Pensions Bill [HL]

Lord German Excerpts

Tuesday 15th February 2011 Lords Chamber

[Lord German]

My Lords, I begin by stating my interest as a pension trustee for the National Assembly for Wales pension fund. I also thank the Library here for its detailed note on this Bill, along with the many organisations and bodies, some of which have been referred to already, which have provided some briefing on and support and criticisms of the matters which are now before us. One must start, I suppose, by looking at the work of the noble Lord, Lord Turner, and his view on this issue, which started in train the changes from which we are seeing some conclusions today. His conclusion was about longer life and I am grateful to the Minister for informing me that I am now a year younger than I was. Perhaps that will mean that I will no longer be able to claim the state pension this year. Maybe the Minister will want to refer to that context later.

The conception that the noble Lord, Lord Turner, had was that a variety of different tools were available to us to make the necessary changes to deal with the longer time that we are going to be spending alive in this world. The first option was to make pensioners poorer; I think that everyone concluded that that was not realistic—a conclusion which we would all want to share. The second option was that taxes would rise or that there would be cutbacks in expenditure on other public goods and services. There were the options, thirdly, that savings would rise and, fourthly, that retirement ages would rise. His conclusion, which has subsequently been resolved through many debates in this place and the other place, was that there is a range of choices but that a combination of the three factors—tax rises or service cuts, rises in personal savings and rises in retirement ages—is necessary.

The demographic challenge, which has been referred to, is the fundamental that we all need. From the work that has already been concluded, both by the previous Government and in the commissions that have taken place, I suspect that there is a general acceptance that the number of years should bear some sense of how long we can expect to live after retirement. In other words, there should be a life expectancy general rule which seems to be a thread throughout these changes. That is why we are bound to revisit this matter. The noble Baroness, Lady Drake, said that this is undoubtedly something that we will have to come back to since, if the trend continues, we will have to alter the state pension age.

However, it cannot be looked at in isolation without including the potential and announced changes to the basic state pension. I come now to the question of deficit reduction, to which the noble Baroness, Lady Drake, referred. She said that we will not see the savings in terms of a contribution to deficit reduction until 2016. What we can do is use some of these changes to assist in ensuring that we have a fundamental review and a fundamentally improved basic state pension. While we have already put in place the triple lock from this April to ensure that pensioners will not be worse off, I have read in the newspapers and other publications that ambitious changes are proposed for the basic state pension. That is a consequence of these measures as well, and I hope we will be able to say something about it at the same time.

There is, however, the issue of acceleration in respect of one group of women. I call it the acceleration bubble. One group of women will bear more of the brunt of the changes than others—those who were born around 1954. On the shoulders of that bubble, it will affect those born between 1953 and 1956. Those women who are still travelling along the same road as people of roughly the same age will see the horizon moving further away from them faster than those around them will. In the most extreme case under these proposals, two women who were born one year apart could see a three-year difference in their pension ages. The crucial thing about this bubble is the extra working months that some women will have to put in, compared to those who are nearly the same age. That is a genuine concern: there is a cohort of women who will be treated differently.

While the announced and prospective changes to the basic state pension will assist us, the Government should give careful consideration to this group of women who will be more affected by the changes—those within the biggest area of that acceleration bubble. Rather than say that the acceleration must be slowed down, there are changes that the Government could make for that specific group of women because it is a one-off. They could, for example, start by making exemptions or providing additional support for those who are seriously ill. They could make adjustments to the pension credit arrangements, which might make a difference for that group of women. They could make changes that affected the whole cohort born between 1953 and 1957, rather than only those who were born in 1954. There is a difference of effect between people with different years of birth.

The Government could also look at some of the other measures that are not a consequence of this Bill but where longevity has produced policy issues that need addressing. The most important of those is health inequalities. Where people live longer, some will do so because of the inequality in their life as a whole. That could be something to do with work opportunities and is usually also to do with poor housing. There are areas that the Government should address in those respects to reduce such health inequalities, particularly in older age.

On age discrimination, both in and outside the workplace, I welcome the removal of the retirement age. It means that people will be treated with dignity whatever age they wish to work to. A basic state pension should be the crucial tool to take people out of poverty. I hope that the changes which are likely to be announced will provide that help. Fundamentally, we must protect those with disabilities or caring responsibilities.

