Pensions Bill

My Lords, 2 per cent is the figure I have, but I will write to the noble Lord if the figure is different. My noble friend Lady Hollis and the noble Lord, Lord Oakeshott, raised the issue of a residency-based pension or a citizen’s pension. At one end of the spectrum there are those who argue for a residency-based single-tier citizen’s pension to be introduced at the guaranteed credit level. The cost of that would be prohibitive, something like £20 billion a year. The Pensions Commission recommended a residency-based pension on a prospective basis, building up accruals over a lifetime, but that does not mean that such arrangements would not produce the sort of anomalies identified by my noble friend Lady Hollis. Any system has to have rules, and there would be people who potentially fell outside this one. There are issues about definitions of ““residency””. The Pensions Commission recognised that if it would not be possible or practical to have a resident’s pension, the right thing to do would be to continue with the contributory principle on which these proposals are founded by the Government but to change things such as the de minimis rule, the home responsibilities protection, the alignment of child ages for BSP and S2P credits and the combination of multiple jobs below the LEL. We have done the first three of those, and our reforms with regard to the number of years required for full basic state pension help to address the latter. The noble Lord, Lord Oakeshott, raised the issue of frozen pensions for overseas pensioners. The Government’s priority is to help the least well-off pensioners living in this country, and we will continue to help them so they are able to have a decent income in retirement. The noble Lord will be aware of the cost of uprating on a routine basis pensions for overseas pensioners outside the arrangements that currently exist of the order of £420 million a year. My noble friends Lady Hollis and Lady Dean, the noble Lords, Lord Skelmersdale, Lord Fowler and Lord Blackwell, and the noble Viscount, Lord Trenchard, touched on the issue of annuities. The Government’s position on the issue is clear and unchanged—pension saving is about giving individuals an income in retirement, and for no other purpose. The Government provide tax incentives to encourage people to save for retirement, and in 2005-06 these totalled some £14.3 billion. It is right that when an individual comes to take their pension benefits they can take up to 25 per cent of the pension fund as a tax-free lump sum, but in return for those incentives the Government have required aspart of the deal, entirely reasonably, that by the age of 75 the remainder of the pension fund is converted into secure retirement income for life and used to provide for dependants benefits. Annuities provide the peace of mind of an income for life, regardless of how long that may be. They provide simplicity, security, a guaranteed income and little risk. Indeed, generally there is little pressure for the change noble Lords have spoken of—currently only5 per cent of people annuitise after the age of 70—but the Government will keep under the review the Pensions Commission’s suggestion that the age limit should rise in line to ensure consistency with the extended working lives agenda. There is no rationale for taxpayers to subsidise bequests through pension tax relief, the point that was argued for by the noble Lord, Lord Blackwell. The annuity market has responded to challenges and absorbed a tripling of demand over the past 15 years. Those who argue for a change in the rules typically argue for there to be a requirement to purchase an annuity up to a certain level to keep people off benefits. My noble friend Lady Hollis touched on that point. Our estimates are that setting up an annuity threshold to keep an individual off state benefits would, at most, allow individuals with the largest5 per cent pension funds to withdraw the remainder of their funds as a lump sum. We consider that this change would be regressive and add complexity to the system. My noble friend Lady Dean and the noble Baroness, Lady Thomas, raised the issue of the LEL and aggregating the jobs below the limit. The Government have looked closely at the issue of aggregation and agree with the Pensions Commission, which found that there is no straightforward mechanism to allow earnings from multiple employers to be aggregated in a way that would not impose additional administrative burdens and costs on business. We should recognise that simply because people have more than one job below the threshold does not mean they are excluded from state pension protection through national insurance credits or, currently, home responsibilities protection. The figures—one noble Lord quoted them—are that there are about 15,000 women in that situation at the moment, but we do not believe that people necessarily stay in that mode throughout their working lives. With the reduced number of years needed to achieve a full basic state pension, we do not think that is the right way to proceed. Many noble Lords commented on the issue of advice and financial capability—whether this should be provided through the education system and whether it should be generic or more specific. The noble Lords, Lord MacGregor, Lord Addington, Lord Blackwell and Lord Oakeshott, and the noble Baronesses, Lady Greengross and Lady Thomas, touched on that, particularly the importance of people who are carers having full advice. My noble friend Lord Howarth also touched on the issue, although I do not think he saw it as a route for the national curriculum. The Government believe that everyone has the right to get advice they can understand and trust on the options available to them, whether that is getting out of debt, choosing a home or saving for a pension. We are delighted that Otto Thoresen is leading this work. It is vital to use the expertise of people who understand financial services. The Government, alongside the Personal Accounts Delivery Authority, will provide individuals with the information they need to support the choices available: whether to opt out or save additional amounts, whether to choose a fund and when, and how to draw a pension. I understand that this is an issue we will wish to discuss in considerable depth in Committee. The issue of whether there should be future reviews or how that should proceed or whether there should be a standing pensions commission was touched on by my noble friend Lord Howarth, the noble Lord, Lord Freeman, and the noble Baroness, Lady Greengross. The whole package of reforms is based on the fact that people need clarity and