Pensions Bill [HL]

Lord McKenzie of Luton Excerpts

Tuesday 1st March 2011 Grand Committee

Moved by

[Lord McKenzie of Luton]

1: Clause 1, page 1, line 6, leave out “December 1953” and insert “April 1955”

[Lord McKenzie of Luton]

My Lords, I take this opportunity to thank the Minister and his team, who have been very helpful and accommodating as we have gone through our amendments. There have been some government amendments, and I am grateful for their explanations.

The purpose of this group of amendments should be very clear. Collectively they seek to review the Bill’s acceleration of the equalisation of the state pension age for men and women. They preserve the existing timetable set out in the Pensions Act 1995, which means that women will reach pensionable age at 65 if born after 5 April 1955. For women born between 6 April 1950 and 5 April 1955, state pension age will gradually increase over a decade, rising one year in every two.

The state pension age needs to rise in order to pay for a more generous basic state pension linked to earnings. This was a principle established by the Labour Government in 2007 and one that we continue to support. By retaining the table contained in the Pensions Act 1995, the increase in state pension age to 66 for both men and women is negated. However, our Amendment 4 brings forward the increase for men and women to 66, accelerating this by four years to between 2020 and 2022.

The amendments make no specific proposals for changing the current timetable for increasing SPA to 67 between 2034 and 2036 and then to 68 between 2044 and 2046, legislated for in the Pensions Act 2007, although we accept—as do the Government, I believe—that increasing longevity will eventually cause that to be revisited. We do not challenge the life expectancy projections that the Government have used to underpin their policy changes. We do, of course, accept that life has literally moved on since 2004, and the data which underpin the Turner settlement have moved on. Average life expectancy for those who reach 65 in 2026 has increased by 1.5 years for men and 1.6 years for women. Our challenge to the Government and their response to these changes is to the speed and equity of the adjustments that the Bill seeks to make, particularly for women.

When the Conservative Government legislated to equalise the state pension age for men and women at 65 in 1995, they gave 15 years’ notice from the beginning of the change and indeed 25 years’ notice of the end of that change. When the last Labour Government legislated to increase the state pension age to 66 in 2007, they gave 17 years’ notice to the start of the process. In this Bill, the coalition Government give just six years.

In setting out their policy objectives, the Government instance the need to take account of the increase in life expectancy, the need for spending on the state pension to be sustainable, the need for intergenerational fairness, and the need for fairness in the balance of support given by the working age population. We do not disagree with these aspirations, but consider that there is another policy objective that has been overlooked: fairness for those going through the transition, with sufficient notice for them to have the chance to adjust to changed expectations of receiving the state pension age at a later date. We know from the impact assessment that the timetable proposed in the Bill will affect some 5 million people; 500,000 will have to wait more than a year extra to receive their state pension, all of them women. Of these, 300,000 women will have to wait for more than 18 months and 33,000 will have to wait for two years. Contrast this with our proposal in this amendment, which affects 1.2 million fewer people. It will affect about the same number of men and women, and no one will have to have an increase in state pension age of more than a year. In terms of intergenerational equity, measured as a proportion of adult life spent in receipt of a state pension, the timetable we propose has a smoother transition to the long-term trend of 32.5 per cent for men and 34.8 per cent for women.

It is accepted that the Government’s proposal will save more in resources, although the savings do not begin to accrue until 2016-17. As the impact assessment makes clear, there is a judgment to be made. Indeed, we thought that it was a judgment that the coalition Government had made when declaring that the date when the state pension age started to rise to 66 would not be sooner than 2020 for women. Perhaps the Minister will take the opportunity to say why the Government have changed their mind on that issue. Just look at some of the unfairness. A woman born in April 1953 will be able to get her pension at 62 years and 11 months. A woman born in April 1954 will have to wait until she is 66. Many women and men affected by these changes would already have plans under way for hitting what they thought was their state pension age. We have heard from many who have reduced hours or given up work and taken on caring responsibilities for parents or grandchildren. The position for women is compounded because of the disadvantage that this generation of women has experienced in terms of lower earnings, interrupted careers and restricted access to private pension schemes. They have less flexibility to respond to the changes that see their state pension age rise by six years between 2010 and 2020, compared to just one for men.

