With this it will be convenient to discuss new clause 2—Review of phasing the transition of a 35-year full pension requirement via an interim requirement of 30 years—
‘The Government shall conduct a review to determine the costs and benefits of phasing the transition to a 35-year full pension requirement via an interim requirement of 30 years. Such a review shall be conducted within six months of Royal Assent of this Act and a report thereof laid before Parliament.’.
This is where the fun starts. [ Interruption. ] I am glad I cannot see the faces behind me, judging by the faces opposite.
We have to do two things. We want to get to the new system as fast as we can, but we want to honour the past, and transition is the most difficult bit of what we have had to do. How do we respect people’s expectations and honour the contributions they have paid in the past fairly without running the system for another 60-odd years? Obviously, one of the issues with pension provision is that people have their own accrued pension rights. For example, we could have someone with, say, 50 years in the current system, and then there are survivor’s rights for widows and widowers, which can go on for another 20 or 30 years. The danger is that people’s own rights and expectations of rights in respect of others can live for 80 years or more, and the idea that we would introduce a system in 2016 that still has the traces of the old system in 2096 is absurd.
A balance has to be struck. There has to be a way of getting from the old system to the new system. The simplest, cleanest way would have been to stop with clauses 2 and 3 by saying, “Post-2016, it is 35ths—get on with it.” But that would have been simply unfair in a number of ways. First, it would have been unfair to people who have already built up more than £144. There are plenty of people who retire on such pensions. The typical man in 2016 will retire on a pension of more than £144, and it would not be right, particularly for people coming up to pension age, to say, “Guess what? You thought you were going to get £160—you have had a statement from us with £160 on it—but we have changed our mind. It is £144.” We had to consider that transition, and clauses 4 and 5, and the related schedule 1, explain how we do that.
In 2016, we will essentially consider two numbers, what people have built up so far under the current rules and what they would get under the single tier, and we will take the higher of those two numbers. That is called the “foundation amount” elsewhere in the Bill. Everyone will have a foundation amount and, once they have that number in 2016, years thereafter will simply build up at one thirty-fifth of £144—so, £4.11 a week—until they reach £144. Although working out that foundation number is a bit messy, once it has been done anybody will be able to find out what their foundation number is—they have the foundation number in the bank—and extra years simply add a fixed sum until they reach the flat-rate figure.
I do not think I am betraying any confidences by saying that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asked me, “When does this get simple?” The transition process is not simple, but my argument is that, particularly for people in the first half of their working life, it is pretty clear: if people do their 35 years, they will get £144. Relatively few people will not be in that position. That is the basic proposition.
There are special arrangements for certain groups of people, and we will consider those who paid the married woman’s stamp later because they are addressed in separate clauses. The first group of people for whom special rules are needed are those who already have more than £144. What we will do is take their 2016 foundation amount and, if it is more than £144, give them that as a foundation amount. They cannot add to it. Post-2016 contributions do not add to the figure, but they will be honoured.
Let us say that someone has built up £160. The single tier is £144, and there will be an extra £16 of what is called a protected payment. The indexation rules are that the £144 gets earnings-linked—at least—or triple-locked, and the £16 gets CPI-ed, which is what would happen anyway to a SERPS pension; it is analogous to the current indexation in-payment for a SERPS pension. That is for people who have built up more than £144.
What happens to the people who have been contracted out? That is the other big, tricky one. Again, an option would be to say, “2016 is a sunlit upland. We forget history and contracting out, and you just get your gross amount that you have built up, and you build on that.” I would have loved to have done that, but it would have been totally unfair. If someone has spent their life paying full national insurance, and their neighbour has spent their life paying contracted-out national insurance, and I come along and say, “You can have a full pension anyway”, people would be a bit cross.
We have said, therefore, that in 2016 we will make a one-off adjustment for past contracting out. We will take away what we call the rebate-derived amount, which is sort of like the existing contracted-out deduction with a tweak. The basic idea is that we work out someone’s 2016 foundation amount and we make a one-off deduction for the periods of their life when they paid less national insurance than their neighbour. That seems to us the only fair way to do it.
