Grand Committee
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Pensions Bill
(10 years, 10 months ago)
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The Deputy Chairman of Committees (Lord Faulkner of Worcester)
My Lords, I am obliged to say that if there is a Division in the Chamber while we are sitting, this Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes or as soon as members of the Committee are able to get here.
Schedule 13: Abolition of contracting-out for salary related schemes
Lord Freud
“Pensions Act 2004 (c. 35)In section 258 of the Pensions Act 2004 (pension protection on transfer of employment), in subsection (2)(c), for sub-paragraphs (i) and (ii) substitute “complies with prescribed requirements”.”
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, before I speak directly to the subject of the amendment tabled in my name, I would like to address some of the points raised in debate last Wednesday while we were still considering amendments to Clause 24 and Schedule 14. I will start by acknowledging the points made in Wednesday’s debate about the need to ensure that statutory mechanisms to amend schemes are used with care. We have not chosen to apply an override lightly and we recognise the need to ensure that the extent is tightly defined.
The primary legislation sets out the key limits on the scope of the changes under the override, but much of the detail that deals with this, including how the extent of the changes is limited, will be set out in the technical regulations that we have been working on with trustees, scheme managers, the actuary profession and pension lawyers. We intend the regulations to set out a methodology and the assumptions that will apply to the calculation of the lost rebate.
We also intend to set out in the same way how the impact of changes to scheme rules are to be valued so that the actuary can certify that the employer is not recovering more than the lost national insurance rebate. We will of course conduct a full public consultation before these regulations are laid. As I said in my letter to Peers, if it would be helpful I would be happy to offer a separate briefing meeting with officials before Report. This will allow us to go through our thinking in detail in a way that is not possible in debate or correspondence.
I also want to make clear that we do not see use of the override as a default position for employers. We expect the override to be used by employers only as a fall-back position where they need to offset the costs resulting from the end of contracting out and have no options available other than closing the scheme. As several Lords pointed out, there are long-standing and established ways in which employers work with trustees to make changes to schemes when required. The noble Lord, Lord Browne, when paraphrasing the Pensions Minister, said:
“The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement”.—[Official Report, 8/1/14; col. GC 427.]
The Government have every expectation that, in the majority of cases, employers will do that and trustees will fully engage.
However, employers have told us that without the override, some of them will have few or no options available to them because such agreement cannot be reached or because scheme rules will not allow it. They tell us that this will force them to close their schemes. Some trustees have told us that without the override, they will find it difficult to agree changes. We therefore believe that the override is necessary to avoid schemes being closed, even though we believe that in most cases employers and trustees will be able to explore other options. As employers and trustees can be expected to discuss scheme changes as a matter of routine, and as it is in their interests to do so, we do not believe that those discussions would be facilitated by overlaying legislative requirements concerning the content and time limits of consultation. That is why we have not provided for that.
The noble Lord, Lord Browne, also asked whether the changes had been discussed with employers and, especially, small businesses concerning the impact of the increases to national insurance that they and employees will have to pay on the ending of contracting out. In particular, what would be the impact of large numbers of employees leaving schemes because of the increases in contributions? During the development of our policy we have engaged with a large range of employers, including the British Chambers of Commerce and the Federation of Small Businesses. Small businesses expressed no particular concern on the ending of contracting out. When we consult on our regulations, we will of course ensure that we gather views from employers of all sizes.
I turn now to scheme members. Notwithstanding the potential for increased contributions, members of defined benefit schemes will continue to get good-quality pension provision. Our expectation is that members, as demonstrated by the low opt-out rates with automatic enrolment, will choose to remain in their schemes. Our communications strategy will seek to ensure that both employers and employees are properly supported through this change and that both parties understand why the changes are taking place and what options and outcomes are available to them.
As to whether the override regulations should follow the negative procedure, I recognise the desire of the Committee to ensure proper scrutiny of the regulations. There is just over two years until the end of contracting out. To ensure that employers have adequate time to consult with actuaries, trustees and members about any potential changes, regulations need to be finalised as soon as possible. We are working hard to complete the regulations. However, these are complex provisions that require us to have extensive discussions with employers and trustees during and after a consultation period before we can get them right. Based on previous experience, we do not expect a final version to be ready to present to Parliament until May or June.
Our concern is that, with the affirmative procedure, we would not be able to secure time for a debate in both Houses before the Summer Recess. This would potentially delay the point at which employers can start to plan with confidence until October this year, just 18 months before contracting out ends. So, while recognising that the negative procedure does not allow Parliament the same level of scrutiny, it will mean that employers and schemes have longer to consider and consult on any changes. We believe that, on balance, this is the right approach.
The noble Lord, Lord Browne, specifically referred to the power in Clause 24(8) to extend the five-year window in which the employer override can be used. I will make clear that we think it important that there is a strict time limit on when the override can be used, which is why the Bill repeals the relevant provisions of Schedule 14 after five years. We fully expect those employers who wish to employ the override to have done so by 2021. However, we recognise that, in limited circumstances and given the complexity of some schemes, some employers may find it difficult to meet that time limit; for example, if several diverse employers have to agree on changes to a multi-employer scheme.
We therefore think it is vital that the time limit can be extended if absolutely necessary, but we also think that the extension of an existing time-limit period should not require the affirmative procedure when using the power would only allow employers otherwise prevented from using the override to do so. The power does not allow us to alter the way the override works or to extend its scope—only to extend the window in which employers can use it. As such, I do not believe the affirmative procedure would be appropriate. I apologise for the length of my contribution to the debate, but I hope that I have helped to reassure noble Lords on the issues that were raised last time we met.
I turn to Amendment 44 to Schedule 13. As I said when we last met, the abolition of contracting out is a natural consequence of the implementation of the single tier. With the ending of the additional state pension, there will no longer be anything to contract out of. Employers who contract out of the additional state pension must provide their scheme members with pension benefits that are broadly equal to, or better than, the benefits they would have received had they remained contracted in. To do so, they must satisfy the statutory standard set under Section 12A of the Pension Schemes Act 1993.
This is a consequential amendment to existing legislation to remove the reference to this statutory standard, as the standard will no longer exist once contracting out has ended. The amendment is to the provision for pension protection when someone transfers employment under TUPE regulations. For future transfers, and those who have already transferred, the intention is that regulations will ensure that employees will receive or continue to receive the same protection of their pension rights as they currently enjoy. I beg to move.
Lord Whitty (Lab)
My Lords, I am grateful to the Minister for giving in his opening remarks a reply wider than the amendment before us merits. I have no particular objection to the amendment, in so far as I understand it, but a few issues were raised in the debate last week that I do not think the Government have yet fully answered, even given the Minister’s speech today.
We have a difficult situation here. Everyone understands that contracting out has to cease in this respect, but the way in which it is done is vital. The Minister referred to the measures for private sector occupational schemes being tightly constrained by technical regulations. They definitely need to be tightly constrained because the Bill provides the ability to override trustees in all circumstances, to avoid any form of negotiation, and to place the full cost of any replacement of the contracting-out benefit on the employees. The cost of contracting out will jeopardise the solvency and therefore the future of many of these schemes. As we discussed at some length, and as was pointed out by my noble friend Lord Browne in particular, there is also the question of statutory protection in some circumstances in certain fairly significant schemes.
The Minister continues to justify doing all this on the basis of a negative resolution procedure. This is quite a revolution that will be imposed by this statute on private sector occupational pension schemes. There is not even, for example, a provision that states that there should be no retrospection. The whole principle of pension scheme regulation is that at any given point, benefits accumulated by an individual until that point will be frozen, even if changes are made by the trustees, by statute or whatever. That is not written into Schedule 14, as far as I can see. We need some reassurance on that.
The wider point is the one I raised last week. Where do the Government think we are going on private sector occupational pension schemes? The Minister said—perhaps not with relish; I would not put it quite like that—that it was a matter of inevitability that the decline in the number of people covered by defined benefit schemes had already reduced from more than 2 million to 1.6 million, and that the figure was expected to be roughly 0.9 million in a couple of years’ time. The Government seemed to regard that with some complacency. Of course changes will have to be made to those schemes, but it is not right to say that this imposition will have an effect only on defined benefit schemes, because the lack of trust in the future for any form of scheme is affected by the way that the Government can change solvency rules and the prospects of this scheme so drastically.
I am grateful to the Minister for offering us a meeting between now and Report. We will probably wish to take up that offer, and some schemes may wish to write to the Minister, but my point is that it is extraordinary that the Government seem to be relaxed about the prospect of the whole occupational pension scheme sector being undermined without any serious guarantees to beneficiaries or a clear strategy as to where we are going on the pensions scene.
The proposal is even odder coming from a Conservative-led Government, because these private sector schemes allow individuals to provide savings for the whole of their working lives. They are a way of providing security in retirement. They are a form of collaboration between employees and the employer in providing that. They defer pay in a way that, because it is in the pension pot and not in the pay packet, reduces inflationary pressures. Of course, they also create funds that will be the long-term investors in our business and industrial performance.
Baroness Drake (Lab)
I thank the Minister for taking the opportunity to address some of the issues we were concerned about—we ran out of time, in effect—in our previous Committee session. My major concern in this debate has been the sufficiency of protections when a statutory override is given or is exercised. It sets a precedent and I am sure that this will not be the last statutory override we are going to see in the pensions arena over the next three or four years, given some of the agenda items we know are coming our way.
I am genuinely concerned that what is proposed or what we can see is weak. The Minister said that he expected that the override would be used in exceptional circumstances. To an extent that is true, because if the sponsoring employer does not need, as a requirement of the scheme, to get trustee consent, there is no need for a statutory override. I had conceded that point in my opening comment. Of course, there will be a need for statutory overrides where the scheme’s rules do not allow what is being proposed on the recoup arrangements, or where trustee agreement is required and the trustees do not want to give their consent.
There are expressions of hope that somehow this consultation will take place and everybody will act appropriately and only in extremis—having gone through due process but finding barriers in the way—will the employer be able to invoke the statutory override. Of course, the Minister has no idea how employers will behave in practice in individual schemes. One hopes that they will all consult, but some may be in a hurry and some may simply see that they are not required to consult or gain trustee consent. A statutory override is being put in the Bill without, as far as I can see, an explicit requirement to consult—merely an expression of hope from the Government that it will take place. That worries me deeply.
The other area about which I remain concerned is the fact that the regulations will still be subject to a negative procedure. Again, we face key issues about the value of what the employer can recoup, and this would be setting a precedent on a significant issue. The Minister conceded that these are complex issues, and that is right. In multi-employer schemes, if the decision is taken to amend the protected order status for certain employees if there are shared cost arrangements, one can see the multiplicity and complexities that could arise. They would arise anyway, but they will arise.
We have no clear indication from the Government about how they will value what it is that can be recouped. As I asked when speaking the other day, is it the net or the gross loss? Will it be crystallised in terms of the 2016 value of the rebate? These are quite significant issues. On one level, setting out some actuarial assumptions in the regulations may be a good thing, although we would perhaps want to see the actuarial assumptions first. But we have no way of seeing them and when we do, the regulation will be subject to the negative procedure.
I know that the Minister said that there would be a full consultative exercise. Consultative exercises are important and I do not wish to detract from the importance of their taking place, but we all know that they can be dominated by organisations that have the capacity, the means and the interest to dominate them. I just hope that in the consultation exercise fair regard is given to the views of employees and trustees.
Baroness Drake
I was drawing to a close. I have a final point on the negative procedure. In response to my suggestion that there could possibly be time limits on consultation in order to meet the spirit of what I aspired to achieve before the constraint of April 2016, the Minister said that seemed too prescriptive and asked why one would want to put constraints on the consultative process. It seemed rather contradictory to say that one cannot go for negative procedures because affirmative procedures take too long and could push up against the efficient way in which employers could adjust in time for April 2016. If the balance were a trade-off between defined periods or timetabled periods of consultation with the employers and the opportunity to deal with the regulation by affirmative procedures, it would be fair.
Lord Browne of Ladyton (Lab)
Like my noble friends, I am grateful to the Minister for engaging more generally with the issues of statutory override in his remarks in support of Amendment 44. That has been of some assistance to the Committee. It is obvious from the engagement he has already had with my noble friends that they believe that to be the case. I, too, wish to be associated with the words of thanks to the Minister for the offers of further briefing and engagement. They will be taken up.
Before I take advantage of his generosity to ask him a few additional questions, one of the advantages of anticipating that he would do this—because he was gracious enough to indicate that he was prepared to do it—was that I was able to read the official record of the previous debate we had in Committee, and there are one or two things that occurred to me that he could expand upon.
