Baroness Hollis: I am Patricia Hollis from the House of Lords. I was the Lords Minister for the DWP from 1997 to 2005 and am currently, of quasi-interest, a member of the board of the Pensions Advisory Service, which gives free professional advice to people who find it difficult to buy it in the marketplace.
Baroness Hollis: I am delighted that we are having the Bill. It is the appropriate way to go, and I am really pleased and all congratulations to the ministerial team leading it. However—there is always a however—I have five issues within the Bill and one without, which may or may not come up in questioning. First, I am slightly worried about the seven to 10 years de minimis for a particular group. Secondly, I have some queries about the transitional arrangements. Third is something that I think has not been raised, although I may have missed it, which is the loss of lump sum for deferred state pensions. My fourth issue is pension age and the fifth is bereavement benefits.
I am also concerned about an issue that is not in the Bill—although the Bill gives us a way forward on it—which is what we do with people, particularly women, who have a portfolio of mini jobs below the lower earnings limit. Those mini jobs combined may take them above the LEL, but in the past the jobs would not have brought them in. I think that we have a way forward on that. Those are the issues that concern me.
Thank you. You seem to have anticipated, in a very perceptive fashion, many of the questions that will come your way. Perhaps those who will tackle some of those sections might take them one at a time.
One at a time. You will have heard earlier evidence about the eligibility to the STP and the requirement that someone works for 35 years to receive a full pension and that someone has to work for 10 years to receive any pension. Chris Curry from the Pensions Policy Institute seemed to suggest that that would present no major difficulty, because the vast majority of people will have accrued between 30 and 35 years by the time the pension is up and running. Mr Davies from Union Pension Services took a different view and cited the example of a 53-year-old lady called Gill, who he said would be worse off by something like £2.80 a week. Do you think that there will be any particular groups that will be dis-benefited by the eligibility criteria?
Baroness Hollis: Just a couple. I will take the de minimis aspect first. I absolutely understand the point about the Aussie bartender, but seven to 10 years can be quite a lot of money. Ten years at the minimum wage could be worth £42 on the pension. I do not know whether this issue has been raised. Most women who have not acquired national insurance contributions through work will acquire them through credits, rightly, for caring for children or older people and so on. But the group that I have found we tend to overlook are service wives who go abroad with a husband who almost continuously has overseas postings, and they may not have children. As a result, they will not be able to enjoy a category B pension and they will not be able to build it up under their own steam, yet they are doing what most of us would think was a right and decent thing to do. It is a small group and that problem could be easily overcome by having ease of buy-back, perhaps restricted to British citizens or British nationals to avoid the Aussie bartender issue. That is one group.
I regret going down from 30 years to 35 years. I understand the logic that you are putting together the basic state pension and state second pension, and that this is a compromise between them. Obviously, the motor is financial. I do not think that, over time, there will be a lot of losers between the two.
I welcome what you are doing about the reduced married woman’s stamp. I think that is decent and sensible. However, I am worried about the 30,000 women who will lose category B, which stops suddenly. I did some calculations on that. If her husband in 2016 is 57 or over, he is likely to have enough stamps for her to enjoy a full category B pension. However, if he is younger than she is, or if he has an interrupted record, and she herself at that time is 55 or 56 with a network of caring and voluntary responsibilities and finding it difficult to re-enter the labour market, she could find herself stuck.
We need ways to allow her to build up the category B pension that she might have got, but which is incomplete by virtue of the fact that we have brought the guillotine down. One way might be that if in the past she has had childcare responsibilities, but the HRP or the new credit arrangement has not come into play because it has not taken her above the de minimis rule, that could be added to, for example, her derived benefit. If you put the two together—her child care credits and the derived rights of her husband—as far as I can see from my back-of-the-envelope calculations, you take almost all women out of the risk class of not getting a full pension when they retire.
Thank you for that. You have been clear about that example. It leads rather nicely into my second question, which is about derived and inherited benefits. Mr Carberry from the CBI said earlier that although there might be some issues with derived and inherited rights, given that people are building up pensions in their own right the impact will not be particularly significant. Do you agree with that?
Baroness Hollis: Forgive me, but the CBI and a bloke? I mean, the pension structure is devised for pale males, isn’t it? There are clusters of women in particular, but also some low-paid men and people with broken records, who are potentially going to be small pockets of losers. The problem is not just how we are treating them now, but the fact that come 65, and in women’s cases, if they are in a partnership with a husband who dies, from 75 to 80, we are going to have a legacy problem. If I were Steve, I would be worried about the fact that we are running alongside that a parallel pension credit system for another 30 or 35 years. Therefore, not just on grounds of decency, but on grounds of administrative, long-term savings, I would want to corral as many of those small groups—such as my service wives and women with incomplete category B pensions—into the pensions, if we can find a fair, decent and not too costly way of doing it.
Thank you for that very full answer. I am conscious that there are about another 12 questions we have to get through, so if we can keep them compressed, that would be helpful.
