themselves rehoused and, if they are prudent, put money aside for long-term care. They may also have mortgages to pay off, which will not be assisted if the Pension Commission's recommendation is accepted that a scheme-specific tax regime for personal accounts does not permit a tax-free lump sum to be taken. Housing assets will of course assist many people moving into retirement, but those with the meanest pension rights will commonly be those with the least housing equity. Reliance on property values is not the solution.
The Pensions Commission invited us all to face reality, saying:
"The current system of private funded pensions combined with the current state system will deliver increasingly inadequate and unequal results ... Some mix of higher taxes/National Insurance contributions, higher savings and later average retirement is required".
This Government have previously done much to help the poorest pensioners. In the 2006 White Papers and in this Bill they are now grasping the nettles held out by the Pensions Commission and addressing themselves to constructing a coherent overall system of pensions.
The new system will, of course, face major uncertainties. We have no idea how inflation will fluctuate in future decades; nor can we know what will happen to longevity. Will better treatments be found for heart disease and cancer? What will be the impact on our demography of migration, perhaps further stimulated by climate change? The policy, based on the Pensions Commission's recommendations, that the Government are proposing seems to be as robust and flexible as it can be in the face of such uncertainties: to create a multi-layered system in which affordable state provision guards against poverty—for most, at any rate—and provides a platform for individual saving which is discretionary but effectively encouraged.
I would like to ask the Minister about some specific aspects of policy. The Pensions Commission recommended certain policies to encourage and support people to work for more years. It proposed making age discrimination in employment beyond 65 illegal, allowing deferral of part of the basic state pension and S2P, relieving employers of national insurance contributions for employees post state-pension age, more vigorous policies on occupational health, and a better focus on re-skilling older workers. Can the Minister clarify the rather fuzzy account in the White Paper of the Government's intentions on these particular recommendations?
The White Paper makes it clear that the Government intend to mount a drive to improve financial literacy and ensure that people understand the nature of the choices open to them on pensions. This is important and welcome. It is not appropriate to introduce financial literacy as such into the national curriculum. On this, I do not agree with the noble Lord, Lord MacGregor of Pulham Market, although I was his schools Minister. The national curriculum is cluttered as it is. We will not persuade teenagers, who think they will for ever be young and invulnerable to the hazards of drugs and fast cars, to interest themselves in pensions any more than in planning their funerals. The noble Baroness, Lady Thomas, made the same point. What is needed is good education that eventually produces people who are numerate and responsible.
It is, however, essential that people receive advice to enable them to make appropriate judgments about pensions and, indeed, other aspects of financial planning. Individual pensions advice, which, as has been noted, is usually better described as sales talk, is so expensive that it eviscerates the value of modest funds, so generic advice must be provided. The Pensions Commission was pessimistic, speaking of the,
"limited impact of providing better information and generic advice".
I am more hopeful. When people's interest is kindled they will grasp quite complicated calculations, as punters do on the racecourse, or farmers work out how to take advantage of CAP schemes. When people are to have their own individual pension pots and property assets, their interest will be of a quite different order. I am pleased that the Government noted in the White Paper Personal Accounts: A New Way to Save that,
"providing good quality information will be critical to the success of personal accounts".
What worries me a bit, however, is that in paragraph 3.12 of that White Paper the Government appear to conflate marketing and communications. They recognise that among the objectives of the delivery authority must be,
"delivering appropriate levels of choice".
It will be a crucial and difficult judgment to determine what that should mean. I believe Sandler was wrong to maintain that regulation of the financial product should make advice unnecessary.
The Pensions Commission more accurately noted that people may, for example, need to be advised that they should direct their resources to paying off expensive debt before embarking on a personal pension account. The noble Baronesses, Lady Turner and Lady Hollis, drew our attention to risks in the eventual interaction of benefits withdrawal and pensions drawn from personal accounts.
"in the round, about you, your money, your future prospects, your family, how to manage that money effectively and then keeping that under review".
How do the Government propose to ensure the availability of suitable generic advice? Through the Personal Accounts Delivery Authority? Through funding Citizens Advice or the Pensions Advisory Service? Through encouraging employers to provide financial advice in the workplace? I was informed a while ago that such advice not only was not a tax-deductible cost for employers, but was treated as a taxable benefit in kind for employees. Was that correct and, if so, has the position altered or will it do so?
The provision of generic advice would probably not be a suitable role for the successor body to the Pensions Commission that the commission has called for. The commission proposed that there should be a permanent Pensions Commission, charged with presenting every three to four years a report setting out trends in life expectancy and implications for the long-term trade-off between public expenditure and the state pension age, trends in private pension saving—no doubt including the impact of continuing means-testing—and an evaluation of personal accounts in stimulating increased participation, as well as trends in retirement ages, differences in life expectations by socio-economic class and implications for policies required to support people to stay in work.
I agree with the noble Lord, Lord Freeman, on this. Surely such a recurrent exercise would valuably inform government, the industry, commentators and the public. It would not be expensive, so why have the Government rejected the proposal for a permanent body and said instead that they will set up only ad hoc reviews from time to time? The job could be attempted by a pensions think tank or a university department, but that would not carry the same authority. I would like to see a provision in this Bill not only to establish a permanent Pensions Commission with such terms of reference, but also requiring the Government to have regard to its findings and to publish their response. We hope that the Bill will help to establish a sustainable consensus on pensions policy, but we must not allow complacency and inertia thereafter.
Pensions policy needs to be fair as well as realistic. The Government have rightly rejected the option of allowing pensioners to become poorer relative to the rest of society. They are seeking to strike a series of fair balances. A fair balance between the generations means that the basic state pension should be indexed to average earnings and that people should work longer. For many people, that means that they will not only be wealthier but healthier and happier. For many others, however, in comparatively unrewarding occupations, particularly physically exhausting ones, and for people in poor health, it would not be just to insist that they should toil for more years to achieve their basic state pension. Will the Government, as the Pensions Commission suggested, assist such people to retire earlier, by making the basic state pension, possibly topped up by the guarantee credit, available before S2P? The White Paper is somewhat opaque on this, too.
A fair balance is to be struck between employers and employees, and between those who are presently in funded pensions and those who are not, by providing for a compulsory employer's contribution, but set at a modest 3 per cent. I appreciate the worries that have been expressed about levelling down, but I worry that levelling down would take place in any case. I believe that the 3 per cent compulsory employer's contribution is well judged.
The Government also seek to strike a fair balance between those who have full-time or near full-time working lives and those who, in the interests of society, put their lives together on a different pattern. This has already been recognised by the Government in the switch from SERPS to S2P. Now it is to be taken further in a new pattern of credits for carers, so that all should be able to build a full basic state pension plus some S2P entitlement in their own right over 30 years. But the Government should be willing to consider in the passage of the Bill whether their model for women with interrupted working lives could be improved on within the bounds of affordability. My advice is that they should pay heed to the noble Baroness, Lady Hollis; I always do.
On fairness, there are some other matters to consider. Tax relief for investment in pensions is, to my mind, outrageously loaded in favour of the well-off, who have least need of incentive and assistance. I have seen various figures—perhaps the Minister can advise us as to the correct ones—but it appears that between 5 per cent and 10 per cent of the wealthiest people receive half the total tax relief. This is neither just nor efficient. If the revenue forgone in tax relief were to be used instead to provide grants to support those most in need of assistance in saving for pensions, that would be a better use of resources.
The Pensions Commission recommended a scheme-specific system of tax relief to give impetus to personal accounts, and I hope that that will happen. Meanwhile, the commission explained, so long as defined benefit schemes still loom large in the array of pensions provision, there will be problems in altering the existing pattern of tax relief. I do not see why this particular tail should wag the dog. Of course we should do nothing to accelerate the demise of DB schemes, but why not proceed in relation to DC schemes?
It is important, in justice and for the economy, to find effective ways of reversing the very worrying decline in saving for pensions by the self-employed. The White Paper tells us that the Government see no satisfactory way in which to enable the self-employed to enter S2P. Therefore, the recommendation by the Pensions Commission that the self-employed should be allowed to participate in personal accounts on a voluntary but cost-effective basis is all the more important, although the commission did not put much flesh on the bones of that proposition. The White Paper tells us that the Government intend to allow the self-employed to opt into personal accounts. That is good, but do the Government have further thoughts on how to encourage and enable self-employed people to save more for pensions?
It is also vital that the Government find ways of helping employers in small businesses to cope with the costs of contributing to personal accounts for their employees. Will the Government accept the Pensions Commission's recommendation that they should take advantage of their improved cash flow from the abolition of contracted-out rebates in DC schemes—£4 billion at the start—to mitigate the costs of employer contributions to personal accounts for very small businesses?
