The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I would like to pay tribute to those whose diligent work underpins this Bill, in particular the former pensions commissioners the noble Lord, Lord Turner, and the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for his work on the previous Pensions Acts. I am sure that this will be a very interesting and well informed debate.
It is the nature of the legislative process that this Bill sharpens and defines the Pensions Acts that have passed before. The foundations of the current pensions regime stretch back to Lloyd George's epoch and we strive, as many have done before, to enhance the system and ensure that stewardship of the pensions system in our own era is worthy of our predecessors.
Even since the noble Lord, Lord McKenzie, stood in this spot in this House in 2008, our pensions landscape has continued to change. In 2008, the Office for National Statistics produced new population projections. If noble Lords would indulge me for a minute, it is worth putting this change into context. In 1981, someone retiring at 65 had on average 16 years in retirement. Today, someone retiring at 65 will spend on average over 21 years in retirement. In future, this is forecast to increase, with some spending half their adult life in retirement. With every new demographic forecast comes a continuing increase in life expectancy.
The very fact that people are living longer is testament to the many welcome advances made in medicine, in technology and in standards of living. Yet the increase in life expectancy places a great deal of pressure on the pensions system. Despite the policies implemented by the coalition Government that are aimed at restoring sustainable public finances, the Office for Budget Responsibility has projected that the impact of an ageing society could wipe out any progress on deficit reduction. Furthermore, the OBR's projections indicate that if the impact of the longevity challenge is left unaddressed, public sector net debt could reach 100 per cent of GDP by 2050. This is simply untenable.
Pension reform has traditionally proved the ability of the legislature to build consensus on an issue. We all agree that something must be done; that much is clear. Therefore, as we celebrate the fact that people are living longer, healthier lives, we also have to recognise that we need to establish a fair and sustainable pensions system to meet the inevitable challenges of increasing longevity.
We need a fair system that provides a decent income for an individual in retirement and distributes the costs appropriately between the generations; we need a sustainable system that acknowledges the changes in life expectancy and adapts to the reality of the society in which we live; and we need a balanced system in which the state, individuals and employers all play their role in achieving a fairer balance between work, saving and retirement.
This Bill makes amendments to existing legislation by correcting, revising and adding, where appropriate, to ensure that our pensions legislation is up to date and fit for the 21st century. A higher proportion of people are now living to 65 than ever before. Life expectancy beyond 65 is increasing steadily. Yet under existing legislation, the timetable for the state pension age increase to 66 was not due to be completed for another 16 years.
The Pensions Commission's 2005 report stated unequivocally that,
“A policy which allows each generation to spend an increasing proportion of life in retirement financed by an increased level of public pension expenditure as a percentage of GDP will be unsustainable in the long run and unfair to subsequent generations of taxpayers”.
In short, the timetable that provided the foundations for the 2007 Act is out of date, since that Act was based on the 2004 ONS projections of average life expectancy.
Noble Lords will be pleased to hear that 2006 was a golden year for all of us, because in that year the ONS updated its expectancy projections; and compared with 2004, many of us lucky individuals gathered here ended the year nearly a year younger than at the start because of this revision. Of course I am looking at age in terms of how long you are expected to have left rather than how long you have had. No anti-ageing cream or time machine can be as effective as what we saw in that wonderful year. But there is a price. If you take just the cohort of people retiring in 2010, the latest increase in life expectancy equates to an estimated £6.5 billion in cost, in constant price terms, over the lifetime of that single pensioner cohort. Given the scale of these costs, it is simply not affordable to wait to increase the state pension age, and it is certainly not fair to the working-age generation who fund the state pension. As outlined in the Government’s Command Paper published in November 2010, Clause 1 of the Bill will bring forward the timetable to complete the equalisation of women’s state pension age with men’s by November 2018. We will then raise the state pension age for both men and women to 66 by April 2020.
