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Nevertheless, I accept that what the Government are proposing is designed specifically to help the lowest paid and in that respect they are to be applauded. But reducing the accrual rate to 10 per cent on the middle slice of earnings is an unnecessary complication and perpetuates for all except the very low paid the cuts in SERPS which were made by previous governments. Do the Government think that people earning between £9,500 and £21,600 are somehow well off? I really do not think that that can be the case.
The effect of the amendment would be that the accrual rate on all earnings above £9,500 would remain, as now, at 25 reducing to 20 per cent over the next 10 years. That would be fairer to the bulk of people earning between £9,500 and £21,600 who are not well off and are very moderate earners by any criteria. I hope that the Government will be prepared to look with some favour on the proposed amendment. I beg to move.
Baroness Hollis of Heigham: Amendments Nos. 125 and 126 seek to change the rates at which entitlement to state second pension will be accrued for different bands of earnings. The accrual rates are set out in
Moderate earners--those earning up to £21,600 a year--will also receive more from the state second pension, despite the 10 per cent accrual rate on their second band of earnings. Those earning from £21,600 up to £26,000--the current upper earnings limit--will receive the same as they would have done from SERPS. The formulae for setting the two bands of earnings above £9,500 are designed to achieve this. In effect, the formulae work by clawing back the extra accrued on the first £9,500 of earnings from those who earn more. But it does this progressively on earnings in band 2. So someone will need to earn £21,600 upwards before they cease to benefit from the boost of the lower earnings threshold--the boost from the accrual rate of 40 per cent on the first £9,500 of their earnings. The lower someone's earnings are, the more they will benefit proportionately. We believe that this is the right focus of resources.
The amendments would mean that everyone would be given more in state second pension than they would have received from SERPS. Moderate earners would further benefit from the higher accrual rate on earnings between £9,500 and £21,600. But also, because there would be no claw-back to offset the doubling of the accrual rate on earnings up to £9,500, higher earners would also get more under state second pension than they currently do under SERPS, regardless of their earnings.
As a result of the amendments, someone earning over £26,000 would get 27 per cent more than under our proposals for state second pension while a moderate earner on £15,000 would get an extra 18.5 per cent. But low earners would not be any better off. In addition, any change to accrual rates would need to be reflected in the rebate arrangements, to prevent people from having an incentive to opt back into the state scheme. That further adds to the cost.
The formula is specifically intended to give a significant boost to low earners together with gains for all moderate earners while maintaining the position of higher earners. We believe that this strikes the right balance. As a result of that, I hope that my noble friend will agree to withdraw her amendment.
Baroness Turner of Camden: I thank my noble friend for her comprehensive explanation of the Government's position. However, she said that my amendment would not give extra benefit to higher earners. I thought it was the Government's intention that higher earners would not be in the second state
As I said earlier, in my view the flat-rate second tier pension is really just a top-up on an inadequate basic state pension. When it becomes flat-rate, people on very moderate incomes will be pushed towards the private sector. As we have heard earlier, that is the Government's real intention. This is no doubt part of the Government's desire to reverse the present 60:40 balance between state and private pension provision.
The Government are doing much to provide better value from private pensions. Arrangements are to be put in hand pushing down charges and setting standards. That is to be welcomed. But people still face the greater risks represented by money purchase arrangements available through stakeholder provision.
I am unhappy about the pressure that will be applied to people with very modest incomes to take the risk of going on to the private market. What about the position of people with earnings that vary up and down around the £9,500 threshold? Would it make sense for them to switch between the state second tier pension and the stakeholder pension each time one or the other seems to offer better value? Switching to a
Amendments Nos. 130 and 131 would subject the order which will set the date of implementation for state second pension to parliamentary debate. It would also make the setting of the start date for the second stage of the state second pension automatically subject to debate in both Houses of Parliament.
It may be helpful if I remind the Committee about what we are seeking to do. We are trying to encourage those who can to make provision for their retirement through the introduction of stakeholder pension schemes. These are due to start in 2001. But we accept that it will take some time for these schemes to establish themselves and for people to move out of the state scheme into such funded pensions.
I do not believe that it is right to wait for that to happen before we start to help those for whom a funded scheme is not an option. That is why we are reforming SERPS by introducing the state second pension, which will provide help to low earners, carers and long-term disabled people with broken work records. We want to introduce that as soon as possible.
The introduction of the state second pension is at the heart of our pension reforms. As a result, it will help those who need it and reduce the number of people who are dependent on the minimum income guarantee. We want as many people as possible to retire on income above that, but it takes time to build it up. That is why it is important that the scheme is implemented as soon as is realistically possible.
Once we have parliamentary approval for the legislation underpinning these reforms to SERPS, we shall concentrate on ensuring that the necessary administrative procedures are in place to enable an early delivery date. As I have said, we believe it is right to encourage those who can to provide for their own pensions through stakeholder schemes. When stakeholder schemes have become established, we shall encourage those moderate to high earners who have a significant part of their working life ahead of them to contract out of the state scheme. We shall encourage
We expect stakeholder pensions to be most suitable for people earning between £9,500 and £20,000 a year. However, carers and disabled people who are out of the labour market are unlikely to be in a position to invest in them, and most people earning less than £9,500 are likely to find that their income is too low for them to save more for their retirement, which is why we need S2P.
Stage 2 of S2P will provide that extra help by further focusing resources on those who need help most. The state second pension will become a flat-rate scheme in which anyone who remains within the scheme will be treated as if they earned £9,500 or whatever the lower earnings threshold is at that time. That means that low earners, carers and long-term disabled people will continue to be considerably better off than under SERPS, but it means that higher earners will no longer, as at present, get the earnings related advantage that they do in stage 1.
As I have explained, the scheme will continue to be earnings related for moderate and higher earners who are contracted out. That will encourage them to provide for their own retirement by means of a funded pension scheme but it will not be compulsory for anyone to opt out. We do not think it prudent to go on to a flat-rate state second pension scheme in one stage. It would cause significant disruption at a time when alternative forms of provision are still in their infancy. We believe that we need to be sure that stakeholder pension schemes have become well established and that moderate earners--that is, the group earning £9,500 to £20,000--have access to low-cost, flexible, funded, safe schemes before we make such a move. We do not believe that it would be responsible to set an arbitrary date now, as Amendment No. 129 would do. It is more prudent to wait and assess when the time is right to make the transition. That will be done in consultation with the organisations concerned. I cannot give the noble Lord any more information than that, but I shall no doubt try!
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