I want to ask you about means-tested benefits. Are you satisfied that the abolition of savings credit will be balanced by the advantages of the single-tier pension?
Baroness Hollis: Actually, I do not know. What will be useful is the way that housing benefit in particular—council tax benefit is localised—and disability benefits will be protected through UC, and will help in all these calculations. I do not yet know what the implications will be for HB. What I suspect will happen is that we will come down from 25% to about 20% claiming means-tested benefits, but that there will be a somewhat reduced degree of loss by virtue of the fact that you are not piling layers of means-testing on top of each other. We are going to have to watch this. We will certainly be tabling amendments to tease out the implications.
What is your view on how the self-employed are treated in the Bill? What is the level of fairness or generosity towards them as far as the Bill is concerned?
Baroness Hollis: I am delighted by the treatment of the self-employed. If we are to take some reasonable risk out of entrepreneurship—people who are poor cannot afford much risk—that is one way of doing it, in terms of the long-term future. I am delighted. I do not know what should happen to the £2.65 that you are going to charge on their contributions. That may have to float up slightly.
What we know about the self-employed is that they are not like this, they are like that. Either they are fairly poor and cycling between employment, no employment and self-employment, in which case this is brilliant for them, or they are the relatively better off in IT services and so on, for whom I do not have a particular case to argue. For the people at the bottom who are in the shadowlands of marginal employment, this is a good, decent and generous settlement.
Baroness Hollis: It may give them sufficient time, but I do not think it is the right way to go. The reason for that—I do not know whether you had the chance to read the 1,050 pages of evidence in the report that came out a couple of months ago from the House of Lords Committee chaired by Lord Filkin. There is a lot of demographic stuff in there that I have been trying to tease out. What we are seeing clearly is that the first 10 years of retirement are healthy. The next 10 years involve growing, chronic functional disability in mobility, reaching, hearing and seeing. The last two to five years are dependency: people are bedridden, have Alzheimer’s or whatever.
Gregg asked about the class connection earlier in his question. All the evidence coming through is that the growing years of older age will be spent in that middle period of chronic disability. In other words, in living longer, people are not having more healthy years; something like two thirds of the population are having more years of chronic disability. Therefore, although I welcome the review, I think that any rise in pension age should be attached to the growth of healthy retirement years, not overall years. Otherwise, if it is kept at a constant percentage, it will squeeze the years of healthy retirement, particularly for people in low social groups.
May I ask about the Second Reading debate? We know that the whole thrust of state pension reform is to increase and encourage incentive to save. The Bill refers to private pensions, particularly in part 4. What is your view on the provisions in the Bill regarding auto-enrolment?
Baroness Hollis: My long-standing concern with the increased raising of the PTT up to £8,000 and beyond, which is fine—beyond that, you get auto-enrolled—is that the group between £5,600 and £8,000 have the right to opt in to auto-enrolment, but most employers will not encourage them. They are a group whom I think will lose out unless we can change the vocabulary and get the Federation of Small Businesses—they mostly work for small businesses—on side to bring those women in.
I have an issue about the group in that every time we raise the tax threshold, more women drop out of auto-enrolment. They are the ones who are least likely to have pension savings and about whom we should be most concerned. We must do something there. There are issues about aggregators, small pots and so on that I could comment on, but you may already have had plenty of evidence on that.
Baroness Hollis: I was talking to some people in the industry about this. I do not understand, but there may be reasons that I have not heard, why people should not have a choice. In other words, if somebody is moving into a scheme which is at least as good or better than the one they are in, then the pot follows the member, but they should be able to run in parallel an aggregatory NEST for that period of time when they are not. You would then end up with two pots—the one that is taking you all the way through and the aggregator. I do not think that that would be difficult to handle. That would be, I think, my preferred way of going, but I would have to do more research before I was completely confident about it.
Baroness Hollis: The industry. When we tried to raise the cap on NEST, get contributions coming in and deal with some of the small pots that were already there, the industry did not want to know. It just wanted to keep as much money as possible under its organisation. The fact is it is not interested in small pots of £2,500. It just shrugged them off. It was sympathetic, but shrugged them off. I do not think that you will get a solution from industry, but I would love to be proved wrong.
Which brings us nicely, in terms of aggregators, to the issue of NEST. Are you surprised that the Bill does not take on the issue of removing the NEST restrictions?
Baroness Hollis: For many people, NEST will be their main form of auto-enrolment pension. You may, for a period, be self-employed. You might be a woman hairdresser who swivels between self-employment and employment. While she is in employment, money is going into NEST, because these are small businesses that do not survive a pension scheme. When she is self-employed, she may develop a small pension pot. She might want to aggregate that into NEST. At the moment, she will find it difficult to do so.
