The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, the Bill contains important reforms to both state and private pensions, as well as to bereavement benefits, and representsa fundamental step forward in tackling a number of significant challenges facing today’s working-age population.
Before I turn to the provisions in the Bill, I would like to commend my colleague, the Minister of State for Pensions, Steve Webb, who has been instrumental in delivering the Bill before us and who continues to make such an important contribution to improving the pensions landscape. I also pay tribute to the noble Lord, Lord Turner, and the noble Baroness, Lady Drake, whose work as former pension commissioners provides the framework for much of what we will discuss today. Pension reform has traditionally proved the ability of the legislature to build consensus on an issue, and I am sure that noble Lords will endeavour to continue in this vein.
Automatic enrolment is a product of this consensus and is creating a substantial shift in the landscape of pension saving. The latest figures from the Pensions Regulator confirm that 1.9 million people had been automatically enrolled into a workplace pension by the end of October this year, and we expect to see a total of between 6 million and 9 million people newly participating or saving more in a workplace pension by the time automatic enrolment is fully rolled out, but this Bill was introduced to Parliament because we should not stop here.
In the latest DWP report Attitudes to Pension: The 2012 Survey, only 21% of respondents felt that they knew,
“enough about pensions to decide with confidence how to save for retirement”.
No fewer than 17 Social Security Acts covering pensions since 1975 and thousands of lines of secondary legislation have meant that considerable complexity has built up in the state pension system over time.
At the core of the Bill, therefore, is the provision for the new single-tier pension: a flagship reform which will simplify the current state pension system and provide a firm foundation for pension saving. These reforms will replace the current, two-tiered pension system with a simpler single-tier state pension for future pensioners—those who reach state pension age on or after 6 April 2016.
The full rate of the new state pension will be set above the basic means test. This will help to clarify the incentive to save privately for retirement without the need for the complex savings credit element of state pension credit. The savings credit will therefore close to those reaching state pension age on or after 6 April 2016. The introduction of the single-tier pension thus reduces means-testing in the pension system, halving the proportion of new pensioners qualifying for pension credit.
There will be far less variation in state pension payments under the new system. We estimate that more than 80% of people reaching state pension age by the mid- 2030s will receive the full single-tier pension. Those who have historically done poorly in the current system, such as the self-employed, carers and those with interrupted work histories, who are often women, will benefit from the introduction of the single-tier pension. Around 650,000 women who reach state pension age in the first 10 years after the single-tier pension is introduced will receive an average of £8 per week more in state pension due to the single-tier valuation.
There will be a minimum qualifying period for entitlement to the new single-tier pension. This period will be set out in regulations, but I am able to advise noble Lords that the Government have today announced that this is to be set at 10 years, in line with the assumptions made in the White Paper and the impact assessment. Integral to the single-tier reforms is the closure of the state second pension for people reaching state pension age on or after 6 April 2016. Contracting out of the state second pension for defined benefit schemes will therefore come to an end in April 2016 and all employees will pay the same rate of national insurance and become entitled to state pension in the same way. As part of the simplification of the system, the outdated provisions which allow a spouse or civil partner to boost their state pension on the basis of the record of their partner or ex-partner will end. These provisions, introduced in the 1940s, are no longer appropriate for today’s society, where the vast majority of men and women get a full basic state pension in their own right.
In addition to reforming the state pension system to make it simpler, the Government are taking action on state pension age to ensure the system remains affordable and fair between generations in light of continuing increases in life expectancy across all socioeconomic groups. The Pensions Act 2007 set the original timetable for increasing the state pension age to 66, 67, and 68. Since then, the average life expectancy of a man reaching age 65 in 2013 has increased by over a year. We are therefore bringing forward the increase in state pension age to 67 by eight years, so that it gradually increases from 66 to 67 between 2026 and 2028. No one will experience a rise in state pension age of more than 1 year compared to the original timetable that was set by the Pensions Act 2007 and I can assure noble Lords that this will not affect anyone whose pension age was changed by the Pensions Act 2011.
The fact that people are living longer is to be welcomed. Yet continued increases in life expectancy place a great deal of pressure on the pensions system. The Bill therefore also provides for a regular review of the state pension age so that is it considered once every Parliament. This will ensure that the state pension age is examined in an open and transparent way on a regular basis and prevent future Governments from needing to take emergency action. As part of these reviews, the Government of the day will ask the Government Actuary and an independently led review to report on life expectancy and a whole range of other factors relevant to setting the state pension age. The Government will then consider what adjustments, if any, should be made to pensionable age. This is not an automatic mechanism for future increases, however, and any resulting proposals to change the state pension age would still need to be set out in primary legislation.