If we adjusted that and said that that deduction—the rebate-derived amount—was like a stain on their record for the rest of their life, no one would get £144, because almost everyone has been contracted out for at least one year. Although contracting out these days is mainly a public sector phenomenon, historically it was not—more people were contracted out in the private sector than in the public sector. If someone worked for a big corporate, they were in a contracted-out pension scheme. As pensions have such a long history, even though now most contracted-out employees are in the public sector, historically most contracted-out employees were in the private sector.
When we reach 2016, what we do not want to do is leave that contracted-out deduction in the system for decades to come. Otherwise, it would take for ever for most people to get £144 and we would have failed. There is a trade-off: we cannot ignore contracting out, but we want to get it out of the system as fast as we can.
We have invented what we call “something for something”, which means we work out the foundation amount in 2016 and net off the deduction for past contracting out, but allow people to work it off through subsequent years of work. If someone has been contracted out in the past, and they get less than the full amount in 2016, if they continue to work post-2016, they will build up towards the full £144. They will not get the full £144 without additional years post-2016, but they can build up towards it. That seems like the right balance. We could not ignore contracting out, but nor could we keep it in the system for another half a century, so we have allowed it to be worked out of the system. That strikes us as the right balance.
That is the gist of clause 4. It will require people to have reached pensionable age, have the minimum number of years and have at least one year under the old system. It repeats the 10-year-minimum arrangement. Post-commencement years are those after 2016, while pre-commencement years are those under the 1978-2016 system or the pre-1978 system. The two will be added together.
We will go into all that in a lot more detail under schedule 1, but having given the headlines, I will enable the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East to explain his views on new clause 2 before responding.
I would like to say a little about clause 4 before moving on to new clause 2; the two are of course related.
The Minister rightly suggested that the transitional arrangements are the most difficult part of the process. He is keen to get the balance right between moving to a new system and, in his words, “honouring the past”. He did not betray any confidence when he mentioned my question about when the system will become simpler. He has great knowledge of the state pension system, but listening to him, one wonders whether the system will ever become simple. He lost me at “rebate-derived…” and I suspect that I was not the only one.
The transitional arrangements are critical and the devil is in the detail. The Minister noted that a typical man will retire with more than £144 under the current system. I am not sure whether he mentioned this, but one aspect of the Bill that enables it to be cost-neutral is that anything one has above £144 and any rights accrued will be uprated by the consumer prices index. Although rights are protected above £144 for those who have accrued them before April 2016, anything one has saved above £144 will be indexed by CPI, not in line with the triple lock. However, as the Minister famously and honestly pointed out to the Financial Times last week or the week before—I am losing track—the triple lock is not guaranteed by either governing party beyond 2015. The situation I have outlined is therefore perhaps not as big an issue as it would be if the governing parties were committed to the triple lock beyond 2015.
The Minister focused largely on those who are contracted out, and he rightly observed that something had to be done about them. He talked about a “something for something” deal. He said that we could not ignore contracted-out pension savers and that there had to be a way to bring them into the system. He has done that in what some might describe as a generous way, allowing people to buy back into the system. There will certainly be individuals who opted out of the state second pension, put their money elsewhere and now find they can buy back into the state system and get to £144. That will be welcomed by people in that position.
It is worth mentioning that the abolition of the state second pension is central to the Bill. Everyone who was saving into it, and, indeed, everyone who was not contracted out—that is, of course, the vast majority who were contracted in—is a notional loser under the new system, in so far as one can no longer get above £144. The Minister mentioned in passing that the sum would be capped at £144, and, from April 2016, no one can save more than £144. There will therefore be significant notional losers, which is inevitable. There will also be actual, substantive losers, in so far as there is an expectation that one’s pension savings will be indexed to the triple lock, but people find that anything above £144 is CPI-ed.
I am slightly confused. The hon. Gentleman seems to be implying that these new indexation arrangements are somehow less generous. At the moment, people get £110 at least earnings indexed, and the balanced CPI-ed. We are proposing £144 at least earnings indexed, and the balance CPI-ed. Surely that is unambiguously more generous indexation.
