Clause
9
Additional
pension: deemed earnings
factors
James
Purnell:
I
beg to move amendment No. 88, in
clause 9, page 9, line 17, leave
out ‘and section 44C
below’.
The
Chairman:
With this it will be convenient to discuss
clause stand
part.
James
Purnell:
We now enter the delightfully complex area of the
state second pension, which we hope to make simpler by means of the
Bill. Committee members will know that, since the state second pension
was introduced in 2002, certain groups have been deemed to be earning
at the low earnings threshold, which is currently around £12,500
per year. Some of the groups that have been deemed to be included are
carers and low earners and, as a result, they accrue additional pension
and have double the state earnings-related pension scheme rate,
typically 40 per cent.
With clause 9, we want to take
the reforms that we made in 2002 a step, or indeed a couple of steps,
further. We want to allow more people to be deemed to be earning at the
low earnings threshold, thus meeting our objective of modernising the
contributory principle by making work in care count equally for state
pension purposes. This would include those awarded child benefit for
children up to the age of 12, approved foster carers and those caring
for one or more severely disabled people for at least 20 hours a
week.
The recognition
of carers ensures that equal recognition for caring is made for both
basic state pension and S2P. These carers, in addition to those already
covered by the original S2P provisions, will accrue state second
pensions because they will have the necessary qualifying earnings
factor, either through earnings alone or through credits alone, as
before.
Clause
9—this is quite important—will also help those who
currently just missed out on accruing S2P in a particular year because
they worked for only part of that year and had caring responsibilities
for the remainder of the year. It will allow people to combine their
credits from caring, for example, with their earnings to bring them
into S2P.
I am sure
that the Committee will welcome the steps that we took in 2002 and the
significant improvements that this Bill makes.
My technical amendment No.88
does not change what we intend to do; it simply corrects a minor
drafting error. It makes clear the obvious. It does not require someone
who has earned enough to qualify for S2P also to have a credit in a
particular year—for instance, if they are a carer—to make
that year count for S2P.
Andrew
Selous:
We welcome the clause, as it means that a
wider range of carers, parents and disabled people will be treated as
earning at the lower earnings threshold of £12,500 a year for
2006-07 for state second pension purposes. We particularly welcome the
fact that the labour market attachment test, which required people to
pay class 1 national insurance contributions for a 10th of their
working life since 1978, will no longer apply. We are especially
pleased about the provision as it affects carers.
I have just one question for
the Minister. The explanatory notes on the Bill state that at present
parents who are in receipt of child benefit for a child under six are
treated as earning at the lower earnings threshold in respect of S2P.
The notes also say that those people in receipt of home
responsibilities protection are treated as being at the lower earnings
threshold. Paragraph 32 of the explanatory notes defines home
responsibilities protection as being awarded to people caring for
children under 16. It is a minor point, which I have raised before with
the Minister, but I should be grateful if he would clarify the issue of
the different ages of children as it relates to qualifying for various
levels of pension in the Bill.
James
Purnell:
That point was covered in an earlier debate. The
age in respect of qualifying for the state second pension is going up
to 12, and for qualifying for the basic state pension it is going down
to 12; the two are being harmonised. There was a question whether we
could have a theological debate on the matter, and I assured the hon.
Gentleman that we could not. The improvements to the basic state
pension more than outweigh the reduction from 16 to 12 and raising the
state second pension eligibility to 12 will bring a significant number
of people into the state second pension.
Amendment agreed
to.
Clause 9,
as amended, ordered to stand part of the
Bill.
Clause
10
Additional pension: removal of
accrual band from
2010-11
Ms
Keeble:
I beg to move amendment No. 70, in
clause 10, page 11, line 14, leave
out ‘40’ and insert
‘45’.
The
Chairman:
With this it will be convenient to discuss the
following amendments:
No. 71, in
clause 10, page 11, leave out lines
15 and
16.
No. 72, in
clause 10, page 11, line 31, leave
out ‘40’ and insert
‘45’.
No.
73, in clause 10, page 11, leave out lines
32 and
33.
No. 74, in
clause 10, page 12, line 7, leave
out ‘40’ and insert
‘45’.
No.
75, in clause 10, page 12, leave out lines
8 and
9.
Ms
Keeble:
I shall be brief so that the Minister has time to
respond before we adjourn. The amendments would make the state second
pension more flat rate.
They would bring forward the flat-rating of the
accrual state second pension to increase redistribution rather than
giving increased benefits to the higher earners. That would mean that
the state second pension would be more targeted towards the lower
earners. The amendments would abolish the second accrual rate band,
which gives greater benefits from S2P for those earning more than the
lower earnings threshold, currently £12,500 a year, with
additional benefit accrued on earnings up to the upper earnings
limit.
