Welfare Reform Bill
Baroness Hollis of Heigham Excerpts(12 years, 8 months ago)
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Baroness Hollis of Heigham
My Lords, I very much support the principle of universal credit. It was put in the “too difficult” box when I was a Minister and I think we can all see why. The benefit system was built in the Beveridge world where, as long as the man held on to his full-time job and his wife held on to him, the family was insured. To his contributory benefits were added, over time, category benefits for disabled people or children; means-tested benefits for emerging groups such as lone parents or emerging needs such as housing benefit; and, more recently, the different structure of tax credits.
The result is that most benefits and credits have different income thresholds, different taper rates, different back-dating rules, different eligibility criteria, different linking rules, different passporting arrangements, different savings caps and different payment patterns. Not surprisingly, therefore, we have error, fraud, underclaiming and overlapping built into the system, to say nothing of complexity, confusion and high administrative cost. The result is that it is a full-time job being poor. We need a robust, easily understood structure that reduces the risk while increasing the reward of working as the most effective route out of poverty. I am hoping that the universal credit will deliver this.
The issue is not the unemployed, three-quarters of whom are back in work within a year, but the economically inactive—the lone parents, people with some disability—who linger far too long on benefit. Will universal credit make it easy for them to work? You need self-confidence, resilience and a modest cushion of security to afford risk. Most lone parents and many disabled people quite sensibly prefer the security of a guaranteed low benefit income to the risk and uncertainty of somewhat higher wages should either their job or their health fold, which would then require an exhausting struggle to get back on to benefit while only two tins of baked beans remain in the cupboard. We must reduce risk. We do not need to whip people back into work. That is a complete fabrication. We need to strengthen their confidence to risk work and to seek it by removing the penalty for failure. I believe that universal credit can do this.
Obviously, we must make work worth while. Any work must pay, not as now when so many lone parents find that working between three hours and 16 hours on minimum wage loses every pound—even though a 10-hour job cleaning caravans, picking mushrooms or working in the launderette may be just what she and a would-be employer want. Beveridge’s world of either “work and wages” or “not in work and contributory insurance benefits” has now become one where many people much of the time, and most women most of the time, will need both work and benefits—dials, not dichotomies. Again, universal credit’s structure can do this for us.
I very much support the concept of UC. Like the noble Lord, Lord Brooke, I thank the Minister particularly for the care that he has taken in his seminars and his briefing papers. In best “Yes Minister” style, I congratulate him on his bravery, as well as his tenacity, in bringing it this far. It needs doing—it really does. We must reduce the risk as well as increase the reward for work by simplifying and recasting the structure. But, and alas it is a big “but”—this reinforces the point made by my noble friend Lady Hayter, in her admirable speech—the architecture is being undermined by the cuts agenda and we risk UC failing.
I shall give some examples. First, as regards second earners, we know that in one-third of poor families he is in work and she is not. Her second wage could lift them all out of poverty and, in a world of increasing flexibility and part-time jobs, it is misguided to use UC to get him to work even longer hours, which are probably not available, or to discourage her from work because UC has higher deduction rates for second earners. It is not sensible. It keeps them in poverty. It does not fit the labour market and discourages a better work-life balance between them. UC needs to follow the choices, not constrict them. Incidentally, any lone parent in part-time work who repartners is relegated to second-earner status and loses money. Either she will not declare it, which is fraud territory, or she will not repartner and her lone-parent status continues. It is not sensible.
A point on childcare has been made by several noble Lords. Helping more people is good but, within a cut or a capped budget, those working longer hours will find that their work is unaffordable. I accept that the cost of childcare presents a huge problem to the department but the Government’s proposals undermine the incentive for full-time work. That is undeniable.
As regards the changes to housing benefit, HB must be regularly reconnected to the 30th percentile of market rents because rents are rising far faster than CPI. I care particularly about the shared room rent housing benefit. A woman of 33 living in a one-bed flat who loses her job will potentially lose her home. It will double her stress as she spends time looking for a room which is safe, rather than searching for a job, which she needs. That, too, cannot be sensible.
Let us take savings, which several people have mentioned. Today, you lose JSA if you have savings over £16,000. With tax credits there is a notional income instead from your savings and no cap. With UC, the Government are going for the lowest common denominator, as in so many fields. If you are new to part-time work, you will get no help from UC until your savings have been run down to £16,000, and probably lower than that. So why save? Instead of savings giving you resilience and protection against risk, we have made saving itself risky—the exact opposite of what we are rightly doing with pensions. That is not sensible either.
ESA is to be means-tested after a year—not just on a man’s income and savings, but on that of his wife, who perhaps is a part-time carer and part-time worker. What would noble Lords do, if they were her? You would either cut your hours or drop out of work altogether, rather than see his benefit withdrawn. Then, you would both enter retirement the poorer. We have increased the risk of her not working, which is the reverse of what UC intends. That is the trouble with a household means test for UC. It makes entirely good sense for the young, unemployed couple on HB but, if a member of the household becomes disabled, after a year financial support for him is almost literally paid for by other working members of his family. That can destroy families, which no one wants.
Finally, there is the helpful input of the DCLG, requiring social landlords to fund the new building programme by increasing rents substantially, thus probably adding £2 billion to the DWP’s housing benefit bill. At the same time, the DCLG is undermining the work incentive by pushing out better-off tenants. We have increased rents, increased insecurity, reduced work incentives and a higher HB bill—really helpful of the DCLG—and then it is a complete idiocy for it to localise and cut council tax benefit, undermining universal credit rules. It sends an Exocet through UC. With friends like the DCLG, who needs an Opposition? I suggest that the Minister explores a useful trade-off—that he drops the benefit cap, which the DCLG and most of us do not want; and the DCLG in return drops the localising of council tax, which the DWP and no one wants. The Minister would have the better bargain.
I want UC to work, but unless we can rectify these issues in Committee, we will have badly damaged the two drivers behind UC: removing the risk and increasing the reward of working. Then we will be back exactly where we are now.
Retirement Age
Baroness Hollis of Heigham Excerpts(12 years, 8 months ago)
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Lord Freud
My Lords, clearly that is the issue: life expectancy is growing rapidly. It is hard to set the figures many decades in advance. The responses to the consultation show that most people think that a period of around 10 years seems appropriate, although other countries have used shorter periods. It is right that we should look at a number of factors when we move the retirement age. These include not just longevity but healthy life expectancy and regional and other variations.
Baroness Hollis of Heigham
My Lords, it is clearly reasonable that the pension age for men and women should rise alongside longevity. However, it is clearly unreasonable that up to half a million women have recently learnt that they will have to wait up to two years longer than they expected for their state retirement pension. The noble Lord will know that many sectors of the House were deeply unhappy about this. The Pensions Bill is now in the other place. Will he tell the House whether the Government are shifting their position on this so that it is fair to all women and not so deeply unfair to so many women?
Lord Freud
My Lords, as the noble Baroness pointed out, we debated this in some depth when we looked at the Bill. Those concerns, expressed around the House, were taken very seriously. The Secretary of State responded at Second Reading in another place by saying that we needed,
“to implement the change fairly and manage the transition smoothly”.—[Official Report, Commons, 20/6/11; col. 50.]
We are looking at how best to do that. Should there be legislative changes, they will of course come to this House to be considered in due course.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years ago)
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“Single tier or universal state pensions
(1) Before the end of June 2016, the Secretary of State must lay before Parliament a report containing an assessment of the consequences of its provisions on any proposals for the introduction of a single tier or universal state pension.
(2) For the avoidance of doubt, this section shall come into force on the day on which this Act is passed.”
Baroness Hollis of Heigham
My Lords, the amendment in my name would require the Secretary of State to introduce a report on the single state pension by June 2016, before Part 1 of the Bill, which refers to the delay in the state pension age for women, is commenced. I would also ask the House to ignore the word “universal” on this amendment—
Baroness Anelay of St Johns
I ask that colleagues carry out the normal courteous procedure. Those who are remaining in the Chamber wish to hear from the noble Baroness, Lady Hollis. Could those who are leaving do so rather quietly?
Baroness Hollis of Heigham
I thank the Chief Whip. The delay in women’s retirement age so that, for the most unfortunate, retirement is delayed by two years, was discussed and determined, narrowly, on Report. No one, I think, was happy about the bunching effect, including the Minister. It is the consequence of insisting, despite the coalition agreeing to the contrary, that the state pension age for women would rise to 66 by 2020. I remind the House that the coalition agreement that women’s state pension age would not begin to rise to 66 until after 2020 was not an election pledge that was broken in the name of coalition dealings and agreement but was part of the post-election coalition agreement from both government parties in the full knowledge of the costs and circumstances. To break that joint, agreed, published, post-election pledge within the year is, in my view, pretty disreputable. However, that is where we now are, regrettably. I hope very much that the other place will try to smooth out the bunching effect, which narrowly this House allowed to continue.
Since Report—I think on the day after—we have had the long-awaited Green Paper on the new single state pension. I am sure that noble Lords greatly welcome it, as I certainly do. It proposes bringing the basic state pension, the state second pension and pension credit into one pool, allowing the payment of a single pension based on national insurance contributions a few pounds above pension credit level. This would both tackle pensioner poverty, especially among women, and encourage saving. Existing accrued rights would be honoured, but possible future accrued rights would be capped in much the same way as when this House decided—rightly, in my view—to replace SERPS with S2P. That mostly capped men’s higher earnings-related pension entitlement with a scheme of more generous redistribution to lower wage earners, mainly women. To me, the Green Paper is very good news, and I congratulate the Minister and his right honourable friend in the other place, Mr Steve Webb, on achieving it in the face of, I suspect, the agnosticism of HMT at best, the scepticism of HMT at least, and the hostility of HMT at worst.
The new single pension is important in a couple of ways. I am raising it now because we did not have the opportunity to raise it on Report, given that the Green Paper just happened to be published the day after Report. There is agreement around the House about the desirability of NEST. It will effectively reintroduce an earnings-related pension, so to speak, to top up the new single pension, performing the same function but in a very different way from the old SERPS. However, as we all know, NEST is risky, particularly for low-earning women. If they do not have a partner at retirement whose pension income lifts them both off pension credit, they find that their savings in NEST are severely depleted by the operation of the pension credit taper. There is no way that someone at 30 can predict whether it is worth saving in NEST if it depends on what partnership and household arrangements they have 30 or 40 years down the line.
Pension credit has done a superb job of tackling the poverty of existing pensioners. It means that pensioners are no more or no less likely to be poor than any other group in society. However, it has added to the risk of future pensioners who seek to avoid poverty by building savings. The single state pension cuts through all of that. It means that your pension income from NEST will depend not on your household but on your own income, which is a far safer, clearer and cleaner path for savers. With a new pension, every penny you normally save in NEST will return to you as your pension. It has built out the risk from saving; it pays to save. That is why, on all sides of the House, we welcome NEST, and I am sure will welcome the new single pension. Hence this amendment.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I am grateful to the noble Baroness for the opportunity to spend a little time today on our proposals for reforming the state pension. She has been instrumental, as other noble Lords have pointed out, in the move for better pension provision for those left out of the benefits of the heyday of the occupational pension and the earnings-related state counterpart. The Pensions Act 2007, with its enormous boost for women through the reduction in qualifying years for basic state pension and the increasing coverage of the state second pension, could have been the final push for equal treatment in state provision.
Even that was not good enough, though. In March last year, a week before the 2007 Act started to deliver for women, the noble Baroness launched the pamphlet The New State Pension: A Call to All Parties, which pushed for further radical change. Very skilfully, she got my honourable friend, the Minister responsible, to contribute a chapter to that. It proposed a new type of state pension with a near-universal amount, set above the level of the means test and made affordable by paying the pension to new pensioners only. Her main motivation, as ever, was to deliver an adequate state pension for women who, because of low pay and career breaks, have historically lost out in pension provision.
Just over a year later, the Government published their proposals for improving state provision, A State Pension for the 21st Century. That Green Paper confronts the big issue of how to respond to a decline in private saving at a time of increasing life expectancy. It describes how means-testing, with all the damage that it can do to private saving, pervades the state system. It describes the great complexity of the state system. Bluntly, for most people the system is simply impenetrable. Crucially, it fails to answer the most obvious of all questions from potential private savers: is it worth it? How much will I get from the state when I retire anyway? As importantly, it describes the extent of inequality in the state system—how women, on average, get £40 a week less state pension than men and how they are more likely to live in poverty as pensioners.
The Green Paper describes two options for reform to respond to the challenges that the pension system faces. The first option would simplify the state second pension. It would strip out the earnings-related part of the second pension, leaving just a flat-rate amount—the same pension for all workers and people who are credited into the system for caring and other good reasons. The second, more radical, option would effectively fold the basic and second pensions into one to create a simple single-tier pension, set above the level of the guarantee credit. This option, which is clearly similar to the one that the noble Baroness proposed a little more than a year ago, would mean that by 2020 no less than 90 per cent of pensioners—men and women—would retire on a pension above the guarantee credit.
The Green Paper, as I said, was published earlier this month and the consultation is currently under way. As the noble Baroness appreciates, changes of the magnitude proposed in the Green Paper can be progressed only by listening to the views of all those with an interest. It is far too early in the process for the Government to come to a view on the way ahead, so I cannot give a conclusion to the consultation. I assure the noble Baroness that, should the Government decide to bring forward proposals to reform the state pension system, we would as a matter of course publish a full assessment of impacts, including those on women, alongside any reform proposals.
I remind the House that we published an impact assessment, including a gender, race and disability impact assessment, of our proposals to increase the state pension age first as part of the White Paper setting out our response to the call for evidence and again alongside the publication of the Bill when it first entered Parliament. Those assessments will be further amended and revised as necessary for republication when the Bill enters the Commons and yet again once the Bill has completed its passage through Parliament. I can therefore assure the House that, were the Government to publish a White Paper on reform, we would be no less diligent in providing detailed information on the impacts of any policy changes by gender, ethnicity and a range of other factors. In short, there will be plenty of opportunity for noble Lords, as well as Members of another place, to scrutinise any proposals for reform and their likely impacts, should the Government decide to proceed with reform.
I emphasise that the proposals that we have set out in the Green Paper do not depend on increasing the state pension age. As I said in our debates on Clause 1, the rise in the state pension age must be brought forward because the sharp upward revision in life expectancy projections has overtaken the legislated timetable. The revised timetable would be necessary with or without the reforms on which we are consulting. We have already discussed at some length the impact of our proposed changes to the pension age timetable, in particular on those cohorts of women who face an increase in their pension age of up to two years. A number of noble Lords have emphasised that point and I do not propose to rerun that debate. However, I draw attention to the fact that a key objective of the reforms, alongside simplifying the system and rewarding those who save, is to look at how the state pension could be made fairer for groups, including women.
The noble Baroness’s amendment seeks to ensure that we consider the impact of the state pension age changes in conjunction with our proposals for reforming the state pension scheme. As I said, we are only at the consultation stage on our reform proposals but I can assure the House that although, as I hope I have made clear, these are not interdependent changes, we would undertake such an assessment if these reforms are taken forward. I trust that I have been able to assure noble Lords that the statutory duty that the noble Baroness’s amendment would impose is not necessary and, furthermore, is somewhat premature. We will have many opportunities to debate what to do with any reform proposals as they go through the whole process. I therefore urge the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
My Lords, I thank all those who have taken part around the House, including the noble Lord, Lord Boswell, the noble Baroness, Lady Howe, and my noble friend for their warm support for the principle of the amendment. If the comments in this House are anything to go by, the Minister can be assured of the reception that his Green Paper will receive outside the House. I am confident that it will be greeted with warm support.
I very much take the point made by the noble Lord, Lord Boswell, that we have to see pensions as part of a structure. However, such a new single state pension is the keystone for any reform not just of state pensions but of occupational pensions that do not generate a savings trap for those on lower earnings. That is why noble Lords all round the House are so delighted to see the possibility of that keystone finally coming into place. The noble Lord said that we should minimise retrospective unfairness and avoid future moral hazard. Those words are well taken; they are wise words for us to absorb.
My noble friend Lord McKenzie is absolutely right that, with the advent of a new single state pension, the issue of the threshold of enrolment into NEST disappears. It does not matter whether you end up with £3,000, £30,000 or £300,000 of savings; you keep the lot if the new single state pension is in place. Therefore, you do not have to legislate to avoid the moral hazard of low-paid women earning less than £7,500 a year going into NEST because their savings may not be worth having, given the effect of pension credit. As NEST will be reviewed in 2017, which many of us are already looking forward to, I very much hope that we shall be able to revisit this issue then as, with the new single pension in place, a threshold of enrolment will simply not be necessary. However modest the savings, they will be worth having and worth encouraging, so that even the poorest of people can go into retirement with a cushion against the adversities of old age.
I am grateful to the noble Lord, Lord Freud, for his generous comments on the background to the single pension and to his officials for their work in bringing the Green Paper forward. My only regret is that the Green Paper came too late for Report and that Third Reading has come too early for the results of the consultation. None the less, we are trying to wedge this in between the two. I believe that the new single pension will transform the pension landscape and should receive huge support. I was delighted to hear from the Minister that there was no interdependence between the deferring of the state pension age—in other words, the raising of the state pension age to 66—and the funding or costing of the Green Paper. That is key. It gives me hope that he and his honourable friend Steve Webb will be seeking to smooth the bunching effect whereby some women have a much rougher deal than others. Some wait nearly an extra year for their pensions and some wait for nearly two years. We all recognise that that is—in the words of the noble Lord, Lord Boswell—rough justice. I would go further than that: it is unacceptable. I and, I am sure, the Minister hope that a decent solution can be found to that in the other place.
However, I am, in a way, using the amendment to do what we would have done had the Green Paper been introduced by a Statement, which was not the case. We are delighted to have the Green Paper in place. We wish the consultation good speed. We hope that the results will come through in such a way that the Government are encouraged to go down the path that they should. I can assure the noble Lord, Lord Freud, that if he comes forward with such legislation in this House or the other place he will have wide and enthusiastic support. I beg leave to withdraw the amendment.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 1 month ago)
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The Lord Bishop of Ripon and Leeds
My Lords, I have put my name to these amendments because I want to talk about the speed with which the goalposts are being moved and the unfairness between individuals that that represents. I speak as the Bishop who has had major responsibility for changes to the Church of England clergy pensions scheme and the reduction in benefits that is involved in that. I have had to present those to the General Synod and I bear some of the scars for doing so. I am under no illusions as to the difficulty of this task for the Government.
I fully accept the arguments for equalisations and those based on longevity to which the noble Lord, Lord Boswell, has just been speaking. Change is needed, but I cannot accept that this speed of change is necessary. From my own experience, from my clergy postbag, and from my postbag about the Bill, I know that the two things that potential pensioners most resent are changes to their expectations with comparatively little notice and perceived unfairness. These proposals fail under both those headings, and the amendments put forward by the noble Lord do much to mitigate that unfairness and failure.
Individuals find changes in pension planning extremely complex and difficult to implement on a personal level. Many of the women who are affected here have taken time out to care for elderly parents, having worked long enough to qualify for the full pension. They have done that deliberately and they have responsibly assessed the way in which they are approaching retirement. Now they are simply being told, with only five to seven years’ notice, that they will have to cope on existing resources for one or two more years than they had anticipated—and than they had been told to anticipate as recently as the last changes in 2007. That is actually draconian for a group of individuals, notably the women, mentioned by the noble Baroness, Lady Howe, who were born in that month of March to April 1954. They face an immediate two-year increase in their state retirement age. Some 33,000 women are unfortunate enough to have been born in a particular month. It is not a tiny number, although it may be a small proportion of those who in one way or another will see a reduction in their pension expectation through the timetable of the Bill. We are often exhorted to plan carefully for retirement. It is understandable that people see little point in doing so if, for some, the goalposts are then moved to the other end of the pitch. This may not technically be retrospective legislation, but in practice that is exactly what it is for a significant number of women.
It causes changes to expectations at short notice and, secondly, unfairness. The proposals as they stand create a situation in which a woman born in 1950 obtained her pension in 2010 whereas her sister, born in 1954 and four years younger, has to wait until 2020 for hers—a six-year increase in the pension age, the best part of a decade between the times these sisters receive their pensions. When we look at the figures, it is easy to see the need for change, but we must also take account of the unfairness that that creates between neighbours, family groups and work colleagues, and the tension and pressure on friendships and relationships. That is why we need to think again on the timetable. The changes in the Bill bring no additional savings until 2016. The savings do not contribute to tackling the present economic crisis. It is a matter of justice for a significant number of women that we change that timetable today.