I take this opportunity to particularise some of this unfairness. I am sure that other noble Lords have received, as we have, a host of representations from people and I would like to quote from two. One is as follows:

“Yes, I’m now 55, with only a small additional work pension on top of the State pension to come, because I wasn’t able to contribute anything extra to my employers scheme when I was younger—my husband & I separated and I was a single parent of 2 children and there just wasn’t the spare cash. I used to be a part-time worker—part-time women used to be discriminated against in not being able to participate in pension schemes (look up ‘Beswick Cases’ and the ‘Barber judgements’). So like many women the same age I’ve grown up in one era ‘Your husband will take care of you financially’, then things changed. I would have been able to retire with a full pension (such as it is) at 60; then, the Equalities legislation was moving it slowly towards 65 but at least I had due warning”.

Another person makes a point that I highlight:

“The law when I was younger prevented me from paying into a private scheme when I was not working or was working part time which happened because due to rearing children and the ill health of one of them, which he will have on and off throughout his lifetime. I feel it was a waste of money buying the extra NI contributions because since I bought them the government is now proposing to give me no pension at all for 2 of the years for which I thought I was buying a full pension”.

I pick up on that point in particular. The noble Lord will be aware of the buy-back opportunities—six years’ buy-back with class 3 contributions. He may also be aware of the further buy-back opportunities that were argued for and recommended to the House by my noble friend Lady Hollis. I imagine that more than a few people found themselves buying back extra class 3 contributions to secure a full state pension, on the assumption that they would give up working at a known date, given that the state pension age was set down in the 1995 Act. Now, like this person, they may find themselves waiting an extra two years for their state pension, continuing to work to be able to survive. By working, they would pay their national insurance contributions, and the buy-back that they had already made would be a complete waste of money. It seems to me a point to pick up and pursue further. I was alerted to it particularly by this representation. We need to reflect on what notice and information were given to people that caused them to go through these buy-back arrangements and to waste a not insignificant amount of money.

I also say to the noble Lord, Lord Boswell, that his amendments look on the face of it to be somewhere between the Government’s position and ours, but doubtless he will expand on that when he introduces them. It would be helpful if he could give us an analysis, in terms of the increase in the state pension age, of those affected who will have to wait less than a year for their state pension in comparison to the current arrangement, those waiting more than a year, those waiting a year and a half, and whether there are any up to the two-year mark.

[The Deputy Chairman of Committees]

My Lords, I should point out that, if this amendment is agreed, I cannot call Amendment 1A, for reasons of pre-emption.

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[Lord Freud]

My Lords, I thank the noble Baroness, Lady Hollis, for that. I have to confess that I was not aware of those events in 1982. I was aware of some events—I think that I was writing a Lex column in 1982 so I was not completely out of the picture. The noble Baroness makes the point that there were five years of notice. Clearly, the smallest amount of notice that we have in this instance is 6.5 years for those who are affected at the tightest level. We believe that that period, which admittedly is shorter than other periods that we have seen, will still allow women to plan for their retirement.

[Lord McKenzie of Luton]

My Lords, I thank every noble Lord who has spoken in what has been a well informed debate. When I hear my noble friends in full flight, it almost makes me glad that I am not the Minister any more. Pretty much everyone who spoke, apart from the Minister, recognised the unfairness embedded in these proposals and was supportive of one way or another—either a timetable or mitigation factors—to address that unfairness. The Minister focused principally on the differential costs between our proposals in this amendment, the Government’s position and the proposals made by the noble Lord, Lord Boswell. Of course there is a cost, but judgments have to be made, and the Government will have made a judgment on this. Why did they not do things even faster than they proposed, which would have saved even more money? Presumably the answer is that they made a judgment about what they thought was fair and where the balance lay in all this. We are saying that see the balance lying in a somewhat different position. Let us put this in context. We are looking at about £10 billion not as an annual hit, but over a period of years and when we get to 2016-17, GDP will be of the order of £2 trillion a year. Of course, there needs to be fiscal responsibility, but we think that the Government have got the balance wrong in this.

The noble Lord said that he thinks that it is a good thing that one ramification is that women will be working longer, which will make them healthier and potentially better off. The issue is whether people have the time to adjust. Many of the case studies that we have are of people who have already made their dispositions on an assumption about when they can access the state pension. That upheaval is creating problems. I was interested in what the noble Lord said in response to my noble friend about the cliff edge and continuing entitlement to pension credit. That was particularly illuminating and I am grateful for it. I note that we are going to pick up the point made by the noble Lord, Lord Boswell, about the EU aspects of that later; I look forward to that.

Like the noble Lord and my noble friends Lady Turner and Lady Drake, I think that the people who are contacting us about this are not blind to the changes in longevity. People accept that the issue has to be addressed, but we come back to the speed and manner with which it is being done. That is the bone of contention. That is why we will continue to press the matter.

