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Lord Higgins: My Lords, it is not quite the same. I was saying that even if one were to accept the argument of the noble Baroness--which is doubtful--perhaps one could make an exemption for small firms by way of saying that they do not have to collect the money.

Baroness Hollis of Heigham: My Lords, the noble Lord is saying that firms would still have a responsibility to make available a scheme without necessarily acting as the collection agency. That is one of the suggestions put to us by some of those commenting on the document.

I have some sympathy with that proposal. We are certainly considering that, and arrangements for suggestions in response to the consultation document. But we will not be doing anything which subverts or undermines the possibility of our encouraging people in the smallest firms (who are the ones least likely to have a second pension) not to join the stakeholder scheme. It is not impossible that the noble Lord's suggestion is one that we could actively follow, but I make no guarantees in that regard. We are still considering the matter in the light of the consultation exercise. We want to ensure that the employees of small firms have access to building up a decent occupational scheme and, in the absence of an occupational scheme, a stakeholder scheme.

Lord Higgins: My Lords, we are grateful for the comments of the noble Baroness. My point was that, even if the Government felt that they ought not, on the basis of sizes to exclude firms from informing employees about a scheme, none the less more and more burdens are being placed on them and there may be a case for exempting them from collecting the money week in week out, bearing in mind that employees probably turn over much more quickly in

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small firms than in large firms. I shall be grateful if the noble Baroness will consider that alternative. Subject to that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Castle of Blackburn moved Amendment No. 25:

Page 3, line 31, at end insert (“other than those who prefer to acquire earnings-related pension rights under section 44(3)(b) of the Contributions and Benefits Act (SERPS).").

The noble Baroness said: Amendment No. 25 relates to a theme to which Lady Turner and I have often returned during debates; that is, the need to give people the freedom to choose. In this case it is the freedom to choose SERPS rather than any other government alternative. This amendment asks that people should not be compelled or induced to go into a stakeholder pension if they prefer to remain in SERPS. The Minister may be surprised how many people, according to my postbag, are deeply attached to SERPS and, given the option, would choose to remain in it.

My moving of this amendment gives the Minister an opportunity to answer two questions which she has so far avoided answering. First, is it not a fact that the manifesto on which this Government were elected contained the phrase,

    “Labour will retain SERPS as an option for those who wish to remain within it"?

Secondly, how does the Minister intend to embody that option in this part of the Bill? I beg to move.

Lord Goodhart: My Lords, at this point we come on to SERPS. Amendment No. 25 has been grouped with Amendment No. 54, which is a directly pro-SERPS amendment. We on these Benches are not enthusiasts for SERPS. With hindsight, we believe that the cost of SERPS benefits were seriously underestimated when SERPS was set up. One of the problems with such a scheme, where the contributions start immediately but the liability for payment does not mature for many decades to come, is that it is easy to create a lot of chickens and it takes those chickens a long time to come home to roost.

By the 1980s it was clear that either benefits had to be cut or national insurance contributions had to be increased to provide for SERPS. By going wholly for cuts, I have to say that the Conservatives took the wrong decision. But something had to be done. Therefore, in that respect, we believe that the scheme was flawed from the start. We also believe that the Government should provide a fixed-rate pension.

We accept that the second state pension and the basic pension will do a good deal better to provide a fixed-rate pension for many people, especially low-paid employees, than the basic pension alone. However, we do not think that the Government should provide earnings-related pensions. We believe that, for higher earners, they should be obliged to provide their own funded pensions to top-up state benefits and that the Government's financial contributions to those should be limited to tax relief.

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Therefore, we believe that the Government are right to phase out SERPS. However, as we will explain more fully when we get to Amendment No. 31, we also believe that membership of a pension scheme, whether it be a stakeholder scheme, a personal scheme or an occupational scheme, on earnings up to the upper earnings limit should be compulsory as a replacement for SERPS for medium and higher earners. Be that as it may, we on these Benches are unable to support Amendments Nos. 25 and 54.

Lord Higgins: My Lords, I shall not detain the House for more than a few moments. We discussed these issues to some extent when dealing with the earlier amendment. We considered whether the substitution of the state second pension for SERPS would be to the advantage of individuals who might contribute to it. I raised a number of points to which the Minister gave fairly complicated answers. Therefore, I should like to take into account what she said by reading her response in Hansard before I take a firm view on the matter.

I have a simple question for the Minister. Despite the manifesto commitment--no doubt she will be able to remind the noble Baroness about that--she is asserting that the state second pension will actually be more advantageous than continuing SERPS. My simple question is this: does the Minister think that the new arrangement will be more or less expensive than retaining SERPS? Moreover, if there is no difference as far as concerns cost, is there any reason why individuals who want to remain in SERPS should not be allowed to do so if they so wish?

9.45 p.m.

