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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1000 -i
House of COMMONS
TAKEN BEFORE the
Work and Pensions Committee
Pre-legislative scrutiny: draft pensions bill
Wednesday 27 February 2013
sally west, dr ros altmann, emily holzhausen and craig berry
Baroness hollis of heigham, paul johnson, chris curry, gemma tetlow and professor jay ginn
Evidence heard in Public Questions 1 - 75
USE OF THE TRANSCRIPT
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Taken before the Work and Pensions Committee
on Wednesday 27 February 2013
Dame Anne Begg (Chair)
Mr Aidan Burley
Anne Marie Morris
Examination of Witnesses
Witnesses: Sally West, Income and Poverty Strategy Adviser, Age UK, Dr Ros Altmann, independent expert and former Government pensions policy adviser, Emily Holzhausen, Director of Policy and Public Affairs, Carers UK, and Craig Berry, Pensions Policy Officer, TUC, gave evidence.
Q1 Chair: Can I welcome you this morning to the first oral evidence session of our prelegislative scrutiny of the Government’s Draft Pensions Bill? I was about to say that our fourth witness was delayed on the Tube, but she has now arrived. Beginning with you, Craig, please introduce yourselves and your organisations, very briefly, for the record.
Craig Berry: I am Craig Berry, Pensions Policy Officer at the TUC.
Emily Holzhausen: I am Emily Holzhausen, Director of Policy and Public Affairs at Carers UK. We represent family members who care unpaid for their disabled or older relatives.
Sally West: I am Sally West, Strategy Adviser at Age UK.
Dr Altmann: Ros Altmann, independent economist and pensions expert.
Q2 Chair: Thank you very much for coming along this morning. I am glad to see there is such interest in what everybody else often thinks of as a very dry subject. We in this Committee know it is really, really exciting, and we are very excited to be able to do this prelegislative scrutiny. Can I ask, very quickly, as an opening question, whether the Draft Bill is sufficiently clear about the important details of the new scheme, and particularly the transitional arrangements? If it is not clear, what needs to be clarified, or what needs to be introduced into the Bill? I do not know who wants to start. It is unusual for all the witnesses to look at one another. Do you want to start, Craig? That is great.
Craig Berry: Very briefly, on that question, there are a couple of safeguards we would like to see in the Bill, for instance triple lock and uprating. The details of the review body for State Pension age have not been included in the Bill. Some aspects of it have, some aspects of it have not, and we would like to see more detail on that. I am quite disappointed with the Government’s plans on that issue, in fact. National Insurance arrangements for the selfemployed, which I am sure will change over time, have not been included in the Bill either. The Government could have at least indicated the direction of travel for how National Insurance contributions for the selfemployed will increase in future, if not in the Bill.
Q3 Chair: We have some questions on some of that. Anyone else?
Sally West: Some of the issues that Craig has raised, like the triple lock and the level of pension, we would not necessarily expect to be in the Bill, but they will be really crucial as to whether the reforms achieve the Government’s aims, which are aims that we support. We would expect some of the things to come later, but, unless we are really clear at this stage, then we are not sure whether they will achieve the aims that we want these reforms to bring about.
Dr Altmann: I think, so far as it is possible to be clear, there is clarity, but it would be welcome if there were a little more certainty about the date of implementation and the level of the pension when it does come in.
Q4 Chair: Which are things that are not on the face of the Bill, but are in the White Paper?
Dr Altmann: Exactly, and maybe some commitment as far as any future changes are concerned, in terms of the interaction of State Pension with means-tested benefits, which is a crucial part of the rationale for the change.
Glenda Jackson: Just on a point of order, Chair, are the microphones on? It is extremely hard to hear people.
Chair: The problem is that the microphones are here for the broadcast, not to amplify. That means I will have to ask everybody to shout out. I do not think there are any amplifying ones. I think maybe there is a sound loop.
Stephen Lloyd: Ironically, as I am the deaf member of Work and Pensions, the induction loop is working perfectly. I feel your pain. Sorry, Glenda.
Chair: Can I ask the witnesses, therefore, to speak up? The acoustics are not very good in these big rooms, but, as I say, there is no proper amplification either. Maybe we all need to get the hearing aids.
Q5 Nigel Mills: The Government says that the major impact of this reform will be that higher earners, and those who work for a longer period, will get relatively less, and lower earners, or those who work for a shorter period, will get relatively more under the new regime. Is that a conclusion you agree with for these reforms, and is that an aspiration that you think is the right direction of travel?
Sally West: I am happy to start on that one. The impact in terms of pension levels for individuals will depend on things like their earnings level, the number of years of contributions or credits that they have had, and when they reach State Pension age, so it will be different for different cohorts. Broadly speaking, lower earners and people with gaps in their work contribution, for reasons such as caring, will be more likely to get a better pension out of the system. Higher earners will be more likely, especially as time goes on, to get less than they would have got under the current system. From Age UK’s perspective, we would think it is right that the State Pension focuses on those who have lower incomes and less opportunity to build up private provision.
However, it is important that, for example, the level of the pension is sufficient to achieve the aims, reduce means testing, and to ensure that workers with modest earnings are able to achieve a decent income from State and private provision. Again, as we have already mentioned, the uprating policy will be really important, because whatever the starting point is, if it is not triple locked, the relative generosity of the pension will go down over time.
Emily Holzhausen: I speak specifically from the point of view of carers, who often have broken National Insurance records, complicated working patterns, and might be out of the labour market for anything from six months to perhaps almost a lifetime if you are caring for perhaps a child who grows up with severe disabilities in the community. Certainly in the short term there are improvements for carers with this particular policy, as Sally said: the triple lock, the uprating, and the level that one is expected to live on, or needs to live on, in combination with sources from private pensions.
Although you are scrutinising the Bill, I do not think this can necessarily be looked at in isolation without looking at other welfare reform changes, and I can talk about that a little bit more later, because they obviously have a bearing on people’s contribution records. In principle, over the short term, yes, it is an improvement.
Craig Berry: I do not think it is entirely fair to characterise low earners as being people with short or interrupted working lives, because low earners with longer working lives or a full National Insurance record will lose out as a result of single tier over the long term. Their losses will not be disproportionately that much greater than higher earners. I think we need to be clear about who the higher earners are. Accruals to the State Second Pension in the current system are quite flat, so anyone earning £40,000 or around that amount, or above, is treated as if they earned £40,000. That is my understanding of the system. People earning around, say, £30,000 or above, especially in parts of the country where the cost of living is higher, should not really be characterised as the high earners, making the system redistributive. I would challenge that characterisation.
We are considering the impact of single tier in the context of wider reforms to the pension system, principally automatic enrolment, and it is fair to say that auto-enrolment targeted at low to medium earners will improve the private pension outcomes of many millions of people. However, you would have to introduce a caveat into that caveat as well, by saying that people are paying for those private pensions during their working lives. The low to medium earners benefiting from automatic enrolment are paying more or less the same National Insurance over their working life in the new system as they would have in the old system, and paying more for a private pension, to get roughly the same or just a little bit more or less than they would have from the State Pension in the current system.
Dr Altmann: I think the aims of the reform are absolutely right. The idea is to provide a flatrate base of State support from a particular age in later life that everybody can understand, expect, and know about. At the moment you have a system that nobody understands that gives more State help to people who earned more during their working life, because there is an earningsrelated element to the pension. Even under S2P there is some earnings relation. That makes it very difficult for people to plan whatever private provision they might want to make, because they do not know what base they are building upon. Also it seems to me to make more sense for the State to pay the same flat rate amount to everybody, rather than trying to ensure that those who earned more while they were working have more State Pension in retirement as well, because by definition those who earned more while they were at work would have had better opportunities to save privately for their own pension.
If you look at Europe, there is a concept of replacement rates for pensions, where the State Pension is based on the idea that those who earned more while they were working deserve more from the State while they are retired. I think what the UK is now trying to do is a much better system for sustainable building of retirement income in the longer term, which is just the basic minimum, and everybody knows that if all you want in retirement is £144 a week, or that equivalent, then you do not need to do anything. However, if you want more-and most people will-you have to make a plan, either to save or to have money coming from your home or somewhere else. That is where I think the fundamental aims of this reform are absolutely correct.
Q6 Nigel Mills: So we have two pretty major changes here. One is that you have to work 35 years to get the full pension, and the second is that, if you have worked for less than seven to 10 years, or your qualifying years are less than seven to 10, you get nothing. Do you think those two changes will impact particularly on certain groups? Do you agree or disagree with those two changes?
Emily Holzhausen: Obviously the rise in the number of years by five years, from 30 to 35, will impact groups who find it harder to work and have to get their contributions paid in some other way, through claiming different benefits, like carers, for example. That is where we start to see holes in people’s records, for a number of different reasons. There are complications around the minimum number of qualifying years as well. If somebody comes to this country when they are aged 35 and aims to work a long time but ends up caring for a disabled child or perhaps a parent, they might not accrue enough contributions, depending on their records and depending on what they claim, etc.
It is those individuals who could lose out under this system. On the whole it is a positive policy, and I accept that because of the rise in the working age, people will have to work longer, but it does cause problems, potentially, for people like carers.
Craig Berry: I think it is quite disappointing that we have moved to 35 qualifying years for a full State Pension, away from 30. I think 30 struck the right balance between a contributory system and a system that was more *substitutebased*[9.42.52], where the vast majority of people can retire on a full State Pension. It is quite disappointing, although I recognise that the impact in practice will probably be quite marginal or minimal. The more important issue is making sure that people get credits when they are due. Sometimes takeup of National Insurance credits, in lieu of National Insurance contributions, is not high enough, and also people with very low earnings are, of course, not credited for a National Insurance qualifying year. It will be important for the Government to look at that as they implement the higher qualifying years rule.
Sally West: I agree with that. Regarding the 35 years and the loss of derived benefits, which hopefully we will talk about later on, particularly for women, who tend to have more complicated working lives-perhaps combining parttime work with a bit of caring-you do not get credits for children aged 12 and over, but they still need support. Women who are juggling struggle sometimes to get qualifying years. For example, you have to claim some of the carer’s credits; they are not automatically linked to benefits. Take, say, somebody who is unable to work or cannot find a job: they may not get any benefit if they, for example, have a working partner. However, in order to protect their credit record, they will need to be claiming a benefit, fulfilling the workrelated conditions, and unless people are aware they need to do it, and prepared to go through that in order to get no benefit but a credit for something that might happen in 30 years’ time, they may come up with gaps.
We still have the issue that we and a number of people have raised in the past when we have discussed previous Pensions Bills: people who have more than one parttime job. If none of your jobs reach the lower earnings limit, you could have three jobs earning £100 per week, and you are still not getting a contribution that gives you a right towards your pension. Some of the issues that were discussed for previous Pension Bills will still be there and need to be raised again, because of the 35 years and the loss of derived rights.
