Phil McEvoy: In some respects, yes, and in some respects, no. GMB has a long-standing, clear policy for the state pension system to be simplified. The Bill obviously goes some way towards delivering that. It is also our policy to remove the scourge of means-testing from pensioners and, to a degree, the Bill will deliver that.
I think it is fair to say that we have concerns on a number of points. We have said all along throughout the reform process that we do not believe any reform will be viable unless it is accompanied by a real-terms expenditure increase in the state pension system for both current and future pensioners. As we have heard, and as the Committee will know, expenditure is neutral. I don’t believe we are in a cost-neutral situation because income to the Treasury will be going up, and it doesn’t look as if that extra income is going to be recycled back with an increase in expenditure. That is the first point: more money needs to be spent. Compared with other countries in the OECD, expenditure on the UK state pension system falls sorely behind by a good few percentage points.
In terms of income, we are very concerned about the impact of moving to a single tier, in that the current contracting-out facilities will end, which we think will put great pressure on occupational pension schemes in both the private and public sector.
We also have a long-standing policy on the state pension age. The Bill, as you know, looks to increase the state pension age and bring in an automatic system. We have a policy of resisting state pension age increases while there is such disparity of longevity across the UK, which, on the face of it, seems to be ever growing.
Craig Berry: Possibly the main objective of introducing a single-tier state pension is to simplify the very complex and messy system that is in place now. That is an important goal—one that we have supported and one that the Turner commission in the previous decade sought to bring about. We need to be quite cautious about the idea that a single-tier state pension, as proposed in the Bill, represents a significant simplification of the pensions system. We heard from a representative of Age UK about the means-testing that will remain within the system. Many people will remain entitled to the guaranteed element of pensions credit. My calculation is that if they miss just one of the 35 qualifying years that are now required for a full state pension, they will require guaranteed credit.
The current system has a mechanism whereby you can be passported on to other means-tested benefits, which do not receive as much attention or debate, such as council tax benefit and housing benefit; if you receive guaranteed credit or savings credit you are passported on to those automatically, so you avoid those over-messy claims processes. That will end as savings credit is abolished and fewer people are entitled to guaranteed credit in the future; they will still need those benefits but will have to go through separate, possibly multiple, claims processes at national and local level. The system is arguably getting more complicated for people who will require one of those means-tested benefits in the future.
The main claim about simplification of the state pension is that it merges basic state pension and state second pension. That is true to some extent, and it mimics the qualities that the basic state pension has now in the current system. The problem is that the vast majority of future pensioners will not be getting as much from single tier in terms of income as they would from a combination of BSP and S2P. That means that what is essentially replacing BSP plus S2P is not the single-tier state pension but the single-tier state pension plus some element of private saving. That is not necessarily a more straightforward system for individuals to understand; it is not necessarily a bad structure, but I think that we need to be clear about what is replacing the current system. It is not just a single state pension benefit; it is a single state pension benefit with a now ever more urgent need to save privately, which can be complex and risky for many individuals.
Craig Berry: The 35 qualifying years that will now be required? I think that the Turner commission, which I referred to in my previous answer, struck the right balance when determining that for the basic state pension only 30 qualifying years of national insurance contributions should be required. That struck the right balance between a contributory system, which we support, and a universal system that is accessible to the vast majority of people, with the vast majority of people being able to get a full state pension.
The increase to 35 years therefore undermines the settlement that the Turner commission arrived at, which is unfortunate. My understanding is that it will affect only a small number of people, and the majority of people will still get a full single-tier state pension, as they have been expecting to get a full basic state pension. However, it almost undermines the sense of trust that the system will remain as the Turner commission laid out in its plans for long-term reform.
The increase to 35 has been justified on the basis of working lives being extended, as reflected in the policy on the state pension age. The state pension age is going up by only three years, and the Bill does not change that in any way whatever; it accelerates the increase to 67. Qualifying years are going up by five years, so there is a mismatch there, to some extent. Perhaps the qualifying years policy should rise in line with state pension age—there is a debate to be had there—but the Bill does not provide for that; it provides for an increase beyond the increase in state pension age.