Baroness Hollis of Heigham
My Lords, I, like others, very much support these amendments. I have here the coalition programme for government, drawn up 10 months ago. On page 26, it makes seven promises on pensions relating to the earnings link, the Hutton review, a review on early access and so on. I agree with almost all of them and the coalition Government are honouring almost all of them—which is great—except for one. The coalition programme states:
“We will phase out the default retirement age and hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women”.
I agree with the coalition programme on that too: it is a clear and reasonable promise that was made just 10 months ago. We need to equalise, in a steady way, and that coalition commitment would have delivered that. Now in this Bill, just a few months later, that key coalition agreement promise—the one that most directly affects women, and poorer women at that—has been torn up and junked.
Whereas women before 2016 are seeing their pension age rise gradually, in steps of one year for every two years, suddenly from 2016 the rate at which their pension age is deferred extends, so that they have to wait three years instead of two and four years instead of three. From then on, half a million women will have to wait more than one year for their pension, 300,000 for more than a year and a half and 33,000—as the right reverend Prelate emphasised—for two years. It means that Susan, born in March 1953, will reach pension age at 63 in 2016. Her cousin Barbara, born a year later in March 1954, will reach pension age in March 2020, when she will be 66—one year younger, and she waits a further four years for her pension. Is that fair? Of course not. Is it necessary? The Government ran two arguments in their impact analysis and in Committee: first, given the deficit, that we need to find savings even from the pensions of the poorest women to sustain fiscal futures; and secondly, given increasing life expectancy, that we need to raise the pension age faster than anticipated.
Neither of these arguments, in my view, is valid. Given the deficit and the need to find savings—as has been mentioned by my noble friend Lord McKenzie and others today—and given that this acceleration starts in only 2016, we are already beyond the deficit period. Anticipated savings of £30 billion—virtually all from women—are not part of the four-year plan. Is it necessary, however, for longer-term fiscal stability? In the longer term, yes; it is the speed that we are objecting to and the unfairness for women dependent on the month in which they are born as to whether they get a reasonable or a very bad deal from the state. It is a lottery, my Lords. The Government, unlike the markets, should not engage in lotteries with people’s pensions.
Lord Stoneham of Droxford
We are very sympathetic to the noble Baroness’s amendment. I congratulate her on an important contribution to this debate on an issue that the Government must address. A number of reasons have been explained, in this debate and in the preceding debate, on why that is important. Men are not being disadvantaged by more than one year, but over half a million women are. The period of notice is inadequate. Women in this age group are some of the most disadvantaged in terms of their pension provision. We have to accept that there is a contradiction with the coalition agreement. We are expecting some assurances from the Government in this debate, but we also accept that this is largely a negotiating matter with the Treasury. We welcome the announcement in the Budget of the new basic pension.
The noble Baroness, Lady Hollis, complained at Second Reading that the Pensions Bill ignored the £140 new basic pension, and said that it was like Hamlet without the prince. Now we have Hamlet with the prince but without a script. We want to see some details of the government proposals before committing ourselves to new transitional arrangements. We know that in present value terms the amendment will cost £7 billion, but the Government need to address the problem and come back with a considered amendment during the passage of this Bill in the other House with regard to how women affected by these transitional arrangements will benefit from the new higher basic pension.
Baroness Hollis of Heigham
My Lords, I will be brief because a lot of the arguments were effectively aired on all sides on the previous amendment. I support this amendment. I spent many hours—I will not say happy hours—last weekend trying to find a compromise, what I would call a fallback amendment, that would address the issue that we have all identified today. That issue is the women who are seeing an acceleration in the time that they have to wait—if that is not a reverse phrase—for their pension.
The Government are proposing to accept the existing timetable to 2016 but, instead of continuing it to 2020, to collapse it to 2018, so that what would have happened over four years is happening over two. That is what is producing the problems of bunching, the unfairness, the lottery, the roulette, one sister against another, one neighbour against another and the like.
We have heard the arguments. I tried, as I said, over many hours at the weekend to find a fallback compromise that overcame the problem of bunching without taking us up to 2020, but could not find one. What the noble Baroness, Lady Greengross, has done, for which she has our warmest congratulations, is none the less concentrated on the post-2020 period and reduces somewhat the period by which pensionable age would rise to 66. That produces the £3 billion of additional savings that the Government are so anxious to secure. It also protects the situation of women. It is smooth, as no woman waits more than one year for every additional year of her age. It is fair to all women. It is a compromise: we get to 66 somewhat earlier than I would like. None the less, it overcomes the basic unfairness of women having random times until which they must wait, according to the random month in which they were born. You cannot make state public policy on the basis of such a lottery. The amendment of the noble Baroness, Lady Greengross, addresses that issue, compromises on the later point and makes savings. I hope it will enjoy the support of the whole House.
Like others, I am thrilled by the proposal for a new state single pension of £140. I warmly congratulate the coalition in this House and the Ministers in the other place on it. Had there been eight bullet points, I would have agreed with eight out of eight instead of seven out of seven. I do not want to put this in a way that makes the noble Lord thump the Dispatch Box, but I hope he will today restore the honour of the coalition agreement by making it clear that he can accept this amendment or a version of it. The substance of what was promised in the coalition agreement by both parties forming the Government—that women’s pension age would not rise to 66 until 2020—will then be honoured, either through this amendment or the Government’s promise to come back with another. All sides of this House could then feel well content that they have protected some of the most vulnerable women, who rely solely on their state pension for their income in retirement. We will have treated them honourably, fairly and decently.
Lord German
My Lords, I echo the noble Lord, Lord Boswell, and the noble Baroness, Lady Hollis, in saying that we look to the Minister to address the issue behind the amendment of the noble Baroness, Lady Greengross, which is that no woman’s pension age should be accelerated by more than 12 months. That is the issue that I raised in the earlier debate. It is a concern about equity. I hope that, in the architecture that the Minister may describe to us, he might find a way of answering that question. Whether it is this or some other architecture, as the noble Baroness, Lady Hollis, just said, is not the issue at stake here; it is about the intention. It is the intention to create that level of equity that is important.
Unfortunately, I have a question for the noble Baroness, Lady Greengross, when she comes to answer this debate. It is on a very technical point. This morning we took the liberty of plotting the dates in her amendment on a graph. Unfortunately, there were two kinks in the graph, which meant that it was not a straight line. I wonder whether, in the second line of the amendment, “August 2018” should not read “July 2018”; and, in the third line, whether “October 2018” should not read “September 2018”. That would produce a straight line. However, in the context of seeking agreement—and of the Government’s intention that no woman should wait more than 12 months, which I think was the intention behind the amendment—I hope that the Minister can give some support and succour to the amendment and the intention behind it.
Baroness Hollis of Heigham
My Lords, I strongly support my noble friend’s amendment. The Government are essentially following the proposals of the Johnson report. I see red copies of it all around the House—I am sure that noble Lords have not consulted it for the first time as we now come to debate it. Having read that report, on which, as my noble friend said, the Government are basing their proposals to lift the trigger, I was completely unpersuaded. I thought that it was thin on everything except, possibly, employers’ preferences, which, left to them, would have no doubt pushed the earnings threshold to £10,000 or more. I am surprised, of course, by such a conclusion.
The Johnson report offers two reasons for raising the earnings trigger. The first is that such low earners are involved that even without NEST they would have a very high replacement income based on their state pensions in retirement, so they do not need an additional pension such as NEST. The second argument run by Johnson, and therefore presumably supported by the Government since it was relayed by the Minister in Committee, is that such people are so low paid that the sums they would achieve are not worth while. For example, if someone is earning £7,500 and the trigger is set at £5,700, they would bring in only about £130 a year for their pension pot.
Let us look at those two arguments. My response to the first argument, about high replacement, is, frankly, “So what?”. There is nothing to say that just because you are poor in your working life, you would break some golden Treasury rule by being at least as well off if not better off in retirement. It is simply an irrelevant argument. I shall make two points in response to the second argument about the small size of the pot. First, as the Johnson report acknowledges and as the Minister has rightly told us, many women will go on to higher-paid jobs, and even small sums started early enough will be valuable and increase persistency of saving and the savings habit. If someone has not enrolled, it will be that much harder for them to do so later on when a pay rise seems to be eaten up by auto-enrolment, and it will not happen.
From my quick calculations over the weekend, even if there was only the very modest figure of £130 a year in real terms going into a pension pot, I estimate that over 30 years that would none the less allow a woman to build up a pot of £8,000 to £10,000. Given a decent state pension, it obviously would not be sensible to annuitise that pot, since it would be below the trivial commutation limit, but it would mean that she would go into retirement with a modest but useful capital sum, perhaps for the first time ever. After all—and this is the question that I would like the Minister to address—that was exactly the previous Government’s argument, which I think the current Government have also run. We encouraged people to defer taking their state pension by one or possibly two years and, with the money saved from that deferment, provided a capital sum of £10,000 to £15,000 as a pension pot, which we further privileged by ring-fencing it and protecting it from pension credit. I stand to be corrected, but I take it that this is continuing and that the Government have not scrapped it.
In other words, a few years back the consensus around the House was that we thought it important to encourage people, mostly men, to build a modest capital sum for retirement by not drawing down their state pension at the age of 65 but deferring it for one or two years. Indeed, we so much wanted this to happen that we ring-fenced those savings by not allowing them to count against pension credit taper. When it comes to NEST and women, however, we do not seem to think that the same argument runs. I disagree with that. The one argument that was not run by Johnson, but might have been valid, was the means-test trap. But even that depended on a woman’s household income and on whether she was partnered. Given the single state pension in prospect—alleluia—that problem evaporates. We are allowing women to do this voluntarily, but as my noble friend Lady Drake said so rightly, these are precisely the women for whom voluntary enrolment is least likely to happen, is the least suitable, and for whom auto-enrolment is appropriate.
I would ask the Minister to remind us why it is acceptable to encourage men to build a small capital sum by delaying taking their state pension for a year or so, even protecting it against pension credit, but when it comes to NEST and where a woman might have a similar small capital sum, apparently it is not so desirable, even though her finances may be infinitely more strained. I hope that the Government will reconsider this. The Johnson arguments are simply invalid. They may give the Government a hook to hang on, but they do not run. The Government seem to be signing up to the notion that if you are poor in your working life, it is morally acceptable to be poor in retirement. I do not accept that and neither should the Government. If they are saying that the capital sum is not worth having, since we do not allow that argument to run on the state pension, we should not allow it on NEST. On both of those grounds, I hope that the Minister will offer his favourable support to my noble friend’s amendment.
Lord Stoneham of Droxford
I support the proposal in the Bill that the threshold should be reviewed in line with the Johnson report. I do so particularly in the light of the reassurance given by the Minister in Committee that there is no proposal from the Government to link the increase in the thresholds to the increase in tax thresholds.
Baroness Hollis of Heigham
The noble Lord’s honourable friend in the other place, Mr Steve Webb, has made the contrary assertion.
Lord Stoneham of Droxford
Perhaps the Minister can clarify that, and I am sure he will. I do not know what the noble Baroness is quoting from since we remain committed to raising the tax threshold to £10,000, but we do not want this particular proposal undermined.
I shall come back to a further point that I think is important. The other interesting development is the new basic state pension. I am sure that my honourable friend the Minister in the other place will have had in mind his proposals on the threshold to align with what we are now proposing for the new basic pension. That makes sense. Too low a threshold, as we discussed in Committee, gives rise to considerable administrative problems and the issue of very small pension pots. I am sorry, but they are very small. They will be insignificant in the context of the improvement we will be making in the new basic state pension.
It is all very well for the noble Baroness to shake her head, but it is extremely dishonest to encourage people on low earnings to make contributions to their pensions which actually result in a low rate of return when they come to receive the benefit. Not only will they get that low return until we introduce the new state pension, but if they were in receipt of housing benefit they would actually lose income that they would have achieved through any increased pension.
Lord Stoneham of Droxford
I have already allowed one intervention and I should like to move on, since this is a short debate.
Finally, it is important to understand that too low a threshold may well encourage more lower income people to opt out than would a more realistic one. For those reasons, I support the proposal set out in the Bill.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 1 month ago)
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“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—
“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””
Baroness Hollis of Heigham
My Lords, Amendment 22 is on early access. I had hoped to be able to move it only once, in Committee, but I found myself caught in another pensions obligation at that time. I apologise to your Lordships.
Those of us who can afford it try during our working lives to build three tiers of savings: instant access to about three months of income; ISAs for the medium term; and, finally, a pension pot for the longer term. Some of us may feed our ISAs into our pension pot in our 50s for tax benefits. To do all that and pay off the mortgage and, increasingly, university fees will require earnings probably well above the national average. Men who can hope to have a full working life and a decent occupational pension may be able to do most of that when mortgage pressures, especially, ease off. I rather doubt that any women earning below about £22,000 could begin to.
On this issue, I am asking your Lordships to hold up the gender filter because this is, for me, a gender point. We assume that the key point about saving into pensions is to transfer income from a financially more secure working life to a more insecure and impoverished retirement. That is true for men, but it is not particularly true for women, unless they are in professional jobs. Women who are in and out of the labour market and have unpredictable and fluctuating caring responsibilities may experience more of a financial rollercoaster during their working years than in their retirement when their income, though lower, is predictable and secure so that their experience during their working life is very different from that of men. Women are far less likely to save in any shape or form, hence the need for NEST. We have already been told today that the pensions pots of men in their late 50s are six times greater than those of women.
What stops a woman saving? This is very different from any analysis that you get when you ask the same question of men. It really is. First, she cannot afford it. Her earnings may be very low, part-time or intermittent. Secondly—and this is where you get a specifically female take on it—she regards it as selfish to save. Money is needed for trainers, and she would expect to put the children’s needs ahead of her own. In any case, she rather vaguely hopes her husband is looking after all of that. Thirdly, even if she does think about saving for a pension, Tracey’s mum who did save is, because of means-tested benefits, no better off than Tracey’s aunt who did not. That is one of the reasons one is so pleased about the prospective new state pension. Finally, and this is the point that this amendment addresses, even if she could afford to save modestly into a pension, her life is so unpredictable, given what I have already said, that she does not want to lock money away that she cannot touch for 40 years. She may face divorce, disability, debt or repossession. Through almost all of that, her husband will keep working. She probably will not. She might lose her home, her husband or her health, and through all of that, she cannot touch her money in the pension scheme, even though her need now is greater by far than her need in retirement and she has no alternative savings. Far more than most men, she may need a modest pot of £5,000 or £10,000 that she can access in hard times but cannot afford to build it alongside a pension.
Why is it that people are putting more money into ISAs than into pensions, even though they are forgoing the employer’s contribution and more generous tax reliefs? It is about access. We allow better-off men and better-off women to put their ISAs into their pensions. What poorer women need is exactly the opposite: the ability to turn part of their pension, so to speak, back into an ISA. There is no product on the market which allows them to do it. We need what David Willetts and Malcolm Rifkind first floated: a lifetime savings account.
Given this Bill, how would we do it? We already allow people early access to a slice of their pension—the tax-free lump sum—even if they are not drawing the rest of their pension. How might it work? I suggest that to encourage saving, when a woman has built a pot of, say, a minimum of £10,000, she could access a quarter of it—£2,500—and I would cap that right at a pot of about £100,000 so that it does not provide work for fancy accountants. She would not be able to draw any more until she had rebuilt her pension back up to, say, £14,000, at which point she could draw a quarter of the difference between the £10,000 and the £14,000, or a further £1,000. By the time she retires, she would have drawn no more than the equivalent that she would have got with her tax-free lump sum, but she would, if she thought it necessary, have had earlier access to it.
Why? First, it would give women especially the right to a savings slice as part of NEST or indeed any occupational pension. A woman would know that for every pound she put away, 75p would be ring-fenced for a pension, and 25p would be available as a savings slice. Knowing she had that rainy day slice does not mean to say that she would draw it, or need to—but if she did, it would be much cheaper to borrow from herself than from someone else at such extortionate interest rates as would squeeze out her ability to continue to pay into a pension. Allow a woman access to a lump sum within her pension and she is far more likely to continue saving and build, eventually, a larger pension.
Secondly, the tax-free lump sum is already separate, if the saver chooses, from drawing the actual pension. Until recently it was at the age of 50, now it is at 55 that you can draw the lump sum, even though you may not take your pension for another five or more years. So no new principle is involved: there is already a disjuncture between taking the tax-free lump sum if you choose and the pension payment. No fiscal adjustments have to be made. You do not have to fret about repayment; you do not have to have judgments about what is and is not good expenditure. Why is it okay at 55 to use your tax-free lump sum to build a conservatory, but not, at 45, to save your home from repossession?
I am often told that the obstacle or objection to this is that it would cost a woman a bigger pension if she has taken her tax-free lump sum earlier, and that this is not acceptable. That might be true—if the tax-free lump sum was usually added to the pension. It seldom is. Of the 76 per cent of people who drew their tax-free lump sum, nearly half spent much of it on the car or the holiday; 39 per cent used it to pay off mortgage or credit card debts; 31 per cent spent it on home improvements; 17 per cent helped their children; and about half put some of the lump sum into other and accessible savings forms, such as a building society. So we should not be reducing the woman’s pension if she were able to draw her tax-free lump sum, but merely freeing up the time at which she may draw down a slice of it, if she needs to—possibly for expenditure on things more significant than will occur at the ages of 55 or 60.
Finally, and above all, being able to access a tax-free slice of the sum would make saving into a pension more attractive. At 22, a young graduate going into their first job would hope that by the age of 30 he or she might have enough for a deposit on a flat. At 40, she may want it for running away money, following family break-up. At any time, it might help with adaptions to the home where there is sudden disability. In the USA’s 401(k) schemes, research shows that those who could access their schemes early—in some you can, in some you cannot—ended up saving up to 3 per cent more into their final pension.
For a low-paid woman wondering whether to opt out of NEST because she believes she cannot afford the 4 per cent contribution, knowing she was also building an accessible savings pot could encourage her to auto-enrol. We should be developing a savings and pension model for those who cannot afford each of those separately—as most of us can—that best fits their needs.
There is currently a consultation paper from HMT which discusses this model, among other models, for early access. The other models—for example, loans and repayment, or channelling money into ISAs which can then be fed into pensions—have their merits, but they add to the fees and complexity and largely benefit those better-off people who can manage both savings and pensions alongside each other. I am concerned for those who cannot manage both. For women between the earnings threshold and, say, average earnings, only the tax-free lump sum model makes sense.
As I have said several times today, as have others of your Lordships, I am thrilled by the £140 proposals, which would make it safe to save. Access to a tax-free lump sum within your pension would make it even more attractive to save. There is no additional cost to the Treasury, no additional risk to the woman saver as she would not from experience have spent that tax-free lump on adding to her pension, and no increased fees because she is supposed to have a different, parallel and separate sort of product. I believe that it would transform her willingness to save in a pension. Many people in the industry tell me that with such a scheme more people would save and they would save more. I beg to move.
Lord Boswell of Aynho
My Lords, the noble Baroness, Lady Hollis, has performed a signal service to the House in bringing this issue to our attention. She was kind enough to refer to work done by David Willetts and Sir Malcolm Rifkind. I was privileged to be part of their Front Bench team at that time, although I cannot claim any real credit for the genesis of the thinking. As the noble Baroness said in referring to the consultation paper, it is now beginning to sink into the mainstream. I am a strong supporter of greater flexibility in this area so I am glad that she has raised it.
I have some slight reservation as to whether the issue is as gender specific as the noble Baroness feels that it is. I think that she is conceding that point and, indeed, she did not say that it was exclusively so. I can imagine situations where men, for example, perhaps have overlapping earnings and have acquired a certain pension capacity or pot. In Committee, we debated some of the difficulties that can arise as regards smaller sums. It might be quite sensible, as well as convenient, for an individual of whatever gender who perhaps is starting a business or otherwise to access that money in order to provide starting capital. It is a wider and general interest. I very much look forward to the Minister’s response to how it is going.
In technical terms—I stress in technical terms, although not in any sense to derogate from it—I have some slight reservations. First, in terms of using this Bill as the vehicle for doing it, it is premature but that is not a reason for not ventilating issues. Secondly, I am not absolutely sure—because it appears annexed to a passage of the Bill which is about auto-enrolment, although I think that the noble Baroness indicated a wider remit—whether it is simply about NEST or more general. I think that it is probably more general and it would be clearly invidious if it was NEST specific.