Before I turn to that, I shall deal somewhat formally with government Amendment 44, which I accept is a consequential amendment. I have to say—I do not expect the Minister to engage very fully with this—that reading the statutory provision which he seeks to amend, the section of the Pensions Act 2004, I am slightly at a loss to understand why the amendment is necessary. It makes the precise provision more elegant, but I am not sure that it changes much of the content. It is genuinely consequential. Section 258(2)(c)(ii) already contains these words, although they are further qualified.
In the more general debate I shall try to be complementary to the points already made and not go back over the issues that my noble friends have addressed, although I have some notes here which are similar to some of their observations. I turn first to the issue of whether it is appropriate to deal with the regulations anticipated by these provisions by affirmative procedure in your Lordships’ House and in the House of Commons, or by negative procedure, and consequently whether it would be appropriate to deal with the limited issue of the extension of the period by negative or affirmative procedure. It seems to me, first, that it is improbable in the extreme, given the way the Minister has described these regulations in terms of their comprehensive nature, their complexity, and the difficulty associated with understanding them, that they will not be debated in some form in both Houses. It is unlikely that there will not be a desire to engage with some aspects of them to—at the very least—achieve some further clarification.
My second point to the Minister is that it seems to be counterproductive to the argument that negative procedure is appropriate to go to such length to explain just how complicated the regulations are. It seems to me that the more complicated the regulations are, and the more the primary legislation has to be supplemented by complicated regulations, the weaker the argument for doing this by negative procedure becomes. I suspect that that is why, reflecting on the Minister’s words, he referred again to the issue of parliamentary time. With respect to the Minister, getting parliamentary time in our current Parliament is the weakest argument possible.
I am struck by the number of times the House of Commons rises before what I consider to be its normal rising time. I do not know whether that is a function of the fact that the coalition Government have run out of agreement about what they can legislate on —that may happen; it is a perfectly natural thing with coalition government—but I am also struck by how much time is spent in the House of Commons debating what is now called “Members’ Business”. As far as your Lordships’ House is concerned, I am struck by the fact that we are all expecting—and I think we will see—that an extraordinary amount of time will be found to debate a Private Member’s Bill over the coming weeks.
If regulations are debated in the normal way, it seems to indicate an expectation that there will be no great competition for parliamentary time between now and the general election. In fact, I go so far as to suggest that the business managers of the respective Houses may have difficulty in filling the time they already have, so I do not think the argument about parliamentary time is all that strong. If the Minister is to continue to promote the idea that these regulations—complicated, difficult, comprehensive and substantial as they are—are still best dealt with by negative procedure, then, with all due respect, I think he will need better arguments than those he has already deployed.
Secondly, perhaps I may take advantage of the opportunity to debate these issues and ask the Minister to give some clarification about information that he gave us when we last debated these issues about the effect that the abolition of contracting out will have on people’s expectations. Early on in his contribution to our last Grand Committee, he came to engage with the issue of trustees and pension funds and their responsibilities. I will quote him fully, not in short. He stated:
“Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes”.—[Official Report, 8/1/24; cols. GC 430–431.]
That is an argument that was deployed by the Pensions Minister in the House of Commons, too, when addressing that issue. It is clearly designed to allay, and does allay, the concerns of a significant number of people about the denial of their expectations. However, in col. GC 433, when the Minister was discussing the issue of protected persons under statutory override, he deployed a similar but different argument. I shall quote it to him, because I am interested in the difference, and what it actually means. He said:
“We also have to factor in that the design of the single tier reforms means that those with a long history of contracting out will in most cases build up significantly more state pension. Around 75% of people in the private sector who pay higher national insurance contributions and reach state pension age during the first two decades following implementation will receive enough extra state pension over their retirement to counterbalance the increase in national insurance contributions”.
He went on to say:
“This is a very complicated issue with many different and conflicting interests”.—[Official Report, 8/1/14; col. GC 433.]
But we know that.
Were these different ways of saying the same thing, or were they different things—and, if so, what is the difference? Why does he say “two decades” in one case and one decade in the other, and why is there a reference only to counterbalancing the increase in national insurance contributions in one while there is a reference to eventual benefits in the other? It may not be easy for the Minister to answer that immediately, and I apologise if it is not, but I would be interested to know whether he intended those two things to mean the same—and, if not, why there is a difference.
On the issue of protected persons, in col. GC 433, the Minister addressed my question about the defeated expectation that the decision that the Government promised following the consultation would be made clear to Parliament. He told the Committee that a decision following the consultation about protected persons would be made as soon as possible, and that when it was made, Parliament would be informed. But what he did not say was important. The Pensions Minister in the other place said at one stage that it would be done in the summer of 2013—and we know that that is now long gone. No matter how generous one might be with Governments who use seasons to give an indication as to when something might be done—and having been a Minister myself I know how wise it is to do that sometimes—in no one’s view are we still in the summer of 2013.
The Pensions Minister gave both the Standing Committee and the whole House of Commons to believe that, at the very worst, a decision may be made when the Bill was still before Parliament. That is not a phrase the Minister used. Was that deliberate or can he repeat the phrase? It is important for the 60,000 people who consider themselves to be protected persons. Their expectation is that the decision and therefore some engagement with the consequences of that decision will still be a live issue while the Bill is still before Parliament.
Lord Freud
I am grateful to noble Lords for their observations. I shall first take the query from the noble Lord, Lord Browne, about whether Amendment 44 is needed. I am conscious of his forensic skills in looking at particular bits of legislation in this area, and I therefore take his warning seriously. What it does is to remove a defunct reference on which legislation is worded. The default test is to meet the statutory standard. Actually, the legislation could work without this particular amendment, but it is confusing to those applying legislation and would leave an out-of-date reference on the statute book. The noble Lord, as usual, has picked up something quite clever.
He also picked up another clever thing: that I mis-spoke about my decades. I should have said two decades in each case, so I am pleased to correct that, and impressed that I was picked up.
On the negative procedure issue that the noble Lords, Lord Whitty and Lord Browne, and the noble Baroness, Lady Drake, mentioned, at this stage I do not have anything to add except to say that we are genuinely concerned about timing if the affirmative procedure is used. But that may be something we have a chance to discuss in our briefing ahead of Report.
On the question from the noble Baroness, Lady Drake, about the override being net or gross, as I mentioned in my letter on Friday, the intention is that the current rebate rate of 3.4% will be used for these calculations. Without reform, this rebate would change over time, but it is impossible to predict what would happen, and therefore creating a net value for the rebate in future years would be impractical.
Baroness Drake
I shall desist from arguing that point, as we are going to have a meeting, but it is such a wrong approach because it is an unexpected premium for employers. You can have net at the employer level and at the aggregate level—what employers would have to pay taking into account taxation and tax relief—as well as how you set the figure for NI overall. Individual employers would have been able to set the cost of the additional NI against their tax liabilities.
Baroness Drake
We are going to have another meeting, but the effect of what the Minister has just said worries me. Employers will be allowed to recoup the value that is crystallised in 2016, but everyone knows that if there had not been changes the post-2016 value would have gone down. In addition, the employer’s NI charges are an expenditure that can be taken into account and set against tax. If those two elements are not built in, is that not a little unfair in term of the rules for recoupment—a little imbalanced?
Lord Freud
I do not think that I am in a position to say anything further, but we will pick this up later and if we cannot satisfy the noble Baroness at that stage, I will have to write very specifically on that matter and the tax implications.
Baroness Drake
It goes to my point about negative regulations. We just do not get the opportunity to address these issues because they are not drafted.
Lord Freud
I hear the point. Clearly we will be looking at it some more.
On the point made by the noble Lord, Lord Whitty, about whether the override can be used for retrospective changes, the answer is no. That is contained in paragraph 3 of Schedule 14, which prohibits changes that might adversely affect subsisting rights; that is, rights to benefits already accrued.
On the noble Lord’s point about whether this undermines schemes, the override has been introduced precisely so as not to undermine schemes. Employers have told us that without the override, they would close schemes; the override is there to help them find ways of avoiding that.
On the protected persons question from the noble Lord, Lord Browne, I agree that it would be most unusual if the Government were not able to notify Parliament of their decision before the Bill completes its passage.
The noble Lord had a query about the rights of trustees to challenge. They could apply to the courts for direction, because amendments to the rules are not valid if they are beyond limits. Costs fall to the scheme, and ultimately the employer pays.
I hope that I have covered all the issues. Clearly this is an area of some interest and we will be spending more time on it.
Lord Freud
“( ) Where the effect of using the power to increase employee contributions of the relevant members would be to increase the contributions that the employer is required to pay, the power may be used to make other amendments needed to ensure that only the employee contributions are increased because of the use of the power.
“( ) Where the effect of using the power to alter the future accrual of benefits for or in respect of the relevant members would be to decrease the contributions that any members are required to pay, the power may be used to make other amendments needed to ensure that the contributions of those members are not decreased because of the use of the power.”
Lord Freud
“Part 1AOption to boost old retirement pensionsOption to boost old retirement pensions
In Schedule (Option to boost old retirement pensions)—Part 1 contains amendments to allow certain people to pay additional contributions to boost their retirement pensions;
Part 2 contains amendments to allow corresponding legislation to be put in place for Northern Ireland.”
Lord Freud
My Lords, Part 1 of the Bill is about future generations of pensioners who will benefit from the certainty of a contributory state pension set above the level of the basic means test.
We have dealt with a great deal of complexity as we have discussed the transition provisions. These are intended to respect past contributions by giving people reaching state pension age on 6 April 2016 onwards the higher of the value of their national insurance record calculated under both single tier or old scheme rules. As a result of this calculation, many people retiring in the early years of the single tier will have their pension boosted using new-scheme rules. So a woman with 30 qualifying years and £10 of state earnings related pension scheme in 2016 would get £123.30 of single-tier pension, which is around £6.30 a week more than under the old scheme rules. As illustrated here, the groups who will benefit most are those who have only modest amounts of additional state pension, if any at all. These tend to be, in the main, women and the self-employed whose social and economic contributions were not captured in SERPS and are not fully reflected in the state second pension.
As set out in these amendments, we now want to give existing pensioners and those reaching state pension age before 6 April 2016 the opportunity to boost their additional state pension by paying a new class of voluntary national insurance contribution: class 3A. The intention is that a unit of additional pension, obtained by paying the class 3A contribution, will provide £1 a week of extra pension. The extra pension itself will simply be added to people’s state pension. The intention is for the scheme to start from October 2015 and run for a limited time of between 18 months to two years. There are just two entitlement conditions to class 3A—entitlement to a UK pension and that the person reaches state pension age on or before 5 April 2016.
We published a briefing paper that provides more details of the scheme, but we have left some decisions to secondary legislation. These include questions such as whether there should be a cap, perhaps of £25 a week; how long the scheme should be open; and whether people should have a cooling-off period after paying class 3A contributions. As the extra pension obtained will be the additional state pension, it will be uprated by CPI, it will be heritable and people will be able to defer, in line with existing rules.
I turn now to costs. As noble Lords will know, covering basic state pension gaps through existing class 3 is relatively cheap. A person paying class 3 to acquire one qualifying year of basic state pension will get their money back within four years of reaching state pension age. A different approach is required for class 3A to ensure that the arrangements do not become a burden for today’s national insurance contributors. So the costs of class 3A, which will be set by the Treasury, will be based on actuarially fair terms, in consultation with the Government Actuary’s Department. In keeping with this, the cost will be adjusted to reflect the age of the pensioner at the time they pay class 3A.
The briefing paper provides an example of how pricing based on life expectancy will work. The Government Actuary expects to report back to us on a pricing structure shortly. The report will take account of the latest ONS life expectancy estimates that were published on 11 December. I should clarify at this point that entitlement to pay existing class 3 voluntary national insurance contributions, which allows people to cover gaps in their contribution record for basic state pension, will be unaffected by this measure. DWP and HMRC will put in place administrative arrangements to ensure that individuals applying to pay new class 3A contributions are made aware that they should check their eligibility to make class 3 contributions.
Baroness Hollis of Heigham (Lab)
My Lords, the Minister has been very helpful in his introduction, but how can the consultation that he reports he has had with possible users be at all meaningful when they do not know how much they are going to have to pay and what they may be likely to get? Following that, can he give us any indication of the ball-park figure? Say someone is 70: what is the lowest possible price and the range for which the extra year of pension will be bought? Otherwise, people’s views cannot be taken seriously because they have not got the relevant information.