I think that we should also reflect on issues concerning migrant workers. There is free movement of labour within the European Union, and many migrants are coming from outside the European Union, too. We will all depend on them. Highly skilled immigrants will sort out their pensions, but many immigrants will do menial and poorly paid jobs and, of them, many will not accumulate anything like 30 years of contributions. What development do the Government envisage of portability of pension rights across national frontiers? Should we not feel ashamed if we were to depend on migrant labour for cleaning and many other jobs in the health service, and for public transport, and then leave those people as second-class citizens to eke out their old age on meagre benefits?
These are questions that I raise, but I welcome the Bill. For the first time that I can remember, we have the prospect of a coherent, realistic and just pensions policy.
My Lords, in making my contribution, I should draw attention to my interest as director of a life assurance company that is also a major pensions provider.
Like others who have spoken in this debate, I very much welcome the general direction of the Bill and I pay tribute to the work of the Pensions Commission under the noble Lord, Lord Turner, on which the Bill is based. Nevertheless, I fall into the camp of those who believe both that the Bill does not go far enough and that the measures as proposed raise some major concerns, which we will need to address.
As others have said, in looking at the pensions issue, we need to recognise that we are at a point in time when there is a sea change in the pensions environment that has made much of the previous way of providing for pensions unsustainable. The primary driving force of that is the length of time that people now expect to live in retirement and the consequent rise in the dependency ratio. Unless we are prepared to increase the retirement age far further and faster than anyone currently envisages, so as to move that expectation of a long life in retirement, we will face a situation in which an increasing proportion of our national income needs to go to those who are not active in work. We cannot assume that our current projections are the end of the story. What will happen to life expectancy because of medical advances is as yet unknown.
I believe that, in the long run, the only sustainable and robust solution to the pensions issue is to move to a much greater level of funding of future pension liabilities. I welcome the encouragement in the Bill for private savings and the new pension accounts, but I believe that ultimately we will have to tackle funding of the state pension as well, moving it from a pay-as-you-go provision to something that has a greater level of funding behind it. That applies both to the pensions liabilities for state employees, which have been mentioned as a huge potential burden on future taxpayers, and to those liabilities that successive Governments have refused to put on their balance sheet, but which are nevertheless there, for the future basic state pension for the population at large. My wager would be that at some time we will need to return to a variant of the scheme put forward by the Government some 10 years ago. That would have phased in state pension funding over an affordable timescale, giving everyone their own pension pot to which their savings could be added.
I recognise that that goes far beyond the scope to the Bill, so we need to turn to making the more modest changes proposed work as well as they can. On that I would like to raise four points. The first point, which has been well aired, involves the interaction with means-tested benefits, including pension credits. That means that many in the target population—as the noble Lord, Lord Turner, pointed out, many of them have no savings at all—and because of the interaction with state benefits, do not have an incentive to save; it is not worth their while. I accept that the Bill will stop the situation getting worse but I am not convinced that it will solve it. Like others, I would welcome more information from the Government on their estimates of how many people will still have most of the benefit from the introduction of employer contributions at 3 per cent, and the tax relief on that and their own contributions, taken away by the benefit taper rate. It is still likely to be a very significant proportion. As a result, I suspect that we need to do more to resolve that.
One part of that solution could be to give a more generous top-up from the state for those who have modest savings so that they are worth more. I have long been a fan of the so-called BOGOF principle—buy one, get one free—where those who do not have much to save can be assured that the top-up from the state will make their savings worth having. As the noble Lord, Lord Howarth, pointed out, it is an anomaly that those on higher incomes get a 40 per cent contribution to their pension pot whereas those at the bottom end of the scale get 20 per cent at most. I am not suggesting that we should reduce the tax relief at the top, but it is worth giving more benefit to those at the bottom to make sure that their savings are worth more. That, in itself, may help get us out of this trap with the pension credit taper. I was interested in the proposal that the noble Lord, Lord Turner, made for cash commutation for small pension pots. That is worth pursuing. However we do it, if we are going to encourage savings from the target population—which is the group that we are primarily worried about here—we need to ensure that a pound saved means that they are a pound better off in their retirement.
That leads on to the second issue, which is the problem of advice. My noble friend Lord Fowler argued for a compulsory contribution system. If the system is not compulsory, people will have to make a choice. The issue is not only about the interaction with benefits but is also because many have outstanding debt and liabilities whose net cost is far higher than return on investment from savings. Many of those people are far better off paying off debt on which the interest rate may be 15, 20 or 30 per cent than putting money into a savings scheme, even with the tax relief, and even before you start knocking off the negative return from the benefits taper. A large proportion of the target population have large amounts of net debt. Even if we solve the benefit problem, we will not solve the problem of the net benefit of saving versus dealing with other liabilities.
How do we get advice to those people? The problem is that over the past 10 or 20 years regulation of advice has shifted so far in favour of protecting the consumer that compliance costs mean that most private sector providers simply cannot afford to sell —and, in order to sell, to give advice—to the less well-off half of the population, who most need it. As the noble Lords, Lord Addington and Lord Howarth, pointed out, the Government's faith is placed in generic advice. I am not as optimistic as the noble Lord, Lord Howarth, that generic advice will solve the problem.
Generic advice will not help people who do not understand these issues to deal with the complexities of their situation, and the interaction of debt and benefits, unless it is face-to-face advice that deals with their specific situation. If you are in a face-to-face advice situation you cannot, by definition, stick to generic advice without risk of getting it wrong. The Government have a brave project to develop generic advice but, as the noble Baroness, Lady Hollis, pointed out, without prejudging this there must be an enormous risk that, as with the advice on opting out in the 1990s, some future ombudsman will judge that we have misinformed people and land the Government with the large cost of compensation. To solve this conundrum, if it is solvable, we need to shift the culture to reduce what are in many cases box-ticking compliance costs, and only penalise sellers where it is clear that there has been deliberate mis-selling. Whatever we do, we must end up with the same rules on advice for the private and the public sector. I cannot envisage a situation where somebody can get large compensation for advice from a private sector pension provider, but somebody given the same advice from a public sector advice provider is not entitled to compensation at all. That will not stand the test of legal challenge.
The third point I would like to raise involves the issue of annuity, which many others have raised. We all understand that if the Government give tax benefits they do not want to see them used on luxury holidays by people who then fall back on the state. We can solve that problem in other ways—for example, by ensuring that there is a minimum amount left in the scheme once people are over a certain age, with the freedom to draw down as they need income. We should then allow remaining funds to pass down through inheritance into the next generation's pension funds tax-free, so that they can help the next generation accumulate savings in time. We have to recognise that it will simply not be possible for much of the population to save enough in one lifetime to make enough difference to their security in retirement. Therefore, we need to encourage the accumulation of wealth over generations. With baby boomers now moving into retirement, it could make a major difference to the next generation if their pension pots, however modest, do not disappear when the current generation die but become a foundation for the next generation's pension savings. We should encourage, not prohibit, that. In order to do that, as other noble Lords have said, we need to tackle the annuity requirement. I will be happy to join others when those amendments are put to the test.
My final point is about the design of the delivery authority. The detail on that will follow, but we need to avoid creating something that destroys the remaining successful private sector provision and sucks money into what could become, if it is not set up and run wisely, an inefficient public administration machine. There is much debate still to be had about what role the private sector should have in administering the schemes. As others have said, there is a risk that some companies will use the proposals to level down contributions in existing private schemes. We need to be aware of that. It must be desirable to ensure that there is a level playing field for existing group pension schemes so that they are not handicapped by competition from, for example, subsidies to the cost to the new pensions administration that would further encourage a slide from well provided private pension schemes into less well provided government schemes.
We should also look at the rules surrounding automatic enrolment, which is proposed for the national pension scheme. At the moment, as I understand it, the distance selling directive prohibits automatic enrolment for conventional group schemes that are not set up as trusts. Again, that is not a level playing field. If we believe that automatic enrolment has a role to play, it may well have an important place in the continuation of those private schemes as well.
Because of those issues, I wonder whether it would be sensible to build into the Bill the safeguard of a minimum period of consultation between the final proposals on the new pension machinery being set out and the legislation being brought forward to enact them. That would allow proper time for discussion so that the House and the country are not faced with the fait accompli of a Bill that it is too late to debate and amend. I should welcome the Minister's assurance on the timescale for that discussion and, indeed, I should like to know whether he will accept an amendment to build that timescale into the Bill.
In conclusion, the Bill makes a very useful start but, as others have said, as we go through it, we will need to test the willingness of the Government to accept its limitations and to be open to further strengthening its provisions so that we do not miss the opportunity to make a real difference to future generations.