The band would
slowly erode anyway under the present system, so that S2P would be flat
rate by 2030. Abolishing it now would enable a greater level of
flat-rate benefit to be paid to all through an increase in band 1 to
accrual rates of 45 per cent., which would give greater support from
the state for all, rather than the state pension system delivering more
for higher earners. The higher earners can, of course, save for
themselves and can accrue a greater retirement income through private
savings either in existing schemes or through the proposed system of
personal
accounts.
12.45
pm
Generally,
there has been a lot of criticism of the Bill for not providing for
pensioners’ needs now. I do not agree; the present generation of
pensioners is supported by other means. Pension credits have been
mentioned, and there are also things such as fuel allowance, the
increase in the personal allowance and the introduction of the 10p
starting rate for tax. However, the group that I have been concerned
about consistently—they are, largely, the people we are talking
about in relation to the state second pension—is women
pensioners. They will start to see some benefits under this scheme, but
will miss out on the more general improvements that will come, either
through the restoration of the earnings link and the reduction to 30
years’ contributions or because they are not of the generation
that is earning now and getting the same access to pensions as men
thanks to higher earnings and different working patterns. That gives us
a generation of women between now and about 2020 or 2030 who may need
more financial support in retirement. Bringing forward the flat rate in
S2P and making it more redistributive will make it more supportive for
that particular group at a critical stage before the other improvements
come through.
Mr.
Waterson:
I appreciate that the hon. Lady’s
amendments aim to make the Government’s proposal, which is
already redistributive, even more so.
Ms
Keeble:
That is
right.
Mr.
Waterson:
Does she accept that even on the
Government’s proposals, let alone hers, anybody earning more
than £18,000 a year would continue to pay the same level of
national insurance contribution, but would have his or her S2P benefit
significantly reduced? Does she think that that is
fair?
Ms
Keeble:
There is clearly an issue of who should benefit
from the different schemes. It is important that measures that are
designed particularly to support those on low earnings should provide
adequate support to lift them out of poverty. Under my proposals, women
would have just over £135 a week, which is not
a huge amount for people to live on. Of course it would be nice to give
more money to everybody, but people earning the amounts that the hon.
Gentleman mentions are more likely to have made provision through other
means, or may have savings.
We
have to ask who should be supported by the state and what we are trying
to achieve. Nobody wants to take money away from anybody, but if we are
trying to ensure that women on low incomes, perhaps in marginal areas
of employment, can have a better income in retirement without going on
to means-tested benefits, is it not sensible to make the measures that
are designed to support people on low incomes more rather than less
redistributive and bring them in earlier rather than later? That is the
argument behind these proposals.
It would be helpful if my hon.
Friend the Minister could indicate at what point the Government would
introduce the flat-rate £1.40 a week band, and when he would
expect S2P to become entirely flat rate. Is there any scope for that to
happen before
2030?
James
Purnell:
I am genuinely grateful to my hon. Friend for her
amendment. She will be glad to know that this one saves money until
2050, and then it has quite a big spike. In her ping-pong with the hon.
Member for Eastbourne, she can quote this one. The precise financial
implications after 2050 are that the costs start to grow—up to
£7.5 billion annually by
2070.
The reason why
the amendment would reduce the overall cost is that it moves towards
immediate flat-rating and, therefore, takes out of the Bill the
transitional earnings relation. The issue is worth probing slightly.
First, the Conservatives say that they support the Bill overall, but
their position here is slightly more tentative. Every now and then we
read in the Daily Express or Daily Mail that they are
against the Bill on the basis that it is some huge stealth tax. The
truth is that it is not a stealth tax. Everybody, in all earnings
brackets, benefits from the Bill. Secondly, the Conservatives do not
have an alternative proposal, unless they are proposing to go back to
the old state earnings-related pension
scheme.
The
Chairman:
Order. Will the Minister return to the subject
of the
amendments?
James
Purnell:
Of course. I will stick closely to the
amendments, which are about when we go towards flat-rating. What I have
been pointing out all the time is that not going towards
flat-rating would cost about £10 billion per year. That is a
spending commitment, if that is what the hon. Member for Eastbourne
meant in his
intervention.
What
would the effect of the proposed changes be? A low earner
would—
Mr.
Waterson:
We are now in a twilight zone, where the
Minister is making spending commitments for us. To be clear, our
concern, which I will deal with in greater detail later in the clause,
is that the Minister always lumps together the increase in the basic
state pension when he looks at the effects on higher earners. However,
higher earners need to be aware that, even without the amendments
tabled by the hon. Member for Northampton, North, the proposals are
redistributive—highly so, according to some
calculations. That is our point.
