Clause 17 - Effect of pensioner postponing or suspending state pension

Pensions Bill – in a Public Bill Committee at 11:30 am on 4th July 2013.

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

Photo of Martin Caton Martin Caton Labour, Gower

With this it will be convenient to discuss amendment 15, in clause 45, page 23, line 36, after ‘section 3’, insert ‘17(5)’.

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

We now come not only to clause 17 but to amendment 15, tabled by the Opposition. To pick up on what I was saying a moment ago, we support the Government’s move to end the ability of people to receive a lump sum after deferring their pensions, for the reasons I gave.

However, the Minister mentioned that he would not calculate at this stage the amount that someone would get when they defer their pension under the new system. The Bill gives the Minister the power to set the amount that people will receive as a result of deferral. It is a wide-ranging power that has significant implications for deferred pensions. Put simply, the ordinary person will be interested in how much they will get if they defer, and that is the crux of the matter. Clear guidelines need to be issued by the DWP to offer security and confidence to those who are considering deferring their entitlements. The Minister mentioned what he thought the calculation would be. Will he return to that point so that I can scribble it down? He speaks too fast for my handwriting. If he gives me another chance, I will get it down on paper.

There is a broader dimension to the Bill, which clauses 16, 17 and 18, but specifically 17, illuminate, which is that, as often happens, the actual nitty-gritty, which is not in the Bill, will be done under regulations. The calculation of how much one can get is important if people are considering whether to defer, so we are asking that, under clause 45, the Minister will return to the House to address the issue when he sets the rate that will apply to those who defer. The calculation will determine the value of a deferral to an individual who is thinking about deferring or choosing to defer, so it is important that the Minister or Secretary of State come to the House to account for the decision on what will be the amount received as a result of deferral.

I am not sure whether the proposal is controversial. As we discussed on Tuesday, the job of the legislature is to scrutinise the Government’s decisions. Although we support the move to end the possibility of a lump sum and the new system for deferral, we need to know how much someone will get from deferring. When they have finished that calculation, the Government need to explain to the House what the rate applicable will be. I look forward to the Minister giving me the chance to scribble down what he thinks the calculation will be.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

The ability to get a larger pension through deferral is in some ways a counterpart of the relaxation of fixed retirement ages; it acknowledges that in many ways we are seeing a very different sort of life pattern. We often discuss this in terms of increased longevity and the burdens that that places on us in society. The other aspect is that there are many people who have not only increased longevity, but increased healthiness, and they are able to and desire to continue working. There are many different groups of people, but one of those groups wants to continue in employment, full time or part time, past what we traditionally regarded as the fixed retirement age. The ability to defer the pension is obviously an attraction.

There seems to be a general acceptance that the current formula is very generous and makes deferral particularly attractive, but we would not want to see that jump to the other end of the scale and be in a position where all of a sudden a very poor option is made available. It is about knowing what that is and having an opportunity to debate that so that we can get the balance right. That is not necessarily about providing an over-generous settlement, but equally we should not want to create a situation where those who come to the point of making a decision decide that deferral is not worth it for them and that they should not bother when, in fact, by deferring their retirement they would continue to contribute not just through their skills, but through tax payments to the Treasury as they draw earnings.

From that point of view, deferring pensions is potentially advantageous. It is certainly advantageous to workplaces that do not want to lose people who are fit and able to make a valuable contribution. I hope that the amendment will be accepted as that would allow the Government to have a debate on the level at which such a measure would be set out and the impacts of any decision.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 11:45 am, 4th July 2013

I am grateful to the hon. Members for Cumbernauld, Kilsyth and Kirkintilloch East and for Edinburgh East for raising this point. It is entirely legitimate to debate the form of parliamentary scrutiny that different aspects of the single-tier pension should have. Where we feel that there is a substantive central element of the single-tier proposition, and the start rate seems to us to be substantively central, we have proposed that that is covered by affirmative regulations.