Phil McEvoy: I agree with that. We fail to see any real rationale for raising the level for full state pension from 30 years, but if there were to be what we might call a “meet you in the middle” solution, there may be an argument to say that, as state pension age increases, there could be a justification for the qualification period to rise in line with the state pension age increases.
At the lower end, the seven to 10 year qualification period seems, in our view, very retrograde. We cannot really see the rationale behind it unless there is some underlying reason whereby in order to clear Treasury costings there had to be some underpinned level at which no state pension was going to be payable.
What sort of estimate have you made of the impact on public finances if we were to keep the contribution limit to 30 years, which would be typically somebody working from, say, the age of 20 to the age of 50? Given the increase in life expectancy, what study have you made of the impact of that on public finances, given that you have problems with extending it to 35 years?
Craig Berry: My understanding is that because the impact of the increase to 35 qualifying years is small, the impact of maintaining the criteria that are in place for the basic state pension would also be small in terms of public finances. It would probably mean that the ostensible cost neutrality that underpins these reforms would be breached, but I do not think it would be a significant impact. I am not aware that the Government have published any fiscal analysis in that regard.
Phil McEvoy: GMB has a number of members affected in a number of different ways by the ending of contracting out. Just to give a bit of background, we have members in the public sector schemes and the Bill states quite clearly that the renegotiated public sector schemes will not be impacted by this. They are coming in in 2014 and 2015. That will cause concerns for members because they will have to pay an extra 1.4% in national insurance and these are members who have faced sustained pay freezes and most of whom are already paying a lot more for their occupational pensions, with the NHS scheme paying about 10% on average.
Is not this a pretty good deal for public sector workers to the extent that they will have benefited from contracting out—sometimes for a very long time—yet in as little as nine years they will be able to build up a full entitlement to the higher single-tier pension?
Phil McEvoy: You are absolutely right. But for people whose finances are already stretched, the prospect of finding those extra contributions is difficult. What I was coming on to say—it might not be often that you will hear unions expressing sympathy with employers—is that the prospect of public sector employers having to find an extra 3.4% is causing us great concern, especially as we do not know the outcome of any spending reviews that might be imminent. We also have members in the private sector who have been subject to various levels of protection in the past. We have those in the privatised industries who might have statutory protection, saying on privatisation that pension schemes could not be changed unless they agreed to it. They might have protections built into the rules of their scheme, which say that members have to vote through any changes to their pension scheme or there might be a lesser degree of protection in that trustees of pension schemes have to give consent.
The Bill, as it is written, seeks to completely override any of those protections that have existed in the past. DWP launched a consultation on the statutory protections. We have yet to see the outcome of that. We would welcome seeing that at some stage quickly. Where that leaves us is that members are very worried about the impact on their pension schemes in 2016, particularly in the private sector. Many of them do not necessarily buy the line that these employers are the good guys who have kept the pension schemes open. A lot of them think that these are the pension schemes that they have fought long and hard to keep. They are worried that changes in 2016 would just precipitate the ongoing rate of closure of DB schemes. What GMB has been mooting, certainly, is whether there is some sort of facility to retain a system of contracting out, albeit on a much simplified basis, to allow a reduced rate of national insurance to be maintained for both employees and employers and for a lower level of state benefit to carry on.
Phil, you mentioned that pension expenditure by the state in the UK is lower than in other EU countries. Why do you think that is more relevant than, say, comparing the relative costs of total pensions and welfare as a percentage of public spending or as a percentage of GDP as a whole? Have you done such research?
Phil McEvoy: I have not done such research, no. If I said, EU, I meant to say OECD. For colleagues who do not know, the figures at the minute are that OECD countries are paying 8.4% on average, whereas the UK lags behind, paying 6.9% on average. What I would say generally on the social security system is that the issue on pensions tends to be that everyone out there wants to get a pension. The UK population views their pensions very protectively. Not everyone wants to get the other social security benefits out there—in fact, I would say very few people actually want to get those, and I am thinking here of disability allowances and jobseeker’s allowance—but people will keep a very close eye on their pensions. People would and should question why the UK is paying so much less than its counterparts across the OECD.
I take that to mean that you have not really considered whether the point I raised is as relevant or more relevant and that you have not done the research as such.