That, of course, depends on how the indexation rules proceed. It will be noted that there has been much talk about the triple lock in relation to the Bill—[ Interruption. ] If the hon. Member for Burton wants to intervene, I will be delighted to let him. I cannot hear what he says when he comments from the second row, but that might be my hearing. He will either have to intervene or shout louder—one or the other.
The indexation issue is a thorny one. The point I was trying to make to the Minister, for the Committee’s benefit, is that we must be aware of the ending of the state second pension, which means that those who contracted into the system and who could save more than £144 will no longer be able to. One aspect of the Bill that demands some reflection—I do not say it is a negative—is that it caps the state pension that anyone can receive at £144, which takes us on to the issue of how people will make up the extra provision they will not be able to get from the state second pension. That was the point I was trying to make, albeit in a perhaps rather muddy fashion.
The issue of simplicity is very important, and the transitional arrangements bring that to the fore. We know that pensions are complicated—by definition, to a degree. We all have a role to play in trying to simplify them. The Minister is absolutely right that there is a tension between moving to the new system and getting things clear and simplified, and honouring past accruals.
I do not think that the Minister could do anything other than honour past accruals as far as is humanly possible. However, we know that by doing so we will not have a simplified system for quite some time—two systems will run in parallel for roughly 30 years. By the time my hon. Friend the Member for Airdrie and Shotts draws her pension, the system will, hopefully, be crystal clear and simple, but I am afraid that many of us will be long gone before it is simplified. I hope not but, coming from a part of the world where people have a tendency to go off their mortal coil rather early, one does not want to take anything for granted.
I come now to new clause 2, which relates to this matter. The thorniest issue in these transitional arrangements involves those close to retirement who had an expectation of needing 30 years. They were told that they needed 30 years. [Interruption.] If anyone wants to intervene, I will be delighted to let them. Some people had planned on the basis of needing 30 years, and they now find that they need 35 years.
The Minister mentioned the fact that there is, of course, a foundation amount, and I will talk about its calculation in a moment. The foundation amount will be whatever someone has accrued so far, plus an accrual of £135 or £144 per annum going forward. It is, of course, true that there is an issue for most people— I was about to say psychologists and sociologists, but I was worried that the Minister would again accuse me of being an academic.
As a matter of common sense, people tend to take their view of the world from those around them. Consider the case of someone who has been saving on the basis of needing 30 years and is now too close to retirement to be able to work for 35 years, and who then finds that a friend who is just a couple of years older is able to get £144. That person will be rather perturbed at that situation. That is inevitable; it is human nature.
The Minister pointed out that there will be difficulties with any shift in the system. I think he described working out the foundation amount as “a bit messy”. I would be delighted to hear the Minister say a little more about that messy calculation, which made me think of a review.
Regarding the women born in 1951 to 1953, the Minister said to my hon. Friend the Member for Edinburgh East that she obviously had not been anywhere near a Government computer. If the Minister does not have overwhelming confidence in Government computers, I have some concern that the calculation of the foundation amount for tens of millions of people under this new state pension could be something to keep an eye on. I hope the Minister will be able to assure me and the Committee that Government computer systems are high tech, tip-top and ready to go in calculating these rather “messy” foundation amounts, as he described them.
I turn now to new clause 2. The situation is that if a person is close to retirement, they do not have time to get from 30 to 35 years, and so find that they will not be able to get to £144. What we suggest in new clause 2—
I am a little confused about the point the hon. Gentleman is trying to make. As I understand it, those receiving 30 thirty-fifths of the bigger amount of £144 will be better off than the would have been under the old system. Is it not the case that, rather than there being winners and losers, there will actually be winners and winners?
I see that I finally managed to entice the hon. Gentleman to make his contribution. I am sorry he is confused. The point I am trying to make is that much of the Minister’s and the Government’s focus is on encouraging people to make up the difference and get up to 35 years. In a number of cases, members of this group are not in a position to be able to get up to 35 years. [Interruption.] I am having trouble hearing the hon. Gentleman. If he wants to come back in, I will be delighted.
I will try to speak more clearly; my broad Dudley accent must be confusing the hon. Gentleman. The point I tried to make is that even those who cannot make up the full 35 years and are left at 30 thirty-fifths will be better off than under the old system.