Pensions Bill

Lord McKenzie of Luton Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, as my noble friend Lady Turner has just said, this is an important Bill which covers a major area of public policy: how we provide for and treat our citizens in retirement, the extent to which we expect them to make provision themselves through their lifetime and how we value contributions made otherwise than through formal work by way of caring or nurturing future generations. It is about the intergenerational bargain.

As a number of noble Lords have recognised, despite major and progressive changes to the pension environment in recent years, we cannot claim that the state pension construct has yet reached steady state. We know that the proportion of women in Great Britain qualifying for a full state pension will not equalise with men for another six or seven years, and for S2P outcomes to equalise will take much longer. While the availability of means-tested benefits—pension credit, housing benefit and council tax support as it now is—has lifted millions of pensioners out of poverty, there remain problems of take-up and ongoing questions of the extent to which their potential availability undermines incentives to save. Despite progress, we have not eliminated pensioner poverty, but neither does the Bill—all this, of course, in an environment where life expectancy for men and women continues to increase at an accelerating rate. As my noble friend Lady Hollis said, we should look at healthy years.

The introduction of a single-tier pension pitched above the rate—just, in the illustrations—of the guaranteed credit is therefore an important development. It is built on the foundation of auto-enrolment which grew out of the Pensions Commission work on which my noble friend Lady Drake was so influential. It was the report of this commission which clearly concluded that the then state and private pensions regime would not deliver adequate incomes in retirement through changes to the state system alone. Reform to make it simpler to understand and less means-tested were essential to provide clear incentives for individuals and employers to build additional private provision.

In analysing the reforms necessary to the state system to underpin private saving, it was clear that abolishing S2P before establishing the success of auto-enrolment and a national pensions saving scheme would be risky. Since then, things have moved on. We legislated for auto-enrolment—my noble friend Lord Hutton was Secretary of State at the DWP at the time—and for NEST, and the coalition Government have brought them into being. It is still early days, but opt-out rates look to be below expectations, which is encouraging. While continuing to acknowledge that the coalition Government have broadly followed the consensus, we should continue to express concerns about raising the bar to automatic entry. Every time the Deputy Prime Minister talks to us about how many people have been taken out of income tax, he might complete the sentence and say how many—mostly lower paid women—have been denied auto-enrolment.

As my noble friend Lady Sherlock said in her sparkling opening speech, the introduction of a single-tier pension deserves our support—our long-term support. I know that it will be music to the ears of my noble friend Lady Hollis, who has long campaigned for this approach. Of course, as proposed, the detail will not be unwelcome news to the Treasury.

We do not reach the sunny uplands of a simplified single tier overnight. There are complications along the way and we will seek the assurances of the Minister in Committee about the communications strategy to be adopted to explain what is going on. We also need to be assured of the capacity of HMRC and DWP to build and maintain the necessary systems which will give effect to all this. Without putting too fine a point on it, I suggest that the DWP has not covered itself in glory in managing change in recent times. It is a sobering thought that the transition to everyone being in receipt of a single- tier pension will probably extend beyond my lifetime. In the interim, there will be two systems running side by side. Those retiring before the single tier could receive the basic state pension, possibly uprated by the triple lock; S2P, uprated by earnings during accrual and CPI in payment; and the guaranteed credit, possibly uprated by earnings. On the single tier, the Bill provides for uprating by at least earnings, although the impact assessment assumes the triple lock. Protected payments under the single tier are to be uprated by price inflation. So it is hardly all simple and straightforward.

There will also be different access to benefits. Those retiring into the new system will be denied savings credit but not the guaranteed credit. They might also be eligible for housing benefit and council tax support, although the former could be affected by the withdrawal of savings credit. Those retiring before 6 April 2016 will be able to access benefits as now. There are complexities here, too, compounded by how passporting is to work. For some benefits, it is the guaranteed credit of pension credit which is the passport; for others, it is either the guaranteed credit or the savings credit. We need more clarity around all this.

Individuals retiring before 6 April 2013 will be able to defer their state pension under the current rules, including taking a lump sum. Deferral under single tier cannot involve a lump sum and will be more actuarially based and restricted. Qualifying conditions will be different for the two regimes—we now know that it will be 10 years for single tier—and both these changes contribute to the savings for the Treasury.