There is also a technical problem in the wording of the amendment. I understand the point, which was developed during her speech, that there could be some rules which would avoid moral hazard and would get one to the same minimum assured level of pension or pension pot at the end. Nevertheless, the way in which the amendment is worded it seems to me to be at least conceivable that as long as the £10,000 limit were maintained, an individual pensioner could make serial applications to the fund and draw it down to the qualifying level. I know that that is not the noble Baroness’s intention. However, it is right that we should be starting to think about this and I hope that it will be even better when we have brought it to effect.
Lord Freud
I thank the noble Baroness, Lady Hollis, for raising this very important issue of allowing individuals early access to their pension saving. I was more or less as disconcerted as the noble Lord, Lord McKenzie, about the concept of it being “running away money”, not least because I thought that if the spouses of Members of this House got to hear of it, they might take advantage as we spent night after night in this place rather than at home with them.
The noble Baroness wishes to allow individuals to access a tax-free lump sum of up to 25 per cent, before the current minimum age of 55, when they have pension savings of at least £10,000. I am conscious that this is an issue to which the noble Baroness has repeatedly drawn our attention, and to which she returned at Second Reading when she asked where the Government's consultation paper on early access to pensions had got to. I can answer that particular question; I can report to my Lords that the Government published their call for evidence on early access to pension saving on 13 December last year. It set out the available evidence around early access and some of the potential benefits and risks, and then sought further evidence from interested parties. That call for evidence closed on 25 February. Drawing on the responses to the call for evidence, we will consider the arguments for and against allowing more flexible access to pension savings, based on firm evidence, before we consider further changes to the pensions tax framework.
It is too early to say what these changes might be. However, we need to bear in mind several principles. First, the purpose of tax-relieved pension saving should be, as the noble Lord would like me to say—I have to say it—primarily to provide an individual with an income in retirement. I think 75 per cent probably makes that point anyway. Secondly, any changes to the pensions tax rules must be affordable and sustainable for the Exchequer, and not, as the noble Lord, Lord McKenzie, pointed out rather vividly, create opportunities for tax avoidance. I was pretty impressed that he was able to knock up a tax avoidance scheme so quickly, but we can see where he is coming from. Thirdly, changes should not create disproportionate complexity or administrative burdens for individuals, pension providers and schemes, or indeed for Her Majesty’s Revenue and Customs.
I am sure the noble Baroness will agree with me that it is right for us to examine the evidence submitted before making changes to legislation. On that basis, I urge the noble Baroness to withdraw this amendment.
Baroness Hollis of Heigham
I am very grateful for the support around the House—equivocal support, perhaps, in some cases—on the significance of this issue. Of course, this is not exclusively a women’s issue by any means, and if it was attractive to anyone who wished to take it up, as far as I am concerned they would be able to do so with the agreement of their trustees. My noble friend Lord McKenzie anticipated the paragraph that we have all had to repeat—I have had to repeat, my noble friend has had to repeat, the noble Lord, Lord Freud, has had to repeat—about how pensions are designed and so on, but I tried to hold up a gender filter because I firmly believe that it is still an HMT model that is based on male working lives. However, let us not go down the route of asking why the Treasury might not understand.
When we are trying to encourage poor women—women earning possibly well below average earnings—into a savings model, I do not mind very much whether it is saving for their current life or their retirement. I do not mind very much whether it is income or capital. We get hung up on divisions that make sense in the click-in click-off world of conventional male work; the noble Lord, Lord Freud, is absolutely right, in the universal credit, to refuse to accept that simple dichotomy of “in work, out of work” and see it as a dial. The same situation applies to women in pensions. They do not have a male life, where they are in work, they contribute to a pension, they retire, they are then poor and where you have to distribute from one to another—that is not the experience of poorer women in and out of the labour market who may face more turmoil and roller-coaster finance in their working lives than they ever will in retirement.
The question is how we best encourage those women to build some protection for themselves against the contingencies in their working lives, as well as to prepare as best they can for savings in retirement. We want to do this in ways that do not either exploit their naivety or get them into oversaving at a risk to their current living expenses. The more research that I and others in this field have done the more I believe we need a simple single product—probably not called a pension, probably called something else—into which you put your money and where a proportion is ring-fenced for retirement and a proportion is available for savings. We happen to have a very easy way of modelling that based on the tax-free lump sum; the other versions that the Treasury have put out to consultation are more elaborate, possibly more adept, models but will not particularly meet the needs of this client group. We need something that is simple, understandable, attractive, affordable and fairly obvious in what it does.
I fully accept that the amendment is probably technically defective. I was of course never intending to do anything other than trying to focus the issue, given that we have the consultation paper. I was hoping to take your Lordships’ views on this so that this might in due course, perhaps, be fed into the Treasury’s response to this White Paper.
The provision is not gender-exclusive. It would not exclusively apply to NEST. I would have it available for all pensions and, again, I would not particularly get hung up about what it was used for. Nor would I worry too much about the issue of moral hazard, providing we cap the amount that people can withdraw, which is why I would not go for the 401(k) models, because too many of them run their schemes right down and that is undesirable.
I fear that too many women may opt out of NEST or—this is more likely—fail to continue in NEST when the first financial crisis of many hits them in their lives and they realise they cannot access the money and they have nothing else. At that point the contributions of those individuals will drop off like a stone. How do we prevent that? We prevent it by running the two alongside each other and produce a package for women where it is attractive to save.
We have discussed it. I am very grateful for the support and encouragement around the House tonight. With your Lordships’ permission, I beg leave to withdraw the amendment.
Disabled People: Employment
Baroness Hollis of Heigham Excerpts(13 years, 1 month ago)
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Lord McNally
My Lords, the House was calling for the noble Baroness, Lady Hollis.
Baroness Hollis of Heigham
Thank you, my Lords, I am grateful. We all agree, following the noble Lord, Lord Addington, that the best strategy for work for disabled people is to see them coming into mainstream jobs. Anything that can be done in this respect by the current Government, as was done by the previous one, is greatly to be welcomed. Yet, frankly, that strategy only works when there is low unemployment. At the moment, in my county of Norfolk where 32,000 people are chasing 4,000 jobs, I suspect that the opportunities for disabled people will shrink unless Remploy can ensure supportive employment. Could the Minister not at least work with Remploy to ensure that there are continuing opportunities for disabled people until we see the employment market open up again?
Lord Freud
My Lords, my last answer made clear the extraordinary success of Remploy in getting people with disabilities into jobs. That does not seem to have been affected by a very difficult employment market. I remind the House of the relative costs: the factory business of Remploy takes between 20 per cent and 25 per cent of the total that we as a country spend on disability employment programmes to support some 3,000 people.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 2 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 2 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
“Voluntary enrolment and employer contribution
After section 9(2) of the 2008 Act (duties to workers without qualifying earnings) insert—
“(3) The Secretary of State shall by regulations provide that any employer to whom subsection (2) applies shall be under a duty to pay contributions in respect of the jobholder equal to or more than 3% of the amount of the jobholder’s total earnings in the relevant pay reference period.””
Baroness Hollis of Heigham
My Lords, this amendment is about voluntary earnings. Who do we think NEST is for? It is basically for poorer people, mostly women, who are not able to save in conventional ways and have hitherto had no access to an occupational pension. The other two members of the Paul Johnson review team that produced the report Making Automatic Enrolment Work are very experienced people, but they come from the industry and employment side. Their report recommends that auto-enrolment begins not at the LEL of £5,204 but at the earnings threshold of just under £7,500. This means that 1 million people, mostly women, who would have been automatically enrolled will now not be. The expectation is that ET will rise potentially to £10,000, at which point 2 million people, mostly women, will not be automatically enrolled.
The report runs two arguments in favour of raising the threshold. I think that both of them are fallacious. The first argument that the report runs is that—it is, of course, true—very low earners have high replacement rates in retirement through benefits and so on, so that NEST is not necessary, unlike for higher earners, for whom state benefits by definition represent a lower replacement rate and who might therefore wish to take advantage of NEST. The second argument that the report runs—as you would expect from the industry—is that they do not want to handle such small sums. That is the basis of their argument and the Government have followed their advice.
The first of these is about replacement earnings. It is, of course, true that, if you have a low enough income from earned work, even the basic state pension backed by pension credit will come to much the same level as your wage and therefore you will have a high replacement rate. The statistics and percentages on this are all very well, but these women are still very poor. That is why their state benefits in retirement will perhaps just about equal their wage. They are still very poor, whether in work or in retirement.
A pension, however small, even if it is below the trivial commutation level, which it probably will be, gives the woman, through pension savings, a two for one to match her own—because she attracts the employer’s contribution and, to a minor degree, the tax relief, depending on where she is earning—which, perhaps for the first time, might allow her to retire with a small capital sum below the trigger commutation rate of perhaps £10,000 or £15,000, depending on how long she has saved.
I do not accept this argument. It is right that there are high replacement earnings in retirement, if you have a very low wage. However, that means that—this is the key fact behind it—both in work and in retirement you are likely be very poor indeed. This is why we need an option for NEST.
The industry’s second argument, which I also think is fallacious, although I understand it, is that employers do not want the hassle of handling small sums that, they say, would not be worth much to the employee once the means-tested benefits come into play. However, there is a profound flaw in their argument here, too.
The reason why the sums are small is that, wherever you set the auto-enrolment start line, whether it is LEL at £5,200 or ET at £7,400, the first £1,000 or £2,000 of earnings above any line that you set will by definition produce only a very modest increment in pension. That would be true whether you were on £10,000, £15,000, £20,000 or £22,000. The first £2,000 produces little additional revenue. That is why, while the argument is true that you might as well put it up to £7,500 because the difference between £5,200 and £7,500 is tiny, it is also the case for the first £2,000 of earnings above £7,500. It is true for wherever you set the threshold, so it does not apply to the figure of £5,200 as such; it applies to the fact that you have a threshold at all, which is not based on the first zero pound.
The whole of the report is fallacious, in so far as it hinges on that argument. Otherwise, if the woman is auto-enrolled at £5,200 with earnings of £7,400, her pot over 25 years, I estimate, with a levy on the £2,000 increment, will be about £10,000 greater than if she was enrolled at £7,400. But if she is enrolled at £7,400, and has earnings of £2,000 above that—say £9,400 or £9,500—she will still have the same size pot on the first £2,000 or so of income, give or take £100 or £200.
The additional pot argument, in other words, applies wherever you pitch the threshold—unless, of course, you are up in the £30,000 or £40,000 region, where by definition you have a much higher increment. Therefore, the argument that the pots are too small to be worth bothering about either is valid for wherever you set the threshold for low earners or is not valid at all. The problem is not whether it starts at the LEL of £5,200 or at the ET at £7,400; it is that it does not cover the earnings below the threshold—the first £5,200 or £7,400. Auto-enrolment on those would make the difference that matters. That is what this amendment is about.
I am pleased that the Government have agreed that, following the Johnson report, wherever a woman wishes voluntarily to enrol between the LEL of £5,200 and the ET at £7,500, the employer must contribute. As I have suggested, although that is useful, it is not enough to make a really significant difference unless it is extended to embrace the whole of the earnings from pound zero.
My amendment adduces no new principle. The Government have already agreed—unless they have changed their mind and I have not picked that up—that young people below the age of 22 can voluntarily enrol. I welcome this. The Government have also agreed—I also welcome this as a concession following the report—that low earners earning between LEL and ET can also voluntarily enrol before they hit the auto-enrolment figure of £7,500. This amendment would allow the earner voluntarily to enrol on all her earnings from pound zero, provided that she was at or above the threshold—a threshold that I would like to be the LEL for the sake of consistency.
Therefore, no new principle is involved in this amendment. It would merely bring into NEST those employees who, if they were in a standard occupational pension, would have their earnings covered from pound zero. It would merely align NEST with best practice already in occupational pension schemes—nothing new or novel. Only NEST has the LEL threshold for voluntary entry at £5,200 and ET at £7,500 for auto-entry.
What does all this mean? Take a woman on half average earnings—say £11,000 a year. Only in NEST would a third of her earnings, between £7,500 and £11,000, be automatically pensioned. If she were in an OP, her entire earnings would be automatically pensioned. I emphasise that it would be voluntary for her to make the choice as to whether she welcomes and wants this form of savings going back to pound zero, given her family circumstances.
Why is it necessary? Some 40 per cent of women at retirement may not be married; they may be cohabiting and they may or may not be financially interdependent with their partner. As a result, they need to carry their own pension. I am sure that the Minister and everyone in this Room would agree with me on that. As it stands, only a third of her income would be automatically pensioned. Should ET rise to £10,000 and she is on earnings of £11,000, almost none of her earnings—a paltry £1,000—would be pensioned unless she chose voluntarily to go back down to the LEL. Not surprisingly, this would result in the small sums which the industry finds a hassle and the employee finds disappointing and which trap employees into benefit tapers.
I will repeat the statistics that I offered at Second Reading. Under these proposals, a woman has the right to enrol voluntarily below the LEL, so a woman on £11,000 after 25 years who voluntarily saved on all her earnings could end up with a pension pot of £40,000 over 25 years. If she relied on auto-enrolment and it were to kick in with an ET of £10,000, which is what the Pensions Minister, the honourable Steve Webb, is promising us, she would retire with a pot of virtually nothing. So the difference is between £40,000 or £1,000 or £2,000.
This amendment adduces no new principle. It is about voluntary enrolment in which the employer must contribute. That principle has already been established for young people and for the gap between LEL and ET. There would be no additional small pots. On the contrary, it could well double the pots and more, to the gain of all parties concerned, and make it worth saving, which is what we all want. I beg to move.
Baroness Drake
My Lords, to my mind there are two reasons why Amendment 16, tabled by my noble friend Lady Hollis, is attractive. First, it would enable people outside the lower limit on the band of earnings who want to save to be able to. Those of us who followed the debate know that a reason for the lower limit on the band of earnings, as distinct from the earnings trigger that is now proposed, was the consideration of the persistently very low-paid workers and whether it was appropriate for them to be nudged. However, as my noble friend said, this amendment is not auto-enrolling. It allows for the active choice of the worker—an active decision of someone on low earnings for a particular job. If they choose positively to make that decision, there seems to be a good and fair reason for the employer to make a matching contribution of 3 per cent, particularly because their incomes are low. The individual would still be a worker and the 3 per cent employer contribution would also assist with the arguments about de minimis levels of contribution and the consequential impact on costs and charges.
My second reason for finding this amendment attractive is that it extends the principle that the reforms should work for women because, although women are most likely to have earnings below the qualifying band, their household income may be such that they still want to make a pension contribution. That is very important. I declare an interest because of my involvement with NEST. NEST is designed to allow someone voluntarily to contribute once they have a NEST account, although I acknowledge that there are de minimis requirements because of the need to keep costs and charges low. However, I am sure that in most instances the combination of the employer contribution and the employee contribution would go above those de minimis requirements. It could also start to address the multi-job problem where women have several mini-jobs, because individual contributions per job look low but in aggregate could be much greater. Although I fear that many women in such mini-jobs will not have the confidence to overcome the barriers of inertia and voluntarily opt in—their needs will require more systemic change, as we discussed yesterday—none the less there will be women who will want to make the active choice and who will be in circumstances where that makes economic sense and where it will assist the asset accumulation for a pension in their own name. So the proposal certainly has attractions.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Baroness for her amendment. I have listened to the debate with great interest. Workers on low earnings do not qualify for automatic enrolment. They have the right to opt into pension saving but do not qualify by right to an employer contribution. The amendment seeks to ensure that these low earners receive a contribution to workplace pension saving from their employer if they choose to opt into pension saving.
I believe that the noble Baroness, Lady Hollis, may have intended us to focus on NEST, but it is worth being aware that other schemes may have earnings thresholds in their rules. Therefore, we have looked at the issue from the perspective of low earners and contributions from pound one, irrespective of which scheme their employers choose.
Persistent low earners get a high replacement rate from the state without private pension saving, so for these individuals it is questionable whether it is beneficial to redirect money into private saving. For some very low earners who are not accruing a state pension, it may be beneficial to opt into pension saving. The noble Baroness, Lady Hollis, gave an example of women in households where there were other earnings. This was an important point brought out in the Johnson review.
During our previous deliberations, the noble Baroness, Lady Drake, also brought to your Lordships’ attention the importance of adding to household saving. However, in practice, it is very hard to distinguish a clearly identifiable group of workers without qualifying earnings who would benefit from opting into pension saving. An employer contribution is an incentive to save, so it follows that for very low earners an employer contribution may be an incentive to opt in. We do not believe that it is right to encourage opting in for the very few low earners who may benefit from saving at the risk of penalising the many low earners who will not benefit from opting in. We also need to be conscious of the potential impact on employers.
Baroness Hollis of Heigham
I do not understand the point that the noble Lord has just made. Why would it penalise other low earners who do not opt in?
Lord Freud
I shall come to that question. There are around 1 million workers with annual earnings below £5,715. If these people were brought into pension saving, it could result in further employer contribution costs of up to £125 million.
There is another issue that makes me urge caution on this amendment, although I appreciate that its intention is laudable. We cannot legislate to discriminate unreasonably between different groups. This proposal could well involve such discrimination because those who earn less than £5,000 would have an employer contribution on their full earnings if they opted in. However, those who earn £8,000 would have a contribution on only £3,000 of their earnings and not on the full £8,000—I am rounding up these figures. If we did it for the lowest paid, we would have to do it for everyone, which would mean extending the requirement on employers to pay a contribution on the first £5,715 to everyone in pension saving. In effect, that would be the equivalent of removing the lower limit of the qualifying earnings band, which would be unaffordable.
Baroness Hollis of Heigham
I am grateful to the Minister for giving way. I obviously did not make myself clear. I said that there would need to be a threshold so that the ability to cover the first pound would apply only to those who are already over the threshold of, I hope, LEL and could even be at ET. In other words, if you are earning only £4,000 there is no suggestion that that would bring you into NEST, as the Minister appeared to think the amendment suggested. If that is what the words say, I apologise because that is due to my drafting. However, I had hoped that I had made the position clear in my opening speech.
Lord Freud
I am now slightly mystified by the intention of the amendment. I understood that it allowed an opt-in at any level. Perhaps the noble Baroness could clarify the position.
Baroness Hollis of Heigham
No. I apologise. It says that at the moment you are automatically enrolled at £7,500 and can opt in from £5,200 if your earnings are between those two figures. I suggest that the same opt-in right should apply to pound zero, but only if you are already at the threshold. In other words, if you are on £4,000 or £3,000, you would have no right to make a pension contribution, but if you are on anything above £5,200—certainly above £7,500—you can make contributions voluntarily not only on the band between £5,200 and £7,500 but on the band £0 to £7,500.
Lord Freud
I thank the noble Baroness for that explanation. My point of concern remains unchanged: if we allow that to happen for this particular group, we must expand it and allow everyone to make a pound one contribution. I therefore do not think that it changes the argument and the concern about the extra costs implied, which could be around £900 million of additional contributions—around one-quarter of the total cost—and represent an unacceptable burden on employers. It would also skew the structure of the reforms that are designed to enable a median earner with solid state entitlement to achieve a retirement income of around 45 per cent in line with the pension commission’s recommendation. The Johnson review endorsed that original recommendation. As the noble Baroness said, I am not putting any weight on the small sums argument—that is not part of this argument. On her point about the move of the threshold up to £10,000, we will debate that later. Clearly, I am sympathetic to the drive behind this proposal. The Government are always willing to consider ideas that will allow us to keep the appropriate balance and maintain our key policy intentions. However, we are unable to accept this amendment and I ask the noble Baroness to withdraw it.
Baroness Hollis of Heigham
I am grateful for the support of my noble friend Lady Drake on this and for the thoughtfulness of the Minister’s answer. I suspect that, possibly because of my drafting, there is a misunderstanding. I had hoped that I had made it clear in my opening speech—obviously I failed to do so—that we were talking about the situation where, if someone was required to enrol through auto-enrolment but had the voluntary right to go back to £5,200, they would also have the voluntary right to go back to pound zero. It is as simple as that. At that point, it seems to me, the Minister’s statistics of £900 million apply to the very different scenario of someone earning £2,000, £3,000 or £4,000 who could voluntarily enrol. That never was, and never has been, my argument. It has always been that those already in the system should be able to cover the first pound.
Lord Freud
I want to make this absolutely clear. Our concern here is about the discrimination that would otherwise come up. We cannot just leave pound one for one group; we would have to extend it to everyone. That is why the costs would balloon from this. It is not possible to maintain a narrow right for one group; we would have to extend it. That is one of the reasons for our concern.
