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Baroness Crawley: My Lords, it is not planned to review the position of service pensioners who retired before 1 July 1997. They expected to retire in Nepal and are paid a pension that provides a very good standard of living in that country. The decision to give the serving brigade and recently retired Gurkhas the opportunity to transfer to the Armed Forces pension scheme was made in the expectation that they would in future be living in the UK because of the 2004 immigration rule change.
Lord Eden of Winton: My Lords, is the Minister aware that everyone who has any connection with the Brigade of Gurkhas is deeply grateful for the recent improvements to the Gurkha terms and conditions of service? However, how does she justify the fact that a large number of Gurkha soldiers who served throughout the Second World War and in subsequent campaigns with such valour and distinction can only rely on welfare support to ease their poverty in retirement? Surely that is wrong. At the very least, if nothing else can be done, will the Government now make a substantial contribution to the resources available to the Gurkha Welfare Trust?
Baroness Crawley: My Lords, I acknowledge the noble Lords experience with the Gurkhas and thank him for his remarks on their new terms and conditions. The new terms reflect our respect for the Brigade of Gurkhas for their loyalty and unique fighting skills over 200 years.
The noble Lord asked about retired Gurkhas who will not receive the terms and conditions he referred to. They break into two camps. The first are Gurkha pension retirees, who receive what is believed to be a very good standard-of-living income in Nepal, where until recently most Gurkhas retired to. They were able to retire after 15 years of service, which means that a Gurkha could be on that pension from age 33 and be able to work.
The second group, as the noble Lord, Lord Eden, said, rely on the pension from the Gurkha Welfare Trust. I am pleased to tell him that the Government put £1 million grant-in-aid a year into that trust and continue to work closely with it.
Baroness Sharples: My Lords, will the Minister confirm that Gurkhas who are demobilised in Nepal and have a job offer back here are fast-tracked back to this country? That is what I was told some years ago.
Baroness Boothroyd: My Lords, is the Minister aware that the Gurkha Welfare Trust has the daunting task of raising £254,000 every month from charitable sources to provide veterans with welfare support? The veterans your Lordships are speaking about are now in their late 70s and 80s and unable to earn a living. The Minister mentioned that the Government provide £1 million to the trust. That is the case, but will she make it clear that that money is for administrative purposes only and not for welfare pensions? Why have these elderly veterans been left out of the Governments calculations?
Baroness Crawley: My Lords, the noble Baroness is right that the Gurkha Welfare Trust takes in charitable donations. The £1 million allows all those donations to be used towards the welfare trust pensions. Pensioners who did not serve the requisite number of years when they were serving as Gurkhas can be entitled to such a pension from age 60. That is a basic pension by Nepalese standards, there is no doubt about that, but the trust is also able to make free healthcare available to those pensioners.
Viscount Slim: My Lords, the noble Lord, Lord Eden, mentioned the figure of 22,000 Gurkhas, which we are well aware of. How many of them receive the Gurkha pension? As the noble Baroness has said, the new arrangements will put tremendous extra work on to the Gurkha Welfare Trust. Surely the Government can do better than £1 million a year.
Baroness Crawley: My Lords, we have 26,300 Gurkha pensioners in the Gurkha pension scheme, which can be activated after 15 years service and so is a pension for life, often from age 33. I asked my officials for comparators to find out what that pension actually meant in terms of the Nepalese standard of living. For instance, an engineer would earn £147 a month and a warrant officer would retire early in his life on £171 a month. I would be very happy to write to the noble Lord.
The Bill implements the most ambitious reform of our pension system in modern times. It takes forward the key recommendations made by the Pensions Commission in 2005 to provide the basis for a sustainable and affordable system that strikes between Government and individuals a new balance of responsibility for security in retirement. It addresses past inequalities and inadequacies and embeds in our pension system the crucial values of fairness and simplicity. Above all, it is built on the solid foundation of consensus.