I accept the Government’s need to remove the cost of auto-enrolment to business as we want to encourage as many as possible to participate. However, as regards the three-month waiting period, the key issue for the Government to address is the right to opt in. The Bill states that you can opt in during that three-month period, but to be able to do so you need to have received clear information from your employer. Is the Minister prepared to consider introducing legislation to enable that information to be provided as of right to people in companies affected by the waiting period? Migrating between jobs also affects auto-enrolment if the threshold is not reached—for example, if you work a different number of hours from month to month and your wages fall below the threshold one month and above it the next. The key issue is whether that three-month period has to be consecutive, or will the waiting period end as soon as three qualifying months have been achieved, even if they are not consecutive? I welcome clarification from the Minister on that.

One of the big problems with re-enrolment is that there is a two-year period in which an employer can simply return the contributions which a member has made in a pension fund during that period, excluding the employer’s contribution. The member does not have the right to reinvest the contributions and re-enrol in the scheme. Members who defer their pensions from these pots are often charged an extra 1 per cent in service charges. Over a lifespan, that can amount to a considerable sum. Is there a role here for the FSA to regulate to ensure that those people get a fair deal? What benchmarking will be put in place to enable a scheme to be approved for auto-enrolment? Clarity is needed in that regard. We need to be given assurances about the quality of a scheme so that a NEST scheme can be compared with others. Employers need to be able to assure their workforce that a quality standard is in place with regard to pension funds.

The legislation is silent on the previous commitment to remove the contributions cap, which will be £3,600 in 2017, moving up to about £4,270 at present-day prices. In the previous legislation that cap was due to be removed in 2017. I hope that that will be possible because this affects a group of workers who often have very small pots of money which they need to reinvest and who want to avoid the bureaucratic burden of moving their pension pot every time they change job. I understand the concerns of the pensions industry regarding the restriction on transfers to the new pension fund but a balance has to be struck between meeting the needs of the pensions industry and those of the workers and those companies that are paying their contributions to ensure that a fair deal is arrived at which works for everyone.

As regards the RPI/CPI impact of the Bill, as the Minister said, no housing costs are included in the CPI. He said that only 7 per cent of pensioners have mortgages. However, 21 per cent of pensioners pay rent, which is the other important housing statistic. Pensioners who pay rent and are on low incomes are protected by housing benefit. However, I understand that the Government wish to include some housing costs in future CPI arrangements. I should be grateful if the Minister could tell me when the Bank of England will return to this matter and advise the Government on it. It is welcome, by the way, that there is no override on pension funds where the scheme specifies that RPI will be the measure of increase, and that the Government do not intend to override these private pension schemes.

It is clear from the figures presented in the impact assessment and by companies and bodies that have advised us on the Bill that some defined benefit schemes may now be able to continue if they switch to CPI. The Pensions Policy Institute believes that this could affect between 20 per cent and 40 per cent of schemes. I hope that the Government will monitor that effect, because it would be useful to obtain a quick evaluation of whether schemes that have been in severe difficulty will be able to retain the rights for their pensioners. The overall change will benefit poorer pensioners, but we may find that richer pensioners have to pay a bit more. I do not know whether other Members of this House consider that to be acceptable or not, but I believe it is the right way to do things.

I noticed that the noble Baroness, Lady Drake, did not refer to judges’ pensions, but I will poke in my toe to test the water. This matter is clearly out of kilter with the current culture of saving for the future, and there is a need for transparency. There is a place not too far from this Chamber where pay awards were made and refused by others on their behalf, and consequently other measures were included in a sort of compensation package that caused a lot of trouble for Members of the other place. It should be clear that if the question is about there being no pension contribution because it is a reflection of a lower salary, it would be much better to improve the salary, and that would be transparent for the public to see. I hope that the Minister can advise us on this matter.

Finally, this is a compendium Bill, in the sense that it has a broad title—the Pensions Bill—and the Minister might consider other measures that are not in the Bill. One of those is of course the rights of pensioners to receive information from those who manage their pensions on their behalf, particularly the need for an annual report to pension holders and a report that can be passed down the food chain on the risks inherent in the investment strategy of pension funds, whereby those affected by pension change will know those risks. It is a world in which people have little knowledge of what is happening on their behalf. Perhaps if they were given more information, the level of awareness would be raised for those who are about to receive pensions or will receive them in the future.

In conclusion, this is undoubtedly an area to which we will return. I expect to see changes in the basic state pension, and I expect that the review by the noble Lord, Lord Hutton, of public sector pensions will undoubtedly attract discussion here. As the Minister said, longer life goes on.