Lord McKenzie of Luton (Lab)
My Lords, following my noble friend Lady Hollis, I support the inquiry about the pricing structure and whether we will know that by the time the Bill completes its passage through your Lordships’ House. I listened carefully to the Minister’s explanation, because at the heart of it this is basically a savings plan. It is effectively an annuity arrangement. It is attached to the additional state pension but you could delete all that and describe the fundamental proposition here very much as an annuity. We know that that cannot be done because the DWP does not have the power to do it. However, we should be clear what this is about.
It is attached to the additional state pension and gives people a chance to enhance provision they have made in that respect. As I understand it, you could avail yourself of this opportunity if there was currently no additional state pension due—or there was a very significant amount of additional state pension due because you had been investing heavily in it, certainly above the level of the single tier of pension. Indeed, if somebody was contracted out of additional state pension I think they would still be able to avail themselves of this opportunity. I am just trying to work out how easily that sits with the whole concept—this is all about people who have reinvested in additional state pension, not just about an investment product.
I did not find the rationale for leaving these arrangements open for only a limited period, and the online survey is a bit difficult to interpret. Can the Minister give us any more information about the expectation of the number of people likely to take this up and the amounts that they are likely to take up? The Minister said—and this was said in the briefing session as well—that nothing has been scored in respect of these proposals so far as the public accounts are concerned, but presumably it will be scored at the next Budget, and certainly credit for any take-up of this will feature in the year 2015-16, presumably with its consequential impact on the deficit and government debt arrangements. Indeed, the lump sum would be taken out in the year in which it is received, and the flow of pension contributions will just score over the years and decades ahead.
Given the nature of this, I am interested to understand the sort of explanations and information that people will be given when they are looking to make their choices. In a sense, the information about their class 3 and 3A voluntary contributions is relatively straightforward, but we are in an environment where we know the annuities market is generally very opaque. The Financial Conduct Authority is on the point of publishing a review of the annuities market. Given the closeness of this product to annuities, what sort and range of advice and information is it proposed that the Government will provide for people thinking about taking up these opportunities? We accept some of the potential benefits. In a sense, it is risk free; it is inflation protected; and it can be shared on divorce. One sees the benefit of those arrangements, but I have one or two queries on the wording of the amendment which I hope the Minister can help me with.
Baroness Hollis of Heigham
Would my noble friend not agree that the Treasury is following the same philosophy as it is in trying to abolish the lump sum as an option for people who have deferred taking their state pension for two years in order to avoid paying out the money upfront and is now trying to do exactly the same thing—a sort of mirror opposite—in terms of this package?
Lord McKenzie of Luton
Indeed, I agree with my noble friend. It is the converse of that. A cynic might say that this is all to do with managing the deficit and the debt in the run-up to a general election, but that is for us cynics, I guess.
Looking at Amendment 62, I wonder whether the Minister can help me out on what will eventually be new Section 14B dealing with the arrangements for repayment of contributions. I am a little unclear about proposed new subsection 14B(4), which states:
“Regulations under subsection (1) may provide for benefits paid to a person because of the unit of additional pension to be recovered by deducting them from the repayment”.
I am not quite sure whether the benefits referred to there are the additional pension that has hitherto been received or whether there is something else because typically one would not expect extra benefits to be paid if somebody has extra income—quite the reverse. Perhaps the Minister can help me on that provision.
Proposed new Section 61ZA is headed “Shortfall in contributions”. I was a bit bemused by this. It states:
“This section applies to a person who has one or more units of additional pension if the person … is not entitled to a Category A retirement pension, but … would be entitled to a Category A retirement pension if the relevant contribution conditions were satisfied”.
It goes on:
“The relevant contribution conditions are to be taken to be satisfied”,
but in a sense it negates the impact of that in terms of payments as you get only the additional pension attributable to units of additional pension. I was trying to fathom what that was about because if somebody is not entitled to a category A pension presumably they would only be entitled at all if they had a category B or D pension. Or is this saying, basically, that even though you do not have a pension entitlement, we will treat you as having a pension entitlement for the purposes of being able to take up these provisions? That seems to undercut one of the two requirements—and there are only two requirements—to be able to access these arrangements.
I do not know why there needs to be consultation with the Government Actuary or the deputy Government Actuary—I do not know whether you can choose who to go to for advice. I would have thought that going to the Government Actuary’s Department would include going to the deputy if the Government Actuary is not available. But there may be good reason for that formulation. This may well be a nice little earner and deserve support on that basis, but until we know more detail it is difficult to judge. It is an odd formulation to attach this to the additional state pension in the way that is proposed.
Lord Browne of Ladyton
My Lords, I, too, thank the Minister for his explanation of these provisions. I take this opportunity to thank his Bill team on behalf of my noble friends and myself for the briefing that it provided to explain some of the issues that have been raised. When the Chancellor announced the scheme in the Autumn Statement there was much excitement among financial journalists, I recollect. It was hailed as a great deal for consumers by commentators, many of whom missed crucial words in the small print that it would be at a broadly actuarial fair rate. My understanding—and the Minister's explanation confirmed this—is that the price will vary according to age at purchase, much as an annuity would, and that it would be gender-neutral.
The Minister has effectively confirmed that the only factor that will be taken into account in pricing a class 3A contribution will be age. No account will be taken of any regional or occupational differences in life expectancy, which are issues that will engage the Committee later in this evening’s debate. As that is not going to be the case, have the Government done any work on the likely distributional effects of this scheme? If this scheme is broadly actuarially fair in pricing and the proposal is that over time the policy will be broadly cost-neutral as the briefing paper says, if some people are getting a good deal others must be losing out. Those who lose out will be those with shorter than average lives, and there is a clear socioeconomic correlation there.
There is much that we do not know about the scheme and the Minister was absolutely candid about that. In fact, there is much that the Government do not know about the scheme because they have not worked it out. We know, however, that it will start in October 2015 and that the Government are minded to run it for 18 months or two years only. I digress here to point out to the Minister the irony of telling us in one short unqualified sentence that the affirmative procedure will be used for the regulations for this in a scheme that is due to start in October 2015 when he spent a significant amount of his last contribution to the Committee explaining that it would be very difficult to find time for affirmative regulations in this Parliament. That irony was not lost on the rest of us. He may find that fact being played back to him at some time in the not-too-distant future.
We do not know the range of prices, but the illustrative price given in the briefing paper sent to Peers showed a charmingly named couple, Mr and Mrs Average, who will be 65 in 2015. They could be expected to live for another 24 years. It suggests that they would have to find £1,248 to acquire another one pound a week. That would be a better deal for them than going to the market, said the briefing, because the extra pension that it would buy would be uprated by CPI and without charges, and would be inheritable under the additional state pension rules. I am not sure whether that was meant to be the price for them to receive an extra £1 per week each because it seems in the polling reports that the prices tested were between £300 and £800 to buy an extra £1 per week, depending on age. I make this point because the value of polling is of course dependent on the nature of the questions asked. If the questions that were asked in the polling were on an expectation that one unit per week would cost between £300 and £800, and in fact it is likely to cost £1,248 to acquire, that polling may need to be redone as it will be of limited value.
Lord Freud
It does not count. I can answer that straightaway because the discussions on the welfare cap have been around working-age benefits, not pension benefits. The Labour Party may have been discussing a wider pension cap but that is not what we—
Lord Browne of Ladyton
It is the pension cap that this Committee is discussing. I am grateful for that clarification, which was appropriate at this time.
Finally, there are the decision points for individuals. Will they get advice on whether they should buy class 3A contributions? After all, there are significant considerations for individuals, such as their life expectancy, which may be significantly affected by where they live in the United Kingdom; whether they are married or in a civil partnership, or likely to be so; and what other income or savings they have—and, therefore, whether it is a good idea, if it may affect their entitlement to incapability benefits, for example. After all, if someone with £10,000 in savings decided to spend £4,000 of those in buying another £5 in income, would they not simply lose that in pension credit and have 40% less of their savings? For all the reasons that we have discussed, those savings may be necessary at later stages in their life. Crucially, who would sell this to them? In the context of the briefing that we received from the Minister’s team, we were told that engagement between the purchasers of this and the Government would be through the Treasury. Does that mean that the Treasury will have certain responsibilities to people who call to inquire about buying these class 3A contributions? If so, how will they be discharged?
There are many questions to ask. The Committee will not be surprised if the Minister cannot answer them all now, because, with respect, he was unable to answer even any of his own questions on his introductory remarks. We may have to wait and see about some of the detail. I understand the reasons for haste; this legislative vehicle is important for this initiative and, if it proves to be positive, that is a good thing. But the scheme was rushed out in the Autumn Statement and added on to the Bill when it had gone through another place. We have no costings or details on price, and no idea how it will be administered—but we still look forward very much to the Minister’s reply.
Baroness Hollis of Heigham
Can I ask a question following on from my noble friend about the interaction of pension credit, which I was trying to tease out as he was going along? At the moment, if you have savings of more than about £40,000, the first £10,000 of pension credit capital is disregarded for pension credit purposes. Thereafter, you have the tariff income of £1 for every £500, which means that if you have savings at the moment of about £40,000 and you are single—I am not sure how it would work for a couple, because I do not have the figures in my head—you would be just about ineligible for pension credit, because your tariff income would float you above it. But turn that capital into a pension, given the fairly unattractive rates for annuity purposes, and I think as a result you would come into pension credit. I shall try to do some more work on this as the discussion moves on, but, if I am right, what the Minister will get in upfront savings he will lose not only in payments in perpetuity while those people live, through his additional pension, but also the immediate payments he will have to make in pension credit—because, having disbursed their capital, they will now come within the pension credit income rules.
Lord Freud
I need to thank noble Lords, as usual, for a mine of interesting questions, and I shall try to deal with as many as I can. On the point that the noble Baroness, Lady Hollis, raised about the research and the understanding of the prices, we are clearly looking at how much the original research needs to be complemented—and, indeed, we may consider more polling work. The original testing was based on a stylised scheme, and further work, playing in the fact that the scheme is secured in national insurance and state pension, may be beneficial. We will also look to consider qualitative research to find out what sort of barriers there may be to taking up class 3A contributions, and I will be happy to provide further details of that research. On the question raised by the noble Lord, Lord Browne, about whether some of that research needs to be redone, I think we would say that it needs to be complemented.
The example of £1,248 raised by the noble Lord, Lord Browne, was not the cost of £1 for a 65 year-old; it was illustrative only, and we are looking to do some more research on the final price. In answer to questions from both the noble Lords, Lord Browne and Lord McKenzie, about information and timing, we will provide comprehensive information and get it quality assured by stakeholders, and we build on the kind of information we provide for class 3, which noble Lords will be familiar with. This is the standard background that we will build on.
The noble Lord, Lord Browne, raised the question of the amount of financial advice that people will need before buying class 3A. Again, in this document, as in others, we draw people’s attention to the fact that they may wish to take independent financial advice before taking a decision that could affect their current or future income. We also need to note that HMRC, rather than the Treasury, administers this scheme.
On the point about pension credit that the noble Baroness, Lady Hollis, was developing in front of our eyes, she is correct that some people would come within the scope of pension credit, but it is up to the decision-maker to decide whether people deprive themselves of capital in order to derive income. We will look at that point further.
Baroness Hollis of Heigham
There is certainly a rule within all social security, along with the rule that capital may be treated as income and income treated as capital, that you may not wilfully deprive yourself of capital in order to boost income. However, to do so wilfully in response to a government campaign would be very different from handing a gift of £10,000 to your grandchild. I think that the Government would be open to mis-selling claims if they went down that road. I do warn the Minister.
Lord Freud
I am, of course, always very grateful for warnings from the noble Baroness or other members of the Committee. That is clearly one of the areas in which quite a lot of detailed work needs to be done. I suspect that it is a minority sport that she is defining, but nevertheless we will need to look at it.
On the question of the noble Lord, Lord McKenzie, about what pension entitlement is necessary, people can have a pension entitlement that consists of graduated retirement benefit or state pension based on their own record of national insurance, which is a category A pension, or one derived from a spouse or civil partner’s record, which is a category B pension. Proposed new Section 61ZA overrides the rules that prevent people having an entitlement to more than one pension at a time.
