Pensions Bill [HL]

Baroness Hollis of Heigham Excerpts

Tuesday 15th February 2011 Lords Chamber

[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.