Clause 80 - None

Pensions Bill – in a Public Bill Committee at 2:00 pm on 7th February 2008.

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Question proposed, That the clause stand part of the Bill.

Photo of Nigel Waterson Nigel Waterson Shadow Minister, Work & Pensions

This is another slightly “techie”, or technical, point, but we think that it is an important one. It ties in with another Bill that is going through Parliament at the moment, the National Insurance Contributions Bill, and also with the question of flat-rating of the state second pension, or S2P.

In fairness, the Government have always made it clear that it is their intention in the long run that S2P should cease to be earnings-related and instead will become a flat-rate scheme, based on earnings at the low earnings threshold. In its report, the Pensions Commission said that, as part of the “package”—I think that it is very important to keep that word “package” at the forefront of our minds—that it recommended, that this process should be accelerated and that S2P should become flat-rate by around 2030.

I am trying to deal with this issue as briefly as I can, but some of it is a bit complicated. The Pensions Act 2007—I am sure if the Minister keeps up, he will get there in the end.

Photo of Nigel Waterson Nigel Waterson Shadow Minister, Work & Pensions

He has been there before and he has the T-shirt.

The Pensions Act 2007 accelerated this flat-rating even further and again, that is all fairly clear. Where things started to unravel was the Budget last year when we had the harmonisation of the national insurance contributions upper earnings limit, the UEL to the initiates, and the threshold at which higher rate income tax becomes payable. The Pensions Policy Institute, God bless it, pointed out that the effect of this would be an increase in the value of the state second pension built up by higher earners running counter to the flat rate in contention.

However somebody in the Treasury failed to spot this consequence until the pre-Budget report in October when they announced that the introduction of the upper accrual point, or UAP, was brought forward to April 2009. With great energy, my hon. Friend the Member for South-West Hertfordshire and my hon. Friend the Member for Putney, in deliberations on the National Insurance Contributions Bill, have been trying to nail down various things—why this was not spotted, why it happened in the first place and how many people lose out as a result.

I think I am right in saying, though I have been unable to find the exact reference today, that in the Red Book there was a figure of £4 billion allocated against this change, which presumably was to be paid by somebody. It is difficult to avoid the conclusion that this is yet another stealth tax on middle England, because people are paying contributions, but will not get anything in return. So by aligning national insurance with income tax in this way, the Government have imposed another stealth tax. Contributions that were once made towards earnings-related benefits now contribute towards precisely nothing, they are just contributions to the Exchequer.

Her Majesty’s Revenue and Customs’ impact assessment pointed out at the time that 2.1 million people with income above the UEL are contracted out of S2P and went on to say,

“These individuals will either see a reduction in their take-home pay, as they will get a lower rebate on their national insurance contributions than would otherwise have been the case, or a reduction in the money that goes into their pension scheme.”

As I say, my hon. Friends working on the other Bill have been trying very hard to establish just how many people are affected in this way.

The key point—I do not want to take overlong on this clause—is that this change was a key component in the overall package post-Turner, following the recommendations of the Pensions Commission. As we have said on other issues in this Committee, any attempts to unpick the basic package, on which there is a broad political consensus, and indeed a consensus outside politics, is a dangerous way to go. The whole package was a complex business of give and take in all sorts of ways, but as my hon. Friend the Member for Putney made clear in the debates in Committee on the National Insurance Contributions Bill,

“Our concerns related to the fact that this was the “take” part of that package, and there was a big question mark over the “give” part, which was the re-establishment of the earnings link.”——[Official Report, National Insurance Contributions Public Bill Committee, 15 January 2008; c. 52.]

That is the most important point here because the Government seem happy to fiddle with the flat rating issue, changing what was in the Turner package. We will have the opportunity later, because I have put down a new clause about it to press the Government again as to when they do expect to restore the link between average earnings and the basic state pension. It may be something the Minister can put us out of our misery on now and tell us what is the current intention of the Government.

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey

I just want to echo one or two of the hon. Member for Eastbourne’s points because there is a package involved here. It was always the intention—particularly in the Turner package but also, as has been discussed, under the previous Pensions Bill—that the  flat rating would very much be a development that would go alongside the uprating of the basic state pension in line with earnings.

As the explanatory notes make clear for this clause, the reference year is expected to be 2012. It is expected, although not yet certain, that the uprating in line with earnings would start from 2012, but the Government have given themselves a degree of flexibility to change that so that it might be at any time up until during the next Parliament before that particular change commences.

