Pensions Act 2014 (Consequential and Supplementary Amendments) Order 2016

Lord McKenzie of Luton Excerpts

Monday 8th February 2016 Grand Committee

I trust that on that basis your Lordships will be content for me not to take up time going into any further details on the order. With that, I commend the regulations and the order to the Grand Committee.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for her introduction of these regulations and the order and note that the two Motions are to be taken en bloc.

The draft Explanatory Memorandum reminds us that this is the second tranche of affirmative legislation which is needed to support the introduction of the single-tier or new state pension on 6 April 2016, and there is more secondary legislation to come. We have been asked today about taking some SIs on 22 February. Is that it or is there still more to be scheduled?

We know that part of what is to come will cover national insurance credits for spouses and civil partners of Armed Forces personnel to cover past periods of accompanied service overseas. We obviously support this but recall that when we debated this before there were concerns, surprisingly, about the data. Perhaps the Minister will confirm how these have been satisfactorily addressed.

The scope of these regulations is a reminder of the complexity which is still very much a part of our pensions system—state and private—and whatever the promise of simplicity to come from the new state pension, that simplicity is, frankly, some way off. The need for effective communication could not be greater, especially as the change comes in the midst of other pension changes, including the accelerated changes to the state pension age, particularly hitting women, and the so-called flexibilities for private provision. This complexity also requires particular diligence in drafting. I am bound to say that slipping through regulations just before a Summer Recess, which have to be unpicked subsequently is not an efficient way to legislate. However, we acknowledge that eventually the new state pension will simplify matters and bring forward the point at which women get equivalent state pension outcomes to men, but not until the 2040s. We also note that the IFS concluded that in the long term the new pension will be less generous than the current system to almost everyone.

We have heard this afternoon that the regulations cover four main topics: deferral of the new state pension; transitional arrangements for inheriting graduated retirement benefit; pension uprating for those living abroad; and technical amendments relating to contracted-out occupational schemes. As we have heard, Regulation 3 deals with the deferral of the new state pension. The opportunity to do this exists, of course, under the current system and is something we support. It is an encouragement to those who wish to stay in the labour market and earning. However, the terms are to be less generous in the future, with the reduction in the accrual rate from 10.4% to 5.8% a year and no opportunity, outside transitional arrangements, to take a lump sum. Any increase is applied to the weekly rate of pension immediately before the end of the deferral period, but this is now to be reduced when there has been an increase other than through uprating. As regards what has been described as an anomaly, does this happen under the current system? What has changed in the need to back out these issues?

The Explanatory Memorandum tells us that the most likely cause of such upratings is where someone has inherited an amount on the death of a spouse or civil partner, so could the Minister please tell us what percentage of entitlements to inherited amounts on death accrue to women rather than men? What is the estimated saving to the Treasury from this measure? Although for those wholly in the new scheme there will not be opportunities to inherit a percentage of a late spouse or civil partner’s additional state pension, we can at least support the transitional arrangements that enable someone to qualify for a survivor’s pension in respect of additional state pension entitlement built up in the current scheme. We also support the new provisions introduced by Regulations 4 and 5 enabling the inheritance of graduated retirement benefit, including deferral payments. Even though amounts are likely to be small, as has been said, it is reasonable that the transitional arrangements are consistent.

With regard to the uprating of pensions paid abroad, I confirm that what the Minister said is correct: in government we, too, resisted calls to uprate the state pension payable abroad other than to those territories set out in the Explanatory Note. This, too, was largely on the grounds of cost, as well as the uprating factors. Carrying over these provisions to the new system is therefore reasonable. We note, however, that one small change is to include Sark in the reciprocal arrangements. Where on earth did that come from? Can the Minister tell us why and say what representations have been received and from whom in respect of this matter? The definition of an overseas resident is somebody,

“not ordinarily resident in the UK”.

But can the Minister confirm that a person could be ordinarily resident in the UK but still not domiciled in the UK? As we have heard, the substantive change to the arrangements relates to the deferral rights of overseas residents. It is understood that the position is to back out the uprating component of the deferral calculation to prevent a benefit being received which would otherwise not be available if there were no deferral. We have no problem with that.

