Pensions Bill [HL]

Baroness Noakes Excerpts

Tuesday 15th February 2011 Lords Chamber

[Baroness Noakes]

My Lords, I support this Bill. It is a bit of a ragbag of measures but I think that it has two main themes. The first is the need for pensions to contribute to deficit reduction and, importantly, to the restoration of our economy to a sustainable path for the future. The second is to support the need, which is supported on all sides of the House, to generate more savings to contribute towards retirement.

I shall start with restoring the nation’s financial health. I fully support the proposals in the Bill to increase the state pension age to 66. That is long overdue. Taxpayers currently spend about 5.5 per cent of GDP on state pensions alone. Bringing forward a planned increase of the state pension age will be a useful contribution to controlling the inevitable upward trend in that cost.

My concern is that increasing the age to 66 does not go far enough and that instead we should be looking at accelerating and extending the current plans to increase the state pension age to 68 by 2046. The Government should be bolder and reflect the fact that life expectancy continues to outpace cautious expectations. Can my noble friend the Minister say why the Government are not using the Bill to go beyond this first step of accelerating the age to 66?

Last year, the European Commission published proposals to increase pension age automatically in line with life expectancy. Although I do not think it is any business of the EU to tell member states what they should do in this area, I think that it has some promise as an idea. Do the Government believe that there is merit in creating a more automatic link in future so that further increases in state pension age can be a matter of evidence rather than a matter of politics?

I also support the Government’s decision about converging the pension ages of men and women. I support it despite the small transitional impact on some women, to which other noble Lords have already referred and doubtless more will do so. The initial plan to bring women and men into line was far too leisurely. I never understood why women were allowed to draw a state pension much earlier than men, because their life expectancies have always been longer than those of men. Doubtless that was due to some misguided notion about the weaker sex. Your Lordships' House is proof that such ideas are long past their sell-by date.

Another key aspect of controlling the cost of pensions for taxpayers is dealing with the increasing cost of public sector pensions. Like many noble Lords with an interest in this area, I am looking forward to the final report of the noble Lord, Lord Hutton, later this year. His commission recognises that there has to be some way of controlling the burden of public sector pensions on taxpayers. If most public sector pensions were funded rather than unfunded, I have no doubt that the logical path would be for public sector pensions to follow private sector pensions and move away from defined benefit terms. Since the previous Government took power, the number of active members in open private sector defined benefit schemes has plummeted by about 80 per cent to about only l million people. By contrast, almost all of the 5 million or so active members in public sector schemes are in defined benefit schemes. The Government must deal with this inequality. Taxpayers simply will not tolerate funding public sector pensions at levels significantly beyond the opportunities available to them.

The real barrier to change is that the majority of public sector pensions are funded on a pay-as-you-go basis. If we shift to a defined contribution basis, we might have to pay out in cash on both bases simultaneously, which is of course impossible in the context of the nation's poor financial position. So I support the initial emphasis on pragmatic ways of reducing the cost of those pensions. This must inevitably involve greater employee contributions, as the interim report of the noble Lord, Lord Hutton, recognised. For this reason, I support the provisions of the Bill which bring judicial pensions into the real world of employee contributions. I hope that the Government will ensure that the contributions will be realistic relative to the very significant benefits which are obtained by members of the judicial schemes. I also hope that the Government will remain resolute when the inevitable judicial lobbying starts and that they will not cave in, like their predecessors.

Let me turn now to the improvements to auto-enrolment which underpin the policy, which has always had cross-party support, of generating more pension savings. I support auto-enrolment because it should dramatically increase the numbers saving for their retirement but my support has always been subject to the caveat that the very real needs and concerns of employers have to be recognised. If we overburden employers, we will kill jobs, which will defeat the object of increasing work-based pension provision. I do not believe that the previous Government always gave due weight to the concerns of employers.

The current Government were absolutely right to initiate a review of auto-enrolment, and the changes being made in this Bill are welcome. In particular, I welcome the higher earnings trigger and the optional waiting period, both of which will make it easier for employers to accommodate the new requirement.

I particularly welcome Clause 10, which introduces alternative self-certification requirements. The noble Lord, Lord McKenzie of Luton, may well recall the many discussions that we held during the passage of the Pensions Act 2008, when I tried, with only partial success, to shift the Government from their stance of requiring private schemes to match the Act's curious calculations at the level of every single employee. The best was very much the enemy of the good, and I applaud this Government's decision to help good private schemes to exist on a much more pragmatic basis. I hope that the Government will also ensure that the impact of phasing does not undermine the good work that they have done in Clause 10 and that phasing can be allowed to go alongside meeting the new self-certification tests.

My greatest regret is that the Government have not heeded concerns about micro-employers. We are talking about the vast majority in terms of numbers of employers—probably two thirds of the total—but, of course, a far smaller proportion of affected employees. The Government have decided to include micro-employers fully within auto-enrolment, notwithstanding the very much higher cost burdens on them. Many of these people are simply private individuals employing personal staff. Real burdens will be imposed. I am aware that the Government's review recommended no change on micro-employers, but that was hardly surprising given the composition of the review team. I do not believe that flagging and communications, which have been put forward as solutions to the problems of micro-employers, have any beneficial impact. They are bureaucratic activities which will do nothing to reduce the regulatory burden on micro-employers, let alone to reduce the cost of auto-enrolment, and we have to remember that the Pensions Regulator has no experience of dealing with micro-employers. I predict that there could well be a backlash from micro-employers once they understand the requirements. I hope that the Government will keep an open mind and be prepared to be flexible as the impact of this policy unfolds.

I should declare that I am a sceptic on the value of NEST. I believe that there were alternatives to one big nationalised pension scheme which could have been pursued. I have seen nothing to suggest that NEST will be incentivised to do other than behave like all monopolies—that is, in an inefficient and unresponsive way—but it is not a part of this Bill, and I do not, in many ways, blame the Government for taking the line of least resistance, given the large amounts of money that have already been invested in the development of NEST. We shall see whether NEST justifies the trust that the Government are placing in it.

The last topic that I would like to address is the use of CPI rather than RPI in revaluation and indexation. First, I support the Government's decision to use CPI to uprate public sector pensions and many benefits. It should provide a welcome contribution to reducing the costs of those items over time. However, as the Minister pointed out, that is not in this Bill. I regret the fact that the Government are not using this Bill to help private sector employers shift from RPI to CPI, and I disagree with the noble Lord, Lord German, on this. If CPI is a proper measure of inflation for the purpose of increasing benefits and public sector pensions, it is difficult to see why the Government have not helped private sector employers to make an equivalent change. The Government know full well that without statutory help it is not easy for employers to make this change, except by very costly negotiation. Having said that, I support the intention of Clause 14 in trying to avoid the ratchet effect on private sector revaluation and indexation when CPI exceeds RPI. I have already mentioned to my noble friend the Minister that the CBI is concerned that this clause may not quite achieve the clear policy intent set out for it, and I hope that he will consider an amendment in Committee to put this right.