My Lords, the Bill, when published in November 2006, was described by the Government as legislation for,
"long-term pensions reform, making the state pension fairer and more generous and providing a solid foundation for private saving".
The three objectives of fairness, generosity and provision of a solid foundation for private saving are wholly admirable, and I am sure that they are accepted as such by all noble Lords. I rather like the shorter description given by my noble friend Lord Fowler of the ideal pension reform having just two pillars: state pension and private savings.
The Government's objectives certainly represent a marvellous Damascene conversion for a Government who, in their term of office of 10 years and 13 days, have proved their commitment to fairness by robbing the pension funds of £5 billion per annum, their commitment to generosity by giving pensioners on one occasion an annual increase of 75p per week and their commitment to providing a solid foundation for private saving by continuing their taxation of savings at a level that certainly discourages such saving, other than investment in housing. But now they are attempting to tackle each of these and they deserve our support. I sense genuine support for most of the Bill from all sides of the House but also a fairly consistent determination to seek all-party amendments.
Those of us who put our names down to speak in this debate have been swamped by impressive representations from organisations such as the Equal Opportunities Commission, Help the Aged, Carers UK and the Occupational Pensioners' Alliance. There is a marked difference in reactions to the Bill, ranging from a "strong welcome" from the EOC to the rather muted one from Help the Aged, which supports the new direction of travel flagged up by the Government but is concerned by the lack of will to invest in pension reform. It has a valid point. Having read the Bill—although, to be honest, I skimmed over parts of it which are far too technical for someone who has always had a fairly desultory interest in pensions, to which I shall return—it seems to be more of a tidying-up exercise than a "reform" Bill. I can understand why it is necessary to have such a tidying-up exercise; as my noble friend Lord Fowler pointed out, it is a hugely complex subject.
The Christmas tree of pensions has become overloaded by bits of legislation that have been forced on it due to the absence of any coherent policy involving joined-up government. However, my metaphor of a Christmas tree is somewhat ironic. It could be described more accurately as a branch of a big tree felled by a storm, which has now been adorned by baubles to make it look pretty and more acceptable. But, as the noble Baroness, Lady Hollis, said, there is a lot of vacuous platitudinous stuff there. Is that harsh? I think not. The whole pensions arena has been an utter disgrace throughout the time of this Government. Final salary schemes are still sacrosanct in government, yet they have been almost eliminated in the private sector. When, I ask, will someone grab hold of this issue in a coherent manner and deliver a pensions programme which meets the Government's overall objectives of fairness, generosity and provision of a solid foundation for private savings?
Objectives are easy to conjure; it is tactics that are important. Objectives can be debated over and again; it is action that is needed. When will the fairness start? As has been pointed out several times during the debate, the earnings link will not occur until 2012. How many pensioners who are currently suffering severe deprivation will survive until then? Of course, we are aware of the huge cost of all this but we seem to be able to accept the billions spent on a failed computer system for the NHS and—dare I mention it?—the continuing drain on the Exchequer of the Iraq episode and the unwanted ID card scheme. Money can be found. Yes, it would involve reductions in spending in other areas, but the various examples of waste that we have heard about in this House from, among others, my noble friend Lord James of Blackheath and the various independent assessments of government waste indicate clearly that ways can be found by just looking at the whole waste scene. But, let us face it, pensioners are a group that carry little importance and have a fairly weak voice. That, I am afraid, is a fact.
A great deal in the Bill appears to be generous—I emphasise the word "appears". Even when the earnings link is restored, the level of the state pension falls far short of that of other countries, but we pride ourselves on being the leading economy of the European Union, with growth rates higher than those of other member states on a long-term, consistent basis. That, at least, is the current myth. It can be exploded very easily just by looking west to another off-shore island of Europe. As the noble Lord, Lord Oakeshott, pointed out, pensions account for 15 per cent of EU GDP but only 6 per cent of UK GDP.
The noble Lord, Lord Rosser, cited that latter figure but omitted to cite the former and the EU's average percentage of GDP spent on pensions. He made an unwarranted and, I fear, ungracious side swipe at the "apparent expertise" of my noble friend Lord Skelmersdale and the noble Lord, Lord Oakeshott. The noble Lord, Lord Rosser, has total experience in reading out masses of published statistics on demographics and longevity, and, as an economist and a statistician, I know what that really means: blind them with science.
However, I congratulate the Government on taking on board the disgraceful situation of carers who have spent their lives caring for loved ones at the expense of being able to enjoy full-time employment. It is estimated that there are 6 million carers in the UK, and the total is forecast to rise dramatically to 9 million in the next 30 years. Until one witnesses at first hand the ghastly, depressing, relentless emotional drain of constant caring on even the most willing and loving carer, one just does not understand how vital are the proposals contained in the Bill. Due to the energetic and persistent support shown in this House, particularly by the noble Baroness, Lady Pitkeathley, we all know how appalling the situation has been. Only last week, I listened to the noble Baroness in a powerful and moving speech, when she quoted the incredible fact that carers save the state £57 billion per annum through their unpaid care. The measures contained in the Bill would cost a lot less than that, so, although I agree that the Government have shown generosity of spirit in proposing to do something about this grave injustice, I feel sorry that they estimate that 40,000 people caring for 20 hours or more a week will not get the carer's credit for the basic state pension and 60,000 will not accrue entitlement to the state second pension. The Government wish to be generous; what about showing it to carers?
To recap, the Government's objective in the Bill is to put in place legislation to make the state pension fairer, more generous and provide a solid foundation for private saving. It is the last of these three to which I now turn. It is probably not too far-fetched to say that pensions—not the most easily understood issue—will, if we live long enough, affect every person in the country. The Government have come up with a range of proposals to try and encourage each individual to think about his long-term future in terms of income in retirement. The Government, quite rightly, wish to establish a climate whereby each of us should try and make provision—in addition to the statutory state pension—for an income in retirement that should guarantee no massive drop in living standards. This is the only civilised way of looking after those who have engaged in paid and unpaid work, or a combination of both during their productive lives. As an aside, one of the most lasting memories held by those who have been present during this debate will be the moving description by the noble Baroness, Lady Hollis, when she spoke of the Sue and Tom situation. That brought home to us where the huge areas of complexity, lack of flexibility and sheer deprivation lie.
The Government are in a cleft stick on the hopes of encouraging private savings. As much as I would wish, I cannot see how the proposal for personal accounts is the answer. They appear to be aimed at those employed at the lower or middle range of the income scale. However, delving into the detail, it is likely that some savers could derive no benefit from the effective 4 per cent reduction in salary, which equals 4 per cent less cash in hand. That is unlikely to have massive drawing power with the target audience. The Bill does not deal with the details of personal accounts. As the Minster said, it deals only with the setting up of the administrative arrangements. The details will be in another pensions Bill. Why not in this one? Why do we need another Bill? There was one in 2004 and one in 2007; when will there be another? Rightly, the Government want to encourage private saving, but the very people to whom they want to make this plea are those with a bare minimum of interest in saving. They are part of the "Spend, spend, spend" generation, which to be fair, has continued over a long period during which there have been Governments of different complexions. We all know about the crippling levels of personal debt that persist in this country and the constant bombardment by the credit card companies encouraging us to spend, spend, spend. I remember it being encapsulated in those advertisements way back in the early 1970s, which said:
"Take the waiting out of the wanting".
I also remember very well the derision I showed towards my parents when they encouraged me to take a particular job that was offered to me on leaving university because it had a good pension scheme. I think the words were, "a good superannuation scheme", which is a real switch-off. I was completely indifferent to the so-called benefits of that scheme. Why should someone in their early 20s even bother to think about retiring? Sadly, I believe the attitude of the young has got even worse as they have been subjected to the 24-hour media, showing that the so-called pensions crisis is no respecter of saving, and that a prudent approach to provision for retirement is probably a dead loss.
This, of course, is not all the Government's fault, but the £5 billion annual raid has not helped. This was referred to by the noble Baroness, Lady Turner, but she also criticised the pensions holiday. It is only fair to point out that the Revenue had threatened taxing the contributions if a holiday was not taken, assuming that the assets of pension funds were growing too fast. However, the disgraceful attitude of irresponsible, and indeed immoral, business operators who have indulged in company takeovers and then allowed the victim company to be declared bankrupt without any provision being made for the pensioners is one of the greatest scandals of this century so far.
