Pensions Bill

I very much welcome the opportunity in Committee to debate the detail ofa Bill that has been widely welcomed. I welcome contributions from veterans of past pensions debates and newcomers, such as myself and my noble friend Lady Morgan. We are happy to engage with Members in Grand Committee or on the Floor of the House—whatever the usual channels determine. Amendments Nos. 1, 5 and 6 all concern the keystone of our state pension reforms: namely, that to qualify for a full basic state pension there will beone single 30-year contribution condition. These amendments raise three important points: first, why the Government have chosen 2010 as the introductory year for the 30-qualifying-year condition; secondly, why we do not propose to apply the change to both existing and future pensioners; and, finally, why we do not intend to phase in this reform. In responding to these important questions, I begin by saying that Clause 1 addresses the inequality of state pension outcomes for men and women. It will bring forward the improvement in women's outcomes in particular, with almost three quarters of all women reaching pension age in 2010 receiving a full basic state pension. Moreover, from 2025 the proportion of women reaching state pension age with a full basic state pension will, for the first time, equalise with men at over 90 per cent. Without these reforms only around 75 per cent to 80 per cent of people would be entitled to a full basic state pension by then. It surely must be the case, though, that when changes are made a line has to be drawn somewhere. To bring that line forward from 2010 to 2008, as the noble Lords, Lord Oakeshott and Lord Kirkwood, propose, would substantially increase costs, jeopardising the overall affordability of the reform package. The estimated additional net cost would be around £50 million in 2008 and around £150 million in 2009. Those additional costs would persist well into the longer term, so it is worth considering the practicalities. It would be impossible to bring these measures forward to 2008 because of the lead time required to make changes to both the pensions' computer system and the NIRS system. The lead time is at least 18 months. The noble Lord, Lord Skelmersdale, chided the Government on their performance on changes to computer systems. Having the proper lead time is the key to this working effectively. That lead time is similar to lead times for changes to systems in the private sector. We cannot undertake detailed design work until we receive Royal Assent, so we look forward to co-operation from Members on all sides of the Committee to get that as soon as we can. So, even putting costs aside, the earliest that the change could realistically be implemented is 2009, and the more complex the change—for example, phasing it in—the more challenging it would be. As Members of the Committee know well, there has been much debate about the cliff-edge effect of this measure, about which I wish to say a little more. I should begin by saying that bringing forward the introductory year to 2008, as proposed the noble Lord, Lord Oakeshott, would not resolve the cliff-edge effect, but would simply move the line so that it would apply to a different group of people. In response to the amendment tabled by the noble Lord, Lord Skelmersdale, and the noble Baroness, Lady Noakes, I acknowledge that there is much to be said for phasing in major changes in policy in order to graduate the effect whereby people are treated significantly differently on either side of a seemingly arbitrary line. That is exactly what we would have done, were there not overwhelming reasons for making these changes with full effect from 2010. It is inescapable that the benefit of this measure is optimised if we introduce it in one hit. We are determined that these measures benefit the maximum number of people. I accept that if we were to smooth the reduction in qualifying years to 30 over a period of a few years, there would be a less stark change in outcomes either side of A-day. However, it would also mean that fewer people would benefit overall and, moreover, the critical cohort of women aged over about 45 today—who we have identified as being in particular need of help—would be most disadvantaged by such a phasing arrangement. I assure noble Lords that we have explored options for mitigating the cliff edge either side of 6 April 2010, but we have concluded that no option provides an acceptable solution. The options are either unfair in principle or they introduce unwelcome complexity or are simply unaffordable. We believe that there are two realistic ways that this reform could be structured so as to smooth the differences in outcomes. First, we could introduce the single contribution condition more slowly with a phased transition starting with 38 qualifying years for women and men in 2009 and reducing qualifying years in one-year steps to reach 30 in 2017. This would smooth the introduction of the reform, but would make the gains for women reaching pension age from 2010 to 2016 less generous. As a result, around 65,000 fewer people would miss out on a full basic state pension and some 45,000 of them would be the women for whom the reform is most needed. Secondly we could make the measures retrospective, as the noble Baroness, Lady Greengross, suggested. I have some sympathy with this view as it seeks to improve the situation of today’s and tomorrow’s pensioners and would create a level playing field for those reaching state pension age either side of 6 April 2010, which is the point at which the single contribution condition in Clause 1 comes into force. On the face of it, the noble Baroness’s amendment could increase the amount of basic state pension paid to some existing pensioners and its effect for those reaching state pension age from 2010 would be similar to that of Clause 1, and would therefore make it unnecessary. However, I should say to noble Lords that while there is admirable intent behind the idea of retrospection, we should be aware that such an amendment would not be affordable and would not necessarily achieve improved outcomes for all. The cost of introducing the proposals for all pensioners is extremely high: at least £1 billion in 2010. The noble Baroness, Lady Greengross, asked why we do not use the savings from the abolition of DC contracting out to pay for it. Over recent months, we have seen a number of references to the so-called savings from the rebate being used. I should make it clear up front that the abolition of contracting out for defined contribution schemes will not produce savings as such. While abolishing the DC rebate reduces costs in the short term, of course there is a broadly equivalent increase in future spending on the state second pension. On retrospection costs, this does not take into account substantial additional expenditure on administration—a matter the noble Lord, Lord Skelmersdale, was interested in—tied to the reassessment of cases. A retrospective approach would require the Pension Service to reassess the pensions of more than 2 million current pensioners in one go. It would do little to improve outcomes for the poorest pensioners, many of whom would be no better off because it would simply displace money they receive through pension credit. Indeed, some could end up worse off because they could lose entitlement to a range of passported benefits, such as housing benefit and council tax benefit. I am sure noble Lords will agree that this is a huge amount of work, which in many cases would achieve little or no overall gain. I am certain that it would also create confusion and uncertainty among today's pensioners. I draw attention to the letter that James Purnell, the Minister of State for Pension Reform, published in the other place. That letter is reproduced in the information pack made available to your Lordships. It sets out a number of the phasing options that wehave considered but rejected for the reasons I have set out. To sum up, it is neither affordable nor realistically practicable to bring forward the introduction year for the 30-year single contribution condition to 2008. That also holds true for applying 30 qualifying years for a full basic state pension to all pensioners—today’s and tomorrow’s. And a phasing scenario does not provide an acceptable solution. It does not meet the Government's key tests for reform based on fairness, simplicity and affordability—tests whichthe noble Lord, Lord Skelmersdale, said he was supportive of. Rather, we believe that 2010 is the most logical time to introduce these changes, not least because that is when the state pension age for women begins to rise. People reaching pensionable age before 2010 will do so in a different scheme where different rules apply. For example, women benefit from a lower state pension age and the age at which people become eligible for pension credit is 60. I hope this explains why the Government have chosen 2010 as the point to draw the line for the new single contribution condition. I therefore urge the noble Lord to withdraw his amendment.