On the question about what we call it, I think that the noble Lord called it a savings vehicle. We have to be rather careful in our language, which the noble Lord was good enough to recognise and acknowledge. Class 3A will be a one-off opportunity for today’s pensioners, with a cap on the amount of additional pension that can be bought and a limited window during which applications can be taken. As with other forms of voluntary national insurance, we do not expect it to be seen as an investment in a commercial sense. As class 3A is not an investment product, it does not require regulation by the Financial Conduct Authority and, therefore, people with defined contribution pension savings will not be able to get their pension pot refunded in order to take up class 3A as an alternative to an annuity.
On the point raised by the noble Lord, Lord Browne, about the belt and braces approach of the Government Actuary or the Deputy Government Actuary, this is a provision to cover situations where the post of the Government Actuary is vacant. It enables engagement for consideration. I know the noble Lord takes an Occam’s razor attitude to legislation, but that is the reason.
The question from the noble Lord, Lord McKenzie, on the recovery—
The Deputy Chairman of Committees
I apologise to the Minister—he will have to finish in a few minutes. A Division has been called. The Committee will stand adjourned for 10 minutes.
Lord Freud
My Lords, I should start by quickly apologising to the noble Lord, Lord Browne, on my belt-and-braces comments. I should have directed my admiration towards the noble Lord, Lord McKenzie, as regards the deputy Government Actuary. I need to address to the noble Lord the point on recovery, which is a straightforward matter, to the extent that if someone changes their mind we will undo both sides of the payment and consider only any actual additional payment made to balance up.
Lord McKenzie of Luton
Perhaps we can clarify the point to get rid of it. In that case, does the reference to benefits paid basically include the additional pension that has been earned from the payment?
Lord Freud
Yes. To the extent that if someone changes their mind about wanting to buy class 3A contributions and recoups that fund, we will recoup the early payments made on that benefit in order to balance both sides of the position.
We hope to have the pricing details bottomed out by Budget time, although I cannot give any range at this point.
As regards the query on numbers from the noble Lord, Lord Browne, of the 7 million pensioners we assess as potentially being able to afford it, we estimate that around 30% will have savings of between £1,500 and £10,000, 20% will have between £10,000 and £20,000, and 50% will have more than the £20,000 limit. So if we assume that pensioners would not want to spend more than, say, 25% of their capital on this, we might expect the average amount bought to be £5 a week. However, those are, again, premature estimates, and it is not worth spending too much time on that because there will be more information later.
I also take on board the points made by noble Lords about the importance of communicating the new scheme effectively and giving people the right information at the right time. We will take great care in going through the detail of implementation and delivery arrangements to put the customer first and will work with key stakeholders to ensure that this happens.
As I said in my opening remarks on pricing and revenue raising, we need to bring regulations back to the House, and at that time we will have the details required for a fully informed debate. We will introduce those regulations as soon as possible. I hope that I have been able to assure noble Lords that the new voluntary national insurance class 3A policy is well intended, designed to give some people who may have lost out on the opportunity to build additional pension the chance to do so.
Lord McKenzie of Luton
Will the Minister clarify a couple of points? Is it the case that someone can avail themselves of these provisions if they are currently contracted out and that there is no prohibition on that?
Lord McKenzie of Luton
Whatever the level of their current S2P arrangements—they might have paid in significantly or they may have nothing at all—can they still avail themselves on the same basis as everyone else?
The Deputy Chairman of Committees (Lord Bichard)
I should point out that this debate has been de-grouped from subsequent Amendments 52 to 58.
Baroness Turner of Camden (Lab)
My Lords, Clause 25 increases the pensionable age to 67. It is a key clause, but I wish to oppose the question that it should stand part of the Bill, as I hope to get the Government to think again about it. I know that in legislation that has an impact on millions of people, as this Bill does, it is useful to have arrangements that are the same for everyone—the same benefits and the same retirement age—as that makes things much easier to administer. The problem with that is that we are not all the same. Even more important, jobs are not all the same.
As I said at Second Reading, some people are happy to work for longer. They like their jobs and the social aspect of working with others is important to them. Such people do not look forward to retirement; they like to go on working if they can. These people are often employed in administrative jobs, but for others things are very different. Some industries involve strenuous and often hazardous work—the construction industry is one such. Those who work in such industries do work that is necessary for the rest of us. Without them, we would not have the comfortable lives that we now have. Yet such industries often have a record of industrial accidents and disease, which we should all find unacceptable. It may be dangerous for older workers to work with others in such a working environment. Therefore, an earlier retirement may well be necessary. This simply cannot be left to the private sector. We cannot have legislation that says that all people must work longer before retiring.
It is not only industries that are hazardous where this is a problem. There are many low-paid workers in dreary jobs who are only too happy to retire, as long as they have enough money to do so. People who work in hospital cleaning and dreary jobs of that kind are only too happy to retire if it is possible for them to do so and to receive reasonable benefits when they are retired. Such people long to retire. It is not enough for us to say, “Oh well, you have to work for longer”.
We are often told of the evidence that we are all living longer, but it is not always sensible to use that as a reason for extending working life—not for everyone, anyway. We are not alone in thinking this. A number of my colleagues have tabled amendments to subsequent clauses to seek a review of retirement ages. I certainly think that that is necessary. Have the Government thought through what all this means? What is the impact on people working in particular jobs and their health? What happens when people live longer? What is the effect on their health? Therefore, it seems to me that this simple provision in legislation to ensure that people work for longer is not a good idea. I hope that the Government will be prepared to look at it again, in the light of some of the things that have been said both at Second Reading and in Committee today.
Baroness Sherlock (Lab)
My Lords, as this is the first discussion of Part 2 of the Bill, it may be worth setting out a couple of principles from these Benches at the outset. First, we agree with the principle of raising the state pension age to reflect longevity, as people are living longer than when the current arrangements were put in place, largely in post-war reforms. As I indicated at Second Reading, we also accept the need for periodic reviews of the state pension age, but we differ from the Government on how best to do that—we will return to that issue in the discussion of our later amendment.
Fixing the state pension age is never easy, and an issue of fairness is always at stake. There needs to be a balance between the interests of the generations on the funding of retirement incomes in a pay-as-you-go system, where today’s taxpayers fund today’s pensions. As we will discuss in later groups, our view is that having a careful, evidence-based review before taking any future decisions on changes to the state pension age is a crucial element of ensuring fairness between generations.
However the arguments made by my noble friend Lady Turner require careful attention from all of us. Sometimes fairness also requires at least a consideration of difference, and my noble friend has highlighted some crucial differences, particularly in relation to longevity and health. We all know that life expectancy is increasing, but that fact conceals as much as it reveals. Mortality rates vary widely, as do morbidity rates. There is a huge amount of socio-demographic data available to inform our debate—and I am sure we will hear a great deal of it in the groups to come—from the Wanless and Marmot reviews to government figures and other outside research. There are also some very interesting data from the TUC. I will say more on this later, but I do not want to pre-empt what I think could be a very substantial discussion coming up shortly.
There are no easy solutions to these problems. The biggest challenge to the Government is to address the question of differential mortality and morbidity rates through urgent attention to public health, but we also need time to reflect on how best to deal with these questions in relation to the state pension age. It is our view that the best way to do that is to ensure that the mechanism for reviewing the state pension age includes a review panel which has on it representatives of a wide range of interests in society, including employer and employee representatives and representatives of different parties and, indeed, our own Cross Benches. I shall move an amendment later today to that effect, but in the mean time, I hope very much that the Minister will take the concerns of my noble friend seriously. I look forward to his reply.
Lord Freud
My Lords, the purpose of Clause 25 is to bring forward by just over eight years the point at which the state pension age completes its rise to 67. The latest evidence shows that we are living longer and, on average, healthier lives than ever before. To illustrate this point: a man in the UK reaching the age of 65 30 years ago—in 1983—could expect to spend 14.5 years in retirement. Today, a man reaching that same age can expect to spend about 21.5 years in retirement.
The noble Baroness, Lady Turner, raised the key issue of differential life expectancy. I do not propose to go into that in great detail at this point because we will have the opportunity to address that full-on in the next amendment; so, if she will forgive me, I shall concentrate my remarks on raising the age to 67.
The Pensions Act 2007 was informed by the Office for National Statistics’ 2004-based life expectancy projections. Those projections suggested that a man aged 67 in 2028 would survive for a further 19.9 years. However, on our latest understanding, this same man is projected to survive for a further 21.5 years, fully 1.6 years longer than we thought when setting the original timetable in the 2007 Act.
We continue to believe that it is only fair that those enjoying the benefits of longer life expectancy pay a share of the associated costs. Bringing forward the increase in pensionable age to 66 through provisions in the Pensions Act 2011 ensured the short-term sustainability of the UK’s state pension system. Now, the measures contained in this clause to accelerate the increase to the age of 67, combined with the regular review mechanism as set out in Clause 26, will help ensure the fairness and affordability of the system into the medium and long term. The savings projected to result from this proposal are significant—some £73 billion in net savings between 2026 and 2036—but not only are there net spending reductions, but this measure is projected to increase employment rates and boost GDP by around £100 billion over the same period.
Bringing forward the rise to 67 by some eight years will affect around 8 million men and women born between 6 April 1960 and 5 April 1969: people who are now aged between about 44 and 53. As with previous increases in state pension age, the transition to the higher age will be phased in gradually: men and women born between 6 April 1960 and 5 March 1961 will have a state pension age of between 66 and 67, and those born between 6 March 1961 and 5 April 1969 will have a state pension age of 67. Those born after 5 April 1969 will not be affected by this change because they already have a state pension age of 67 or 68, or somewhere in between the two, as legislated for in the Pensions Act 2007. The proposals in this clause mean that the maximum increase that any individual will experience in their state pension age, in relation to the Pensions Act 2007, is one year. By starting the transition to age 67 in 2026, no one who was affected by the Pensions Act 2011 will have their state pension age changed again by the measures in this Bill. To help people prepare for the change, we announced these proposals back in November 2011, giving the first cohorts affected more than 14 years’ notice.
Finally, noble Lords will be aware that an ageing society is not a phenomenon unique to the UK. That is why other countries in Europe and beyond are moving to adjust the age at which retirement benefits become available. Indeed, even by moving to a state pension age of 67 in 2028, we will still be behind many other countries—Ireland will get there in 2021, the Netherlands and Australia in 2023, and Denmark and the US in 2027. In bringing forward the rise to a state pension age of 67 we are ensuring that the system as a whole remains fair between the generations and sustainable and that we are doing so in a way that is on a par with elsewhere in the developed world. I beg to move that Clause 25 stands part of the Bill.
Baroness Hollis of Heigham
My Lords, in moving this amendment, I suspect I will also speak to some of the other amendments in the group en route. Clause 26 states that the Secretary of State must review pensionable age from time to time,
“having regard to life expectancy and other factors”,
he considers relevant. In preparing this report he must consult GAD and a panel appointed by him which will produce their own reports to inform his. All that seems entirely sensible and I welcome it.
This amendment is a limited and modest one, which I hope the Government will find helpful and might even accept. It simply asks to put in the Bill, for the avoidance of doubt, those factors that the White Paper of January 2013 on page 77, paragraph 161 stated:
“are expected to be considered”.
There is also one additional factor, gender, which slightly oddly was omitted.
What factors does the White Paper expect “to be considered” both by the Secretary of State and the review body? The first is:
“evidence of variations in life expectancy … by socio-economic class”,
and therefore, by implication, as my noble friend Lady Turner said, by occupation, and by geographic reason. Secondly, there are,
“trends in healthy life expectancy”,
a point I am sure we will pick up and explore as my noble friend already has done in referring to the Marmot report. Thirdly, there are
“alternative ways of measuring life expectancy”,
and, finally,
“impact on the labour market”.
As I said, all these factors, which the amendment seeks to put in the Bill, come from page 77 of the Government’s own White Paper from January 2013—The Single-tier Pension: a Simple Foundation for Saving. The only missing factor, as I have said, which I have added in was gender, which I presume was an oversight, given the recent fusses we have had over unisex annuity rates and the like. This amendment is very simple. It seeks to put in the Bill that the considerations in the Government’s White Paper will come into play.
Why bother to spell it out in the Bill instead of leaving well alone and keeping it in the White Paper? My noble friend has mentioned the Marmot report, which was highly important. I, and I am sure other Members of the Committee, have read—and I know the Chair of the Committee knows it very well—the recent Lords report from the Committee chaired by the noble Lord, Lord Filkin, called Ready for Ageing?. I have been through all of its 1,000-plus pages of evidence. It was an important and valuable report, especially for the evidence coming in from the wide range of contributors. However, I was surprised to see how relatively little attention, particularly in the recommendations, was paid to these other factors. Instead, there is an insistence on trying to connect retirement age, in some rather formulaic way, to increased longevity, as, I fear, the Minister has just done.
