The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I am grateful to the noble Baroness for the opportunity to spend a little time today on our proposals for reforming the state pension. She has been instrumental, as other noble Lords have pointed out, in the move for better pension provision for those left out of the benefits of the heyday of the occupational pension and the earnings-related state counterpart. The Pensions Act 2007, with its enormous boost for women through the reduction in qualifying years for basic state pension and the increasing coverage of the state second pension, could have been the final push for equal treatment in state provision.
Even that was not good enough, though. In March last year, a week before the 2007 Act started to deliver for women, the noble Baroness launched the pamphlet The New State Pension: A Call to All Parties, which pushed for further radical change. Very skilfully, she got my honourable friend, the Minister responsible, to contribute a chapter to that. It proposed a new type of state pension with a near-universal amount, set above the level of the means test and made affordable by paying the pension to new pensioners only. Her main motivation, as ever, was to deliver an adequate state pension for women who, because of low pay and career breaks, have historically lost out in pension provision.
Just over a year later, the Government published their proposals for improving state provision, A State Pension for the 21st Century. That Green Paper confronts the big issue of how to respond to a decline in private saving at a time of increasing life expectancy. It describes how means-testing, with all the damage that it can do to private saving, pervades the state system. It describes the great complexity of the state system. Bluntly, for most people the system is simply impenetrable. Crucially, it fails to answer the most obvious of all questions from potential private savers: is it worth it? How much will I get from the state when I retire anyway? As importantly, it describes the extent of inequality in the state system—how women, on average, get £40 a week less state pension than men and how they are more likely to live in poverty as pensioners.
The Green Paper describes two options for reform to respond to the challenges that the pension system faces. The first option would simplify the state second pension. It would strip out the earnings-related part of the second pension, leaving just a flat-rate amount—the same pension for all workers and people who are credited into the system for caring and other good reasons. The second, more radical, option would effectively fold the basic and second pensions into one to create a simple single-tier pension, set above the level of the guarantee credit. This option, which is clearly similar to the one that the noble Baroness proposed a little more than a year ago, would mean that by 2020 no less than 90 per cent of pensioners—men and women—would retire on a pension above the guarantee credit.
The Green Paper, as I said, was published earlier this month and the consultation is currently under way. As the noble Baroness appreciates, changes of the magnitude proposed in the Green Paper can be progressed only by listening to the views of all those with an interest. It is far too early in the process for the Government to come to a view on the way ahead, so I cannot give a conclusion to the consultation. I assure the noble Baroness that, should the Government decide to bring forward proposals to reform the state pension system, we would as a matter of course publish a full assessment of impacts, including those on women, alongside any reform proposals.
I remind the House that we published an impact assessment, including a gender, race and disability impact assessment, of our proposals to increase the state pension age first as part of the White Paper setting out our response to the call for evidence and again alongside the publication of the Bill when it first entered Parliament. Those assessments will be further amended and revised as necessary for republication when the Bill enters the Commons and yet again once the Bill has completed its passage through Parliament. I can therefore assure the House that, were the Government to publish a White Paper on reform, we would be no less diligent in providing detailed information on the impacts of any policy changes by gender, ethnicity and a range of other factors. In short, there will be plenty of opportunity for noble Lords, as well as Members of another place, to scrutinise any proposals for reform and their likely impacts, should the Government decide to proceed with reform.
I emphasise that the proposals that we have set out in the Green Paper do not depend on increasing the state pension age. As I said in our debates on Clause 1, the rise in the state pension age must be brought forward because the sharp upward revision in life expectancy projections has overtaken the legislated timetable. The revised timetable would be necessary with or without the reforms on which we are consulting. We have already discussed at some length the impact of our proposed changes to the pension age timetable, in particular on those cohorts of women who face an increase in their pension age of up to two years. A number of noble Lords have emphasised that point and I do not propose to rerun that debate. However, I draw attention to the fact that a key objective of the reforms, alongside simplifying the system and rewarding those who save, is to look at how the state pension could be made fairer for groups, including women.
