Schedule 1 - Transitional rate of state pension: calculating the amount

Pensions Bill – in a Public Bill Committee at 3:15 pm on 2nd July 2013.

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Question proposed, That the clause stand part of the Bill.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The spotlight now falls on the unheralded talent of the parliamentary counsel, who write our legislation. I would love to claim that I wrote all this stuff myself, but I simply say, “This is what I want to achieve,” and very clever people who have studied law go away and write it beautifully.

I encourage the Committee to look at page 26, on which schedule 1 appears, because I am advised that this is quite avant garde as parliamentary drafting goes. It takes people step by step through how the whole thing works. Paragraph 2 goes through the four steps of the calculation. In step 1, we calculate someone’s pension under the old system; in step 2, we calculate a pension under the new system; in step 3, we take whichever is the higher—this is the one place in the legislation where the wording “foundation amount” is used; we were determined to get it in the Bill—and in step 4, we revalue to when the person reached pension age. I will say a little more about the latter in a minute. The remainder of schedule 1 goes through each step in detail. It is rather beautiful, in the sense that it takes us through, in intelligible language, how the calculation is done.

I will now clarify what each of the four steps does. [Interruption.] I can hear some appreciative noises from my right. Step 1 simply works out the pension based on the old system, including, as we heard this morning, the graduated retirement benefit. We then work out under the new system the 35 years less the rebate-derived amount, take the higher of those two, which is the foundation amount, and finally—this is the crucial point—that figure is revalued to when a person reaches state pension age. As we have heard, the single-tier element is revalued in line with earnings and any excess protected payment is revalued in line with CPI. Having had that foundation amount revalued to when a person reaches state pension age, any post-2016 years after that are accrued at 35ths of £144.

The beauty of the system is that everyone will have a foundation amount. What goes on under the bonnet may not be very pretty, but they will have a figure that tells them what they have in the bank. People could have a badge saying, “My foundation amount is so and so.” Apart from revaluation, that is the figure, and future years of service build people up to the magic figure of £144. About 85% of people at steady state will get £144. Although there is a great deal of detail, on which I am happy to answer questions, I hope that I have given an overview of what schedule 1 does.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I am tempted to ask the Minister whether the wonderful draftsmen to whom he refers are situationists. Never did I think that the avant garde would be brought into parliamentary drafting. Listening  to the Minister’s enthusiasm for the calculations involved in the Bill, I was trying to remember who he reminded me of, and it suddenly came to me—I mean this as a compliment—that it was that wonderful man Johnny Ball who used to be on TV explaining numbers to schoolchildren and others. I had my own experience of Johnny Ball, when we managed to eject him from the rectorship at Glasgow university, but that is another matter, and I will not go into it.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Absolutely. The schedule is significant because, as the Minister has said, it explains how the calculation is done. We had what I might describe as a preliminary skirmish—that is probably putting it a bit strongly—about the amount that someone may have above the new flat rate state pension. My understanding is that under the Government’s current triple-lock policy, all of one’s state pension is triple-locked. Under the proposals of this new system—

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

No, the basic state pension is triple-locked.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

The basic state pension is triple-locked. Under the new system there will only be one state pension, and anything that one has above £144 or whatever the figure is for the new flat rate state pension, will not be triple locked. Is that the case?

It was worth a try, but I could not draw the Minister. The point I am trying to bring out, as I am sure the Minister is aware, is that as things stand, the basic state pension is triple-locked. We are, by the Government’s lights, rolling the additional state pension and the basic state pension together into a new state pension system. Those who have accrued rights above whatever level the new flat rate state pension is set at, will have those accrued rights above the illustrative figure of £144, and that will be, according to the Government’s lights, indexed by CPI. No longer will the state pension, as such, be fully triple-locked. Is that the case?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

It never was. The triple-lock pledge applies to the £110. If one retires today on £150, £110 will be triple-locked and the rest CPI-ed. In the brave new world you get £144 triple-locked and the rest CPI-ed once pensions are in payment. The new regime, in terms of pensions in payment, is unambiguously more generous.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I thank the Minister for that reply. As I said previously, generosity is not a crime. Whether I take the view that it is avant garde or not, it is very clearly set out. I think that generally speaking, we are into the calculation. We have to be aware that the Minister is clear that this is a cost-neutral reform, so being cost neutral, we have to be aware that there will be losers as well as winners. We will continue to tease that out, but in terms of the schedule itself, I am happy to accept the Minister’s observations on it.

Question put and agreed to.

Schedule 1 accordingly agreed to.