Noble Lords may wish to note that increasing the state pension age is something of a trend internationally. Ireland has already legislated for the pension age to be raised to 66 by 2014. Similarly, the Netherlands and Australia are increasing the state pension age to 66 by 2020. There is widespread recognition across the developed world that this is an issue that must be addressed.
The Government want all pensioners to have a decent and secure income in their retirement. That is why we have introduced the triple guarantee, for example, to ensure that the basic state pension will help to provide a more solid financial foundation for pensioners from the state. But alongside this, the Government must also encourage and enable a culture of individual savings. Around 7 million people are currently not saving enough to meet their retirement aspirations. This means that if we do not address the issue of under-saving now, huge numbers of people reaching retirement will be met with a pension income that is less than they hoped for. It is imperative that we encourage individuals to save for their retirement now rather than as a belated afterthought. The automatic enrolment of individuals into a workplace pension means that people will start thinking about their retirement in good time.
So, under the Pensions Act 2008, all employers will be required automatically to enrol all eligible workers into a qualifying workplace pension scheme from 2012. For the first time, employers will be obliged to make a contribution to that arrangement. I would describe this as an example of asymmetric paternalism—policy benefiting those who would perhaps not plan ahead but simultaneously allowing choice for those who do.
The principle of automatic enrolment has already been debated in this House during the passing of the Pensions Act 2008. We are absolutely committed to that principle. The Bill will tweak some of the parameters of the policy to ensure that automatic enrolment works as effectively as possible. This is what was set out in the recent independent review, Making Automatic Enrolment Work.
We propose a slight increase to the earnings threshold at which automatic enrolment is triggered, aligning it with the basic rate tax threshold. This simplifies the administration by aligning automatic enrolment with existing thresholds that employers use. We believe that this measure will create a buffer against de mimimis contributions without creating a significant contribution cliff edge.
The Bill introduces measures to ease the regulatory burden on employers by allowing a waiting period of up to three months. This is on the proviso that employers must provide a notice of their intention to invoke a waiting period and workers are able to opt in to pension saving if they wish to do so within this period.
The Bill also contains a measure to enable employers who are using money purchase schemes to certify that their scheme satisfies the relevant quality requirements. My department has worked closely with employers and industry bodies, including the ABI, CBI and NAPF, to design a straightforward test that will work in practice. The details of the test will be set out in regulations, but this clause sets out appropriate parameters to deliver an easement for employers to continue delivering quality pension provision while protecting individuals.
As a result of the workplace pension reforms, we expect 4 million to 8 million people to start saving, or save more, in all forms of workplace pension schemes. These savings could make all the difference to a comfortable retirement. To put this in financial terms, we estimate that someone earning £28,000 a year and saving into a workplace pension, with an employer contribution of 3 per cent, could increase their pension pot by an extra £650 a year as a result of the reforms. This will transform the pensions landscape in this country and help steer individuals towards a more secure future.
Part 3 of the Bill covers occupational pension measures. The Bill amends a few rogue references to the retail prices index in existing pensions legislation to set occupational pension schemes’ indexation and revaluation at the “general level of prices”. This follows on from the Government’s decision to use the consumer prices index, as announced in the emergency Budget. We believe that the CPI is the most appropriate measure of the general level of prices in this country for the uprating of pensions. If noble Lords will indulge me, I shall explain this approach. For example, as only 7 per cent of pensioners have a mortgage, with about 70 per cent of pensioners owning their own homes outright, the Government consider it appropriate and correct to use an index that excludes mortgage interest payments. The CPI excludes these costs.
Furthermore—a technical matter which I find fascinating—the CPI takes account of consumers trading down to cheaper goods when prices rise: the so-called substitution effect. The RPI does not do this. That does not make the RPI an inappropriate measure, but it makes the CPI a measure that is more appropriate in this instance. Who does not switch brands of teabags or biscuits when feeling the pinch on the wallet? It is basic budgeting. The CPI reflects the changes that people make. Suffice it to reiterate the words spoken about CPI in 2003 by the then Chancellor, Gordon Brown:
“It is more reliable … It is more precise”.—[Official Report, Commons, 10/12/03; col. 1063.]
