Pensions Bill

Baroness Hollis of Heigham Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Baroness Hollis of Heigham (Lab)]

My Lords, I declare an interest as a board member of the Pensions Advisory Service. In that capacity perhaps, I suggest to the noble Lord, Lord Paddick, that he should consider buying some voluntary NICs to make good his shortfall and he will get a 25% return on his capital.

Private DC pensions are deeply problematic. Most people, especially poorer women, do not understand them. They do not trust them; they cannot afford them; they cannot access them; and they do not know what income they would get from them. Pensions for them are high risk. I think the Minister once said that the poor can better cope with risk as they have less to lose. In my view, the exact opposite is true: when you are a week’s wages away from going hungry, you cannot afford any risk at all.

For me, the great virtue of the new state pension, unlike private pensions, is that it removes risk. So my test of the Bill, not dissimilar to that of my noble friend Lady Sherlock, is: does it make pensions simpler, easier to understand and more transparent? Will it produce an adequate replacement income in retirement while being affordable both to individuals and society? Is the Bill fair, recognising women’s unpaid as well as conventionally paid work, and not leaving groups of women unfairly outside the system? Is it also fair in its assumptions about retirement age? Does it encourage savings where possible by removing means-testing, which inhibits them? My acronym is SAFER. The Bill must make pensions: simple; adequate and affordable; and fair; encouraging savings; and removing means-testing. Does it do so?

Is it simpler? Yes, although it is not yet simple. By bringing together the state retirement pension, S2P and pension credit into one single state pension, people can predict their state pension if they have full contributions. But they still have to work out whether their mix of contributions and credits will cover 35 years. Over time, it should do so given a full working age life, but it may not.

Is it adequate and affordable? Will the new state pension continue to address pensioner poverty? S2P, which redistributes to poorer earners, and pension credit, which especially helps older widowed women, were both in Bills that I took through this House. Together, they targeted pensioner poverty and succeeded. Since 1998, pensions have increased three times faster than wages. In 1997, pensioners were the poorest group of our society—the poorest of the poor. When we left, they were less likely to be poor than any other group in society.

But helping existing poor pensioners through means-testing has potentially the perverse effect of deterring future pensioners from saving. By building a stronger state platform, as the Bill does, we both target poverty and support saving. Is it adequate? A middle-aged couple, he on average earnings and she on a modest part-time job, might expect a replacement state pension in future of around 70%—adequate for them, yes. On top may come NEST, its value depending on their age, contributions and the markets.

Is it affordable for us? Given the raising of the state pension age, the capping of S2P and the overall £5.5 billion of NICs windfall from ending contracting out, which will go to HMRC, then, yes. Indeed, HMRC will make such a profit, no wonder we are bringing forward the new Bill by at least a year. In that case, some small fraction could be available for decent transitional arrangements.

Is the Bill fair? For me, that raises two questions. First, will all those who should do so get the new pension? No, it is not that fair. If I were the Minister I would want as inclusive a structure as possible. Those left out of the new single pension will continue to get pension credit, and the cost and confusion of running two systems for a further 40 years is clearly undesirable. Obviously, pension credit will remain as a residual safety net, but we want as few people as possible to fall into it. Who gets left out? Service wives do, possibly, depending on their age, and I will table an amendment on that. Women with several mini-jobs will also be left if they perhaps work 20 hours a week yet are not building their own state pension and are denied a future married women’s pension.

The problem in the past was the employers’ contribution and how we divvied it up. In 2007, the Government thought that there might be 15,000 affected women. We now think that it is almost three times that—40,000 women and 10,000 men—working above the lower earnings limit but still not coming within the NI system to give them a state pension. With real-time information—one of the bonuses of UC—and treated as self-employed as this Bill rightly does for all other self-employed people, we can and must bring those 50,000 people into the new pension.

Steve Webb said in the other place, in a slightly male way, that such women would not thank us for paying £2.70 a week NICs. How does he know? Has he asked them? He also believed that their situation was short-lived and that they should have enough contributing years. How does he know? Has he asked them? He said that they could pay voluntary NICs, but that costs five times as much and might not cover early missing years—that, we do know. I am not myself willing to see 50,000 or so excluded on the beliefs—not facts—offered by the DWP. Those 50,000 should be treated as self-employed unless they opt out. It would allow them to move seamlessly between mini-jobs and a longer-hours job, as we want them to do, as their caring responsibilities require.