This attitude has to be changed, but how? I am taking advantage of this Second Reading debate to ask the Minister whether there is any chance of encouraging financial literacy in our schools. I was very impressed by the description by my noble friend Lord MacGregor of trying to put financial education into the schools curriculum. What a wasted opportunity. It is only there that the seeds for financial prudence can be sown. Piggybanks used to be given as gifts by godparents, but not any longer. Now, gifts are new trainers or rollerblades.
As children, we were always encouraged to save from our meagre pocket money and not spend it all in one go. That advice was given not only at home but in school as well. Do teachers encourage children in this manner nowadays? I fear not. It may seem stupid to have raised this point, but habits—both good and bad—learnt at an early age persist. Saving and profligacy are habits too. It would be wonderful if the former could be instilled into the receptive minds and the latter firmly banished. That is not a moral plea but a practical one, and one that has resonance with the subject we are debating.
Finally, I wholeheartedly support the noble Baroness, Lady Hollis, in her emphasis on improved financial advice. This is imperative and, combined with action to improve financial literacy, would be an excellent step forward in fairness, generosity and the provision of a solid foundation for private saving.
My Lords, I am pleased that your Lordships' House has this opportunity to debate the Bill today. While I am grateful to the Minister for introducing the debate, I am less than fully confident in the ability of the Government to get pensions right. The reforms implemented by the Bill will not work unless confidence is restored in both the state and private pension systems.
Noble Lords have already commented extensively on many features of the Bill, and I agree in particular with the comments made by my noble friend Lord Skelmersdale and the noble Lord, Lord Oakeshott, on the financial assistance scheme and the failure of the Bill to address the absurd anachronism of compulsory purchasing of annuities at the age of 75. This is the first time that your Lordships' House has had an opportunity to debate pensions since the Government were forced under the Freedom of Information Act to release documents showing that civil servants warned the Government in 1997 that implementation of the pensions stealth tax—the abolition of dividend tax credits—would leave a big hole in occupational pension schemes and lead to the closure of many such schemes. I know that many noble Lords have already referred to this matter, and I apologise for returning to the subject, but I consider that it is so important that I feel compelled to talk about it again. We now know that 60,000 occupational pension schemes have wound up or have started to wind up since Labour took office. Membership of defined benefit pension schemes in the private sector has fallen by some 60 per cent.
In past debates the Minister has often made light of the damage caused by the implementation of the Government's stealth tax, claiming that it was an anomaly and seeking to make out that the damage it caused was rather less than the immediate charge of £5 billion a year. Why then did the Government try so hard to suppress publication of documents which show all too clearly that the Chancellor had received and chose to ignore warnings on the extent of the damage that his measures would inflict on British occupational pension schemes, which were once the envy of the world?
As was claimed by Mr Michael Fallon, the deputy chairman of the Treasury Select Committee, we need an inquiry into why the Chancellor ignored these warnings. I agree with the noble Lord, Lord Turner, and others who have criticised the Chancellor for taking the credit but not the blame for what has happened on his watch. However, I think that the CBI should have protested much more vigorously against the Chancellor's plans at the time.
Of course the pensions stealth tax is not the only factor that has damaged our once healthy defined benefit pension schemes. Increased life expectancy and companies taking pension holidays have also had a negative effect on pension fund finances, and so have increases in the regulatory burden borne by pension schemes. However, the people will not forgive the Chancellor for his calculated and deliberate decision to remove the privileged tax status from our pension funds, and it should not be forgotten that his decision hit defined contribution or money purchase schemes and charities, as well as defined benefit schemes, to which the cost is often underestimated at £5 billion a year—underestimated because the stock market performed less well than it would have done in the period following the stealth tax raid as fund managers rebalanced the composition of their portfolios, reducing their weightings in UK equities.
The Minister is fond of pointing out that previous Conservative Governments had already removed a substantial part of the value of imputation tax credits. It is true that the value of tax credits was reduced by 18 per cent—from 43 per cent to 25 per cent—between 1979 and 1997. However, corporation tax was reduced over the same period by 19 per cent—from 52 per cent to 33 per cent. In 1979, £100 paid by a UK company as a dividend to a pension fund or charity came to £68.57, after crediting the tax credit and deducting corporation tax. After the changes in tax credit and corporation tax rates, the net amount had increased by 22 per cent to £83.57. Taking into account the tax changes introduced by the Government, even including the inadequate recent cut of 2 per cent in the corporation tax rate, £100-worth of dividend now leaves £72 net in the hands of our pension funds, which is still 14 per cent less than in 1997.
The Chancellor is always telling us how well the UK economy has performed under his stewardship. Therefore, it is reasonable to expect that if UK fund managers had maintained their weightings in UK equities, the UK stock market would have performed at least as well as the average performance of the American, German and French stock markets over the period. However, whereas the FTSE 100 index has increased by 44 per cent since 1997, the average of the principal indices of those other three markets, adjusted for exchange rate movements, has increased by 86 per cent, outperforming the UK by some 96 per cent.
Like my noble friend Lord MacGregor, I disagree with the comments made by the noble Lord, Lord Rosser, on this subject. The noble Lord claimed that the dividend income of pension schemes was higher in 1999 than in 1996 and that the total assets of pension schemes were similarly higher. It is, of course, true that the total of pension scheme assets invested in the stock market is as volatile as share prices themselves. Even if the figures he cited are correct, that cannot alter the fact that the income and assets of pension schemes in the period would have been that much higher in the three-year period if the Chancellor had not introduced the stealth tax. In that case, how many of the 50,000 pension schemes that have closed since 2000—one year after the end of the period conveniently chosen by the noble Lord for his illustration—would still be open and healthy today? How many of those whose pension schemes have closed or been wound up and who are receiving—or rather, not receiving—mean and inadequate assistance from the FAS would today be much better off?
To assess the total damage to our pension schemes, we also need to take account of the negative effect on UK share prices resulting from fund managers rebalancing and the likelihood that some 50 per cent of the stolen tax credits would have been reinvested annually in UK equities, yielding some 3.25 per cent. In May 2005, I calculated the total cost at £166 billion, without taking into account the cost to charities and defined contribution pension schemes. It is clear that by now the total cost is most certainly well in excess of £200 billion. Yet on
"manifestly the right decision in the long-term interests of the economy".
His words will provide cold comfort to the 120,000 people past pensionable age who should be receiving money from the financial assistance scheme, all but 871 of whom are still receiving nothing. When in 2004 your Lordships' House debated the previous Pensions Bill, it was already clear that the £400 million to be available to the FAS over 20 years was a derisory amount that would not even begin to tackle the problem. I welcome the fact that the Government have belatedly recognised that. However, I cannot understand why they do not take the obviously sensible step of transferring responsibility for the FAS to the Pension Protection Fund. The PPF would surely be more effective at managing the assets of failed pension schemes, and there seems to be no good reason for the continued separate administration of the FAS and the PPF.
The Pensions Commission, chaired by the noble Lord, Lord Turner, was surely right in recommending the restoration of the link between the state pension and earnings. The Government have reluctantly agreed to comply with that recommendation, but not before 2012, and possibly only by the end of the next Parliament. Why not straightaway? Why should millions of vulnerable pensioners be subject to the whim of the Chancellor? Even if he becomes Prime Minister, the Chancellor can have no certainty over the extent of the term of the next Parliament.
As the National Association of Pension Funds so wisely observed, the Bill fails to define appropriate terms of reference for the Personal Accounts Delivery Authority. They are far too broad, and the danger is that the authority will grow in size and powers, so as to be able in future to make decisions properly made by Parliament. The terms of reference must be properly defined in the Bill. Clause 20(6) gives the Secretary of State powers to issue guidance to the authority about the discharge of its functions. That is clearly much too broad and would anyway seem to be incompatible with Clause 19(2), which states:
"The Authority is not to be regarded as the servant or agent of the Crown".
A glance at the procedures for the authority and its staff does nothing to encourage confidence that the authority will be independent of government, as it needs to be.
The most important part of the function of the authority will surely be to harness the best possible fund management expertise to ensure the most effective deployment of pensions savings. How to select fund managers, how to incentivise them and how to decide which investment strategies should be provided are but some examples of the important tasks the authority will face, yet the Bill says nothing at all about them. This point was well made by my noble friend Lady O'Cathain. It is a pity that these matters will all be left for another, later, Bill. In any event, these matters are all far too important to be left to secondary legislation.
As other noble Lords mentioned, the Government have accepted several of the sensible recommendations made by the noble Lord, Lord Turner, such as the reduction in qualifying years and the achievement of parity between men and women as far as the basic state pension is concerned. I agree with the noble Baroness, Lady Hollis, that similar provisions should be extended to the state second pension. The Government's decision to increase the retirement age to 68 by 2046 will, I suspect, seem rather too timid before another decade has passed.
