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Andrew Selous: The hon. Gentleman said that pensioners would be assessed every five years. Will he comment on how they will fare when their circumstances change within the five-year period? Are there not real difficulties in coping with those circumstances?

James Purnell: It is an important point, but Baroness Hollis answered it in the other House when she made it clear that there are only four or five circumstances that will require reassessment: the death of a partner; moving overseas; moving house; and another one or two that escape me. We must have some flexibility in the system to allow such major changes to be taken into account—we can do that in a simple way—but the important thing is that the vast majority of pensioners will be assessed only once every five years, which makes the means test much simpler than it was.

My noble Friend also made it clear that a huge range of items of information that can currently be required no longer will be. With pensioner credit, pensioners will no longer have to report savings of over £6,000 or child maintenance payments. They will not have to report student grants or loans, if they have gone into higher education or the university of the third age, and they will not have to report rent on land or on a second property.

All in all, this will be a system in which pensioners are entitled to the income because they have paid for it through their taxes over their working lives. It will be a simple, non-intrusive system, with changes only once every five years. That is a universe away from the means tests of the early part of the last century; that is why we need to rehabilitate the means test.

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The policy choice that we face is stark—between targeting money on the poorest pensioners and spreading it equally among rich and poor; between putting the investment into pensions, as the Government have done, and have pledged to continue to do, and cutting spending on pensions, as the Conservatives would have to do to meet their public spending goal of 35 per cent. of GDP. They tried to wriggle out of that, and complained when the Secretary of State mentioned it earlier, but that is no use. That aim has been broadly stated both by the party leader and by the shadow Chancellor, and if that is their goal they will have to tell us at some point where those cuts would come from.

We heard no policy proposals from the hon. Member for Havant, but the agenda behind his speech was fairly clear, and it is worrying. The Conservatives would reduce the number of people being means-tested by cutting the minimum income guarantee and the pension credit, and claiming that the slack should be taken up by stakeholder pensions. They would then say that if that were not possible, it would be because of design faults in the Government's policy.

If that is the way the Conservatives plan to save the billions of pounds that would have to come out of pensions to meet their goal of 35 per cent. of GDP, they should be ashamed of themselves. They know as well as anyone else that for a significant number of people in lower-income households there will never be any sense in saving huge amounts in an occupational or private pension, because it would be much better for them to spend that money as income now, on feeding their families, rather than saving a tiny amount for their retirement, which would probably be dwarfed by the benefits that they received from the state.

The earnings limit for the minimum income guarantee is a major departure for pensions policy. The Conservatives make the charge that that reduces incentives to save. Of course that is true, but it was also true of income support, which the MIG replaced. The reason why it now affects more people is simply that the MIG is more generous than income support. In introducing the pension credit, we are therefore addressing a problem that has been inherent in our pension system for decades. As Lord Fowler said in the other place:

Of course I am aware that many people say that the pension credit is too complicated. I look forward to examining the details of the scheme during the Select Committee's next inquiry, which will be into that very issue. The outcome of the pension credit is simple, even if its workings may be complicated. Pensioners will keep 60 per cent. of any private pension, which will make a significant difference to 5.5 million people. We have already started to see progress: more than half a million fewer pensioners now live in households with a low income than did in 1997, and people of working age now contribute £19 billion more in real terms to non-state pensions.

The Opposition say that the Government's policy is failing. Is that why stakeholder pensions have been welcomed by the right hon. Member for Hitchin and

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Harpenden (Mr. Lilley), by Lord Fowler in the other place, and even by the Opposition Front-Bench spokesman? The Government's policy will stand the most important test of any pensions policy—the test of time.

8.59 pm

Mr. Howard Flight (Arundel and South Downs): I was disappointed that the Secretary of State responded to the raising of serious issues in what I felt was a party political, knockabout way. There are two clear interrelated problems. One is that the combination of measures intended to address the need for those who are less well-off to have a decent income in retirement—the minimum income guarantee, quickly followed by the pension credit to help stakeholders—has put in place a system whose original thinking was pretty short-term but which, as the right hon. Member for Birkenhead (Mr. Field) pointed out, is highly unlikely to be sustainable in the long term.

A provision that will cost the equivalent of 11p on income tax—about £26 billion in today's money—and put 65 per cent. of the population on means-tested benefit is highly unlikely to survive in the long term. A further serious effect is that it has demotivated employers' in their efforts to provide proper pension schemes for their staff. Everyone in the pensions industry now thinks that the Government's professed objective of reversing the 60 per cent. state funding versus 40 per cent. private funding of pensions is completely unrealistic, and that we are going in the other direction.