Craig, you mentioned that private savings can be “complex and risky”. I am sure everyone would agree with that, but what role do you see for private savings in preparation for retirement? Do you see pensions as one aspect of savings, or do you see a state pension as something that should be a large percentage of people’s total savings pot? What role do you see for private savings, and what do you think of auto-enrolment as part of this?
Craig Berry: There is no reason why, in the future, as is the case now for many people, private savings should not play a large part in people’s retirement incomes. The TUC and our affiliated unions have been strong supporters of auto-enrolment from the word go. It is vital that we establish not just an inertia-based system, where people are encouraged to save for the long term, but the minimum employer contributions necessary to enable that system to function properly, alongside Government and individual contributions. We are fully supportive of people saving more privately. The state pension should be a significant aspect of somebody’s retirement income.
One of our concerns about the starting rate that has been talked about for the single-tier state pension is that it does not do enough to incentivise private saving. It is almost a stick, because it is low enough that it forces people to save more— they are getting less from their state pension than they might expect or than they would have got under the current system. But there is no carrot, because the solid platform for private savings that we were promised probably will not materialise. I fear that as a result of putting a greater portion of people’s retirement income in the hands of private saving, people will be more risk averse and more averse to making losses. It is our understanding of these behavioural traits that means we have a system based on inertia in the first place. I worry that people will not want to contribute more, because they will be more fearful of taking risks in private saving and putting a greater portion of their expected retirement income in jeopardy.
On the protected persons issue, schedule 14 and clause 24 provide for an override for protected persons, but also for an exemption for protected persons, so the Bill allows us to go either way. Can I give you a chance to respond to what employers’ organisations have said on this issue? They said that if you employ a former privatised worker in the transport industry or the energy sector, you already have a two-tier work force—a set of people with protected persons and a set without. They said that if we do not override the protected persons, recouping the employer national insurance increase will fall entirely on the unprotected workers, and that is unfair within the work force. What is your response to that?
Phil McEvoy: What I would envisage in an ideal world come 2016 is the unions and employers being allowed to sit down and negotiate a settlement. We cannot turn a blind eye to the fact that employers might have to pay this extra national insurance cost—I do not think we would or should. We have experience in recent years of dealing with employers operating such protected schemes, at UK Coal and British Gas, where protections have existed, and GMB has sat down and negotiated detrimental changes to those schemes in the light of representations made by the employer. We do not think the employer necessarily should disproportionately benefit one group of employees over another, because, clearly, we have members in those other groups who might lose out. We are worried about employers having carte blanche to trample over previously hard-fought-for rights. But, by the same token, I strongly suspect that we will be sitting round the table with them, looking at the Bill and saying, “Okay, how do we deal with this?”
Chair, I should say that I am a member of two TUC-affiliated unions, Community and Unite. Phil, you mentioned that TUC wished to sit down with employers to sort out the problem. Would an amendment to the Bill saying that schemes could not be overridden without trustees’ consent help in that process?
Craig Berry: I talked in a previous answer about the probably counterintuitive sense that a higher state pension actually incentivises people to save more. As a savings platform, it is more solid, which is important. It is important to note that we have taken away one of the key savings incentives in the current system, savings credit, although there is a debate about how effectively that benefit worked.
More generally, we accept the reality that most people in future will be automatically enrolled in defined contribution pension schemes. We would like those schemes to be large-scale so they have cost efficiencies and are easier for the press, members and trade unions to regulate and monitor, and we would like them to be well governed through trust-based governance. Although obviously there are advantages and disadvantages to both trust and contract-based governance of pension schemes, we think in general that trust is the way forward, although improvements could be made to the contract-based model too.
There is not a great deal in the Bill that moves us towards that kind of system. I notice that there is no reference to the restrictions on NEST. It is important that those restrictions are lifted, because NEST is the model of the kind of defined contribution pension scheme that we would like people to be enrolled in. Not only is NEST a good scheme, it provides a benchmark for the rest of the private pensions industry: it is a low-cost, well-governed scheme in which members can trust. There is evidence that it has already had some effect on the market despite the restrictions, but we could enable it to do a lot more.