The Bill comes after 10 years of progress in reducing the poverty that had all too often become associated with old age. Since 1997, 1 million pensioners have escaped from relative poverty and more than 2 million from absolute poverty. We are spending around £11 billion a year morenearly 1 per cent of gross domestic producton pensioners than we would have done had we continued the policies that we inherited in 1997 and £7 billion a year more than we would have had we simply reintroduced the earnings link in 1997. As a result, pensioners have shared in the rising prosperity of the country and for the first time in a generation, they are now less likely to be poor than any other group in society.
The Bill will take the crucial steps needed to continue that progress, to meet the challenges ahead and ensure that security in retirement is a reality for generations to come. This year for the first time there will be more people above state pension age than children in the UK. People retiring today can expect to live more than five years longer than their parents generation. The potential implications of this rapid, demographic shift are profound and nowhere more so than in terms of the pensions people receive.
In 2002 the Government established the Pensions Commission to consider the long-term challenges for our pension system and I should like to take this opportunity to express my thanks and admiration to the noble Lord, Lord Turner of Ecchinswell, for the formidable analysis and recommendations which he and his team produced. That work has genuinely shown us a way through some difficult issues and we are greatly indebted to him and his colleagues.
Alongside the implications of demographic shift, the commission identified three other major issues; first, that people are not saving enough for their retirement; secondly, that as a result of historical legacy, the current state pension system is complex and delivers unfair outcomes, especially for women and carers; and, thirdly, that if the current basis of indexation were maintained, the basic state pension would reduce drastically in value over the next few decades and by 2050 eligibility to pension credit could spread to more than 75 per cent of pensioner households. The Bill addresses all those challenges head on and, crucially, in a way that promotes personal responsibility for dignity and security in old age, with outcomes that are fair, simple, affordable and sustainable.
Part 1 of the Bill provides for a simpler and more generous basic state pension; a simplified state second pension; new rules on eligibility that will provide equality for women and carers; and a higher state pension age. As proposed in the White Paper on pensions reform last May, Clause 1 reduces for those reaching state pension age from 6 April 2010 the number of years needed to qualify for the full rate of basic state pension to 30. It allows those with fewer than 30 qualifying years to receive a pro-rated basic state pension, regardless of whether their qualifying years are made up of contributions from earnings or credits.
Clause 3 replaces home responsibilities protection with a new system of credits for carers. As we set out in the White Paper a year ago, the clause includes provisions for a new carers credit which will be available for people caring for at least 20 hours a week for one or more severely disabled people, each of whom is entitled to attendance allowance, the middle or highest rate care component of disability living allowance or constant attendance allowance.
In addition, following discussion with the key organisations that represent carers, we are extending the carers credit to those caring for people who are not entitled to one of these benefits. I am pleased to inform noble Lords that this was announced at the Report stage in the other place by my honourable friend James Purnell, the Minister of State for Pensions Reform. Those certified as caring for at least 20 hours a week by a health or social care professional will also be eligible for the carers credit. This will give us some flexibility to recognise the small number who are caring for at least 20 hours a week but for people without a qualifying disability benefit.
We will determine hownot I stress, ifthis certification process will operate through the review of the National Carers Strategy. The approach we are taking here and throughout the Bill is intended to ensure that those providing valuable caring contributions are recognised by the state pension system. Taken together, these clauses mean that, for the first time, a life of social contribution will be properly recognised and rewarded on an equal footing with work. In addition, they address the gender inequalities in our system.
Today, only around a third of women reaching state pension age receive a full state pension. In 2010, as a result of the Bill, that figure will be around 75 per cent. In 2025, it will be over 90 per cent. That is a hugely significant step forwards for women in our society.
We are determined to ensure that future generations of pensioners continue to share fairly in the rising prosperity of the nation. Clause 5 restores the earnings link in primary legislation and allows for this to happen from 2012, or in any event by the end of the next Parliament. As a result, by 2050, the basic state pension will be worth more than twice as much in real terms as it is today.