A number of the points raised in the debate—the pension credit point in particular—will feature in subsequent amendments, so I shall not go into detail on them. The noble Lord, Lord German, made a point that my noble friend Lady Hollis picked up on when he said that part of the mitigation would be to have a decent state pension of £140 a week. That would be good if it were achievable, but it is down the track on any basis. How far down the track, we may elicit a bit further during the course of our proceedings; or perhaps not. However, it does not mitigate what is happening to women now and over the next few years, with people not being able to access the state pension that they thought they were going to get, and which it had been legislated that they would get.

We are bound to return to this issue on Report. On one basis or another, I hope that we can find common cause, whether the middle route preferred by the noble Baroness, Lady Murphy, or our proposal. I hope that we can stick with this consensus and get some real change, because it will make a real difference. I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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Moved by

[Lord McKenzie of Luton]

12: Clause 2, page 3, line 8, after “force” insert “or 6th April 2012, whichever is the later”

[Lord McKenzie of Luton]

For noble Lords who were anticipating a debate around PUCODIs, I advise them not to blink. This is just a gentle probe about the effects of getting rid of PUCODIs; hopefully, we communicated the nature of the inquiry to the Bill team to make it a bit easier on the Minister’s time. Clause 2 removes the right to receive payable uprated contracted-out deduction increments from 6 April 2012. It does not, as I understand it, affect awards already in payment, so the noble Lord, Lord Boswell, can relax, although I understand that he will be CPIed on it in the future. I imagine that at the moment it will buy him a thimbleful of petrol, if that.

Let me be clear: we support this measure and consider it to be a sensible tidying-up. My probe is about what we understand to be the range of PUCODIs that would have been payable but for this abolition. The notes accompanying the impact assessments point out that the overall saving is less than £1 million—pretty small beer. For those currently in receipt, we are told that 80 per cent receive less than £1 per week, and for inherited rights the mean is about 60p per week. However, we are also told that the maximum payment is £14 per week, and £6.30 per week for inherited rights. Removing a few pence as a top-up is one thing, but taking away £700 per year is potentially something else. Perhaps amounts build to these levels only after a period of time, so maybe it is not an issue. Nevertheless, I should be grateful for the Minister’s comments about the spread of what would otherwise have arisen, to see whether there are any issues there or whether it really is de minimis.

[Lord Boswell of Aynho]

My Lords, the noble Lord, Lord McKenzie, has been kind enough both to mention my name and to tempt me. I shall disappoint the Committee, I am sure, by indicating that I have no intention whatever of explaining how PUCODIs work or how important they are to one’s lifestyle. All I can say is that I indicated at Second Reading, and a further reading of my recent annual pension statement appears to confirm this, that I think that I have one. However, rather in the manner of one of my masters at school who conducted a survey among the masters’ common room into the wearing of long johns in the winter and found that a significant number of people did not know, I am not absolutely sure that I have one. For the avoidance of doubt, it certainly is not in the range of £14 a week; it is much lower than that, although it is more than £1.

I simply make the point that this is an example of complexity and I am sure that we need to remove it. I am pleased to see the noble Lord who moved the amendment nodding to that. It is an example of how even people who know a modest amount about the system do not know everything that is applied. It creates problems that are almost in geometric progression: the more complex the system is, the less easy it is for people to understand it and the greater the chance of making mistakes. As one building block of the programme of simplification and consolidation, this is a modest but essential measure. I look forward to the Minister’s explanation—if he understands PUCODIs too.

[Lord Freud]

My Lords, I really am grateful to the noble Lord for giving me this incredible opportunity to talk about PUCODIs. I have to quote the noble Lord himself from 2007, when he said:

“This is a technical area and, despite the hour, I hope that the Committee will bear with me as I explain”.—[Official Report, 4/6/07; col. 875.]

He then gave an explanation, but I am convinced that, to his disgrace, he has forgotten every single word that he said to the Committee.

The essential point regarding the payable uprated contracted-out deduction increment is that these payments are very small. As the noble Lord pointed out, 77 per cent of recipients get less than £1 per week. Where it is in payment, it represents 0.6 per cent, on average, of an individual state pension income. Most of the people in receipt are women—93,000 out of 118,000 people are women—and the average received by women is slightly higher than by men. Bluntly, though, both are around 20p per week.

