Examination of Witnesses (Questions 132
- 139)
WEDNESDAY 3 MAY 2006
RT HON
FRANK FIELD
MP AND MR
HOWARD REED
Q132 Chairman: Good morning and welcome,
particularly Frank, you have spent more time in these chairs than
you have sat down there, but it is good to have you with us and
we recognise you have something different to say. If I can just
kick off, do you think the Pensions Commission got things broadly
right in terms of the proposed framework of reform?
Mr Field:
It got it right in one sense, Chairman, in that it emphasised
that if we are going to help the poorest pensioners in this country
and lay the basis for security for other reforms as well, then
we need to get reform of the basic state pension right; there
is no way that we are going to deliver decent pensions to the
poorest pensioners by emphasising the role that the National Pension
Savings Scheme might play. Where they have it wrong is that they
are proposing that there should be a tax-financed reform of the
basic state pension, and if we look at the record of tax-financed
reforms, they do not last. Indeed, if the Prime Minister went
down the route of implementing fully the Turner proposals he would
be telling the House of Commons and the country that in fact here
is a reform that will last, but by the way boys and girls I am
actually winding up the state second pension which I introduced
only four years previously. It hardly lays down the basis of confidence
that the next set of tax-financed reforms will work and that is
why the Pensions Reform Group has emphasised the importance of
an investment-led reform, making the very most of this unique
opportunity the Chancellor has given us by decoupling how we help
the poorest pensioners, which the Chancellor has done through
Pension Credit, and separately thinking of long-term reforms to
the basic state pension which take decades to come into effect.
Mr Reed: Our
view on the Turner proposals would be that the Pensions Commission
report is really good in terms of identifying the basic problems
with the current system as it stands—over-complexity, lack
of private pension saving amongst a huge proportion of the population
and a growing trend towards means-testing, with all the problems
that entails. We think that Turner gets things broadly right in
one sense, in terms of the National Pension Savings Scheme, but
on the more important question of how to amend the state pension
system to secure getting as many people as possible out of the
means test and reaching a sustainable settlement, we think it
leaves too much of the current complexity in place and we would
have preferred to see reforms to the flat rate basic state pension,
a big up-rating to the pension credit guarantee level as soon
as possible, and then a commitment to up-rate with earnings. I
do not agree with Frank that that would be an unsustainable settlement,
it actually would be a fairly straightforward and sustainable
settlement.
Q133 Chairman: We had Nick Barr from
LSE giving evidence last week and he alluded to the equalisation
of state pension age as having been foretold for about 20 years,
as if it is going to happen without any particular difficulty
or any comment. Could the same be said about any proposed increase
in the basic state retirement age from 65 up to whatever, if it
is announced 20 or 30 years in advance? Does that then become
a non-issue or do you think it would still be controversial?
Mr Reed: The fact that Turner
says that increases in the state pension age have to be announced
at least 15 years in advance is a good thing in that it means
that you are not saying to somebody who is aged, say, 55 or 60,
"Excuse me, you thought you were going to be able to retire
at 65, but in fact it is 66 or 67"; you are not putting them
in a position that close to retirement where they have to make
a big rethink about their state pension eligibility. There is
a broad consensus that because of increases in longevity, the
state pension system has now got to a point where it is financing
people for far longer periods of retirement than the original
designers of the system in the 1940s would have thought possible
or, indeed, desirable. We do not exactly know what life expectancy
will be, say, 40 or 50 years into the future, but in terms of
creating a system which keeps the ratio between years of working
life and years of retirement roughly stable, the implication of
that is obviously that the state pension age is going to need
to rise. It can rise very gradually, but it is going to need to
rise by, say, one year every 20 years or one year every 15 years
or so. That bit of the Turner analysis is correct and basically
unproblematic, although selling it to the population does create
certain issues.