The second question of fairness is around the state pension age. I am pretty fed up with people, usually in well paid, interesting, salubrious and physically undemanding jobs, pronouncing that as we are now living longer we must all work longer and what is more—the final insult—it is good for us. This House will know that we have three stages of older age. Most of us who reach 65 in good health can expect another decade of healthy retirement. From our mid-70s, we develop functional disability—mobility, sight, hearing and reach—which increasingly limits what we can do for the next decade. We need support. Then, in the last three to five years of life in our upper 80s, we need care. As the Government’s analysis in the ONS stats shows, between 2000-02 and 2008-10, male life expectancy rose by over two years. But—and this is key—only a third of that was healthy life expectancy. It was 0.7 of one year by the Government’s own stats. So we gain, as the noble Lord, Lord Paddick, said, three to four months every year, but only one month of that may be healthy.

Between 2007 and 2010, the most deprived fifth of the population had a healthy life expectancy of just 55 years—15 years less than the most affluent. The gender gap is narrowing, but the class gap is now widening. So those extra years that we are living are not, alas, years extending healthy retirement but additional years of increased disability and dependency, especially if you are poorer off. Every year that we raise the state pension age is deeply unfair on those who have had hard lives. They start work five years earlier than those who enjoy higher education, and they can expect 10 to 15 years less of overall life expectancy and of healthy life expectancy. By raising the state retirement age, we eat into and reduce their few healthy retirement years even further, all to subsidise the pensions of people such as me—the longer lived, healthier, better educated and better off, including those of us in your Lordships’ House. Our single-age retirement policy—one size fits all—is regressive and unfair. We do not need to shrug this off as Borisconi tough luck. We can do better than that, and I welcome the proposed independent review.

I proceed along with my SAFER acronym: simple, adequate, fair. Will the new state pension—E—encourage savings? Will it—R—reduce means-testing? Yes it should. It will do so by removing the perceived disincentive that having savings costs you benefit. Savings credit actually supported small savings, but under half of those entitled claimed. Its value is eroding and overall the doorstep line I always encountered when canvassing was, “I’m not any better off for saving”. There is one point here about AIPs—assessed income periods. We should not add to yet more means-testing for those on pension credit, which is what the Government propose, while stripping it out, rightly, for those on the new pension. I implore the Government to leave it alone.

The sums saved will be small—I calculate them to be £60 million a year net at best. The stress for older pensioners will rise. The implications for funding social care from equity release for the over-75s—over half of whom are owner-occupiers—on which the social care bill is premised will be catastrophic, overwhelming any savings that the Government may get. Do not go there. What you may save in pension credit, you will overwhelmingly lose in people not being able to co-fund social care. It is really not worth it.

Importantly, under the new state pension, auto-enrolment will be safe. Without the platform of a non-means-tested predictable pension we could, with some justice, be accused of mis-selling NEST. However, NEST was meant for women with low earnings. It originally kicked in at £5,700; from April it is £10,000. Every time you raise the tax threshold, another tranche—mainly women—drop out of auto-enrolment. There are 420,000 in 2013-14. Of course, consultation exercises show that employers like it. What is not to like? The last lift saved them £6.4 million. The losers—poor women—do not know and do not complain.

At the 2017 review we must reconsider NEST’s trigger, perhaps the PTT, and in the mean time strengthen opt-in arrangements. Some 1.1 million women have already lost the opportunity of auto-enrolment. Next spring, still more women will be excluded. Unless we intervene, NEST will lose the very group for whom it was designed.

I want also to register my disquiet at the proposed new bereavement benefit; the loss—proper stats, please—of the state pension lump sum; the interaction with other benefits, especially HB, after five years; the transitional arrangements for married women relying on the 60% pension; divorcees; and widows’ inherited rights. We can pursue all that in Committee.

Do I support this Bill? Yes. On the state pensions front, indeed I do. I even wrote a pamphlet calling for something similar before the last election, and was delighted to corral Steve Webb, then a Back-Bencher, into contributing to said pamphlet. All credit to him and the DWP team behind him for delivering the SAFER pension; I am really pleased. It will continue to reduce pensioner poverty; it will eradicate for very many the snakes and ladders of means-testing; it moves us closer to a decent state pension for all, but one rightly clothed in a contributory system. It will make it safe to save. Those are really valuable contributions. However, it can be improved. The Minister will be delighted to learn that there will be quite a few amendments in Committee. I look forward to them; I hope that he does, too.

--- Later in debate ---

[Lord Freud]

My Lords, I expected an interesting and valuable debate and I got one. I congratulate my noble friend Lord Balfe on his remarkable maiden speech, which I know we all enjoyed. I hope we provided him with adequate intellectual stimulation this evening of a kind he will remember. Whether we met the challenge set by the noble Baroness, Lady Sherlock, in making the topic interesting, at least we will, as my noble friend Lord Paddick pointed out, have all gained an extra hour in our lives during this debate.

