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The Minister of State, Department for Work and Pensions (Steve Webb)
I congratulate the hon. Member for Central Ayrshire (Mr Donohoe) on securing the debate. We have a common interest in quality pension provision, fairness and making things simpler for people. I entirely accept the premise that we have allowed the pension system to become bafflingly complicated. I entirely accept his point—not only do not all of our colleagues understand the pension system, but why should a member of the public understand contracting out, guaranteed minimum pensions and all the rest of it? A central drive of the state pension reform—I am grateful to him for his positive comments on that—is to sweep a great deal of that away and to have a single, simple, decent state pension set at a rate that people know. They will get that pension for 35 years in the system, contributions or credits, with no contracting out and no differences if they have been in a company scheme. That is the world that we are moving to.
Clearly, the hon. Gentleman’s constituents have spent their working life in a very different world. I want to say a word about one of the reasons why some of them—without full details it is difficult to comment on individual cases—might be getting less state pension than their neighbour. They might think that that is unfair, but it may not be unfair, because there is something else going on that they are not really aware of, namely the whole business of contracting out, which is about to be abolished. A number of his constituents, whom he mentioned by name, worked for firms that had a workplace pension scheme.
Under the principle of contracting out, the operators of the scheme, not the individual, decided that the scheme would be contracted out of the state earnings-related pension scheme. As a result, the scheme would pay less national insurance and, crucially, the hon. Gentleman’s constituents would pay less national insurance than their neighbours who worked at a factory that was not contracted out. Imagine there are two factories side by side, one of which has a company pension scheme and the other of which does not. At the factory with the company pension scheme that chooses to contract out of SERPS, all the employees in the scheme pay less national insurance than the employees at the factory that does not have a workplace pension scheme.
Mr Donohoe
I am not talking about the person who is in another scheme; I am talking about the person who is in those schemes and who has everything coming their way, but who has never contributed anything to it. It is important to stress that I am not saying that we have to reduce the amount that they live on. I would not live on £130 a week, and I doubt whether the Minister would. The fact is that the situation is seen as unfair. If the new scheme will overcome that problem, it is a great idea.
Steve Webb
It will to some extent, for reasons that I will explain. When an individual is contracted out, they will receive a smaller state pension than they would have done, because they are building up only a basic state pension, not SERPS. However, they will not get a smaller pension than they would have done, because the company promises to match the SERPS pension that they would otherwise have received. When somebody retires and says, “I am only getting 16 quid of SERPS”, what matters is not the SERPS figure—in a sense, they might be getting zero SERPS—but the SERPS figure plus the occupational pension promise together.
Steve Webb
They have paid for it, but they have also saved by paying less national insurance. I take the hon. Gentleman’s point about people who have not worked, and I will come on to them. In a world of contracting out, if person A pays less national insurance but still gets the same pension as their neighbour who was not contracted out, that would not be fair either. Fairness has a number of dimensions. The fact that someone has a £16 SERPS pension does not tell us anything in isolation; it depends on whether they paid less national insurance than their neighbour for years and years, which is why they have got a lower SERPS pension, but they have got something else instead. That is part of the system.
The hon. Gentleman asked about the position of people who have done nothing, and I often hear from pensioners who say, “Why did I bother saving? If I had done nothing, I would have got everything.” Part of the point of the single-tier pension is to set the value of the state pension above the basic means test, not 30-odd quid below, where it is now. Automatic enrolment then takes people further above that figure. As a result, because they have saved, they are clear of the means test and they are better off than someone who has done nothing. That is a new feature of the new system, because we are trying to address that point.
The hon. Gentleman has said that people who do nothing get stuff for free. He is not saying that poor people should not get stuff for free, but we cannot have it both ways. If we think we have to look after people who have got nothing, and they get free prescriptions because they have no money to pay for them, we cannot then say, “But that is not fair to people who work, because they do not get them for free.”
Steve Webb
Well, temporarily they do. Unless we give everybody everything free, we must recognise that we sometimes do things for poor people because it is right to. Inevitably there will be an element of people who work and think, “It is not fair; I do not get that free.” However, as part of a civilised society I do not want people who have no income to be unable to afford medicines. That is just the way it is. If we give everyone free prescriptions and free everything, we will just tax everyone to the hilt. I understand what the hon. Gentleman says, and the new state pension system will start to address that point by setting levels of pension above the basic means test.
Automatic enrolment will be a huge step towards pensions for the millions of people who may never understand them, because the firm chooses it for people, puts them in for it, and puts money in. We put tax relief in, and people are free to opt out. Nine out of 10 are staying in, which is fantastic. Just as the hon. Gentleman got the pension scheme extended to shipyard workers, as I think he said, we are extending pensions to 10 million people, many of whom are low paid or part-time—many will be women or people on the edge of the labour market, and they are just the sort of people who would not otherwise have had a pension. That is a huge step forward in the spirit of what the hon. Gentleman achieved for his constituents all those years ago, and it will bring millions more in.
The hon. Gentleman asked about the scope of auto-enrolment. It is about employment and an employment relationship. There must be an employer to pay the employer contribution. The self-employed are not in auto-enrolment, but they do well out of the new state pension scheme, because at the moment the self-employed class 2 national insurance builds up only the basic pension, not the SERPS bit. In our new world, there is no distinction—there is just the pension; so every year in which a self-employed person puts in, in future, will be more valuable than now. That person will be building up 35ths of the whole pension, not 30ths of the basic state pension. So the self-employed will get better provision.
Carers, unless they are in a contract of employment, will not be auto-enrolled, because there will be no employer to put them in a scheme. However, they will be credited into the 35 years of full single-tier pension, so a carer will build up, every year, a 35th of the £144 pension—or whatever it will end up as. There is provision for carers in the new system.