Over time, those reaching state pension age before single tier will comprise a smaller proportion of the pensioner population and it is important that their interests, too, remain protected. Those retiring in the earlier years of single tier will be better off than under the existing system—notionally, that is—although this reverses for those retiring later. The position of women improves, particularly because single tier benefits lower paid and part-time work.

Transition is not only about two systems running side by side. Provision is necessary for those who retire after 6 April 2016 but who have a contribution record prior to this—hence the need to grapple, as we doubtless will in Committee, with new concepts of “foundation amounts”, “protected amounts” and “rebate-derived amounts”. We should also test the transitional proposals for derived and inherited entitlement.

Perhaps a surprising fact to emerge from the various analyses that we have been sent is the extent to which means-testing will remain within the new system. While the amounts may have declined, the percentage of pensioners receiving housing benefit or council tax support in comparison to what would have happened under existing arrangements hardly changes. There is a significant fall-off of pension credit entitlement, but even 5% of those reaching pension age in 2060 will qualify. Overall, there is a reduction in benefit claimants of just 3%. Nevertheless, there is an improvement in the number having low marginal deduction rates, which is important for saving incentives.

In these circumstances, take-up remains an issue. If the rationale for the assessed income period—a degree of stability in the incomes and capital of pensioners—has not proved to be the reality, it could be difficult to argue for its retention, although I take the point that my noble friend Lady Hollis has just made. However, we think that the Government have done the right thing in retaining the current indefinite awards. Given the still significant scope of benefits within the system and the fact that take-up of pension credit is not high, the need for more regular reporting will bring its challenges. What assurances can the Minister give us about the support proposed for pensioners having to reconnect with the reporting system?

We should be clear that, because of this Bill, the state is going to do less than is currently planned. Over time, the share of GDP going to pensions will be smaller than currently predicted. At 2060, it will be 0.6% less—some £30 billion—but assuming the triple lock for uprating. Should uprating be as provided in the Bill, by earnings, the reduction is 1.5%. On top of those savings are the increased national insurance contributions which accrue to the Treasury from the abolition of contracting out—some £5 billion a year in the early years. More than 80% of that will be borne by public sector employers and employees. An additional 1.4% national insurance contribution is unwelcome news for scheme members at a time when incomes are being squeezed and household costs are rising. Costs have risen faster than wages in 39 of the 40 months since this Government came to power.

Notwithstanding the override given to private sector employers to recoup the loss of the 3.4% national insurance rebate—I share the concerns of my noble friend Lord Whitty about that—there is the risk that all of this will accelerate the decline in defined benefit provision. Public sector schemes will not be able to recoup the loss in that fashion. Following on from questions already asked, perhaps the Minister will say something specific about how those costs are to be met. On the local government schemes, specifically dealt with by my noble friend, as he said, the LGA estimates employer costs in the region of £700 million a year. Given the savaging of local authority budgets by the coalition, how does the Minister think that those costs can be found? Does he think that the new burdens policy should apply and that they should be met centrally? What analysis has been undertaken of the concerns expressed by the LGA that the Bill could undermine the agreement of the reform of the local government pension schemes due to be implemented next April?

The Bill is not only about state pension provision. It includes a raft of other measures, and it should be supported in its attempts to tackle some long-standing problems in the private pensions industry, including the prohibition on offering incentives and removal of short-service refunds. Although the focus on tackling small pension pots is to be applauded, like others, I regret that the proposed solution cannot be supported. The technical amendments to auto-enrolment look supportable, but is it not time to remove some of the historic constraints on NEST?

Finally, I have observed with admiration the work done by Gregg McClymont, the shadow Pensions Minister, aided and abetted by my noble friend Lady Drake, on the urgent need to restructure the UK pensions market, including the annuities market, to forge greater transparency and drive down costs for savers. Once again, we see the Labour Party, just as on energy prices, leading the way, standing on the side of consumers against the vested interests of dysfunctional markets.

Given the scope of the Bill, I hope that the Government will yet be able to pick up some of the amendments that will undoubtedly be moved. As for what is in the Bill, it should, sensibly amended, receive our agreement. I look forward to supporting my Front Bench to that end.