The noble Baroness’s amendment seeks to ensure that we consider the impact of the state pension age changes in conjunction with our proposals for reforming the state pension scheme. As I said, we are only at the consultation stage on our reform proposals but I can assure the House that although, as I hope I have made clear, these are not interdependent changes, we would undertake such an assessment if these reforms are taken forward. I trust that I have been able to assure noble Lords that the statutory duty that the noble Baroness’s amendment would impose is not necessary and, furthermore, is somewhat premature. We will have many opportunities to debate what to do with any reform proposals as they go through the whole process. I therefore urge the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
My Lords, I thank all those who have taken part around the House, including the noble Lord, Lord Boswell, the noble Baroness, Lady Howe, and my noble friend for their warm support for the principle of the amendment. If the comments in this House are anything to go by, the Minister can be assured of the reception that his Green Paper will receive outside the House. I am confident that it will be greeted with warm support.
I very much take the point made by the noble Lord, Lord Boswell, that we have to see pensions as part of a structure. However, such a new single state pension is the keystone for any reform not just of state pensions but of occupational pensions that do not generate a savings trap for those on lower earnings. That is why noble Lords all round the House are so delighted to see the possibility of that keystone finally coming into place. The noble Lord said that we should minimise retrospective unfairness and avoid future moral hazard. Those words are well taken; they are wise words for us to absorb.
My noble friend Lord McKenzie is absolutely right that, with the advent of a new single state pension, the issue of the threshold of enrolment into NEST disappears. It does not matter whether you end up with £3,000, £30,000 or £300,000 of savings; you keep the lot if the new single state pension is in place. Therefore, you do not have to legislate to avoid the moral hazard of low-paid women earning less than £7,500 a year going into NEST because their savings may not be worth having, given the effect of pension credit. As NEST will be reviewed in 2017, which many of us are already looking forward to, I very much hope that we shall be able to revisit this issue then as, with the new single pension in place, a threshold of enrolment will simply not be necessary. However modest the savings, they will be worth having and worth encouraging, so that even the poorest of people can go into retirement with a cushion against the adversities of old age.
I am grateful to the noble Lord, Lord Freud, for his generous comments on the background to the single pension and to his officials for their work in bringing the Green Paper forward. My only regret is that the Green Paper came too late for Report and that Third Reading has come too early for the results of the consultation. None the less, we are trying to wedge this in between the two. I believe that the new single pension will transform the pension landscape and should receive huge support. I was delighted to hear from the Minister that there was no interdependence between the deferring of the state pension age—in other words, the raising of the state pension age to 66—and the funding or costing of the Green Paper. That is key. It gives me hope that he and his honourable friend Steve Webb will be seeking to smooth the bunching effect whereby some women have a much rougher deal than others. Some wait nearly an extra year for their pensions and some wait for nearly two years. We all recognise that that is—in the words of the noble Lord, Lord Boswell—rough justice. I would go further than that: it is unacceptable. I and, I am sure, the Minister hope that a decent solution can be found to that in the other place.
However, I am, in a way, using the amendment to do what we would have done had the Green Paper been introduced by a Statement, which was not the case. We are delighted to have the Green Paper in place. We wish the consultation good speed. We hope that the results will come through in such a way that the Government are encouraged to go down the path that they should. I can assure the noble Lord, Lord Freud, that if he comes forward with such legislation in this House or the other place he will have wide and enthusiastic support. I beg leave to withdraw the amendment.
Lord Freud
““(2A) Alternative requirements must be such that, assuming all jobholders to be active members of schemes to which this section applies, for at least 90% of jobholders—
(a) employer contributions, and(b) total contributions,would be likely to be no less if every scheme satisfied an alternative requirement applicable to it than if every scheme satisfied the relevant quality requirement.(2B) In subsection (2A)—
“alternative requirement” means a requirement prescribed under subsection (2)(b);
“employer contributions”, in relation to an active member of a scheme, means the amount of contributions that have to be paid under the scheme in respect of the member by the employer;
“total contributions”, in relation to an active member of a scheme, means the total amount of contributions that have to be paid under the scheme in respect of the member by the employer and by the member.
