Examination of Witnesses (Questions 280
- 299)
WEDNESDAY 7 JUNE 2006
RT HON
JOHN HUTTON
MP
Q280 Jenny Willott: Can I pick up
on the point you raised about residency having to start from now
to build up a record. Surely for people who have a contributions
history, you know how long they have been making contributions,
you know how long they have been in the country. If they have
been earning, they will have tax records back over so many years.
Mr Hutton: These are proxy indicators
and they are not as robust as many people would think. I do not
want to rehearse all of the arguments about do we know who is
in the country at any one moment in time. That is fortunately
for another Committee and for another Minister.
Q281 Jenny Willott: Obviously residency,
and whether or not it would be appropriate or possible to base
the State Pension on a residency indicator, is the remit of this
Committee.
Mr Hutton: If you think residency
is better than the contributory principle, you better set out
the reasons for that.
Q282 Jenny Willott: I am asking you
about it.
Mr Hutton: I am telling you that
it is not, and I am telling you for one simple reason, and the
same is true across the Benefits System as a whole. The something-for-something
principle is a very, very important principle. People earn the
State Pension, and they earn it through their cash contributions
and their work record, but more so now, and increasingly so, from
their wider contributions to society as a whole for the people
they are caring for and the social responsibilities that they
are delivering. I believe very, very strongly, and the Government
does, that the contributory principle, which has always been at
the heart of the State Pension system in this country, is the
right one. It is the one that commands overwhelming public support
and we should stick with it. Of course there are alternatives
and the residency proposal has some supporters, but I think on
balance we have come to the view that it is not right to proceed
down that path. The reforms to the contributory principle we are
making have, firstly, a much bigger impact on correcting the injustices
for women and carers than the residency system would, and that
is generally acknowledged now; and, secondly, it keeps in tact
the connection between what you have contributed to society and
what you are entitled to when you retire. That fundamentally is
a very important connection to keep. The Committee might have
a different view but that is the view of the Government.
Q283 Jenny Willott: Given that one
of the objectives of the reforms is to ensure that more and more
people are entitled to a full Basic Pension rather than relying
on means-tested top-ups, you are tinkering around with the system
to try and ensure that more and more people, whatever they have
contributed, are entitled to a full Basic Pension by reducing
the number of years, by increasing the number of credits and things
like that. If the ultimate aim is to get to at least 90% of people
entitled to a full Basic State Pension, can you clarify what the
big differences between that versus having a residency-based system
where you probably have around the same proportion of people eligible
for a pension?
Mr Hutton: Residency would take
longer to get to that result. There is no doubt at all about that.
The trajectory is much more rapid by reforms to the contributory
principle than could ever be achieved by substituting a new residency
test and that is acknowledged. Turner himself has welcomed the
reforms we are making to the contributory principle and believes
they would have a more immediate and radical impact on women and
carers and has given his support to them for that reason.
Q284 Jenny Willott: He did also propose
residency.
Mr Hutton: Yes, but if you look
at what he said in response to the White Paper he has very broadly
welcomed the reforms we have made to the contributory principle
believing they would have a much more immediate impact, and a
more profound impact, than the changes he was proposing on the
grounds of a new residency test. He acknowledged that could not
be made retrospective and could only be worked on a future accrual
basis because of the operational difficulties of trying to use
a variety of very crude proxies as a measurement of previous residency.
I do not doubt that the argument on this will continue, I am sure
it will, but I do not think, with great respect, it can be said
these reforms are in any way a series of tinkering with the current
system. These are hugely radical changes to the contributory principle
that keep the principle itself in tact, which is absolutely right
for the reasons that I have given, but transform the opportunities
for women and carers to retire in the comfort and security of
knowing they will get a full Basic State Pension. People have
asked us to do this for a long, long time and we have delivered
it. You can query the means by which it is obtained, but I do
not think you can query the outcomes. The outcomes are better
through this route than through the residency test.