The Pensions Bill does nothing to restore the former privileged tax status of our pension funds, which was both logical and legitimate. Given the accelerating demographic changes now in train, it is also necessary to take radical action to increase retirement savings. The Minister himself acknowledged that people are not saving enough for retirement. It is often said that the Prime Minister is most concerned to construct a legacy of great achievements for his Government. I accept that he has always done what he thought was right, but his Government will be remembered for creating a vast number of new, non-productive public sector jobs, whose incumbents, almost uniquely, continue to retire at 60 and enjoy inflation-adjusted defined benefit pension schemes, which are largely unfunded and whose enormous deficit will have to be paid by the taxpayer. He will also be remembered for his failure to stop the Chancellor wrecking our private sector occupational pension schemes through his ill considered and ill advised first and worst stealth tax.
This Bill is by no means the worst Bill that has been introduced to this House by the Government and, like my noble friend Lord Hunt of Wirral, I give it two cheers. I am also confident that we will improve it greatly before it leaves your Lordships' House.
My Lords, it is a great pleasure to follow the noble Viscount, Lord Trenchard. Estimations of the Bill have ranged from it being not the worst the Government have ever brought forward to a 95 per cent approval rating—although I think the noble Lord, Lord Turner, had his tongue in his cheek. This has been a well argued, interesting debate. I have enjoyed participating in it, and I have learnt a lot. I look forward to the remaining stages.
It is an important Bill that will set the scene for the long term—not before time. We are lucky to have not just the expertise in this House, of which we have taken advantage this afternoon, but a great deal of expert knowledge in the industry in the United Kingdom. We should be grateful for that, too. I declare an interest as a governor of the Pensions Policy Institute. I have been thinking about these things for some time. The climate in which the Bill has been introduced is important. The noble Lord, Lord MacGregor, said that you must try to achieve a culture and atmosphere in which positive thinking can be developed, because the industry has experienced difficult patches, to put it mildly, over the past few years. I hope that the Bill will begin to rebuild the confidence that is necessary, to which the noble Lord, Lord Skelmersdale, referred.
Re-establishing confidence is as important as taking the long-term view. Some important threads have come through the debate and will repay careful study by the House, including issues such as the imbalance between the government-provided, unfunded public-sector schemes. One in three speakers today rightly referred to the need to review that. I hope that the Government will accept that there is still a long way to go in establishing the long-term fairness needed. That anomaly is increasingly obvious to those who know about these matters. That was a clear message from both sides of the House. We look forward to continuing that debate, although it is not technically part of the Bill.
We should acknowledge some of the Government's achievements of the past 10 years. When I was chairman of the Department for Work and Pensions Select Committee in another place, in the previous two Parliaments, the Government's work on pensioner poverty in particular was acknowledged as essential considering the position that they faced on coming to power 10 years ago. Means testing was an important and quick way of delivering some of the help necessary in the short term. I agree with the observation made today that means testing has become part of the long-term problem. I listened with interest to the important contribution of the noble Lord, Lord Turner. I accept his point that there must always be a trade-off and there will always be a degree of means testing in any system that can be foreseen in the near future. However, he suggested that continuation of means testing for 30 per cent of people by 2050 was acceptable. I am not sure about that; I do not even know if the estimates are robust. I am not a statistician or an economist, but I cannot fathom how the Government have arrived at the figure of 30 per cent. We may have to live with it, but it is rather high. I would feel more confident if, during the passage of the Bill, the Government were able to back up that estimate with more robust reasoning and statistical analysis. I, for one, would be grateful for that, because it is a key issue. That will be a feature of this debate for the next 30 or 40 years.
For the first time, the Bill seriously tries to integrate the public and private sectors, with provision made on top of that of the state sector. I agree with my noble friend Lord Oakeshott—noble Lords would expect me to say that, anyway, but I say it also as a governor of the Pensions Policy Institute—that the citizen's pension is a much cleaner way forward. That policy should be developed, and the Bill heads in that direction. With a little work we may improve it as the House wants. There is a feeling that the Government should go further and faster, and I hope that we encourage them to do that in Committee.
Everyone anticipated that the noble Baroness, Lady Hollis, would make a powerful speech about women. It will repay careful reading, particularly the example that she gave at the end, as the noble Baroness, Lady O'Cathain, said. We are trying to achieve an income of £145 per week, in today's prices, for pensioners by 2050. However, I have always been interested in what constitute modest but adequate income levels. We must not forget that the minimum standards used by most of our European partners in calculating what it costs to live as a 75 year-old or an over-65 year-old are not the same as ordinary retail prices index calculations for other members of the population. Even if we achieve an income of £145, a goal that I want to reach as fast as anyone else, perhaps we should examine some of the experience and practice regarding minimum income standards in other European countries.
There was another thread with which I identified strongly. The Second Reading prize for propaganda coup of the day goes to the Resolution Foundation by a wide margin. It made an impact on the contributions of the noble Baroness, Lady Greengross, and many others, who referred to the need to obtain not just information but advice. The foundation's clear proposals resonated throughout the debate, and I hope that the Minister will look at them carefully. For personal accounts to do the job I hope they will do, the issue of generic advice must be properly addressed.
My noble friend Lord Oakeshott mentioned the work done by Steve Bee and Scottish Life. The noble Baroness, Lady Turner of Camden, mentioned the 650,000 who might fall out of the scheme without any savings, as a result of wrong and unsuitable advice at the outset. It is unacceptable that 650,000 benefit units—to use the department's rather ugly characterisation—should suffer that kind of loss. I hope that there will be further consideration of that. The current Thoresen review is welcome; we will have access to the report at the end of the year. I hope that it will be a foundation on which we can build.
The noble Lord, Lord Fowler, said that he had anticipated in 1986 the demographic surge that we experienced. I was around at the time, and a surge was identified, but the noble Lord, Lord Freeman, was right to say that suddenly, out of the clear blue sky, there came a level of demographic change that I was certainly not expecting. I do not know where the actuaries were when all that happened. I accept the observation by the noble Lord, Lord Fowler, that it was a known dimension to the problem, but we did not anticipate the extent to which it landed on us all. As a result, people started to panic. We really need to try to deal with the see-saw of estimates more sensibly in the longer term. Demographic change will have a profound effect not just on DWP issues, health and carers, but on education and transport. The noble Baroness, Lady Greengross, rightly referred to the frightening disparity between the life expectancy in Glasgow and that in Kensington and Chelsea. These will be issues for the Government during the rest of this Parliament and beyond, because inequality and social mobility are, rightly, climbing up the political salience index. Some of these issues will have to be dealt with urgently in this Bill because they will take a long time to fix. I was pleased that reference was made to those issues.
Everyone has recognised the debt we owe to the noble Lord, Lord Turner, and his two fellow commissioners. The most inspired thing that they did was to go way outside their brief. Good for them, because if they had not done so the outcome would not have been worth a tenth of what they did. As your Lordships know, the noble Lord has a great deal of style. On page 173 of the first report, a wonderful footnote to table 5.1, on personal assets in the private and public sectors, reads:
"Correct to the nearest £50 billion".
No cheapskate is the noble Lord, Lord Turner. It reminds me of the old Highland acronym ATHINE, meaning "Ach to hell, it's near enough". Before I die I want to have a table that is correct to the nearest £50 billion. I think it has immense style. Perhaps I should go to Zimbabwe.
Means testing has been a cardinal thread throughout the debate. I hope that the Minister will clarify the reasoning behind the estimate of 30 per cent as the proportion who will continue to be means tested by 2050. The noble Baroness, Lady Hollis, and the noble Lord, Lord Howarth, mentioned the issue of self-employed people. I expected it to feature more in today's debate but we must not forget about it. S2P will not work for self-employed people. It is not adequate and is too complicated. I have never been able to work it out for myself, even though I have been looking at these matters for longer than I care to remember. I hope the Government will address this issue.
It has been an extremely good debate on a very important Bill. I do not know whether this is not quite the worst Bill the Government have ever brought forward or whether it gets 9.5 out of 10, but there has been a consensus today that there is scope for improvement in Committee, and I look forward to contributing to that.
My Lords, it is a pleasure to follow the noble Lord, Lord Kirkwood. We have one thing in common: neither of us understands S2P. I never understood SERPS or the graduated pension, particularly as it affects my own pension. I agree with the noble Lord that this has been an excellent debate on an extremely important topic.