Dr Altmann: I am not so concerned about the increase from 30 to 35. If you look at where we started from, we started from 44ish, and we went to 35 via 30. It is a bit odd, but at the end of the day the aim of the reduction to 30 years was to ensure that more women got a better State Pension. Now we have a single tier, which should itself ensure that more women get a better State Pension, it is not so odd to have increased the qualifying years from 30 to 35. Again, there will be a transition group and, again, it is a shame that there is so much tinkering and confusion within the State system itself. We have had so many changes.
The bigger concern for me is the one Sally just raised, which is that there will still be many women, potentially, who have more than one job and each job has no National Insurance contribution attached to it. We do not know how many there are; the DWP says it is very few, but how much that is in numbers I am not sure. They will be much worse off than somebody who is not working at all. If we could finally find some way of crediting people who are still working and earning, but below the National Insurance limit, in the same way that we can credit people who are not working at all within this Bill, I think that would be most welcome.
Sally West: Of course the positive thing about the Basic State Pension being triple locked is that it has increased in value somewhat, but as the lower earnings limit is linked to the basic pension, it means that threshold goes up, so it is a bit swings and roundabouts. Currently you could have 16 hours at minimum wage, and not meet that threshold. That is something that needs to be considered.
Q7 Nigel Mills: None of you have commented on the seven- or 10-year disregard. Does that mean you are all quite relaxed about it?
Dr Altmann: The issue with the seven to 10 years is that it is most likely to impact on people who have not lived in the country for that long. We do not know exactly who they are, but they may well have contributions in other countries or elsewhere, and we will still be retaining the system of pension credit for people who do not achieve the full State Pension. If one has to look for areas of targeting spending, I am not so uncomfortable. I do not think it will affect women who have lived in the UK for their whole life, for example, because they will have been credited-unless they are in this group, as I say, who are below the National Insurance threshold.
Q8 Sheila Gilmore: To follow up a point that Ros made there-that the previous system, with its earningsrelated element, meant that betteroff earners were getting more pension-these are people who, by definition, do not have a private pension. They could have been contracted out from the State Pension. Are you confident that there are good private sector pensions for these people to start saving into? If you were covered by SERPS, you were generally contracted out. If you had a good pension otherwise, you would have been contracted out, so they do not have unemployment pension is what I am trying to say-or they would not be in SERPS.
Dr Altmann: I was trying to make a more general point. We need to ensure that there is good private provision for everybody, whether you are a higher earner or a lower earner. The fact is, if you were earning more while you were working, you had more opportunity to save, in whatever savings vehicles were available. Is it the duty of the State to ensure, just because you were earning more when you were working, that you have to get more State Pension as well when you are not working? The balance needs, perhaps, to be the other way.
Q9 Sheila Gilmore: Particularly high earners. The State, you are suggesting, was in some way subsidising all of these high earners. I am suggesting that a lot of the people who were and are covered by the second State Pension did not have the opportunity of an employer’s pension scheme, which is why they were covered by it in the first place. Are you confident that we really are in a position to guarantee that, if that goes, people will be able to make it up in other ways?
Dr Altmann: If you are asking whether I am confident that we have a reasonable private savings system in the UK, I think we have a way to go in terms of improving that. Is our private savings system much worse than that of other countries? I probably think, "Not really." I think we have an issue with private pensions in general, and I take your point that certainly over the past couple of decades there have been astonishingly bad practices in private pension provision, in charges and the value that has been offered by many nondefined benefit pensions. I think the defined benefit pension system we have had, which sadly is now pretty much on its last legs, would have offered, and did offer, very good topup pensions. We are now in the defined contribution phase, and I think therefore the quality of pensions will obviously be lower for the member. However, the costs of the defined benefit system proved too high, and the risks proved too high to be relied upon.
In the end, one is talking about the social policy rationale for a State Pension. Is the social policy rationale for a State Pension, and for taxpayer funding of State Pensions, to ensure that everybody gets a flat rate on which they can build whatever private provision is out there? Then you have to address private provision, and obviously make sure that it is suitable. Or is it to ensure that people who earned more while they were working then get a higher State provision, funded by taxpayers, in retirement?
You can argue it both ways. I would argue that the basic pension flat rate for everybody, irrespective of your previous earnings, makes more social sense. Others might argue differently: obviously your contributions to National Insurance would have been higher, because you earned more and you paid a higher proportion of salary, which in money terms is higher. However, I still believe that if we are to achieve a successful private retirement savings culture, people need to know what the State will pay to them. There needs to be a flat rate base on which people build. Earnings fluctuate during your working life, but irrespective of the fluctuation in your earnings, if you have a singletier, flat rate pension, you will still know that when you reach a certain age the State will pay you £144 per week, or whatever the equivalent will be, and that is it. Anything else you want, you have to find from somewhere.
Q10 Debbie Abrahams: This links into Sheila’s question, but I would like to open it up to the rest of the panel. I think we can all agree with the objectives around the legislation: to reduce inequalities for pensioners. Much of the legislation over the last few years has tried to do that. There seems to be, in terms of the detail-again, similarly with other legislation-much up in the air about whether it will actually achieve that. There have been different points there. Would you agree that one of the elements of this is to continue to shift the risk, in financial terms, from Government and employers to individual employees?
Craig Berry: The Pensions Commission, whose findings are often gospel for anyone involved in debating pensions policy, I think recognised that the system of private pension saving was not ready to take up the slack if earningsrelated State Pensions were abolished. Of course it set us on a path towards more of a universal flat rate State Pension, but did not recommend abolishing earningsrelated State Pensions over the kind of time period that the Government is suggesting.
Those problems identified by the Pensions Commission, which in many ways they sought to rectify, are still with us to some extent. Defined contribution pensions are too often low quality and highcharging. There is no certainty at this stage that people will be able to replace the income that they lose from the State Second Pension through private saving, especially when you factor in, as I said earlier, the fact that they are putting a proportion of their salary into these savings vehicles, in addition to continuing to pay full National Insurance contributions.
Sally West: Craig mentioned the Pensions Commission; one of the things we are very interested in is an idea that the Pensions Commission themselves suggested, which is some kind of ongoing advisory committee. We have suggested that should be the body to be looking at the evidence around State Pension age, but it could also look at some of these broader issues around whether we have the right balance in sharing risks. If you look at one aspect of the pension system in isolation, such as the State Pension, private provision or whatever, it is hard to get that overall picture. We think that might be one way of making sure that we are heading towards a system where we have that decent balance and everybody is able to get an adequate income.
Chair: We had better move on. We have a lot of questions, and another panel after this one.
Q11 Jane Ellison: Communication: it is probably universally agreed that one of the areas in public life generally that people are the least au fait with is the communication around pensions and an understanding of that. The DWP team have told us that their communication plan for these reforms is a work in progress. Obviously your contributions to that thought process are welcome, but in particular I wondered if there was any aspect of communication you felt should be written into the face of the Bill-perhaps a pension statement or something like that?
Dr Altmann: That is very important. One of the points I would make about the concerns on replacing S2P, which people now may no longer receive at slightly higher income levels, goes to that point, because most people do not have a clue what S2P they will get anyway when they are making a plan earlier in their life. I think it is important that people get regular statements that help them make that plan. How far are you along the road to getting your £144 per week? How many more years of contributions via National Insurance in some way, or, if you are a carer, how many more years of credit, will you need to be able to get that? Then you can still have your base on which you can plan your private income.
Sally West: I had not particularly thought about what needed to be written into the face of the Bill on that.
Q12 Jane Ellison: You have said that one of the key challenges is the communication.
Sally West: Yes, definitely. I think there are the communications for the individual at the time the change is coming, to make sure that absolutely everybody is clear what their foundation pension will be and what that means for them. It is a simpler system, but it will be quite a long time in the future before it will be a really simple system. The transition and indeed the communications will be complicated. There is ensuring people get individual communications they can understand. There are some general issues we need to start looking at now, because a lot of people do not really understand what "£144 for all" means, because it is not that.
Many of the people contacting us are current pensioners, and I should put on record that we are concerned that current pensioners will not benefit from any of the improvements, where they have a low pension. However, some of the people contacting me say, "It is unfair because I only get £107 basic pension, and in the future everybody will get £144." Of course that is not the case, because they do not take into account additional pension or contracting out. It is very understandable; as Ros said, people do not understand the additional pension, so I think sooner rather than later we need to be getting some general messages, to explain broadly speaking what the reforms mean. I hope that we and other organisations will be able to work with the DWP and the pensions industry to try to get some common language and some common factual information about what it means.
We also need to think about people who perhaps should be doing, or not doing, something now. We talked about the credits, and whether people need to be starting to sign on to get credits, whereas they were not before, because they thought they had 30 years, or the issue of voluntary contributions. Some people may be able to make up gaps through voluntary contributions. However, we understand the Government is saying they will relax the time limits for these, but that message needs to go out quickly, if that is the case. Otherwise people may pay six years’ backdated contributions and discover they will not get anything more, because they already have additional pension.
We are finding a lot of people are understandably confused. People are worried that there will not be a means-tested benefit system in the future, and people are concerned they already have £160 in their State Pension and they will lose out. It is a really important issue.
Q13 Jane Ellison: Just thinking about the people you deal with and advise, it is obviously hundreds of thousands of people a year, I would imagine, as an organisation. What percentage, broadly, would you say, have a good understanding of their pension entitlement as they approach pension age?
Sally West: I thought you were going to ask me a difficult question there: "a good understanding of the pension system". I could probably tell you that was a handful.
Jane Ellison: Just how it affects them.
Sally West: As people get nearer to State Pension age, they start to ask for pension forecasts. Once you get to that stage, you can get that information. They know what they are due to get, although the forecasts are not that easy to interpret, but they often do not know why. I do not know if you have ever tried to explain contracting out to someone; it is very difficult.
Jane Ellison: We tried to discuss it as a Committee, and it was very difficult.
Sally West: You say, "You were contracted out," and they say, "No, I never contracted out." They do not sign a form to say, "Please contract me out"; they join their private pension, and I do not think any Government or DWP in the past has tried to explain to people, "You are paying lower National Insurance because you are in a pension scheme." I think particularly as people are further away from retirement, there is very poor understanding.
Q14 Jane Ellison: You are both highlighting the same point, which is the future planning bit, rather than people just approaching it.
Emily Holzhausen: I wanted to give a specific example from Carers UK. Under the last Government, carer’s credit was introduced, which was a fantastic bit of pensions policy whereby people who could not get carer’s allowance or any other benefit were able to get a credit towards their State Pension. It was very flexible; we really very warmly welcomed it, and it was welcomed by all parties, I have to say. There are about 120,000 people who should be entitled to carer’s credit. I beg your pardon; those are 2007 figures. I do not have any uptodate figures, but I do know that the uptake of that is extremely low, and one of the problems around that is people do not know about getting these credits.
For example, you might just go over the earnings limit for carer’s allowance, lose your carer’s allowance, but you do not earn enough to meet the lower earnings limit to be credited into the Basic State Pension. It takes somebody to say to you, "You need to claim carer’s credit in order to protect your pension," and the level of knowledge out there, I would say, needs to change within the Governmentrun advice services and also welfare rights services and other ordinary advice organisations. We need something on the face of the Bill to help people understand that they need to do this.
