Clauses 2 and 3 deal with what might be called the simple cases, which are people whose qualifying years are all after April 2016. In such cases, there will be no problems of transition or rights built up under the previous scheme. They are the “clean cases”—people whose working lives or qualifying years fall entirely within the new system. I cannot go quite so far as to say that if everybody started work after 2016 the Bill would need to contain only three clauses, but this is the easy bit.
Clause 2 states that to receive a pension, an individual must be over pension age, and that they must have 35 or more qualifying years to receive the full rate. I remind the Committee that the current state pension has two main strands: the basic pension payable for 30 years of contributions, and a state second pension—a state earnings-related pension scheme—in which an individual can build up rights over 49, 50 or more years. In merging those two into one pension, rather than sticking with 30 years, which would be very different from the current SERPS arrangements, or going up to 49 or 50-odd, which is the current STP arrangement, 35 years seems reasonable—I might call it a weighted average—in a world where people may work from the time they leave school until their late 60s. We will return to the 35-year issue later in our proceedings, and new clause 2 also deals with it. I will not go into the matter in great detail now, because we will cover at some length the transition to 35 for those who might be approaching pension age and expecting it to be 30.
As I think I mentioned in the oral evidence sessions, there are 1,000 different levers that can be pulled when designing a system such as this. We have an overall goal of cost neutrality—we will spend the same as we would have spent—but the starting level, the number of years, the minimum number of years, the uprating, the revaluation and so on can all be tweaked. The number of qualifying years is simply one of those parameters. In the context of people’s working lives lengthening, taking the average number of years needed for a full pension down substantially—it is 50-ish for a state second pension—would be going against the grain. That is the balance.
Briefly, on the move from 30 to 35 qualifying years, for 30 years a person gets a basic state pension— 110 quid a week or so. They might get some additional pension depending on the contributions they have made. For 35 years, they will get £144. If they have 30 years, 30 thirty-fifths of 144 is £123. In crude terms, when it becomes 35 years, if they have 30 years and they push through the new system and get 30 thirty-fifths, £123 is bigger than £110. Of course, there are complications. It depends on what SERPS they have, and whether they have contracted out.
Although it sounds as though the move from 30 to 35 years is a cut, first, it is 30 thirty-fifths of a higher number. Secondly, people can buy voluntary contributions if they want to, so if they have gaps they are able to build their entitlement up. The rules on that have been softened considerably, and we know that the true cost of a class 3 contribution ought to be about four times as much as it actually is; they are very good value. Therefore, people can top up to a bigger pension if they want to.
Thirdly—I will give more detail on this later—we are introducing something called a foundation amount in 2016. We work out a person’s pension on the old rules, we work out their pension on the new rules, and the foundation amount is the higher of those two numbers. If the 30 thirty-fifths plus SERPS is bigger than the 30 thirty-fifths with the relevant adjustment, the person will gets what they would have got under the 30 thirtieths rule. That is a protection built in to the change.
We think that 35 years allows people to have about 15 non-qualifying years. Bear in mind, it is 35 years of contributions or credits. It is not just paid work; it is caring, being at home with young children and active job searching. It is a comprehensive definition of what a person has to do to get the qualifying year. We think that 35 out of about 50 is the right balance. Of course, there will be the odd year when the person does not qualify—there are a range of things that people can be doing—but it seems about right to ask people to be doing something creditable or contributing for roughly two thirds of their adult life. When people do not have 35 years, the amount is reduced pro rata, as with the present system. That is what clause 2(2) does.
We think there should be a minimum amount of contribution. It is worth reminding the Committee that until April 2010 that was how it worked. Broadly speaking, a person needed a 25% contribution record. In general, women, pre-April 2010, needed 10 years. There is a symmetry here. At the request of the Work and Pensions Committee we put the figure of 10 years in the Bill. We do not intend to go beyond 10 years. Our future costings are premised on 10 years. We talked in the documents about seven to 10 years, but all our numbers are premised on 10 years.
In an increasingly global world—if that is not a tautology—people move around; they build up a year here and a year there. We do not want to have a contributory pension where, given that every year will be one 35th of £144, we end up paying significant amounts of money all over the world to people who have hardly ever been here. We are saying that people need 10 years in the system. Bear in mind that that 10 years includes six years that they can buy—in fact, they can buy more than that. Given that people can buy voluntary years, this measure is not particularly draconian. Practically everybody who spends their life here will get 10 years.
Subsections (4) and (5) simply explain what qualifying years are. Subsection (6) explains that for people with pre-2016 qualifying years, or people who paid the married woman’s stamp, there are separate rules, so I think that clause 2 sets out a simple case: 35 years for a full pension, reduced pro rata if someone does not have that, and a 10-year minimum. Those are all reasonable, measured features of the new scheme.
I shall have more to say on this matter when we come to clause 4 and new clause 2. The Minister used the example of paying into S2P for 49 or 50 years, and suggested that what is proposed was in some way a weighted average. I should be interested to hear him explain that in more detail. As to the minimum and the range of seven to 10 years, I feel that the Minister was hinting heavily that it will be 10 years, not seven, eight or nine. There is a sensible case for that, as he set out.
The Minister rightly mentioned what he described, I think, as softening the rules for the buying back of years. That is exactly how I read the Bill, too, and it is welcome. I think that communication will be an issue in encouraging people to buy back. Also, there will be those who will find it difficult. None the less, he is right to say that the rules have been softened.
I thought that the Minister was suggesting, or at least hinting, that the move from 30 years, which he seemed to favour, to 35, was driven by financial considerations, and I suggest that those played a significant part. He mentioned the previous Government several times. Bringing down the number of years that a woman needed to get a full state pension from 44 to 30 was a significant policy shift, as was bringing down those needed by a man from 39 to 30. That was done in the spirit of trying to make the state pension universal and inclusive. There is a case for putting the number of years back up to 35, given increasing longevity.
We support the clause, but I shall have more to say on clause 4, particularly about those who are close to retirement who understood that they needed 30 years, and now find that they will need 35 to get the full state pension, but will not have time to do it.
I am grateful for the hon. Gentleman’s support for the clause.
My point about a weighted average is that at the moment, a typical pension on retirement for a woman—for example, the cohort we were just talking about—is £125. The £110, or a large part of it, is based on a 30-year rule. The extra bit is based on a 50-year rule. Obviously that extra bit, the state second pension, is accruing and getting bigger and bigger, so over time the state second pension bit of people’s pensions would otherwise have been a bigger proportion.
All I am saying is that we are bringing together a 30-year relatively large chunk, and a 50-ish-year smaller chunk, but one that is getting bigger. So, in a sense, if we had split the difference and said 40 years, people would have said, “That’s not fair,” because most of the pension is currently basic pension; so 35 years is a kind of weighted average. That is the underlying intuition I was using.
The hon. Gentleman was right about communication. The dilemma is that we cannot communicate with people until Parliament has decided what the rules are. However, that does not mean we are doing nothing. We have already put details of our communications plans in the Library. We are talking to those bodies who talk to people about pensions, such as Age UK, the Pensions Advisory Service and the Money Advice Service, and those that have websites for financial advice. We are using focus groups to test what language about the proposals makes sense to people, and what confuses them, so a lot of work is going on.
Assuming Royal Assent is given next Easter and there will be no reviews to do after that, we have two years before the start in which to communicate with people. We are thinking in the medium term about such things as online access and statements, so that, because the new system is simpler, what people will get will be clearer to them. I entirely take the hon. Gentleman’s point about communication, and there is plenty of that to come.