We have argued from these Benches that the 2012 date is, in itself, too late; that improvement should start as soon as possible. However, if there is to be a clear sense that this particular measure is going to take effect from 2012 then, equally, it needs to be the case that the uprating in line with earnings, to match it alongside, is going to take place from 2012 as well. The Minister’s reassurance on that basic point, which is pretty fundamental to this part of the Bill, would be gratefully received by the Committee.

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions 2:15 pm, 7th February 2008

I am grateful that the hon. Member for Inverness, Nairn, Badenoch and Strathspey acknowledged that there is a package of notice to be considered here, as I was encouraging him to do so in the previous debate. Part of the package—aside from what the Bill is doing—is the very extensive reform taking place to the state pension. He will also know, as was also acknowledged by the hon. Member for Eastbourne, that a considerable part of that is the extensive reform of the state second pension. Having simplified future rights to the state second pension, clause 80 and schedule 3 of this Bill go a step further. These provisions enable us to simplify past accrued pension rights.

Put simply, the key proposal is—for people retiring after 2020—to bring forward the calculation that would currently occur at state pension age. In doing this, any and all accruals of additional state pension up to 2012—be they accrued rights to graduated retirement benefit, SERPS and/or S2P and contracted-out equivalents—would be rolled up into a single cash value amount. This amount would then be revalued annually in line with earnings during a person’s working life. As a result of this, people will be able to work out much more easily what state pension they can look forward to and, subsequently, be better able to plan appropriately for their retirement.

I would like to bring to the Committee’s attention that we still wish to bring forward amendments to this part of the Bill to simplify the contracted out deductions payable as part of this consolidation. The required amendments are technical and therefore demand very careful drafting, but I can confirm that we will bring these forward as soon as possible.

I would like to reassure hon. Members that I intend to provide them with a comprehensive fact sheet—I know they will look forward to this—setting out all the details of what is being proposed here, hopefully in the most digestible manner possible. I will do that in time for the amendments that I have just referred to.

Photo of Nigel Waterson Nigel Waterson Shadow Minister, Work & Pensions

I do not want to end the sitting on a churlish note, but would it not have been much more helpful to produce the amendments in a fact sheet in time for this debate?

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

As I have said, the amendments are highly technical. Given that these changes are still some way off before they come in, and there will therefore be further opportunities to consider this during the passage of the Bill, we will bring that amendment forward before the consideration of the Bill is complete. When we supply him with his very useful fact sheet the hon. Gentleman will see the complexity of this and the importance, therefore, of spending time on it to get it absolutely right. We want to achieve a simplification of a state second pension system here. The parts of the S2P that we are dealing with have accumulated a lot of changes over the years. It is a complex task to achieve simplicity, as it often is in Government.

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey

The Minister is right. Simplicity is an objective much sought after and rarely achieved. We are all full of excitement about the fact sheet. [ Interruption. ] I note the whole Committee is full of excitement about the prospect of a fact sheet.

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey

Indeed. Could the Minister confirm whether he expects these amendments to be brought forward in time for them to be considered during the passage of the Bill in the Commons or whether he expects those to be a matter to be slowly debated in another place?

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

All I can say is that we will do our best. I cannot I give an undertaking.

Turning to the point the hon. Member for Eastbourne focused on at some length, the changes announced in the PBR and the points he made in respect of the upper-earnings limit on national insurance contributions and his suggestion that there is a stealth tax hidden in here. I will try to persuade him that that is not the case.

The May 2006 White Paper announced our intention to convert the earnings-related state second pension into a flat-rate top-up to the basic state pension. The process would commence around 2012 and is expected to be finished by 2030. Changes to the tax and national insurance thresholds announced in Budget 2007 have the knock-on effects of extending this transition and of high earners gaining entitlement to more state second pension compared to the position outlined in the White Paper. Measures announced in the pre-Budget report subsequently are consistent with the original intention stated in the White Paper. To keep within our original timetable we are bringing forward to 2009 a key feature of the White Paper proposals, a cap on accruals. To add clarification from the Pensions Policy Institute, which I think the hon. Member for Eastbourne prayed in aid to support his own argument. Responding to this point, it said:

“While this may sound like a significant policy change, widely reported to save the Exchequer £2 billion, it in fact refers to a technical change introduced to restore the flat-rating of S2P back towards the path originally envisaged in the Pensions Act 2007.”

They went to explain that,

“from 2012, S2P will be payable on the same earnings as originally envisaged in the Pensions Act 2007, becoming flat rate around 2030.”

It is a matter of keeping faith with the intentions as originally set out. With that, I hope there will be support for this to be included in the Bill.

Question put and agreed to.

Clause 80 ordered to stand part of the Bill.

Schedule 3 agreed to.