We have recently had the Autumn Statement, in which the Chancellor of the Exchequer again seems to think that retirement age should be mechanistically linked to longevity by defining a set proportion of adult life that should be spent in retirement, irrespective of what happens to whom or what the quality of that retirement is like. It is all, in my view, highly elitist, and I am delighted that the DWP is not following the Chancellor’s approach, which is the easy, mechanistic way, but is seeking appropriate evidence with which to inform its decisions. This amendment would strengthen the DWP’s decent, evidence-based approach against a simplistic, bulldozing Chancellor, now or in the future, who wanted easy money to cut the welfare budget in its entirety by raising the state pension age.
What are the issues? Some have been touched on by my noble friend Lady Turner. Most commentators go over the well worn statistics—a year for every three or four years; the doubling of numbers of those over 85; the trebling of centenarians, and so on. They end up with the glib assumption that we cannot afford it so we must all work longer or, more specifically, delay drawing our pension to pay for all those—not us, of course—who in future will linger too long; and if we do not do this we are destroying the life chances of our children and grandchildren. That argument is pretty well nonsense. The issue of affordability is invariably prayed in aid and is, I think, inappropriately stated—indeed, badly misstated.
The first point is that half the population growth among the elderly, by which we are so financially frightened, is a temporary bulge left over from the baby boomers and will scale down from the 2030s on, at which point we will have one of the best worker/pensioner support ratios in Europe. I do not think the Chancellor told us that, if he actually knew it. The second point is that I remember doing a speech at the Institute of Directors 18 months or so ago and to a man—as, indeed, they were—they thought that the state pension age should be 70 and that they should have the right to dismiss staff at 65. No connection was made between the two. There is little point in raising the state pension age if people do not stay in the labour market. It merely means that they linger longer in the twilight of inadequate working-age benefits.
The latest statistics I have—the Minister’s may be more up-to-date—is that some 30% of men have left the labour market before the state pension age of 65, though the averages are skewed and in practice it is actually a higher number because some men, and women, continue working for a couple of years after 65, a subject we debated when talking about lump sums earlier in Committee. At the moment, that 30% or so of men who leave the labour market early, whether through unemployment or poor health, are protected. This is a point that is never raised in any of these discussions and I do not know why, because it is very relevant. They are protected because they can claim pension credit on the same terms as women and thus, while pension age remains unequal, they have, or have had, a level of benefit equivalent to the state pension topped up by pension credit for up to five years while they linger in the twilight world between leaving work and pension credit age. That will disappear as the state pension age is equalised and poorer men, unable to work but unable officially to retire will find themselves in a no-man’s land on a low level of benefits with no top-up by pension credit as the state pension age continues to rise. As far as I know, no consideration at all has been given to that by anyone, and it should have been.
I come to my third point. What matters, therefore, when we consider the cost of state pensions is their percentage of GDP, which over the next 20 years will actually fall. Why has that not been brought into play as an argument? It depends also on employment levels and productivity during working years; savings ratios, including pensions, which conventionally are not counted in the savings ratio—the difference between outgoings and incomings; rising real incomes, which can buy adequate heating and food, both before and during retirement; and the ability in the later years of retirement, the decade of growing disability, to release assets such as one’s home. Those are also not counted in the savings ratio—and there is a big difference between us and Germany. That could be done by trading down, or equity release, can help co-payment of the cost of old age. Then there is the degree to which heavy-end caring, especially dementia, can be pushed back.
Lord Whitty
My Lords, that was a real tour de force by my noble friend. She has laid out the problems of simplistic answers to the setting of the pension age. I would have preferred it if the strategy embodied in the Bill had been preceded by the kind of review referred to by my noble friend. The reality is as she spelt out. There has been due consideration and serious assessment of the statistics, certainly, but a simple and mechanistic relationship has been made between increased average longevity on the one hand and a Treasury-led assessment of what the nation can afford in the medium term on the other, on a fairly spurious basis.
I have two amendments in this group that move in much the same way as my noble friend’s amendments. She has made the case for looking much more widely when we come to review the pension age next time and ensuring that we do that by including it in the Bill. The central problem was also referred to by my noble friend Lady Turner in the previous amendment: the range of longevity and life experience is still enormously wide. One of the problems in this House, frankly, is that most of us have spent most of our lives in relatively comfortable positions and healthy and salubrious surroundings. In so far as we have been under pressure, it has probably stimulated our brains to function for slightly longer than many of our fellow citizens. None of that will go on forever for any of us but, nevertheless, we are in a fairly privileged group in that regard.
At the other end of the scale, there are people whose whole life has been in physical and intellectual distress and who have come in their 60s—let alone 67—and sometimes in their 50s to a position where they cannot sensibly work any longer. This is a minority group, but it is quite a large minority. It tends to be defined by occupational background, geographical area and income. All of those factors need to be taken into account in a much more sophisticated way in any future review. My noble friend referred to two wards in Norwich having that differential. We have long said in London that life expectancy declined if you went from South Kensington across to Mile End roughly by one year per stop on the District line. This is not an equal society, and we should not be imposing an equal retirement age on everybody, however they got there.
All these amendments ask is that we recognise that change is necessary. We recognise that there will be another review but at least let us ensure that our successors, in undertaking that review, look at these wider elements. The extra bit in my Amendment 57 is that we should look specifically at the lowest end of the longevity increase or achievement, if that is the word, to see whether we need to make special provision for them in so far as we can define them. That is an exercise in the future, but this Bill could ensure that it is effective and undertakes a much wider review of life experience than a direct correlation between average longevity and the state pension age. I am very pleased to support my noble friend in her amendment.
Baroness Drake
My Lords, I shall speak to Amendments 52, 55 and 58. I acknowledge that increasing the state pension age consistent with increases in life expectancy is part of delivering a sustainable state pension system. For the regular reviews of the state pension age rules, however, we also need to ensure that a clear and wide range of relevant factors is considered and that there is clear and authoritative public presentation of the evidence to inform that debate, while recognising, of course, that the Government of the day will determine the policy that is brought to Parliament.
Intergenerational fairness requires that each generation should enjoy a roughly similar proportion of adult life in state-supported retirement, and we may well see newer and higher projections for life expectancy in the future which will bring huge challenges to how our society operates. For example, who knows where advances in modern medicine will take us in terms of life and health expectancy? State pension policy clearly has to be robust, in the face of not just increasing life expectancy but major uncertainty about how fast that increase could proceed. However, I am also concerned that increasing the state pension age should not be seen as the silver bullet for automatically delivering sustainability without considering some of the complexities and collateral consequences which need to be addressed at the same time.
This requires a range of factors to be considered in the periodic review of the state pension age. My noble friend Lady Hollis has clearly identified these factors, and I shall add arguments about why it is important that they are in the Bill. On average, life expectancy is increasing and yes, on average, ageing appears to be healthy, but averages do not tell the whole story. There are major inequalities, as has been articulated. Life expectancy varies significantly by socioeconomic class and while it has risen significantly in all social classes, there are widening absolute inequalities. Lower socioeconomic groups live for fewer years post-retirement, a smaller percentage of which appears to be free of sickness or disability, and they are far more likely to leave the workforce early for health reasons. In part, this reflects differences in key lifestyle predictors of future health.
The key implication is that there may be limits to the feasibility of across-the-board increases in the age of retirement from the workforce, particularly if the increases are more than proportionate to the increase in life expectancy of particular socioeconomic groups. Similarly, for those who are healthy, since the state pension accounts for a larger share of their total retirement income, this suggests that an increase in the state pension age would be most likely to induce lower income workers to work longer and less likely to induce higher income ones.
It is important to understand how trends in life expectancy and health by socioeconomic class will develop in the future. Certainly, figures indicate some significant differences in life expectancy and healthy life expectancy between regions. The recent figures, kindly provided, show that there is a widening gap between local authority areas with the lowest and highest life expectancies at age 65. Of course, one can speculate on the causes of these differences—major industrial shocks, unemployment rates, specific health problems and cultural and behavioural issues. However, if one looks below age 65, lower socioeconomic groups are also not participating equally in the significant reductions in death rates between the ages of 45 and 65.
An optimist could argue that the major occupational sources of ill health that played a large role in previous generations, such as coal mining or heavy industry, and whose impacts can still be seen in the regional incidence of unemployment, will decline in importance. Conversely, a pessimist would stress that the increasing divergence of some lifestyle factors, continuing differences in working conditions and new labour market features may offset some of these positive developments. The issue therefore is whether policy levers can be deployed to mitigate the disproportionate impact of a rising state pension age on lower socioeconomic groups.
Variable state pension ages may not be an appropriate response for addressing the significant differences in morbidity, life expectancy and early departure from the labour market. However, where differences exist a response is needed. Simply ignoring them is, in itself, a default public policy response with potentially negative consequences for many people. Measures need to target reducing health inequalities but the welfare system needs also to be sensitive, efficient and protective in supporting those for whom working longer is problematic because of their class and health. If these inequalities persist or widen should, for example, the age of eligibility for pension credit be lower than that for the state pension itself?
The UK state pension system, even with these reforms, will not be particularly generous in relative terms. Its focus is poverty prevention rather than an income replacement system. The value of the single tier will be only a little above the guaranteed credit. Yes, it will be the foundation for private saving to enable people to achieve a reasonable level of replacement income but it will be some years before auto-enrolment delivers the necessary savings levels. We are still only staging and phasing its introduction. Meanwhile, lower socioeconomic groups will still be facing a greater likelihood of ill health and earlier exit from the labour market as they get older.
Understanding the extent to which increases in life expectancy are accompanied by increases in healthy life expectancy, monitoring inequalities between socioeconomic classes and regions and identifying the implications for policies associated with the evolving policy for state pension ages will remain an important part of any review. The key responses should include a strong focus on health service and occupational health policies and on the measures to reduce the life expectancy gaps and to compress morbidity. The long-term aim must be to narrow health inequalities rather than treating them as permanent barriers. We should aspire, for example, for the men in Glasgow and Liverpool to have as good an average life expectancy as the men in Kensington and Chelsea, or even those in East Dunbartonshire. Policy needs to be designed to be both equitable and affordable in the face of whatever rise in life expectancy actually occurs. Higher pension ages are essential but are not in themselves a sufficient response.
Increasing labour market participation by older workers is, equally, an integral part of sustainability. Analysis of trends in average age of retiring from the labour market and in employment rates among older people by gender, region, occupation and socioeconomic class is required to understand the extent to which increases in state pension age are accompanied by increases in employment. Unless increases in state pension age are accompanied by higher labour market participation by older workers, then the effective contribution of those pension ages to public expenditure pressures will be weakened, GDP will be lower and other benefit expenditure could well increase. However, major inequalities in life expectancy and health may make across-the-board increases in retirement ages unfeasible unless these differences disappear over time.
The policy of raising the state pension age needs to be accompanied by measures that facilitate higher labour market participation by older workers, because barriers certainly exist. Take, for example, the position of some women. Although women have a higher average life expectancy than men, the figures also reveal that the gap between them is narrowing. The gap between women in higher and lower socioeconomic classes is increasing and women’s participation in the labour market has reached a plateau, partly because of care requirements and the cost of care provision, particularly childcare. Older women are increasingly looking after their elderly parents or grandchildren. An older woman’s earlier age of retirement from the labour force may, for example, be the price paid so that her younger daughter or son can be economically active.
The cultural biases against older workers are often embedded in personnel practices and employers’ assumptions. Take training as an exemplar. The evidence suggests that employer-provided training is skewed towards younger workers, with an assumption that some workers are too old to train. Yet the experience of workers in their 50s plays an important role because beyond the age of 65, participation in the labour market is driven by participation up to the age of 65. Once older people exit the workforce, they are much less likely to work again. The challenges facing business in embracing older workers will be very real. I recall quite vividly 10 years ago the CBI, anxious about that challenge, simultaneously arguing for an increase in the state pension age to 70 but a default retirement age under discrimination law of nearer 65. I described it at the time as a five-year gap between loss of employment rights and receipt of pension. The debate has moved on but that indicates what tensions will be there as industry responds to increased longevity and increased state pension age.
