State Pension Reform

Rachel Reeves Excerpts

Monday 4th April 2011 Commons Chamber

[The Minister of State, Department for Work and Pensions (Steve Webb)]

With your permission, Mr Deputy Speaker, I would like to make a short statement about state pensions. The coalition has already taken steps to support current pensioners by reintroducing the earnings link for the basic state pension. Indeed, we went one step further with our triple guarantee, which will mean that a pensioner retiring today can expect to receive about £15,000 more in basic pension over the life of their retirement. However, the pensioners of tomorrow face a new landscape. With longevity continuing to increase, future pensioners can expect to work for longer and they may not have the same levels of housing equity. They are less likely to have the certainty of a final salary pension and from 2012 we will introduce a new system of automatic enrolment into workplace pensions.

Today, the Government are publishing a consultation document, which looks at whether the existing pensions system is suitable for meeting the challenges of the future. This Green Paper marks the next step in the coalition’s plan to create a system that is fair and simple for pensioners and that rewards those people who do the right thing and take responsibility for their future. It is right that we ask people to take responsibility for their retirement by saving over the course of their working lives, but it is also right that the Government should play their part by ensuring that we support those who make the right choices for their future and those of their families.

If we want to encourage pension saving, the key is getting the state pension system right. The current system has been in a sort of permanent evolution for decades, which means that planning for retirement is fiendishly complex. The Green Paper sets out two options for reform, neither of which involves spending more money on future pensioners than has already been forecast through the existing system. The key is to spend the money we have better. The objective is clear: to move to a simple, contributory state pension system that provides flat-rate support above the level of the means-tested guarantee credit, which would be easy to understand, efficient to deliver and provide a firm foundation for further saving.

The first option involves bringing forward existing reforms so that the state pension would evolve into a two-tier, flat rate system more quickly. The second, more radical, option is to move to a single-tier state pension. Both options are for future pensioners; pensioners who have already reached state pension age by the date of reform would not be affected, so no existing recipient of state pension would see their income reduced. For future pensioners, we would also continue to honour the contributions that people have built up to the date of reform. The option of a single-tier state pension would be a marked improvement on the current system, which is dogged by complexity and confusion. During the transition, many would receive their single-tier pension from a combination of their state and contracted-out scheme, as happens now, which means that they would receive less than the currently estimated £140 directly from their state pension.

Let me give hon. Members an idea of just how confusing the present UK pension system is for the average person. The Pensions Commission has described it as one of the most complex in the world and a departmental survey on attitudes to pensions found that barely one in four people agreed that

“they knew enough about pensions to decide with confidence about how to save for retirement.”

Worse still, few people have a clear idea of what their state pension will be worth when they retire. Critically, the current system actually discourages some people from putting anything aside; the mass reliance on means-tested benefits leaves people unsure whether they will benefit from the savings they make. Automatic enrolment into workplace pensions with employer contributions are due to start from next year, so we need to give people more clarity and certainty about what they will get from the state, thereby giving them a firm foundation for decisions about saving to fund their retirement.

For women, the low-paid and the self-employed, the state pension system can produce unfair outcomes. As a result, people in those broad groups are far more likely to have poorer state pensions, which we will address. Under a single-tier state pension, for example, the self-employed would be able to build up as good a state pension as anyone else. They stand to gain around £1.40 a week of state pension for every year of national insurance contributions that they make, up to a maximum of 30 years. That could provide them with a state pension of around £140 a week, instead of the current rate of £97. Currently, less than 50% of women in their late 40s or early 50s are expected to get £140 a week from state pension income in retirement. Our proposals would address that. We are clear that reform on this scale could take many years to deliver, but the prize—providing clarity to savers and all those planning for their retirement —is a real one.

There are two other, related issues. The Government recognise that means-tested benefits play an important role in targeting support where it is needed most and provide an essential safety net for the most vulnerable. However, means-tested benefits add to complexity and can be a real disincentive to saving for many people. Therefore, in addition to consulting on the two state pension options that I have briefly mentioned, the Green Paper seeks views on whether the current system of means-tested support would best meet the needs of future pensioners. On the state pension age, as life expectancy projections continue to be revised upwards, we also have a responsibility to ensure that the pensions system is sustainable and that the costs of increasing longevity are shared fairly between the generations. Therefore, as well as reforms to the state pension, we are consulting on the most appropriate mechanism for determining future changes to the state pension age.

