Pensions Act 2014 (Consequential and Supplementary Amendments) Order 2016
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Baroness Altmann
That the Grand Committee do consider the Pensions Act 2014 (Consequential and Supplementary Amendments) Order 2016.
Relevant document: 12th Report from the Joint Committee on Statutory Instruments
The Minister of State, Department for Work and Pensions (Baroness Altmann) (Con)
My Lords, I beg to move that the Grand Committee considers the State Pension and Occupational Pension Schemes (Miscellaneous Amendments) Regulations 2016 and the Pensions Act 2014 (Consequential and Supplementary Amendments) Order 2016. As the regulations and order both make provisions relating to the new state pension, it seems sensible that they should be discussed together. I confirm that the statutory instruments are compatible with the European Convention on Human Rights.
I propose to speak in most detail about the regulations. In summary, they enable a widowed person whose late partner was in the old state pension scheme to inherit graduated retirement benefit. They modify the rules for calculating a deferred increase, so that the payment accurately reflects the amount of new state pension the person had deferred. They maintain the long-standing policy of not uprating the state pension for people resident in certain countries overseas. Lastly, they insert a provision relating to survivor benefits that was in a previous set of regulations into the new set that replaces them.
Regulation 3 is a technical provision which relates to the calculation of the weekly pension increase for a person who defers their new state pension. The standard calculation method is set out in the Pensions Act 2014. It provides for the increment for each week in the deferral period to be based on the rate of pension that would have been in payment at the end of the deferral period, if the person had not been deferring. This allows the pension increase to reflect any annual upratings that would have been awarded in that period.
The provision made by Regulation 3 modifies that calculation to cater for what will be the relatively rare situation of a change in the weekly rate while a person is deferring for a reason other than uprating. The most likely reason for a non-uprating change would be where a person is widowed and becomes entitled to an inherited amount under the transitional arrangements. The modification is needed to ensure that the increase is based only on the rate of pension applicable at each stage of the deferral period rather than the rate at the end of the period.
Regulation 4 inserts a new Part 6 into the State Pension Regulations 2015, which will provide for a widowed person who reaches state pension age after 6 April 2016 to inherit graduated retirement benefit. These provisions correspond to the transitional arrangements set out in the Pensions Act 2014, which enable a person whose deceased spouse or civil partner was in the old state pension to inherit SERPS or state second pension in line with the pre-2016 rules. The survivor will be able to inherit half the deceased person’s graduated retirement benefit—the same as they would have inherited under the pre-2016 rules. This is provided that the same conditions are met as would have applied in the old system and the marriage or civil partnership existed before 6 April 2016.
Although the great majority of people in the old scheme have accrued some graduated retirement benefit, the amounts involved are small. As a result, we estimate that, on average, widows would inherit around £2.50 a week and widowers less than £1 a week under these provisions. They are therefore principally about maintaining consistency between the way we treat graduated retirement benefit—which was, of course, the first earnings-related state pension—and the rules for inheriting SERPS and state second pension.
The provisions introduced by Regulation 4 also enable the survivor of a pensioner who deferred their old state pension to inherit a weekly pension increase or, if applicable, a lump sum payment based on the deferred graduated retirement benefit. Again, these mirror equivalent provisions in the Pensions Act 2014 that protect the existing inheritance arrangements for the survivors of people who deferred an old state pension.
Regulation 6 is also a minor technical provision and inserts a new Regulation 27A into the Occupational Pension Schemes (Schemes that were Contracted-out) (No.2) Regulations 2015. The 2015 regulations replace the current 1996 contracting-out regulations. It was decided to replace the whole of these regulations to deal with the requirements necessary for the end of contracting-out, rather than simply amend the 1996 regulations. The aim was to produce a coherent set of new regulations for the end of contracting-out to assist the reader.
In fact, Regulation 27A replaces Regulation 69B of the 1996 regulations without amendment. It requires a scheme converting guaranteed minimum pension, or GMP, into scheme benefits to provide a survivor’s benefit in the same circumstances as a survivor’s GMP. However, new Regulation 27A requires the affirmative procedure and therefore needs to be debated before it is made, so it is inserted by this instrument.
Baroness Altmann
My Lords, I am grateful to the noble Lord for his contribution to this technical debate. He has raised several questions, and I will attempt to answer some of them. If he requires further answers, I will of course write to him.
It is indeed the case that the analysis conducted by the department shows that the majority of those reaching state pension age between now and 2013 will receive more from the new state pension than they would have done under the old system. In the long run, the aim is that the rollout of automatic enrolment will provide a supplement to that state pension for future generations of retirees. Therefore, in the long run, the overall amount paid out by the state may reduce, but that is to be offset by the impact of automatic enrolment.
Women will get more state pension, on average, under the new system than they would have done under the old one. Notwithstanding the equalising of state pension ages, over their lifetime women will on average get 10% more state pension in total than men of the same age. The idea that women are losing out needs to be modified by some of the data that we have already produced.
Lord McKenzie of Luton
I was not suggesting that women were going to lose out. My point was that there is movement towards equalisation with men, although that is some time in the distance—I think that the 2040s has been the calculation.
Baroness Altmann
The equalisation between men and women of state pension payments may come in the future but, in the mean time, notwithstanding whether they get slightly less than men—the gender gap will be much narrower—over their lifetime they will get more, because the average woman lives longer than the average man. Once equalisation occurs, the gender favour to women will be even greater. In the mean time, the new state pension will put women in a much stronger position under the new state pension rules relative to the old ones. This is a significant improvement in the position of state pension payments for women on average, who, as we all know, have lost out in the past; we are remedying that to a large degree.