I turn now to Part 3 of the Bill, which provides for the abolition of the assessed income period in pension credit. The assessed income period was introduced as part of pension credit in 2003 and was a new approach to case maintenance for customers aged 65 and over. This was based on the assumption that pensioners were more likely to have relatively stable incomes with fewer changes in their circumstances and so a lighter touch maintenance and review regime was deemed appropriate. However, it has proved more complex than originally anticipated and the assessed income period has allowed inaccuracies to build up in the system. As customers with an assessed income period do not need to inform the department if they experience changes in their capital or the make-up of their retirement income, an increase—for example, a windfall—can legitimately be ignored until the end of the period. Many see this as unfair, particularly in the current economic climate. The Bill will therefore abolish the assessed income period from April 2016. Older customers will be protected through the continuation of existing indefinite assessed income periods for those aged over 75.
Moving on from state pensions, the Bill contains measures to reform the bereavement benefits system through the introduction of the bereavement support payment, which will both simplify and modernise the current complex payment and contribution system of bereavement benefits. The current system was introduced at a time when women were not seen as workers and when widows were left destitute. However, society has changed. Women are no longer expected to be dependent on their partners and we now have an expectation for people to work, with universal credit to support those who cannot.
However, we recognise that many working-age people, regardless of income, do not make contingencies for the loss of a spouse or civil partner and are unprepared for the significant financial impact in the period immediately following the bereavement. We have therefore designed the new payment to focus on this period. It will support people with the additional financial pressures associated with bereavement, helping them plan during the readjustment period and better understand what they will receive from the state while encouraging a supported return to work for those without employment. An additional £110 million will be invested in bereavement benefits during the first four years of reform, so that existing recipients are protected over the course of the next Parliament and those who claim the new bereavement support payment get the help they need when they need it most.
Finally, the Bill contains a number of private pensions measures. As I said earlier, 13 million people are currently not saving enough to ensure an adequate income in retirement. Furthermore, the number of employees saving into a workplace pension has declined from 12.9 million in 1997 to 12.1 million in 2012. It is expected that automatic enrolment will see between 6 million and 9 million people either starting to save or saving more into workplace pensions, and the introduction of the single-tier pension will ensure that the state provides a good platform for private saving. Measures in the Bill are therefore designed to build on these reforms and give people greater confidence in pension saving.
As a result of more people saving into a private pension we expect to see more dormant pension pots as people move jobs—up to 50 million by 2050. The Bill therefore contains powers to introduce a pot-follows-member system of automatic transfers of small pension pots. This will help people to better keep track of their pension savings and ensure that they reap the benefits of consolidating those small pots.
The automatic enrolment of people into pension schemes and the introduction of automatic transfers make it all the more important that schemes used for workplace pensions are well governed, well administered and offer value for money. The Bill therefore extends powers to set minimum quality requirements for workplace pension schemes and to limit or prohibit charges to allow the Government to respond to the recent consultations on these issues accordingly. In addition, the Bill contains a number of measures to clarify and strengthen existing private pensions legislation, including a power to prohibit the offering of incentives to transfer pension rights. Finally, the Bill gives the Pensions Regulator a new objective to minimise the impact on the sustainable growth of an employer when regulating defined benefit pension scheme funding, and it also makes changes to the calculation of the Pension Protection Fund’s compensation cap to reflect long service.
Following further work done by my department and the report from the esteemed Delegated Powers and Regulatory Reform Committee, I plan to bring forward a small number of amendments during the Committee stage. I will ensure that noble Lords are made aware of those in good time. I very much look forward to an informed and constructive debate on the reforms and measures in the Bill, both this afternoon and over the coming months. I particularly look forward to hearing the maiden speech from my noble friend Lord Balfe, who I am sure will make an erudite contribution to this afternoon’s discussion.
To sum up, this Bill introduces significant reforms to state and private pensions and will bring our pensions system into the 21st century. It will allow security in old age and provide a firm foundation for today’s working-age people so they can save with confidence for their retirement, an ambition with which I am sure noble Lords will wholeheartedly agree. I commend this Bill to the House. I beg to move.
Lord Freud
My Lords, I expected an interesting and valuable debate and I got one. I congratulate my noble friend Lord Balfe on his remarkable maiden speech, which I know we all enjoyed. I hope we provided him with adequate intellectual stimulation this evening of a kind he will remember. Whether we met the challenge set by the noble Baroness, Lady Sherlock, in making the topic interesting, at least we will, as my noble friend Lord Paddick pointed out, have all gained an extra hour in our lives during this debate.