(2C) The Secretary of State—
(a) must apply the test in subsection (2A) when regulations under subsection (2)(b) are first made, and(b) must carry out subsequent reviews of whether the test continues to be satisfied.A review under paragraph (b) must be carried out during 2017, and after that each review must be completed no more than three years after the completion of the previous one.””
Lord Freud
My Lords, I am pleased to be returning to the topic of certification and even more so to be moving a government amendment that I believe will address the concerns of the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake. I understand those concerns to be twofold: first, on the scope of the Secretary of State’s powers and, secondly, on the risk of unscrupulous employers manipulating the certification test.
The aims of this amendment are: first, to strengthen the regulatory framework in which the alternative certification model will operate by imposing tougher preconditions before regulations can be introduced; and, secondly, to introduce an ongoing requirement for the Secretary of State to keep the test under review.
At the outset, before publishing any regulations, the Secretary of State must be confident that at least 90 per cent of jobholders will receive the same level of contributions under the certification test that they would have received if their scheme had satisfied the relevant quality requirement. This is more demanding than the previous requirement, which referred to,
“a majority of the individual relevant jobholders”.
In addition, the Secretary of State must periodically review the evidence base of the test. This is expected to involve analysing the dataset from the Annual Survey of Hours and Earnings, known as ASHE. These are the data that underpinned the development of the certification model and other relevant data on the rate of pension contributions required by schemes. This is tougher than the previous test, which relied on a snapshot of the data at the point of publishing regulations. If, as a result of review, we detect undesirable trends in pay and reward packages that suggest that more individuals than expected are receiving lower than minimum contributions, the Secretary of State can intervene to strengthen or repeal the test.
After the publication of the regulations, the review will take place first in 2017 and subsequently at least every three years. The review will form part of our ongoing evaluation strategy. Its publication will be considered in the context of the evaluation of the reforms. The noble Lord, Lord McKenzie, will note that we have pared back the Secretary of State’s power as far as we reasonably can, based on the available evidence. In view of this, I hope that the noble Lord will be reassured that the Secretary of State’s powers are proportionate to the task in hand. For clarity, I should add that the requirements fall to the Secretary of State and not to employers using the test.
The reconfigured regulation-making power aligns more closely with our dataset from the annual survey from ASHE, which we believe to be robust, representative and reliable. Thus, the Secretary of State will be able to deliver the certification model welcomed by employers and key stakeholders at the same time as affording scheme members the appropriate level of protection. A supplementary delegated powers memorandum has been sent to the Delegated Powers and Regulatory Reform Committee to reflect the tighter constraints on the Secretary of State’s regulation-making power.
I say in conclusion that we have ended up with the outcome broadly envisaged by the amendments that the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, tabled on Report. I thank both noble Lords for the expertise that they brought to bear on the issue. The Bill has been improved by their intervention and I am grateful for it. I beg to move.
Lord McKenzie of Luton
My Lords, I thank the noble Lord, Lord Freud, for his introduction and explanation of the amendment, and for his generous attribution. As he explained, when making regulations about the alternative certification test, the Secretary of State is required now to be satisfied that 90 per cent of individuals eligible for automatic enrolment will receive contributions to the level they would have received had the scheme satisfied the relevant quality requirement. The Secretary of State is required to be so satisfied when regulations are first made and at subsequent reviews. We support the amendments because they represent a significant tightening of the Secretary of State's regulation-making powers.
As we detailed, we support a certification process which gives employers an incentive to retain existing good-quality schemes, provided that it does not undermine the opportunity for relevant employees to benefit from auto-enrolment. We acknowledge that the certification scheme on which the Government are consulting appears already to be drawn within the parameters of the amendment. Perhaps the Minister will update us on that, and in particular on the phasing of employer contributions. Presumably such phasing now will have to be consistent with the amendment. Notwithstanding the constraining of the Secretary of State's powers, we should not lose sight of the fact that the Bill still allows the prospect of up to 10 per cent of jobholders missing out on contributions to which they would otherwise have been entitled.
