Pensions Bill

My Lords, it will come as no surprise that I speak in favour of the Bill as it is in large part devoted to reforming the state pension system in line with the recommendations of the Pensions Commission. The Pensions Commission identified two inter-related problems with the British pensions system: first, that our state pensions are too complex and too means tested; secondly, that large numbers of people—indeed it is a majority of the private sector workforce—not only are failing to make adequate private pension provision on top of this rickety state system but a majority of the private sector workforce is making no private provision on top of this rickety system. These problems are, to a degree, related with the relentless spread of means testing undermining incentives to private savings. But there are also problems with the state system which are quite separate from its consequences for private incentives, in particular its poor treatment of many women with interrupted job records or caring responsibilities. In the face of these inter-linked problems the Pensions Commission proposed a twofold response: reforms to the state pension system to make it more generous, simpler, less means tested and fairer to women; and a national pensions savings scheme designed to encourage people to make private provision in addition and to enable them to save at low cost. The Bill deals primarily with the first thrust of the Pensions Commission’s recommendations, with another Bill next year to legislate for the national pensions savings scheme, albeit in this Bill power is taken to establish the delivery authority. The Pensions Commission’s recommendations received widespread, cross-party and cross-interest group support in principle, and so have the state pension proposals in the Bill. Criticism of the Bill, reflected, for instance, in amendments tabled in the other place, some of which may also be proposed in this House, have come almost entirely from those who wish that the Bill would go further and faster towards establishing a simpler and less means tested state pension system. Indeed, the Pensions Commission’s own recommendations were criticised from exactly the same direction as right in principle but too little and too slow even before the slight watering-down of our recommendations through the shift of the date of earnings indexation of the basic state pension from what we recommended, which was 2010, to 2012. As that is the main thrust of the criticism of these proposals and of the Pension Commission’s proposals, I shall say a few words in response to the criticism that we should be going further still. Concern has been expressed that the indexation of the basic state pension to earnings has not only been delayed until a likely date of 2012 but that the Bill itself, in a complex piece of wording which I would defy any non-expert to decipher, commits itself to make the change only before the end of the next Parliament. That concern has been expressed by the noble Lords, Lord Skelmersdale and Lord Oakeshott. Amendments were presented in Committee in another place to pin the date down more precisely. In principle, I agree that it is unfortunate that we have ended up with this complicated wording rather than with a straightforward commitment to commence average earnings indexation from 2012. I also believe that whatever the wording says, indexation of average earnings will commence in 2012, because I cannot imagine any of the political parties going into the next election without making it clear that that is their intent, or any government being willing to renege on this affordable promise. I have not checked whether it is allowable procedure in this House to offer wagers, but if it is allowable I would be willing to bet anyone that indexation of the basic state pension to earnings will start in 2012 if not before. The more fundamental criticism says that even if average earnings indexation starts in 2012, Britain will still be left with too means-tested a state pension system and that disincentives to private savings will remain and that even with the proposed changes to the contributory system, with 30 years of contributions securing a full basic state pension, and a more generous system of carer credits, a small minority of women will still fail to accrue a full pension and women retiring before 2010 will receive no benefit. I have three responses to these more fundamental criticisms. First, yes of course it would be more attractive to have a state pension system still simpler, more generous and less means-tested than now proposed, but all public policy is about trade-offs, and there are other claims on public expenditure. Achieving agreement to this package of reform involved what I might describe in retrospect as full and frank discussions with the Treasury. I do not criticise the Treasury’s role in those discussions. It is the role of the Treasury to challenge the many people urging on it increased expenditure on many different and equally attractive projects. Getting rid of means testing entirely is expensive—I suspect too expensive for any government ever to deliver. With this Bill, we have argued through to a compromise which is affordable, sustainable and an acceptable balance with the