I do not know whether we are going to come to the automatic transfer system and pot follows member. An unfortunate consequence of that might be that it does not provide us with the opportunity to create the scale that an aggregator approach to solving the problem might create. Possibly it is a backward step in that regard.
Can I split my question into two parts? Phil, you said that the policy of the GMB is to resist any increase in the state pension age while there are huge disparities in longevity, but I think you would accept that on average, there has been a significant increase in longevity. What disparity in longevity would you think to be reasonable in order to make the change?
Phil McEvoy: How long is a piece of string? This is very timely. My local council magazine came through my door yesterday. There was an article about longevity. It said that kids born at one end of my borough can expect to live 11 years less than kids born at the other end. To my mind, that seems wrong. What degree of variation? Ideally, none. Maybe that is setting the bar a bit too high. How that would be achieved, I genuinely do not know.
Probably the point that I would like to make is that in considering increases to state pension age, I would not dispute that average longevity is going up. The focus should tend to be on those in the lower deciles of longevity expectation. Anecdotally, I would suggest that those are the groups that tend to rely more on their state pension in retirement. I think we would welcome any independent review body study into state pension age changes, but it should focus on those groups, as well as looking at the average.
Phil McEvoy: As you know, over the past few years we have gone through the public sector reforms, and the outcome of that is that the public sector schemes have a pension age in line with the state pension age, so we have a lot of representation from members in the public sector about the impact of the increase in state pension age. I am thinking of people such as ambulance workers, paramedics, the guys who are carrying people down six flights of stairs to get them to hospital after they have had a heart attack. The prospect of such people working at 66, 67 or 68 is potentially very difficult. We are also talking about people in jobs that are very emotionally stressful—social workers, and we have a lot of members in that profession. The prospect of their working to those later ages, first, does not fill them with much delight, but, secondly, they genuinely question their ability to do their jobs at those later ages.
Phil McEvoy: One possibility that would be useful for the independent body to look at—it is a radical departure for the state pension system—is almost to mimic occupational schemes and to consider the prospect of early release of state pension, albeit on a cost-neutral basis. A lot of caveats would have to be thrown in there, but the possibility that someone with a state pension age of 67 could actually draw their state pension at 65—as I say, on a reduced, cost-neutral basis—on the proviso that they might have another source of income to take them up to whatever the single-tier level might be, should be strongly looked at. I believe, anecdotally—I do not have the information—that some other countries offer that early access to state pension rights; it is something that the UK should look into as well.
Craig Berry: Sometimes we look at the costs of increased longevity, which is a real phenomenon, in the wrong way, in the sense that we look at the old age dependency ratio—the only measurement that the Government collect data on—which is the proportion of people in retirement above state pension age to people of working age. What is more important, a recommendation that comes from a recent report by the International Longevity Centre, where I used to work, is to consider the labour market adjusted dependency ratio—the number of people in work of working age—the most important aspect of the equation. The implication is increasing employment opportunities for the working age population, and so higher pay. We are seeing this drift towards the UK becoming a low-wage economy to some extent—lower employment rates and lower wages will impact on tax revenues and our ability to adapt to an older society. At the very least, the Government should be capturing those data, which should be informing policy in a way that I do not think they do at present.
First, I would like to say that I am a member of Community trade union, an affiliate of the TUC, and I am a former Community organiser. You touched on it there, Craig, briefly, but do you think that the Bill and the Government have done enough to take into account recent economic trends in terms of zero-hour contracting?
Craig Berry: The state second pension has not had very long to bed into the state pension system. It was a very good model. I can understand that it increased complexity in some regards for the state pension, but it was a very accessible system for people who are very low earners or out of the labour market for justifiable reasons—the best example being caring responsibilities—so too often we are comparing the single-tier state pension with the people coming up to retirement now and their pension entitlement. The system of credits and allowances that existed in SERPS, the predecessor of the state second pension, was nowhere near as generous and accessible as the policy that the Labour Government introduced—the state second pension—which was then made more accessible following the Turner commission’s recommendations.
We need clarity in that debate about exactly what we are replacing when we introduce a single-tier state pension. We are essentially replacing a benefit that has not had time to bed into the system, and that has not fed through into people’s retirement outcomes yet.
