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Lord Goodhart moved Amendment No. 69:

(" .--(1) This paragraph applies if a pensioner attains pensionable age after the end of the first appointed year and the pensioner's earnings factor (as revalued under section 148 of the Administration Act) in respect of any relevant year before the first appointed year is an amount equal to or greater than the qualifying earnings factor but less than the lower earnings threshold at the date when he attained pensionable age.
(2) The additional pension payable to a pensioner in respect of any relevant year before the first appointed year in which his earnings factor (as revalued) was equal to or greater than the qualifying earnings factor but less than the lower earnings threshold at the date when he attained pensionable age shall (subject to sub-paragraph (3) below) be calculated as if his earnings factor (as revalued) for that year had been equal to the lower earnings threshold at that date.
(3) The number of years to which sub-paragraph (2) above applies shall not exceed the number of complete years between the beginning of the first appointed year and the date on which the pensioner attained pensionable age.
(4) If the number of years to which sub-paragraph (2) above applies is less than the number of years to which it would have applied but for sub-paragraph (3) above, it shall be treated as applying to those years in which its application is most favourable to the pensioner.").

The noble Lord said: My Lords, the amendment is a revised and, I hope, somewhat improved version of an amendment moved at Committee stage. The S2P is an ingenious and interesting idea which has a certain number of defects. One of them is the slow rate of build-up to the full benefits to be provided. If nothing is done to speed it up, we know that it is something which can take up to 40 years--someone's full working lifetime.

The Minister said at Committee stage on 15th May that many of the lower paid,

    "can expect to see a significant boost to their pensions within 20 years or so".--[Official Report, 15/5/00; col. 86.]

The implication is that there will not be a significant boost until about 20 years from now. That seems too slow.

The effect of the amendment would be to speed up the benefits. The way in which it would do so is perhaps a little complicated. It would allow any past year in which the benefits derived from SERPS are less than they would have been had S2P then been in operation to be upgraded to the S2P level. That will apply to years in which the earnings of the pensioner, after taking into account the uprating in line with earnings factors, were lower than £9,500.

In order to prevent a large boost in government spending on pensions, we have suggested that this should be done only a year at a time; only one year of SERPS can be exchanged for the higher level provided by S2P for each year after the Bill comes into effect in which a contributor has income at or above the level of the qualifying earnings factor. That means that the

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burden will be increased only gradually, but at rather less of a snail's pace than will be the case with S2P as it is now proposed.

The previous version of the amendment involved the exercise of an option by the pensioner and, of course, a corresponding need to inform the pensioner of his or her right to exercise that option. That complication was rightly criticised by the noble Baroness. The new version tabled here operates automatically, without any need to get in touch with the pensioner to ask whether he or she wishes to exercise the option.

Almost all of the benefit will go to those who are on relatively low earnings. As I explained previously, there is no point in exchanging SERPS for S2P for anyone whose earnings before downrating would have been more than £9,500. It will be of benefit only to someone whose earnings are below that level. That could be of some benefit to those who begin their careers on low pay but subsequently prosper. However, most of the benefit will pass on, proportionately, to those with a lifetime of low earnings.

In our view, this will speed up the conversion of SERPS into S2P. It will provide enhanced levels of pension benefit for some of those who have, in the past, been entitled to only very low levels of SERPS. It will do so at a relatively gradual rate, but even so, it will enable S2P to become effective more rapidly than has been proposed by the Government. I beg to move.

Baroness Hollis of Heigham: My Lords, Amendment No. 69 is similar to one we discussed in Committee. It seeks to boost the amount of additional pension which someone with low earnings would receive from their years of SERPS entitlement while S2P is building up to maturity.

The amendment would allow someone who had low earnings while in SERPS to have their SERPS calculated when they reach pensionable age as if those earnings, when revalued, were at the level of the lower earnings threshold. I am glad to see a comforting shake of the head to acknowledge that the amendment has been understood. That is not always the case!

The number of SERPS years which could be enhanced in this way would be restricted to the number of years between the introduction of S2P and the reaching of pensionable age. This would give a retrospective boost for certain people for years before the introduction of S2P, based on the number of years' entitlement after its introduction.

Perhaps I may remind noble Lords of what we are trying to achieve with S2P. We are reforming SERPS to refocus state help on those who have the least opportunity to build up good second pensions. SERPS has served many pensioners well, but because it is earnings related those who earn the least gain the least from it.

Under SERPS, someone who earns just above the lower earnings limit for the whole of their working life will still retire on a state pension below the minimum income guarantee. And that is before the 1986 and 1995 changes to SERPS have their full effect. But

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under our proposals, anyone retiring with a full working life of employment behind them, or periods of caring or disability, from 2038, when the state second pension has built up, will receive a total of basic and additional pension above the MIG.

We recognise that the benefits in S2Ps take time to build up. Pensions, by their very nature, are a long-term issue. I am sure that the noble Lord will have read the financial pages which state, "If you don't start building your pension at 23, 25 or 27 you will not have a decent one at 65 and you cannot come into a pension scheme at 50 and have anything much worth having".

Lord Goodhart: My Lords, I am grateful to the noble Baroness for giving way. That is true and those advertisements relate to funded pensions. However, as regards pay-as-you-go pensions, the level of pension is determined by what the Government think fit to charge by way of contributions or provide out of general taxation. There is no structural reason why it should build up gradually.

Baroness Hollis of Heigham: Except, my Lords, that current taxpayers have to fund at an additional cost the pensions of a previous generation which has not in turn funded other people to the same extent. That is the definition of a pay-as-you-go scheme. It is paid for in a different way. As regards a state second pension, there is not the advantage of an employer's contribution, which is available in occupational pensions or in some cases--I hope in money purchase pensions--of contributions along with the recycled rebates and the person's own contributions.

Lord Higgins: My Lords, but there are employer's contributions.

Baroness Hollis of Heigham: My Lords, in the state second pension?

Lord Higgins: My Lords, in the basic pension.

Baroness Hollis of Heigham: My Lords, I am talking about the difference between funded schemes, which involve the employer's and employee's contribution together with rebates, as opposed to pay-as-you-go schemes, which still have to be funded but by current taxpayers and national insurance contributors for a generation which is already coming towards retirement--

Baroness Turner of Camden: My Lords, does the Minister agree that all pension provision constitutes a contract between generations, no matter whether it is funded or pay-as-you-go? If it is funded, it comes from the overall economy, which is produced by the present generation in order to support the older generation. There is a contract between the generations, whether pensions are funded or pay-as-you-go.

Baroness Hollis of Heigham: My Lords, I, too, believe that pensions are a contract between

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generations, but I believe there is a deep difference between funded and unfunded schemes. I do not believe that my noble friend's formulation will overcome that. A funded scheme is a personal savings pot into which a person has put money, the employer has made a contribution, and there are recycled rebates and so forth which will grow. As regards pay-as-you-go schemes, whenever you make a pension scheme more generous, those who enjoy it are not the same people as those who have paid for it. The people are currently paying for it at a different rate from the previous generation. That is why, as my noble friend will know, many European countries, such as Italy, France and Germany, where there is a real desire to switch over to funded schemes, cannot do so because one generation will have to pay twice over; for their own scheme and for the generation which has gone ahead.

While I do not disagree in general terms that pensions are a contract between generations, I believe that that conceals the real difference between the method of funding and the nature of that obligation between generations as regards funded and pay-as-you-go schemes.

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