Baroness Hollis of Heigham
I am simply not persuaded by this. Is the Minister saying that because the very poorest—those earning less than, say, £5,000 a year—could not come within the system, those above the LEL should not be able to go back to zero? I think it likely that the poorest might have a couple of mini-jobs or whatever and might well not qualify because they are below the LEL. The Minister would not dream of applying that argument to the national insurance system, the whole of which is based on a lower earnings limit. You are automatically brought into the NI system, building up your entitlement to the basic state pension, but you do not start to pay your NICs until you hit the £7,500 ET. That argument is the basis of the basic state pension. I have not heard the Minister say that this is unfair because someone earning £3,000 or £4,000, who is therefore below the LEL, cannot earn their way into the national insurance system. I would welcome the Minister’s comments on this.
What the Minister is saying is impossible here, because it is unfair, is at the very basis of the national insurance system for the whole of our population. If it is good enough for NICs, it is certainly good enough for NEST. I am sorry, but I do not accept the noble Lord’s argument. In practical reality, I doubt that someone on £3,000 or £4,000 would want to save, although I suppose that it is possible, as my noble friend said, because of her household circumstances rather than her own. What I am trying to do is to make available to those people in NEST the best practice for most pension schemes. That is, you can save from pound zero once you are over the earnings threshold—the LEL. Once that happens, you then end up, by choice, with a pot that is worth having. To say that it is unfair cannot be the case unless the Minister also accepts that the whole of the national insurance system is unfair. I am sure that he would not wish to go on record as saying that. I beg leave to withdraw the amendment.
“Right to apply for amalgamation of earnings from multiple sources of employment for purposes of the earnings trigger
(1) A jobholder who in any week in a tax year is employed in more than one employment and—
(a) whose earnings do not exceed the weekly earnings trigger in any individual employment or self-employment in that week; and(b) whose earnings in aggregate reach or exceed the earnings trigger in any week,shall be deemed to have earnings equivalent to or exceeding the earnings trigger for the purposes of requesting voluntary enrolment into national employee savings trusts.”
Baroness Hollis of Heigham
I will be brief. As the noble Lord, Lord Stoneham, noticed, very perceptively, this is a shadow repeat of the arguments on mini-jobs for the basic state pension. I do not adduce new arguments for it; it is basically a duplicate of Amendment 13. Multiple mini-jobs that, bundled together, take a woman over the LEL should be eligible not just for entry into the basic state pension, as we argued on Amendment 13. We had some encouraging but cautious—I think that was the word we agreed to use—comments from the Minister on that, which were also in the reply to NEST. The same arguments run. The DWP or HMRC will, for universal credit purposes, need the relevant information from all the employers of a woman who has mini-jobs. Just as they will deduct any or no NICs, or a proportion thereof, they could—in exactly the same way—deduct for NEST.
I accept that it will be more complicated for contributions to the state pension, since women will be credited into the BSP between the LEL and the ET. Whether her portfolio of mini-jobs took her above the LEL, or even above the ET, she would herself have to contribute finance. In a sense, this puts down a marker. It is important that we do so if we can at this stage. NEST is due to be reviewed in 2017—five and a half years from now. I accept the cautious arguments that were advanced by the noble Lord, Lord Freud, on Tuesday that any such changes—even for the BSP, which is a simpler proposition—would have to await the introduction of universal credit in 2013. It would also be a possibility with no guarantee until the stability of the ICT system is secured and real-time information can flow in from employers.
As I say, I want to put down a marker on this for 2017, by which time both UC and NEST should be secure. We will know, I hope, that we have done this successfully with BSP by then—indeed, I hope that it will apply to BSP by 2017. I believe that, on the basis of that, we could build a similar proposition in relation to NEST. If we are serious about bringing as many women as possible into the pensions system, we should review this, certainly by 2017 at the latest. I seek the Minister’s views on this, even at this early stage. I beg to move.
Lord Boswell of Aynho
My Lords, I wonder whether I might make my contribution before the Opposition spokesman. First, I apologise to the Committee for having been late; my excuse is probably the best I have ever been able to tender, because I have just been attending a meeting of pension trustees.
Lord Boswell of Aynho
Well, they are, and it is the Conservative Party agents’ superannuation scheme, but I promise not to detain the Committee on that. I hope I would have given the same attention to anyone else with whom I was in a trustee relationship.
May I just make two points? I fully understand that the Minister was kind enough to quote my slight reservation in our earlier exchanges on related matters. The first is a note of concern: it would certainly be unfortunate if one employer were somehow to be delinquent because of the failure of another employer to declare, which had created excess over the qualifying limit. I just make that point; I am sure my noble friend will have it in mind.
The second point is intended to be more positive and it might help to inform trains of thought. One always has to be careful about these sorts of things, not least for data protection reasons. I happened yesterday to have gone to a completely unrelated meeting in this building about occupational health, which is an interest of mine. We were looking at the new construction workers’ smart card scheme. Of course, once there is something that is able to identify the individual with known characteristics—dates of birth, for example, or presumably one could incorporate an NI number—and that is portable, it is possible for that to be tendered, or even required to be tendered, through various places of work. It might be possible to aggregate electronically in that way. I just offer that to my noble friend as a way forward. I am pleased to see the noble Baroness, Lady Hollis, also nodding; at least it is a thought. We always have to be careful with these things, because there will be some people on manual, some people who do not understand and minority interests and industries. But if we can possibly start working toward some sensible protocols people could use, it would be generally beneficial.
Lord Freud
We are in danger of sitting here devising IT systems, which is great fun but rather time-consuming. The word “awareness” is more than modest, because making people aware in the present IT environment is a substantial requirement due to the privacy around the data concerned. It would not be possible. I come back to my earlier point: in the new world of universal credit, the way in which that information is used will change quite dramatically and things may become possible. However, this is not the way to do it. In the present context, it is practical neither technologically nor politically.
Baroness Hollis of Heigham
Before I decide what to do with the amendment, which will be fairly predictable, perhaps I may ask the Minister a further question—again, it may reflect my failure to understand either the briefing papers or their import. Let me give him the example of a woman in a job where she earns more than £7,500—let us say £7,600—and is automatically enrolled. What would be her situation if she had a second job which gave her £6,000 a year, taking her above the LEL but below the ET, and she might or might not wish to enrol? Alternatively, she might have a second job which paid £4,000; that is, below the LEL. Could the Minister help me on that?
Lord Freud
I shall try to answer that, but I shall keep an ear open to those behind me.
Lord Freud
As I understand the situation, for the job paying £7,600, she would clearly be auto-enrolled. For the job paying £6,000, she would not, but she could opt in—it would be treated separately. For the job paying £4,000, she could opt in if she wanted to.
Lord Freud
The £7,600 would take her through the threshold. The additional incomes would be treated separately, because we do not aggregate. The £4,000 falls to a level at which she can make a contribution, although she would not get an employer contribution on top. That is how that would work. A thousand examples could be cited, but the basic rules remain.
Baroness Hollis of Heigham
I would be very happy for the Minister to write to me; I realise that I am throwing this example at him.
Lord Freud
Just to make it absolutely clear: the contribution is made above that trigger.
Baroness Hollis of Heigham
To be clear—again, I am very happy for the noble Lord to write to me, because I realise that I have sprung this on him—I think that he is saying that, if a woman was earning £7,600, she would be automatically enrolled in NEST by her employer. If she had a second job which brought her in £6,000 and she chose to enrol, the employer would match it. So she would be running two NEST pots simultaneously.
Lord Freud
I do not need to write. I can confirm that. It does not have to be NEST. The pensions may or may not be NEST in each case.
Lord Freud
That is exactly what I said, so I thank the noble Baroness, who is an expert in this area, for giving me the relief of not making a horrific solecism.
Baroness Hollis of Heigham
I think that where that takes us is that the woman in question would be getting information and contributions from two employers, in much the same way as would be the case if she were in mini-jobs which, if put together, would take her above the threshold. I accept the Minister’s point that at this moment in time this is a step too far for NEST to carry out. I genuinely understand that. As I say, we are putting down a marker. However, I am not sure that the size of the further step to take is as great as he originally suggested in the light of the exploration that we have had on having two streams of money going into possibly two separate NEST pots, according to whether one is default and the other is not. In order to handle that, we will need the IT on which one could build the push of my original amendment. None the less, this has been an extremely useful debate and I am grateful to the Minister, my noble friend Lady Drake and the noble Lord, Lord Boswell, for helping to clarify this issue. I beg leave to withdraw the amendment.
Lord Freud
My Lords, first, I thank the noble Lord, Lord McKenzie, for leaping into the breach and allowing us to have this debate on the issue about the trigger at which an individual is automatically enrolled being reduced. We are looking at the three amendments, together with the amendment of the noble Baroness, Lady Turner.
The reference to the potential move to the tax threshold is a really important issue that deserves a robust debate in its own right. We have an opportunity to debate it in later amendments. Rather than pre-empting that debate—in which I will make a commitment—I turn to the specific proposals in the amendment. We have committed to alignment with next year’s tax threshold of £7,475. This is the right direction of travel. However, we also need to retain flexibility for the future in order that we continue to target the right groups at the right times. I very much take the point of the noble Lord, Lord Boswell. There are quite a few issues that have to be looked at in the context of that debate. Let me put that to one side because we will be reverting to it. I apologise for the scars that the noble Lord, Lord McKenzie, bears. As a result of the level of uncertainty that exists in the structure of the pension system, we look to have rather more freedom of manoeuvre than he was able to enjoy.
This Government have always supported automatic enrolment into workplace pensions. We believe that it is the step change that will make a critical difference to a boost in retirement savings. However, we also believe that the new automatic enrolment earnings trigger is a significant improvement to the breakthrough in pension reforms that the noble Lord, Lord McKenzie, and so many other members of this and another place work so tirelessly to develop. Automatic enrolment for every individual into pension saving is not always the right thing to do. The key question is, and always has been, whether low earners would benefit from saving, as the noble Lord, Lord Stoneham, pointed out. It makes no sense to require people to sacrifice income during their working life and redirect it into private pension saving, when that saving makes them no better off.
The nub of this issue is about getting the right people saving. We, therefore, commissioned an independent review to ensure that the scope proposed for automatic enrolment by the previous Government was right. We wanted to look again at the point at which people should be auto-enrolled to ensure that we capture the right group.
Baroness Hollis of Heigham
Can the Minister help me? He said that we should not encourage people to save who would be no better off as a result. That was the line he used. What does he have in mind? If his right honourable friend’s new state pension of £140 comes into play, that problem should not arise, apart from for those tenants who might be on housing benefit—who may or may not be a diminishing minority. Have I misunderstood the Minister?
Lord Freud
I thank the noble Baroness for her intervention. Regrettably, she catches me at a time when I am not able to go as far as the Daily Mail, for instance, in saying what may happen as a result of discussions—which are entirely amicable—between the DWP and the Treasury in developing these proposals. Therefore, I cannot deal with her rather pointed query.
The Johnson review recommended that the personal income tax threshold of around £7,400 from this April would be the right starting point to trigger automatic enrolment. The latest announced pension and benefit rates bear this out. Persistent low earners get a higher replacement rate from the state, with means-tested benefits and the state pension, without private pension saving. This is clearly the other leg of the argument about whether it is attractive for low earners to save. From this April, the minimum annual guaranteed retirement income for a single person from the state will be around £7,140, with housing benefit on top of that. It is clear that individuals earning around this level during their working life can receive a similar income in retirement without saving. Therefore, it would be wrong to auto-enrol them. These amendments seek to introduce a lower entry point for automatic enrolment. This would mean encouraging a group to save who may receive more money in retirement from the state pension system than they earn during their working life.
There is an additional advantage to a higher earnings trigger that I would bring to your Lordships’ attention, which we believe will address a concern from pension schemes and employers. One of the persistent problems with the original design of automatic enrolment was to do with very small, low-value contributions on earnings just above the automatic enrolment point. We believe that the separation of the entry point from the contributions threshold creates a buffer against such small contributions. As a bonus, but not a driver, if we can settle on rates that employers already use, it would make the operation of payroll a great deal simpler.
We recognise that the increased automatic enrolment trigger has an impact on low earners at the point of automatic enrolment. However, we do not believe the effect is detrimental. The right people will be auto-enrolled and the lowest earners will not be. That is the right outcome. Critically, we have built in a safeguard. We support an individual’s decision to save where they feel that saving is right for them. Where someone below the threshold feels that they would benefit by saving, they can opt in to a workplace scheme. If they earn more than £5,715, they will get an employer contribution. We have just covered that ground.
I am acutely aware of the passions that the raised threshold has aroused. I am honoured to have taken part in such a robust and challenging debate. However, the automatic enrolment earnings trigger significantly improves the operation and the targeting of automatic enrolment. The new trigger ensures that the right people are encouraged to save. These amendments would encourage saving among a group of individuals, many of whom should not be saving. Therefore, we are unable to accept them and I ask noble Lords to withdraw them.
Baroness Hollis of Heigham
My Lords, may I ask the Minister a question? He rested much of his argument on this amendment, as with Amendment 16, not so much on the issue of small pots as the fact that people would get a replacement income in retirement sufficient almost to match their wage. Therefore, it is not worth their saving. I raised this in terms of its relevance to the basic state pension and whether it will lift people above pension credit. All the Minister’s assumptions are based on the belief that the household he is dealing with is a single-person household.
Lord Freud
I thank the noble Baroness for that intervention and that question. We have looked closely at this issue. She is absolutely right that many low earners are second earners and have partners. The trouble is that it is very hard to identify them with any precision, which makes it very difficult to encourage them to save, because many of them—we do not know which of them—would not find it beneficial.
The noble Baroness will make an argument, based on the discussions between the DWP and the Treasury, about what a single-tier pension would do to that position.
Lord Freud
She would make an argument to that effect, no doubt. However, how that would happen and its timing would be very sensitive, so it is simply not appropriate at this stage to make any presumption which would drive one into this very uncertain territory.
Lord Freud
Perhaps I may respond to the noble Lord on that and make absolutely clear the arguments that we will be taking from the Johnson review. It said that you needed to look at three things: replacement rates, earnings dynamics, and family make-up and characteristics. Looking at all three of those, on balance the recommendation was for a higher threshold of roughly £7,400, the reason being that it got the right people saving. That must be the core argument, along with the practical argument relating to costs. It is very expensive to manage small pots. The economics of running a NEST operation, let alone other operations, where it is important to get costs down, is an important secondary consideration. However, the primary one is to get the right people saving. After all, this is, as I have said previously, the biggest experiment in asymmetric paternalism. Let us get it right first and fine-tune it later.
Baroness Hollis of Heigham
How can the noble Lord know whether it is right if he cannot establish the family circumstances which, as my noble friend rightly said, determine whether it pays to save?
Lord Freud
My Lords, we are all using the Johnson review as a basis. It recommends that higher threshold and we are following that. It is straightforward and has been well argued. It is a review that has been well accepted across the political and industrial spectrum, and that is the basis on which we are making this change.
Lord Boswell of Aynho
My Lords, briefly before my noble friend replies and in the spirit of the questions that are being fairly put by the noble Lord, Lord McKenzie of Luton, I wonder whether the Minister could give some thought to the position of people who have not changed what they are doing—they are still doing it at the same place—but whose employment status has changed. Quickly, off the top of my head, I am thinking of two sets of people. One includes those who come in as self-employed and are then taken on by the firm as employees to do substantially the same thing. Clearly, that cannot be backdated and should not be backdated from their time as self-employed persons, but they have been there. The second case, which may be even more difficult but is at least worth rehearsing, is the question of agency workers. The employer may choose to take them on from the agency and pay a take-on fee, but they are, again, doing substantially what they were doing before in the same place as before. It is clear that they are not covered by the existing provisions, but it is not entirely clear why they should not be, at least in terms of equity.
Baroness Hollis of Heigham
That is a very interesting contribution and I hope that the Minister will follow it up. I want to put to the Minister a very simple but not obvious point. I understand why employers prefer a waiting period—obviously one is glad that it is not two years, as in some conventional schemes—but even with three months we must recognise that, given the figures on job turnover on page 103, with which I am sure the noble Lord is familiar, the median number of jobs that men and women have is 11. My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job. The report makes the point—although it does not back it up with research—that statistically there is not that great a difference between the two. It is worth pointing out that if somebody has 11 job changes, which is the median according to the report, having a three-month waiting period represents three years’ loss of pension contributions. Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them—if my sums are right—a loss of five years’ pension contributions. Furthermore, 15 per cent have 16 jobs or more—up to 23—which would be an average of something like eight years’ loss of pension contributions.
This is highly significant. Even reducing that by one month to two months would help; reducing it back to one month, as my noble friend has argued, would make a significant contribution for those who have staying power but none the less a rapid job turnover for whatever reason. It may be because of a cycle between self-employment and employment—take a hairdresser, for example, for whom the conditions of employment are often very obscure, whether you are self-employed or, even if you work in a salon, whether you are employed or not. None the less, the waiting period of three months can represent over your lifetime a significant loss of working contributions matched by the employer into your pension. For that reason, as well as others adduced so far, I hope that the Minister will reflect on whether he could make any movement in this direction.
Lord Freud
My Lords, Amendment 23 would reduce the maximum length of the waiting period from three months to one month. Amendment 24 applies an exception so that existing employees have a three-month waiting period. However, based on previous discussions with the noble Lord, our interpretation is that Amendment 24 is intended to apply an exception so that new employees would remain eligible for a three-month waiting period. I know that we are in Committee and so one can refine the intention of an amendment to make it more precise, but that is our understanding of its intention.
Clause 6 introduces the concept of an optional waiting period to the automatic enrolment process. Automatic enrolment has made numerous appearances in this place and another place. A recurring theme has been the extent of the duty placed on employers. I preface my remarks by putting this in context. We are talking about auto-enrolment for pensions—the biggest experiment in asymmetric paternalism that the world has ever seen, I think. We are trying to encourage people to save. We forget that the encouragement comes in the form of automatic enrolment. Let me say in response to both my noble friend Lord Boswell and the noble Baroness, Lady Hollis, that if we overcomplicate this, we will not have a smooth-running system. Auto-enrolment is a means to an end. That end is for the norm to be for people in the country to save more.
The noble Baroness cited the median figure of 11 jobs over a lifetime. If that is the median, the noble Baroness is right: 33 months represents 7 per cent of the provision of a potential pension pot. However, if auto-enrolment has worked and people have started opting into pensions, by the time they are on their second, third or fourth job, they will opt in because it will have become a habit. One must look at what auto-enrolment is, rather than become overly mechanical about it, which these amendments are.
The aim here is to ease the burdens on business. This simplification measure of pulling two systems into one—to get rid of postponement and to have one system of waiting periods—has been widely welcomed by employers. A waiting period will free employers from the administrative burden of enrolling casual staff who are working for them for only a few weeks and wish to maximise their take-home pay, rather than save for a pension. I am thinking of most of Sydney in Australia when I make that remark; I think that most people in Sydney come to work in London for two years.
Lord Freud
A waiting period will also allow employers to align automatic enrolment processes with their existing processes and avoid part-period calculations of contributions. In addition, it will allow them to stagger auto-enrolment of large workforces. An employer will be able to apply a waiting period to all employees at their staging date. It will also be possible for an employer to apply a waiting period when a new employee joins the workforce or from the date when an employee becomes an eligible jobholder—for example, when they turn 22.
It is important to note that an employer will be allowed to apply a waiting period only if he gives the worker information about the waiting period within a certain deadline. This will ensure that workers are informed of their right to opt into pension saving during the waiting period. It is only right and fair that those who wish to start saving for retirement earlier are not prevented from doing so.
The waiting period is intended to ease the administrative burden and has been widely welcomed by employers. However, it means that, for those individuals who have frequent job changes, there could be a significant impact on their overall pension savings. This is particularly so, as the noble Baroness, Lady Hollis, pointed out, if they are subject to a waiting period in every post. Allowing individuals to opt in during the waiting period will address this imbalance so that no one is denied the opportunity to save. As I said, if auto-enrolment has the impact that it should have, the psychology of saving should change for many people.
Noble Lords will be pleased to hear that much of the detail is on the face of the Bill. We propose taking regulation-making powers in just two areas. First, we will specify in regulations how quickly the employer must give notice to the individual about the waiting period. Secondly, we will set out what information that notice must contain and any other accompanying information that the employer must provide. For example, workers will need to be provided with information about the right to opt in during the waiting period. It is important that we have the flexibility to set the period and to provide for additional accompanying information in regulations once we have had an in-depth consultation with our stakeholders.