Baroness Hollis: This was part of the original deal when John Hutton or James Purnell set it up. I was marginally involved in some of the discussions. Industry was very nervous about losing money under management to NEST, and the deal, therefore, was that we would cap it at the £3,000 a year limit, with no contributions in or out in order not to destabilise it. That was a reasonable deal to start with, and obviously most of those NEST pensions will not mature in any worthwhile sum above trivial commutation level for another five or 10 years. We have a few years in hand. I think the fears of the industry will not be realised, and we should then be able to bring it on board to relax the limitations on NEST.
On that, you referred to these very small pots and I thought you suggested that the industry was resistant to losing management of them. Surely the very small pots are a big administrative cost, with very limited revenue from them.
Baroness Hollis: You are absolutely right. At the moment, a small hairdresser, for example, might have half a dozen pots, which, if amalgamated, would take her over the trivial commutation limit. She cannot therefore trivially commute them, but each individual pot cannot be annuitised, and companies such as Legal and General might be reluctant to amalgamate its pot with one of the Pru’s, each of £2,000. Therefore, you need some way of breaking through all of that, and the easiest way it seems to me is to be able to put them into NEST.
If I may, I will press you on that. Would that not leave NEST as an extraordinarily unwieldy, enormous and growing fund? If it just becomes a default fund and is taking such a large number of these small pots over time, will it not become unwieldy and difficult to manage?
Baroness Hollis: Well, not really, except that obviously private sector employees have a poorer deal relatively speaking than public sector employees. However, the evidence I am getting—it is anecdotal, so I do not know how much it is worth—is that many of the employers are taking on the additional payments even though they have to pay the higher-rate NICs. If that continues, and I think the Minister should encourage that, that would be very good news.
You said that the public sector was getting a better deal than the private sector. Do you think it is sustainable for the public sector to get that deal? Will the schemes be able to continue in the way they have been reformed when employers have to find that extra 3.4% from April 2016?
Baroness Hollis: It depends on whether what you are trying to do is to look at, say, the total fund—for instance, the local government fund or the teachers’ fund—and the payments in and payments out. If, instead, you do what Hymans Robertson would do, which is to take whether the individual in it is paying his or her way by their contributions, you get different answers.
The reason that the NHS scheme has been in profit, so to speak, is that the NHS has been growing so rapidly; it is bringing in more contributions than those that are going out. Once you start shrinking the public sector, the contributions out become more of a liability over time because they are not supported by contributions in, but you cannot blame the individual for that.
It is which of those two you are more concerned with: the total in-out package, or the individual’s in-out package. You get different answers for each.
I want to pick up on Mark’s question regarding scale and NEST. Many of the witnesses so far, in terms of the private sphere, have talked about the benefits of scale. It struck me when Mark was asking that question that schemes like the Ontario teachers’ scheme and the Calpers scheme have enormous amounts of money under management and seem to be very effective. Is that a fair comment?
Baroness Hollis: Yes, and in Australia the average DC scheme has 27,000 members. You can see what is going to happen to charges, management costs and so on in that situation. Clearly, you have got to have fewer, larger, well-managed, well-regulated schemes. There is no doubt about that. Then, competition ought to be able to work.
Sometimes, in response to that view, people would look to the energy market and say that that does not work effectively with its few big players. Is that an issue?
Baroness Hollis: I really do not know. If I were involved in taking that aspect further—I do not claim to have any expertise in this—I would want to talk to the Financial Conduct Authority and take advice on what it felt was an appropriate maximum size for appropriate regulation. The actual size of the funds under management does not bother me, when you consider what many of us are now putting into ISAs and so on.
I want to follow up on something the Work and Pensions Committee picked up on: people who might have several different jobs under the lower earnings limit. I had a constituent who was in that position and she was quite angry that they were not put together. Did you say that you thought there was a way that could be addressed?
Baroness Hollis: Yes, and I also had a concern about bereavement benefits, but we may not get to that. Indeed, that issue—where people have, say, two 10-hour jobs at the minimum wage, both below the lower earnings limit, and there is no means by which to amalgamate—is one we have been unable to resolve for over a decade. Similarly, sometimes people even have three jobs.
I think that the solution is actually in the Bill. The Bill gives us the way forward, which is to treat such women—they are mostly women, and poorly paid women at that—as though they were self-employed. That would therefore mean that you do not need an employer’s contribution, which has always been the big stumbling block in the past. You do not have to divvy up between two or three employers bits of the NI contribution that the employer should make into the pension. That has always stopped us in the past, but it has gone for the self-employed. We can therefore follow in the path of the self-employed for these women.
Secondly, if their combined income is between the LEL and the PTT—between the £5,600 and, say, the £8,000—they could be credited in under national insurance, as now, for women. If they are over the PTT, we can either get them to pay the self-employed rate of £2.65 or the voluntary mixed rate of £12—whichever you thought was decent, appropriate and affordable.
I really hope the Government take this on. We have a way through this by building on the self-employed strands in the Bill for women who are, with two, three or even four small part-time jobs, essentially self-employed. That way, we can allow them to aggregate and be treated as though they were self-employed. That way we can break through for the first time, because we do not then have to worry about the employer’s contribution, which has always stopped us in the past.