As we know, applying for benefits is a very complicated and difficult process, and people, if it means just a couple of pounds in their pocket, may make a decision not to do it. Of course that will affect their pension entitlement, so it is absolutely critical that we get this communication. Although there are some protections out there for carers, we need to work so hard to make sure that they are implemented.
Q15 Jane Ellison: Can you put a figure on what you think the nontakeup is?
Emily Holzhausen: I think it would be best if you wrote directly to the-
Chair: We were told yesterday that 3% to 4% is the takeup rate. It is very, very low.
Emily Holzhausen: It is very, very low indeed. These are the people that were at risk.
Chair: Craig, I will not get you to answer that one, because I think you will probably have to answer most of the next ones on contracting out.
Q16 Anne Marie Morris: Craig, I fear these are entirely for you. Have you made an estimate of what the additional National Insurance contributions will be for contractedout employees on average earnings? When we end contracting out, clearly there will be a change. Have you done an estimate as to how much, for the average earner, the additional NI contributions they have to make will be?
Craig Berry: I think it would be around a few hundred pounds a year. I do not have the exact figure.
Dr Altmann: About £350 a year.
Craig Berry: £350 sounds about right for the median earner.
Q17 Anne Marie Morris: What do you calculate the average earnings to be, to make that calculation?
Craig Berry: The median earning is £26,000, is it not?
Q18 Anne Marie Morris: Fine. That is very helpful. Employers have the right to amend defined benefit pension schemes to enable them to recoup the additional NI liabilities, without trustee consent. The TUC is concerned that this creates a significant risk of material loss. Could you amplify that for us, explain your concerns, and suggest what might be put in place to avoid your concern?
Craig Berry: I think the statutory override that employers will have to make changes to their schemes is unnecessary. It is a narrow interpretation of the work that trustees do, and it is a misrepresentation of the work trade unions and members do. Trustees and unions will often take measures and support proposals that safeguard the wider financial viability of DB pension schemes, so I do not think it is entirely necessary to give employers this unilateral power to make scheme changes. They should be negotiated at a scheme level. There is no other evidence that trustees or members would be entirely averse to making those kinds of scheme changes, if they recognised the State Pension outcomes will be higher.
The problem with the statutory override, as I understand it, is that the cost will be at the aggregate level. Employers will be able to calculate how much extra in National Insurance contributions they will be paying in relation to their DB pension scheme, and they will be able to make scheme changes that recoup those costs in full, but there is no guarantee that there are no losers among individual members. Individual benefits will not be safeguarded in that process, so it may be that some people’s lost private pension income is offset, or more, by higher State Pension income eventually, but there is no guarantee that many people’s lost private pension income will be offset by higher State Pension income.
Making these calculations at the aggregate level per scheme is the difficulty here, and we would like to see a guarantee that no members will suffer meaningful losses as a result of this unilateral power being employed, if it is employed. As I say, we think it is unnecessary anyway.
Q19 Anne Marie Morris: I understand what you are saying, but presumably we have a tradeoff between simplicity, to try to get things sorted and moved on, and something that is, as I think you would describe it, fair. When you talk about negotiation, I guess the challenge with that is inevitably it adds to delay, uncertainty, and does not help people in terms of planning for the future. Is there anything that is not complete freeforall negotiation but is not equally a straight override that you think would be fairer?
Craig Berry: I am not entirely sure what the Government’s plans are. I know they are in discussions with the actuarial profession. It will be interesting to see what role The Pensions Regulator has in that process as well. If there is some form of override, the process should be entirely clear and involve trustee and member consultation, although, as I say, the need for trustee consent, where that is written into scheme rules, should not be taken away.
Q20 Anne Marie Morris: Let us move to the other side of the fence, the public sector, who are in a very different position, because their employees are protected and effectively the burden falls on the employer this time around. Do you think that is a fair position?
Craig Berry: It is a fact that public sector employers will be paying higher National Insurance as their employees are contracted back in. This is the reason that singletier reforms are not fiscally neutral, despite the Government’s claim. I think it is around £6 billion in extra National Insurance revenue, and about £3.5 billion of that comes from public sector employers. They will not be able to recoup that cost, which I think is absolutely right, but the Government should ensure that the necessity to recoup that cost somehow does not impact on the quality of public services and of course, as part of impacting on the quality of public services, jobs and pay in the public sector. If singletier reform is to be fiscally neutral, it should include that extra revenue in the calculation.
Chair: We have talked a wee bit about women and carers, but we have some more questions.
Q21 Sheila Gilmore: Are you satisfied that the proposals constitute an improvement in the State Pension for women and carers? Maybe one point that has already been alluded to that we could perhaps look at in a bit more detail is this one about people under the lower earnings limit. A constituent came to me recently who was doing more than one parttime job. Her total earnings in most years were over the lower earnings limit, but she was not getting the contributions in any of those jobs. When I wrote to the Minister at that time, only a few months ago, he just said, "That is how it is," and, basically, "Tough." There may be many more people like that, especially given the move to zero hours contracts and lots of parttime jobs. I wonder if that is a particular issue.
Dr Altmann: That is something I have raised with the DWP a number of times over the years. It is of great concern to me. I am assured by the DWP each time that it is a very small number of people. I do not know how many, and I think it would be worth trying to find out how many. However, I cannot believe that it is beyond the wit of the DWP to credit people who are below the National Insurance threshold in one or more jobs in the same way as they credit people who are not in any job.
It may be that you have to fill in a form, but at the end of the day, it should not be the case that women who have caring responsibilities and have to juggle a few, very lowpaid parttime jobs are excluded from being credited for the State Pension, when somebody who is at home fulltime and is not working at all is credited. They are equally valid as far as contributions to society are concerned, and I think it is important, now that we are getting these reforms through, that we find a way to bring those people in.
Q22 Chair: Should they be able to do it through National Insurance numbers? They must be registered somewhere to show that they are below the levels.
Dr Altmann: Again, I am told by the DWP that it is not possible to use National Insurance numbers as a unique identifier for some reason, but there must be a form that somebody could fill in, surely, that would say, "I am working. I am not paying National Insurance because each job is below the limit, but I am working; I am a valid member of society; please credit me for my State Pension for this year."
Sally West: It is an issue that has been looked at before, as I said earlier. It is not a new issue, but it feels like one that we need to come back to. I do not think any of us would have instant answers to how you do it, but it would be really good to have a commitment that that is something we need to look at and achieve.
Q23 Sheila Gilmore: There are two reasons, are there not, why this is now more important? One is to do with the state of the labour market, and the kinds of jobs we all know people are doing. The other is that in the past a lot of women would have got the wife’s part of the husband’s pension, for example, so there might have been an assumption, "Well, at least we will get 60%, so it is not necessarily a problem."
Sally West: Some people do work on that assumption. Some people plan their lives and they know that, and for a lot of people it happens by default, because a lot of people assume they get a State Pension at pension age, and they do not know how the contribution record works. I agree it will be particularly important with the labour market, the 35 years, and the loss of derived rights.
Q24 Glenda Jackson: I have a question on how you track these women down: if they do not have National Insurance numbers, they surely have a National Health number, so there should be a way of finding them.
Mr Burley: Do you have any experience of how they deal with this in other countries? This must be a common problem, not just unique to Britain. Have they solved this problem in Europe, in your experience, or elsewhere?
Sally West: I cannot answer that one, I am afraid.
Dr Altmann: I do not believe they have the same kind of cutoff system in Europe. I think you get social credits in a different way; it is not quite the same. We have quite strict and convoluted qualification criteria, very often, in a way that other countries do not. I would have to look more closely to give you a detailed answer to that.
Q25 Glenda Jackson: We have received a number of submissions from women, particularly those born between 1952 and 1953, and a House of Commons Library search puts the number of those women at 430,000. They believe they have been doubly disadvantaged by the increase in their State Pension age and their ineligibility for the singletier pension. Are there any steps the Government could take to address this, or is this just an inevitable consequence of the changes to State Pension provision?
Dr Altmann: Sorry, do you want to go first?
Craig Berry: I was going to say that I do not think it is an inevitable consequence of introducing the single tier. It is perhaps an unavoidable consequence of introducing it now, as we are going through the process of State Pension age equalisation. That is not to say that single tier’s introduction should be delayed for this reason alone, but surely the fact that we are equalising the State Pension age around the time we are planning to introduce single tier should be taken into account when we deal with the transitional system. I do not think we have dealt with that sufficiently so far.
Q26 Glenda Jackson: What would you do: equalise it up or equalise it down?
Craig Berry: There is a suggestion of a staggered introduction of single tier, so when women reach the State Pension age of men born on the same day, they will then transfer over to the singletier system. Options like that should be explored.
Dr Altmann: I think there are two issues bound up in this. The first one is women who were born from 1952 up to April 1953, for whom men born on the same day as them will be on the higher tier, but they will stay on the old system.
Q27 Chair: Ros, you just said, "They will be on the higher tier."
Dr Altmann: Sorry, the new single-tier State Pension.
Q28 Chair: That is part of the confusion, is it not? Everybody is assuming that if they go into the new system they will get more money, but from what we were told yesterday, only 50% will be better off and 50% will be worse off. Is that about right?
Craig Berry: You have to maintain a safeguard of allowing them to get the better of the current or the new system.
Chair: But that is where the confusion is coming from.
Dr Altmann: Can I address that one, Chairman?
Dr Altmann: For the people who are coming up for retirement immediately, most of the women moving on to the single tier will be better off, and the men will not be affected, because if you are above the single tier at that stage, you will not lose anything. It is people retiring in 20 years’ time who will potentially have less than they otherwise would have done. The immediate issue is that we are protecting the extra rights above the £144 for those coming up for retirement immediately, and it is only those over the next 10 or 20 years hence who would have had more out of S2P than they will get from the £144 who could, if you like, perhaps be termed losers. The issue at the 2017 point, or whenever it comes in, is that most women then are likely to have a better pension under the single tier than they otherwise would. Most men will be unaffected.
Q29 Chair: But not necessarily £144, because of the protected rights.
Dr Altmann: Correct. If you assume the contractedout element with the single tier, that is right.
Sally West: The impact assessment, which I happen to have here in front of me, is that for people reaching State Pension age in 2017, the median gain is £9 a week. The maximum you could gain is the £37-the difference-but, as you say, most people will not be in that situation of going from £107 to £144, because of the complexities of additional pension. However, as Ros said, we know women will be more likely to be in this position, and we know that people very understandably feel that the State Pension age has been moved, and even if the first move was back in 1995, often people did not realise that their State Pension was going up, and some of the women in this group will have then faced an additional increase as a result of the 2011 Bill, and now feel that State Pension age has gone up again but they will not benefit.
Q30 Glenda Jackson: One of the areas here is that they are born on the same day as a man, but they do less well than the man, it seems to them, at this moment. We are going back to the communication issue here, are we not?
Sally West: Yes, but there would be ways round this. You could say they could choose to be treated the same as a man born on the same date; you could say, as Craig says, once they get to April 27, or whatever date it is, then the pension could be increased, were they due for a higher one.