I shall focus first on the transition which many noble Lords rightly focused on. There are some tough issues around it. People who have contributed to or been credited into the national insurance system have expectations, so we cannot switch to the new system overnight. I assure the noble Baroness, Lady Sherlock, that this is not a hard, fast transition. It is pretty difficult to design a transition that strikes the right balance and takes account of people’s expectations as far as possible while also ensuring that those who are part of the transition—in other words, those who will retire over the next 50 years—will see the benefits of the single-tier pension. I believe this Bill has been successful in this difficult endeavour, and for that reason I expect it to outlast by a considerable factor the 10 years predicted by the noble Baroness, Lady Donaghy.

The foundation amount allows people to see the value of their pre-2016 national insurance record in one figure, which gives simplicity to the single tier but also recognises past contributions. It is a smooth transition. For the vast majority of people reaching state pension age in the years after single-tier is introduced, their outcomes are similar to what they would have got under the old system. Nearly three-quarters of those reaching state pension age in the first five years will see a change in their state pension of less than £5 a week. Of those who see a larger change, five times as many gain as lose. Those who see this boost are likely to be those who have traditionally been badly served by the state pension system: women, carers and the self-employed.

While moving to a modern system based purely on individual entitlement, the transition provides, for example, for inheritance of additional state pension where one member of the couple is in the current system. There is also transitional protection for those who paid the married woman’s stamp. Difficult decisions and trade-offs have been necessary to redesign the state pension within its cost-neutral envelope, and inevitably this means that while some people get more than they would have done under the current system had it continued into the future, some people get less.

I shall move on to as many of the specific points as I can—there were a lot. The noble Baroness, Lady Donaghy, said I would delight the 1951 to 1953 generation of women by moving. I think I might delight them a little bit. Ninety per cent of these women will get more in state pension and other benefits over their lives by drawing their pension in the current system at their state pension age than they would if we gave them a state pension at 65 and single-tier pension. The women in this cohort will reach state pension age between two and four years before a man born on the same day, which means that they will get between £13,000 and £26,000 more state pension than a man of equivalent age. To correct the point made by the noble Baroness, Lady Dean, it is not a double whammy. They have not seen their state pension age rise, except for the equalisation under the 1995 Act. The only change this group has seen recently is in the triple lock.

The noble Baroness, Lady Sherlock, raised derived entitlement. We will clearly go into this in some detail, but we estimate that in 2020 fewer than 30,000 married and widowed women—less than 5% of single-tier pensioners—will be affected by loss of derived entitlement to a basic state pension based on their spouse’s national insurance record. I know this is an area we will debate in great detail.

[Baroness Hollis of Heigham]

This is an area of some concern to a lot of us. Will the Minister be kind enough to give us all the stats he has, including how many of those getting the married women’s 60% were born or live overseas, do not have UK residence and so on, which was the argument in the Commons? We are very short of detail on this.

[Lord Freud]

My Lords, as I hope everyone in the Chamber knows, I have arranged to run a series of briefings at the appropriate time—about a week ahead of every Committee session—particularly to try to go through this detail. It really is extraordinarily complex, to reuse a tired word. One needs to go through it with examples and graphs and so on, which is much better. We will get all the information that we can, but we will do it in that context and will then be able to look at it in Committee on the basis of that process.

The noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, asked what the start rate will be. We will need to decide that closer to implementation when the level of the pension credit standard minimum guarantee for 2016-17 is known. I am afraid that I cannot reveal all tonight.

The noble Baroness, Lady Dean, asked about cost-neutrality. The reforms are designed to be cost-neutral in terms of spending on persons. The spending on the single tier should be within 1% of projected spend on pensions until the late 2030s. In the longer term, after that, the single tier will slow the rate of increase in pension spending, helping to make it a sustainable system.

The noble Baroness, Lady Sherlock, raised the savings credit. One of the things that the single tier does is to clarify savings incentives, so that people will know what pension to expect from the state and be able to plan the additional provision that they want. The issue of passporting was raised by the noble Baroness and the noble Lord, Lord McKenzie. Clearly, passporting will be through the guarantee credit, not the savings credit, although in practice the numbers are not that different. On the difference between being on the single tier and being on a credit, and whether you get various passporting, that is always the case when you have a system of passporting. However, it is worth bearing in mind that when you look at the relative rates for members of a couple, the single-tier rate is much higher than the credit guarantee rate; the single tier comes out at £288 for a couple in 2012-13 prices, against £216.55 at 2012-13 prices. So there is a very big gap for couples on that passporting issue.