Baroness Hollis of Heigham: My Lords, as we have heard, these amendments seek to preserve the right of an individual to remain a member of the state earnings related pension scheme. Amendment No. 25 would exempt employers from designating a stakeholder pension scheme for any employees who opt to stay in SERPS. As I understand it, Amendment No. 54 would give employees a continuing option to remain in SERPS, which would also apply after the state second pension is introduced.

I understand the pride and belief in SERPS of my noble friend Lady Castle. However, time has moved on. Given the changes that have been made to SERPS over the years, in particular the hatchet job that was done in 1986, we believe that the time has come for its reform. We accept that the desirable option is for people to have a good, funded occupational scheme with a defined benefit or a defined contribution, according to the circumstances. However, we also believe that the state system has a vital role to play. Many people cannot afford to save enough themselves to provide a decent income in retirement. This includes not only very low earners but carers and disabled people who may never have the opportunity to build up a pension.

We considered these problems seriously in our pensions review and concluded that membership of SERPS was not the right answer. By its nature SERPS gives the lowest benefits to the lowest earners. It

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currently gives nothing at all to those who do not earn anything. The new state second pension which will reform SERPS--with, I hope, the approval of Parliament--will ensure that those who need the most help (low earners, carers and disabled people with broken work records) will get higher pensions. I remind your Lordships that anyone in a state second pension between the lower earning level, which is about £3,500, and £9,000 will pay in pro rata but will get back a pension, whatever their income--whether it is £3,600 or £6,000--as if they were paying in £9,000. It is a redistribution that SERPS did not even begin to contemplate. Therefore it will be worth far more for low earners than SERPS would ever provide. For example, as I mentioned earlier this evening, on a figure of £6,000 someone would receive nearly double the sum from the state second pension as he would from SERPS for the same sum of money.

My noble friend pressed me on the manifesto commitment. SERPS is not being abandoned; it is being reformed in that the earnings related element which gives most to those who pay most and least to those who pay least is to be reformed through the introduction of a state second pension which, as I say, will give more help to low and moderate earners, carers and long-term disabled people with broken work records. But obviously people's accrued rights in the existing system will build up and continue in the new system.

The noble Lord, Lord Higgins, pressed me on the costs of the scheme. It will be much less than SERPS as originally envisaged. The original cost of SERPS would have been about £40 billion but eventually came down to about £12.5 billion as a result of removing the best 20 years, reducing the accrual rates and some of the other measures of 1986 and 1988. The scheme will cost much less than SERPS as originally envisaged; it will cost rather more than the current SERPS. That is because we are quite deliberately using the mechanism of the state second pension to give help for a decent pension to those who otherwise would not qualify to be lifted off means tested benefits. Without this, people who could not get much from SERPS would remain on means tested benefits. Because we are going for a state second pension which, frankly, is undisguisedly redistributive towards the poorest, those who cannot work, those who have been disabled and those who are carers, it will cost more. I am proud that we are introducing this. I think that it is one of the best measures that we are introducing at the moment.

We shall produce a state second pension which is SERPS without the earnings related element and reducing the threat of means testing in retirement. Any extra savings people manage to put by--they can be quite modest--will add to their retirement income rather than being eaten up by means tests. This must be considered in conjunction with what we discussed earlier; namely, the question of capital limits.

I return to the amendments themselves. By requiring employers to offer access to a stakeholder pension scheme we are not compelling employees to join that scheme. Membership of SERPS, and in due course the state second pension, which is the reformed SERPS,

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will remain an option, as it is now. Amendment No. 25 as it stands would therefore add a rather unnecessary additional complication for employers and for the regulator seeking to check compliance by making the requirement on the employer dependent on whether individual employees elect to remain in SERPS.

The main effect of Amendment No. 54 would be to retain SERPS in the future alongside the state second pension. As I say, this misunderstands the state second pension. We do not propose to abolish SERPS and replace it with a new benefit. Rather, SERPS is to be reformed and enhanced by the introduction of the state second pension. When the state second pension is introduced most people will gain and no one will lose. Women will benefit in particular both as carers and as low earners, including many part-time workers.

I know that my noble friends may have concerns about stage two of the state second pension when benefits become flat rate--that is, for those over the £9,000 figure--but we have not set a date for this as it will be dependent on stakeholder pensions becoming successfully established in the market-place.

I believe that to follow my noble friends' amendment would produce confusion and complexity and, above all, it would not help those who most need help. No one will lose by the developments of the state second pension on the one hand and the stakeholder pension on the other. However, if employees were misguidedly to remain in SERPS unreformed, as opposed to the reformed SERPS, they could well be worse off under my noble friends' proposals than under ours. We are improving SERPS by ensuring that it delivers to the poorest, those who cannot afford to go into funded schemes.

I hope that with that explanation my noble friend will feel able to rejoice with me in the changes that will be introduced by the state second pension.

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