I shall focus first on the transition which many noble Lords rightly focused on. There are some tough issues around it. People who have contributed to or been credited into the national insurance system have expectations, so we cannot switch to the new system overnight. I assure the noble Baroness, Lady Sherlock, that this is not a hard, fast transition. It is pretty difficult to design a transition that strikes the right balance and takes account of people’s expectations as far as possible while also ensuring that those who are part of the transition—in other words, those who will retire over the next 50 years—will see the benefits of the single-tier pension. I believe this Bill has been successful in this difficult endeavour, and for that reason I expect it to outlast by a considerable factor the 10 years predicted by the noble Baroness, Lady Donaghy.
The foundation amount allows people to see the value of their pre-2016 national insurance record in one figure, which gives simplicity to the single tier but also recognises past contributions. It is a smooth transition. For the vast majority of people reaching state pension age in the years after single-tier is introduced, their outcomes are similar to what they would have got under the old system. Nearly three-quarters of those reaching state pension age in the first five years will see a change in their state pension of less than £5 a week. Of those who see a larger change, five times as many gain as lose. Those who see this boost are likely to be those who have traditionally been badly served by the state pension system: women, carers and the self-employed.
While moving to a modern system based purely on individual entitlement, the transition provides, for example, for inheritance of additional state pension where one member of the couple is in the current system. There is also transitional protection for those who paid the married woman’s stamp. Difficult decisions and trade-offs have been necessary to redesign the state pension within its cost-neutral envelope, and inevitably this means that while some people get more than they would have done under the current system had it continued into the future, some people get less.
I shall move on to as many of the specific points as I can—there were a lot. The noble Baroness, Lady Donaghy, said I would delight the 1951 to 1953 generation of women by moving. I think I might delight them a little bit. Ninety per cent of these women will get more in state pension and other benefits over their lives by drawing their pension in the current system at their state pension age than they would if we gave them a state pension at 65 and single-tier pension. The women in this cohort will reach state pension age between two and four years before a man born on the same day, which means that they will get between £13,000 and £26,000 more state pension than a man of equivalent age. To correct the point made by the noble Baroness, Lady Dean, it is not a double whammy. They have not seen their state pension age rise, except for the equalisation under the 1995 Act. The only change this group has seen recently is in the triple lock.
The noble Baroness, Lady Sherlock, raised derived entitlement. We will clearly go into this in some detail, but we estimate that in 2020 fewer than 30,000 married and widowed women—less than 5% of single-tier pensioners—will be affected by loss of derived entitlement to a basic state pension based on their spouse’s national insurance record. I know this is an area we will debate in great detail.
Baroness Hollis of Heigham
This is an area of some concern to a lot of us. Will the Minister be kind enough to give us all the stats he has, including how many of those getting the married women’s 60% were born or live overseas, do not have UK residence and so on, which was the argument in the Commons? We are very short of detail on this.
Lord Freud
My Lords, as I hope everyone in the Chamber knows, I have arranged to run a series of briefings at the appropriate time—about a week ahead of every Committee session—particularly to try to go through this detail. It really is extraordinarily complex, to reuse a tired word. One needs to go through it with examples and graphs and so on, which is much better. We will get all the information that we can, but we will do it in that context and will then be able to look at it in Committee on the basis of that process.
The noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, asked what the start rate will be. We will need to decide that closer to implementation when the level of the pension credit standard minimum guarantee for 2016-17 is known. I am afraid that I cannot reveal all tonight.
The noble Baroness, Lady Dean, asked about cost-neutrality. The reforms are designed to be cost-neutral in terms of spending on persons. The spending on the single tier should be within 1% of projected spend on pensions until the late 2030s. In the longer term, after that, the single tier will slow the rate of increase in pension spending, helping to make it a sustainable system.
The noble Baroness, Lady Sherlock, raised the savings credit. One of the things that the single tier does is to clarify savings incentives, so that people will know what pension to expect from the state and be able to plan the additional provision that they want. The issue of passporting was raised by the noble Baroness and the noble Lord, Lord McKenzie. Clearly, passporting will be through the guarantee credit, not the savings credit, although in practice the numbers are not that different. On the difference between being on the single tier and being on a credit, and whether you get various passporting, that is always the case when you have a system of passporting. However, it is worth bearing in mind that when you look at the relative rates for members of a couple, the single-tier rate is much higher than the credit guarantee rate; the single tier comes out at £288 for a couple in 2012-13 prices, against £216.55 at 2012-13 prices. So there is a very big gap for couples on that passporting issue.