other claims on public expenditure. Secondly, it is vital not to make the unattainable best the enemy of the achievable good. It is vital to recognise that this Bill is a major step forward toward a more generous and less means-tested state pension system. Left indexed to prices, the value of the basis state pension would by 2050 be less than half of what it will be under these proposals. Without the Bill, the percentage of pensioners subject to means testing will increase from about 40 per cent to more than 70 per cent, but with the Bill it will fall. With the Bill, we will ensure that the proportion of women reaching state pension age with full basic state pension accrual, which is currently about only 30 per cent, will by 2025 be more than 90 per cent. Thirdly, while it is true that there will be people still subject to means testing once these reforms are enacted, the number subject to withdrawal rates high enough to offset the benefits to saving of tax relief and the proposed compulsory employers’ contribution will actually be much more limited than the 30 per cent figure mentioned earlier. Crucially, the likely total private savings, in the national pensions saving scheme or elsewhere, of those people subject to very high withdrawal rates will be very small. It is therefore likely that the remaining problems of disincentives to save could be significantly addressed by changes to the rules relating to the commutation of small pension accumulations into lump sum cash payments, and by changes to the capital disregard rules in relation to pension credit eligibility. I urge, therefore, that efforts to improve this package of reform, whether in amendments to the Bill or in subsequent policy debates, should concentrate on focused changes of that sort, which I believe could significantly address the remaining problems of means-testing. Similarly, some of the remaining problems relating to women’s pensions can be addressed by the sort of specific, focused proposals being developed and put forward by the Equal Opportunities Commission, for instance, without challenging the overall architecture of what is proposed by the Bill. My overall theme is simple. We cannot have a perfect, entirely un-means-tested state pension system except at an unaffordable cost, but the Bill is a huge step forward in the right direction. The Bill includes one element not related to the Pensions Commission’s proposals but to financial assistance scheme compensation. In the interests of time I will not comment on those proposals now, except to welcome the undertakings made by the Government in response to the debate in another place and to note, as I shall also note if I talk on this in detail in subsequent debates, that in relation to the winding up of pension schemes I have a declarable interest as a director of a life insurance company involved in the bulk buyout market. One issue that the Bill does not deal with, however, is public sector employee pensions. I know the Government will argue that any attempts to discuss public sector pensions within this debate or to propose the establishment of a review of public sector pensions are irrelevant to the Bill before us. Strictly speaking, that is true, but I have some observations. Following the Pensions Commission report there was an extensive, robust and, at times, heated debate about whether as a society we could possibly afford, over 50 years, to devote an extra 1.5 per cent of national income to the state pension system, on which 100 per cent of our citizens are to a degree dependent. At almost exactly the same time, it was accepted with almost no debate that public sector pension arrangements should remain in place, which implies that over the next 50 years probably an extra 1 per cent of national income—an increase from 1.5 per cent to 2.5 per cent—will flow as pensions to the 17 per cent of people who work in the public sector. That 17 per cent of the population owns about 35 per cent to 40 per cent, by value, of all the occupational pension scheme rights in the UK. As it happens, I am a supporter of good occupational pension provision in the public sector, including salary-related schemes, but I think there has been an asymmetry in the rigour with which the different issues of pensions for all people—the state pension system and public sector pensions—have been addressed. There is an asymmetry when the state pension age is now, quite rightly, rising to 68 by 2045 while someone who joined the Civil Service before 2005, even if currently aged only 25, will retire at age 60. I suggest that while this Pensions Bill provides an agreed and sustainable basis for the state pension system, the issue of public sector pension provision cannot be considered as fully settled by the limited reforms introduced in 2005. On the subject matter considered by the Bill, I remember that at a crucial stage in debates surrounding the Pensions Commission’s recommendations, the Chancellor of the Exchequer was reported as saying that he was 90 per cent to 95 per cent in agreement with what we proposed. I am happy to say today that this is a Bill with which I and my fellow commissioners are at least 90 per cent to 95 per cent in agreement, and I hope it will receive strong support from the House.