Q285 Jenny Willott: Given that men
and women's entitlement to a full basic pension, because of changing
work patterns and so on, are starting to come together at some
point in the not too distant future anyway, can you say how much
difference the reduction of the number of contributory years required
is going to make to that convergence?
Mr Hutton: It makes a very substantial
difference. If you want a detailed break-down of the numbers,
I can certainly provide that to the Committee, but the biggest
change of all that accelerates that progress towards equalisation
between men and women in terms of full BSP entitlement is the
reduction to 30 years. That by far and away has the biggest effect
on outcomes of all of the changes. The carer's credit is a very
significant change, but there is no doubt at all it is the reduction
to 30 years that has the biggest impact. If you would like to
see a more detailed break-down of the numbers, we can certainly
provide it, but I do not think we will.
Q286 Jenny Willott: How many years
of work or credits will be required to build up entitlement to
a full State Second Pension?
Mr Hutton: Ultimately it depends
on how much you put in. It is how many years you have got. There
is no cap on it.
Q287 Jenny Willott: But how many
years of work until you get full entitlement?
Mr Hutton: The full entitlement
depends on how many years you have been paying in. It is as simple
as that. There is not any other way of approaching it. For the
basic State Pension, you have got to have your 30 years, but for
the State Second Pension, it literally depends on how many years
you have been contributing. That is what you get out. You can
contribute for 40 years, but for each of those years you get more
when it comes to your retirement.
Q288 Jenny Willott: And there is
no ultimate cap.
Mr Hutton: No.
Q289 Jenny Willott: Do you not feel
that it is going to be quite complicated. People will be able
to get different entitlements over different working periods to
be able to work out their ultimate pension?
Mr Hutton: The State Second Pension
is becoming a flat-rated pension, so I think it will be absolutely
clear and transparent to people what they will be getting.
Q290 Jenny Willott: That will not
be until 25 years' time?
Mr Hutton: That is the problem
with the State Second Pension, if I am being blunt about it, and
its predecessors, SERPS and graduated retirement benefit and everything
else. You build up, once you make these reforms, a pattern of
accrued rights. So, I am afraid, when it comes to the State Second
Pension, as I have learnt, there is a built-in element of complexity
that no amount of reform is ever going to remove, but, I think,
moving to a flat rate more quickly is going to speed up the simplification
of the State Pension system. That has got to be a good thing.
It will be more obvious to people what they will be entitled to
when they retire on the basis of how many years they are contributing
to S2P, and I think the reforms relate to the simplicity of the
system that needs to come through all this.
Q291 Jenny Willott: In which case,
if there is going to be a flat rate, presumably that means that
there is a certain number of years or a certain amount that you
need to have contributed to it to be able to get that flat rate?
Mr Hutton: You get a fixed amount
for every year you have contributed to the State Second Pension.
Q292 Jenny Willott: I will clarify
with you afterwards.
Mr Hutton: Jenny, if it is any
comfort to you, I have exactly the same problem when it comes
to the State Second Pension.
Q293 Jenny Willott: I think we all
do.
Mr Hutton: If you could park it
there, it would be very, very helpful.
Q294 Jenny Willott: Maybe we can
come back to you with some questions if necessary.
Mr Hutton: Maybe I could write
to you.
Q295 Jenny Willott: One of the things
that is in the White Paper as well is how we would deal with the
employment support allowance and the State Second Pension entitlement,
and so on. One of the proposals would be that you would only get
State Second Pension entitlement credits towards it if you were
on the new employment support allowance rather than the employment
support element. What would be the rationale behind that and how
would that help in any way towards simplification?
Mr Hutton: We have not made a
decision to do that.
Q296 Jenny Willott: Sure.