The noble Lord asked about contracting out. The idea of removing contracting out is not so much about cash flow or increasing the amount of money that comes to the state, because contracting out merely replaces what the state would have otherwise paid out in the state pension. By ending contracting out, the national insurance payments that are increasing will be offset over the long run. Indeed, depending on the average life expectancy, it could perhaps end up meaning that the Government pay out more in state pension as a consequence of ending contracting out than they do under the current system, where part of the state pension is contracted out to an employer who promises to replace the additional state pensions.
Therefore, it is not clear to me that there is a cost saving. It is clear to me that it is absolutely essential that we move to a simpler state pension system, which people can understand and deal with, because currently they cannot do so. At present, the existence of contracting out means that part of people’s state pension builds up in a private pension, which confuses the messages and the planning. Therefore, the principle of the new state pension is that everybody pays the same type of national insurance without some people being able to pay less than others because they are in a particular type of private pension scheme, and that everybody, regardless of their earnings, the type of credit they have or the type of national insurance contribution they pay, will be able to build up the same state pension each year as they accrue another year on their contracting-out record.
Lord McKenzie of Luton
In relation to the year we are just about to enter—2016-17—is the Minister saying that there will not be extra net revenue in the system that year from the abolition of contracting out?
Baroness Altmann
Of course that is not what I am saying. I am saying that we have to look at the state pension over the long term. National insurance is paid now but it relates to liabilities that will be paid over a long period of time, and Governments, quite rightly, have to plan for that with regard to the money flowing in now and the liabilities that will ensue from that over the longer term. As we know, the new state pension is expected to be cost-neutral to the taxpayer. Given that, I am not convinced that it is appropriate to consider contracting out as a money-saving exercise.
I am delighted that the noble Lord supports Regulations 4 and 5. Most of the measures that are being put in place here are indeed technical in nature and try to maintain the principles of the new state pension as well as protect people when we move from the old system into the new system—in particular, as we said, widows or widowers who inherit parts of the state pension entitlements that they would be able to inherit today.
The noble Lord also mentioned the importance of communications, and I completely agree with that sentiment. Indeed, as he alluded to, we are engaged in a widespread campaign to inform people and improve communications around state pensions. An enormous amount of time, effort and money has been put into this exercise, and we will continue that over the coming period. I assure the noble Lord that we have very much adopted the idea of communications being particularly important and will continue to work in that way.
The noble Lord also mentioned the complexity of the new state pension rules and some of the issues that have arisen with the drafting of the regulations. Of course it is a matter of regret that we had to come back with an affirmative regulation, which should have been done in the appropriate way in the first place. However, the debate is now taking place, as required.
We must not forget that the old state pension is what is so complicated. Dealing with past complexity is imposing difficulties when moving to a new state pension system. We have not been able to just sweep away the old system; we have to carry people into the new state pension system. That means carrying with it the complex rules and the many adjustments that were made over the many years for which it has existed. Once that new system is in place, the scale of complexity will be vastly reduced. For most people, it really will be a simple system, but we have to get from the old system into the new one, when it is fully up and running, and that will take some time before we can reconcile all the records as at April 2016 to know what everyone is starting the new system with.
As for national insurance credits for spouses and partners of people in the Armed Forces, we will be providing data when we bring forward those regulations. As the noble Lord said, we plan to have that debate on 22 February. We believe that we have reliable data that we can put before the House. Unfortunately, as I explained, the old system is very complicated. We need to bring in a huge number of moving parts from the current system to try to ensure that people do not lose out.
The noble Lord mentioned inheritance. In the new state pension system, widows will be able to inherit the additional pensions of their late spouses or partners. That inheritance currently exists and will be carried forward. I can reassure the noble Lord on that matter.
The noble Lord asked me about digital state pension statements. At the moment, they are in testing. The testing will be carried out over the next few weeks, and we will then be gradually rolling out the new digital statements, which will be much clearer and more helpful, so that people can see forecasts of what their new state pension will be able to give them.
As for the issue of deferral, as I said, the regulations will correct an anomaly that exists. The new state pension will ensure that the deferral for those who live in overseas countries which do not have a reciprocal arrangement with us, and those countries in which pensions are not uprated at the moment, will apply only to the pension at the date at which the person reached state pension age. That is the increment that will be added for deferral, rather than adding an increment to an increased state pension, which would otherwise give them a double benefit.
The debate has ranged rather widely—probably more widely than the provisions—so it may be helpful if I remind the Committee of what the regulations do. They enable a widowed person whose late partner was in the old state pension scheme to inherit the graduated retirement benefit. They provide for increments from state pension deferral to be based on the amount of new state pension the person would actually have been entitled to if they had been receiving their pension instead of deferring it. They maintain the long-standing policy of not uprating the state pension for people resident in certain countries overseas. They replicate a provision relating to survivor benefits that was in an old set of regulations in the new set that replaces them. The order simply makes consequential amendments that result from the introduction of the new state pension. I therefore commend the regulations and the order to the Grand Committee.
Lord McKenzie of Luton
Would the Minister mind looking at the record after this and perhaps writing where she has not been able to cover matters this afternoon?
Baroness Altmann
Yes. As I said, I am more than happy, if there are issues that have not been covered, to write to the noble Lord.