I shall not weary your Lordships now with the details of the methodology behind the two indices and the advantages of that employed by the CPI. The comparison between the two indices is what fuels this debate—the question of which is the most appropriate index for pension payments to reflect inflation.
We must remember that the key legislation for setting the statutory minima for the revaluation and indexation of occupational pensions is not in this Bill. The Occupational Pensions (Revaluation) Order 2010 was laid in December and came into force earlier this year. Legislation requires the Secretary of State to consider the “general level of prices in Great Britain”, not a specific index or a specific price. Furthermore, indexation is aimed at protecting purchasing power, and the use of the CPI does indeed protect an individual’s occupational pension from inflation. Noble Lords may also note that any schemes wishing to pay the higher of RPI or CPI are perfectly able to do so. In similar vein, the Bill amends references to compensation paid by the Pension Protection Fund. Provisions are also included to remove the indexation requirement for cash balance benefits.
The Bill also introduces provisions to allow for contributions to be taken from members of the salaried judiciary towards the cost of providing personal pension benefits. The interim report of the noble Lord, Lord Hutton, found that the value of public service pensions had been increasing following dramatic increases in life expectancy at retirement. The Government have accepted the noble Lord’s recommendations that the most effective way to make short-term savings on the cost of public service pensions is to increase member contributions. In view of this recommendation, it is right that judges, like other public service pension scheme members, should begin to contribute towards their own pensions.
In 2009-10, judges paid £4.3 million in total towards dependants’ benefits, compared to a contribution by the Government—and, ultimately, the taxpayer—of nearly £84 million. There is clearly a good reason for members of the judiciary to make a greater contribution if their pensions are to remain fair to them and to taxpayers, as well as remaining affordable for the country. I would therefore argue that the provisions for the judiciary included in the Bill represent a fair, affordable and responsible way forward.
Indeed, the principle of contribution is already contained within judicial pension schemes. Existing provisions are in place for contributions to be taken from members of judicial pension schemes towards the costs of widows’, widowers’, surviving partners’ and children’s benefits. The Bill proposes to extend the contributory principle to cover personal pension benefits, with rates to be set through secondary legislation, consistent with the approach taken for existing contributions. However, judicial officeholders who have already accrued full pension benefits will not be required to contribute under this measure. The Bill legislates for this provision to be phased in from April 2012, and the savings on pension costs will make an important contribution to our commitment to deficit reduction.
I must also acknowledge that esteemed body, the Delegated Powers and Regulatory Reform Committee, which has published a report on the delegation of powers contained within the Bill. The committee commented on one of the amendments, in Schedule 4 to the Bill, relating to the Pension Protection Fund, and it has requested an explanation of the relative financial significance for pension schemes of the PPF levy in comparison with the pension protection levy and the general levy.
I would be happy to clarify this matter for the House. The amounts to be recovered on behalf of the Secretary of State through the PPF administration levy and the general levy are broadly equivalent. For both the financial year ending 31 March 2011 and the financial year ending 31 March 2012, the PPF administration levy was set to recoup £22 million; for the same periods, the general levy was set to recoup £43 million a year. By comparison, the amounts to be recovered on behalf of the board of the Pension Protection Fund through the pension protection levy are much higher. For the financial year ending 31 March 2011, the pension protection levy was set to recoup £720 million; for the financial year ending 31 March 2012, the levy was set to recoup £600 million. I hope this satisfies the request of the committee.
The Bill contains several parts, but these parts are joined together by a common thread—readjusting the pensions landscape to work towards a more sustainable system in the face of increasing longevity. I do not need to labour the point about the scale of this challenge: many noble Lords present have contributed richly to writing the book on pensions reform, including taking legislation through this House and another place. I will, however, reiterate that the Bill provides the essential amendments needed to ensure that we have a fair, affordable and sustainable pension system to pass on to the next generation. I beg to move.