Pensions Bill

Lord German Excerpts

Tuesday 3rd December 2013 Lords Chamber

[Lord German (LD)]

My Lords, the noble Baroness, Lady Sherlock, has set me quite a challenge in making pensions interesting, although I might venture to say that the capping of pension charges has appeared on the front pages of a large number of newspapers in recent weeks. I must say to her that calling my honourable friend Steve Webb a sinner is perhaps a step too far.

This Bill will transform the state pension system by introducing its new single flat-rate pension. I, too, pay tribute at the outset to all those who have contributed to its happening. I particularly want to acknowledge the hard work and dedication of my honourable friend the Pensions Minister, Steve Webb, not just for bringing this Bill to Parliament but for bringing to fruition a policy which reflects my party’s long-standing aspiration for a citizen’s pension. We have worked for that for many years.

The new single-tier state pension will particularly benefit women and the self-employed. It will also make it easier for people to understand what they will receive from the state when they retire. It will help to promote private saving and build on the base of auto-enrolment, which in itself has had a most encouraging start. Under the current state pension, a woman on average receives £40 less a week than a man. The new single-tier system will treat men and women alike. The Institute for Fiscal Studies estimates that of women arriving at state pension age in the first four years of this policy—between 2016 and 2020—61% will see their pension income increased as a result, and that there will be further progress as time passes by.

The IFS analysis also shows that the gains are greatest for those who have spent periods not in work, caring for children, and for those men and women who have had long periods of self-employment. The new system will fully count time spent out of work caring for children, which is of particular benefit to women, who are still more likely to take time out of work as a result of starting a family. The new system also benefits self-employed people, who currently lose out as a result, among other things, of irregular working patterns and the difficulty of applying a means test to them.

The benefit of simplicity cannot be overvalued. Simplification is very worthwhile. It enables people easily to understand their future position in respect of a state pension, which in turn should act as a spur to help people save more for their retirement. Coupled with automatic enrolment, we should see the quality and cost of private saving schemes improve. That is why the Government’s proposal to cap pension charges is so important. It is a crucial part of the mix in creating a strong, good-value and sustainable future pensions offer.

Reading through speeches from the other House and responses from a wide variety of interest groups, there would appear to be broad support for the single-tier proposal, and in particular for where it will stand when brought fully to fruition. At that point, the vast majority of people will have 30 or more qualifying years, and they will get at least as good a pension from the single-tier proposal as they would had the current system continued. However, as with so many policy changes, transitioning from one system to another is where we find the most difficulties.

Of course, as pensions provision has a long timespan tail, transitioning becomes even more difficult. The Government have made significant changes to the transitioning arrangements from when they first appeared as a policy proposal, but I know that your Lordships’ House will wish to examine and probe to see if the best balance, in the light of all the circumstances, has been struck. This is a complex issue, but there are some broad issues in the Bill that I would now like to highlight.

The first relates to public sector contracting out in pensions. As it stands, the Bill provides for private sector pension schemes to be able to amend their rules to accommodate the loss of income from national insurance contribution rebates. These permitted scheme changes can go no further than recouping the loss of these rebates, but can be used more than once to achieve any objective—perhaps by staging changes according to the strength of their overall funds. But this ability to modify does not apply to public sector pension schemes.

Public sector schemes cannot alter contribution levels into their funds, nor can they alter the benefits offered. Yet there will be a reduction to these schemes in national insurance contributions, of 1.4% from employees and 3.4% from employers. Meanwhile, the Government retain this money—which some estimate at £5.5 billion a year from 2016 onwards—for, among things, forward-funding the requirements of this new pension.

A helping hand to employers has been introduced to allow them from next April to offset the first £2,000 against their national insurance bill. This means that many small companies will pay no national insurance at all. Some of the retained government finance has already been committed to meeting the financial demands of other age-related policies, such as funding the care proposal cap outlined in the Dilnot report. Roughly on a 5:7 to 2:7 ratio, two-sevenths of the retained money has been allocated and five-sevenths remains to be allocated. That is an annual unallocated multibillion-pound sum.