As I said, a key aim of the reforms is to encourage more people to start saving for retirement. However, at the same time, we have been mindful of the costs for employers of implementing the reforms. We believe that a three-month waiting period provides the correct balance between easing employer burden and maximising individuals’ savings. This amendment introduces a variable length of waiting period depending on the circumstances. There are two main issues with such an approach. First, introducing a one-month waiting period for existing employees would remove some of the flexibility afforded to employers through waiting periods; for example, they would not be able to stagger automatic enrolment of large workforces. Secondly, we are keen to ensure that the introduction of waiting periods does not make the automatic enrolment process more complicated. We believe that a simple process is key to employers understanding and preserving their support. A two-tier waiting policy would add complexity and would be difficult for employers to understand or use. It would add to the burden on employers, which is not the intention of waiting periods.
Waiting periods were designed with employers in mind and have been welcomed. We believe that they will provide a real easement for employers, as well as ensuring that individuals’ savings are protected. I urge the noble Lord, Lord McKenzie, to withdraw the amendment.
Lord Freud
I tried to explain that. There are a few things happening here but the relevant thing is to try to allow people with large workforces to time it so that they can do things in bulk rather than having to individualise. That will allow us to get a single system running through rather than having to have separate systems. Administrative simplicity has been the guiding goal here and it is also the reason why we have abandoned the concept of postponement, which was again a slightly complicated two-tier system. We are trying to get to one tier and a great deal of administrative simplicity.
Baroness Hollis of Heigham
The Minister has already, and I am glad that he has, sold the pass on that by allowing voluntary enrolment for young people under 22 or for people, mostly women, earning between £5,200 and £7,500. The employer is already going to have to identify and respond to particular individuals rather than to cohorts of a labour force that may be moving tidily through the system. While we welcome the concession of voluntary enrolment, the noble Lord cannot now pray for administrative simplicity in cohorts when he has already sold the pass on voluntary enrolment.
Lord Freud
There is a great deal of difference between having a system that allows opt-in at any stage compared to a system that puts an obligation on an employer to do something at one month for some people and three months for others. There is a difference and I would not agree that any pass has been sold on this.
Lord German
My Lords, I will not keep the Committee long, given that the Minister has, in his response to a previous debate, accepted this amendment in that he has said he will introduce a requirement for the correspondence that is sent to employees to include a statement of the rights of that employee under this provision. Therefore, the only argument that I wish to retain in this discussion is about whether the rights of the employee should appear as an item in the Bill, rather than simply relying on the important statement that the Minister has just made.
At the moment, the protection for this matter in the Bill relies entirely on proposed new Section 4(1)(b) in Clause 6(2), which says that,
“any prescribed requirements in relation to the notice are met”.
That is obviously as broad as you could get. However, the purpose of this amendment is to ensure that those jobholders whose waiting period is being enacted are informed of the rights to which they are entitled, particularly the right to opt in to the scheme as soon as they wish. I understand that this information will be provided by regulation. I am absolutely certain that that will happen, given the Minister’s commitment. However, I have always been of the view that in any Bill, where the rights of an individual are at stake, it is important to uphold those rights in the Bill itself. That means that it should be a very simple statement. It means establishing that those rights will be communicated and that there are rights to be had. It is a very important agreement, which one should have in front of an employee at the time.
I know that we have to ensure that everyone is aware of their rights, and that it is important that what is enshrined in the Bill is communicated properly. However, we must remember that this will all be very new. It will be new for employees and new for employers. The very fact that this will be enshrined from the beginning—from the date that the Bill becomes an Act—means that it is important that a signal is sent to every employer and employee that they have rights in this matter. It is important not just to have it in the Bill but to ensure that we get it right from day one. There is a great expectation that this will happen. It will be difficult for many very small employers to adjust to the changes that are coming. What I am looking for is a form of letter, with a standard set of words, which an employer can hand to their employee and that will remove any extra bureaucratic burden.
There is no additional bureaucratic burden established by this amendment, but it gives a clue as to the preparation that will be essential. If I were a small employer, having heard about this in whatever way in the coming weeks and months, I would want to know fairly quickly what I am going to have to tell my employee If an employee can say to an employer, “What about me?”, I would want to know that there was somewhere where I could download the appropriate piece of information about rights, particularly in this respect. As we wish simply to express in the Bill the rights of the individual, I beg to move this amendment.
Baroness Hollis of Heigham
This is an important amendment, not just for this but for all the other areas where we are looking at voluntary enrolment. I hope, therefore, that the Minister will reassure us on the employer making sure that the employee in the waiting period can voluntarily enrol into a NEST scheme before it becomes automatic. I hope that he will also reassure us that employees earning above the LEL, but below the automatic enrolment threshold will be made aware of their rights. That could involve quite a considerable number in jobs where, for example, very many women work part time; I am thinking of retail, where women might work two days a week and so on. I hope he can give us some reassurance as to how he is going to operate a nudge, where there is opt-in, as opposed to where there is auto-enrolment.
Baroness Drake
My Lords, I express my support for the sentiments and views of the noble Lord, Lord German, in moving this amendment. I, too, noted the Minister’s comments on regulation on this matter. As we move nearer to the commencement of auto-enrolment in 2012, I am also conscious that both the Department for Work and Pensions and the pension regulator will need to prepare for a major programme of communication and guidance to workers and employers. Can the Minister assure us that sufficient funds will be made available for this scale of communication and guidance programme? As the Minister said, this is the biggest ever example of asymmetrical paternalism, and, given the constraints on public expenditure, the old phrase about not spoiling the ship for a ha’porth of tar, is extremely important in this instance.
I, too, agree with the noble Lord, Lord German, that, if individuals are to be given the right to opt in during the deferral period, it has to be a meaningful right, understood both by the employer and by the employee. A meaningful right to me means three things: do you know you have it; do you know how to exercise it; and do you not suffer a detriment in exercising it? That is quite important if the three-month waiting period is to have integrity for the reasons given as to why a three-month period is needed and the individuals none the less can opt in. It is quite important that guidance and culture meet those three requirements. I hope there is guidance to both the employer and the employee that makes the opt-in opportunity meaningful.
Lord Freud
My Lords, I thank noble Lords for their observations and repeat how the structure works. The cycle would be starting again. However, I emphasise that we think that the group involved would be extraordinarily narrow. We could overcomplicate this issue, because in practice many employers will probably just enrol those people the following month, which they are quite free to do. They can opt in. As I said, we will be monitoring this very closely. If it becomes a substantive issue and we can see some peculiar games going on, we will have to move in and sort it out, and we will do that.
Baroness Hollis of Heigham
I should like to reinforce that. I was struck by the point made by the noble Lord, Lord Boswell. When I was doing some pension work on things such as buy-back and so on, I was struck by the number of women in a variety of jobs who told me that their employers very deliberately capped their hours at 15 to avoid national insurance. I am afraid that I can see very small employers—whether they run a launderette, a newsagent or whatever—having people working for them for two months, laying them off for a week and then starting them in work again. They could, for possibly quite a long time, avoid automatic enrolment and therefore avoid paying a pension, which they would be reluctant to pay because they would regard it as a burden on their business. I have no idea how many small employers might abuse the system in that way, if I can put it like that, but I fear that among small employers there will be quite a strong incentive to do that. I wonder how the Minister is going not only to watch that but to remedy it.
Lord Freud
My Lords, I thank the noble Baroness, Lady Hollis, for that point. Clearly, in all these areas there is potential for abuse. However, it is very important that we do not overcomplicate the system in case there is abuse, which in this event is likely to be rather small. If, as the noble Baroness fears, it does become an abuse, we will be monitoring it.
Lord Freud
I have given a commitment that we are going to monitor how all this works on a regular basis and I feel confident in saying that, if we find that it is a genuine problem, we will have to move in. However, it is pointless to try to pre-empt something that looks as though it is too small an issue to be concerned with.
Baroness Hollis of Heigham
I do not understand how the Minister can monitor the difference between the two months and the week’s lay-off, be it in the hairdresser’s shop or anywhere else, in order to restart the dinners as it were, and the non-occurrence of voluntary enrolment. I do not understand how the Minister can ensure that the person not joining the pension scheme is in the latter category and not in the first. I do not see how he will monitor it, because he will not keep the records.
Lord Freud
We have committed to monitor this situation quite widely, in particular how the waiting periods are working. It is essential to get it right. We have not developed the specification of that monitoring, but we will do so. We will watch closely that and other issues.
Lord Freud
All this is saying to me that, right now, uprating measures for entry and savings levels need to be flexible. Therefore, we want to maintain flexibility to consider a wide range of economic measures. Pensions cast long shadows. Pension law has to last for the long term. We believe it is prudent to build in maximum flexibility for all eventualities, as regrettably we do not have 20:20 foresight.
I sympathise with the intention behind the amendment and I understand the concerns about any unfettered discretion or an unrestrained dash to a £10,000 trigger. However, the primary aim here is to ensure that we target the people who should be saving, while excluding those who should not. If, at the same time, we can align with a threshold that employers are already familiar with and minimise administration burdens, so much the better.
Automatic enrolment has to be sustainable. My worst fears are that we set rules which scoop up people who cannot afford to take a hit on their pay packet. If we get the trigger wrong—if we set it too low—we risk high levels of opt-out. Once we do that, we turn people off pension saving, even if we have applied asymmetric paternalism to get them to save. To get the trigger right, we need flexibility.
Today’s debate is further ample evidence that the automatic enrolment earnings trigger is a matter of deep interest and concern to this House. For that reason, we want to ensure that the House has an ongoing opportunity to debate this issue. We recognise that including such a flexible power to amend figures that appear in primary legislation represents a very broad power, and that is why the uprating order will be subject to an affirmative resolution procedure. It will mean that this complex issue, and the exact rates set for the launch of automatic enrolment, will be the subject of a full debate to ensure complete transparency.
It would be unusual to commit to an impact assessment in the Bill, as requested by the noble Baroness, Lady Drake. However, I make a commitment to provide an impact assessment for the next five years, up to the 2017 review and shortly afterwards. This will allow time for the reforms to bed in and for us to understand the wider landscape. Therefore, there will be full information on the uprating order as a basis on which the House can conduct the debate.
I hope that I have been able to set out the case for flexibility and the need to future-proof these provisions. I also hope that I have provided the reassurance on transparency that noble Lords are seeking with their request for an impact assessment. However, I regret that I cannot give a guarantee that the trigger for pension saving will in future be set in complete isolation from prevailing personal tax thresholds. I am afraid we are unable to accept the amendments and I ask the noble Baroness to withdraw this amendment.
Lord Boswell of Aynho
My Lords, I rise to move my sub-amendment, to use European parlance, as corrected by the noble Baroness’s perceptive intervention, and to speak to my noble friend Lord Stoneham’s substantive amendment and around the parallel thoughts of the noble Baroness, Lady Hollis of Heigham, on this matter. My amendment is slightly different in character, but all these amendments are about essentially the same problem. I quote, with approval, the words of the Minister only this afternoon, which I jotted down for greater accuracy:
“It is very expensive to manage small pots”.
That is exactly what the problem is about. There are a number of complexities in the consequences of this. It is expensive for employees and employers, or pension administrators. It is extremely expensive for the Inland Revenue and gives rise to lots of often misleading tax codes, which overlap and never seem to get synchronised and sorted out. It causes difficulties for taxpayer compliance and taxpayer understanding when these bits and pieces come in from sources that are probably long forgotten and do not add up to very much.
On Second Reading I quoted examples. I will be a little more pointed than I was then. They were actually my wife’s two pots of about £20 per annum and about £30 per annum. Goodness knows what the administrative cost of carrying that burden is. I am pleased to see the Minister chuckling. As I recall the situation, my wife had already consolidated a number of pension entitlements and had one go at this. She had some entitlement under the teacher pension scheme but no actual pension and she had had that out. You cannot consolidate more than once. I may have got that wrong, such is the complexity of this. In other words, there was nothing that she could really do about them. The proposals, as I understand it from my noble friend and the noble Baroness, are basically that NEST should be an optional repository to handle them. I can understand that the Minister may be a little diffident about taking it all in while he is getting this extremely imaginative scheme under way, but there is at least the potential for a default mechanism to take this over. Were my energies not to have faded, I would have sub-amended my noble friend’s Amendment 34 to read “may make regulations” rather than “must make regulations”, but let us not debate that at this hour. The idea would then be that NEST would be a place where these could be sorted out.
An alternative approach would be to enable people to have a slightly more relaxed view about taking these in cash, which is what my sub-amendment in effect proposes. One always has a whiff that the Inland Revenue has a certain concern here. I am quite sure that some elaborate scheme could be devised of tax avoidance where people could have hundreds of miniature pots and somehow take it all out in cash with the full benefit of the accrued tax reliefs, ending up with a fortune. Perhaps this has never happened, but I am quite sure that the Inland Revenue would be there alert to make sure that it did not.
I also feel, in relation to the suggestion made by the noble Baroness, Lady Hollis, and the thinking behind it, that it is not absolutely essential that this should be done by NEST. It could be that, if the rules were made more flexible, existing administrators could take this on. I am pleased to hear her acknowledging that. I do not wish to create an unnecessary controversy in the Committee, but I have a feeling that the words “any willing provider” might even be considered. If, for example, in a case such as that of my wife, where there was an entirely trivial and ridiculous entitlement that could have been bolted on to her existing private pension arrangements, somebody could say, “This is the value of the scheme; will you take it over?”, and pay it possibly as an agent—I am not concerned with the legal basis of this—I think that we would be making some progress.
I feel strongly about two things. The debate in this Committee has rightly focused on mini-jobs. We are now talking about mini-pensions, which are often, but not always—and it is not contingent on income or anything else—a by-product of mini-jobs, and good luck to people. They may in certain cases, though not in the case of the lady whom I mentioned, be quite central or disproportionately important to the income or the top-up of income of the individuals involved. We should be moving towards a system that is less complicated, more flexible and less obsessed with the possibility of theoretical minor difficulties with tax. We should somehow cut through the legal thickets and deliver something that is cheaper, easier to understand and worth having in the hands of the beneficiaries who have properly earned it.
Baroness Hollis of Heigham
My Lords, I have high hopes for the thrust behind these amendments, given that all sides of the Committee today share a similar take on the problem. I know that the Minister shares this view and I hope that he can give us some positive indications of ways forward. I am particularly happy to follow the noble Lords, Lord Stoneham and Lord Boswell, on this.
We discussed earlier the question of the number of job changes and we know that, as I said, the median number of job changes is around 11—25 to 26 per cent will have between 11 and 15 job changes and others will have even more than that. That means, depending on the rules of individual schemes and how long people are required to work before they can join a scheme—it could be two years or up to two years, or your contributions could be returned to you and you might decide to hold them in a pot—that it is likely that low-paid employees and some not necessarily low-paid employees, but people who have moved a lot in their first five, 10 or 15 years of earning, will build up some pension entitlement in five of those jobs. At, say, £11,000—half women’s average earnings—with a fairly conventional DC scheme, which I know applies in a lot of the charitable or voluntary world, a five plus five would mean that such a woman would have something between £1,000 and £1,200 a year in her pot for each year in her job. That could mean that she had five or six pots of anywhere between £1,000 and £3,000, depending on the rules of the scheme. The question then is what happens to those pots.
I am cross with myself because I missed a trick and I should have put it down as an amendment, because one way to approach this, obviously, is to follow in a slightly larger form the thrust of the argument of the noble Lord, Lord Boswell, which is to raise the trivial commutation limit, which at the moment is £18,000— 1 per cent of the lifetime savings allowance. A trivial commutation limit of, say, £25,000 or £30,000 would pick up quite a lot of these very small pots without having to hassle about whether they were at or above a certain level. Of course, some providers—some banks and so on—will allow you to bring together five or six small pots and consolidate them, because they are then worth handling.
In addition, the Government propose in due course to remove annuitisation at the age of 75. However, the Treasury—bless it—has insisted on a quite absurd de minimis figure of £20,000 income. That is quite unnecessary; it merely needs to be about £8,000. Of course, if the new state pension comes into play at £140, you will not need any de minimis for failing to annuitise, because it will float you off all public funds, apart from housing benefit. Therefore, with, I hope, the new state pension of £140, not only would NEST be safe but so would all other small savings schemes. You would not then need things such as trivial commutation rules because the choice would be left entirely to the individual. We would be kicking out a lot of silly mess and tangles that have been imposed by the Treasury, which is more concerned to avoid £1 being lost through manipulation of the tax system than it is to encourage £10 being gathered into the savings system. I consider that to be really rather sad. I am sorry that I missed that point, but we will come back to the trivial commutation issue later if it seems worth doing so.
If the person in question cannot trivially commute and she is handling pots of, say, £3,000 each, she will be getting somewhere between £1 and £4 a week from each of those small pots. The Pensions Advisory Service—I should declare an interest as a board member of TPAS—has been very concerned about what noble Lords have called “orphan assets”. At the moment, a poor woman can use these small pots altogether, but she may end up with, say, £20,000 or £25,000 in her NEST pot, have three, four or five other pots of £3,000, £2,000 or £1,000 and lose all those small pots, which are above the trivial commutation figure, are too small to be annuitised and cannot be bundled together. She would effectively lose a third of her lifetime savings, even though she is on a very low income. No one would regard that as decent. Therefore, I think that she should be able to bundle or consolidate her various pots. For this purpose, I am talking about NEST but I am perfectly happy for it to be any willing provider. The important thing is that she can access all her savings.
What would be the advantage of my proposal? It is very simple. First, above all, the person in question retains the full value of all her savings, rather than possibly losing some of them. Secondly, it represents simplicity for her in retirement, as she could be handling just one flow of pension income rather than multiple flows of small pots. Thirdly, there is a sort of best-value option going on here—a version of the open-market option. In this Bill we have not yet talked about disinvestment strategies, but I suspect that she would get a better return on disinvestment were she to purchase an annuity if all these small pots were bundled together and consolidated into one scheme, rather than if she were trying to play around with various small pots to avoid losing them.
In my amendment, I stipulate that the transfer should be able to take place the year before retirement simply to recognise the concerns—they may be exaggerated but they certainly exist—among some pension funds that existing scheme providers will not want a wholesale flood of money from their schemes under management going earlier into NEST, possibly because NEST will appear so much more attractive in terms of the reduced fees that will be charged and therefore the amount that will be available for accumulation. I do not mind that, but they might, and therefore it may be a price that has to be paid.
Given the support around the Committee today, given that I know that the Minister is sympathetic to the issue that has been raised and given that we have produced two or three different ways in which we can approach this problem, I hope that we will get a sympathetic hearing from the Minister.
Lord McKenzie of Luton
My Lords, given the hour, I rise briefly to say that we have put our names to the amendment in the name of my noble friend Lady Hollis because we support the thrust of it. We certainly also support the thrust of the amendment in the name of the noble Lord, Lord Stoneham, as amended by that in the name of the noble Lord, Lord Boswell. This issue seems to have been around for a long time. The Minister may well push that back at us and ask why we did not do something about it, and that would be a good question.
If I have any caveat at all in relation to NEST, it is one that the Minister himself may have. That there should be no transfers into NEST was part of the consensus, although the consensus has been a little disturbed by the Bill, so that does not preclude this being opened up. It changes systems and the costs as well, but those are second-order issues in relation to the substantive matter that has been raised. The time is now right to deal with that.
Lord Freud
My Lords, I must start by declaring an interest. I think I have one of these infuriating little stranded pensions. It is the most annoying thing. You look at the file, look at the headline and close the file because dealing with it is unendurable. I am far too polite to complain to the noble Lord, Lord McKenzie, for not doing anything about it. If I thought about it I would resent him deeply every time I looked at the file.
I take the opportunity to let the Committee know, through these amendments, what we are doing to consider how transfers across the industry, particularly of small pension pots, can be made easier. The Making Automatic Enrolment Work review, carried out last summer, recognised that facilitating transfers was critical to the success of the workplace pension reforms. It believed, however, that the issues went beyond NEST. When automatic enrolment becomes the norm, there is a much higher risk that pension savings, particularly for lower earners and people who move jobs frequently, will become fragmented in several small pots—a point made so eloquently by the noble Baroness, Lady Hollis, just now.
