Pensions Bill [HL]

Lord McKenzie of Luton Excerpts

Tuesday 15th February 2011 Lords Chamber

[Lord McKenzie of Luton]

My Lords, this has been a powerful and exceptionally well informed debate that was enlightened yet further by the great sweep of history from the noble Lord, Lord Brooke of Sutton Mandeville, with his insights into actuarial practice in the EU. I, too, congratulate the noble Lord, Lord Freud, on the manner in which he introduced the Bill and the very clear way in which he set out its contents. He reminded us about the golden years under a Labour Government in 2006. I am especially pleased to have heard from the noble Lord, Lord Boswell, because he actually has a PUCODI. I have been seeking someone who has one for a long time, and what I thought was going to be a fairly sterile and short debate in Committee will, I think, be much more extensive, as I am sure the Minister will attest. Like many others, I also congratulate my noble friend Lady Drake not only on a very impressive first appearance at the Dispatch Box but on her incisive analysis of why we have concerns with this Bill.

The Bill seeks to address the right issues—increasing longevity and undersaving—but in a way which we cannot fully support. Fundamentally, we consider accelerating the equalisation of the state pension age for men and women to be unfair. Of course, we recognise that life expectancy has increased beyond the 2004 projection, as spelt out by the Minister, and we adhere to the Turner commission proposition that intergenerational fairness argues for the proportion of adult life spent in receipt of state pension to be broadly constant. That would be catered for as much by the approach we support as by the Government.

It is our view that the existing timetable for equalisation of the state pension age to 65 should be left unchanged and that the increase to 66 for men and women should take place between 2020 and 2022. We accept that it would also be necessary to review the subsequent timetable for increasing the state pension age to 67 and beyond. Perhaps we could make common cause on that with the noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, although whether we would end up in the same position is another matter. The noble Lord, Lord Boswell, opposed the suggestion about accelerating the state pension age to 66 for men but not for women, but there are issues within the EU about that.

It is to our disappointment that we could not have consensus on this Bill. Had the coalition Government stuck to their commitment that the date at which the state pension age for women would not start sooner than 2020, we could be at one—a point pressed by the noble Baroness, Lady Greengross. Now, as we have heard, some 300,000 women will have to wait for between 18 months and two years longer to receive their state pension. This means that they will lose up to £10,000 in pension income, and more if they are eligible for pension credit.

The timeframe within which these changes are to take place will make it very difficult for women to mitigate their loss. Women are less likely than men to be in private pension saving and have fewer financial assets to bridge the gap. Some have caring responsibilities and will have left the labour market having anticipated their state pension at a certain date. Those women are now faced with the dilemma of seeking to rejoin the market when employment prospects are particularly weak. My noble friend Lady Bakewell referred to these issues as issues of discrimination, poverty and injustice.

However, dealing with these matters in terms of percentages, aggregates or cohorts belies the fact of the change on individual lives. We have heard the stories from my noble friend Lady Hayter about how individual women will be affected and we have heard powerful reasons why the Government should stick to the legislative timetable for equalisation. The noble Lord, Lord German, offered us some mitigation if the Government are not to change their position around pension credits and in addressing those who are seriously ill. Perhaps we can seek common cause in Committee on that, but that does not address the fundamental unfairness in the Bill.

None of this unfairness can be claimed to be in the cause of eliminating the deficit by 2015, as the savings from the Bill would not begin to accrue until 2016-17. We accept that holding to the existing equalisation timetable would reduce the savings, but fairness has implications. That would mean that more would be borne by the working age population, but it would still give rise to savings of some £20 billion, including additional tax receipts of about £8 billion.

We have heard from the Minister about the triple lock and the relinking of the basic state pension with earnings in 2011, which is earlier than required by legislation. However, on the basis of Treasury forecasts—a point made by my noble friend Lady Turner—it looks likely to be 2013 before earnings become the highest of the three components of the lock. With the switch to CPI, it is possible that pensioners will be no better off and that some may be worse off under the lock than they would have been had there been continuance of uprating in line with the RPI.

As many noble Lords have said—everyone who has spoken, I think—we strongly support the coalition Government’s decision to proceed with auto-enrolment and with NEST. Indeed, why would we not? The proposals were created on our watch: my noble friend Lady Drake was a member of the Turner commission and was later chair of PADA; my noble friend Lady Hayter served as a trustee of NEST; and my noble friend Lord Myners was chair of PADA. We are, as it were, up to our necks in it. The prospect of between 5 million and 8 million people newly saving, or saving more into a workplace pension, is a profound change that will allow millions of workers, who never had the chance previously, to build up their own pension and give them an opportunity to save.

Of course, auto-enrolment will not transform matters overnight, but it is part of a broader pensions settlement, grounded in the intellectual rigour of the Turner commission. That settlement proposed improvements to the basic state pension, especially improved access for women, accelerated the flat-rating and simplification of S2P and proposed the imperative to redress market failure through the creation of a national low-cost saving scheme, which is now NEST.