Where decisions are less on policy and more on the actual numbers, which will depend on data on the latest estimates of life expectancy, we think that provided we have been clear about the policy—we have set that out now for the Committee and it can scrutinise that and decide whether it agrees—the nuts and bolts of that number is a second-order issue. I entirely take the hon. Gentleman’s point that that matters to people; it is about how much pension they will get. It is, however, worth keeping this in context: fewer than one in 10 of the people who draw a state pension get any increments; the vast majority of people draw their state pension on time.

In terms of the division between affirmative and negative resolutions, we are making clear that our policy is that the rate of increment that people get for delaying their pension should be actuarially fair; that is the principle. To give an illustrative figure, we propose that for every 10 weeks a person defers taking their pension, they get an extra 1% on their pension. Earlier, I rounded that up crudely to state it as about 5% a year, as opposed to the current figure, which is about 10% a year. We are therefore halving the advantage given for deferral.

On the link between deferral and longer working lives, it is worth saying that the state pension is no longer a retirement pension and it has not been for more than a decade. People do not have to retire to draw their state pensions, so people can—and do—carry on working past the state pension age while drawing  their state pension and we do not mind that; we are very happy about that. Recent figures show that more than 1 million over-65s are now working and many of them will be working and drawing a state pension.

Again, on the idea that deferral is about longer working lives and encouraging people to work longer, I would say that it is much more messy and complicated than that. There is no problem or inconsistency if people want to work and have a pension; indeed, having a pension and working enables people to stage their retirement so that they can work part time while drawing their state pension and gradually phase into retirement.

I entirely agree that the House wants to know the policy, and I set it out. However, in the spirit of the amendment proposed, I want to make a further offer: we will be happy to publish the advice on which we set the number. We will ask the Government Actuary for advice on the level of increment that would provide a fair return, which is our policy, and we will publish that. Just as, for example, the Government Actuary currently advises us on the level of the contracted-out rebate, we publish that advice whether or not we accept it, so there is plenty of precedent for that model. We are transparent about the advice we receive and, if we come up with a different number, we have to explain why.

We are happy to put it on the record that we will do that. We will ask the Government Actuary at the relevant time how much the increment should be if we want to be actuarially neutral. Our policy is to set the regulations on that basis. We do not want then to have a nugatory debate in Committee—“The law says it’s the affirmative procedure, so we have to”—when all we have done is ask the question we have said we have asked, got the answer the experts have given us and done what we said we would. We do not want us to have to gather in Committee to go through all that.

Of course, even if we do not do what I have just described, the fact that something is subject to a negative resolution does not prevent us from having a debate in Committee about it. Hon. Members can pray against it, we can have a debate on it and obviously the House can express a view, but whether the procedure is affirmative or negative, the regulation is unamendable, so it is not as if one way allows it to be changed and the other does not. If the Committee does not agree with the policy, now is the time to say so. We have set out what the policy is. What follows, assuming the Committee agrees the policy, is the technical stuff—the actuaries coming up with the number and us acting in line with that.

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

I apologise for stopping the Minister in full flow. I thank him for the offer to publish the advice on that basis, which is to be welcomed. I was struck by his suggestion, on the point about what the payment would be, that this policy would halve the advantage given by deferral. Can he say a little more about what the logic of that decision is? We know that, in a cost-neutral Bill, there will be places where money is laid out and places where money is recouped. Is this one of the areas where money is being recouped, or is there another justification for it?

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

There are two justifications. One is certainly financial. The measure does save us money. If we did not do what I have described, in 2020 the scheme would  cost another £200 million a year and in 2030 another £300 million a year—significant sums. However, the justification is also conceptual. We do not have much evidence that spending money on incentivising people to defer their state pension and take increments really does anything. The hon. Gentleman was generous enough to admit that he did not know about the lump-sum option. Many people do not. We do not think that there are lots of people outside the House sitting down to read the whole of our 64-page booklet, although clearly there are some.

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

I just want to clarify what the Minister has said. I can exclusively reveal that I was aware of the lump-sum option; I just was not aware of the method by which the lump sum was calculated.

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

I apologise: I traduced the hon. Gentleman grossly unfairly.