Mr Field: Chairman, I think there
is a real difference between a "getting away with it"
approach when you are dealing with women and when you are dealing
with the whole host population which includes men. I do not think
it would have been so easy to raise the retirement age by five
years if we had had men in that group, and it is one of the factors
of our politics that the interests of women are still less effectively
represented than those of men. I do not think, therefore, that
it is natural to assume that because the Government got away with
it for women they will get away with it when they actually put
men into that equation. Secondly, there is clearly a case for
over time raising the retirement age, given that people are living
longer. After all, when Lloyd George introduced a means-tested
pension for the over 70s life expectancy was 48 years and it was
easier then, Chairman. I do think, representing a seat with large
numbers of people who have worked hard manually, we do have to
accept that many, women are literally burnt out long before the
age of 65 now and, therefore, this reform of raising the state
retirement pension must necessarily be considered with the Government's
reform of incapacity benefit; if we are going to successfully
raise the retirement age, we must have a benefit which people
who cannot continue working know that they can draw and they are
not penalised.
Q134 Chairman: The Secretary of State
has been fairly blunt on this issue—the need, as he sees
it, to raise the retirement age possibly from 2020—and on
that basis one assumes that something will be in the forthcoming
White Paper. In the light of that is the Government's policy on
public sector pensions still sustainable, of maintaining a retirement
age of 60 for all current members of the scheme. Do you think
that is still sustainable in the light of the broad architecture?
Mr Field: No, I do not, and I
do think one of the areas the Government will have to attend to
after it has done its White Paper is to seriously begin a review
about public sector pensions and their financing, the different
ways that they are financed and the impact on taxation and council
taxation as well. I also think that in that review our own pensions,
as part of the public sector, have to be put into the equation,
and one of the questions voters will want answered is that certainly
in the past the public sector rightly got what was thought to
be more generous pensions because they had a worse pay deal. Is
that currently true, has relative pay in the public sector caught
up or in some instances advanced over the private sector? If that
is so then it seems reasonable one looks at the other side of
the equation as well. Given this is an area where people's prejudices
can be paraded about quite easily, it would be very, very useful
for the Government to start collecting the data so that we can
have an informed discussion rather than merely shuffling our prejudices.
Q135 Greg Mulholland: Turning to
means-testing, the Pensions Commission estimates that around a
third of pensioners would still be entitled to pension credit
in 2050 once its proposals were implemented, but that this would
only be across a "small element of their pension income."
How worried should we be about this?
Mr Reed: I would say that ideally
we would want as few people on the means-test for pension credit
as possible, and I do not think the Turner proposals go far enough
in letting that happen. IPPR's preferred approach simplifies what
Turner is trying to do; it is slightly more costly than the Turner
recommendations: we recommend raising the basic state pension
to the pension credit guarantee level. This means that anybody
who has the necessary contribution record will be taken off the
means test entirely; they may still have to be means-tested for
housing benefit and council tax benefit, but that main part of
the means test they will be exempt from entirely. 30% of the pensioner
problem is still going to be quite a lot of pensioners that far
out and the sheer hassle of pensioners having to fill in a means-test
form of several pages and the sheer rigmarole that goes along
with that I do not think is very dignifying for a lot of pensioners.
The current expenditure information from DWP shows that only about
65% of expenditure out of the total eligible expenditure is actually
taken up, so there is a lot not being taken up at the moment.
Pension credit has therefore only been partially successful as
it stands in eradicating pensioner poverty and I think we can
do better by using the basic state pension directly at that higher
level.
Mr Field: I do not accept the
point, Chairman, about pension credit; it has been much more successful
and I would be very surprised if members of the Committee in their
own constituency work have found many of their constituents eligible
for pension credit for any length of time who are not claiming.