The Government are already acting on the recommendation of the review to consider how transfers across the industry can be made easier. The DWP is working alongside the Treasury, HMRC, the Financial Services Authority, the Pensions Regulator, employers and pension providers to understand better the burdens employers and schemes face when administering small pots, and to identify any barriers facing members.
In addition, the DWP recently published—on 31 January—a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. We are seeking to address existing rules which could impact on the success of the reforms, such as rules on early scheme leavers and disclosure. The call for evidence is likely to consider actions better to manage small pension pots. This call for evidence closes on 18 April. Our response will be released later this year after we have considered stakeholder views and evidence of burdens and costs.
Her Majesty’s Treasury recently held a call for evidence on early access. This reflects the Government’s commitment to consider ways to boost individual saving and to foster a culture of personal responsibility over financial choices, particularly in encouraging saving for retirement. The document sets out the available evidence on early access to pension savings, some potential models for early access and the potential benefits and risks, and sought further evidence from interested parties. It included a specific question on ways to improve the transfer process and on whether there is a case for introducing further flexibility in the trivial commutation rules. The call for evidence closed on 25 February. HMT is currently considering the responses and will publish its findings in due course. So, across all three of these areas, we are seeking to identify options to improve transfers so that individuals can get the most out of their savings.
I appreciate the interest that noble Lords have indicated in the overall issue of transfers, which is much wider than the restrictions that are currently placed on NEST. The restrictions on transfers into NEST are intended to focus the scheme on its target market, particularly as the reforms are staged in, enabling its administrative processes to be simple, leading to lower running costs and creating safeguards against levelling down. NEST can already accept certain transfers in—for example, where a member with less than two years’ service has the right to a cash transfer. This allows jobholders who move from an employer not using NEST to one offering NEST to transfer their cash transfer sum into NEST. The Pensions Act 2008 commits the Secretary of State to review the effect of NEST transfer restrictions in 2017. But we are doing work now, before 2017, that will bring together evidence and analysis from a broad base.
As I know noble Lords appreciate, there is no straightforward solution and the outcome of any quick fix may not provide the universal remedy for individuals and pension schemes that we might hope for. Aggregating small pots by transferring them into another pension scheme is not necessarily a good thing to do for individuals, as the noble Lord, Lord Flight, just pointed out, as it will depend on the merits—the risk, charges and growth—of the fund they are transferring into compared to those of the fund they are transferring from. It is not necessarily a good thing for pension schemes either, which, though they would no longer need to pay for the maintenance of a potentially smaller pot, would need to pay to transfer the fund out. Hence, the work we are already doing to see what measures we can sensibly take to minimise industry burdens while delivering the best possible protection of individuals’ retirement outcomes. We want to ensure that any solution will stand the test of time and meet the needs of all pension schemes and their members.
I do not want to prejudge the outcome of our considerations, but I can see the merit in a number of your Lordships’ arguments, including that of the noble Lord, Lord Boswell, that we should take into account giving the individual a choice, where they have very small pension funds, to take the cash. It is, of course, the very smallest pots that cause the biggest problems, as even if transfers can be facilitated, the frictional administrative costs have a proportionally higher impact. The noble Lord talked about sums of £20 and £30—I shudder to think of the proportion of administrative costs involved in doing anything with them.
Our ambition is that NEST will complement rather than replace existing good-quality pension provision. Changing the provisions now to allow NEST to accept transfers in during the critical implementation period could undermine that aim. By 2017 the reforms will have been fully implemented. We will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the market. While I appreciate the principle behind these amendments, I urge the Committee to bear with us while we get to the heart of this difficult and complex matter. On that basis, I urge noble Lords not to press their amendments.
Baroness Hollis of Heigham
That is helpful and I understand the issues associated with it, but can the Minister give us some guidance on the timescale? This is a problem now, as my noble friend said. Women, in particular, are low-income savers and have small pots which they are losing. They are being stolen from them with nobody being a thief but with women certainly being the victims. Given that this Bill is still going through this House and will then go on to the other place, presumably once it has finished the Welfare Reform Bill, the noble Lord has until June or July or some time like that before the Pensions Bill completes its passage through both Houses. Can he come up with some proposal by the summer in which we can corral these small pots so that they are not lost permanently to those who can least afford to lose them?
Lord Freud
My Lords, I am pleased to respond to the noble Baroness, Lady Hollis. She will see by the amount of work that we are undertaking and its complexity that getting a comprehensive review is not going to be possible in a matter of months. We are clearly talking about a matter of years to lock this situation down. I refer back in politest possible way to what the noble Lord, Lord McKenzie, said. This has been a problem for a very long time and it is very complicated, involving a lot of different systems and structures of pension provision. We need a holistic solution. We have the work in train. We will get there but it will not be a matter of months, I regret.
Baroness Hollis of Heigham
My Lords, it would be very simple, at least as an interim stage, to build on what the noble Lord, Lord Boswell, was talking about and either have a cap on the size of individual funds that can be taken as cash or to raise the trivial commutation limit under specified circumstances. That would be very simple and would not get in the way of further more fundamental and wide-reaching reforms, of which I understand some of the bigger complexities—particularly between DB and DC schemes, although obviously DB tends to be confined to the public sector. But the noble Lord could make some interim arrangements which would not preclude an intelligent, sensible and decent wider response in the future. At the moment real people are losing real money who can ill afford to do so.
Lord Freud
My Lords, I accept the point that the noble Baroness makes that people lose money because of this. They have been losing money for many years. This problem has not suddenly emerged. Regrettably, because of the amount of work now under way, it would be premature for me to give any time indication about whether one could envisage some certain quick fixes that would go along with an overall strategy. It just depends. Noble Lords will understand that I am simply not in a position to say that we could apply some quick fixes along way. They may be possible but I certainly cannot indicate that that will be the case or the timing of it. I would love to be able to announce a wonderful transformation so that with one bound we broke free. But I can assure noble Lords that there is a major process in train to get a holistic solution to the issues of savings and these pots, and we are moving at a rapid speed to get that done.
“Voluntary and additional voluntary contributions into NESTs
After section 15A of the 2008 Act (as inserted by section (Transfers-in before decumulation)) insert—“15B Voluntary and additional voluntary contributions into NESTs
(1) The Secretary of State shall by regulations provide that a jobholder who in a preceding tax year or years after the commencement of NESTs has not paid contributions up to the maximum employee contribution limit for the year or years in question may at any time pay voluntary contributions up to the total of the maximum employee contribution limit for each of those years.
(2) The jobholder shall not be entitled to require the employer to pay the employer’s contribution on voluntary contributions paid under subsection (1).
(3) The jobholder may exercise the right to pay additional voluntary contributions equal to the total amount of the contributions which would have been paid by the employer if the contributions in subsection (1) had not been voluntary.
(4) Voluntary contributions shall attract tax relief at the applicable rate.
(5) For the purposes of this section, rounding-up under section 9 above shall apply.””
Baroness Hollis of Heigham
I think that many of us would like the annual cap of £4,200 on contributions to NEST to be removed. However, I again understand the industry’s worries about losing funds under management from the better-off. I accept that a person would have to be a reasonably high earner to hit that cap of £4,200 each and every year. The amendment would simply allow the making-up of missing years—I am rather keen on making up missing years whether in the basic state pension or in NEST. The person concerned may have enjoyed a small legacy, perhaps on the death of a parent and the sale of the parent’s home. They may have had a small lottery or premium bond win. He or she may have traded down their home to somewhere smaller while in their fifties and have thought that it made very good sense to add some of the modest equity available to their pension fund as a form of saving. They may have divorced and received from it a modest financial settlement of a few thousand pounds or so, some of which they would like to put in their pension to make up for the years that they missed. I make it clear that there is no suggestion of there being any parallel employer contribution; the amendment would simply allow an employee, if they wished, to add to their pension pot. The money would not come from any other savings, nor would it be a transfer. It would be, so to speak, new money. Although I doubt that it would occur very often, being able to add to their pension pot in this way would still offer women in particular, whose financial and, frankly, personal and private lives are highly unpredictable, some extra flexibility in the way in which they build their NEST pension. I beg to move.
Lord German
My Lords, I want to say a brief word about Amendment 38, which is in the group. Clearly, the Johnson review looked at this issue and having weighed up both sides of the argument, recommended that the Government should proceed to legislate. The words of the recommendation were quite ambiguous. It said:
“We are therefore recommending that the Government legislate for the removal of the contributions cap in 2017”.
One could read that as recommending legislating in 2017 for removal of the contribution cap, or as recommending legislating now. Actually, the text of the Johnson review does use the word “now”—in other words, it should be part of this Bill—but because neither the Minister nor the Government are on record yet as saying why they have not chosen to follow that advice, it would be very helpful if this amendment could be probed in that manner.
Lord Freud
My Lords, I thank the noble Baroness and my noble friends for bringing the important issue of the NEST contribution limit to the attention of the Committee. I shall deal with the amendments in the order they were raised. The noble Baroness, Lady Hollis, has raised, through Amendment 36, a vital point about the ability of NEST members to make contributions to their retirement pots that exceed the minimum contributions required by automatic enrolment. NEST has been designed to provide a low-cost, portable pension scheme for low to moderate earners. We want to encourage people, where possible, to save more than the minimum. The NEST order and rules already allow a member to make contributions up to the annual contribution limit in the financial year in which the contributions are made, as the noble Lord, Lord McKenzie, pointed out.
The current limit is already set at such a level that it enables median earners to contribute as much as twice the minimum contribution requirement in a tax year. Allowing NEST members to make use of unused annual contribution limits in subsequent years would undermine the purpose of the annual contribution limit. This limit was designed to ensure that NEST does not adversely impact on existing good-quality pension provision. While I understand the principle behind this amendment, we should not forget the purpose of NEST. This is to enable millions of people to participate in pension saving from which they are currently excluded because they do not have access to suitable workplace pension provision. Filling this supply gap requires NEST to be both low-cost and as straightforward a scheme as possible. Adding to the complexity of administering NEST through complex arrangements for calculating the maximum annual contribution would undermine those aims.
Moving on to Amendment 37, the noble Baroness raises another important point, about how the annual contribution limit should be calculated. The limit, alongside the transfer restrictions, is designed to focus NEST on its target market of low to moderate earners. This is to ensure that NEST will complement existing good-quality pension provision, not replace it.
The baseline contribution limit was set at £3,600 in 2005 terms, following wide consultation on the proposals in the White Paper, Personal Accounts: A New Way to Save. Responses on the appropriate level for an annual contribution limit were based on analysis of several factors, in particular, the potential impact on existing schemes and the ability of individuals to save flexibly for their retirement. In line with the provisions in the scheme order, NEST Corporation has adjusted the contribution limit for 2011-12, prior to scheme launch, to £4,200. The current method of setting the annual contribution limit strikes the right balance. It ensures that NEST focuses on its target market of those excluded from pension savings as a result of market failure, while providing for a level of contributions that is sufficient to allow employers and individuals to contribute more than the minimum required.
I turn to Amendment 38, tabled by my noble friends Lord Stoneham and Lord German. This puts forward the recommendation from the Making Automatic Enrolment Work review that the Government legislate now to remove NEST’s annual contribution limit from 2017. That review recognised the importance of the NEST contribution limit during the introduction of the reforms. It acknowledged that there was broad consensus behind the reforms, and that NEST’s role was to fill the supply gap that those in the existing industry currently find difficult to serve. The review saw the contribution cap as a key lever in ensuring two things: that NEST remains focused on this target market as the reforms are staged; and that during this important period it does not adversely impact existing good-quality pension provision. However, the review team considered that once the reforms were fully implemented it may be appropriate to remove the cap. This is both to ease the administrative burden on NEST and to avoid any unintended message that there was somehow a maximum appropriate level of pension saving.
Great minds think alike. Section 74 of the Pensions Act 2008 already requires the Secretary of State to appoint a person to review the effect of the annual contribution limit in 2017. By this time, the reforms will have been fully implemented and we will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the marketplace. I am not saying that the review team was wrong. I am saying that, given that it saw 2017 as the right time to remove the cap—by then we will have much more evidence of the impact of NEST in the real world—2017 is also a more sensible time to consider changing or removing the NEST annual contribution limit. Since this can be achieved by secondary legislation, there is no need to legislate now. I understand the principles behind these amendments. However, now is not the time and, given the scope individuals already have to make additional contributions and our intention to review the contribution limit in 2017, I urge the noble Baroness to withdraw this amendment.
Baroness Hollis of Heigham
I can well understand why pension providers are—let me put it politely—apprehensive about the competition offered by NEST in terms of fees and charges and, therefore, want to protect the funds under their management. I accept the noble Lord’s argument that the bigger issue of getting rid of the cap altogether may have to wait until 2017, although I am disappointed about that. What I do not understand is why there should be any threat to existing alternative providers for people who are in NEST and who, two or three years down the line, find that they have missing contributions, possibly by virtue of maternity leave or whatever. I cannot see how that situation—making good the shortfalls of previous years—is in any sense a threat to any other provider. Because they are in NEST, they will not be in any other provider’s scheme. NEST is not, therefore, in any sense, competition to them.
I support the second of these amendments, although I understand the challenge that it might represent. However, the first amendment would simply make good the headspace in back payments, and I do not see why that would represent a challenge or a problem of any sort. Given that people occasionally get modest sums of money, it would seem to be consistent with our wish to encourage people to think about their retirement and to be able to make that money available for NEST. I do not know whether the Minister has anything further to add; he may feel that he has said all he is going to say on this.
Lord Freud
I thank the noble Baroness for giving way and for giving me the opportunity to clarify matters. This is simply about administration, simplicity and cost. As you start to introduce these kinds of rules going backwards and forwards on what people can contribute, it gets very complicated and you start to build in the kind of complexity that we are all complaining about. Stranded pots are just one area generated by the complexity in the system. Therefore, the rationale here is: keep it simple.
Baroness Hollis of Heigham
My Lords, given the time, I do not think that there is any point in my pursuing this matter further. However, if not during the course of this Bill, perhaps subsequently we will come back to this bundle of issues, because it clearly has to be addressed. I beg leave to withdraw the amendment.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 2 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord German
There is a general sense that there is a group of people who are being treated unfairly because of the rate of acceleration, although maybe I will explain later that they shall actually be decelerating towards their pension. The general aspect here is that something needs to be done to ameliorate that unfairness. One of the key ways where that could take place, and I hope that the Government are minded to tell us about this, is to seek an upward revision and a much enhanced state pension as a right for all. That is an issue that would affect people in a much more radical way if it were the case. I have read many of the newspaper articles about the uprating of the state pension, but this seems to be almost a hand-in-glove issue. If you use the financing that comes from this measure and put it into a pot, you will be doing something to ameliorate the situation.
I am keen to examine the issue raised by my noble friend Lord Boswell about trying to make sure that we do not overly deal badly and unfairly with a particular cohort of people. The issue primarily relates to a singular group of women. This is a one-off group, because there will not normally be a similar group of people who are so badly affected by the one-year to two-year increase in such a rapid space of time. After all, there is an acceleration of something like three months in age and four months in pension age. You could not get much faster than that, unless you went to three months and 29 days, or whatever; you would be talking shades. It is a very fast rate of acceleration for a particular cohort of women, who will disappear when the system has worked its way through. That acceleration will not be apparent.
There must therefore be some measure which the Government can take to either improve the post-retirement abilities of women in this cohort or lengthen the timetable somewhat to accommodate the interests of a particularly badly-done-by group. When two people whose ages differ by as little as three, four or eight months, or whatever, stand shoulder to shoulder within a year, they will find that the differential in the rate of change in their retirement age is magnified. I hope that the Minister will reflect upon the amendments before us and try to see whether measures can be taken to ameliorate the situation of this group of women.
Baroness Hollis of Heigham
My Lords, like everyone else who has spoken, I support the amendment of my noble friend. We all agree—and I am sure that we will come back to this issue, following the point made by the noble Lord, Lord German—that what we also need is a decent state pension: the £140 pension espoused by his honourable friend Steve Webb in the other place, which would be transforming for both men and women in retirement. However, that does not address the issue here, which is about not just equalisation—no one disputes that—but the speeding up of that equalisation, including the very speedy additional year.
First, I suggest that that makes some easy assumptions that are false. Secondly, it has some unintended consequences that have perhaps not been considered. The first easy assumption is that because we are all living longer, we must work longer to support our old age. One understands the stats about the number of workers relative to the number of pensioners and the additional costs in the future of long-term care. However, increased longevity is not actually accompanied by increased years of full and healthy living, whereby one enjoys leisure, holidays and time with grandchildren. All the research shows that those extra years of longevity come with extra infirmity, particularly for those who are worse off. It is very much a class, as well as a gender, issue. Since the Black report, the health inequalities of those in the bottom E and D classes have widened, not narrowed, relatively—not absolutely, as obviously they have improved for us all.
Those extra years come with extra infirmity—fortunately not bed-bound infirmity necessarily requiring residential care but second-order infirmity, including the need for help with, for example, cleaning, transport, aids, appliances and care to allow you to stay in your own home. The implication is that the healthy years of retirement will be squeezed and reduced as retirement age increases, because you will not enjoy extra years of healthy living at the other end as a result of increased longevity. The first thing to address is the fact that we are squeezing the number of years people, particularly poorer people, can hope to expect to enjoy in retirement. The second assumption or myth is that women, as a result, will stay in the labour market longer and until they retire. That retirement age will increase first to 65 and then to 66. I do not know why we think that this will happen because it has not just been connected to the state retirement pension or even to the fact that employers have traditionally got rid of people at the age of 65. It has never been true for men. The majority of men leave the labour market at around 62 or 63 years old. It is even lower in Europe. In other words, half of all men have been on benefit for at least a year, sometimes two years or more, before they draw their state pension. Men compared to women have more secure and better paid employment. Therefore, they have more incentive to stay on until the age of 65. But they cannot and they do not.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, the purpose of the amendments moved by the noble Lord, Lord McKenzie, is to delay any change to the age of 66 until women’s state pension age is increased to 65 on the current schedule. The amendments moved by my noble friend Lord Boswell aim for, if I may use the expression, a third way, by proposing a timetable that increases the state pension age to 66—one year later than the Government propose, but one year earlier than proposed by the noble Lord.
I begin, however, by welcoming the fact that, in each case, the amendments propose to bring forward the increase to 66, in the first case by four years and in the second case by five. This reflects widespread recognition that the current timetable for raising the state pension age to 66, which was approved by this House and in another place less than four years ago, has already been overtaken by events. I will not, therefore, detain proceedings by repeating the case for a faster rise in the state pension age, which I am pleased to note that my noble friend supports. I will just go to the point made by the noble Lord about the coalition agreement, and I say upfront that my honourable friend the Minister for Pensions has said in another place that women’s state pension age does not start rising to 66 until 2020.
I will endeavour to explain why, notwithstanding the impact which we recognise our proposals will have on a small minority of women, we believe that we should not delay until 2020 before we start on the path to 66. We estimate that our proposals will save £30 billion, in constant price terms, in state pensions expenditure, after taking account of all of the increased spending on working-age benefits—a point which the noble Baroness, Lady Hollis, was concerned about. The difference between what we have proposed and what is proposed under the amendment of the noble Lord, Lord McKenzie, is about £10 billion, which is a very significant sum. It is equivalent to one-third of the total savings to the public purse from our proposals. In proposing to forego this £10 billion, the noble Lord is perhaps losing sight of what such a sum represents. To help put this in context, in order to save even half of that today, which is broadly the annual savings from raising the state pension age by a year, we would, for example, have to cut the education budget by 10 per cent over the spending review savings. The estimated benefits from additional tax and national insurance receipts would also be cut by nearly a third, from £8.1 billion to £5.6 billion. The alternative proposition put forward by my noble friend would also significantly reduce the savings from our proposals, in this case by more than £7 billion.
The question is: who picks up the tab if we delay until 2022 or 2021? I suggest that the answer is: our children and our grandchildren. The point has been made that our proposals will make no contribution to reducing the budget deficit in this Parliament. This line of argument implies that, once the immediate fiscal crisis is out of the way, we can afford to relax. Although we expect public debt to be on a declining path by 2015-16, it will still be well above the pre-crisis levels. The OBR forecasts that public debt will be 67 per cent of GDP in that year, compared to less than 40 per cent five years ago. We need to do all that we can to keep debt down, and hold it down over the medium term, to ensure that we have the capacity to respond to future fiscal shocks. The cost of increasing longevity will not, unfortunately, stop increasing in 2015.