Most people on zero-hours contracts work 20-odd hours a week, and as long as, at some point, they trigger auto-enrolment—as long as they earn above the threshold, ever—they will be put in. If I am on a zero-hours contract and work zero, zero, zero, zero, and then 20 hours over a pay period and go above the trigger, my employer has a legal duty to put me in. There are complexities about waiting periods and the rest, but the basic principle is that I must be put in once I am over the trigger. Once I am in, if there is a week when I have no earnings, of course no money goes in; but if there is a week when I do have earnings, money goes in. I do not fall out of the pension. Once I am in, I am in. Auto-enrolment happens once. It is triggered by earning above the threshold once in a pay period.
Mr Jim Cunningham
My problem with what the Minister has said about zero-hours contracts is that surely a situation is possible in which someone falls below the threshold because there is not continuity of employment. That is a “suck it and see” situation. How would the Minister deal with that, 40 years down the road?
Steve Webb
A zero-hours contract is a contract. If someone has a contract of employment, in the weeks or months—whatever the period is—when they are above the earnings threshold, money goes into the pension. We will not insist on pension contributions being made in weeks when people do not earn any money. How would they put money in?
I think the zero-hours contract argument is greatly overdone, in the sense that the typical person on a zero-hours contract does 20 hours a week, on average. It may vary—when they earn a lot in a good week, they will put a lot into the pension; when they earn less, in a bad week, less will go in. As long as they get work through the contract they will be in a pension, possibly for the first time. I think that many people on zero-hours contracts will do better, because employers would not generally have put them in a pension at all. We are making that happen.
As to people with multiple jobs, a small number of people have jobs that, taken together, would put them into the system, but, taken separately, do not. Sometimes they will have children, and if they do they are credited in the state system anyway. Only 35 years of contributions are needed for a full pension, so someone might not make contributions for a number of years and still get a full pension.
The House of Lords, in about half an hour, I think, is going to talk about the issue in the debate on the Pensions Bill. We will gather more data on it. We think the issue is small, but clearly we need to ensure that we know what is going on. The number of women, for example, doing multiple part-time jobs went down in the past 12 months, so we do not think that the assumption that the numbers are all going up and that it will all get worse is borne out by the data. However, it is a serious point and we will look into it.
The hon. Gentleman is right that people often do not have a clue. It would be lovely to think that one letter from Downing street would fix things. I have two views on the matter. We need to make sure that pensions work for people who do not get it and never will, because with the best will in the world, expecting tens of millions of people to understand all this stuff is a heck of an ask. For me, we have to make sure that the system works for people who do not understand it and do not make active choices. That is where the state pension reforms come in.
Steve Webb
We look at lots of different ways of communicating with people. The thing that we know most of all is that if we opt people in to pensions and they have to opt out, they stay in. We could have hand-printed 1 million booklets—I could have delivered them and sat down for half an hour with each person, and I would not have persuaded them. We have used the power of inertia and what we know about how people behave to get them in as 1 million Government advertising campaigns would never have done.
We are going to include financial education in the national curriculum. That is a good thing. Under the Budget measures that the hon. Gentleman referred to, people will have a guidance guarantee, so before they make their choices, they will have the right to a face-to-face conversation with somebody who is not trying to sell them anything, as he said. It is not independent financial advice—they can pay for that separately if they want; it is just a conversation that they have never had a right to before that will enable them to make informed choices. If they want to spend some of their pension money up-front, it is their money to spend, but we are making sure that there is a state pension system in place, so that even if they underestimate how long they will live—blow the lot, or whatever—they will have that floor of the state pension above the means test that they do not currently have.
I want to mention something else that may be of interest to the hon. Gentleman’s constituents who reach state pension age under the current system. We are allowing people to top up their state pension if they want to. If someone has a bit of savings and they want to pay voluntary national insurance, under a new category of national insurance for people who have already retired, or who will do shortly—we are calling it class 3A or the additional state pension top-up—they can pay national insurance and get an extra pension for the rest of their life. That will be index-linked. There will be survivors’ benefits if they die. We think that will appeal to a set of people who perhaps have very low interest on their savings currently and are getting nothing in the bank. From October 2015—there are helplines, websites and all the rest of it—they can make additional contributions and enhance their pension if they wish. That is another option that we have created for today’s pensioners.
The hon. Gentleman mentioned the guarantee credit. The constituent that he mentioned, if I understood him correctly, is above women’s state pension age, so qualifies for pension credit, but has not reached men’s state pension age. Clearly, in that period, we are saying to people who have no other income, “Here is an income that we think you need to live on, but if all you have is half of it, we will top you up to the full amount.” In theory, people could have nothing at all and get the full amount, which I think was the point that he made.
However, bear in mind conditionality on benefits. We do not allow people just to get jobseeker’s allowance for doing nothing all day. In a different debate, his colleagues might be saying to me, “We are far too strict with these folk. We are sanctioning them when we should not be”—and all the rest of it. The rules are pretty tight, so the option of sitting at home all day and doing nothing, and getting credits for a state pension, is one that we are essentially eliminating. People get credits for their state pension and so on only if they are actively seeking work, applying for jobs and doing the things we expect them to do. We do not have the system whereby people can just do nothing and then cash in. There are an awful lot of conditions and requirements on people receiving benefits.
We have tried to recognise that the system has been fiendishly complicated in the past—we accept that—and to simplify it so that it is simpler and fairer, particularly to older women, many of whom have done very badly out of the system. We have tried to ensure that everyone is in a workplace pension as far as possible and that that is good quality and good value, and to put new freedoms and guidance alongside that. I hope that, as a result, we will have a much fairer system in the future than we have had in the past.