The clause also places in primary legislation the Governments pledge to uprate the standard minimum guarantee element of pension credit by earnings. The Government are committed to reducing the extent of means-testing in the future, ensuring that pension credit continues to be targeted at those who have been unable to make sufficient provision themselves. Clause 5 provides the means of securing this important outcome. We anticipate that by 2050, less than 30 per cent of pensioners will be eligible for pension credit.
Clause 4 will abolish adult dependency increases. Todays dependency increase provisions are a hangover from the immediate post-war period where single breadwinner households were the norm. We live in a very different world today. Furthermore, entitlement to adult dependency increases is based on an all or nothing earnings limit, which creates a disincentive for younger women who are married to men drawing a state pension. If these womens earnings are over this limit, their husbands state pension is reduced. The money saved from the abolition of ADIs will be reinvested to help provide the more generous state pension eligibility criteria, which, as I have explained, will ensure that women in particular can qualify for a full state pension in their own right.
Clause 9 provides for the introduction of a new carers credit which will increase the number of people eligible to accrue entitlement to the state second pension. These new credits, aligned with the credits for the basic state pension, could see around 180,000 more people accruing entitlement to the state second pension in 2010 and we are exploring how we can use health and social care professionals to reach another 60,000.
As recommended by the Pensions Commission, we intend to accelerate the phasing out of earnings relation within the state second pension through provisions in Clauses 10 to 12. But we also intend to go one step further in simplifying the system, by replacing the current complex accrual mechanisms with a flat rate sum of an additional £1.50 a week, on top of the basic state pension, for each qualifying year spent working, caring or a combination of both.
One of the key concerns identified by the Pensions Commission was the complexity of the current state pension system and the difficulties that this presented to individuals attempting to plan their retirement saving. The Bill addresses that concern. Together with the basic state pension, this simplified state second pension entitlement will effectively provide a single state pension for most contributors, thereby giving people a much clearer understanding of what they can expect to receive from the state in retirement and what they must do for themselves.
Finally, Clause 13 legislates for a gradual increase in the state pension ageincreasing by one year every decade between 2020 and 2050, and with each change phased in over two consecutive years in each decade. In committing to increase the state pension age to 68 by 2046, the Bill sets a course for 40 years. This is a major step for any Parliament, but I am clear that it is the right course to take. These gradual increases will not reduce the length of the period people can on average expect to enjoy in retirement. On the contrary, they keep the proportion of life spent in retirement stable between generations, by reflecting increases in life expectancy. Those who reached state pension age when the first contributory state pension was introduced in 1925 constituted a little over a third of their generation. Those reaching state pension age today comprise more than three-quarters of their generation, and by 2050, even with a state pension age of 68, this proportion is projected to rise to nearly 90 per cent.
The Pensions Commission was absolutely clear that the state pension age should increase to reflect rising longevity. The simple fact is that if we are not prepared to increase the state pension age, we will burden our children and grandchildren with the ever greater and unsustainable cost of a population spending longer and longer in retirement. Pulling back from this increase in the state pension age would mean either significant rises in personal taxation or cuts in spending elsewhere.
That is why an increase in the state pension age sits at the heart of this Bill, ensuring the sustainability of the whole reform package, and locking in the essential stability that is needed in any successful pensions policy.
Part 2 of the Bill implements a number of measures designed to support good quality existing employer pension provision by reducing the regulatory burden and making the existing system simpler for employers and providers. It also provides for additional levels of financial assistance for those who have suffered the loss of their pension due to the collapse of an occupational scheme.
Clause 14 allows occupational pension schemes to remove the complexities of the detailed rules on guaranteed minimum pensions by converting members rights accrued between 1978 and 1997 into ordinary scheme benefits. I can assure noble Lords that members interests will be safeguarded by a requirement for the new rights granted after conversion to be of at least equal actuarial value to those that they replace.
I should like to take the opportunity to signal the Governments intention to table in Committee a further amendment consequential to the current Clause 14. We have identified an unintended consequence of the conversion of guaranteed minimum pensions on the state retirement pension entitlement of a small number of individuals and require a further amendment to correct this. The proposed amendment will ensure that those already in receipt of indexation on their GMP increments as part of their state retirement pension will continue to receive this.