The Government have made much play about seeking consensus on pensions reform. There is broad consensus, as today's debate shows, that our pension system is not in good health, but I do not think there is complete agreement that the Government's prescription will be an effective cure. I shall not go through all the ailments from which our pension system suffers, as they have been described by other noble Lords in considerable detail. I shall refer only to the ACT raid, which my noble friend Lord Trenchard analysed with his usual forensic skill. The Minister is familiar with my noble friend Lord Trenchard's position, having exchanged views with him on the subject. Although other factors have harmed occupational pensions, as my noble friend Lord MacGregor pointed out, £5 billion of cash is still being taken out every year, and we now know that the Chancellor knew exactly what he was doing when he introduced those changes.
The report of the Pensions Commission led by the noble Lord, Lord Turner, to which many noble Lords referred, is the father of today's Bill. We were very glad to hear the noble Lord speak again today and we hope that he will bring his expertise to bear on the remaining stages of the Bill if he can find the time.
My noble friend Lord Skelmersdale made it clear that we support the Bill because it moves in the right direction towards giving people a better, more secure income in retirement. We have heard today that it does not solve all the problems of pension provision and that there are significant doubts about the degree to which it will be successful.
I shall mention only means testing, to which the noble Lord, Lord Kirkwood, referred. The Government claim that the prevalence of means testing, currently at around 50 per cent, will decrease from a projected 70 per cent based on the current regime in 2050 to 29 per cent. I agree with the noble Lord, Lord Kirkwood, that 29 per cent is still too high, but the Pensions Policy Institute thinks that it will be 45 per cent—barely less than current levels. Of course, the answer depends on some critical assumptions but it is clearly possible that the Bill will do nothing of substance to reduce pensioner means testing and therefore to restore the incentives to that group to save. That is not a reason for not supporting the Bill but it is a reason for not being very happy about it.
Many noble Lords, including the noble Lord, Lord Turner, pointed out that the Bill does nothing about public sector pensions. We are marching steadfastly into a world where public sector workers have generous defined benefit provision, protected by backroom deals between Ministers and the public sector unions, but in the private sector employees increasingly have no equivalent pensions on offer. The best they can hope for is a defined contributions scheme or whatever modest income will be created from personal accounts. This disparity between public and private sector workers is unsustainable and will threaten the durability of the proposals in this Bill. It is unfinished business.
My noble friend Lord Blackwell also pointed to the unfunded nature of the state's total pension liabilities. There is now an overhang of more than £1 trillion, which future taxpayers will have to meet. This, too, is unsustainable.
We support the move to earnings-linking the state pension but we remain concerned about when it will be introduced, a matter to which many noble Lords referred. We are also concerned about the lack of specificity of the earnings index to be used. My noble friend Lady Miller of Hendon gave us a master class on the detail of pensions uprating, a matter at which we will need to look closely in Committee.
We are also concerned about the contracting-out changes. It is clear to us that the driving force behind these proposals is the short-term saving to the public purse, as my noble friend Lord Sheikh pointed out. My noble friend Lord Freeman is right that we need to be much clearer about these contracting-out changes. We will be looking at this in more detail.
As has already been noted, it came as no surprise to hear the noble Baroness, Lady Hollis, address the issue of women's pensions. She has been consistent and passionate in search of a better deal for women, especially those who act as carers, and she was well supported by many other noble Lords. The Bill gives women and carers a much better deal out of the system. It is also clear that much more could be done but there is the issue of cost and affordability. We on these Benches will support further changes provided that they are affordable.
My noble friend Lady O'Cathain pointed to the money wasted that could fund better provision, but the Government need to commit to making the savings, and the Gershon precedent on savings is not encouraging.
My noble friend Lord Skelmersdale referred to the Government's late conversion to improving assistance for those who lost their pensions before the Pension Protection Fund arrangements came into effect. The Government's initial attitude to the ombudsman's findings and to the plight of the 125,000 pensioners worst hit was mean spirited and is still not good enough. We intend to return to the creation of a lifeboat fund to remedy these wrongs in Committee, and we certainly welcome the support of Liberal Democrat Peers on this.
My noble friend Lord Fowler, among others, made a powerful case for the cessation of compulsory annuities at 75, and we were heartened by the support we received from the noble Baronesses, Lady Hollis and Lady Dean. This is clearly an issue to which we will need to return in Committee. There was a false dawn called alternatively secured pensions. The Chancellor has obliterated that in this year's Budget with penal tax charges. When will the Government grasp the idea that those who save for their families and their own retirement should be praised not penalised?
Just four clauses and one schedule are devoted to personal accounts and the new Personal Accounts Delivery Authority. It is not entirely clear why we need a delivery authority at all. According to Clause 20, it is needed to prepare for implementation and to advise on the modification of the Secretary of State's proposals for personal accounts. In another place, the Minister Mr Purnell described the role of the authority as,
"supporting the Government in understanding the operational and commercial implications of policy options".—[Official Report, Commons, Pensions Bill Committee, 2/7/07; col. 275.]
Governments do not need a public corporation for these flimsy functions. This so-called authority is just a fig leaf, designed to cover the fact that the Government's proposals have no clothes.
There is a mismatch between the job descriptions of executive and non-executive directors, now being recruited, and the initial purpose for the delivery authority as set out in Clause 20. For example, the chief executive is to,
"turn strategic vision into a successful initiative".
The strategy and commercial director is to implement a strategy which optimises participation in personal accounts within low levels of churn. What has this got to do with the initial function as set out in Clause 20? We are told that we will have to wait for the next Pensions Bill to arrive before we see what the authority will actually do; yet it is clear that the people employed in the authority will be doing much more than giving advice. We do not regard it as satisfactory that the authority is to be created in this way.
We shall seek in Committee to ensure that the focus of the authority is more clearly defined in the Bill, in order to guide these hapless new employees in their initial function. For example, we will want to see some specific issues addressed in the Bill, such as the impact of personal accounts on other forms of pension provision and levelling down, for which my noble friend Lord Hunt made a convincing case. We will also seek to ensure that what goes on in the authority is open and transparent. Parliament and all those with an interest in personal accounts need to see in detail how the proposals are developed. The Freedom of Information Act should provide nowhere to hide from this.
Personal accounts are generally regarded as a good thing. They will not be a good thing for everyone and will be the wrong choice for some, who will not get back what they have invested. Our old foe means testing is the primary, though not the only, villain here. We want to see this Bill reflect concerns that people will be inappropriately lured into personal account investment. Many noble Lords have referred to the risks of mis-selling. This certainly means tackling financial advice, though I am not convinced that generic advice will provide the solution. We need to explore this in more detail.
We shall also be looking in detail at the composition of the authority and its closeness to the Secretary of State. The authority should be independent and its composition should reflect those who will be affected by personal accounts. Lastly—this will not surprise the Minister—we will be looking at the finances of the authority and where the costs of personal accounts will fall.
We look forward to working constructively with the Minister in Committee. Given the importance of the Bill, it is right that there will be a Committee of the whole House. The Minister will know from today's debate that our work on this Bill will be detailed and challenging. I have worked with the Minister on other Bills and know that he is diligent and responsive. I hope that he brings with him into Committee a willingness to accept that the Bill needs to be changed before we return it to another place. It certainly needs to be improved, which is what these Benches will be working hard to achieve.
My Lords, I start by thanking all noble Lords who have participated in this debate, which has been wide-ranging and of high quality. It has ranged into many matters which are likely to be encompassed in the second Pensions Bill, which will be before us soon, and indeed beyond that. I was comforted to hear from the noble Lord, Lord Turner, that the thrust of the proposals in the Bill are consistent with the recommendations of the Pensions Commission, even if not quite to the 100 per cent extent. I am advised that wagers are permitted, not in the Chamber, which is outwith The Companion, but certainly outside its confines. I thank the noble Lord, Lord Fowler, for bringing so many noble Lords along to this debate to be so helpful.
I will try to deal with as many points as I can and will of course write where I do not cover any in the time available. I shall start with the comments of the noble Baroness, Lady O'Cathain. I was somewhat astounded to hear the criticism of why the earnings links has not been re-established earlier than as proposed in the Bill. After all, whose Government was it who broke the link in the first place? The suggestion that pensioners are not a priority for this Government is simply not the case. Look at the current position: on average, pensioner households will be £1,500 better off this year as a result of our tax and benefit changes than they would have been under the 1997 system. The poorest third of pensioner households will be £2,200 better off per year. We have tackled issues of pensioner poverty, but there is always more to do.
Next I should tackle the issue on which a number of noble Lords contributed—my noble friend Lady Turner, the noble Lords, Lord Fowler, Lord Skelmersdale, Lord Oakeshott, Lord MacGregor and Lord Sheikh, the noble Baronesses, Lady O'Cathain and Lady Noakes, and, predictably, the noble Viscount, Lord Trenchard. I am surprised that noble Lords have continued to press the issue of the dividend tax credit. I thought that the Chancellor—our next Prime Minister—dealt with this effectively in another place. Indeed, my noble friend Lord Rosser dealt with it comprehensively this afternoon.