The
Chairman:
Order. This is not a clause stand part debate.
Can we return to the subject of the
amendment?
James
Purnell:
I take your directions clearly, Mr.
Taylor, and we can return to the issue
later.
It is worth
reminding the Committee that the state second pension is made up of two
components. Everybody who pays into the state second pension, or is
credited into the system, is assumed to earn at least £12,500,
whether they do or not, which provides for them to receive the
flat-rate amount of S2P. In addition, earnings over £12,500 and
up to £33,540 attract an earnings-related component to the state
second pension. The Pensions Commission recommended that the
earnings-related component should be withdrawn to make way for personal
accounts.
The
commission analysis identified three options for accommodating the
withdrawal of earnings relation with the emergence of personal
accounts. First, the commission considered stopping earnings relation
overnight, which would be the effect of the amendment tabled by my hon.
Friend the Member for Northampton, North. At the other extreme, the
second option was continuing with the existing withdrawal path of
earnings relation, which would see us out of the system by the
mid-2050s. The third option, which the commission recommended and we
support, was to accelerate the withdrawal of earnings relation by
freezing the upper earnings limit at the point where accruals to S2P
end. This would see earnings-related accruals out of the system by
around 2030. I can confirm that our goal is to get to that point in
2030. There are provisions in the detail of the clauses to allow for
changes to be made around that date to achieve that and to revoke those
parts of the legislation that would by then have become
otiose.
The
commission recommended that option, which is what we are doing. A
sudden move to flat-rating, which the amendments aim to deliver, would
impact not just on those who would otherwise get a transitional amount
of earnings relation, but on the contracting out of state second
pensions. That could have an unpredictable and quite damaging effect on
final salary schemes, which, of course, are supported by the
contracted-out element related to S2P. Given the importance of final
salary schemes, we decided that that would not be the right approach
and, indeed, the Pensions Commission has observed that a gradual
decline in the rebate would be the most appropriate
policy.
The second
objective of the amendment is to increase the accruals rate of the
flat-rate element from 40 to 45 per cent. That would make the flat-rate
element more generous. We have taken a different approach with our
simplification of S2P—the heart of clauses 10 to 12, which we
will discuss in the relevant stand part debates. Suffice it to say that
our approach is simpler to understand and strikes the appropriate
balance between flat-rating and a transitional amount of earnings
relation. I therefore urge my hon. Friend to withdraw her
amendment.
Ms
Keeble:
That explanation was very helpful. I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Mr.
Laws:
I beg to move amendment No. 64, in
clause 10, page 12, line 15, at
end add—
‘(7) The Secretary
of State shall publish estimates, no later than 1st April 2008, of how
many people he expects to receive less than £135 a week in Basic
State Pension and Second State Pension combined in 2030 and
2050.’.
The
amendment is similar to the 29th recommendation from the Select
Committee on Work and Pensions in its report on the Government’s
pension reform proposals and came in the context of a statement from
the Government in response to the consultation on the White Paper in
October 2006. In paragraph 57 of the White Paper, the Government
pointed out that the median value of a state pension for those reaching
state pension age in 2050 would be £135 and that anyone
with a good working or caring life would be entitled to about that
amount. The Government have, of course, already responded to the Select
Committee’s recommendation by publishing estimates, in October
2006. They project that under the White Paper proposals by 2050 about
half the number of individuals reaching the state pension age will have
a total state pension entitlement of at least £135 per week, in
today’s earning terms, and that two thirds will have an
entitlement of at least £125 per week.
The amendment, which is a
probing one, is designed to invite the Government to keep closely under
review the level of pension provision for individuals of the type just
mentioned by the hon. Member for Northampton, North—those on
lower earnings—particularly given concerns that the new personal
accounts will not necessarily be very attractive to those on low
incomes because of the extent of means testing. It is important,
therefore, that we have a good and constant assessment not only of how
much they can expect from their basic state pension and state second
pension provision, but of how the personal account provision will
affect them in the future in order to ensure that it is an adequate
replacement for the benefits that the Government would have sought to
deliver more securely through the existing
system.
James
Purnell:
I am grateful to the hon. Gentleman for tabling
the amendment, although he could also have tabled a parliamentary
question, to which I would have been equally happy to reply.
It being One o’clock,
The Chairman
adjourned the Committee
without Question put, pursuant to the Standing
Order.
Adjourned
till this day at Four
o’clock.
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