The extent to which increases in state pension age are accompanied by increases in labour market participation will inform government of what initiatives they need to take, be it tackling discriminatory cultures, financial incentives for later retirement, incentives to employers to employ and train older workers, flexible employment practices, cultural attitudes and health policies and changes to welfare policy and welfare payments themselves. Whatever decisions are made in response to the periodic reviews of state pension age, and however much desirable continuity in policy can be achieved, delivering both a fair and sustainable pension policy and level of public expenditure will and should be subject to fully informed debate continuing over time, in the light of new information on a series of relevant factors becoming clearly available and systematically considered.
Lord Stoneham of Droxford (LD)
I was not going to intervene, but there is not as much difference between the two sides of the Committee on this, as earlier contributions seemed to suggest. I certainly thought that the remarks of the noble Baroness, Lady Drake, were right down the line and I was sympathetic to them. Nobody is suggesting that the Labour Government were wrong to start the debate on early retirement. Everybody knows that life expectancy is improving and there are great complexities with inequalities. I would question whether the inequalities have necessarily got worse. I will come to that in a moment, but there is also the issue of overriding affordability.
One of the problems of extended life expectancy is that it almost certainly results in higher social care costs—and, as we know, higher pension costs. We all want to see better pensions, and you cannot often have both a lower retirement age and better pensions. It has to be recognised that you have to get a balance. We have all seen the extra costs that this Government have put into pensions through the triple lock. We want to see that continue into the next Government as well, but that will add to the overriding costs.
I question the inequality issue. As someone who worked in the mining industry when there were 250,000 people working in it, having seen the consequences of early retirement on a lot of those communities and the effect that it is already having on inequalities and lifetime expectancy, I would expect to see some improvement, as we have moved away from older, heavy industries. Another argument was about boring jobs—and boring jobs in the health service. The boring jobs of my generation were in the car assembly industry. With improved technology, anybody organising cleaning jobs should certainly know that that is one of the most important jobs in the health service. It should be respected and there should be pride in it, and there are ways and means of managing that.
That takes me to my further point. You have to have a uniform state pension age and it has to be an average. There will be difficulties with certain occupations, but those have to be respected. We already have some occupational pension schemes that have a lower retirement age because of the consequences of people working in those sectors.
My final point is on the categories that we are using here and the factors that will be included in any review. Those will change over the next 20 years. You could put in the proportion of people smoking or having bad diets as factors that should be looked at specifically. In fact, there is a whole variety of factors and I do not think that the Government are saying in the Bill that there will not be a variety of factors considered in these reviews. We all have an interest in reducing the health inequalities that arise in terms of life expectancy. Under the Government’s proposals, these factors will be taken into account, but we are giving people a recognition that this will be done formally, as part of a set procedure, whenever this is looked at every six or seven years. This will give some certainty as we go forward. I doubt whether the differences between us are really very big.
Baroness Sherlock
My Lords, there are times when one feels rather redundant in these proceedings—and, after a range of extraordinary speeches from my noble friends, this is one of them. I thank very much all those who contributed to this debate.
Perhaps I might start by briefly responding to the noble Lord, Lord Stoneham. I think I may have misheard him, and I hope that he will correct me if I did. He said that inequalities had not got worse, but perhaps I might refer him to the brief sent out by the DWP on equality in life expectancy and in healthy life expectancy. It said that while life expectancy has risen substantially for all social classes, this has resulted in a widening of inequalities, and that the smallest growth in life expectancy at age 65 was experienced by those in the lower socio-economic groups. What has been happening is that life expectancy has been rising for all classes, but because of the differential rate at which it has been rising, the gap has been widening. In fact the inequality problem is significant. That is a question for public policy to address.
We have heard today about trying to find a way to do two things: First, the analysis was made very clear by my noble friends Lady Hollis and Lord Whitty that people are living longer, but the proportion of years spent in full health is not keeping track at the same rate. We have significant inequalities in health within the UK, and significant variations in mortality and morbidity rates as a result. Also, we have people who are not able to work safely through to retirement age. Those are the issues that somehow public policy has to grapple with.
The fact is that mortality rates start rising slowly when people hit their mid-50s, and rise significantly from 65 onwards. That has significant implications for workers and employers. First, we have the implication—to which a number of noble Lords alluded—of having an older workforce. There will of course be employees who find, as my noble friend pointed out, that they cannot work until the state pension age. I wonder what consideration the Government have given to the risk that we will see a growing number of people who are recognised as sick or chronically disabled, but are having to wait so long for their pensions that they end up eating through the savings that they have set aside for retirement and so move into retirement without the very nest eggs that we want them to build up. Has any assessment been made of whether that will be one of the consequences of the changes to state pension age?
Secondly, what happens to those who know that they are unable to work safely at 67 but cannot retire? We have heard various examples mentioned of people in different professions. This is not simply a case for those in unskilled jobs. I would not want to be operated on by a surgeon who felt that his or her eyesight was no longer up to it, either. The reality is that a number of people in different roles may find that they have to face up to the fact that they cannot continue in the same role until a higher retirement age. The real question is whether their differential experience and resources may give them differential strategies for dealing with that. One of the questions for public policy is how we address the problems of those who do not have the resources or choices available to them in that circumstance.
Then there is the question of employers. We know that many employers welcome the wisdom and experience of older workers, but they have often expressed concern that older workers may get seriously ill and be off work for longer periods. I know that the Government have often reassured them that that is not the case and that older workers do not take more time off sick than younger ones. Have the Government given any consideration to whether that is likely to change as the state retirement age increases? Of course, at the moment, people can choose to work beyond the state retirement age and therefore there must be an element of self-selection among older workers who carry on working. As the retirement age increases, people may have no choice but to continue working, and I am interested to know whether any work has been done on whether that could make a difference to the composition of the older workforce.
We then heard about the issue of inequalities in health in relation to the fairness test. I read very carefully through the DWP document on equality in life expectancy and in healthy life expectancy, but in the end, I almost wrote at the bottom, “Baroness Hollis was right”. I found it hard to summarise it other than with something I have heard my noble friend say repeatedly almost ever since I have known her—one can expect 10 years of healthy retirement, 10 years of declining health and the rest of one’s life with significant levels of infirmity and disability. Yet despite that fact, she has pointed out the tendency of Governments to put so much store by actuarial information on average life expectancy. That of course is precisely what the Bill says in bald terms, whatever assurances we may want to receive about how it will be done in practice. The point has been made that average life expectancy tells us something, including quite a bit about how medical advances can keep us alive, but it does not tell us very much about our health in retirement, or about differential mortality rates.
We have heard a huge amount of information about clear socio-economic differences and the health inequalities that result from them. There is also clearly still a gender divide. Women still live longer than men, although the gap is closing. I also note that we are only now seeing a generation of female pensioners who have worked for most of their lives as well as raised families. We do not yet know the impact of that on female longevity—it will be interesting to see that.
Baroness Sherlock
My Lords, in addition to a gender divide, we have heard that there is a class divide and a geographical divide. To add to the examples from Glasgow, Liverpool and Norfolk, I offer Dorset, which I am reliably informed is the place to live—statistically, you are expected to live longest in the UK. Women in east Dorset can expect to live nine years longer than women in Corby—the area with the shortest life expectancy for women. Men living in east Dorset can expect to live 7.1 years longer than men in Manchester—the area with the shortest life expectancy for men. Then there is the effect of this differential life expectancy on state retirement incomes. Those living shortest post retirement, primarily the poorest and least skilled workers, will obviously receive less in state pension than their better-off counterparts in Dorset. Women in Corby will get £67,000 less and men in Manchester will get £53,000 less. And, of course, those manual workers may well have contributed for longer than those who spent longer in education.
Where does all this take us? It does not take us to any straightforward policy solutions. As I am sure is the case with other noble Lords, many representations have been made to me on ways in which the Government should tackle this—that perhaps they should not raise the state pension age until we have tackled inequalities in health; or that a variable retirement age should be brought in, taking account of life expectancy, work pattern or contribution history; or that there should be flexible retirement proposals or the idea of paying actuarially adjusted pensions early for those retiring in their 60s but before the state pension age. It is quite likely that none of these will commend themselves to the Minister. Given the look on his face, I expect that I am right in that. However, I am sure the Minister will accept that what we have heard today is an analysis that suggests that a significant set of public policy issues needs to be addressed. They are not all pension issues—a point that my noble friend Lady Drake made powerfully—but are effectively spillovers from decisions around the state pension age, which will then impact on public policy-making in a range of other areas.
If the Minister does not feel able to respond positively to any of those concrete suggestions on how to deal with this issue, I encourage him at the very least to go along with the idea of spelling out in the Bill the need to take account of all these factors, because that would then at least put the review process for setting the state pension age in the position of having to tackle all these complicated issues and making some recommendations to government on which we could all, I hope, place some store.
Lord Freud
My Lords, the purpose of Clause 26 is to ensure that every Government consider state pension age in light of the latest life expectancy projections and other relevant data. The legislation sets out that a review must be informed by a report from the Government Actuary on the proportion of adult life spent in retirement and corresponding implications for state pension age.
On the point about pensions as a percentage of GDP raised by the noble Baroness, Lady Hollis, the single-tier impact assessment shows that even with an SPA of 67 in 2028 and an SPA of 68 in 2046, the proportion of pensioner benefit expenditure could rise from under 7% of GDP in 2016 to 9% of GDP by the 2060s. I am addressing her point about the baby boom.
It is true that life expectancy is different between socio-economic groups, and even in the latest figures it slightly widened. However, it is increasing for all groups. Such inequalities have always existed and, as the Minister noted in Committee in the other place, adjusting the pension age is not the right way to address these inequalities. We need to address these issues elsewhere through tackling the factors that lead to these differences in life expectancy. To illustrate the rate of increase, the period of life expectancy at age 65 for males in the lowest occupational class between 2002 and 2006 was 15.3 years. You have to go back only to 1999 for the average period of life expectancy of males from all occupations to be the same figure.
I will not go into detail on one of the amendments regarding adult age because we have not discussed it very much, but I will pick up the point raised by the noble Baroness, Lady Hollis, and the noble Lord, Lord Whitty, on the timing of when people enter the labour market.
The single-tier pension’s key features are simplicity—giving people the clarity and confidence to save—and a value set above the minimum income guarantee standard. Allowing early access would mean that we would have actuarially to reduce the pension, and this would severely undermine both these key features of the new system, complicating outcomes and meaning that, if people’s actuarially reduced state pension was below the minimum guarantee, we would retain an extensive and complex system of means-testing. International organisations have repeatedly advised countries to withdraw incentives to early retirement. Indeed, in recent years, a number of countries have put in place measures to discourage it, including Denmark, Finland and Germany.
The changes to state pension age are primarily about fiscal sustainability and fairness between the generations, such as taxpayers and pensioners, at any given time. It is therefore right that the Government Actuary’s Department focuses on total life expectancy from state pension age and not on healthy life expectancy. Indeed, the Pensions Commission advocated that pension age should rise proportionately in line with life expectancy, thereby maintaining the proportion of adult life spent in retirement. Just last week, the noble Lord, Lord Turner, reasserted this principle. This is what the GAD element of the review is for.
We also think it is crucial that future Governments have access to wider evidence before laying any proposals to change state pension age before Parliament. We have been clear in the White Paper and in the other place that we believe the reviews of state pension age should consider healthy life expectancy but also differences between socioeconomic groups and the wider economic effects of increasing state pension age.
On my original point about flexibility, we do not want to be too prescriptive in setting out factors that must be looked at by each review. We want to foster a more long-term view which would allow each Government to specify factors relevant to the circumstances at the time of commissioning the review. There is the danger that, by setting out a list of things for each review to consider, future Governments will simply have a tick-box approach to the reviews. As my noble friend Lord Stonham said—
Lord Freud
When I last talked to the noble Lord he was pretty indifferent about his pronunciation, but I apologise to the noble Lord, Lord Stoneham. He made a point which I want to reinforce. When we are looking out for 10, 20 or more years, it is quite difficult to specify all the considerations that a review should take into account. The risk is that that if you specify them, you become restricted.
Baroness Hollis of Heigham
The Minister is being a little unfair in this argument because at no stage did I suggest that we remove the words “other factors”. They would remain. All I am trying to do is transpose the wording from this document into the Bill; they are both the Government’s documents.
Lord Freud
I am very grateful to the noble Baroness for her advice, but we want to make sure that future Governments look at this themselves, take a proactive approach to the review process and are transparent and conscious about what they are commissioning. Stipulating now all the variables and all the factors to be taken into account restricts rather than supports that responsibility. Greater discretion will also allow an iterative approach with future Governments building on the reviews of previous ones.