Phil McEvoy: I would echo what Craig said about the state second pension not getting a chance to bed in. The reforms that were being brought in, albeit slowly, to the state second pension meant that it was moving towards a flat-rate payment anyway. I think that the DWP’s own analysis showed that you could expect an extra £1.60 every week for every year that you were contracted into the state pension. This is moving over to the longer term. I have sat with a calculator and done a few simple sums, and that shows that if you had 35 years of contracted-in service, under the reformed state second pension you would end up with a pension at a much higher rate than £144 a week: you would be looking at £160-something a week. That is under the state second pension system that we have and are moving towards.
I would agree with that. Our preference was to retain, albeit simplified, a state second pension model and—going back to the point that was made earlier—with the facility to contract out if occupational schemes so desired.
I have a brief second question. Have you got any information or research in relation to the discrepancy of longevity between, say, the average shift worker and the average non-shift worker?
I, too, declare that I am a member of the Community and Unite trade unions. You have spoken a bit about your views on the state pension age—you do not want it to increase—but is there any evidence from your members and workers about the effect of the acceleration of the increase in the state pension age that has affected women recently?
Phil McEvoy: The big one that this obviously refers to is the bringing forward of the increase to 65. At our policy conference, GMB had a lot of people standing up and outlining the impact on them, the main one being the lack of time to prepare. If the state pension age is to change, a key factor that has to be recognised—to be fair, I think most parties would recognise it—is that people have to have sufficient notice to prepare for that. I would argue, and I think a lot of people would argue, that the time allowed to women to prepare for this acceleration just was not enough.
Phil, earlier you suggested that the Government should increase their spending on state pensions by 2.5%, which is the difference, on your figures, between the UK spend and that of the rest of the OECD. What would the cost be of an annual increase in expenditure by the Government?
You said that you had concerns about the increase in the state pension age. We all understand that people who do physically and emotionally demanding jobs cannot necessarily do those same jobs all the way up to retirement age. What steps is the TUC taking to try to help workers reskill and retrain for different types of work towards the end of their careers? Is that an area in which you are engaged at all? If not, will you start to look at that?
Phil McEvoy: From the GMB point of view, we are always working with employers to manage ageing work forces and the roles that they can do. I have to say that it is very difficult.
There is the “Working Longer” review that is ongoing at the minute in the NHS. There seems to be an idealism that people can move away from manual roles in their later years and take up more sedentary, office-based roles. The reality is that that does not always happen, but we try to work with employers—the NHS is one example—on ways to manage an ageing work force to provide for people to work into those later years.
Ultimately, we come down to an increase of people leaving the workforce before pensionable age. People have to leave for reasons of ill health or incapacity, which can put strain on occupational schemes whether in the public sector or private sector. Much as you might try to help people to change their role, those who have a lifetime in one industry might not, for their last few years, welcome the opportunity to change that role.
Craig Berry: The TUC published an analysis last year of a group of men and women aged just below state pension age on their employment circumstances. As you might expect, there are very high inactivity rates among that group compared with other age groups.
There is particular concern about the extent of ill health and disability experienced by that group. These much wider problems will not be tackled either by pensions policy or even labour market policy; it is going to require long-term change to the way that the labour market works, how careers work and so on—the whole system of disability benefits and everything like that.
A large proportion of that group, especially women, were also out of work due to caring responsibilities. Again, that is not something that can magically disappear overnight as an aspect of the way that people live their lives and their ability to create a place for themselves in the labour market. These are not short-term, insignificant problems; there is much work to be done across Government to deal with these issues.
I have a couple of related questions on the private pensions part of the Bill. First, does the TUC share the Work and Pensions Committee’s view that the Government’s idea of a pot follows member policy for stranded pots is the wrong way to go and that, in fact, an aggregator system would be better? If so, why? Secondly, what is the TUC’s view on clause 34, which gives the Secretary of State a general power to exempt employers from auto-enrolment?
Craig Berry: I should chastise my colleagues from Age UK for not mentioning that the TUC was also a signatory to that campaign, along with the National Association of Pension Funds and Which?, which opposed the Government’s decision to introduce a pot follows member system for automatic transfers of small pots.