I turn to the impact on women, which is at the core of these amendments. The argument is that the adjustment we propose is unfair to women in their late 50s. I do not dispute the fact that a gender gap still exists in pension provision—a point made by several noble Lords. However, the proposals of the noble Lord, Lord McKenzie, do not suggest that we should delay increasing the state pension age to 66 until the gap is closed. Nor do I dispute that, because of our proposals, some women will need to work for longer than they may have otherwise planned to. I am prepared to say that I do not think that that is a bad thing. We need people to work longer because they are living longer. We need them to contribute more and, by working longer, they can save more for their retirement. Working longer has not just financial benefits for the individual; people of working age are generally healthier when they are employed than when they are not. Some of these women will indeed increase their pension saving as a result. Only a small proportion, some 4 per cent, of women currently aged between 55 and 57 say they are already retired; while around 70 per cent are still in employment.
Let me deal with two of the issues raised by noble Lords. On the point raised by the noble Baroness, Lady Hollis, on the cliff edge for men as well, I do not see a cliff edge in our proposals. The whole point is that there is a gradual increase. Anyone, man or woman, who is on pension credit, must already be above women’s state pension age, and by definition they will not lose out or have to move off pension credit as the state pension age increases.
Baroness Hollis of Heigham
That means that a man who is currently on pension credit, who qualifies for it shortly after his 60th birthday, will hold on to that for the next five years, while women’s pension age increases. Therefore, a woman of a similar age could have half his income.
Lord Freud
The point is that once you are on the system there is a gradual move up, so you do not bounce on and off it. You are on that system. Clearly, we are looking at two systems—a pensions system and a working-age support system. Nothing changes while we have that gradual increase for the individuals concerned. People will join the system at different points, depending on their age. Fundamentally, there is no difference between the Government’s position on either of the amendments.
Let me deal with the point raised by the noble Lord, Lord McKenzie, on buying back class 3 voluntary national insurance contributions. There has been a lot of debate about this matter during proceedings on various Bills, as he will be more aware than me. I believe that it took two Bills to allow people, mainly women, to buy additional years, going back to 1975. However, the noble Lord will also recall that this particular easement applied only to people who reached state pension age before 2015. People must weigh up their options when deciding to buy additional national insurance contributions, and we do not have any plans at this moment to provide refunds.
Let me turn to the facts about women’s life expectancy. Women will on average still draw their state pension for longer than men after the pension ages are equal—a fact that was rather put to one side during our debate before the Recess. It is important to record that, at the time that the decisions were made about when to raise the pension age to 66, a woman born in 1954 would be expecting to draw her state pension at 64 for an average of 24 years. Thanks to increasing life expectancy she will still on average draw her state pension for 24 years, even with the rise to 66 proposed in the Bill.
Baroness Hollis of Heigham
I should like to push the noble Lord again about the timescale. I think that there has been unanimity, pretty much, that the state pension age for women and men should be equalised. The debate has been about the increased speed of it and, therefore, the degree to which women can reasonably have been expected to make provision for it, and to take into account whether they are in waged or unwaged work. As we know, many women will be in heavy but unwaged work at that point in their lives.
Is the noble Lord aware of a similar instance some time back? In the 1982 social security legislation—I am not sure whether it was introduced by the noble Lord, Lord Fowler, but it might have been—the Government proposed, with some intellectual justification, to remove the right of widows to claim 100 per cent of SERPs entitlement, rather than the conventional 50 per cent as per the status of a widow. That was due to come into effect 20 years on, in 2002. The Government were going to give 20 years’ notice, except that they did not. They forgot about it entirely. Suddenly, in about 1997 or 1998, that issue landed four square on my desk. It was clear that women did not have sufficient notice and that three or even five years’ notice, as it would have been in 1997 for 2002, was regarded by the noble Lord’s party as unacceptable, even though it had been an omission of publicity.
We all agreed that five years’ notice of something which would happen only to a group who could not foresee their future, because it was about widowhood, and that they would inherit only 50 per cent rather than 100 per cent of SERPs as a result, was far too truncated and should be extended. Therefore, we brought back to your Lordships’ House, with all-party agreement, provision that that change should start from 2010 and that for each two years a 10 per cent SERPs reduction should take place. So, if you became a widow in 2012, you would get 90 per cent; in 2014, I think I am right in saying, you would get 80 per cent; and so on. Finally, you would get to 50 per cent by 2020.
In other words, we gave a further 15 years’ notice over and beyond what the Government of the day had originally intended because they had failed to publicise it. We were told that this was unfair and unreasonable, and might even be subject to judicial review, because people were not aware of what was going to happen. Five years’ notice at the point at which we could have escalated the publicity would not have been deemed to have been enough. Will the noble Lord care to comment on this story?
Lord Freud
My Lords, I thank the noble Baroness, Lady Hollis, for that. I have to confess that I was not aware of those events in 1982. I was aware of some events—I think that I was writing a Lex column in 1982 so I was not completely out of the picture. The noble Baroness makes the point that there were five years of notice. Clearly, the smallest amount of notice that we have in this instance is 6.5 years for those who are affected at the tightest level. We believe that that period, which admittedly is shorter than other periods that we have seen, will still allow women to plan for their retirement.
Lord Boswell of Aynho
I wish briefly to comment on the amendment of the noble Baroness, Lady Turner. She is on to a substantive issue of concern: that there are clear occupational differences which, in a sense, mirror some of the concerns that many of us across the parties would have in relation to differential health outcomes between people with different occupations. In a sense, that supports some of the points that have been made about relative gender disadvantage. We understand why the Bill is conceived as it is, but those are issues that are entirely proper to raise in Committee.
I am not enthused by the text of the amendment, not least because I am not a Treasury official, and I notice that it provides a power to revise but does not explicitly state that there should be a power to revise downwards. Knowing one or two Treasury officials, they might have a go at the opposite. More seriously, there are concerns about whether we should differentiate the pensions and benefits system by different occupational groups, in the way that some of our continental neighbours have done. I may be old fashioned, but I would be reluctant to do that. Whether we could define the categories in any coherent way that did not give rise to further anomalies or whether this is the right approach, I am sure there is a problem which the noble Baroness is right to draw to the Committee’s attention. For example, I am sure that there are lots of issues in the construction industry or agriculture, which I know well, whereby we can try to mitigate and improve occupational health. We should do that, but I am not sure that a vehicle that is about the state pension age is the appropriate one to do it.
Baroness Hollis of Heigham
If I may, I want to use the amendment to raise an issue that has been touched on before but which needs to be re-emphasised, although I am sure that noble Lords are well aware of it. That is the differing work patterns, whether waged or unwaged, of women and of men through their working-aged lives.
We all recognise as appropriate that women, even those with children once the children are old enough, should be encouraged to enter the labour market. I have no problems with that at all; I think that it brings independence, increased income, sociability and all sorts of other life chances. Also, it encourages other members of the family to realise that work is indeed an option and appropriate for them in years to come. I have no problem with that, but that is the position of only about 60 to 70 per cent of women. When we talk about them being in work, we are including part-time work as well as full-time work. The number of women in full-time work is relatively very low—mostly among lone parents rather than married women, because married women tend to work fewer hours although more of them do some part-time work.
A group has been hinted at who are doing some of the most heavy-ended work of the lot without anything other than a most trivial benefit income attached to it. That is what I call heavy-end caring. I attach this to my noble friend's amendment. I do not have an easy answer for what should be done about it, except to say that I would like to see an age-related premium attached. Taking a woman who is perhaps in her early 60s at the moment, she is likely, if she is a carer—and several million of them will be—to be caring for someone in their upper 80s. We know that one person in three over the age of 85 is likely to suffer from dementia, which will become increasingly severe although their physical health may remain. We also know that another one of those three aged over 85 is likely to be experiencing severe physical health problems, although their longevity may expand. So she—and it will almost always be a she—will be involved in that heavy-end caring.
I am delighted that the previous Government have allowed for those doing what I call lighter-end caring of 20 hours a week to come into the NI system without payment—although, probably rightly, without paying a carer's allowance. Think about those women who currently receive a carer's allowance of about £57 a week, together with the right to earn up to £100 if they can manage it. The effect of what I call heavy-end caring—by that I am talking about 50 or 60 hours a week—is that, first, it almost certainly breaks the health of the carer. All the experience of caring is that the help of the carer suffers seriously.
Secondly, the carer’s savings run down. She is usually caring for another family member, probably her parents or possibly the parents of her husband. In order to make their life tolerable, she is using her money. What savings she may have will help to keep them afloat as well as herself. Thirdly, she will suffer, as a result of heavy-end caring, increasing isolation, so that when she comes to need care in turn there will be few people able or willing to care for her.
Finally, as a result of all that, given her caring record, she has become in the eyes of an employer someone who is tired, has been out of the waged labour market for perhaps 15 years, has poor physical health and has perhaps suffered, as a result of bereavement, from depression. She is then expected to go into the labour market, but she is effectively unemployable. Even if she were willing, able, fit, healthy and financially buoyant to re-enter the world of work, it will be very difficult for her to do so.
The women who are being asked to stay in the labour market between 60 and 65 are precisely that group who are doing what I call heavy-end caring. It is caring that gets heavier as they get older, because the person cared for is getting older and is more likely to have Alzheimer's and severe problems of longevity. I do not have an easy answer, except to say that if we cannot—as we obviously should not—keep women's pension age at 60, I would like some age-related premium or some version of what my noble friend mentioned: some recognition of carers’ responsibilities.
We are too easily assuming that women are in the waged labour market and will stay there for up to an extra six years. That is true for men; it is not true and never will be true for women who expect and embrace with grace the heavy-end job of caring which, as I said, will make them poorer, possibly break their health, may leave them isolated and almost invariably unable to re-enter the world of work at 63 or 64, when the person for whom they have cared has finally died.
I hope that, between now and Report, my noble friend can in conjunction with us think of ways to address that, because I think that those women will find themselves in a very bad situation.
Lord Freud
I thank the noble Baroness, Lady Turner, for tabling this amendment and for giving us the opportunity to debate a key concern about increasing the state pension age and longevity. I use the soft “g”, whereas I notice that the noble Lord uses the hard “g”. We probably differ on other things as well. The noble Baroness raised the question of what older people want and whether they want to work longer. Research has found that people want to return to work, whether for financial, personal or practical reasons, and will find ways to do so if they are motivated, have recent work experience and if illhealth does not act as a barrier.
In essence, the amendment is about whether it is fair for the state pension age to be the same for everyone irrespective of their circumstances or whether we should have a variable state pension age for certain groups. To echo what my noble friend Lord Flight said, one of our aims—which is in common with previous Governments—is to simplify an extremely complicated pensions system. The Bill contains various measures to simplify, from the abolition of the fiendishly complicated and fascinating PUCODIs, to which we will come shortly, the flexibility to consolidate additional pension—
Lord Freud
There are only two experts in the room on PUCODIs.
On the serious point, simplicity is really important in this system. Clearly, we have tipped over the edge in complexity in the pensions system, as we have in the welfare system. Our state pension system has always been based on a common state pension age—albeit differentiated by gender, at least for the time being. Each exception that we add would increase the complexity. Including health conditions, occupations—and even, as has been suggested, where someone lives if we add that into the mix—would rapidly pile confusion on confusion. Introducing different state pension ages at a time when we are working to simplify benefits and pensions would make the system very complex and difficult to administer, and would take us further away from our objective.
The amendment raises questions about parity of treatment between those who could get their state pension from an earlier date and those who could not. Of course, the kind of illness or infirmity envisaged would need to be defined, as would the types of employment that it suggests be covered. There are, of course, some countries where people are allowed to retire earlier than the standard state pension age from occupations which may be classed as particularly arduous or dangerous employment, but who is to say what is arduous or dangerous? The other point we must note here is that in many of those cases, retiring early results in a person’s state pension being reduced, as might be expected for any pension scheme. Through her amendment, the noble Baroness, Lady Turner, shares our view that having poorer pensioners is not a desirable outcome, but to allow early retirement without reducing benefits could be very expensive.
Noble Lords will share the great sympathy that we all have for people who are in ill health, whether they have the misfortune to become seriously ill or are infirm. We also have sympathy and respect for the carers referred to by the noble Baroness, Lady Hollis— particularly for what she calls the heavy-end carers. I do not have an answer to that, certainly not today, but I will reflect on her comments. As Michael Marmot has shown, there are long-term differences in disability-free life expectancy between socioeconomic groups, and they need to be addressed. Noble Lords will be aware, however, that there have been improvements in both life expectancy and healthy life expectancy across all sectors of our society.
Baroness Hollis of Heigham
Given that the Minister referred to last year’s Marmot report on health, can he confirm that it found a 17-year difference in healthy life expectancy between the richest and the poorest?
Lord Freud
I regret that I do not have that figure to hand, but I can provide it later. I am sure that the noble Baroness has it to hand and that that is the point of her question, but I will confirm the exact figure.
The other point is on life expectancy across the regions. There are differentials, but it is important that life expectancy has risen in all regions and looks set to continue to do so. In England, in the 29 years from 1981 to 2010, it increased from 79 to 86 for men and from 83 to 89 for women. In Scotland, it increased from 78 to 85 for men and from 81 to 87 for women; and in Wales, it increased from 79 to 86 for men—the same as in England—and from 82 to 88 for women. There are differentials, but they are all moving in the same direction at roughly the same pace.
Likewise in terms of occupations, male manual workers have seen an increase of almost two years in their life expectancy at 65 between 1992-96 and 2002-05. Women manual workers have seen a one-year increase in the same period. Reverting to the point that we discussed under the previous group of amendments, there is no doubt that on average we are living longer and healthier lives than in the past. I shall not go through the figures that we discussed then.
When we come to what kind of support we can offer to people as they get toward the end of their working lives, I need to emphasise that we have developed a support network in this country, and we are going to transform it. Many people in this Room will be part of the consideration of the new universal credit. There clearly is support for people of working age with health problems.
With the universal credit, we have the opportunity to sweep away the patchwork of benefits and credits and to bring in a much more coherent and simpler system. That system can take the weight of the concerns of the noble Baroness. That is a better place to address the concerns underlying her amendment. For that reason, I do not accept that varying pension ages is the right way to support people who have ill health towards the end of their working lives, and I therefore urge the noble Baroness to withdraw her amendment.
Lord Freud
I thank the noble Lord, Lord McKenzie, for tabling this amendment and the noble Baroness, Lady Drake, for introducing it. It allows us to consider the role that pension credit plays in providing income-related support for those over a certain age. These amendments seek to keep the pension credit qualifying age at the existing timetable for women’s state pension age by proposing a new and separate age schedule that would apply to pension credit between March 2011 and March 2020. The effect of these amendments would be to break the link between pension credit qualifying age and women’s state pension age.
Lord Freud
Yes, but it is being pulled together for men. That is the point of the 1995 proposition and, now, the acceleration.
The effect of these amendments would be to break the link, as I said. As the schedule proposed by the amendment would effectively follow the existing timetable, it would therefore see a divergence from the increase to women’s state pension age from 2016 as proposed by the Bill. The amendment also seeks to ensure that the pension credit qualifying age cannot be set higher than state pension age in the future.
As life expectancy is increasing for people at all income levels, it is right that we raise the starting point for pension credit in line with changes to women’s state pension age and, beyond that, state pension age. A key part of the Welfare Reform Bill that is currently going through Parliament and of the introduction of universal credit is to ensure that people of working age have the opportunity to do just that—work whenever possible. To ensure that we provide the appropriate work focus and work-related support for all those of working age, we will be setting the upper age limit for universal credit at pension credit qualifying age. Setting the pension credit qualifying age at an artificial point below women’s state pension age will therefore undermine this fundamental aspect of welfare reform.
The amendment also suggests that the means-tested help available through universal credit will not be adequate for those approaching state pension age, and this is not the case. Universal credit is intended to provide appropriate levels of support, including for those who, for whatever reason, are unable to work or have limited capacity for work. Universal credit will also provide for a more generous treatment of earnings, and it is not right to withdraw this support for people who wish to continue working.
To pick up the points made by the noble Baroness, Lady Drake, when she referred to the impact assessment, I should make clear that the stylised cases in the impact assessment are designed to show the maximum possible loss. Most of those affected will not experience such losses. The noble Baroness addressed the issue around minorities and disabled people. I accept that there will be differences, but we are determined, and we have various programmes now to do this, to tackle the labour market disadvantage that those groups have.
Given the proposed upper age limit for universal credit, the amendment is not particularly well targeted. The extent to which people may see any benefit will depend on their own circumstances and on those of their partner. I should also point out that as this change would require a concurrent but different rise in state pension age and the pension credit qualifying age, it would add complexity to the system which, as we discussed on the previous amendment, goes the opposite way from our intentions. It has the potential to create a very confusing message to give customers about qualifying ages and what benefits are available to them.
Pension credit is primarily a safety net benefit for those over state pension age. It has been set at women’s state pension age to avoid discrimination until men and women’s state pension age are equalised. There has never been an intention to raise the qualifying age above state pension age. It is clear that this amendment is intended to help those people who might be described as “vulnerable”—people who might be in ill health or who have been in manual jobs and are unable to continue working as state pension age increases.
I hope that the Committee will forgive me if I take the opportunity to answer the question raised by the noble Baroness, Lady Hollis, regarding the Marmot review. I have now been able to put my hands on those figures. She dropped a nought in the differences in life expectancy where the highest life expectancy, in Kensington and Chelsea, was not 17 years but 10.7 years above the worst, which was Blackpool, for men—
Baroness Hollis of Heigham
Perhaps the noble Lord will allow me to quote from the Strategic Review of Health Inequalities in England post-2010—the Marmot report, which states:
“In England, people living in the poorest neighbourhoods, will, on average, die seven years earlier than people living in the richest neighbourhoods”.
The report then refers to the graph in Figure 1, and continues:
“Even more disturbing, the average difference in disability-free life expectancy is 17 years … So, people in poorer areas not only die sooner, but they will also spend more of their shorter lives with a disability”.
The report goes on to state that even excluding the top 5 per cent and the bottom 5 per cent, the difference in years of disability-free life expectancy is 13 years.
Lord Freud
I thank the noble Baroness for saving my team from having to write a letter, given that she has isolated the issue. We are playing with different numbers—10.7, 17 and 7. I think that we have sorted out what each means. However, the point remains that for all groups there is a movement in the right direction towards longer lives and for longer healthy lives for all groups—albeit that there is a difference within groups.
Baroness Hollis of Heigham
Except that the point established by my noble friend Lady Drake and others is that the cuts, if you like, in spending on pensions and pension credit are falling heaviest on the poorest women who will have the least disability-free life expectancy along with their male counterparts.
Lord Boswell of Aynho
My Lords, I endorse the amendment and the thinking of my noble friend Lord German. As we begin to move towards the end of the deliberations on Clause 1, he has capped an interesting piece of architecture that has developed during the afternoon. The first pillar was set jointly, and possibly independently of each other, by the noble Lord, Lord McKenzie, and me. We are clearly the Stakhanovites of this game and we have set out to proceed by formula and on principle in redesigning the architecture of the table for the withdrawal of benefit or the increase in the state retirement pension. That is clearly one approach, which also has the consequence that my noble friend Lord Freud has already pointed out to the Committee, of substantial expense.
It will be interesting to see how further consideration of the Bill unfolds, not only this afternoon, but one way to mitigate that might be some conjunction of large figures in terms of income, some other benefits being reshaped or males being asked to pay earlier, if that were possible, to try to balance those large aggregates. I understand that that is at least one approach.
Then, if I may put it this way, there was the approach of the noble Baroness, Lady Turner, of looking at pension credit, because it is the keystone in the middle. That is also using a piece of architecture which is already in being. Because it is income-related, or means-tested, if you want to put it the other way round, that is a way to deal with it for a lot of people who, as we have all acknowledged in this Committee, are most seriously affected. We now come to the other side of the pillar in the suggestion of my noble friend Lord German of what might be termed a targeted scheme which, as he said, might cost three and seven pence, or thereabouts, if that is all that the Treasury could provide, but would be designed to look at the specific problem for an age group that we have all identified as being particularly heavily affected, although that is mitigable in certain cases to see what could be done.
It may be that, on reflection, that is the most sensible approach for the Minister. Certainly, his most sensible short-term strategy would be to say that we will reflect on these things, that there are problems and that we need to think further about how best we might deal with them. If I implied, in having bound myself and the Opposition spokesperson together as Stakhanovites, that my noble friend Lord German was in any way a slacker, the way that he set out the different options was appealing and, I thought, covered most of the field.