Q31 Glenda Jackson: So there is room for manoeuvre as far as the Government is concerned?
Sally West: It would be possible to do, yes, certainly.
Q32 Glenda Jackson: But there has to be the political will to do it, essentially?
Sally West: Yes.
Glenda Jackson: Thank you.
Dr Altmann: And there would be a cost attached.
Glenda Jackson: Oh, well, of course. We know about the cost.
Dr Altmann: There are two groups. There is the group born before April 1953, and there is the group in the AprilJuly 1953 category, who had the second increase in the State Pension put upon them, if you like, by the Coalition. As that legislation was going through Parliament-and you remember it was pretty contentious, because there had been a promise that they would not face a second increase in State Pension age-the implication was given that, although they will have to accept a second increase in their State Pension age beyond the 1995 changes at very short notice, they would at least get the singletier State Pension when it came in. The Green Paper said it would be introduced in April 2016.
That will not now be the case, so they will have the second increase in the State Pension age, and they will not be on the new singletier State Pension system. There is also, of course, the possibility that the timetable will slip and it will not be April 2017. So although at the moment we are talking a certain number of people, the number could increase significantly if the introduction date is delayed. I believe we need to have some transitional protection for women who find themselves in this category. The other side of the argument that I think the DWP would put is that these women are getting their State Pension earlier than men, so they are going to get more and they are likely to live longer, so over the balance of their lifetime they may end up getting more money. However, I think one needs to look at the immediate impact rather than the longer term impacts, and the concepts of fairness here.
Q33 Jane Ellison: The time to plan is something that everybody always mentions.
Dr Altmann: For me, that was the biggest problem. I never had a problem with equalising men and women’s State Pension ages. It did not make sense for men and women’s State Pension ages to be different, especially in the context of improving State provision and more women working, and so on. It was giving people fair notice, and it was clear that this second increase in pension age did not give many women enough time to plan their finances, having thought they were on course for a certain date, and planned around it. When you only have five years’ notice, some have already retired and are caring for others, having taken that decision based on finances that will not come through. We need to bear that in mind.
Q34 Sheila Gilmore: I wanted to ask Sally, in particular, about this issue of the derived and inherited rights. In your written submission you said there should be a way of ensuring that these are protected. How would you define the group of people, and what protection should be in the legislation?
Sally West: I should say first that I think it is right that the State Pension is an individual entitlement. I have absolutely no problem, particularly going forward, with explaining that you have your own right to a pension. We are mainly talking about married women; derived rights affect married couples and civil partners, but because of historical issues we are mainly talking about the position of married women. Most people do now have contribution records or credited records for raising children or other reasons. There is protection in the legislation for people who paid the reduced rate married woman’s stamp, which is right, because that is a big issue, as you probably know from postbags, and there is also protection for the inherited additional pension.
However, there seems to us a gap: there will be some women who were expecting to rely on their husbands’ contributions for a basic pension who will suddenly find that, if they retire under the single tier, that will not be the case, and in our written evidence I gave the example of a woman I have been talking to. She has just eight years’ contribution record. She has had poor health for a lot of her life, and she and her husband decided that he would work and earn, and they could manage on his income. She felt it would put pressure on her health to try to work or to work, so they agreed that they would live on his income. She did not claim benefits. She said she did not want to claim benefits, but in any case she was not sure she would get anything.
They were both assuming she would get a married woman’s pension when she gets to State Pension age, and that if he dies before her, she would get the basic pension as a widow. Now it appears that will not be the case, because she will be reaching State Pension age under the single tier. It is really important when we look at the foundation pension in 2017 that people in this position, who could reasonably have expected to use their husband’s contribution records, do not suddenly find they are left without a pension at all. She has now started signing on, because she says, "At least that will give me an extra four years, so I can get my pension contributions up to 12 years," but that would still be 12 years at £4.11; it will be nothing near a full basic pension.
This is a particular issue. I am not saying we have any problems with the issue of not having derived rights, but where people have that legitimate expectation that they would receive a pension on their partner’s contributions, it seems very unfair to suddenly say, "We are changing the rules and you should have done something different for the last 40 years."
Q35 Sheila Gilmore: Are there implications for women divorcing, as well? In the past, at least-I am not quite sure of the current position-on divorce, even if you were not yet at retirement age, you could in effect get an advantage. If you had not been working, then you could adopt part of the husband’s contribution record, and as a family lawyer some years ago, that was quite a valuable thing for a lot of women, so they then had a base. Obviously once they were divorced, they had to go on with their own contribution record, but it gave them a base on which to build,
Sally West: That is the situation; at the time of divorce you can in a sense substitute your husband’s-or wife’s, but it is mainly an issue for women here-record, and then any other future years, up to State Pension age, you build up on that. It will be the same situation. Again, most women will be in the situation that their own contributions or credits will give them at least as much as the basic pension. I think you would need about 26 years in the single tier to get to £107, and 35 years to get to £144. As long as you have something around 26 years, you will get something equivalent to what you are expecting. Again, there will be women in that situation whose husbands have said, "I do not want you to go out to work. I am not allowing you to go out to work." You might have couples who are assuming that the husband’s contributions will be the record they will both depend on.
Q36 Sheila Gilmore: Is there a particular issue for women who might be in that position who, say, were divorcing at a later date? Somebody in their 20s or early 30s has plenty of time, normally, but again it is not uncommon, and I acted for a lot of women in that position, who were already at an age from which it would have been extremely hard to build up their own individual contribution record, even under the previous system.
Sally West: A lot of women will have protection, having raised children, and particularly in the past, the credits for raising children went on to a higher age. Now it is only up to 11. There will be a lot of people in that situation who will be okay, because of their own individual rights, the credits for children or caring, and earnings, but there will be women-and the DWP tell us it will be quite a small number of women-who will be affected. That is fine; it ought to be possible to find a solution, and not a particularly expensive solution, if the numbers are small, but I think we do need to look at making sure that people do not miss out because of that.
Q37 Sheila Gilmore: If it is a small number, it is an issue for Government as to how much they have to pay, potentially, but for each of these people, this could be quite significant.
Sally West: Yes, it is potentially a big impact for a small number of people. It is something we need to look at, and the legislation ought to have some protection for this group. It is not something we will need in 20 or 30 years’ time, because, as I say, as long as people realise this, they will be able to build up their own record, but I believe we need protection for people who are heading towards pension age and are not able to change their plans.
Dr Altmann: I believe the intention is to protect them. I think it is just a question of identifying who they are, and then making sure that the Bill covers them.
Q38 Sheila Gilmore: But we need it in the Bill.
Dr Altmann: Yes, absolutely.
Sally West: The legislation covers inherited additional pension, and time when people paid the married woman’s stamp, but at the moment I do not think there is protection for the group I am talking about.
Dr Altmann: Yes, which we need to put in.
Q39 Teresa Pearce: Just a quick question: you just mentioned women who are raising children and getting a credit. Currently, at this moment, there will be women making the decision not to claim child benefit, because the other person in the house earns over a certain amount. They can either be taxed on it, or they stop claiming. Is there any information around informing those women of the pension consequences of that decision, do you know? Anybody?
Dr Altmann: I do not believe there is yet, but I believe it is important.
Q40 Teresa Pearce: The decision they make has serious pension consequences, and HMRC certainly are not informing them of that. I wondered if you were aware of anything else.
Dr Altmann: I have not seen any.
Sally West: It is certainly an issue that is being considered. I am not sure what people are sent directly about that.
Teresa Pearce: Not much.
Sally West: Yes, it is another important issue, and it goes back to the things we have referred to a number of times. It is just making sure that people, at a younger age, think about their pension.
Chair: Throughout all of this, with regard to women, they do not know how they are building up the credits, and what their pension will be made of. There is a big education job to be done with younger women about how they get it.
Q41 Nigel Mills: I want to check something Sally said about women who are relying on their husband’s record needing 26 weeks to get the £107. Presumably they are only expecting 60% of £107 in that situation, so it is more like 16 weeks’ record they need to find, to get roughly the amount they are expecting.
Sally West: Yes, 16 weeks for the 60% pension, but also, if somebody is a widow or divorced, then it is £107, yes.
Q42 Graham Evans: Several witnesses have stated that the singletier pension is too low at £144. At what level do you think it should be, and how might the additional costs be met, while keeping the reforms costneutral?
Craig Berry: It was always going to be difficult to make this kind of systemic change to the State Pension while maintaining cost neutrality. It is important to point out that the Government has not maintained cost neutrality, because they are getting increased National Insurance revenue and there will be a saving to the system in the long term as well-I think in the 2050s it begins to cost less than the current system does. That principle of cost neutrality can be questioned. £144 a week is too low, and it would cost more to raise it. Raising it would overcome a lot of the difficulties around shortterm losses from savings credit being abolished, longterm losses from earningsrelated State Pensions being abolished, so either introducing it at a higher rate or uprating it much more quickly to deal with the longterm losses would be necessary.
Sally West: I agree. The £144 is just £1.30 over the basic pension credit rate. We have not really talked about the loss of other meanstested benefits.
Chair: We are coming on to that. Hold that thought. That is the next set of questions.
Sally West: I think the level needs to be sufficient to take people above meanstested benefits, and act as a platform. If we look at the Green Paper, there was a larger gap. The single tier was about 5% or 6% higher than the basic pension credit rate. That probably ought to be the sort of minimum, but it is difficult for us to put a figure on that. We would clearly like it to be as high as possible, but if you take the pension credit as a kind of benchmark, you definitely need a bit of clear blue water between that and the single tier.
Dr Altmann: I do not think that I have said that £144 is too low. I think the logic of having it just above the meanstested pension credit threshold is sound. If we as a society decide that the appropriate level for meanstested benefits for pensioners is the pension credit guarantee, then the State Pension needs to come up to at least that level. If there is any extra money in the system, what I would like to see is existing pensioners being moved on to the new system, because they are the ones who are most likely to be in poverty. They are the ones who are least likely to claim even the pension credit level, so they are often surviving on even less than that.
That is where the big problem lies. They cannot do anything to save more for themselves now. They cannot do anything now to make extra financial provision, whereas as we go forward, this base allows people to realise, "This is the level society will give you. It is all we can afford, but you will know what it is, and you are on the hook to do something for yourself if you would like more than that."
Q43 Stephen Lloyd: Thank you very much. We are moving on to the pensions credit thing, but just before that, I have one question. Obviously there are complexities around moving from one system to the other. I have been listening very, very carefully for the last hour. Recognising the simplicities, I am not clear whether the three of you, excluding Ros, think that the new singletier pension is better than previous? Some of what you are saying indicates that maybe it is worse. Could you clarify that? Would you agree or disagree that the singletier pension will be better for the vast majority of people compared with what they currently have, or not? Let us start with you, Craig.
Craig Berry: Whether or not it is better for the majority of people depends on when they reach State Pension age, because the impact assessment is very clear that in the future, say people retiring in the 2040s, the vast majority of them will get less from their State Pension.
Q44 Stephen Lloyd: Would you prefer it if, rather than the change, the Government stayed with what it was?