Around 6,000 of the 9,000 in receipt of inherited awards are women. The average received by women is again similar to men: around 30p per week. The original policy intention of the PUCODI was to ensure parity between those who were contracted out, and those who were not. However, as noble Lords will be aware, contracting-out on a defined contribution basis is being abolished from April 2012. The proposed abolition of new awards of PUCODIs for members of such schemes is linked to the abolition of defined contribution contracting-out. I shall not go into the detail of the timings, except to assure the noble Lord that it has never been the Government’s intention to bring the proposed legislation into force before 6 April 2012.

I am not sure that I have a reliable spread, although I am very happy to write making clear what the spread of payments is. However, given the averages we are talking about, there are going to be fairly few outliers. The point is that, as the name suggests, there is an element of choice for people when they take them. They are delaying payment of their contracted-out pension, and there is therefore an element of choice. If the loss is too much, they can start to take it, so there is an element of market balance for the outliers. I will write about that very specific point beyond the averages.

As the noble Lord said in his introduction, it is not his intention to do anything more than find out some of this detail, and I am sure that he will be pleased to withdraw the amendment.

[Lord McKenzie of Luton]

I thank the Minister and the noble Lord, Lord Boswell, for participating and will be delighted to withdraw the amendment. I will be very happy to receive a letter in due course. I remember reading out a script in 2008 or 2007 when I think it was the noble Lord, Lord Skelmersdale, who was leading on the opposition Benches. He assumed I did not understand it because I read the script very quickly. I beg leave to withdraw the amendment.

Amendment 12 withdrawn.

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[Lord Stoneham of Droxford]

I support the amendment. It is related to the amendment that we will discuss in a moment about including part-time earnings to qualify for NEST. This is an important issue, and we need the Minister to look at it with a view to recognising the fact that part-time work is growing and is going to grow. There is a lot more out there in the unseen economy than we probably realise, which should be revealed as we move towards the universal credit system. We must therefore address it. As an employer myself, I have seen discrimination happen over the years. People deliberately keep employment below a certain limit so that they can avoid national insurance, and in future they will be doing this on pension contributions as well. This needs to be addressed.

I accept that there is an administration problem, but systems are improving. We should be trying to address this problem in the light of that. Because it is linked to the problem that we will be discussing on a later amendment, I am very sympathetic to this one.

[Lord McKenzie of Luton]

My Lords, my noble friend Lady Drake and I have put our name to this amendment because we support its thrust. Having heard my noble friend, I gather that, perhaps unsurprisingly, she is even more ambitious for this amendment than I took it to be on first reading. It is entirely consistent with the progress that has been made in crediting people into the pension system, in any event, over many years. It is highly relevant—we heard from the noble Lord, Lord Stoneham, and my noble friend Lady Hollis about the growing importance of part-time work in our economy.

When I first read the amendment, I thought that its thrust was to say that when you aggregate employment earnings, if you are above the lower earnings limit, you get credited in. That in itself would not require any payments from the individual or any payments on behalf of any employer. That, at least, would be progress from where we are. There are arrangements that you have to aggregate if you are within associated companies, but that is a separate case.

If it is possible, as my noble friend suggested, perhaps in discussion with the noble Lord, to go further and say that we could aggregate and then work out what the employee and employer contributions would be and how we divvied that up across employers, then that would be a significant improvement and an advance. That is not only because of the state pension arrangements, with credited and contributory benefits in any event, but for the point that the noble Lord, Lord Stoneham, made about auto-enrolment. If we can aggregate and reach qualifying earnings, particularly if qualifying earnings are going to be pitched at the primary threshold, or at the secondary threshold, which I think is the same thing at the moment, then we can also seek to ensure that people on part-time earnings who would not otherwise qualify in respect of a single employment could, on some basis or another, by aggregation and then divvying up across employers, be entitled to auto-enrolment. At its most basic, lowest level, the ability to aggregate and credit in, for the purposes of the state pension, would be a valuable gain. To be able to go further, as is the ambition of my noble friend, would be a very considerable advance, and if the Minister’s command of technology enables him to deliver on that, we would all be delighted.

[Lord Freud]

My Lords, I am very grateful to the noble Baroness, Lady Hollis, for raising this matter. Clearly this debate has been conducted before, although I was not present, but there is a potentially a new context for it. The fundamental issue of the aggregation of low earnings from multiple part-time jobs and how they could be made to qualify for basic state pension has been a matter of concern to her for some time. It was considered by the Pensions Commission and during the passage of the Pensions Act 2007.