We note that the legislation is deficient in other respects in not allowing a disapplication of uprating where a survivor’s benefit is not to be uprated because the deceased person’s pension was not to be uprated—perhaps the Minister could expand a little on those circumstances. So I ask: can we therefore look forward to another Pensions Act if that is what it is going to take? The provisions generally relating to contracted- out defined benefit occupational schemes, the GMP requirement and the right to convert to ordinary scheme benefits take us back to the challenges of the 2007 Act. What was essential for conversion was the need to enable a survivor to have benefits at least equivalent to the survivor’s GMP. This looks to have eventually been achieved under the new arrangements by paragraph (6) of these regulations and Regulation 27A of the 2015 Regulations. However, this reminds us that contracting out is no longer available from April 2016, with higher rates of national insurance contributions being payable by individuals as a consequence. We have probed before what this means in terms of extra tax and perhaps the Minister would like to take this opportunity to update us on precisely how much the Treasury expects to garner from the switching off of contracting out.

As far as the order is concerned, we support the provisions enabling credits for parental and caring responsibilities awarded after but relating to pre-6 April being included in a person’s “starting amount”. We wonder why HMRC has to take over the Secretary of State’s authority in connection with entitlement to credits but note that this is not a new provision. As for extending the factors that the Secretary of State can take into account to trigger auto-enrolment and set the band of earnings to include the full rate of the new state pension, can the Minister please explain what practical effect it is considered that this change will have?

Paragraph 9 of the Explanatory Note refers to the multichannel communications campaign. Perhaps the Minister can tell us how this is is going. Mention is made of a new online service to be rolled out in 2016, which will provide a projection of the new state pension at state pension age. Is this on schedule? What volume of inquiries is currently being experienced and what are the response times?

The regulations and order are complicated but we thank the Minister and officials for a very detailed Explanatory Memorandum. Overall, we judge that they contribute to making the new state pension work properly, and we will not oppose them.

[Baroness Altmann]

My Lords, I am grateful to the noble Lord for his contribution to this technical debate. He has raised several questions, and I will attempt to answer some of them. If he requires further answers, I will of course write to him.

It is indeed the case that the analysis conducted by the department shows that the majority of those reaching state pension age between now and 2013 will receive more from the new state pension than they would have done under the old system. In the long run, the aim is that the rollout of automatic enrolment will provide a supplement to that state pension for future generations of retirees. Therefore, in the long run, the overall amount paid out by the state may reduce, but that is to be offset by the impact of automatic enrolment.

Women will get more state pension, on average, under the new system than they would have done under the old one. Notwithstanding the equalising of state pension ages, over their lifetime women will on average get 10% more state pension in total than men of the same age. The idea that women are losing out needs to be modified by some of the data that we have already produced.

[Lord McKenzie of Luton]

I was not suggesting that women were going to lose out. My point was that there is movement towards equalisation with men, although that is some time in the distance—I think that the 2040s has been the calculation.

[Baroness Altmann]

The equalisation between men and women of state pension payments may come in the future but, in the mean time, notwithstanding whether they get slightly less than men—the gender gap will be much narrower—over their lifetime they will get more, because the average woman lives longer than the average man. Once equalisation occurs, the gender favour to women will be even greater. In the mean time, the new state pension will put women in a much stronger position under the new state pension rules relative to the old ones. This is a significant improvement in the position of state pension payments for women on average, who, as we all know, have lost out in the past; we are remedying that to a large degree.

The noble Lord asked about contracting out. The idea of removing contracting out is not so much about cash flow or increasing the amount of money that comes to the state, because contracting out merely replaces what the state would have otherwise paid out in the state pension. By ending contracting out, the national insurance payments that are increasing will be offset over the long run. Indeed, depending on the average life expectancy, it could perhaps end up meaning that the Government pay out more in state pension as a consequence of ending contracting out than they do under the current system, where part of the state pension is contracted out to an employer who promises to replace the additional state pensions.

Therefore, it is not clear to me that there is a cost saving. It is clear to me that it is absolutely essential that we move to a simpler state pension system, which people can understand and deal with, because currently they cannot do so. At present, the existence of contracting out means that part of people’s state pension builds up in a private pension, which confuses the messages and the planning. Therefore, the principle of the new state pension is that everybody pays the same type of national insurance without some people being able to pay less than others because they are in a particular type of private pension scheme, and that everybody, regardless of their earnings, the type of credit they have or the type of national insurance contribution they pay, will be able to build up the same state pension each year as they accrue another year on their contracting-out record.