Craig Berry: This is not incremental reform. They are two very different approaches to providing a State Pension: a basic State Pension with an earningsrelated topup versus a single, universal, flat rate amount. The benefit of simplicity should not be undervalued. Simplification is an extremely worthwhile objective, and I believe it can help to improve private savings rates. Hopefully it will act as a spur to improve the quality and cost of private savings vehicles.
Q45 Stephen Lloyd: So pinning you, as the TUC, down: overall, despite some of the drawbacks, which you allude to, in 40, 50, 60, 70, 80 years’ time, so to speak, would the TUC agree that the new singletier pension is better for the majority of people than just staying where we are?
Craig Berry: As I say, it has clear advantages over the current system. If it were introduced at a much higher level, a level we believe would be appropriate, then we would be in a position to evaluate it further.
Q46 Stephen Lloyd: That is great, thank you. Emily?
Emily Holzhausen: Yes. In the short term, some people will be better off.
Stephen Lloyd: Are you talking 40 or 50 years, so to speak?
Emily Holzhausen: Shorter than that.
Q47 Stephen Lloyd: What I have here, Emily, is that up to 2040 65% will be better off, and then at 2060 it will be around 50% better off.
Emily Holzhausen: Yes.
Stephen Lloyd: That is where I am pinning you down. The language is quite important, because some of the groups, obviously, are saying, "Short term, short term." We know the issues around communication with pensions. I get contacted by people who I know will be better off, who are saying, "This is a disaster, Stephen, because we hear we will all be worse off." You can understand the responsibility of language.
Emily Holzhausen: Of course, absolutely. I think we come back to the communication. This is one of the complexities of pensions. I have talked to a few women over the last few days, trying to work out their records and how they will be affected, and having worked on pensions over the last 20 to 25 years, it is so complicated that it is incredibly difficult to work out people’s different scenarios. Carers UK has tried to look at where the gaps are and prevent all those people who have contributed what is, in effect, billions to the economy by caring for older and disabled relatives ending up in poverty in retirement because of a combination of caring for children, caring for relatives, and not being able to predict what happens in their lives.
We are not experts on the absolute levels. I would say that, and I would defer to the greater knowledge of my colleagues here. There are still specific groups over whom we have concerns. There are some improvements here.
Q48 Stephen Lloyd: Agreed, but overall would you, representing Carers UK, say that the new STP means that more people will be better off than currently, or would you say, "No, let us forget the STP and stick with what we currently have"?
Emily Holzhausen: We definitely think there is merit in simplicity.
Stephen Lloyd: Good, thank you. That is great.
Emily Holzhausen: That is so important, notwithstanding the communication problems we still have around the fact that this is a contributory benefit and you need to get your credits. So Jane’s point is critical.
Q49 Stephen Lloyd: I agree. Sally, overall?
Sally West: Yes. We are definitely supportive of the idea of a single tier, a simpler system, a better pension for people who have very low earnings and are caring, and reducing means testing, but we would like that to be done by better State and private pensions rather than reduced means testing.
Q50 Stephen Lloyd: No, I appreciate that. I will not go to you, Ros. On to pensions credit: this is one of the classic challenges around communications. All of us MPs around the table know that in our own constituency, despite everything we do, we still have anywhere between hundreds and possibly thousands of people who should be on pensions credit and we cannot get them on it, so it is always difficult. Do the benefits of simplicity that you have talked about and we have discussed, and an increase in the singletier pension for some people, outweigh the potential loss that some poorer pensioners will face from the abolition of savings credit? Ros, shall we start with you, please?
Dr Altmann: I think that the aim of the reform is so important that we have to accept the reduction in income with savings credit. I would prefer that we had more of a transitional arrangement to protect people who have saved, and who then claim and lose out. Savings credit has already been reduced. The value of savings credit has already been devalued in recent policy changes anyway. Of course, again, once you reach State Pension age, the incentives to save that savings credit are meant to address no longer really apply. I would prefer to see transitional protection, but the aims of the policy-to establish a simple State Pension that people understand and can then build on and plan for-are important and valid enough to overcome that objection, but I say that reluctantly.
Q51 Stephen Lloyd: I understand. Emily, I know, with the fantastic work that Carers UK does, this will include some of the people you represent. What are your thoughts on it?
Emily Holzhausen: I have not looked in depth at this particular issue. I can go away and have a look at that, and come back to you on that.
Q52 Stephen Lloyd: That is fine, thank you. Sally, can I ask you?
Sally West: We would like to see a system in which we do not need so much means testing. If you look at the impact assessment, although pension credit rates will fall as a result of the single tier, it is mainly because of loss of benefit rather than increased level of single tier. That is a concern. In the medium to longer term, you should not need something like savings credit, because people ought to have a reasonable income from their State Pension, and people will have had automatic enrolment and they should have better opportunities for private provision. Then you will have a simpler system and, as I say, many older people do not claim the benefits they are entitled to.
One of the reasons we support the single tier is that it should reduce that, and that is one of the reasons why, like Ros, we are very concerned that current pensions are not included. The loss of savings credit overnight is a potential problem. It is worth up to £18 a week for a single person. There is something in the White Paper about some transitional support with housing costs, rent and council tax. We do not know the details of that, but what we need to do is look at the transitional generation-the people reaching single tier in the first 10 years-and whether we need to do more within the meanstested benefits so that there is not a stark difference between people reaching State Pension age before and after the implementation date.
Just to go back to the very first question, when your colleague was asking whether it was low earners or high earners who would benefit, some of the lower earners who will be worse off will be those who lose savings credit, and I think it would be unfortunate if we had people who, in the early stages, were quite a few pounds worse off as a result of the meanstested benefit. Longer term, yes, let us have a simpler system, but perhaps we need to look further at the transition arrangements around the benefits.
Sheila Gilmore: Is it not possible to reduce dependence on means testing without making people any better off? What you do is drop the means-tested protection. There is an assumption, and everybody says, "Great, there will be less means testing." The assumption is that people will be better off as a result, but will there be people who may be no better off and might actually be worse off? What about passported benefits
Chair: That was going to be our next question, but time has moved on, and we have it for the next panel, so, Sheila, you hold on to that as well, and we will ask the next panel. I will wind this one up. If there is something you are desperate to say, please give it to us in writing. I am sorry we do not have enough time, but we are very short of time, anyway, to do this part of the scrutiny. Can I thank you very much for coming along this morning? What you have had to say has been very interesting, and it will help us when we come to make our recommendations to Government.
Examination of Witnesses
Witnesses: Baroness Hollis of Heigham, Paul Johnson, Director, Institute for Fiscal Studies, Gemma Tetlow, Programme Director of Pensions and Public Finances, Institute for Fiscal Studies, Chris Curry, Research Director, Pensions Policy Institute, and Professor Jay Ginn, Institute of Gerontology, King’s College London, and Women’s Budget Group, gave evidence.
Q53 Chair: Thanks very much for coming along this morning. I think most of you were listening to our first session; some of the questions will be similar, but there will obviously be slightly different questions as well. Can I begin perhaps with you, Patricia? Please introduce yourselves briefly for the record.
Baroness Hollis: Patricia Hollis. I was DWP Minister in the Lords and did various pension Bills, including Pension Credit and S2P, credit sharing on divorce, etc. Then, just before the last General Election, I wrote a pamphlet calling for a new single State Pension, so I am very much a supporter of it but I do have three or four real concerns that, if opportunity presents, I would like to air.
Gemma Tetlow: I am Gemma Tetlow. I am Programme Director of Pensions and Public Finances at the Institute for Fiscal Studies.
Paul Johnson: I am Paul Johnson, Director of the IFS.
Chris Curry: Good morning. I am Chris Curry, Research Director at the Pensions Policy Institute.
Professor Ginn: Good morning, I am Jay Ginn, King’s College.
Q54 Chair: Can I ask you, Jay, to speak up a bit? The microphones do not amplify; they just record. This is basically the same question I asked the first panel: does the draft Bill offer sufficient clarity on the implications of the reforms, and is it acceptable to leave so much of the detail to be worked out later on and to regulations, rather than being on the face of the Bill? Who would like to start?
Baroness Hollis: I do not think that is unusual. Pension regulations are often the result of elaborate negotiation with the stakeholders, and I think it is perfectly appropriate that you have a framework Bill, particularly as we have had very extensive Green and White Papers and consultation before, as well as this prescrutiny. I think that is an appropriate way to proceed, but there are a number of issues that are not covered, by definition, in either the Bill or the White Paper that I am worried about. As I say, I am an enthusiastic supporter for it, above all because, apart from pensioner poverty and women’s issues, it makes it safe to save. Without this, I do think we could risk a misselling scandal on NEST, for example.
The issue I am worried about, Chair, is what I am gathering about the funding for all this. The funding just about works out, according to our pamphlet work from Landman Economics, but I now understand that some of the funding that is coming from S2P is going to go into social care, so we were told in the last week or so. If so, it cannot be spent twice, and I worry about where the funding is going to come from for this. The obvious answer is that you will increase faster the state retirement age, which also worries me, because on page 72, footnote 85 makes it clear that the Government is expecting the period of retirement to be a virtual constant at 21.4 years. This means that increasingly, as people live longer, the period of retirement will shrink as a proportion of their total lives and it will carry more years of disability. So there is an issue there that I am quite concerned about, particularly if the response to inadequate funding is to raise the retirement age even faster than that proposed, to 67 and 68.
Then I have a number of smaller concerns. I dislike the fact we are losing the ability to defer a State Pension and roll it into a lump sum rather than into an increased pension, because what a lot of people want is a modest amount of capital at retirement, not just an increase of income. I think they will then, as an alternative, go to dubious credit/debt agencies or possibly less well informed equity release patterns, and I hope we will run amendments to try to bring that back in. I do not understand why that has been excluded; I think it is very unwise.
I am also worried, as was picked up in the previous discussions, about ensuring we have adequate protection, particularly for women with very volatile working lives, given caring responsibilities, so that there are adequate credits and buybacks and all of that for them, including the right to be able to amalgamate a portfolio of jobs that are below the LEL. Given Universal Credit, which interestingly has not been mentioned so far, and the realtime information going from employers ultimately to the Secretary of State, it would be very simple now, in my view, to be able to amalgamate small jobs and get women with a portfolio of small jobs above the LEL and into the NI system.
So there are a lot of workarounds that are now possible given the interaction of UC and the proposed Bill. There are other concerns I have, but those are my main ones.
Chair: Thanks very much.
Chris Curry: As you have stated, it is very clear there are a few quite important things that are not on the face of the Bill and will not be set. But as Baroness Hollis alluded to, there is always the tradeoff between flexibility for implementation and certainty as to what is going on. It is interesting that one of the main objectives of the Bill is to provide certainty in outcomes for State Pensions, and it seems we just have to wait a little bit longer to get that certainty in order to help people with their planning. But I think it does also make analysis of the implications of the Bill quite difficult, because quite small changes, potentially, in for example the level of the benefit or the indexation arrangements, could have quite significant implications on the numbers of people who gain or lose at any one particular point in time or the types of groups who end up being gainers or losers. So the sooner we can get indications of some of the key parts of the policy, the better-in particular the date of implementation, as we have already heard there are some very important implications coming from there.
