Clause 12

Pensions Bill – in a Public Bill Committee at 1:45 pm on 24th January 2008.

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Review of qualifying earnings band

Photo of Andrew Selous Andrew Selous Shadow Minister (Work and Pensions)

I beg to move amendment No. 20, in clause 12, page 6, line 15, leave out subsection (2).

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments: No. 86, in clause 12, page 6, line 15, leave out from first ‘in’ to end of line 16 and insert ‘the value of the amounts in—

(a) section 11(1)(a) are to be assessed in a way that the Secretary of State finds appropriate and which has been approved by resolution of both Houses of Parliament; and

(b) section 11(1)(b) are to be in line with earnings’.

No. 21, in clause 12, page 6, line 17, leave out ‘may in particular’ and insert ‘shall’.

No. 73, in clause 12, page 6, line 17, leave out subsection (3).

No. 74, in clause 12, page 6, line 21, leave out subsection (4).

No. 75, in clause 12, page 6, line 24, at end add—

‘(4A) If the average earnings index (including bonuses) for the whole economy for September of a year is higher than the index for the previous September, the Secretary of State shall as soon as practicable make an order in relation to each amount mentioned in section 11(1)(a) and (b), increasing each amount, if the new index is higher, by the same percentage as the amount of the increase of the index.’.

Photo of Andrew Selous Andrew Selous Shadow Minister (Work and Pensions)

We move on to another important clause, which covers the review of the qualifying earnings band, which we have just agreed should be in the Bill by agreeing to clause 11. Of course, the two figures—£5,035 for the lower limit and £33,540 for the upper limit—will not maintain their value due to the ravages of inflation, so it is quite right that they should be increased over time. Clause 12, however, gives the Secretary of State almost complete carte-blanche to decide how the two bands will be increased, so we seek greater clarity on how the uprating will be undertaken. There is a precedent because the Employment Relations Act 2004 sets down a formula through which statutory redundancy pay is uprated. I look forward to hearing the Minister’s intentions for reviewing the qualifying earnings band in the years to come.

Photo of Paul Rowen Paul Rowen Shadow Minister, Work & Pensions

I wish to speak about amendment No. 86 in particular. The purpose of amendments Nos. 20 and 86 is to probe the Government as to what methods they intend to use to ensure that the values of the earnings limits are maintained. I know that the EEF would like to see the qualifying band uprated in line with earnings, rather than leaving it to the Secretary of State, as the Bill proposes. That is not necessarily our view; we believe that the Secretary of State should have discretion.

Amendment No. 86 would, however, ensure that whatever discretion the Secretary of State used on uprating, the limits would be reported to the House. That would be an important safeguard to ensure that savings and the amounts paid keep their value. I am not saying that a future Secretary of State—whoever that might be—would not ensure that they would maintain their value, but we believe there should be a mechanism to ensure that Members are able to respond to the proposals put forward by the Secretary of State. I look forward to hearing how Ministers will ensure that Members are kept informed of the rates proposed each year.

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions

The reforms have been structured to enable a median earner with solid state entitlement to achieve a replacement rate in retirement of around 45 per cent., in line with the Pensions Commission’s recommendations.

The limits of the qualifying earnings band—the lower limit of £5,035 and the higher limit of £33,540, in terms of 2006-07 earnings—have been set in conjunction with the default minimum contribution rate for defined contribution pension saving: 8 per cent. Having established a relationship between working-life income and income in retirement, it is important to establish a mechanism to maintain that, as the hon. Gentlemen said. That is right, and it is the exact purpose of the clause.

We plan to review the limits of the qualifying earnings band once a year to determine whether they have maintained their value, as the Bill says. Our expectation is that future changes to the limits of the qualifying earnings band will follow changes in the general level of earnings. Tracking earnings is important for two reasons: first, to ensure that the value of contributions going into money purchase schemes remains stable in relation to earnings, which will help to maintain the balance between working-life income and income in retirement; and, secondly, to avoid enrolling even higher numbers of workers with low earnings for whom state provision will already offer high income replacement rates.

Pension reform involves making policy for the long term, however. Average earnings might not always be the only, or the most suitable, measure with which the Government should assess whether the limits of the qualifying earnings band have maintained their value. In the absence of complete foresight, which no Government can have, we have taken the prudent step of retaining some flexibility over the measures that the Government must consider when assessing whether the limits of the qualifying earnings band have maintained their value.

All the amendments would, in various ways, reduce that flexibility by removing elements of the Secretary of State’s discretion in uprating the lower and upper limits of the earnings band. Amendments Nos. 20 and 73 would remove the discretionary ability to uprate the earnings band limits using a more appropriate measure than earnings, should the need arise. Amendment No. 86 would require an assessment of the change in the value of the band limits to take place by two separate methods: an approach approved by Parliament for the  lower limit, and using average earnings for the upper limit. Amendment No. 21 would make it mandatory to carry out a review of the qualifying earnings band in line with rises in average earnings only, and amendment No. 74 would remove the Secretary of State’s discretionary ability to change the limits of the qualifying earnings band, even when he judged that their value had not been maintained. Amendment No. 75 would make it mandatory to review and revise the qualifying earnings band limit in line with rises in average earnings.

In all of their various ways, the amendments would curb the discretion of the Secretary of State and reduce flexibility in the system. It is clear that the real test of whether the bands have retained their value, in terms of ultimate income in retirement, is value vis-Ã -vis earnings. It would not be sensible to be over-prescriptive about which measure of earnings could be used, although it is perfectly clear which ones are used at present in respect of other benefits that are earnings uprated. Given that the provision will be in the Bill and that it is conceivable that, due to statistical developments or changes in future Government policy, the way of measuring earnings might change and new indices might evolve, it would not be wise at this time to prescribe with great specificity the index that should be used. We are establishing the principle that the value is maintained in relation to earnings, and the appropriate earnings index will be used.

It is also important to leave open the possibility—this is not inconceivable—that earnings in any given year might not be the right measure by which to assess value. There have been periods in which prices have risen faster than earnings. We want to leave the possibility open because the important thing, as the Bill says, is to maintain the value of those bands. The objective is to ensure decent levels of income in retirement and to maintain the balance of income obtained through work and income derived in retirement as a result of that work. That is the reason why the clause is drafted in such a way, and why we would not want to see it restricted in any way. Given that, I hope that the hon. Member for South-West Bedfordshire will withdraw the amendment.

Photo of Andrew Selous Andrew Selous Shadow Minister (Work and Pensions) 2:00 pm, 24th January 2008

This was put down as a probing amendment, just something to get down on the record as to the Minister’s intentions. I listened carefully to what he said and I am reassured that he has made the commitment to maintain the value of both figures specified on the face of the Bill in relation to earnings. That is a useful reassurance that can be reviewed in years to come by Members of this House, should anything else be done by a Government at any future time. So, having heard the Minister’s comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 ordered to stand part of the Bill.