I throw one specific point into the pot for the Minister's consideration. I do so tentatively, not least because it breaks some of my precepts about differential arrangements, but I have always felt strongly that one of the impacts that is underdescribed and underconsidered in relation to state retirement, almost irrespective of age, is the substantial hurt that it represents not merely in the receipt of a benefit that is taxable, but in relation to the withdrawal of an obligation to pay an employee national insurance contribution, because that can have a substantial effect.
I remember looking at my payslip and saying that the withdrawal of the NIC is worth nearly as much to me as is my state retirement pension. In my case, that is on a 40 per cent rate of tax, but it is underdescribed as a factor. I leave this for the Minister's consideration in due course, but it might be that one way of doing that would be to say, not least because we are interested in maintaining employment wherever possible, given that this is a particularly hard-hit group of individuals that is relatively easily definable and quite small, that we might be prepared to waive the NIC contribution for the employee while they continue in employment until they reach the state retirement age, as if they had already retired.
I put that only as a consideration, but the Committee is wrestling with some dilemmas. We know where the problem lies, in a relatively small group. Other groups are affected—I am not trying to say that they are not—but we know that there is a particular problem for a small number of people. One can either adopt a large architectural solution that redesigns the system and may claw back all or part of the cost of doing so, or one can adopt a much more targeted scheme directed towards their particular problems along one or other of the lines that my noble friend so helpfully suggested.
Baroness Hollis of Heigham
My Lords, I support the thrust of the amendments in much the same way as has the noble Lord, Lord Boswell. Whether this is the right way forward I do not know, but we have all identified that there is a problem. There will be a group, particularly of women—although there may be some men who currently would come under pension credit—who are among the poorest, because they are eligible for pension credit, and who have very reduced employment prospects and very poor life expectancy. That goes together. They are poor, their health is not good and they would normally have been eligible for pension credit.
“Right to apply for amalgamation of earnings from multiple sources of employment for Basic State Pension accrual
A jobholder who in any week in a tax year—(a) is employed in more than one employment,(b) whose earnings do not exceed the lower earnings limit in any individual employment or self-employment in that week, and(c) whose earnings in aggregate reach or exceed the lower earnings limit in any week,shall be deemed to have earnings equivalent to or exceeding the lower earnings limit for the purposes of accruing entitlement to the Basic State Pension in that week.”
Baroness Hollis of Heigham
My Lords, I hope the wording of this amendment is reasonably clear and self-explanatory, although I am absolutely sure that it is technically deficient, but I do not think that matters for the purposes of Committee stage. I think we all agree that it is essential to bring as many men and women as possible into the state pension system. That has been aided by past changes, which we mentioned earlier—for example, the Labour Government’s changes, which were carried with all-party support. The number of qualifying national insurance contribution years was reduced to 30 from 39 for women and 44 for men. Other groups, including carers not doing heavy-end caring but caring for 20 hours or more, were brought in. We allowed the amalgamation of hours of caring to bring people, including grandparents, within the basic state pension system. In all ways, we have sought to bring more people within the basic state pension system.
However, there is leftover business, which this amendment seeks to address. I am very grateful to the Minister, who has taken a very constructive attitude towards this issue, and I am hoping that he may have found a way through for us which has been unavailable to us in the past. As a result of all the changes to the national insurance system, we expect that about 90 per cent of men and about 90 per cent of women will have full coverage of the basic state pension certainly by 2020 and maybe earlier than that. However, there is still a key group of people, among other small groups, who remain outside the basic state pension through no fault of their own, who are in the waged labour market, especially women with a portfolio of mini-jobs. Individually the jobs may be six hours or eight hours and the women may hold three or four such jobs together, but at present you are not allowed—and we do not have the technology—to add those hours and those wages together to bring somebody into the NI system. Oddly enough, if you are a lone parent and are entitled to tax credits at 16 hours, you are allowed to add those hours together for tax credit purposes but not for NI purposes, except that the tax credit itself would then give you a right into the national insurance system. So there was a rather complicated loop through for some women in the past, but we were not able to do it directly.
The stats are flaky, and we raised this issue at Second Reading. My latest information—which may have been superseded by the Minister’s information—is that there are some 50,000 people, mostly women, with more than one part-time job. For upwards of 15,000 women, the summation of those jobs might take them into the national insurance system and therefore into the state pension if they were able to add those jobs together. At Second Reading, the Minister helpfully reminded us that some 250,000 women might be coming into the mini-job scenario in the future under universal credit who might find themselves in a similar situation. The problem is likely to increase rather than decrease.
Why do we need this change? I suggest three reasons. First, it seems to me entirely fair that women—and they are nearly all women—should qualify for the full state pension by the fact that they are in the labour market, whether waged or unwaged, especially given their precarious financial situation. It seems unreasonable, if you are working 16, 18 or 20 hours, however that is split up, that you should be denied access, which you have earned, to the national insurance system and therefore, above all, to the state pension system, particularly given women’s precarious financial situation which remains, even though we have made it much easier for women, along with men, to enter the NIC system.
Secondly, particularly in rural areas, it is quite difficult for women to find a full-time job of over 16 hours a week if they wish to do so. I come from Norfolk, and the women I know in the more rural areas of the county mix and match according to season. For example, their jobs may include picking mushrooms, cleaning boats, caravans or private houses, being a lollipop lady, making sandwiches during the summer season or doing bar work. It is a mix-and-match situation. Even if women wish to build a mini-job into a job of over 16 hours a week in a clean, simple way, they are not available to very many women, particularly in rural areas, where decent jobs are in very short supply. All they can do is add another mini-job to their existing mini-job, and their portfolio may eventually take them over the 16 hours.
Those mini-jobs are extremely valuable to employers in giving them a resource of very flexible labour. It may be a couple of evenings of bar work when there is the most customer demand, it may be part-time work at a newsagent’s or launderette when there is the most demand, or it may be work in a shop or a supermarket where there is the most demand. To my knowledge, a number of employers keep an employee’s hours under 16 hours in order to avoid paying the NICs that would become due when she goes over. Receptionists have told me time and again that their hours are capped quite deliberately by their employer.
Perhaps I may reiterate. The first reason is that, if you work the hours, it is only fair you should be able to come into the national insurance system; the second is that, for many women, a mix of mini-jobs may be the only way that they are going to be able to put together an adequate or appropriate income for themselves, and it is a useful form of flexibility for the employer.
Lord Freud
My Lords, I am very grateful to the noble Baroness, Lady Hollis, for raising this matter. Clearly this debate has been conducted before, although I was not present, but there is a potentially a new context for it. The fundamental issue of the aggregation of low earnings from multiple part-time jobs and how they could be made to qualify for basic state pension has been a matter of concern to her for some time. It was considered by the Pensions Commission and during the passage of the Pensions Act 2007.
Like her, I am keen to encourage mini-jobs, which I think are not just good in themselves for people in supplementing income, but are an invaluable stepping stone which we have made difficult for people to use in the current welfare system. A system that encourages that process and takes it out of the informal or grey economy and into the proper economy, will be immensely valuable for many people. What I am going to say at this stage and in this debate will be rather correct, in the sense that, in the present situation and in the context of our present systems, it is not be possible to go ahead with something like this. Until we have a new system defined, laid out, and understand its technology, we will not be able to look seriously at what we can do here, and it is an immensely complicated issue in practice. The structure of this answer may be negative as I go through it.
Lord Freud
Thank you, cautious is a much better word. It will be somewhat cautious, but I will make a commitment at the end of it, based on what might be achievable later.
I start saying that many of the changes that have been made have already reduced the problem, and I know that the noble Baroness would have been involved in making those changes. I am thinking in particular of the reduction to a 30-year contribution making up a pension. The estimate now is that in only a few years’ time 90 per cent of women and men—both genders for different reasons—reaching state pension age will be entitled to the full basic state pension.
Baroness Hollis of Heigham
My Lords, that was probably superfluous to requirements, but I thank all noble Lords who have taken part in this short but interesting debate. The issues were fully aired and it suggested to the Minister that there is an understanding of the issue and the concerns and difficulties—I admit that there are difficulties—attached to it, as well as the need as far as humanly and technologically possible to address them. I am very grateful to everyone who took part.
I am intrigued that the figures have gone from 50,000 before the Recess to 65,000 after it, which shows how quickly the problem is growing, but I am grateful for the later information. I recognise that many of the women who could otherwise be covered by a proposal like this, were it to be implemented, are already partly covered by other arrangements that have occurred over the past 10 years or so. I remind the noble Lord that one of the changes that I accepted—I was in no position not to—was that we reduced what used to be called HRP to when the youngest child was 12. At 12, it stopped. In the past, it had been 16.
One of the things we have not, perhaps, brought into this debate—I was trying to get my head around it and I cannot usefully put any stats to it so I did not run it earlier—is that many women with a youngest child of 12 to 16 and so on have to manage work with continued responsibilities to their children which in the past HRP would have stopped. There is also the question of elder care. Many women who want to do part-time jobs will do unsocial hours because their partner will be keeping an eye on their children, who they do not wish to leave at home, who it would possibly be illegal to leave at home, but who are none the less not at school. Those unsocial hour jobs tend to be short jobs or mini-jobs. They are an evening in the bar, in the cinema as an usherette or very early or very late hours cleaning. I am surprised that we have not had legal challenges of the Government’s assumption that lone parents of children not just of five but even of 12 onwards are not liable for their care and attention. It suggests to me that this group will find mini-jobs one way out of the dilemma that we have given them, as well as all the rather better things that have happened with reducing the number of years you need to come into the NI system. There is a potential area there that we have not yet been able to track very far that may grow, particularly if there are JR problems associated with leaving children of 12, 13 or 14 unattended at home. We have already had babysitting issues in the court. Mothers have been strongly criticised by the judicial system for leaving their children at home at that age. If we can go further along this line in being able to find small slices of jobs that better fit around the need for childcare where HRP no longer applies, it would be valuable.
I accept the Minister’s assurance about universal credit and understand that it is not technically possible for employers or the department without the technology underpin that universal credit will provide. If universal credit is to work, virtually all the information the Minister will need to be able to make this call will be in the hands of the department, whether under a revised NIRS2 system or whatever, I do not know. I would like to see such women come within the BSP pension because they have earned a way to do so. As the noble Lord said, it is not just out of fairness to them, because they have the earnings; it is a way of producing a stepping stone—a ladder if you like—into further opportunities. The longer women stay away from the labour market, the harder it is for them to re-enter. The more we can make it easy, attractive, available and accessible to them, the more they will come in. They want to do it, but they want to make it commensurate with their family responsibilities and childcare. I think this is one way to do it, and I am trusting, as I am sure I can, to the Minister’s commitment to the values of this and his determination to make the technology work. I beg leave to withdraw the amendment.
Pensions Bill [HL]
Baroness Hollis of Heigham Excerpts(13 years, 3 months ago)
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Baroness Hollis of Heigham
My Lords, I thank the noble Lord, Lord Freud, for his clear introduction of this Bill and congratulate my noble friend Lady Drake on a very impressive first performance on the opposition Front Bench. I hope, of course, that she will not be on the opposition Front Bench for very long.
There are two issues for me in this Bill. The first, which has been mentioned by other noble Lords, is women’s retirement age. Like others, I have no problem with the equalisation of women’s retirement age, but I have a problem with its speed, which is unacceptable. After the Government made the same sort of mess when changing the SERPS widows pension many years ago, we had to add an extra eight years before implementation to allow women the opportunity to rearrange their financial affairs.
We have been here before and we should learn from that. As the noble Baroness, Lady Greengross, said, raising the retirement age will require some women to stay two years longer in the labour market—although very few will actually do so because of health, caring responsibilities and so on—or linger on lower benefits and go into retirement in even greater poverty.
The second issue is NEST, which needs to be made more women-friendly, but I fear that most of the changes in this Bill will make it less women-friendly. I will put three big questions, two smaller questions and a thought to the noble Lord, Lord Freud. The first issue was raised by my noble friend Lady Drake. The Government seek to raise the point at which women enter NEST under auto-enrolment so that they will enter not at the lower earnings limit of £5,204 at which you get credited into the NI system—as was originally proposed—nor even at the earnings threshold, where bizarrely you pay NI but do not pay tax, but instead at £7,475, which is the personal tax threshold. Women earning above the LEL but below about £7,500 will, however, be able to opt in voluntarily.
The Government’s proposals to raise the tax threshold ultimately to £10,000 will have serious implications for the constituency of NEST. Given the proposed threshold of about £7,500 before automatic enrolment, 1 million people—mostly women—who have incomes below £7,500 but at the LEL, will be excluded. If the tax threshold is raised to £10,000, which is around half of women’s average earnings, some 2 million people—three-quarters of them women—will not be automatically enrolled.
The whole point of NEST and auto-enrolment was to nudge into a pension scheme precisely those low-paid and part-time workers who would otherwise not join—that is why we have it. Raising the entry threshold ultimately to £10,000, which is half of average earnings for women, will mean that those most in need will in effect be excluded from NEST. A woman on half of average earnings will have no NEST pension at all, and a woman on average earnings will have only half her earnings covered by NEST. Under Labour, she would have ended up with a pot of £20,000; with a pension threshold of £10,000, a woman on half of average earnings will have no pension at all. The Government intend to allow such women to auto-enrol voluntarily if their earnings are between the LEL—about £5,200—and the current £7,500 threshold, which will ultimately be raised to £10,000. However, NEST exists precisely because voluntary self-enrolment has not worked for most low-paid women. Such women feel that they cannot afford a pension, so they think it selfish to save or they cannot access their money.
In any case, the Government must do more than merely allow those with incomes above the LEL to opt in; the Government must allow all women who earn above the LEL not only to come into NEST at that point but, if they so choose, to contribute on their entire income from the first pound, as in all other occupational pensions. Only NEST excludes potentially half or two-thirds of the income of the poorest women from a pension contribution. I argue that if a woman chooses to contribute, employers must also do so. A woman on half of average earnings could then potentially have a pot of £40,000 after 25 years; under the Government’s proposed scheme, she would have a pot of zero.
If the Government do not move, NEST will not do what it says on the tin, which is to bring the poorest women, by virtue of nudging them, into auto-enrolment.
The second big issue around NEST is the risk—a word that we have not heard today—associated with auto-enrolment. We know that a few women should not enrol, especially if they are likely to be on housing benefit and, possibly, on pension credit. The difficulty with pension credit is that, when people are 30 or 50, it is completely unpredictable as to whether they will need pension credit in retirement. If you are partnered in retirement, your partner’s income will almost certainly float you off the pension credit threshold; if you are single, divorced, widowed or a cohabitee with no financial interdependence, you will probably lose 40 per cent of your savings to pension credit. That risk is entirely unpredictable for any individual—no one can foresee what their private lives will look like five years down the line, let alone 20 or 30 years on—yet, on such an issue, the household income of many women will depend almost entirely on whether, in retrospect, they made the right decision to enter NEST.
So what to do? I firmly believe that, in any nudge activity of the Government, the Government have a moral responsibility to build risk out of the situation so that what the Government want for all of us is in the best interests of each of us. How? It is really very simple. We need a new state pension, promoted by the Minister’s right honourable friend Steve Webb, at or above pension credit level—the £140 a week proposed by the Pensions Minister—by bringing together the basic state pension, the state second pension and pension credit. With early flat-rating and capping of S2P, that could be introduced by 2020 within the same financial envelope. That is absolutely key because, without it, we have “Hamlet” without the prince.
Such a pension, based on 30 years of NI contributions, would ensure that almost all women would carry their own full state pension, which, if they are in a partnership, would give them together a family income of £14,000 a year before occupational pensions. That would be a real attack on pensioner poverty, especially that of women. More than that—and relevant to this Bill especially —such a pension would encourage women to save, because it would build out the risk that the value of a woman’s savings would be depleted by pension credit, depending on whether she was single or partnered. It would become safe to save. Industry, the financial institutions, the NAPF, women’s organisations, patients’ organisations and the trade unions have all called for it. I repeat that it could be done within current costings.
So where have the proposals got to? We were promised a Green Paper at Christmas, which we have not had. Minister, when can we expect that? I support strongly the work by the noble Lord, Lord Freud, on universal credit for people of working age, but a new state pension is the major equivalent reform for people as they face retirement. I failed to persuade my Government of both of these; if the Minister can achieve both, I shall be cheering him on.
The third major question about NEST is: where has the Government’s consultation paper on early access to pensions got to? Poorer women cannot afford rainy-day savings, such as ISAs, alongside pensions. As a result, they usually have neither. If we could develop a joint product such as a lifetime savings account—which was first a Conservative thought—poorer women could have the same advantages as those who are more comfortably off in smoothing, with an accessible slice of their pensions, the possible financial traumas of their working life, from divorce to disability to debt incurred by unemployment. Incidentally, that would be much cheaper than having to borrow from someone else.
In my view, that would mean earlier access to the tax-free lump sum of 25 per cent, which until last year was accessible at the age of 50 but is now accessible at 55, and which can be drawn independently of drawing the pension itself. Why is it okay for people to spend that lump sum on a conservatory when they are 55 but not okay for them to use it to protect their home from repossession at 45? As I have said, all the research shows that the main reason for women not contributing to a pension is that they think it selfish, but the second reason is that they cannot afford to tuck away that money for 40 years, given that the working lives of women are financially much more precarious than those of men. Therefore, we should make it easy and attractive for them so that, for every pound that goes into an occupational pension—including NEST—75p is ring-fenced for their pension and 25p for a savings slice. They may never need to draw on that, but the fact that they could would encourage them to join NEST. The industry believes that that would encourage the very group that most needs help.
My other concerns about NEST have been heard in the House previously, but I hope that, given the proposed universal credit, the noble Lord, Lord Freud, may be able to help us. First, what are we doing to help the self-employed? For too long, we have done very little. By what means, if any, can we bring them within NEST, particularly the lower paid? Secondly, what about mini-jobs and pensions? Of the 50,000 women who have a part-time job with earnings below LEL, it is believed—although the stats are not very robust—that something like 15,000 may have a couple of part-time jobs, which, if the earnings from both jobs were added together, would take them above the LEL and bring them into the national insurance system. However, that is not possible at present, because the figures cannot be added together, so such women stay out of the contributory element to the basic state pension and, as a result, may lose the possibility of a full pension.
I appreciate that the noble Lord, Lord Freud, is anxious to solve this unfairness, so I hope to hear a little more today about how it might be done. The issue is increasingly urgent, because 90 per cent of the latest 200,000 new jobs are part-time. Given that universal credit will rightly encourage mini-jobs and more women may find it easier to build a portfolio of mini-jobs rather than one full-time job, particularly in rural areas, the problem may grow. There needs to be a solution if women who work more than 16 hours a week but in a variety of smaller jobs are to come within the NI system.
Another issue is orphan assets. For example, a hairdresser may have £20K in NEST as well as two small £2K pots from previous employment. Within NEST, she cannot commute her small orphan pensions, but, equally, those are too small to annuitise. At the moment, from her £24K savings, she may lose £4K entirely. It is a disgrace that this continues. She should be able to bring such savings into NEST at the point of retirement at the very least and hopefully—as the noble Baroness, Lady Greengross, said—earlier than that with a higher contribution cap. I hope that the Minister will agree with me.
I have one final, somewhat off-the-wall suggestion. We are desperately in need of more social housing. The Minister’s right honourable friend Mr Pickles has proposed that most new housing should be paid for at intermediate rents in the social housing sector, which will be financed quite heavily, I suspect, by the DWP’s benefits bill—I declare an interest as chair of a housing association, which will certainly do its best to ensure that happens. Alternative finance has conventionally been raised from the banks, but, given the pressure on banks to lend to small businesses and to hoard reserves, it will be increasingly difficult to secure social housing finance from the banks. Indeed, it looks as though things may stagnate altogether. As the Minister will appreciate from his very appropriate City background, could not pension funds—including the hundreds of millions of pounds of new savings that will flow into NEST—be a commercial funder of social housing, which after all, being bricks and mortar, is a triple-A asset? That would add to social housing and would reduce the benefit bill, so there would be a virtuous circle indeed. I wonder whether the Minister could apply nudge here, too.
The major issue on which we disagree strongly with the Government is the speed with which they propose to change the state pension age for women. The Minister knows where we stand on this, which is against. But I hope that, on the more technical but also important issues of NEST, and its potential interconnectedness with universal credit, the Minister will be forthcoming and constructive. I know that he wants NEST to work, and I believe that he knows what needs to be done.