Professor Ginn: Shall I summarise the comments that I have made in my paper? First of all, I think it is, in principle, a good idea, but there is a lot of difference between the principle of fairness and simplicity, which is the aim, and the way it is being drafted. In particular, the level of the S2P is too low for a decent standard of living for those who cannot get any pension above that level.
Secondly, I have worries about the 35 years, because, as was explained earlier this morning, this will leave many women falling through the gaps in credits or employment, and unable to reach the 35 years and falling back on to means testing.
Thirdly, removing the S2P is part of the simplification, but it does have a cost for women. That was the only earningsrelated pension in which women with caring responsibilities could still aim for a good replacement wage in retirement. In private pensions, they will be penalised for every gap in employment. It will make no contribution to their final pension. So I think the loss of S2P is very serious, particularly for women with caring responsibilities, which is most of them.
Indexation: because of their different spending patterns, the RPI was never enough to compensate pensioners for the rise in the cost of living, and that is likely to continue. A triple lock is an advance, but the CPI is even lower than the RPI and, therefore, I do not think indexation will be adequate. That affects women more than men because of their greater longevity.
Raising the SPA is also an issue, as Patricia has described, and I suggest that there needs to be some compensation for those who cannot work anymore because of health or caring issues and yet are below State Pension age, if it keeps going up, as is planned.
I also have concerns about the particular birth cohort, and that has been mentioned already and perhaps we could come back to that.
I think there is financial leeway to improve the S2P and make it much better than it is at the moment.
Q55 Chair: Paul, do you want to add something?
Paul Johnson: There is one issue that is not in the Bill, perhaps not surprisingly, but is potentially a very important one, which is the question of whether there will be any change to the National Insurance system, particularly for the selfemployed in response to what is a very significant change in the level of benefits that they are going to receive.
Chair: We have a question on exactly that point coming up, so we might get a chance to explore it. A lot has been said about winners and losers, and Aiden has some questions on that.
Q56 Mr Burley: The first question is to the IFS. I know you welcome the simplicity the proposals will bring, but you concluded-and I quote-"The main effect in the long run will be to reduce pensions for the vast majority of people whilst increasing rights for some particular groups." Can you explain to the Committee why you think this is the case? Then we will open it up to the other witnesses as to whether they agree or not.
Gemma Tetlow: Our point essentially was that if you think about the current State Pension system, with the State Second Pension and Basic State Pension, for people who are doing an activity in a year that earns them credits to both of those systems, whether that is being on low earnings, caring for children under the age of 11 or caring for sick or disabled adults, the combined entitlements they would get from the Basic State Pension and the State Second Pension under the current system, for any given number of years of contributions, will be higher than what they would be promised under the singletier pension. So, the group of people who qualify for the State Second Pension at the moment would get less out of the singletier pension than they would out of the current system. The exception that we were particularly drawing attention to was the selfemployed, who are one significant group who do not get credits to the secondtier pension at the moment.
Paul Johnson: The key point here is cohorts retiring after around 2040 or 2050-it is hard to be precise when-will clearly, on average, be worse off as a result of these changes. Of those retiring in the 2020s, there are quite a lot of gainers, and so there are shortterm gains and longterm losses. You can see that directly in the DWP numbers, because it costs less in the future, and the only way it can cost less is to have people getting less.
I heard some of the discussion earlier in terms of when this starts to happen, and I think one of the Members was referring to 2060, with 50% losing and 50% gaining. Now, I think that refers to the stock of pensioners, not those who are hitting retirement at that age. The way the DWP chose to present all these figures was to show the stock of pensioners. Therefore, obviously, if a lot of people retiring in the 2020s and early 2030s are gaining, by 2050 it remains the case that the majority of those who are pensioners in 2050 will be gaining, but the majority of those retiring in 2050 will be losing as a result of this.
Q57 Mr Burley: Baroness Hollis, you are shaking your head.
Baroness Hollis: Obviously, I would not dispute Paul’s figures on this, but every time we change legislation there will be a different array of winners and losers. Particularly when we went from SERPS to S2P, which is a Bill I had the pleasure, if not the fortitude, of taking through, there were a lot of potential losers, but the key thing is you protect accrued rights. I do not think you have a moral obligation to protect notional future rights that you would have accrued had no change happened, because every time there is a benefit change this is the case.
The second thing I would add is that we should not see this, in my view, in isolation from what is happening to autoenrolment, because at the moment, given means testing-and this was touched on by your previous witnesses-it is highly risky to save. If you went into autoenrolment without this, you would be trying to work out at the age of 25 what benefits you were on and whether you would or would not be married at the age of 55 or 60 as to whether you should or should not autoenrol. This is an unreasonable choice. You do not control your future life volatility in that way. So what this does is take the risk out of private saving. It means every penny that comes through in autoenrolment you can have, so that the higher earners will be able to substitute for what they would have got in more generous S2P, in my view, with contributions through into autoenrolment. The total package of retirement income should have a secure foundation of a State Pension and then a topup of private savings through autoenrolment, including NEST, and it is up to you to determine how important that is to you. That seems to me to be treating people as moral adults.
Chris Curry: The first point I would have made is the one that Patricia made very well at the start, which is that what we are talking about here is not taking away from people benefits that they already have. We are talking about them building up less in the future than they might otherwise have done had the system stayed exactly the same as it was. One of the questions I have is: if we had not had this change, what other changes might have happened to the system? Would we have managed to spend 8.5% of GDP on State Pensions in 2060 anyway without this change? It is important to bear in mind that we are comparing singletier, with a relatively quick transition, with a current system that is still in transition and will be for another 40 or 50 years. The current S2P reforms, even though they were started back in 2000, will not feed right the way through until 2050 and 2060. You can see that in the way the costs build up, and so perhaps the DWP and the Government as a whole have constrained themselves a little bit too much in trying to meet the shortterm costs of a halfreformed system and use that as the baseline for a full system going forward. In a way, they are underspending compared with the current system, because they are not meeting the generosity of the current system that would have been there when it had fully fed through.
The other very important point to bear in mind in our analysis, which we have done alongside the IFS, is very similar. We find that if an individual, for example, on low earnings and with career breaks, reaches State Pension age in 2017, they might only have a current State Pension entitlement of around £132 a week compared with the £144 singletier. An individual with exactly the same history but in a different cohort reaching State Pension age in 2037 might have built up £150 under the singletier system, given the triple lock indexation. It is slightly higher than £144, but £154 under the current system. So, even a low earner with career breaks might have got more under the current system, even by 2037, than they would do under the singletier.
The important fact that I do not think has been raised yet today is that they might end up getting a lower State Pension at the point at which they retire, but the way in which the pensions change after retirement and the indexation arrangements mean that within five years that lowearning individual would get more under the singletier system than they would do under the current system. That is because with the singletier the whole of the State Pension is indexed, in my understanding, at least in line with earnings, in the illustrations, and potentially in line with the triple lock. In the current system, only the Basic State Pension has that increase, and the State Second Pension rights on top of that are only indexed in line with the Consumer Price Index. Now, that could be a difference of, potentially, 2% a year in how that increases over time. So it does not take too long before people who initially had lower State Pension entitlements under the singletier system can end up, at older ages, with a higher State Pension than they would have done in the current system. I think that is an important fact and helps to explain some of the figures the DWP have come up with, in that it is not just people who retire in 2020 to 2030 who are gainers in 2060, but even people who retire in 2040 to 2050, who may have initially had lower State Pension entitlements, eventually end up higher than they would have been.
Baroness Hollis: That is exactly it.
Q58 Mr Burley: You have all touched on this rebalancing that is happening, and I just wondered whether you agree that this rebalancing is the right approach. So you have the equalisation of men and women; you have the singletier pension that broadly gives more to lower earners and those with gaps in their working lives and less to higher earners. Do you think this rebalancing is right in principle or do you disagree with the fundamental direction of travel of this?
Paul Johnson: There are two things here. Is this giving more to lower earners? In the long run, no, it is not. I think it is really important to be clear that, in the long run, in equilibrium this is giving less to lower earners, to carers, to women than would be the case in 2060 or 2070 if the current system carried on. I agree entirely with what Chris and Baroness Hollis said about the fact that this is not stuff that they have already accrued, and therefore I do not have a problem with the Government doing this, but I think we need to be absolutely clear that lower earners, women who have taken time out of the labour market, as a result of these changes, compared with a world in which no change had been made, will have a lower State Pension income in 2060 than they would have done. That is also true when you take account of the indexation, once you get that far down the road. In the particular example that Chris gave, that particular individual would only take five years or so to catch up on the indexation. Once you get 20 years later and the initial gap is higher, it takes until you are in your 80s before that catches up. We have done some calculations here that show net present values of these things for most people will be lower in the long run. I think that is important.
What is the rebalancing that has been happening? There is a lot of rebalancing happening in the short run, which is giving significant additional money to the groups that you are talking about, the low earners, particularly those who have taken time out of the labour market before 2002, which is the crucial cutoff date here. So there is a significant additional amount of money going to the earlier cohort of pensioners and, for reasons that Chris described, there is a good economic case for taking money from later cohorts because of the additional cost. I think that is the crucial rebalancing that is happening. There is rebalancing in the short run towards particularly women and carers and people who took time out of the labour market before 2002, and there is a rebalancing away from the whole of the later cohorts, but more from the higher earners.
Baroness Hollis: I think it does seek to rebalance. I absolutely agree that there are different winners and losers, so to speak, notionally-and I do emphasise notionally-the further down the line you go. But certainly women, the selfemployed and BMEs too will gain significantly from these proposals. What is key, it seems to me-and this is inappropriate for a framework Bill but will have to be looked at in terms of regulations very carefully-is to ensure that there is sufficient coverage for credits, particularly for carers, and the right to buy back, which some of us were fighting for, so that you could make up gaps in your years. What worries me, and I am hoping this will be clarified in the course of the Bill, is of course women in their 50s, who may have two generations below them to look after and possibly even two generations above them to look after; the longer their own parents and grandparents live, the more likely they are to be out of the labour market at just the time in their 50s when they should be building up their pension. Therefore, what is going to be key to this is to smooth out the volatility of women’s caring lives, so that we ensure that at retirement age she has her 35 years of credits or NI paid contributions. That is what I call the small print detail, but providing that is secure, including the right to buy back, I think it is very welcome.
The other way it is rebalancing-I know I keep hammering on about this, so forgive me-is that it also makes it safe to save. We should not see this, in my view, in isolation from what is happening with autoenrolment and NEST, because that is the layer on top that in the past people, particularly men, went into SERPS to produce. Now they will have this as a legal right and entitlement, and it will be their choice as to how much they invest in it. Put the two together and even the notional losers on the State Pension reform can protect themselves perfectly adequately if they choose so to do.