Significant sums of money are involved. What are we spending £200 million or £300 million of taxpayers’ money on? It looks, on the face of it, like an inducement to defer pension. Has that led to many people working much longer? There is not really any clear-cut evidence of that. We cannot just throw a few hundred million pounds around here or there without pretty strong evidence that it is doing something, and we do not think that it is doing a great deal. For individuals, it might be, but there is no strong conclusive evidence that it is at an aggregate level. That is money that we could put into bits of the system where I think we would all agree we really want it.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

On the effectiveness or, indeed, the purpose of the scheme, I wonder whether the Minister has any views on the fact that the arrangements have not been in operation for a terribly long time and therefore might not be very well known, and whether there has been any significant change in take-up following the removal of the fixed retirement date.

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

I am not sure that I understood the final part of the hon. Lady’s question, but one of our dilemmas with regard to deferral is that we cannot tell that someone has done it actively. All we observe is that they are not receiving a state pension. We do not know at that point whether they are going to receive a lump sum or choose increments. When people have started drawing it, they can—“de-retire” is the wrong word, because they do not have to be retired, but hon. Members will know what I mean: they can go back to not having it.

The issue is trying to get a grasp on what people are actually doing. We have done a certain amount of research on this and, because of the system’s complexity, it is very hard. If someone is five years away from pension age, they can know what the law says the increments will be, but they cannot know what the lump sums will be, because they do not know what the Bank of England base rate will be in five years’ time, so it is just not money well spent in incentivising longer working lives. It is pretty clear that if we have £300 million to spend, we could do an awful lot more with it—for example, working with sectors of the economy where people drop out at 53, say. We could do an awful lot more in a much more targeted way than this policy.

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

Will the Minister fill in some of the history of the desire to encourage people to defer, and explain how the current policy proceeds from that and marks a break with it? It might be useful for the Committee to have a sense of where that came from and why the change is necessary now.

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

We are in a slightly odd transitional period. Although increments have been in place since the 1970s, the lump sum was an innovation in 2005. I think it was the Pensions Act 1995 that proposed that the rate of increment be enhanced—that was partly to do with the equalisation of state pension ages under that Act in 2010—and then I think it was the 2005 legislation that brought forward to 2007 the 2010 proposed changes to increments. There has been a lot of fiddling with all of this.

There has been a belief that surely if we give people bigger pensions for delaying them it must do something, but it is hard to see any clear-cut evidence for that in the data. The policy has evolved, with the best of intentions. I do not criticise that—I might even have been quite complimentary about it at the time—but having looked at the evidence, I have been surprised that deferral is not the calm, rational, carefully worked-out thing that makes people work longer.

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

I am struck that the Minister says honestly what his own position might have been at the time. I can assure him that we have no evidence to that effect; we have not been digging down on it.

I am struck by a point that will be pertinent to some of the discussions we have next week. The Minister had assumed a rational approach by individuals but, when the evidence is looked at, it turns out that people do not respond to those signals. I have always taken the view that his time at the Institute for Fiscal Studies made him too much of a believer in rationality, so it is interesting to hear him confess that perhaps rationality does not always proceed in the way one might hope or expect.

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

I have long given up on rationality. I am sure the hon. Gentleman is right. Therefore, we need a system that is simple for people and which acts as one would expect—that if one puts off the pension, one gets a bigger pension in a fair way. That is what we are proposing. I could share the fine detail that I have just remembered from the 2002 Green Paper, “Simplicity, security and choice”, Command Paper 5677, which had a 100-page covering leaflet explaining all the options. That makes me think that, on balance, we are going in the right direction now.

I hope I have reassured the Committee that we are being absolutely transparent about the policy we propose. It is an actuarially neutral increment rate. We are being transparent about the advice we receive; it will be published. We will base regulations on that policy. If the House thinks we have failed to do that, it will have the opportunity to pray against the negative resolution. On that basis, and at the risk of a nugatory affirmative debate, I encourage the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East not to press his amendment.