We stated from the outset that we support the Government and congratulate them on their decision to proceed with auto-enrolment and with NEST. I do so again today. However, we do not do this with unconstrained joy, because a number of provisions in the Bill erode the intended coverage of the arrangements. Some employees might miss out because of the certification process under Clause 10; the three-month waiting period in Clause 6 could reduce an individual's accumulated years of savings by nearly three years; the introduction of the earnings trigger in Clause 5, as currently set, would exclude some 600,000 individuals; and the broad uprating powers in Clause 8 would allow the Government to achieve their aspiration of a trigger of £10,190. As my noble friend Lady Drake pointed out on Report, this would exclude a further 800,000 workers each year, three-quarters of whom would be women.
Collectively, the measures hit the low paid and those working part-time, especially women. They run counter to the overarching objective of auto-enrolment, which is to enable low and moderate earners to save. Should the trigger reach the level of £10,000, the reforms would begin seriously to undermine their original intent. All of this compounds the central unfairness in the Bill, which is the disproportionate way in which women are affected by the raising of the state pension age. As we have had no further comfort from the Minister on this issue today, the parliamentary campaign now moves to the other place.
I conclude by thanking the Minister for the concession that is embodied in the amendment, and his team for their efforts in enabling the matter to be dealt with at Third Reading. They have removed the potential for severe diminution of coverage via the certification process, which is to be welcomed. We look forward to the reviews of how the alternative requirement is working in practice. As this is the last time I will speak on the Bill, I will take the opportunity to thank the Minister for his open approach to handling this important piece of legislation, and the Bill team for the way that they have stepped up to the mark and been helpful to the Opposition as well as to the Minister.
Lord Freud
My Lords, I thank the noble Lord, Lord McKenzie, for that response. He had, as ever, a couple of questions—that is rather a low number for him. I shall do my best to summarise my answers.
On phasing and parameters, I can assure the noble Lord that it does work. Phasing will be consistent with the amendment, which probably does not surprise him. At the moment the figures are comfortably within the parameters, so there is a safety margin. Clearly, if they fall out of those parameters, it will be due to changes that we need to look at. The certification model will be reviewed in 2017 when the phasing of the contributions has ended.
As a result of this amendment the preconditions before the Secretary of State to make regulations will be a better check and balance on his powers due to two factors—that the percentage of job holders that must potentially receive at least minimum contributions is high, at least 90 per cent; and that the strength of the alternative certification requirements will be periodically reviewed. As there might be concern that this will add to the burden on employers, I should repeat for absolute clarity that the requirements fall to the Secretary of State, not to employers, using the test.
Although the government proposal will be more demanding for the Secretary of State, it should maintain the right balance between flexibility for employers and safeguards for individuals. I am very pleased that we have been able to reach common ground on this issue. In my turn, I must commend the close scrutiny to which the Bill as a whole has been subject in your Lordships’ House. The quality of the debate has demonstrated noble Lords’ accomplishment and high level of expertise. Once again, this House has performed its role with the distinction and spirit that are expected from it.
While I have the Floor I must take the opportunity to thank in particular those noble Lords who have made a significant contribution to the Bill’s journey through this House, notably, of course, the noble Lord, Lord McKenzie, in his role as opposition spokesman, and the noble Baroness, Lady Drake, for her accomplished performance at the Dispatch Box. I also thank my noble friends Lord German, Lord Stoneham and Lord Boswell, my noble and learned friend Lord Mackay, the noble Baronesses, Lady Greengross, Lady Hollis and Lady Turner, and the noble and learned Lord, Lord Falconer, for their participation in an active and often challenging debate. Finally, I thank my noble friend Lady Garden for her proficiency in covering a number of clauses in the Bill. I also thank the Bill team, who have supported the Bill throughout this process with the right material at the right time. I am very grateful to them.
The Bill now passes over to the other place, and a number of noble Lords have presaged a little of the activity that they expect to see there on particular matters. I am just grateful to get rid of any prospect of having to look at PUCODIs again.
Let me reiterate the principles of the Bill which I set out on Second Reading, as they are still absolutely applicable. We need a fair, sustainable and balanced system that adequately and accurately reflects the society we live in. Saving for retirement should not be a thought which occurs only when you first spot that grey hair. It should be a process that begins when you enter the labour market as an adult and continues over the years. The Bill does just that while not losing sight of the key tenet of providing a decent income for the individual in retirement.