As the coalition addresses those issues, I shall be seeking as many views and contributions to the debate as possible. We shall be asking all interested parties—hon. Members, employers, pension providers, members of the public and specialists—to work with us to ensure that we deliver the state pension system that the people of this country deserve. If we want future generations to take responsibility for their retirement, we need to deliver a simpler and fairer state pension system that acts as a foundation for people to build up to a decent income in retirement. Fairer, simpler systems that reward people who do the right thing and take personal responsibility for themselves and their families—these are precisely the same themes that run through the welfare reforms being implemented by my right hon. Friend the Secretary of State, from the universal credit to the Work programme.

With the Welfare Reform Bill we have set out how the coalition will transform working-age benefits to make work pay and tackle the root causes of poverty and welfare dependency, but we also need people to save for their retirement. We need automatic enrolment and employer contributions to work. With today’s Green Paper we are setting out how we plan to transform the pensions system and create a simple, decent state pension that is easy to understand and efficient to administer. We need to ensure that saving for the future pays. I am proud to be part of this bold, reforming agenda. Today’s Green Paper is a step on the road to a radical reform of the state pension system, and I commend this paper to the House.

[Rachel Reeves (Leeds West) (Lab)]

I thank the Minister for advance sight of his statement—half an hour before he got to his feet. Given that the pensions Minister and the Secretary of State chose to announce the most positive elements of the Green Paper to the media over the weekend, I cannot help feeling that I am the only person who still has not seen it. Today we have heard proposals that include a universal flat-rate pension and further increases in the state pension age. Although in principle the move to a more simplified system is welcome, it raises a number of important questions.

The Labour Government recognised the importance of pension reform. Labour made great inroads, particularly in lifting more than 1 million pensioners out of poverty and in recognising the vital role that people—mainly women—play as carers. The Labour Government reduced the number of years needed to qualify for a basic state pension to 30, helping women, while more generous credits for carers have ensured that more people are now entitled to a higher level of the state second pension. Labour also introduced automatic enrolment, helping the up to 8 million people who previously did not put money aside for their pensions to save. Although we welcome the fact that the Government are continuing with automatic enrolment, we disagree with the watering down of some of those proposals.

Previous changes to the state pension mean that, based on new accrual rates and assuming 30 years of national insurance contributions or caring credits, a low-paid woman or someone in a caring role would be entitled to a basic state pension of £102.15 a week, plus £43.50 in the state second pension, totalling £145.65 a week, or more if she had 40 years of contributions. The figure of £140 a week that the Minister set out must be seen in that context. Pensioners and families must assess the proposals carefully to ensure that they are not worse off than they would have been under Labour’s plans. Can the Minister give some reassurances about the other benefits that pensioners receive, including free TV licences, prescriptions, eye tests, support with council tax, bus passes, the winter fuel allowance and cold weather payments? In the Budget we saw a cut in the winter fuel allowance, despite rising energy prices and two successive cold winters. Will the Minister explain how he will account for those benefits in the new system, or say whether we will see further cuts, by stealth or otherwise?

I have a few brief questions about affordability and fairness. The Chancellor announced in his Budget that the reforms would cost no more than the current system, yet the Pensions Policy Institute estimates that a flat-rate pension at a guaranteed credit level will cost almost 1% of GDP after 13 years. That must imply that although some will be better off under the Government’s plans, some will also be worse off. The Minister has spoken eloquently about the potential winners, but the distributional impacts are critical, so will he confirm who will be worse off under the new proposed system?

On fairness, the Minister has said that accrued rights will be protected. Forgive me for being a bit sceptical, but he said the same about the switch in uprating from the retail prices index to the consumer prices index. However, in this instance I will give him the benefit of the doubt. Can he guarantee that someone in their 50s who has worked all their life on average earnings and has never contracted out of the state second pension will still be entitled to a more generous state pension than someone who has not paid in? If not, does he think it fair that those contracting out and getting defined benefit pensions in retirement could receive the same state pension as their counterparts who have paid full national insurance contributions throughout their careers? If those who have paid in get more than £140, will the change really be cost-neutral? If some will get less than £140 based on lower contributions, will the Minister ensure that no one falls below the guaranteed credit level? In what way can that be called a flat-rate pension?

The Government’s proposals could have serious implications for the future of defined benefit schemes, because they will end the rebate for those on DB schemes. Given the importance of occupational savings for retirement income, as the Minister said, what are his estimates of the generosity of DB schemes—and, indeed, their overall survival—given the changes? The changes in contracting-out touch on a wider point. The post-world war welfare state is based on the contributory principle. We welcome the news that any new flat-rate system will keep contributions at their core, and that anyone with 30 years’ national insurance contributions will be entitled to the newly formulated pension. However, given the Chancellor’s announcement that the Government intend to merge tax and national insurance, will the Minister explain how the contributory principle will work in practice if that merger takes place? Will he also give a reassurance that taxes will not go up for pensioners, who of course do not pay national insurance?