My noble friend Lord German asked me for the latest correspondence on bilateral agreements. I regret that I just do not have that information to hand right now. I will search the cellars of the DWP to see if I can do any better and write; it is probably very heavily buried there.
Several noble Lords—the noble Lord, Lord Whitty, my noble friend Lord German and the noble Baroness, Lady Donaghy—raised the abolition of the rebate and the costs that would go to the public sector employers. The noble Lord, Lord Whitty, asked whether we would talk to the LGA. The Chief Secretary to the Treasury has met with the LGA and I can confirm that Her Majesty’s Treasury is happy to meet with them.
We will spend a lot of time on multi-jobs in Committee. One point to make is that the effect of welfare reforms will naturally be to improve coverage. All adults on universal credit, many of whom will be the lower paid that the noble Baroness, Lady Hollis, is rightly concerned about, will get their pension correctly that way. In that way, the crediting system is extremely comprehensive. By the 2040s, more than 80% of people will receive the full single-tier amount based on the 35 qualifying years. Clearly, we will be reviewing the crediting arrangements in the light of reforms and will look at the position of these people as part of the review. The noble Baroness is as familiar as I am with the quite revolutionary opportunities which Governments can look at, now or in the future, around RTI when that is built in. I know that we will spend a lot of time on that.
A lot of noble Lords raised the age review and some of the relevant issues: the noble Baronesses, Lady Sherlock and Lady Hollis, and my noble friend Lord Paddick. Clearly, one point of having a review is that longevity on its own is not the only factor. That is exactly what is being realised here. We have debated that in the past, and I know that we will debate it further.
On equity release and the AIP change, income-related benefits take account of any income and capital generated by liquidating assets. However, equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital.
The right reverend Prelate the Bishop of Derby and the noble Baroness, Lady Sherlock, raised bereavement support. This is clearly driven substantially by the change in the welfare system when you have universal credit as a basic bedrock for people. Bereavement benefits were another way of producing that kind of income in an entirely different way. We are now targeting this support for the period of financial need, as we heard that it was required; we did a survey on that. One therefore needs to separate it from bereavement, and maybe the right reverend Prelate’s point about what we call it is relevant there. It is a financial support which is underpinned by the universal credit but, clearly, we do not offset it against universal credit which, if it went on for a long time, we would do. By not offsetting it, we are targeting help at those with the greatest need, whether they are a widow or parent or not. It is a very progressive structure in that way. It means that 62% of the very poorest are actually better off. We will go into this in great detail in Committee; I will not do so now. However, that is the structure and the thinking behind it.
The noble Baroness, Lady Sherlock, and my noble friend Lord German raised conditionality. The structure is that all recipients of bereavement benefits—not just partners, but also if you lose a child—have access to Jobcentre Plus, purely on a voluntary basis, for the first three months; no conditionality for the next three months; and at the end of the six months, advisers will use their discretion to ensure that individuals’ capability and requirements are taken into account.
We will have a major debate in Committee and, I suspect, beyond on the pot-follows-member approach versus the aggregator approach. At this stage I will make a few minor protests about why we have chosen the former rather than the latter. However, I will make an impassioned defence as we go through it in great detail. The pot-follows-member approach maximises the consolidation, is in the best interests of savers and will reduce by half the number of dormant pots by 2050. We estimate that an aggregator approach would achieve just half the cumulative administrative savings for the industry by 2050. We will spend more time on that.
The question from my noble friend Lord Brooke is a suitable last question: what more is there on which to legislate? We will probably have some open questions left after the Bill on how much people are saving. Quite a few noble Lords suggested that perhaps people are not saving quite enough for what they anticipate they will want to spend when they retire. There is also the nature of the savings vehicles—we talked about defined ambition. Those are the two big areas in pensions. I suspect that there are probably several more, but perhaps I would pick those two.
I close by thanking all noble Lords who contributed to the debate, which was informed, measured and interesting. As I said, we will hold a number of briefing sessions. I am keen that in this debate we deal with the real issues on an informed basis and do not waste time. That is what these sessions are for—so that we have full information. I will endeavour to make sure that noble Lords have all the information they need to make the contributions they want to make. In particular, I want to make sure that the noble Baroness, Lady Hollis, is able to table all the many amendments that we all look forward to.
The Bill does a remarkable job of creating a pension system fit for the 21st century—nine times as long as the noble Baroness, Lady Donaghy, thinks. It is a return to the simplicity of Beveridge’s model for the state pension, it strengthens the private pension system, and it will enable today’s and tomorrow’s working-age population to plan for and build towards a secure retirement income. I commend the Bill to the House and ask for it to be given a Second Reading.