There may be a real problem with very frail, very elderly pensioners
whom we have less chance of meeting, and they also have less contact
with the outside world, but I think pensioners rightly think that
their savings are no business of Government so that when they
fill in the family resources survey they do not actually complete
that part of the data. It looks therefore as though many more
pensioners are eligible for pension credit than they are, but
I certainly have not found them in Birkenhead. What we do know
is that Turner, if fully implemented, is not acceptable to the
Conservative Party. The one clear statement that David Cameron
has so far made is that he wishes to decrease the numbers on means-testing
and therefore to have a Turner objective, when the whole thing
is rolled out in 50 years time, with the same proportion on means-testing
as currently, that is clearly not acceptable as I understand what
David Cameron has said and therefore we would be expecting the
Opposition to come up with proposals in addition to Turner to
achieve that objective. The proposals of the Pensions Reform Group
differ in two respects from Turner: one is that it is investment-financed
rather than tax-financed reform and, secondly, unlike Turner where
most of the £128 in today's money is to be found from the
state second pension or accrued rights in SERPS, PRG says that
that £130 should be achieved through the basic state pension
itself. That necessarily benefits most the poorest, therefore
our scheme does have redistribution within it and we believe that
the investment way can be won in that higher paid people proportionately
pay more for a universal protected pension, as we call it, or
the basic state pension—whatever you want to call it—of
between 25 to 30% of average earnings. That is a guarantee they
could never buy on their own; that is the guarantee a community
can offer but most people would not have the resources to buy
that in the private market. It is therefore heavily in favour
of the very poorest who are always the most difficult to get into
a successful pension reform, but it is one which is paid for by
redistribution but is sold on the basis that everybody gets something
out of this that they have not got before.
Q136 Greg Mulholland: Are you not
worried that those pensioners will still be on pension credit?
Mr Field: Because our reform is
about the basic state pension, leaving aside all the business
about the National Pension Savings Scheme and the rest of it,
and that everybody is in this and contributions have to be paid
that year for those people who are doing services to the wider
society like caring, then fewer are going to be on means-tested
benefits at the end of the day than any other proposal that you
are considering.
Q137 Greg Mulholland: Howard, you
mentioned council tax and housing benefit. Again, I probably know
the answer to this, but when we talk about means-testing the focus
is sometimes exclusively on pension credits—or that is how
the argument comes across. Why do you think that is and do you
think we really need to broaden this discussion to housing benefit,
council tax benefit and also to the disability addition to pension
credit.
Mr Reed: The reason that the focus
recently has been on means-testing specifically in pension credits
is because that is the area where you have seen the huge increase
in means-testing. There has always been a large proportion of
pensioners also on housing benefit and also on council tax benefit,
but the main change that has happened recently is the big expansion
in the generosity of pension credit and so you are drawing a lot
more pensioners into the means-test. It would be nice to be able
to reduce the amount of means-testing on council tax benefit or
whatever if the Lyons review or the follow-up to that does come
up with a replacement system, and it would be nice if it could
be designed in some way as to means-test less pensioners. One
of the most obvious examples of a system that would means-test
less pensioners for local tax would be local income tax, but there
are other problems with that local income tax system, so I am
not going to say that I would recommend it per se, but it is an
option that could be looked at, and there are other options around
property taxes and so forth and you might be able to get away
with less means-testing on them. On housing benefit it is very
difficult because you have one section of the population who are
owner-occupiers and another section who are renters, and renters
on low income are always going to need some kind of means-testing
support, whether it is flat rate or related to the rent they pay.
Successive cohorts of pensioners are going to have less and less
renters in that cohort, simply due to the expansion of owner occupation,
so that issue will decrease over time as well. On disability benefits,
there are a number of things you could do; you could move them
all towards a non-means-tested system—you could expand attendance
allowance for example, and there are similar benefits to that.
Although that has a cost, if you are really serious about wanting
to get pensioners out of every form of means-testing there are
a number of reforms you can make which could be sold as part of
the general pensions reform package.
Mr Field: I think we will see
reform of council tax shortly. If I was running a campaign for
pensioners I would try and ensure there were 100 supporters who
were not members of political parties who refused to pay and were
put in prison, and if that view has occurred to me then I am sure
it will have occurred to campaigners. I just do not think the
public will actually put up with large numbers of pensioners being
put in prison for refusing to pay the council tax which they feel
is unfair.