Like her, I am keen to encourage mini-jobs, which I think are not just good in themselves for people in supplementing income, but are an invaluable stepping stone which we have made difficult for people to use in the current welfare system. A system that encourages that process and takes it out of the informal or grey economy and into the proper economy, will be immensely valuable for many people. What I am going to say at this stage and in this debate will be rather correct, in the sense that, in the present situation and in the context of our present systems, it is not be possible to go ahead with something like this. Until we have a new system defined, laid out, and understand its technology, we will not be able to look seriously at what we can do here, and it is an immensely complicated issue in practice. The structure of this answer may be negative as I go through it.

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Moved by

[Lord McKenzie of Luton]

14: Schedule 3, page 21, line 4, after “date” insert “, not later than 6th April 2025,”

[Lord McKenzie of Luton]

My Lords, we are back on a couple of probing amendments. In reverse order, Amendment 15 is merely probing whether the specified date would always be at the commencement of a tax year. I can see that it could be organised this way, but is it inevitable? If not, then something along the lines of this amendment would be appropriate. Amendment 14 is a more substantial probe, though I see that the date has come out as 2005, rather than as 2025, which was originally intended. It is not particularly significant, because it was just a peg on which to hang a question.

Clause 3 introduces Schedule 3, which changed some of the provisions in the Pensions Act 2008 concerning the consolidation of the additional pension. The idea is, at some point in time, to effectively bundle together the various contracted-out rights, and to apply actuarial factors to smooth the disparities in entitlement. We obviously support this approach, but as the notes to the Bill set out, a consequence of smoothing in cash-flow terms is that the Government are likely to pay more earlier and less later than under the current system. I understand that that is the thrust of it. Rather than lock in to the flat-rate introduction year for the start of this process, the Government now seek flexibility by way of an order. I would be grateful if the Minister could say how much flexibility they consider it necessary to have. By how many years is it estimated that the consolidation will have to be delayed or indeed advanced, if that is the thrust of it? Could he give us some indication of what this change means in terms of the likely process of consolidation? What does this mean for the wider aspiration, touched on earlier in our debates, of consolidating the basic state pension with the state second pension? I understand what the Minister said earlier about being unable to advance much on that, so I will not press him on that point, but there is a point about the interrelation of this with that process. Presumably, consolidation of the additional pension is a necessary prerequisite, and perhaps he will confirm that.

On one other practical point, I have a recollection that we were chided during the passage of the 2008 Act by the noble Baroness, Lady Noakes, who is not with us today, on our adherence to advice from actuaries. We had some discussion on whether the actuarial smoothing had to be effectively determined by the actuaries, or by Ministers on the basis of advice. Perhaps the Minister could remind me where we ended up on that issue. I beg to move.

[Lord Freud]

My Lords, I thank the noble Lord for the opportunities to speak to Amendments 14 and 15, which seek to define the latest possible group for whom the additional pension consolidation would be introduced. The amendments tabled by the noble Lord, Lord McKenzie, seek to fix the affected group in relation to a somewhat arbitrary date of 2025. It might be helpful if I provide some context as to why we have taken steps to replace the previous certainty as to the start date and the affected group with a power to define both by way of regulations. Clause 3 and Schedule 3 of the Bill provide flexibility around the implementation of consolidation, which, as provided for in the Pensions Act 2008, simplifies past earnings-related pension rights.

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[Lord McKenzie of Luton]

I thank the Minister for that response. I will read the record with interest, but I will certainly withdraw the amendment.

I just want to be clear on a couple of points. I think the Minister said that something like £200 million per year would be involved in the smoothing exercise. Did I understand that correctly?

[Lord Freud]

Yes. At the early stages there are some years where the figure peaks at around £210 million and then comes back later, so it is a net early annual cost to the state with that maximum, coming down later to a net present cost that is neutral. From memory, the peak year was coming out at—was it 1925? Sorry, 2025. I will get the right century soon. The peak would be early in the 2020s until 2025.

[Lord McKenzie of Luton]

I am grateful for that response. I rather took from reading the literature that the cash flow issue was the real driver in all this, but from what the Minister has said there are obviously broader ramifications. I will read the record.

Might the Minister deal with the point about the other minor amendment about defining a tax year? At the moment the Bill says,

“the tax year beginning with the specified date or a subsequent tax year”.

That presupposes that the specified date would be at the start of a tax year. My question was: does that inevitably follow?

[Lord Freud]

The noble Lord, as ever, is spot on in his assumption. Yes, it is at the start of the tax year.

[Lord McKenzie of Luton]

I am grateful for that. I can see that it is meant to be at the start of the tax year. I suppose that I have a question about what makes it the start of the tax year, but perhaps we will leave that for another occasion. I am happy to beg leave to withdraw the amendment.

Amendment 14 withdrawn.