My noble friend Lord German asked me for the latest correspondence on bilateral agreements. I regret that I just do not have that information to hand right now. I will search the cellars of the DWP to see if I can do any better and write; it is probably very heavily buried there.

Several noble Lords—the noble Lord, Lord Whitty, my noble friend Lord German and the noble Baroness, Lady Donaghy—raised the abolition of the rebate and the costs that would go to the public sector employers. The noble Lord, Lord Whitty, asked whether we would talk to the LGA. The Chief Secretary to the Treasury has met with the LGA and I can confirm that Her Majesty’s Treasury is happy to meet with them.

We will spend a lot of time on multi-jobs in Committee. One point to make is that the effect of welfare reforms will naturally be to improve coverage. All adults on universal credit, many of whom will be the lower paid that the noble Baroness, Lady Hollis, is rightly concerned about, will get their pension correctly that way. In that way, the crediting system is extremely comprehensive. By the 2040s, more than 80% of people will receive the full single-tier amount based on the 35 qualifying years. Clearly, we will be reviewing the crediting arrangements in the light of reforms and will look at the position of these people as part of the review. The noble Baroness is as familiar as I am with the quite revolutionary opportunities which Governments can look at, now or in the future, around RTI when that is built in. I know that we will spend a lot of time on that.

A lot of noble Lords raised the age review and some of the relevant issues: the noble Baronesses, Lady Sherlock and Lady Hollis, and my noble friend Lord Paddick. Clearly, one point of having a review is that longevity on its own is not the only factor. That is exactly what is being realised here. We have debated that in the past, and I know that we will debate it further.

On equity release and the AIP change, income-related benefits take account of any income and capital generated by liquidating assets. However, equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital.

The right reverend Prelate the Bishop of Derby and the noble Baroness, Lady Sherlock, raised bereavement support. This is clearly driven substantially by the change in the welfare system when you have universal credit as a basic bedrock for people. Bereavement benefits were another way of producing that kind of income in an entirely different way. We are now targeting this support for the period of financial need, as we heard that it was required; we did a survey on that. One therefore needs to separate it from bereavement, and maybe the right reverend Prelate’s point about what we call it is relevant there. It is a financial support which is underpinned by the universal credit but, clearly, we do not offset it against universal credit which, if it went on for a long time, we would do. By not offsetting it, we are targeting help at those with the greatest need, whether they are a widow or parent or not. It is a very progressive structure in that way. It means that 62% of the very poorest are actually better off. We will go into this in great detail in Committee; I will not do so now. However, that is the structure and the thinking behind it.

The noble Baroness, Lady Sherlock, and my noble friend Lord German raised conditionality. The structure is that all recipients of bereavement benefits—not just partners, but also if you lose a child—have access to Jobcentre Plus, purely on a voluntary basis, for the first three months; no conditionality for the next three months; and at the end of the six months, advisers will use their discretion to ensure that individuals’ capability and requirements are taken into account.

We will have a major debate in Committee and, I suspect, beyond on the pot-follows-member approach versus the aggregator approach. At this stage I will make a few minor protests about why we have chosen the former rather than the latter. However, I will make an impassioned defence as we go through it in great detail. The pot-follows-member approach maximises the consolidation, is in the best interests of savers and will reduce by half the number of dormant pots by 2050. We estimate that an aggregator approach would achieve just half the cumulative administrative savings for the industry by 2050. We will spend more time on that.

The question from my noble friend Lord Brooke is a suitable last question: what more is there on which to legislate? We will probably have some open questions left after the Bill on how much people are saving. Quite a few noble Lords suggested that perhaps people are not saving quite enough for what they anticipate they will want to spend when they retire. There is also the nature of the savings vehicles—we talked about defined ambition. Those are the two big areas in pensions. I suspect that there are probably several more, but perhaps I would pick those two.

I close by thanking all noble Lords who contributed to the debate, which was informed, measured and interesting. As I said, we will hold a number of briefing sessions. I am keen that in this debate we deal with the real issues on an informed basis and do not waste time. That is what these sessions are for—so that we have full information. I will endeavour to make sure that noble Lords have all the information they need to make the contributions they want to make. In particular, I want to make sure that the noble Baroness, Lady Hollis, is able to table all the many amendments that we all look forward to.

The Bill does a remarkable job of creating a pension system fit for the 21st century—nine times as long as the noble Baroness, Lady Donaghy, thinks. It is a return to the simplicity of Beveridge’s model for the state pension, it strengthens the private pension system, and it will enable today’s and tomorrow’s working-age population to plan for and build towards a secure retirement income. I commend the Bill to the House and ask for it to be given a Second Reading.