[Lord McKenzie of Luton]

In relation to the year we are just about to enter—2016-17—is the Minister saying that there will not be extra net revenue in the system that year from the abolition of contracting out?

[Baroness Altmann]

Of course that is not what I am saying. I am saying that we have to look at the state pension over the long term. National insurance is paid now but it relates to liabilities that will be paid over a long period of time, and Governments, quite rightly, have to plan for that with regard to the money flowing in now and the liabilities that will ensue from that over the longer term. As we know, the new state pension is expected to be cost-neutral to the taxpayer. Given that, I am not convinced that it is appropriate to consider contracting out as a money-saving exercise.

I am delighted that the noble Lord supports Regulations 4 and 5. Most of the measures that are being put in place here are indeed technical in nature and try to maintain the principles of the new state pension as well as protect people when we move from the old system into the new system—in particular, as we said, widows or widowers who inherit parts of the state pension entitlements that they would be able to inherit today.

The noble Lord also mentioned the importance of communications, and I completely agree with that sentiment. Indeed, as he alluded to, we are engaged in a widespread campaign to inform people and improve communications around state pensions. An enormous amount of time, effort and money has been put into this exercise, and we will continue that over the coming period. I assure the noble Lord that we have very much adopted the idea of communications being particularly important and will continue to work in that way.

The noble Lord also mentioned the complexity of the new state pension rules and some of the issues that have arisen with the drafting of the regulations. Of course it is a matter of regret that we had to come back with an affirmative regulation, which should have been done in the appropriate way in the first place. However, the debate is now taking place, as required.

We must not forget that the old state pension is what is so complicated. Dealing with past complexity is imposing difficulties when moving to a new state pension system. We have not been able to just sweep away the old system; we have to carry people into the new state pension system. That means carrying with it the complex rules and the many adjustments that were made over the many years for which it has existed. Once that new system is in place, the scale of complexity will be vastly reduced. For most people, it really will be a simple system, but we have to get from the old system into the new one, when it is fully up and running, and that will take some time before we can reconcile all the records as at April 2016 to know what everyone is starting the new system with.

As for national insurance credits for spouses and partners of people in the Armed Forces, we will be providing data when we bring forward those regulations. As the noble Lord said, we plan to have that debate on 22 February. We believe that we have reliable data that we can put before the House. Unfortunately, as I explained, the old system is very complicated. We need to bring in a huge number of moving parts from the current system to try to ensure that people do not lose out.

The noble Lord mentioned inheritance. In the new state pension system, widows will be able to inherit the additional pensions of their late spouses or partners. That inheritance currently exists and will be carried forward. I can reassure the noble Lord on that matter.

The noble Lord asked me about digital state pension statements. At the moment, they are in testing. The testing will be carried out over the next few weeks, and we will then be gradually rolling out the new digital statements, which will be much clearer and more helpful, so that people can see forecasts of what their new state pension will be able to give them.

As for the issue of deferral, as I said, the regulations will correct an anomaly that exists. The new state pension will ensure that the deferral for those who live in overseas countries which do not have a reciprocal arrangement with us, and those countries in which pensions are not uprated at the moment, will apply only to the pension at the date at which the person reached state pension age. That is the increment that will be added for deferral, rather than adding an increment to an increased state pension, which would otherwise give them a double benefit.

The debate has ranged rather widely—probably more widely than the provisions—so it may be helpful if I remind the Committee of what the regulations do. They enable a widowed person whose late partner was in the old state pension scheme to inherit the graduated retirement benefit. They provide for increments from state pension deferral to be based on the amount of new state pension the person would actually have been entitled to if they had been receiving their pension instead of deferring it. They maintain the long-standing policy of not uprating the state pension for people resident in certain countries overseas. They replicate a provision relating to survivor benefits that was in an old set of regulations in the new set that replaces them. The order simply makes consequential amendments that result from the introduction of the new state pension. I therefore commend the regulations and the order to the Grand Committee.

[Lord McKenzie of Luton]

Would the Minister mind looking at the record after this and perhaps writing where she has not been able to cover matters this afternoon?

[Baroness Altmann]

Yes. As I said, I am more than happy, if there are issues that have not been covered, to write to the noble Lord.