Clause 15 abolishes contracting out on a defined contribution basis, as recommended by the Pensions Commission. This change will offer greater simplicity for individuals by removing the difficult judgment as to whether they would be better off contracted in or contracted out. People will therefore be able to make clearer decisions about their additional pension saving options, building on a simple foundation from the state. I should also like to take this opportunity to signal our intention to table some minor, technical amendments to Clause 15 and to the regulation-making powers relating to occupational pensions set out in the Bill.
Clause 18 relates to the extension of the financial assistance scheme announced by the Chancellor in his Budget speech on 21 March this year. The extended scheme will now provide assistance to ensure that all members of qualifying pension schemes will receive 80 per cent of the core pension rights accrued in their scheme, subject to the cap. There will be no age-related tapering of this assistance. The level of the cap will be revised from £12,000 to £26,000 a year and the de minimus threshold will be scrapped. Clause 18 also makes provision for raising initial paymentsthose made while schemes are winding upfrom the current 60 per cent to a level of 80 per cent, to take effect immediately. An estimated 100,000 people will benefit from the extensions to the FAS: 85,000 scheme members will be eligible for assistance for the first time, and around 15,000 people who stood to benefit under the current scheme will receive more assistance due to the extension. As a result, we expect that all the estimated 125,000 people who suffered losses to their pensions as a result of their employers insolvency will receive at least 80 per cent of their expected core pension, subject to the increased cap.
As noble Lords will be aware, this extension to FAS was made partly as a result of the recent judgment in the judicial review relating to the ombudsmans report. The High Court directed my right honourable friend the Secretary of State to reconsider his response to the ombudsmans first recommendation on the basis that maladministration had occurred; he did so on that basis, resulting in the extension that now appears as Clause 18. The extension increases the taxpayers commitment from £2.3 billion in cumulative cash terms, to £8 billion, which equates to more than doubling the scheme in present value terms, from £830 million to £1.9 billion. Further, on 23 April, my honourable friend James Purnell, the Minister of State for Pensions Reform, published the terms of reference for a review of pension scheme assets to determine how these or other sources of non-public expenditure could be used to increase assistance for affected scheme members. Any funds identified by the review will be used to supplement FAS support up to 90 per cent.
Part 3 provides for the creation of a Personal Accounts Delivery Authority. The creation of the delivery authority provided for by the Bill is the first step towards establishing personal accounts. We intend to legislate further on the detail of the personal accounts scheme. The delivery authority will be an independent body, which will draw on the wealth of expertise that exists in business, financial services and consumer groups. In the first instance it will provide advice and make recommendations, supporting the Government in understanding the operational and commercial implications of options, and advising on the design of the commercial strategy, including the financial, technical and commercial analysis needed for policy development.
The introduction of personal accounts will transform the savings culture in this country, offering a simple and affordable means of saving to millions of people who are currently without access to a suitable savings vehicle. At the same time, automatic enrolment will tackle the behavioural barriers to saving and secure economies of scale so that individuals can take the benefit from lower charges and higher returns. Simple, low-cost, flexible and portable, personal accounts may generate an additional £4 billion to £5 billion of new net saving each year, equivalent to around 0.5 per cent of GDP. They will help millions of people take greater responsibility for building their retirement income by giving them greater opportunities and incentives to save, building on the solid platform provided by the changes to the state pension in this Bill. However, the detail of these changes will be in a future pensions Bill. This Bill deals only with the setting up of an advisory body to help the Government in developing personal accounts and as such the remit of the body is limited to its role for this Bill.
The broad consensus that this Bill has received in its passage so far reflects the fact that it is founded on a basis of agreement on the direction of travel. This is a comprehensive, integrated package of reform, but it has also involved difficult decisionsfor the Government, business, individuals and the pensions industry. The progress of the Bill has shown that our reforms have been broadly endorsed by all of these groups, which is a significant tribute to the work of the Pensions Commission in establishing the principles behind these reforms.
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