Photo of Mark Reckless Mark Reckless Conservative, Rochester and Strood

I thank the Minister for his explanation. His overall point that  the policy should be actuarially fair, and the evidence he has produced for that, means that there is no need for a positive resolution statutory instrument, but the debate has drawn out some important issues. I am a little sceptical about some of his numbers. It is not that I am sceptical about him or his analysis; I simply emphasise the uncertainty around the issue.

The number of people working past traditional retirement ages—perhaps an extra 1 million people—makes the uncertainty great. There is also the change in the pension requirements whereby employers cannot make people retire. Because of the way that changed, and because of the cut-off date, I fear that a significant number of people were forced into retirement prior to that date who would have preferred not to retire—the employer knew they would not be able to carry on afterwards—and that reduced the number of people temporarily who might have carried on working later and increased the chance of deferral.

After that, some people were able to carry on working. At the same time, there were significant pressures—the collapse in annuity rates because of the more general problems in the economy—on older people to keep on working. I think, therefore, that there are strong pressures pushing many more people into working longer. With that, there is at least a stronger rational argument for many of those people to defer their pensions, particularly given the generosity of the existing scheme. It is important to emphasise the availability of that generosity in relation to people of a certain generation retiring before April 2016. I asked the Minister on Second Reading about people whose retirement date was before April 2016 but who had triggered a deferral, and whether they could carry on deferring at the more generous rate post-April 2016. I recall that he answered, “Yes, they could”, but for some extraordinary reason it does not appear to have been picked up by Hansard, so if he could confirm that for my constituents again now, I would be grateful.

On the Minister’s numbers, he mentioned an extra £200 million by 2020, over a seven-year period from now, but an extra £300 million by 2030. Did he mean an extra £300 million in addition to the £200 million? If not, I do not understand why the amount by which that sum was rising would only be £10 million per year during the decade of the 2020s, given the £30 million or so per year in the earlier period.

The option is not particularly well known, and a lot of people might not have made rational decisions about it, but I wonder whether in a world where more people are working longer, it might become something that people are better advised and informed on and whether, particularly in the three years to April 2016, we might see significantly more people taking that option, not least because they could entrench the right to continue deferring past April 2016.

The situation will therefore be actuarially fair afterwards, but even that raises questions, because I am assuming that the deferral rate will be common for men and women, which suggests that—at least on the way such things used to be done—it will be actuarially generous for women and stingy for men. Are we required to do this on the basis of the European Court of Justice  ruling, or does it apply only to private sectors? Is the Minister choosing to do it that way for the state pension, or does EU law now require it? Will he and the Treasury look more closely at the sums involved and emphasise trying to understand how the sums could build up over the next few years? I wonder whether the sums’ incentive could be significantly greater than might have been assumed. I entirely recognise, however, the difficulty of the environment for modelling likely take-up, given the large things happening to the economy and the ability to carry on working past retirement age.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 12:00 pm, 4th July 2013

I am grateful to my hon. Friend for his forensic questioning, and I hope to offer him some reassurance. To assure him and the Committee, we anticipate publishing the number around the time the Bill receives Royal Assent. In other words, all being well, by around Easter 2014 the number will be out there, so people will know it two years ahead of things happening—there will not be any uncertainty. The question raised by the amendment is whether, having published the number, we would have to debate it or whether we would have to do so only if someone asked for a debate. That is what the amendment does. I can assure him, however, that people will know two years ahead of the date what the number is, which will enable them to plan.

On the specific question about my hon. Friend’s constituents and people whose state pension age will arrive before the implementation of the single tier, any deferral will be on current terms for as long as they defer. Even if they deferred past 2016, they would remain in the current system. In a sense, there is no rushing to defer: someone either is or is not a single-tier pensioner—if someone is a single-tier pensioner, they get the new accrual rate; if they are not, they get the old one. That will apply whatever happens.

On the costings, we must bear it in mind that the £200 million and the £300 million are heavily rounded numbers, so we cannot divide by four, 10 or whatever and infer an annual figure. We are simply saying that this is clearly a significant amount of money. The £200 million would be the extra cost of the scheme by 2020 if we kept the old increments going, and £300 million would be the extra cost by 2030 if we kept the old increments going—it is not another £300 million, but a total of £300 million.