A lighter touch approach will help to generate more debate at the time when the state pension age review is conducted. This should encourage all interested parties across Parliament and industry to feed in their thoughts and contributions and involve them better in the process.
The noble Baroness and, indeed, the noble Lord, Lord Whitty, discussed quite a lot of the factors. I do not wish to get into a huge debate about healthy life expectancy, and so on, but I will make just make a few points on it. The first is to warn noble Lords that the ONS measure of healthy life expectancy from 2000 onwards was changed to run in comparison with our EU partners, so we do not have a consistent data run for the whole period, although we have evidence that shows that healthy life expectancy has increased consistently since the 1980s. Do not use the run because there is a discontinuity in it.
Lord Freud
It is a very fair point that health is, importantly, attitudinal. It is not a matter of just taking a medical model for this. I accept that point.
However, where we have an unbroken record, which is the time spent free of disability, which runs from 1981 to 2010, the figure for men in Great Britain rose by 2.9 years and by 2.8 years for women. It is possible to take a rather more encouraging attitude towards our healthy life expectancy compared with some of the gloom I sometimes hear. The House of Lords report, Ready for Ageing—the Filkin review to which the noble Baroness referred—concluded:
“The Government were right to raise the state pension age, but they are now adopting a timetable of increases slower than that recommended by the Turner Commission and will have to revisit this with rising healthy life expectancy”.
Baroness Hollis of Heigham
Yes, but one of the problems is that people quote that without reading the 980 pages of evidence that went with it, which show that the summary of those recommendations did not pick up most of the debates in the evidence.
Lord Freud
My Lords, I can only go with the conclusion that I would like to leave on the record alongside my warning to take a little care on some of the conclusions that have been drawn on the progress of healthy life expectancy.
The noble Lord, Lord Whitty, asked whether people can work longer and what the trends are in the labour market. The SPA has remained at 65 for men since the 1940s and the average age of labour market exit in 1950 was just over 67 for men and just under 64 for women. That figure has declined, ironically, along with the nature of the work that we have been talking about—hard physical labour. We have seen a countertrend in what has happened since then.
I genuinely welcome this debate and believe that it is important to keep having these discussions, whether inside or outside the House. But we should not seek to prescribe every last detail in the Bill; we must make sure that each and every Government revisit the issue in the light of the circumstances. I urge the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
Despite being interrupted by a couple of votes, we have had an interesting, valuable and, I hope, important debate. I am very grateful to the number of noble Lords who have taken part in it, including those who had not expected to do so. I was certainly grateful to hear from the noble Lord, Lord Stoneham—not to be confused with the housing association called Stonham.
I am grateful to my noble friends Lord Whitty and Lady Drake for joining me in pressing the Government to put these provisions in the Bill, not to challenge where we are now but for future consideration, when we are thinking about raising the state pension age—and I cannot emphasise too strongly—so that we have a coherent policy across government. We need that, because, as pension credit is withdrawn, with every year that we equalise the state pension age between men and women, we reduce the income of men who are in their twilight and who have dropped out of the labour market early, as 30% or more have and do. That figure will increase as the pension age rises—that 30% will probably go up to 35% and 40%, and so on, as we raise the state pension age, unless we can keep people in the labour market for longer, as my noble friend says.
Lord Freud
Let me just make a point, before we take those figures absolutely on face value. When you have differential incentives—in other words, the point that the noble Baroness is making precisely, when you have a higher level of pension credit than working age benefit—you cannot be too surprised when people elect to go with the better paying structure. That probably tells you less than it could about what is happening to those people.
Baroness Hollis of Heigham
Oh, dear me. Are we assuming that somebody who has a real choice about whether to stay in work is going to make a rational decision to forgo a job that pays £400 a week to take an extra £30 or £40 or £50 in pension credit to top up an employment support allowance? Is that what the Minister is saying—that that person is so rational that he will willingly reduce his income to one-third of what it was because of the enticement of pension credit? Is that the Minister’s position?
Lord Freud
I was referring to the differential between the two benefit structures. I was not referring to enticement; I was just saying that one cannot be too surprised if people select the better of two options.
Baroness Hollis of Heigham
I think that I am right in saying that under 10%—probably about 7%—of those in that position do not choose to go on pension credit when that choice is available to them, and the rest do. So clearly the Government’s position assumes that people are making a choice that is attractive because they have been financially encouraged to do so by the relative generosity of pension credit. I cannot attach any other understanding to the Minister’s position. If pension credit did not exist, the assumption would be that the benefits structure was less attractive and therefore, presumably, that they would stay in work for longer—and that therefore they are being encouraged because of pension credit to leave earlier than they need to and that, therefore, withdrawing pension credit is a wise move in the process of the rationality of economic thought in the labour market. Is that what the Minister is saying?
Lord Freud
My Lords, I am saying that when you have a higher benefits structure, it is not surprising if people select it, other things being equal, over a lower one.
Baroness Hollis of Heigham
I think that the Minister and I have a very different understanding. My view is based on my experience representing—I do not know if the noble Lord has ever had that privilege—one of the poorest wards in my city for nearly 25 years. My noble friends here have either represented such wards or constituencies with very poor members and I can tell the Minister that if people can work they want to work. They want it for self-respect, for income, for social mobility and they regard going “on the club”, as it used to be called in my ward, or taking benefits as something that they are not proud of but reluctantly do because the labour market does not make appropriate provision for them, given the state either of their skills or their health. If that comes from experience of working with people, as I have done and as I am sure my noble friends have done, then I regret that the Minister cannot share that personal experience, which might give him a greater respect for the pressures that some people face in making decisions when they have to leave the labour market. I am not for a moment suggesting that he is lacking respect, but there is a great difference in perspective on this and I do not know that I can bridge it with the noble Lord.
It is certainly the case that, as pension credit is withdrawn, it will reduce the income of people who have already had to leave the labour market, usually on grounds of ill health, and as a result they will have less money for heating, diet and all the other things that we know they will need. People going onto pension credit are already effectively entering that second decade of disability without, in many cases, having gone through the first decade of reasonably healthy retirement. By withdrawing pension credit and putting no substitute in its place, we are ensuring that all we do is increase people’s poverty and thereby progressively increase the rate at which they go into further ill health, since they can no longer afford the heating, the diet, the aids and appliances, the cleaning help and all the rest of it which keeps them more effectively fit and engaged in society. Again, I am really disappointed in the Minister if he does not appreciate that.
Lord Freud
I cannot understand the difference between what the noble Baroness has just been talking about and what she was saying the other day when she was so indignant that men could get pension credit at women’s state pension age. She described it, if I remember right, as a smooth path to the beach before getting state pension.
Baroness Hollis of Heigham
Indeed so—I made the image up on the spot, but I will, indeed, repeat it. What I was arguing there was that women were facing a cliff edge. Men had always had that slow path to the beach, but that is now being withdrawn from them and as a result they have a cliff edge in the future between where they are, on benefits, and state pension. Unfortunately for the Minister, the argument continues to be made.
I do not think that any of us disagree, as my noble friend Lady Drake pointed out so well and as was reinforced by my noble friend Lady Sherlock, that we need to extend healthy life expectancy and that that requires health policies. We need to make the second decade of average life expectancy, of increasing disability, of as decent a quality as we possibly can. The noble Lord, Lord Stoneham, said that factors will change. Of course they will. The Minister said that factors will change, but the point is that that is already covered, as was pointed out by my noble friend Lord Browne, but the wording of Clause 26(1)(a) gives the Secretary of State alone the privilege of determining the other factors. Putting all these factors in the Bill, as listed in the White Paper, does not exclude other factors that may develop as time permits; it is a basis on which I would hope that the DWP has its arm strengthened as it engages in battles for resources with other departments and with the Treasury.
Does the Minister really think that he will have greater powers of persuasion to get those health policies that we would want to extend healthy life expectancy, or those supporting policies from local government or from the DCLG for the second decade if these factors are not in the Bill and if the Government are not bound by the legislative requirement to consider those factors? On the contrary; by putting those factors into the Bill we will strengthen the DWP’s arm in requiring other departments to play their part in seeking to extend healthy life expectancy and to improve the quality of the decade of disability. Without it, his position will be weaker, not stronger. The other factors, as my noble friend Lord Browne has reminded me, remain the same. I hope that this addresses the point made by the noble Lord, Lord Stoneham. We are absolutely right to challenge the assumption of reduced inequality.
My noble friend Lady Sherlock said that we are going to eat into capital. The point is that, for example, somebody who is in a position to draw down an occupational pension has a choice of when they retire and they are not dependent on their basic state pension. The people we are talking about in this Bill are, and they have no such choice. As my noble friend Lady Sherlock said, they will eat into their capital, thus ensuring an impoverished old age as they wait to reach their state pension age.
Baroness Drake
Baroness Drake
My Lords, I shall speak also to Amendment 54. Amendments 53 and 54 are tabled in my name and that of my noble friend Lady Hollis. They provide for a report on the periodic review of the rules about pensionable age, having regard to life expectancy and other factors, to be prepared by an independent commission.
There is an important role for an independent commission, while recognising that the Government of the day would determine the policy that is brought to Parliament. The demographic challenge poses unavoidable choices, which are partly for society to make and partly for individuals. However, for those choices to be rational and sustainable, they have to be informed, barriers have to be removed and a broad consensus has to be achieved. One of the useful roles of an independent commission is to present society with those difficult but unavoidable choices. It can spell out the facts and choices clearly and starkly. It can identify the complexities. That process will also assist the parties in reaching a political consensus.
Public debate on policy changes will be better focused and more likely to arrive at consensus if there is a permanent independent body charged with presenting to society the evidence and the issues. A commission can provide the public with a clear and comprehensive narrative about what is happening and what it means. Delivering a sustainable state and private pension system and responding to the demographic challenge are long-term projects that cannot be delivered in the lifetime of any one Government.
A consensus needs to be held over a long policy framework, because optimal outcomes take decades to come through. However, securing and maintaining a consensus will not be easy, because deciding the way forward involves important political judgments, and successive Governments have focused very often on immediate challenges. Trade-offs are the essence of political debate, but achieving some degree of consensus on core principles will be easier to achieve if there is an independent commission supporting that consensus. We know that the long-term management of public finances requires intensive debate now about the state pension age—but, notwithstanding the desirability of continuity in policy being achieved, the detail of pension and associated policies will and should be subject to continuing debate over time, in the light of new information becoming available.
Life expectancy and healthy life expectancy may change significantly from current forecasts, trends in voluntary private pension savings could turn out to be more or less favourable, and the participation rate of older workers in the labour force may prove problematic. As the information available changes, so the precise public policy direction can be refined, even if the overall framework of the system maintains as much continuity as possible. It is important that an independent commission should consider the sort of issues and complexities that we all referred to in the previous debate.
As to the type of commission, it should be small, so that the quality of engagement between commissioners is dynamic and qualitative, but sufficient in number to allow for wider input and for the stimulation of considerations that an individual by definition could not achieve. The commission could become a source of authoritative and independent presentation of the facts, and of the estimates of public expenditure consequences and of what future rises in the state pension age might be implied by the principle of pension ages rising in proportion to life expectancy increases. A commission could maintain a clear and steady focus.
The report could capture the key trends in life expectancy and the differences in morbidity, employment and retirement patterns among older people, by gender, region, occupation and socio-economic classes. This analysis would also allow early and regular identification of whether increases in state pension age are accompanied by increases in productive employment and/or a greater reliance on means-tested benefits and whether major inequalities in healthy life expectancy can make across-the-board increases in retirement ages feasible or unfeasible.
For example, if state pension ages rise and average retirement ages rise, state pension expenditure as a percentage of GDP will be reduced, not only by a pension expenditure reduction but by a rise in GDP. However, if pension ages rise and average retirement ages do not, the reduction in pension expenditure will be offset by other non-pension benefit expenditure and lower GDP. These issues are matters of some moment when we are looking to achieve sustainability in the light of what is a major demographic challenge.
Engaging the public is important. Individuals consistently underestimate their own life expectancy. Research confirms that. Individuals on average are unaware of, or do not believe, the projected increases in life expectancy—in some instances, even when the evidence is presented to them. Such attitudes make it difficult for people, particularly young people, to think rationally about the savings rate/retirement age/pension level trade-off that they personally and society face. An independent commission would assist in changing those attitudes and getting those key messages across in a way that very often government and political parties cannot do successfully.