Informed commentators, and everybody who looks at these matters objectively, know that the key problems associated with defined-benefit schemes are the increase in life expectancy, as the noble Lord, Lord Blackwell, acknowledged, the decisions made in the 1980s and 1990s about pension holidays and the fall in the stock market. That fall happened not only in the UK. The changes made were part of a comprehensive package of changes to the tax system to entrench the long-term stability of the economy. Those changes have proved to be right in levels of business investment and rates of return to the corporate sector.
I cannot deal with the matter more effectively other than to say that there was a point when corporation tax was reduced under the previous Conservative Government. If the noble Lord checks the record he will see that the rate was reduced to correspond with a demise of first-year allowances. It was a quid pro quo for that, and nothing to do with reducing the tax credit.
The claim that somehow the difficulties of defined benefit schemes are unique to the UK and to the past 10 years is simply not right. The trend away from final salary schemes is worldwide and long-term. The trend certainly picked up pace in 2000 with difficulties in equity markets, but it happened faster and started sooner in other countries; for example, the United States. The OECD report of October 2006 referred to the retirement landscape changing as the numbers of occupational defined benefit schemes decreased.
The noble Lords, Lord Oakeshott, Lord Turner, Lord Fowler, Lord MacGregor and Lord Kirkwood, the noble Baronesses, Lady Howe and Lady Noakes, and the noble Viscount, Lord Trenchard, criticised the public sector scheme. We are making substantial changes to public service schemes to secure their long-term sustainability. There have been changes to the normal pension date for new entrants into the scheme, and beyond that there have been negotiations and changes relating to cost-sharing and cost-capping arrangements. The reforms will achieve the savings that were originally projected.
Issues of the state pension age and the impact of the S2P and the BSP operate in the same way for public sector workers as for others. When looking at the affordability of public sector schemes, the key is to consider them in the context of the long-term public finance report. Noble Lords will see that they are affordable within a range of 1.5 per cent of GDP at present to 2 per cent in 2055-56.
My Lords, 2 per cent is the figure I have, but I will write to the noble Lord if the figure is different.
My noble friend Lady Hollis and the noble Lord, Lord Oakeshott, raised the issue of a residency-based pension or a citizen's pension. At one end of the spectrum there are those who argue for a residency-based single-tier citizen's pension to be introduced at the guaranteed credit level. The cost of that would be prohibitive, something like £20 billion a year. The Pensions Commission recommended a residency-based pension on a prospective basis, building up accruals over a lifetime, but that does not mean that such arrangements would not produce the sort of anomalies identified by my noble friend Lady Hollis. Any system has to have rules, and there would be people who potentially fell outside this one. There are issues about definitions of "residency".
The Pensions Commission recognised that if it would not be possible or practical to have a resident's pension, the right thing to do would be to continue with the contributory principle on which these proposals are founded by the Government but to change things such as the de minimis rule, the home responsibilities protection, the alignment of child ages for BSP and S2P credits and the combination of multiple jobs below the LEL. We have done the first three of those, and our reforms with regard to the number of years required for full basic state pension help to address the latter.
The noble Lord, Lord Oakeshott, raised the issue of frozen pensions for overseas pensioners. The Government's priority is to help the least well-off pensioners living in this country, and we will continue to help them so they are able to have a decent income in retirement. The noble Lord will be aware of the cost of uprating on a routine basis pensions for overseas pensioners outside the arrangements that currently exist of the order of £420 million a year.
My noble friends Lady Hollis and Lady Dean, the noble Lords, Lord Skelmersdale, Lord Fowler and Lord Blackwell, and the noble Viscount, Lord Trenchard, touched on the issue of annuities. The Government's position on the issue is clear and unchanged—pension saving is about giving individuals an income in retirement, and for no other purpose. The Government provide tax incentives to encourage people to save for retirement, and in 2005-06 these totalled some £14.3 billion. It is right that when an individual comes to take their pension benefits they can take up to 25 per cent of the pension fund as a tax-free lump sum, but in return for those incentives the Government have required as part of the deal, entirely reasonably, that by the age of 75 the remainder of the pension fund is converted into secure retirement income for life and used to provide for dependants benefits. Annuities provide the peace of mind of an income for life, regardless of how long that may be. They provide simplicity, security, a guaranteed income and little risk.
Indeed, generally there is little pressure for the change noble Lords have spoken of—currently only 5 per cent of people annuitise after the age of 70—but the Government will keep under the review the Pensions Commission's suggestion that the age limit should rise in line to ensure consistency with the extended working lives agenda. There is no rationale for taxpayers to subsidise bequests through pension tax relief, the point that was argued for by the noble Lord, Lord Blackwell. The annuity market has responded to challenges and absorbed a tripling of demand over the past 15 years.
Those who argue for a change in the rules typically argue for there to be a requirement to purchase an annuity up to a certain level to keep people off benefits. My noble friend Lady Hollis touched on that point. Our estimates are that setting up an annuity threshold to keep an individual off state benefits would, at most, allow individuals with the largest 5 per cent pension funds to withdraw the remainder of their funds as a lump sum. We consider that this change would be regressive and add complexity to the system.
My noble friend Lady Dean and the noble Baroness, Lady Thomas, raised the issue of the LEL and aggregating the jobs below the limit. The Government have looked closely at the issue of aggregation and agree with the Pensions Commission, which found that there is no straightforward mechanism to allow earnings from multiple employers to be aggregated in a way that would not impose additional administrative burdens and costs on business. We should recognise that simply because people have more than one job below the threshold does not mean they are excluded from state pension protection through national insurance credits or, currently, home responsibilities protection. The figures—one noble Lord quoted them—are that there are about 15,000 women in that situation at the moment, but we do not believe that people necessarily stay in that mode throughout their working lives. With the reduced number of years needed to achieve a full basic state pension, we do not think that is the right way to proceed.
Many noble Lords commented on the issue of advice and financial capability—whether this should be provided through the education system and whether it should be generic or more specific. The noble Lords, Lord MacGregor, Lord Addington, Lord Blackwell and Lord Oakeshott, and the noble Baronesses, Lady Greengross and Lady Thomas, touched on that, particularly the importance of people who are carers having full advice. My noble friend Lord Howarth also touched on the issue, although I do not think he saw it as a route for the national curriculum.
The Government believe that everyone has the right to get advice they can understand and trust on the options available to them, whether that is getting out of debt, choosing a home or saving for a pension. We are delighted that Otto Thoresen is leading this work. It is vital to use the expertise of people who understand financial services. The Government, alongside the Personal Accounts Delivery Authority, will provide individuals with the information they need to support the choices available: whether to opt out or save additional amounts, whether to choose a fund and when, and how to draw a pension. I understand that this is an issue we will wish to discuss in considerable depth in Committee.
The issue of whether there should be future reviews or how that should proceed or whether there should be a standing pensions commission was touched on by my noble friend Lord Howarth, the noble Lord, Lord Freeman, and the noble Baroness, Lady Greengross. The whole package of reforms is based on the fact that people need clarity and certainty about the future in order to plan and save for retirement. A standing pensions commission would undermine this by creating a vehicle for permanent re-examination of the framework and of policy and would be an unnecessary and expensive quango with little to do in the short to medium term. We will carry out periodic reviews, drawing on a range of independent expert advice in the light of emerging evidence on demographic change to confirm whether the timetable for increasing the state pension age, as set out in the legislation, remains appropriate. That should also be the process for looking properly at the issues of disparities in life expectancy, a point raised by my noble friend Lady Turner.
The noble Baroness, Lady Greengross, and the noble Lord, Lord Sheikh, referred to issues of the cliff edge in introducing the changes in basic state pensions. We have looked at phasing changes in more gradually, both from 2010 or an earlier date, and apart from introducing complexity, we do not think an earlier introduction would be right in principle. It would be unfair for people to gain from both today's scheme through the lower pension age for women as well as the proposed reforms.
The noble Baroness, Lady Thomas, asked how we are going to publicise the carer's credit. We have already been working closely with a number of carers' organisations, most notably Carers UK, and they have warmly welcomed the credit. Other details about the carer's credit will be dealt with by regulations which will be affirmative when they are first introduced. The noble Baroness, Lady Howe, asked about the modelling. Our modelling and forecasts assume that the Bank of England hits its 2 per cent inflation target on the consumer prices index and that earnings grow 2 per cent faster than prices.
