Clause 4 - Entitlement to state pension at transitional rate

Part of Pensions Bill – in a Public Bill Committee at 11:00 am on 2 July 2013.

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Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions) 11:00, 2 July 2013

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.