The commission’s analysis could also identify the latest trends in private pension provision on average and across different gender, socio-economic and ethnic groups, and thus of the overall coverage and adequacy of pension provision. This analysis coming from an independent commission could assist in future debates about appropriate adjustments in employee or employer default contribution rates. This is a not insignificant matter and a key debate—one that people are probably feeling tentative about in view of other, wider considerations, but one which certainly an independent commission would help address, as well as helping the formation of a political consensus.
In the debates on previous amendments we heard much reference to data—the quality of the data, what they show, their integrity, whether they are sufficient and so forth. The quality of choices made and policy decisions taken is directly influenced by the quality, quantity and type of data that are available. An independent commission would be well placed to interrogate the quality of the data available and to make recommendations on the gaps or omissions in the data collected, and on the data needed to inform debate.
As the Minister conceded in an earlier discussion, there is a need to take a long-term view on these issues. In considering those long-term issues, long-term projections also need to focus on the uncertainty inherent in such analysis and on important sensitivity analysis. These are issues that a standing commission could focus on. It could assist in helping the debate and in helping the quality of government and individual decisions.
To repeat what I said at the beginning, one of the useful roles of an independent commission is to present society with difficult but unavoidable choices. It can spell out the facts and choices clearly, and it can identify the complexities and assist government and political parties in making the type and quality of decisions that are necessary in the light of the challenges that we face. I beg to move.
Baroness Sherlock
My Lords, I rise to speak to Amendments 55 and 57A in my name and that of my noble friend Lord Browne of Ladyton. I shall speak also to Amendments 53 and 54 in the names of my noble friends Lady Hollis and Lady Drake.
As we heard in the very clear speech from my noble friend Lady Drake, Amendments 55 and 57A provide that the periodic review of rules on pension age should be prepared by an independent commission. I can think of no one better to suggest how a pensions commission might work than my noble friend Lady Drake, who was such a distinguished member of the Turner commission.
As I indicated previously, we agreed that there should be periodic reviews of the state pension age to reflect changes in longevity and the need for people to fund their retirement and also to achieve a fair balance between generations. The question is how to achieve that, and we have grave concerns about the way in which the Government are approaching this matter.
As it stands, the Bill simply says that the Secretary of State shall review the rules about pensionable age. That leaves us with some significant gaps. There is insufficient information about the kind of review mechanism that there might be. There is also insufficient detail about who will conduct a review or how it is to be done, and there seems, on the face of it, to be insufficient scrutiny by Parliament of any recommendations that emerge. Perhaps the Minister will clarify that for us when he replies.
At the heart of this lies a very important question: how do we enable people to have confidence in the system? If we want to encourage people to save for their retirement and we need them to save more, they need to trust the Government, to trust Parliament and to believe that their pensions are safe in our hands. The public need to know that they will not be at the mercy of political expediency and will be protected from any adjustments that might otherwise be made too quickly. After all, they may be nervous about this. There has been a succession of changes to pensions legislation, pensions levels and the state pension age. To suggest just one example, under the previous Labour Government the number of years of contributions required to get a basic state pension—
The Deputy Chairman of Committees (Baroness Fookes)
My Lords, we have to adjourn the Committee for 10 minutes.
Baroness Sherlock
My Lords, as I said, there has been a succession of changes to pension policy and legislation. One key example is that under the previous Labour Government the number of years of contributions required to get a full basic state pension fell significantly, only for there to be a change of Government and for the number now being proposed to shoot back up again. The Chancellor did not help by giving the appearance of using the Autumn Statement to make an ad hoc announcement about the raising of state pension age. Once the dust settled, that turned out to be nothing more than what was already in the Pensions Bill and was therefore not necessary. However, that ran the risk of reinforcing the impression that pensions policy is made on the hoof, and we need to tackle that.
If we are serious about getting Britain saving for retirement, we need a proper, cross-party consensus on the way forward for settling the state pension age. Rather than simply being a matter for the Secretary of State, as the Bill proposes, we need a proper external panel which has the kind of cross-party and independent representation which will reassure the public and give confidence to parliamentarians from across the spectrum. We need a review mechanism that is clearly understood, a review body that is clear in purpose and function and ways of working, and clear parliamentary scrutiny of its finding—the kinds of things that will come from the report.
I know that the Minister will want to be reassuring about the Government’s intentions. In another place, the Pensions Minister said, in the face of pressure from the Opposition, that he had always envisaged a model such as the Hutton review, where the review is chaired by someone who people respect and who has credibility across the spectrum. That point was underlined by the Minister at Second Reading. I am happy to accept that the current Pensions Minister means that. However, even if that proposal were satisfactory, he will not always be Pensions Minister. I mean no disrespect when I say that I hope very much that in 18 months he will not be Pensions Minister any more. I can recommend my right honourable friend Mr Gregg McClymont, should anyone be looking for an alternative. However, Mr Webb, even when he is Pensions Minister, cannot bind the hands of his successors, even in this Parliament, never mind a future one. That is why this matter needs fixing in legislation.
Our amendment proposes simply that the review body should include representatives of the opposition parties and of the Cross-Bench Members of this House to ensure that Parliament as a whole is at the heart of this process. It would also include representatives of trade unions as those who represent those who are spending their ever-longer working lives saving for retirement. This broader representation on the review panel will give people confidence that a wide range of views will be heard. This amendment does not seek to shape the remit beyond that of having a range of competent and representative people sitting on the review panel. I urge the Minister to accept it.
Lord Freud
My Lords, I start by acknowledging the expertise and experience of the noble Baroness, Lady Drake, as a member of the Pensions Commission, on which she was able to rest when she moved this debate.
The purpose of the review is to inform the Secretary of State. Its job would be to collect and analyse the latest data, compiling a report to give the Government of the day the information they need to make a decision. Of course, we are all keen that the Secretary of State receives a report that is both impartial and credible. We appreciate the attraction of a panel to ensure that a wide range of views are reflected in the compilation of the report. However, we have been clear that we do not think that prescribing a committee is the right way to go. We do not want to restrict future Governments by prescribing exactly what the review looks at and who is doing the looking. There is greater merit in allowing Governments to choose whether to appoint a single reviewer—as with the review of public service pensions by the noble Lord, Lord Hutton—or a larger commission, such as the Pensions Commission. Indeed, the latter, set up by the previous Government, was made up of three individuals, two from the worlds of academia and business, neither of which, incidentally, was mentioned in the amendment.
Both of those cases show that a legislative underpin is not required to set up a review that can win cross-party and wider public support and that there is no consensus on where is the best place to find the right people. We do not think that the proposal by the noble Baroness, Lady Drake, to set up a permanent commission—an NDPB or a standing commission, as she put it—is appropriate. That kind of structure is simply not necessary for a review that will come together and publish a report on a single issue, wide-ranging though it may be.
Baroness Hollis of Heigham
Is that so very different from the Low Pay Commission, which is also a single issue?
Lord Freud
The Low Pay Commission reports on a much more regular basis than the five years envisaged here. To pick up the timings that we have experienced, there is the example of Independent Public Service Pensions Commission. The noble Lord, Lord Hutton, was appointed in June 2010 and reported some nine months later, in March 2011. In the intervening period the noble Lord held two calls for evidence, undertook a research event, published an interim report and published his final report. It is clear that a lot can be done in the space of a year, and that is the kind of period that we imagine is about the right length of time required for a review.
NDPBs also tend to look at a wide variety of regularly changing data in the areas of longevity, healthy life expectancy, socioeconomic variations, trends in the labour market and so on, and they tend to be published on a much less regular basis than this. I want to be clear, though, that the groups indicated in Amendment 57A and many others should all be encouraged to participate and contribute in the process. Indeed, the review has been designed to ensure that both Parliament and stakeholders will have ample opportunity to participate in the process and shape the outcomes. Furthermore, because the reviews will be regular, stakeholders may indeed be able to better prepare and contribute than they are now.
Of course, if the Government decide to bring forward changes to the pension age, then those changes must be secured through primary legislation and subjected to the full scrutiny and approval of both Houses, as now. However, to have such extensive and political input at the data-gathering and analysis stage risks stymieing the process before information can even be provided to the Secretary of State. Indeed, the House of Commons Disqualification Act 1975 prevents MPs sitting on many public bodies, precisely in order to avoid politics influencing their work.
Regarding the publication of this report, subsection (6) of this clause requires all reports prepared under the clause to be published. This means that both the Government Actuary and the report from the independently led review, including any recommendations that that component of the review makes, will be published, so all the evidence that has been taken will be made available. Every report will be laid in Parliament and published, including the report from the Secretary of State. As I said before, any proposed changes will require primary legislation.
It is for the Government of the day to put forward proposals resulting from the reports and to present any legislation to Parliament. Responsibility for publishing any overall report on the outcome of the review therefore has to remain with the Secretary of State. I hope that I have been able to provide some reassurance about how we envisage the review working and why. In this case, less is more. I urge the noble Baroness to withdraw the amendment.
Baroness Drake
I thank the Minister for his comments. I certainly was not trying to overleverage my experience on the Pensions Commission; that was not necessarily the main driver for my amendment. I shall respond to some of the points that he made. In Clause 26 the periodic review on the state pension age is a standing arrangement, which is why it provides an opportunity to create an independent commission in support of that arrangement. It is not a case of a one-off job and then it finishes, otherwise it would not be in the Bill. It is obviously intended as a standing arrangement, which is meritorious; I do not disagree with that. However, that is materially different from a one-off commissioning of something. It says that if you are going to have this standing arrangement and periodic reviews and assess whether the current rules on state pension age are fit for purpose, that lends itself to being supported by a commission on a standing basis.
Again, on reading Clause 26 it is not simply dealing with the narrow issue of the state pension age rules, it is also quite clearly saying it will review other factors relevant to the review. The implication in that must be that the Government recognise that complexities would arise around the demographic challenge. That would need to be understood in order to influence policy decisions across a range of issues. Again, a standing commission would be able to assist in looking at that wider range of factors that would inform the review.
I also repeat the point I made in moving the amendment because it is really important. The long-term management of public finances, particularly in respect of responses to the demographic challenge, would be really helped by having a standing commission. The fact that so much progress was able to be made on a political consensus that we are still getting the reward from was because there was a commission. It was able to present the issues and the case to Governments and political parties, as well as the country as a whole, in such a compelling way that it drives, almost from a sense of political responsibility, a consensus on the long-term management of public finances on that issue. It would be a shame to lose that.
Sustainability is a long-term project. Secretaries of State change, Governments change, but as a society we want a political system that delivers rational policies that give us good long-term outcomes. The one thing that characterised pensions in the last 20 years of the previous century was the incremental decisions that Government after Government made about both the private and public pension system. When you stood back you could see the complexity and the dysfunctionality of what the political system, motivated as it might have been in each instance in a very positive way, created. Certainly, when employers started to withdraw from the private pension system it started to show the weaknesses of our political system.
If we are looking for long-term effective management of public finances, the sustainability of the private pension system and the demographic response over the long term this strikes me as a way to go forward. To take an anecdotal example, I remember telling my husband that I was about to go and tell the whole country that they had to work significantly longer and we could not even promise that even the first forecast of how much longer they would have to work would not be increased further in the light of experience. He thought that I was committing career suicide and could not believe that I could possibly do that. I explained to him that the evidence was so compelling and if one cared desperately about a pension system and the interests of the people in this country you had to have the courage to take that debate out to people.
I can remember the CBI being horrified at the thought of having to retain older workers. I can remember trade unions being mortified at the prospect of the default retirement age being raised or abolished because it was a stalking horse for raising the state pension age. However, because you had a commission you could have a much more positive influence on that debate. I remember, as I am sure the Minister will experience, lots of people from around the world, particularly in Europe, asking how the UK managed to get such a consensus from the country about the reforms that needed to be made to the pensions system and the state pension age in particular. I genuinely think that one of the reasons that was possible, compared with some of the problems that are being experienced in other countries, is because the analysis and the narrative that were taken out to people were not just the product of party politics. They were the product of a commission that sought to identify the issues and the choices on the basis that even if you did not make a choice, that by definition was a choice because you would be inevitably moving along a certain line.
I think that that is right. There are 60 million people in this country who have an investment over the very long term, either for themselves, their children or their grandchildren, so we must get this right. What is there to fear in trying to sustain the political consensus by having a group of independent people who assist that process by being able to assist with the narrative and identify the issues? It is that passion that makes me move the amendment, not just that I happened to be on a commission at a point in time. I beg leave to withdraw the amendment.