A number of noble Lords raised the issue of whether there would be financial incentives to save in the system and how that interrelated with issues of means-testing. The noble Lords, Lord Blackwell, Lord MacGregor, Lord Hunt, and Lord Turner, and my noble friend Lady Turner, each touched on this matter. Our estimates show that a large majority of people saving in an occupational pension or personal account can expect good payback on their saving. Somebody saving over a full working life would expect around £2.50 plus inflation payback for every £1 they invest in a personal account. Entitlement to pension credit does not mean that people will get poor returns from saving. Most people who qualify for pension credit in retirement can expect to see a positive return on their saving. Many long-term savers would expect to get back as much as £2 plus inflation for every £1 that is saved in a personal account. I acknowledge again those are issues that we will need to discuss in more detail in Committee.
As for the financial assistance scheme and the opposition proposals for a lifeboat fund, I see that the Lib Dems and Conservatives are proposing to stand shoulder to shoulder on this again, but the Government's approach contrasts with the spending promises made by the opposition parties in their amendments to the Pensions Bill calling for a lifeboat fund funded from unclaimed assets and/or government loans to top up FAS payments. We do not know what assets, if any, are available and therefore this amounts to an unfunded spending commitment. If people want to put more public expenditure in to raise the level of compensation, they should come clean and say that is what they are doing, otherwise we have a fudge. The Government believe it is sensible to ask the experts on the review team to identify whether assets are available and make informed recommendations on their optimal use.
The noble Baroness, Lady Howe, asked about unisex annuities. The Sex Discrimination Act prohibits discrimination based on sex relating to the provision of goods, facilities or services, but there is an exception for the provision of insurance. For example, women under 30 generally pay less for motor insurance in the UK than equivalent men. This is based on the frequency of claims made and the size of those claims. Similarly, it is generally more expensive to pay a given level of annuity to a woman than to a man because on average the woman will live longer. Similarly, impaired-life annuities offer a better rate for people with certain health problems which significantly reduce their life expectancy.
My noble friend Lady Hollis asked about the self-employed. Self-employed people will be able to opt into personal accounts, saving at a rate of their choosing, subject to any general limits. There will not, of course, be an employer contribution as there is no employer.
The noble Baroness, Lady Miller, raised an interesting point which we might best deal with in Committee. The Bill says that the uprating must be based on a "general level of earnings". Therefore, picking and choosing footballers or football managers or whatever clearly would not be permitted. It also says that the uprating must be "not less than" and so it would provide for catching up in the circumstances the noble Baroness identified. Again this is an issue for us to discuss in Committee.
The noble Lord, Lord Skelmersdale, asked about savings from the abolition of ADIs. The abolition of ADIs from 2010 will save nearly £2 billion by 2020 and this will be reinvested in the substantial measures which improve the coverage of the basic state pension, which of course will particularly benefit women and carers so that by 2025 90 per cent of women retiring will have a full basic state pension.
The noble Lord also asked about FAS and the level of payouts. As of today, they are being made to 1,166 members—955 members receive an initial payment and 211 receive annual payments. A further 92 will be paid once their personal details have been confirmed. FAS has paid all scheme members for whom scheme trustees have provided the operating unit with the correct information. There is no backlog of payments.
The noble Lord, Lord Oakeshott, asked about the level of means-testing in 2050. Our model shows that 28 per cent of pensioners will be eligible for pension credit in 2050. Of course, forecasting the world in 2050 could be challenging, so we normally say about or under 30 per cent. This is a good issue to explore in Committee, as the noble Lord, Lord Kirkwood, said.
The noble Lord, Lord MacGregor, asked why we are waiting until 2024 to bring forward the SPA. We wanted the first rise in state pension age to fall after we had finished equalising the state pension age for women in 2020. We also want to give people an adequate period of notice. We gave 15 years' notice of equalisation and want to give a similar period for the first of these increases so that people can plan ahead.
The noble Lord also asked about the links between the uprating by earnings and the increase in pension age. Much as the noble Lord, Lord Turner, said when he published his report, this is a package of measures. We believe that they need to be taken together and on that basis, they present an affordable package.
A number of noble Lords touched on levelling down. Workplace pensions are an important recruitment and retention tool, and we believe that the benefits offered by employers will continue to reflect this. We carried out a nationally representative survey of 2,500 private sector employers across a range of size bands. Some 1 per cent of respondents said that they would reduce the level of contributions; only 2 per cent suggested that they might close down their scheme or introduce eligibility restrictions.
The noble Lord, Lord Sheikh, asked about how the rebate savings will be used. In the short term, the abolition of defined contribution contracting-out will mean an increase in revenue to the National Insurance Fund. However, this change is balance sheet-neutral in that there will be a comparative increase in state second pension liabilities later.
My noble friend Lady Dean asked whether I could repeat the assurance about carers. Perhaps the easiest thing would be for me to drop her a note. The noble Lord, Lord Sheikh, said that he believed the present pension credit is unpopular. I do not know whether his party would scrap it, but it has been key in helping a number of people to escape poverty. The noble Lord also asked about governance and appointments to the PADA and how it will become the Personal Accounts Board. We are establishing the advisory delivery authority to bring in the expertise needed to set up an occupational pension scheme of this size.
The noble Lord, Lord Freeman, raised a number of points about occupational pensions, longevity and actuarial valuations. I agree that reliable, consistent actuarial advice is important. As he said, the Board for Actuarial Standards has been set up to promote high standards. I confirm that the board is independent of government—indeed, there is a specific provision in the Bill on that. I agree that trustees have a vital role and that the Pensions Regulator has taken significant steps in promoting trust, knowledge and understanding. On the increase in the percentage of GDP taken by pensions and how that relates to the number of pensioners, perhaps I may reflect on that and write to the noble Lord. It is an interesting point.
The noble Lord, Lord Hunt, talked about consensus and said that it has to be earned. I agree—consensus has to be evidence-based and we have to examine these issues openly and fully. I welcome a constructive engagement. The Government will play their part in that.
The noble Lord, Lord Blackwell, asked about the phases for personal accounts. The advisory delivery authority will run from the Royal Assent of this Bill to the Royal Assent of the second Bill, which we hope will be the summer of next year. The executive delivery authority will run from the Royal Assent of the second Bill to hand over to the final scheme which we estimate to be in 2011-12. The Personal Accounts Board needs to be established before the scheme goes live, which we hope will be in 2012.
My noble friend Lord Howarth asked about small employers and contributions for personal accounts. We announced in the White Paper that we will phase in contributions to personal accounts over three years; this will help all participating employers to adjust to the additional cost. While we recognise that the smallest businesses will have the most difficulty in managing additional costs, personal accounts will not be implemented until 2012.
My noble friend Lord Howarth also asked some interesting questions about what the Government are doing about the Pensions Commission proposals to tackle age discrimination, the deferring of pensions and reskilling of older workers. That is perhaps an issue for wider debate, but recent years have seen a significant improvement in the employment rate of 50 to 69-year-olds, which has risen from 48.7 per cent in 1997 to 55.4 per cent in 2006. There are 1.1 million people working after reaching state pension age. Clearly, there are some more challenges to address, but the Government's recent White Paper, Further Education: Raising Skills, Improving Life Chances, set out policies to help people of all ages to improve their skills.
The noble Baroness, Lady Noakes, touched on the role of the delivery authority, wishing to constrain it or to be more specific about its remit in legislation. I am not sure whether the concern was that it would be too independent or not independent enough, but that is a debate for another day. If I have not covered all of the points raised, I will read Hansard and follow them up in correspondence, unless we will clearly deal with the matters in Committee.
In 1997, we made it clear that addressing pensioner poverty would be our first priority. In a decade, we have come far. I began today by saying that pensioners are now less likely to be poor than the population as a whole. That is a significant achievement, and one of which we are rightly proud. But if we are to lock in that success for future generations of pensioners, we need to do more. The long-term challenges of demographic change, widespread undersaving and the shortcomings of today's pension system demand a bold and lasting response. That is why the Bill is so important. It represents an historic opportunity to cement a national consensus, and, for the first time, to offer all our citizens a framework of long-term stability in which they can plan for their retirement with confidence.
The Bill will establish a clear deal between the state and the individual, that a life spent working or caring will be recognised and rewarded fairly with a simple and solid state pension entitlement. It will represent the most significant move towards equality between men and women since the introduction of home responsibilities protection in 1978, and will create a system that is affordable, not only today, but for future generations. In other words, it will be a system that is sustainable.
I am sure we all share the fundamental belief that tomorrow's pensioners, like today's, are entitled to security and dignity in retirement. The Bill puts in place the legislative support to ensure that that belief can be realised and I commend it to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.