Q138 Harry Cohen: Can I pick up on
your earlier point about David Cameron and means-testing in association
with Turner. Although it is not for me to put details on the Tory
policy, we have presumably members who could do that if they wanted
to, but one thing Turner did say is that there is declining spending
on contracted out rebates, partly as a result of people contracting
back in. He says that will "produce very significant increased
cash flows for government". Could that not be applied to
increasing the basic state pension here and now? That would ease
the way for reform and also perhaps have a little less means-testing
as a result of that. Could that not be done?
Mr Field: The Chancellor was understandably
angry with the Commission in that it presupposed that extra monies
coming into the Exchequer, which had long ago been financed into
the general level of monies available for public expenditure,
were now in a sense being diverted to pension reform. I do not
think any of us will get anywhere by suggesting to the Chancellor
that monies that he has long since in his head put down for other
reforms should now be diverted into reforming pensions. He has
obviously made a calculation because this is a long term trend
of monies coming back into the Exchequer from the contracted out
rebate; similarly, long ago he put raising the retirement age
into the general pool of monies available for his public expenditure
plans and I do not believe that he is going to give up those easily.
We therefore have to look at other ways and we propose, using
the contracted out rebate which is currently in existence to be
brought into the scheme that we propose as the first tranche of
contributions in an investment strategy to take very significant
numbers of people above means-tested eligibility. I think it is
reasonable to say to the Chancellor that if he raises the retirement
age further over the 65 point, the monies thereby gained simultaneously
should be used as ways of building pension reform. I would also
hope it would be something the Committee might consider in that
if one looks at the tax concessions to pension savings, which
overwhelmingly benefit the richest—we have something like
5% of the population gaining over half of all the tax revenue
lost through tax concessions on pension savings -to allow all
of that at the standard rate again would give us very substantial
sums of money to play with. In a sense the crunch point is that
if we want better pensions we actually have got to put more money
towards pensions and not less.
Q139 Harry Cohen: I hear that point
and I agree with it, but I am still a little alarmed. Turner says
that this extra flow of money should be used for future pensions;
a lot of other organisations say it should be used for the current
basic state pension. You are in effect saying the Chancellor has
put it away for reforms somewhere else and it has just got lost
in the system, but surely money that can be generated within the
pension account should be used for pensions one way or another,
either the basic state pension increase or for future pensions.
I wonder if you could explain your thinking a little bit further.
Mr Field: They are being used
for future pensions. If you look at the expenditure growth on
the state second pension it begins to rise very significantly
indeed, and my guess is that the Treasury line is this is a very
useful way, the additional monies coming in from people contracting
back in to the state second pension, to reallocate those resources
to meet an increasing bill on second state pensions. More money
is therefore going on pensions, but I do not think it is free
money to use for additional reform. We have to think outside the
system if we wish to achieve that objective, and it is one reason
why I think at some stage a government might question the role
of the state second pension, but that is another matter.
Mr Reed: If I could just add something
on that, one of the key elements of the IPPR package is to abolish
the contracted out rebate completely which gives you an extra
0.9% of GDP which you can divert into higher basic state pension;
that actually goes a long way towards meeting the initial costs
of the reform. One of the weaker aspects of Turner is the way
that the report says we do not accept that money raised by abolishing
the contracted out rebate should be used to increase basic state
pension in this way, but it does not really provide a rationale
for saying that. He [Turner] is worried about reductions in national
savings rates, but I would argue that the reduction in complexity
of the system and the establishment of NPSS or a closely similar
system will provide the impetus to incentivise private saving,
will drive that forward and will increase the savings rate without
the Government really having to do much else. Also, Frank's point
about tax incentives is quite correct, they are overwhelmingly
skewed towards higher earning individuals. There are certain fiddly
things which the Turner Report goes through in terms of
the difference between defined benefit and defined contribution
schemes and why it is difficult to reform tax relief, but certainly
a reform focusing specifically on key elements like NPSS, making
tax support for that more progressive, more weighted towards lower
earners, would I think be a very good idea and would incentivise
savings for people on low to medium incomes.
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