The status quo is unsustainable as it creates a lot of problems and those problems will be intensified when more people are auto-enrolled into pensions schemes. We felt that the best approach was an aggregator, which could be a single aggregator or a multiple aggregator. The real risk for us was consumer detriment; moving from a good scheme to a bad scheme.
To the Minister’s credit, he took on board those concerns in terms of addressing scheme quality so that when people are transferred between schemes, they can be assured that there are rigorous quality standards in place. But you can still transfer from a better scheme to a worse scheme even if those two schemes are both part of the same regulatory structure.
We were particularly concerned that an aggregator approach was not sufficiently assessed before the decision was taken. There was only a very rough estimate of the cost of administering dormant pots within the aggregated system upon which the fiscal impact was based. There was no analysis by the Government of the impact on particular individuals who have changed jobs and, therefore, had their pension pot moved very frequently. There is clearly that risk group under this system. The costs will mount up. The risk of consumer detriment will mount but also the cost of frequently transferring their pot. The impact assessment describes the transaction costs of transferring the pension pot as unquantifiable. That may be the case, but unquantifiable is not non-existent. Those transaction costs may well be significant and will build up as you frequently change jobs.
We have concerns about the system and the assessment on which the decision was made. We much prefer a multiple aggregator approach. I should say that the impact assessment also did not model a multiple aggregator approach, only a single aggregator approach, which I assume would be NEST, but there are alternatives that could be employed.
You asked about clause 34. We do have concerns about that because it seems to provide the Government, the Secretary of State, with a very broad power to create exceptions to the employer duties on auto-enrolment. When the Government consulted on the issue they talked about some very sensible real-world circumstances where an exception might be necessary: breaching tax relief allowances, where a member about to be auto-enrolled is leaving that employer or, perhaps tragically, has a terminal illness. Exceptions would be sensible in those circumstances.
The result of that consultation seems to be a very broad power where the Government can create exceptions across a range of circumstances. Clearly, that is open to abuse. We have seen Government increase the earnings trigger for auto-enrolment already, with lower earners being excluded. The commitment to ensuring that all low and medium earners are in auto-enrolment is already in question. This probably puts it in question a little more.
Phil McEvoy: On the automatic transfers, on more detailed scrutiny quite recently, schedule 16 threw up the fact that members can be transferred out of money-purchase or other prescribed schemes. I am not sure what those other prescribed schemes might include. I think there might be some concern out there that this might also bring in more hybrid or defined benefit schemes under its umbrella. That may not be the case, but some sort or reassurance on that front would be welcome.
To echo Craig’s point on auto-enrolment, we have seen the goalposts change a few times on auto-enrolment policy, which had consensus under the previous Government and this one. We have seen the goalposts move in real numbers terms since auto-enrolment has kicked off. With the uprating of the personal allowance this year, you will have somebody who might have been earning £8,500 in March, who was auto-enrolled, whereas somebody in May would not have been, because of the change in the lifetime allowance. We would be worried about the impact on both employees and employers of constantly moving the goalposts, meaning that the larger employers might have had to meet one set of requirements, whereas the smaller employers might not.
We have briefly touched on the automatic transfer. Craig referred to it in one of his answers. Could you elaborate a little on your concerns or otherwise in relation to the transfer of funds?
Craig Berry: Yes. As you say, I referred to it in a previous answer. It is the risk of consumer detriment. We have now an inertia-based system in private pensions, which is absolutely right. We need to apply that inertia-based approach to transfers as well when people are moving jobs fairly frequently, because we do not want small pension pots to build up in the system and create inefficiencies and complexity for individuals. But if people’s pots are being transferred from a scheme with low charges to one with high charges there is a risk of detriment.
They will have had very little say and little opportunity to avoid that detriment because we have an inertia-based system. People changing schemes fairly frequently are obviously at greater risk of experiencing consumer detriment and also costs associated with transferring the pot. The transaction costs with selling your assets in one scheme and buying assets in another scheme are considerable. There will be people who spend some time out of the labour market, regrettably perhaps between jobs. That will be very difficult for employers to handle as well. In general, the system creates an administrative burden for employers that perhaps undermines the consensus between trade unions, employers and Government that has been in place and driven forward the auto-enrolment reforms more generally.