Other hon. Members have said quite a bit about the decline in occupational schemes, but I should stress that they have been one of the British economy's great successes. They are one reason why Britain has enjoyed lower tax rates than the countries of euroland—even under a Labour Government—and why the British economy is doing better than the economies of continental Europe, yet we face the prospect of a serious reversal. Membership of occupational schemes has declined by 500,000 in the past decade, and by 2 million in the past 30 years. As has been cited, 28 per cent. of men and 26 per cent. of women have no occupational employment scheme, whereas 10 years ago the figures were only 19 per cent. and 21 per cent. respectively. The movement away from occupational final salary schemes to money purchase schemes is accelerating. In the past five years, 24 per cent. of firms have made such a shift, and 46 major companies have closed their final salary schemes in the past year alone.

The key point—it is perhaps not realised—is that, typically, contributions to money purchase schemes are about 7 per cent. less per annum than contributions to final salary schemes. Just when it appears that real returns on investments are declining, as measured by the long-term yield on gilts, savings in pensions are actually being reduced. As a result, in the next 30 years the great majority of people—a generation that will aspire to higher living standards—will not enjoy the pension provision that the present generation enjoy, whether from final salary or money purchase schemes.

The moral is that there will be a greater burden on taxpayers and the state, at a time when the population will be ageing, the number of people in work declining and the number of retired people increasing. As it stands, the policy does not stack up and is not capable of surviving

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the next 20 or 30 years. Above all, pensions policies should be long term. It is no good trying to address a genuine short-term problem by cobbling together a policy that is impossible to deliver and that damages long-term provision.

I am horrified by what I see happening today. Typically, employers will say, "Your remuneration package is worth so much, so between 7 and 10 per cent. can be put into a money purchase pension, or you can have the money." Quite understandably, many people under 35 are saying, "We'll have the money." As a result, they have no form of occupational provision. They say, "We've got the pension guarantee and the minimum income guarantee—we don't really need such provision. The state will be there to look after us." As the right hon. Member for Birkenhead pointed out, that is unrealistic.

There is a positive angle. In America, independent retirement accounts—IRAs—and 401Ks have been extremely successful in reviving pension saving in the private sector. In Canada, more than 40 per cent. of the population have a regulated retirement savings plan. Under that system, there is no obligation to buy an annuity on retirement.

The case has been argued in different places. It is unwise of the Government not to recognise that when ordinary people up and down the country save for their retirement, they do not want to be locked into buying what they perceive as a bad-value annuity. That is why, increasingly, people save and buy properties. In the past, thank the Lord, they used personal equity plans and today they use individual savings accounts, but they are not attracted by pension arrangements with an annuity obligation.

When he was at the Treasury, the Secretary of State for Work and Pensions was a keen promoter of the independent pension account. It was envisaged to be much like an ISA—a tax wrapper, but subject to the pension rules. It would be extremely simple: there would be no requirement to belong to a pension scheme on top of it, people could save for their old age with a mixture of ISAs and IPAs—one governed by pension rules and one by ISA rules—and then provide for their old age themselves. It was thought that it would suit many people who were self-employed, especially women, who might not work for their full careers. However, the IPA was stillborn—it has been a complete failure, with no providers and no takers because it adds costs. There is the double cost of belonging to a pension scheme, as well as the IPA charges. Moreover, there is the terminal problem of IPA moneys having to go into an annuity upon retirement.

I caution the Government: they have had five years to address pension policies. We were told that the stakeholder pension was to be the main solution. The Minister for Pensions was a little disingenuous on one occasion in arguing that the people who have bought stakeholder pensions are those whom the Government intended should buy them. The Government clearly intended stakeholder pensions as a savings vehicle for ordinary people, not just as a tax benefit vehicle. The take-up rate has been disappointing. The large numbers of corporate schemes are merely intended to meet the legal requirements, and the members thereof are few and far between.

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It is unwise for the Government to continue to argue that they place their hopes of private sector pension accumulation on the stakeholder. It is not happening, nor does it look as though it will. I wish that it would, but I do not think that it will until the annuity issue is addressed. Furthermore, it will not happen easily while there is the promise of the Government's minimum income guarantee and pension credit. People who find it hard to save for their pension wonder why on earth they should bother if they know that they will be looked after out of overall taxation.

It is a growing, invisible problem. It is ridiculous that, in an age of greater affluence, the majority of people will be less well provided for in their retirement than the generation coming up to retirement. There is the risk that the policy will lead to the same problems found in continental Europe. Retirement income will become a massive burden on taxation, leading to excessive taxes on employment, which will, in turn, damage overall economic performance. I cannot believe that that is what the Government want. Indeed, their commitment to reverse the swing from 40:60 to 60:40 suggests that they want to go in the other direction.

Pension policy is not working, and I would like to see greater cross-party collaboration to get it right. However, the onus is on the Government to recognise the problems. Let us hope that the Pickering report will propose some solutions. This is not a party political issue. The Government are the Government; it is not for the Opposition to make the Government's policy on pensions, but there are major policies to address, and address quickly.

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