I recognise that this could be seen as a decision to be taken by the Chancellor of the Exchequer at some stage in the future, at the beginning or after the beginning of the single-tier proposal. However, just as the current Chancellor has allocated support in certain areas in advance of retaining the current national insurance contribution rebates, I would like to understand why the Government cannot go further at this time.

By way of example, if we were in times of plenty, with public sector pension funds running strong surpluses, pension schemes would be able to deal with the changes in contributions. However, many funds are not. I wonder if my noble friend would agree that without the power to amend their schemes, any shortfalls will have to be made up by the public sector organisations responsible; and that this could mean local authorities, who are currently so stretched for resources to meet the urgent demands of their communities, having to find the extra cash needed to sustain their pension funds. It would therefore make sense for the Government to give some forward commitment to pension funds to enable them to bridge the transfer to the new regime.

There are also mixed schemes, with both private and public contributors, which will be treated as a public sector scheme, and others with public and private sector contributors that perhaps will be treated as a private sector scheme. I will quote my own example, and declare an interest. I receive a pension from a public sector pension scheme, but my contributions are, and were, made by a charity—a company limited by guarantee—which obviously was not in the public sector. Some of these anomalies are not immediately obvious, and I believe that we need further clarification on this very important issue during the course of the Bill through your Lordships’ House.

I am sure that my noble friend will be pleased to note that I do not intend to press for a review of the overseas frozen pensions issue, as raised by Clause 20. I am well aware of the costs to the Exchequer, and of the European Court of Justice decision. However, this issue is an anomaly and I can understand the feelings of many UK pensioners living in those countries, where no agreement was reached so many decades ago. Will the Minister tell the House how many Governments of countries with whom there was no such agreement have expressed an opinion on this matter to the UK Government—and, if so, whether any of them had a deal to offer? I would be grateful if the Minister could make any such correspondence available.

This Bill, not unusually, has tacked on to it a measure that is only loosely related to its principle—that of bereavement benefit. The current system pays people a relatively small lump sum and then a taxable weekly benefit over a longer period of time. It also uses a complex system of contribution conditions that makes it difficult to calculate what people will receive.

We are told that the reforms in the Bill are based on what people have told the Government would provide them with the most support. I understand that the Government believe they are not about reducing entitlement or saving money. However, there is one part of the reforms that is particularly harsh—and, some might argue, cruel. The Government will expect parents of bereaved children to look for work just six months after the child’s mother or father has died. Kinship carers, by contrast, will be exempt from full work-search requirements for a year after a child comes to live with them, to allow the child to settle. As charities have pointed out, this could lead to the perverse situation where a father caring for his daughter after his wife's death would be required to work within six months, whereas if the child went to live with an auntie, a full year could be dedicated to helping her adjust. Subjecting widows and widowers to full conditionality at such an early stage in their grief may be counterproductive; it may increase stress and anxiety, which in turn may lengthen time away from work.

In most families, the current weekly payments of bereavement benefit assist with general living expenses, with many finding those essential to meet basic living costs. Where the person who died was the main breadwinner, the benefit goes some way to replacing their income, allowing some continuity with arrangements for looking after the children. For others, it allows the surviving parent more flexibility to work fewer hours or to change jobs or even sector to fit with their new responsibilities as sole carer of their child. Requiring bereaved parents to complete a readjustment in just six months is harsh indeed, and I hope that the Government will reconsider it.

We will have an opportunity to examine this matter as well as other matters related to transition issues during the Bill’s passage through this House. We on these Benches will not lose sight of the value of this measure to our country.

This Bill is to be welcomed. It sets in train a new pensions settlement for the people of this country. It treats men and women, employed and self-employed, equally. It is easy to understand and simplifies the complexities that are a huge fault in the current system. It will help people of working age to make sensible choices about the need for additional saving for retirement. Whatever changes are sought, I hope your Lordships will recognise that this vision of a better pension is a goal worth pursuing.