certainty about the future in order to plan and save for retirement. A standing pensions commission would undermine this by creating a vehicle for permanent re-examination of the framework and of policy and would be an unnecessary and expensive quango with little to do in the short to medium term. We will carry out periodic reviews, drawing on a range of independent expert advice in the light of emerging evidence on demographic change to confirm whether the timetable for increasing the state pension age, as set out in the legislation, remains appropriate. That should also be the process for looking properly at the issues of disparities in life expectancy, a point raised by my noble friend Lady Turner. The noble Baroness, Lady Greengross, and the noble Lord, Lord Sheikh, referred to issues of the cliff edge in introducing the changes in basic state pensions. We have looked at phasing changes in more gradually, both from 2010 or an earlier date, and apart from introducing complexity, we do not think an earlier introduction would be right in principle. It would be unfair for people to gain from both today’s scheme through the lower pension age for women as well as the proposed reforms. The noble Baroness, Lady Thomas, asked how we are going to publicise the carer’s credit. We have already been working closely with a number of carers’ organisations, most notably Carers UK, and they have warmly welcomed the credit. Other details about the carer’s credit will be dealt with by regulations which will be affirmative when they are first introduced. The noble Baroness, Lady Howe, asked about the modelling. Our modelling and forecasts assume that the Bank of England hits its 2 per cent inflation target on the consumer prices index and that earnings grow 2 per cent faster than prices. A number of noble Lords raised the issue of whether there would be financial incentives to save in the system and how that interrelated with issues of means-testing. The noble Lords, Lord Blackwell, Lord MacGregor, Lord Hunt, and Lord Turner, and my noble friend Lady Turner, each touched on this matter. Our estimates show that a large majority of people saving in an occupational pension or personal account can expect good payback on their saving. Somebody saving over a full working life would expect around £2.50 plus inflation payback for every £1 they invest in a personal account. Entitlement to pension credit does not mean that people will get poor returns from saving. Most people who qualify for pension credit in retirement can expect to see a positive return on their saving. Many long-term savers would expect to get back as much as £2 plus inflation for every £1 that is saved in a personal account. I acknowledge again those are issues that we will need to discuss in more detail in Committee. As for the financial assistance scheme and the opposition proposals for a lifeboat fund, I see that the Lib Dems and Conservatives are proposing to stand shoulder to shoulder on this again, but the Government’s approach contrasts with the spending promises made by the opposition parties in their amendments to the Pensions Bill calling for a lifeboat fund funded from unclaimed assets and/or government loans to top up FAS payments. We do not know what assets, if any, are available and therefore this amounts to an unfunded spending commitment. If people want to put more public expenditure in to raise the level of compensation, they should come clean and say that is what they are doing, otherwise we have a fudge. The Government believe it is sensible to ask the experts on the review team to identify whether assets are available and make informed recommendations on their optimal use. The noble Baroness, Lady Howe, asked about unisex annuities. The Sex Discrimination Act prohibits discrimination based on sex relating to the provision of goods, facilities or services, but there is an exception for the provision of insurance. For example, women under 30 generally pay less for motor insurance in the UK than equivalent men. This is based on the frequency of claims made and the size of those claims. Similarly, it is generally more expensive to pay a given level of annuity to a woman than to a man because on average the woman will live longer. Similarly, impaired-life annuities offer a better rate for people with certain health problems which significantly reduce their life expectancy. My noble friend Lady Hollis asked about the self-employed. Self-employed people will be able to opt into personal accounts, saving at a rate of their choosing, subject to any general limits. There will not, of course, be an employer contribution as there is no employer. The noble Baroness, Lady Miller, raised an interesting point which we might best deal with in Committee. I would say to her that the Bill says that the uprating must be based on a ““general level of earnings””. Therefore, picking and choosing footballers or football managers or whatever clearly would not be permitted. It also says that the uprating must be ““not less than”” and so it would provide for catching up in the circumstances the noble Baroness identified. Again this is an issue for us to discuss in Committee. The noble Lord, Lord Skelmersdale, asked about savings from the abolition of ADIs. The abolition of ADIs from 2010 will save nearly £2 billion by 2020 and this will be reinvested in the substantial measures which improve the coverage of the basic state pension, which of course will particularly benefit women and carers so that by 2025 90 per cent of women retiring will have a full basic state pension. The noble Lord also asked about FAS and thelevel of payouts. As of today, they are being made to 1,166 members—955 members receive an initial payment and 211 receive annual payments. A further 92 will be paid once their personal details have been confirmed. FAS has paid all scheme members for whom scheme trustees have provided the operating unit with the correct information. There is no backlog of payments. The noble Lord, Lord Oakeshott, asked about the level of means-testing in 2050. Our model showsthat 28 per cent of pensioners will be eligible for pension credit in 2050. Of course, forecasting the world in 2050 could be challenging, so we normally say about or under 30 per cent. This is a good issue to explore in Committee, as the noble Lord, Lord Kirkwood, said. The noble Lord, Lord MacGregor, asked why we are waiting until 2024 to bring forward the SPA. We wanted the first rise in state pension age to fall after we had finished equalising the state pension age for women in 2020. We also want to give people an adequate period of notice. We gave 15 years’ notice of equalisation and want to give a similar period for the first of these increases so that people can plan ahead. The noble Lord also asked about the links between the uprating by earnings and the increase in pension age. Much as the noble Lord, Lord Turner, said when he published his report, this is a package of measures. We believe that they need to be taken together and on that basis, they present an affordable package. A number of noble Lords touched on levelling down. Workplace pensions are an important recruitment and retention tool, and we believe that the benefits offered by employers will continue to reflect this. We carried out a nationally representative survey of 2,500 private sector employers across a range of size bands. Some 1 per cent of respondents said that they would reduce the level of contributions; only 2 per cent suggested that they might close down their scheme or introduce eligibility restrictions. The noble Lord, Lord Sheikh, asked about how the rebate savings will be used. In the short term, the abolition of defined contribution contracting-outwill mean an increase in revenue to the National Insurance Fund. However, this change is balance sheet-neutral in that there will be a comparative increase in state second pension liabilities later. My noble friend Lady Dean asked whether I could repeat the assurance about carers. Perhaps the easiest thing would be for me to drop her a note. The noble Lord, Lord Sheikh, said that he believed the present pension credit is unpopular. I do not know whether his party would scrap it, but it has been key in helping a number of people to escape poverty. The noble Lord also asked about governance and appointments to the PADA and how it will become the Personal Accounts Board. We are establishing the advisory delivery authority to bring in the expertise needed to set up an occupational pension scheme of this size. The noble Lord, Lord Freeman, raised a number of points about occupational pensions, longevity and actuarial valuations. I agree that reliable, consistent actuarial advice is important. As he said, the Board for Actuarial Standards has been set up to promote high standards. I confirm that the board is independent of government—indeed, there is a specific provision in the Bill on that. I agree that trustees have a vital role and that the Pensions Regulator has taken significant steps in promoting trust, knowledge and understanding. On the increase in the percentage of GDP taken by pensions and how that relates to the number of pensioners, perhaps I may reflect on that and write to the noble Lord. It is an interesting point. The noble Lord, Lord Hunt, talked about consensus and said that it has to be earned. I agree—consensus has to be evidence-based and we have to examine these issues openly and fully. I welcome a constructive engagement. The Government will play their part in that. The noble Lord, Lord Blackwell, asked about the phases for personal accounts. The advisory delivery authority will run from the Royal Assent of this Bill to the Royal Assent of the second Bill, which we hope will be the summer of next year. The executive delivery authority will run from the Royal Assent of the second Bill to hand over to the final scheme which we estimate to be in 2011-12. The Personal Accounts Board needs to be established before the scheme goes live, which we hope will be in 2012. My noble friend Lord Howarth asked about small employers and contributions for personal accounts. We announced in the White Paper that we will phase in contributions to personal accounts over three years; this will help all participating employers to adjust to the additional cost. While we recognise that the smallest businesses will have the most difficulty in managing additional costs, personal accounts will not be implemented until 2012. My noble friend Lord Howarth also asked some interesting questions about what the Government are doing about the Pensions Commission proposals to tackle age discrimination, the deferring of pensions and reskilling of older workers. That is perhaps an issue for wider debate, but recent years have seen a significant improvement in the employment rate of50 to 69-year-olds, which has risen from 48.7 per cent in 1997 to 55.4 per cent in 2006. There are 1.1 million people working after reaching state pension age. Clearly, there are some more challenges to address, but the Government's recent White Paper, Further Education: Raising Skills, Improving Life Chances, set out policies to help people of all ages to improve their skills. The noble Baroness, Lady Noakes, touched on the role of the delivery authority, wishing to constrain it or to be more specific about its remit in legislation. I am not sure whether the concern was that it would be too independent or not independent enough, but that is a debate for another day. If I have not covered all of the points raised, I will read Hansard and follow them up in correspondence, unless we will clearly deal with the matters in Committee. In 1997, we made it clear that addressing pensioner poverty would be our first priority. In a decade, we have come far. I began today by saying that pensioners are now less likely to be poor than the population as a whole. That is a significant achievement, and one of which we are rightly proud. But if we are to lock in that success for future generations of pensioners, we need to do more. The long-term challenges of demographic change, widespread undersaving and the shortcomings of today's pension system demand a bold and lasting response. That is why the Bill is so important. It represents an historic opportunity to cement a national consensus, and, for the first time, to offer all our citizens a framework of long-term stability in which they can plan for their retirement with confidence. The Bill will establish a clear deal between the state and the individual, that a life spent working or caring will be recognised and rewarded fairly with a simple and solid state pension entitlement. It will represent the most significant move towards equality between men and women since the introduction of home responsibilities protection in 1978, and will create a system that is affordable, not only today, but for future generations. In other words, it will be a system that is sustainable. I am sure we all share the fundamental belief that tomorrow’s pensioners, like today’s, are entitled to security and dignity in retirement. The Bill puts in place the legislative support to ensure that that belief can be realised and I commend it to the House. On Question, Bill read a second time, and committed to a Committee of the Whole House.