Chris Curry: I am not as sure that there is that much of a rebalancing going on if you look at this in the longer term. I think this is really a continuation of the policies that were put in place or recommended by the Pensions Commission, who quickly identified that, with an increasingly ageing population, it was going to be very difficult for the State to continue the role of looking at replacement incomes provided through the State. So the reforms that they recommended and were put in place in the 2007-08 Act started down this road of making sure that outcomes across the State Pension system were much more equal. The difference is in the initial reforms it took much longer to do that: it was 2050 or 2060 before you got to the situation where men and women, in theory, were retiring with the same retirement incomes in general. What this Bill does is bring that forward and do it much more quickly, so I think the overall shape is very similar under a singletier to what it would have been eventually under the current system with the Basic State Pension and State Second Pension. The key thing here is that, by doing it more quickly, it helps a lot more people in the short term compared with the current system. But, as I said, by constraining it to expenditure in the shorter term it has ended up being less generous in the longer term than the existing system would have been.
Baroness Hollis: Chris, an awful lot of the credits that women will now get, which takes them into the new single State Pension in full, would not have given them any eligibility for S2P, so there is a major rebalancing there for those who are not in the waged labour market.
Chris Curry: Although we still need to see exactly what will qualify as credits in the singletier to be able to make a definitive statement on that.
Baroness Hollis: Yes, absolutely.
Q59 Mr Burley: Professor Ginn?
Professor Ginn: I still have worries about autoenrolment, because it is defined contribution and that is essentially risky. A lot of people are riskaverse and women are more riskaverse than men, so there is the investment risk in autoenrolment. People do not know what they are going to get. It is quite justifiably seen as a form of gambling by some people.
Q60 Stephen Lloyd: Are you really saying that with NEST it is going to be clearly underpinned by the entire state? Even though I appreciate particularly this cohort are nervous about investing and saving, it is the always the challenge of every Government to try to get them to do that. Are you really saying that the underpinning of the Government of the day, whoever it is, to NEST will not assuage some of those fears?
Professor Ginn: Not everybody will get the full singletier pension, so there will be people, particularly women, who get less than the full amount and will be eligible for means testing. Now, asking them to save in a risky DC pension is going to be problematic for those who are eligible for means testing. I also think that autoenrolment means a subsidy from the Government and from the employer into the City profits that are made, and it is not necessarily to the benefit of the employee as much as to the people who handle the pensions. They are going to be handling billions of extra money every year, which is not necessarily to the benefit of ordinary working people.
Q61 Stephen Lloyd: For a start, I think it is going to be a giant bomb in the whole private pensions market, and we are already seeing that with charges coming down. So are you saying that in your judgment NEST is also part of this horrid, capitalist, unscrupulous cartel or are you seeing it as something that hopefully is going to clean up the horrid, capitalist, cruel cartel?
Professor Ginn: I do not think it can clean up anything, even though its charges are at the moment low and I hope they will stay low. Women who cannot enter NEST, either because they cannot afford it or they are below the lower earnings limit for it, will also be paying towards it, in the sense that employers will hold wages down for everybody. I also have the worry that employers will have a great incentive to keep people out of NEST and other schemes, because they do not want to pay their own contribution. So they have a good motive to keep wages down. That is another worry about autoenrolment that I have for the low paid and for carers.
Chair: We are going to publish a report on pensions’ governance, and this discussion probably sits in there more easily, so I think we will move on, because obviously not all employers will go into NEST anyway.
Q62 Mr Burley: I have a quick question on the selfemployed, who are going to benefit a lot from these reforms. Do you think it would be fair to increase the National Insurance contributions of the selfemployed to pay for their more generous pension?
Baroness Hollis: Yes. I basically think that the selfemployed should be paying in what certainly the employee would do. Whether it would be reasonable to pay in what the employer does as well is a different matter. Paul will know this much better than me, but if you look at the profile of the selfemployed, it is not a continuous curve. There are a lot of people who are very low paid, who cycle between employment, selfemployment, no employment and so on, and you cannot put on the heavy responsibilities of a sudden increase there. At the other end, you have people in the IT services and so on who are generously and adequately paid. Certainly they should pay in the full employee’s stamp, but I think it would be unreasonable to expect them also to pay in the employer’s stamp, particularly if they are low paid, unless one could make it incomerelated in some way.
Paul Johnson: There is not just a fairness issue here. There is a question here about whether there is any contributory basis here at all in any case, but I think the key issue is about the efficiency of the tax system. The current way of treating the self-employed for National Insurance is a huge open invitation to tax avoidance, because it is so much lower than you pay as an employee. Therefore, there is a very large incentive to be selfemployed or to claim you are selfemployed. This may offer an opportunity to close some of that gap.
Q63 Stephen Lloyd: Starting, again, with Baroness Hollis, are you satisfied or not that the proposals in the draft Bill constitute an improvement in State Pension provision for women and carers? If so, what benefits will the singletier bring? If not, what further measures would you like to see?
Baroness Hollis: I think it will transform the situation for low-paid women or women who are in and out of the labour market. We know that by 2020 at the age of 50, and even by 2020 and at the age of 60, something like half of all women will not be in marriage. They may be in a relationship, but given that half of all marriages end in divorce and so on, they will lose the right to a dependency pension, even if they are cohabiting with somebody. Given their caring responsibilities, many of them have had very real difficulty accessing a State Pension of their own, but because they are in a relationship, they are excluded from a means-tested top-up. So they are caught: they cannot build a State Pension of their own because they have had caring responsibilities. They cannot get one derived from their husband because they are no longer married, but because probably they are in a partnership, they cannot get Pension Credit or a means-tested benefit either, because his income floats on top of it. So they are hammered three ways over, and what this will do is deal with all of that-clear all of that problem out of the way. Provided-and it is a big provision-there are adequate and appropriate credits and buybacks for women who have volatile, in and out relationships to the waged labour market, I think this will transform the situation. They will be able to look forward to a clear, simple, straightforward, guaranteed State Pension. In the light of that, a couple would have an income perhaps of £15,000 a year, with housing costs possibly already paid. It would help to tackle their pensioner poverty and it would allow them all sorts of other freedoms. So what it does is tackle the potential poverty of individuals and couples, but it also ensures that women carry their own pension and do not look to either husband or employer-erratic employer perhaps, because they are in and out of the labour market-or the State, if you like, for means-tested benefits. They get it in their own right and, as a result, they can plan their future. Women’s working lives are infinitely more volatile than men’s, and, as a result, it gives them some sort of security at, I hope, a decent enough level when they retire, so I think it will be transforming.
Q64 Stephen Lloyd: Thank you for that. Professor Ginn, would you like to add anything to that?
Professor Ginn: I entirely agree with what Baroness Hollis has said so eloquently, but could I come back to the question of the cohort of women who have been excluded from S2P? I have had a sheaf of emails; they are most distressing letters from people who feel they have been hit by State Pension rises at short notice, which have thrown their plans into disarray and left them feeling they are going to lose £36 a week for the rest of their life. Now, I know that this is not necessarily true for everybody. Nevertheless there is that fear and that sense that their needs have not been considered and that they need some form of protection, such as, for example, being allowed to join the STP when they reach the age and it is implemented. Some negotiation needs to be done about a fair way of doing something for this cohort of women who at least feel that they have been extremely badly treated and ignored. As I said before, I think there is financial leeway to do that for them.
I also feel that women who are existing pensioners have lost out very badly over time. Many of them did not get home responsibilities protection and, therefore, had long gaps in their National Insurance record and lost out because of that. In fact, the older generation is far less likely to be employed and build up a National Insurance record. Therefore, their need is far greater even than working age women to have this STP. I wish some way could be found, as Sally West said, to include those who choose to be included in the STP even though they are over State Pension age.
Stephen Lloyd: Thank you very much.
Paul Johnson: Can I have one point of clarification on this again, about who is winning and losing and which group of women are benefiting? It is very clear that that group retiring from 2017 through to maybe the mid2030s who have spent time out of the labour market, before 2002 in particular, will get a significant boost from this. That will retrospectively credit them for things they were doing in the past. It is very important to be clear that this does not benefit women who are, for example, currently looking after children, because they are already fully credited into the S2P and Basic State Pension and will end up with less under the new system than the current one. It is very important to be clear that in looking into the future, while this may provide more certainty because it is simple and straightforward, it does not provide more income to this group of women.
Stephen Lloyd: You can absolutely rest assured that, irrespective of what others say, what you and the IFS say about how people are going to lose out is continuously, continuously used as an illustration of how the singletier is not a good thing. Now, I know that is not what you intended, but you can rest assured that your message that people are losing out is being used continuously. I think it is used wrongly and unfairly, but maybe that is a moot point between us.
Chair: On that, we will move on to ending contracting out.
Baroness Hollis: Could I just support Jay on the point about women who lose out twice over? It was a point very well made by Ros Altmann previously. That is the cohort who, because the state retirement age is below that of men, go into retirement with a lower State Pension than the new State Pension will provide. I would hope that we could produce transitional arrangements-maybe, for example, the right of women to defer taking their State Pension, given, after all, if they continue to fail to draw their State Pension, there would be a rollup effect anyway to the increased income of about 5.2% a year, as is being proposed, down from the old 10.4%. Maybe we could think about that and perhaps enlarge on that generosity. There are ways in which we could, absolutely rightly, help these women who have been hit twice over-not just once, but twice over. I do think it is not decent that we should leave them exposed in this way.
Chair: That was a practical suggestion.
Q65 Nigel Mills: One of the side effects of this is we end contracting out of National Insurance contributions, which means that some people end up paying more National Insurance themselves and may see their occupational pension contributions reduce. The Government reckon that 90% of those people, as a result of getting the higher State Pension, will not end up worse off from that change. That clearly leaves about 10% who are going to lose out. Is that roughly the proportion that you think is right, and do you think anything could or should be done to try to smooth this out?
Chris Curry: That is a difficult question to answer, especially without seeing more detail of the DWP analysis and exactly how they calculated who has gained and who has lost from this particular change. It is not surprising, given the way that the transition has been set up, that from the DWP estimates 90% of those who have been contracted out will end up doing well from moving to a singletier system. It is a specific feature of the transition here, which is very different from the original proposals in the Green Paper. It means that people who have been contracted out have more opportunity to rebuild State Pension entitlement and get a full singletier pension and still keep the benefit of their previous years when they have contracted out, when they paid lower National Insurance contributions and built up private pensions on top of that. We have an example in our written evidence of individuals, one who is contracted in, one who is contracted out, with exactly the same contribution history. You can see how the person who has been contracted out gets exactly the same singletier pension, pays lower National Insurance contributions over part of their life and builds up something in the private sector built on the contributions the State has given them for being contracted out. I think the specific transition is very generous to people who have been contracted out in the past.
The 10%, if 10% is the right number, who do not gain are those who, in the same way as a certain proportion of people who have contracted in will not gain, have already built up strong State Pension histories, and maybe have not been contracted out all of their life and so have State Second Pension entitlements as well, which means they have built up more than the singletier amount when it comes to 2017, or perhaps are getting very close to reaching pension age already and so do not have as many years to rebuild the singletier pension. It is a feature of any transition that there will be groups who do well and groups who do not, but in this particular situation I think, as a group overall, people who have been contracted out do pretty well from the transition as it has been set out.