The point I was trying to make is that those sums are significant and, as my hon. Friend says, they could get bigger. That is even more of a reason to set a fair, neutral rate, rather than an incentivised rate, because there is a lot of dead weight—a lot of people will defer because they were going to defer anyway, and we would just give them some cash. If we want to spend public money to enable people to work longer, my strong view is that keeping people in the labour market in their early 50s who might drop out because of ill health and a bad back is money vastly better spent than spending it on giving people slightly bigger increments because they draw a pension at 67 and not 66. That feels to me like the right balance of spending.

My hon. Friend is right that we would set the same rate for men and women. Although I am not a lawyer, I am about to become one: under European Union law, any rate would have to be the same. Domestic regulation in the UK would have to be the same as outside the UK, and it would therefore have to be gender neutral, as he expected. I hope I have answered his queries.

Photo of Mark Reckless Mark Reckless Conservative, Rochester and Strood

The Minister referred to the £200 million extra; I am still unclear whether that is extra compared to now, or whether some of that £200 million has already accrued from people taking their increments. I would also like to emphasise that of course, people are not paying national insurance after the state requirement age, so that is also a significant incentive for them to stay in the work force.

We have discussed the 51 to 53 group, and the Minister has come up with various scenarios in which they benefit, compared with where they lose out. We should also emphasise that the current opportunity to retire and have the increments at such a generous rate is available to them but will not be available to people retiring after the single tier.

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

On the costing, the question I asked was: “If we were to continue with the current system of increments—that is 10% for a year rather than 5% for a year—how much extra would we have to spend?” That is where the £200 million figure comes from. For people who have already deferred, we are talking about those who defer under the single-tier system. Anybody who has already deferred is baked into the baseline, as it were.

Clearly, our guesses are based on current behaviour. One could think that reducing the deferral rate might discourage people from working longer, but as my hon. Friend says, there are plenty of pressures that will lead to more people working longer. Inevitably, we have made an estimate. The fact that the number has eight zeros on the end makes it big, in my book: it is £200 million. I am absolutely not convinced by the slightly random and haphazard way in which we currently spend the money, compared with spending it outside the system or with what we are doing, which is recycling it within the system so that it enables us to pay £144, and not £143 and something or other pence. It just seems to be a better trade-off.

I hope I have been able to reassure my hon. Friend, and I encourage the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East not to press amendment 15 when the time comes.

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

I was interested in the dialogue between the Minister and the hon. Member for Rochester and Strood, who raised some significant questions. I was struck that, in the final part of the dialogue about the savings going forward, the Minister talked about the Government’s guesses being based on current behaviour. He also said that the Government anticipate publishing the parameters within which the deferral numbers will be set in 2014. I thank him for moving a little further by offering to publish the Department’s advice on how the numbers will be calculated.

I have a general view, which covers other parts of the Bill but applies specifically to this issue. The Minister will know from what I said a moment ago that I am very sympathetic to the argument that the incentive system appears to work with the grain of people’s rational behaviour, but, when one looks at the data, it is not clear that it is communicated effectively—it is not clear that enough people know about it and that it therefore works in the way the previous Government intended.

However, as the issue has been discussed further, the numbers involved have become a little muddier. We know that, in a cost-neutral Bill, as the Minister clearly  and honestly stated, there will be areas that involve significant savings, as well as other parts of the pensions landscape where there is greater spend. In that circumstance, and given my general view that scrutiny is better than a lack of it, we will press the amendment to a vote under clause 45, asking that the Minister or the Secretary of State return to the House to deal with the issue when setting the rate applicable to those who defer.

Photo of Martin Caton Martin Caton Labour, Gower

As I am sure you know, Mr McClymont, you will have the opportunity to choose whether to press or withdraw the amendment when we come to the clause to which it pertains.

Question put and agreed to.

Clause 17 accordingly ordered to stand part of the Bill.

Clause 18 ordered to stand part of the Bill.