The Turner commission’s analysis holds good and is not fundamentally disturbed by the Bill. The noble Lord, Lord Stoneham, made that point. The practical ramifications of that analysis have been subject to compromise—for example, the cap on contributions, the contribution levels, the staging and phasing and the restrictions on transfer—and not everyone has been happy with the outcome. We may have a difference of view with the noble Baroness, Lady Noakes, for instance. However, the Bill disturbs that compromise and tilts the balance in favour of employers and against participation of the lower paid. The Government deserve our support for resisting the clamour to remove micro businesses from its scope and to exclude older workers. However, setting the trigger, as we have heard, at the personal allowance threshold for income tax denies 600,000 people—nearly half a million women—the opportunity of auto-enrolment. More worrying is the concern expressed by my noble friends Lady Drake, Lady Donaghy and others about the start of an upward movement of the personal allowance, which will be tracked by this trigger. Should the trigger reach £10,000, 1.4 million people will miss out on auto-enrolment. Linking the entry point for auto-enrolment to the primary threshold for national insurance is more appropriate.

Our further concern, voiced by several noble Lords, is the introduction of an optional waiting period of up to three months before employees are auto-enrolled. While we see the benefit of not having to enrol individuals who up and leave quickly and opt out of pension savings, there is another side of the coin: seasonal short-term working may be the pattern of somebody’s working life and they could miss out completely. Even if not, as we have heard, the number of job changes routinely undertaken during a lifetime will mean a significant period when an employee will have to opt in to gain continuity of saving.

We will explore these matters further in Committee and seek reassurance from the Minister that the application of the easement will be monitored. It is claimed that one of the benefits of a waiting period is fewer small pots, an issue which my noble friend Lady Hollis has rightly continued to pursue. To a certain extent, this is solved by the use of NEST, where employees automatically collect their pension pots from a range of different employers. However, that solution does not cater for circumstances where the providers chosen are other than NEST. We support my noble friend in her exploration of whether small pots might be collected together in NEST at the point of retirement, a matter pressed also by the noble Baroness, Lady Greengross. My noble friend rightly revisited the opportunities to amalgamate earnings from mini-jobs for the purposes of national insurance credits, qualifying earnings and, now, the trigger.

What is the Government’s position on changes to the rules on NEST which would allow transfers into the scheme? What is their position on removal of the cap on contributions into NEST? On a more general point, how will the rules which allow pension contributions to be deducted in computing tax credits be carried forward to the universal credit?

The issues around self-certification have proved intractable in the past. The challenge has been to facilitate sensible mechanisms to encourage employers to stay with existing good provision provided that it has delivered at least the equivalent of 8 per cent on qualifying earnings without employees who should be auto-enrolled dropping through the net in large numbers or systematically. Consultation on how this might work is being undertaken, but we are unfortunately unlikely to see it brought to a conclusion by the time that we have finished our deliberations. Unless these matters are clear, there are those who would seek to use the rules to circumvent the auto-enrolment requirement. Evidence, if it were needed, can be found in attempts to exploit the differences in trust-base and contract-base refund rules, although we are pleased to see that the Government are on this particular case.

On judicial pensions, a matter spoken to by the noble and learned Lords, Lord Woolf and Lord Mackay of Clashfern, and my noble and learned friend Lord Falconer of Thoroton, I am aware that there is sensitivity and history surrounding this issue. If I were not, I was woken up to it pretty quickly. When I raised the issue with a couple of colleagues and said that judicial pensions were on the agenda in the Bill, there was a sharp intake of breath and I was told, “You’re on your own”. We all agree that we are incredibly well served by the judiciary, although I cannot speak from personal experience on the matter. The issue of public service pensions has been most recently addressed by the noble Lord, Lord Hutton of Furness. His interim report was issued in October and we await his final report. The interim reports recited that the best way to make savings would be to increase member contributions but to protect those on lower earnings. Can the Minister let us know how the Government’s acceptance of the recommendation is to be implemented and within what time frame?

Clause 24 is an enabling measure and, in principle, has our support. It cannot be right to exempt judicial pensions from the financial discipline which is to be applied to other public service schemes. However, changes must, as for all public service schemes, respect accrued rights. It is important also, as the noble and learned Lords contend, that these matters proceed in a manner that does not impair the independence of the judiciary.

Time does not permit a review of all the other essentially technical changes in the Bill—we will pick up on these in Committee—but perhaps the Minister can help us on one point raised by several noble Lords. Paragraph 3 of Schedule 3 seeks to introduce some flexibility into the arrangements for consolidation of S2P. There seems to be nothing in the Bill to address the much heralded consolidation of the basic state pension and S2P on the way to a £140 basic pension. That was referred to by the noble Baroness, Lady Greengross, my noble friend Lady Hollis, and the noble Lord, Lord Stoneham, who said that he has had some engagement on this with the Pensions Minister. Can the Minister update us on this and say when we can expect firm proposals?

A further issue of significance, which the Bill addresses in part, is the consequences of the switch from RPI to CPI in determining the general level of prices for revaluation and indexation purposes. The major impact of this on occupational pensions will, as the Minister said, be delivered by order and not by the Bill. From the Government’s point of view, this seems to be yet another item of work in progress as their consultation is not due to close until the beginning of March. Can the Minister let us know when the responses will be shared with us? The impact assessment has also become a bit of a moveable feast by some £20 billion in the space of a few days.

We have generally signalled our acceptance of the switch to CPI for uprating benefits, not necessarily as a permanent change but for a period while the deficit is being addressed. We will continue to examine the appropriateness of CPI as currently configured as a suitable measure for inflation compensation purposes.

We have much to discuss in Committee but our efforts will be focused on seeking a reversal of the unfairness at the heart of the Bill. That unfairness goes against the grain of recent pension legislation, which has been to redress the historic discrimination that women have faced in the pension system. However, the Government will have our support—if not uncritical —in taking forward the auto-enrolment proposals.