Mr Hutton: I do not want to pre-empt
the decision that we are going to make. At the moment, of course,
if you are on incapacity benefit, you get a State Second Pension
after 52 weeks. We might want to continue with that policy. There
is the other option of introducing it at 30 weeks, after people
have been through the new personal capabilities assessment and
go on to the higher employment support component as well, but
there are options for us to look at, and that is why the White
Paper said that we would consult on this as we develop further
our proposals on entitlement to the State Second Pension.
Q297 Jenny Willott: Which is why
I asked, in the conditional tense, what would the rationale be
for that particular decision rather than another one, just applying
it to the support element rather than the employment support element?
Mr Hutton: Off the top of my head,
I do not think there probably would be one, but it is one of the
things that we are looking at as a possible option, because it
is there on the table in front of us if we wanted to go down that
road. I think we should try, as far as possible, to keep access
to the State Second Pension as broad and as wide as we possibly
can, but that obviously has to be subject to affordability and
other public expenditure implications. It is very hard, and I
feel I probably have already, but I do not want to pre-empt the
consultation on that; I genuinely want there to be a response
where people can tell us what they think without feeling that
I have already made up my mind, which I genuinely have not, about
the hearsay. I think we should look at all the options though.
Q298 Michael Foster: Before moving
to an area that I wanted to ask questions on, can I ask one more
question on that. Is it the case that a man who retires in 2009
with 43 years contributions will actually receive less than someone
who retires in 2010 with 30 years contributions? If that is so,
and it appears to be so, how do you justify the [odq]something
for something[cdq] argument, which I entirely agree with?
Mr Hutton: It is hard, but I think
it comes down to one basic issue. There has got to be a line.
If you are going to make these changes, they are going to have
to come in at a certain moment in time. We are giving people reasonable
notice of what the change is, but I do not think it could be argued
that there was any expectation, ahead of today's announcement,
that anything other than the current laws would have continued
to apply. I think that is all I can say on that. There are very
few men who do not qualify, I think it is 10 or 12% now who currently
do not get the full basic State Pension, so we are talking about
a very small number of people, and certainly, if you have got
43 years, you are 99.5% of the way to the full pension, but it
is a big change, I accept that. All I can do is repeat what I
said earlier, and I do not want to keep doing this, but we have
looked at all these issues. We have looked to see whether there
is not a different way to introduce this change to the contributory
principle. There is not, and there are these cases that fall very
close to the line where people say, [odq]This is unfair.[cdq]
I do not personally think that is true; I think, as I said, there
was no expectation of these changes ahead of the White Paper and,
for women in particular, prior to 6 April 2010, they are able
to retire at 60 and that is something that women after that date
will not have the opportunity to do. But it is a judgment call
at the end of the day and I think it is important to make the
change as quickly as possible and make it as radical as possible
if we are going to correct the injustices of the previous system.
It will create these sorts of cases, but that is probably all
I can offer as a defence.
Q299 Michael Foster: We will have
to work on it. I wanted to ask you more about the contracting
out rebate, which successive governments always regarded as an
incentive for employers and employees to enter into pension arrangements
in the private sector generally. It now seems to be the suggestion
that, so far as the White Paper is concerned, those rebates will
continue for defined benefit schemes but not for defined contribution
schemes. What is the rationale for that?
Mr Hutton: It is a rationale that
Lord Turner himself set out when he published his second report
when he recommended that we make this change. In essence, the
abolition of the DC rebate in Turner's view and in our view will
aid the simplicity in the system and take a layer of complexity
out. Has the DC rebate worked as an incentive to save, which is
partly what it was designed to do? Probably not. It does create
some space now, which is necessary, for the personal account scheme
to be set up and to work. I think you just need to look at what
is happening on the DC side with more and more people contracting
back into STP to realise that, I think, this change now is a necessary
one. Turner's analysis, and again it is one with which we agree,
is that DB reform needs to be slightly longer term. I think it
would be too destabilising for DB to take away the rebate at this
moment in time, and that is why Turner did not recommend it and
why we have agreed with him.
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