Clause 12

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

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Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions 1:45 pm, 24th January 2008

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.