Nigel Mills: Nobody else on that topic?
Baroness Hollis: I would agree with everything Chris has said. I was interested that there appears to be different arrangements for contracted out DB schemes in the public sector from the rest of the occupational pensions. I understand the context of this, but we may need to see to what extent we can ensure that people in private sector DB schemes-I do not say final salary DB schemes-may also be treated in a similar way. It is something to be explored.
Q66 Nigel Mills: I am not sure we will see many private sector DB schemes. That might be a separate topic. The Government has not published any estimates of what the additional NI contributions for people in various bands are going to be. Paul and Gemma, is that something you have worked on yet or do you have an estimate of how much the extra cost is going to be for people?
Gemma Tetlow: We have not looked at it. I would not disagree with what Craig Berry said in the previous session.
Chris Curry: We did have a quick look at some of these things. There is a very handy calculator on the HMRC website where you can put in how much you earn and it tells you how much in National Insurance contributions you should be paying, so you can always check there. It ranges. For example, for an individual earning £20,000 a year, the employee would need to pay just over an extra £200 a year in National Insurance contributions and the employer an extra £490 a year. The maximum that we found that you could pay as an employee was an extra £480 a year; for the employer that increases to almost £1,200 a year. So you can see that there are some potentially significant impacts on the amount of National Insurance that people would have to pay.
Q67 Nigel Mills: Is that someone earning right on the upper threshold?
Chris Curry: That is right, yes.
Q68 Graham Evans: It appears that public sector employees will be protected from paying additional pension contributions when contracting out ends, because of agreements previously agreed on public pension reform. Is this acceptable, given that the public sector employers will have to pick up the yearly £3.4 billion bill? Essentially, the taxpayer is picking that bill up whereas private sector employers will be able to pass the costs on to their employees.
Baroness Hollis: I think it is a prudent position for DWP, given what is happening with public sector pensions more generally. Given that and given a commitment that there will not be a change for 25 years, as it says in the White Paper, I do understand the Government’s position on this.
Gemma Tetlow: I would just say that, whilst they have said they will not change the pension rights, one other way to recoup the cost is to hold down pay relative to what would have happened had you not done this reform, and we will never know what public sector pay would have been in 2017-18 without this reform.
Chris Curry: It is also important to recognise something that Craig Berry was alluding to earlier: that even though public sector employers will have to pay an extra £3.4 billion in contributions, the Treasury will then collect an extra £3.4 billion in contributions. That will probably not make a massive difference to the overall Government finances; it just affects the way that it is distributed and the way that it decides to spend that money and allocate it between Departments. So I think there is flexibility within Government to try to overcome some of the potential difficulties there.
Paul Johnson: It will all be down to negotiation between the Treasury and the Departments. One effect clearly will be that the proportion of public sector remuneration that comes from pensions, in both senses, will rise as a result of this, from a point where it is already much higher than is the case in the private sector.
Graham Evans: Professor Ginn?
Professor Ginn: I have nothing to say on that issue.
Q69 Debbie Abrahams: Earlier on, I mentioned that within these reforms and so on the shift of responsibility from Government to the individual around the financial risk is clear, but also the responsibility for saving. Baroness Hollis mentioned the importance of treating people as adults, but I also think the IFS have made statements, but they are ambiguous in terms of whether these reforms will have that effect. I wondered if you think that the singletier pension will achieve that. In particular, again thinking about pensioner poverty- this is what this Bill is supposedly trying to address-will it have an effect on helping people on low incomes save?
Baroness Hollis: It is the crucial question, is it not? I do not know whether I should declare an interest as a board member trustee of the Pensions Advisory Service, but without this reform it will be almost impossible, I think, to advise people, particularly women in their 20s and 30s, on whether they should opt out of autoenrolment. With this, except for some very specific and quite tiny circumstances, you could encourage people, if they are querying this, to remain autoenrolled and build up their pension. It really does take the risk out of the advice and I hope, therefore, the strategy that makes the best sense for women.
Q70 Debbie Abrahams: Let us hear from the IFS.
Gemma Tetlow: I would slightly disagree with that. When we are talking about incentives to save, we really should be thinking about the longer term picture, because it is people in their 20s and 30s who are going to be saving for retirement. As Paul said, that is where we get into a situation where the pounds per week that people can expect to get from the State Pension for many people would be lower under the singletier pension than under the current system. On its own, other things being equal, that makes it more likely you are going to come into contact with Council Tax Benefit and Housing Benefit tapers. That effect is going to make it more likely that there is a lower incentive to save.
Baroness Hollis: But about less than 20% of pensioners draw Housing Benefit, and of course Council Tax Benefit is now, in my view very unwisely indeed, being localised into a Council Tax Support Scheme, which will vary from area to area. That of course screws up some of the simplicity of these proposals and adds an element of Russian roulette to the whole advice issue of whether, long term, you should or should not be autoenrolled. I think it is very unfortunate.
Paul Johnson: Of course, the Council Tax Benefit is not being localised for pensioners, but several things are happening. One is that the income that you will get from your pension will be lower. That by itself increases the incentive to save, because you have less money, so you want to save more. The Savings Credit is going. For a lot of people, that might increase the incentive to save, because there is less in the way of means-tested benefits. But as Gemma said, you are more likely to be brought into the other set of benefits, Housing Benefit and so on, so that might have the reverse effect.
The other thing that is going on is there is more certainty about what you will end up with, and that has an uncertain effect. I think a lot of people do not realise that they are going to get S2P when they are in their 20s and 30s, and they are just basing their assumption on the Basic State Pension and assuming something about means-tested benefits. That may increase incentives to save; it may have the opposite effect.
Q71 Stephen Lloyd: So the IFS’ basic premise is that, if people know what their singletier pension is going to be, they are less likely to save.
Paul Johnson: It depends on their circumstances. If they are not in rented accommodation, for example, and the Savings Credit has gone, it may slightly increase their incentive. If they have Housing Benefit, it may slightly reduce it. Fundamentally, we do not think it has a very big effect. The getting rid of the Savings Credit is probably more important in terms of thinking about this. For many people, though not those who are brought on to the Guarantee Credit, it will increase the savings incentive.
Q72 Sheila Gilmore: In the scheme of things, how important is that in people’s thinking? If you are in your 20s and you have a student loan and you want to take a mortgage, these things are probably much more important than this.
Paul Johnson: I agree. This is of limited importance for people on low earnings. The change in the amount of money they are going to get is relatively limited, and I suspect you are right that people in their 20s and 30s do not think ever so hard in this way. Because it is something much clearer-we all get £144 a week-it is more likely to have an effect, though exactly in which direction I am not sure, than the relatively small things that we are talking about.
Stephen Lloyd: I would concur with that, because at 20 or 30 I certainly did not think about pensions; people did not. One of the reasons I did not is I had absolutely no idea of how the whole system worked, because it was unbelievably complicated. I personally believe, having been in business for many, many years, if people know what they are getting, even if they are disappointed at what they know they are going to get, at least they know and they can then start to take informed decisions. It is impossible for normal people to take informed decisions on pensions, because it is just too complicated, in my opinion.
Q73 Debbie Abrahams: Professor Ginn and Chris, would you like to say anything on this?
Chris Curry: The economist in me cannot fault the IFS analysis, as usual, in that, in particular, given the level of the singletier, the impact is likely to be relatively small one way or another. There are some people who might be more likely to end up on Guarantee Credit-the people who do not qualify for any singletier pension at all. I think potentially people who might still qualify for the Severe Disability Premium or carer’s premium for an extra £58 on top of the £142 a week Guarantee Credit might have an impact. Overall, even though the DWP has estimated only 5% of people will be eligible for the Guarantee Credit, our own estimates, based on the Green Paper proposals-so they are not directly comparable-suggest that there might be a third of pensioners who might still be entitled to any means-tested benefit, including Housing Benefit and Council Tax Benefit.
So there is still going to be means testing in the system, but I think the real impact on levels of saving is not necessarily likely to come through the economic incentives within the system. How people can understand the system, how it can be explained to them and whether people can tell them, "Yes, you should be saving," goes back to what Baroness Hollis was saying, in that the certainty in the system may or may not make people think they ought to save or ought not to save, but at least it means people can talk to them about it, and so whether they will benefit or not should be clearer. Hopefully, that might have a positive impact.
Q74 Debbie Abrahams: And a *broad record*[1.32.45] in that context as well. Professor Ginn, would you like to finish?
Professor Ginn: Yes. Certainty, obviously, is valuable. I fully understand the purpose behind the singletier pension will improve it. The trouble is the details undermine the purpose, in my view, particularly the amount being so close to Pension Credit amount. It needs to be far higher, at least £10 a week above the Pension Credit level, in order for people to be certain that it is worth saving. That makes a proper foundation for employment, letting out a room or saving, or saving outside pensions or whatever.
Secondly, there is uncertainty introduced by the 35 years instead of 30. That means a lot of people will not know whether they are going to make the 35 years or not, because of what we have discussed about the difficulty of getting care credits for informal care for older people, the complexity, and not knowing how many years you are going to be caring for somebody. That is the second point: there is uncertainty in that issue.
I wondered if it is possible to put credits into NEST. NEST is well intentioned and state sponsored, but you still do not get credits in it for caring and that is a major flaw. I wonder if there is some way that could be altered.
I have spoken about indexation, State Pension age and the cohorts. I want to emphasise that I think the gains to National Insurance that will come from increasing contributions and the ending of contracting out is an annual gain to the National Insurance fund, which surely would allow a more generous state singletier pension.
Also, it seems to me that tax relief at 40% on pension contributions is targeted upwards on the higher paid. Most of that benefit goes to people who are well off and who are going to save anyway, and it seems to me we should end the 40% tax relief. That would bring a lot more money into the Treasury to increase pensions for lower paid people and particularly for carers.
Q75 Chair: I know that Debbie has to go; she has a Prime Minister’s question. Can I just ask if there is anything that you came here burning to say and we have not asked you? How did I know that Baroness Hollis might have something?
Baroness Hollis: It is the funding. I am now worried about the funding issue-I was not a month ago-by virtue of the Government’s statements that the abolition of S2P and the employers’ NICs will help fund the new social care arrangements of 85,000. That really needs to be bottomed out, because what I fear is that the easy alternative to having that money is to have even more quickly an increase or a further delay in the state retirement age. As I say, if that is going to be pegged at 21.4 years, that is extremely unfair to people in a lower social class and all the rest of it-manual workers-because it means that retirement will be a smaller proportion of their total working lives, and those extra years of retirement that they get in terms of living longer, as we know from all the health and King’s Fund reports and so on, will be accompanied by poorer health. So there is a double issue there about where the funding is coming from and whether we can ensure that it will not come from raising the state retirement age, with all its deleterious effects.
Chair: Everybody else is happy. Can I say thank you very much for coming along this morning? It has been a very interesting session and there is quite a lot of food for thought for us as a Committee, so thanks very much.