The other, less briefed elements of today’s Green Paper include the automatic mechanism for increasing the state pension age to make future increases fair and smooth, with time for people to plan. The move comes too late for the 500,000 women who will have to wait a year longer before they receive their state pension and the 33,000 women who will have to wait exactly two years before receiving their state pension. Does the Minister now recognise that the accelerated timetable for the state pension age for women in their 50s does not spread the cost fairly or, with just five years’ notice, leave enough time to prepare?

To conclude, the Green Paper does nothing for today’s pensioners, because a flat-rate pension will be for only new pensioners. Today’s pensioners are suffering at the hands of this Government, with an increase in VAT to 20%, which sees pensioners worse off by £200 a year, low savings rates and a £100 cut in the winter fuel allowance. Although a flat-rate pension of £140 sounds good in theory, the Chancellor says that there is no new money, so who will lose out? It is quite likely to be families on average earnings, or just a bit more, who have worked hard and brought up a family, paying their full national insurance contributions. Some people will be worse off under the reforms, yet the Government want to talk about only the winners. In the final chapter of the review, the Government suggested that a crude formula could be used for uprating the state pension age. They have already hit women in their late 50s with a two-year increase in their state pension age; now they want to use a formula that pays no attention to health in later life, so we will all be waiting longer and longer to get our pensions.

We welcome the intent behind today’s Green Paper. We want a more progressive and less complicated system, but I am yet to be convinced that today’s Green Paper will achieve that.

[Steve Webb]

I did write the hon. Lady’s words down—in principle, she welcomed the Green Paper, so I am grateful for her warm comments about our proposals. She asked a number of specific questions, and I shall try to respond to them.

The hon. Lady seemed to imply that women would get £145 anyway, so wondered why we needed to do anything. That, however, is decades away. Equality between men and women in the state pension system is decades away, and we think that is too slow. Many women who did their child rearing in the ’80s and ’90s got no state second pension protection because it did not exist at that time. They will be retiring over the coming years and we are now bringing forward that protection for them. We do not want to wait 20 years for equality.

The hon. Lady asked an important question about passported benefits and we will need to consider the implications of these changes for those benefits. She had the cheek to suggest that the winter fuel payment had been cut in comparison with what she would have provided if she were in office. She will be well aware that we are sticking precisely to the budgets that her right hon. Friend the Member for East Ham (Stephen Timms), the former Chief Secretary to the Treasury, wrote. He will know perfectly well how much he put aside for the winter fuel payments, and we are doing exactly what he planned.

The hon. Lady asked about the Pensions Policy Institute and its estimate that a £140 flat-rate pension would cost 1% of gross domestic product. What she may have misunderstood from the report is that the question it asked was what it would cost if that amount were paid to everybody. That is where its figure came from. We are saying that we will create this for new pensioners, because new pensioners face a new world in which they will work longer, retire later and have fewer final salary pension schemes, so we need a system that is fit for them.

The hon. Lady sought reassurance on two points and the answer is yes to both of them. We will honour past service and we will make an adjustment, as I said in my statement, for contracted-out periods.

The hon. Lady asked about the future of final salary pension schemes after 13 years of decline under Labour. She will be pleased to know that the National Association of Pension Funds—the trade body for company pensions —welcomes these reforms and supports them, but we are in dialogue with those operating large final salary pension schemes to discuss how these changes will impact on them and how we can work with them to move towards the sort of simpler scheme that they and we want to see.

The hon. Lady asked about merging what the Chancellor referred to as the operation of the tax and national insurance system, which is certainly at an exploratory stage, but he has made it clear that pensions will be protected under these changes and that the contributory principle will remain.

Finally, the hon. Lady asked about the mechanism for raising the state pension age. She referred to a crude formula, but there are options in the Green Paper. One is to have an automatic mechanism for raising the pension age as longevity increases; the other is to adopt a more nuanced approach to take account of a range of factors. We would welcome feedback on that.

Overall, I think the hon. Lady welcomed our proposals, particularly the fact that they will benefit women and self-employed people and will lead to a fairer system. She said that she wanted to see a fairer system; in office, the Labour Government never delivered one, but through this Green Paper, we will.