§ The Secretary of State for Work and Pensions (Mr. Andrew Smith)
With permission, Mr. Speaker, I wish to make a statement on the Government Green Paper entitled "Simplicity, Security and Choice: Working and Saving for Retirement".
Decisions on pensions are some of the most important of our lives. Since coming to office in 1997, this Government have faced three specific challenges on pensions—of affordability, pensioner poverty and expectations. Rising longevity poses important challenges for the affordability of pensions systems right across the developed world. The old age dependency ratio is expected to more than double in the EU, with even greater increases in other developed economies such as Japan.
It is good news that people live longer, but if people want their standards of living to continue to rise in retirement, they must either save more or work longer, or a mixture of both. The UK is in a stronger position to meet this demographic challenge than most other developed countries, not only because our dependency ratio is expected to increase by half as much as the European average, but because of the choices that the Government have made over the past five years to ensure that the UK pensions system remains affordable.
We rejected demands to link the basic state pension to earnings, because that short-term solution would not have been sustainable over the long term. Instead, because of our targeted approach, projections show that public spending on pensions in this country will remain stable over the next 50 years at around 5 per cent. of gross domestic product. In contrast, EU forecasts show that other European countries such as Germany and Spain will require increases of between 40 per cent. and 80 per cent. in public spending on pensions over the next 50 years in order to meet their pension liabilities.
That same targeted approach has enabled us to meet the second challenge, of pensioner poverty. Since 1997, we have strengthened the foundation of basic state support through the introduction of the minimum income guarantee and, from next October, the pension credit. As a result, next year the poorest third of pensioners will be on average £1,500 a year better off.
I can tell the House that the Government continue to reject calls from the pensions industry and others that all targeted support for pensioners should be scrapped and instead added to the basic state pension. Such a move would mean an increase in the maximum basic entitlement of £10 a week for some pensioners, but at the expense of a cut of £17 a week for the poorest pensioners. That would amount to taking resources from the poorest pensioners and redistributing them to the richest, and it is not our way.
Over the past five years, as we have taken action to tackle pensioner poverty, the pension contributions of people on higher incomes have risen by 40 per cent., increasing the incomes that they can expect in retirement. The challenge facing society today, therefore, has to do with the expectations of middle-income earners—people who expect continuing rising standards of living in retirement, but who to achieve that will either have to save more or work longer, or both.
694 Evidence shows that perhaps 3 million such people are currently not saving enough for their retirement, and others may not be saving enough to provide the pensions that they want. At the same time, occupational schemes have come under pressure from rising costs and increasing complexity. Some employers are closing schemes or cutting the amount of contributions, and many people are leaving the work force earlier.
There is a choice to be made on how we meet these challenges. Some believe that a radical strengthening of the voluntarist approach to pension provision can never be made to work and that the United Kingdom should move beyond it, for example, adopting further compulsory pension contributions. We believe that the partnership between Government, individuals, employers and the financial services industry has long been a strength of the pensions system in the United Kingdom, and that the proposals we are setting out today will renew that partnership and reaffirm the responsibilities of each member.
Our proposals show how, if all partners play their part, the voluntarist approach can work to maximum effect. The test will be whether, with this radical strengthening of our approach, employers and employees can rise to the challenge voluntarily, or whether we will need to introduce more compulsion. In a voluntarist system, over and above the level of support provided by the state, individuals are best placed to judge their own long-term savings needs and aspirations for retirement; but the success of that approach rests on the information and understanding that people have, and the clarity of the options open to them. The approach will fail if the complexity of products and the cost of financial advice deter people from saving.
Since 1997 we have taken action to rebuild trust in the financial services industry, to clear up pensions mis-selling—[HON. MEMBERS: "Oh!"]—for which Opposition Members ought to apologise—and to introduce new savings products such as individual savings accounts and stakeholder pensions, opening up new opportunities for people to save. For too many people, however, pensions planning—as we all know—has remained an incomprehensible maze.
As I told the House in July,Pensions simplification has to be at the heart of any strategy to encourage greater pension provision".—[Official Report, 11 July 2002; Vol. 388, c. 1053.]Nowhere is that truer than in taxation of pensions, which has grown complex enough to challenge even the experts. There are currently no fewer than eight sets of tax rules governing pensions—each with its own annual limits on contributions and benefits—imposing unnecessary inflexibility, driving up costs and, worst of all, discouraging people from saving.
Today I can announce a radical simplification of the rules. We propose to sweep away the eight existing pensions tax regimes with their associated limits on annual contributions and benefits. We propose to replace them with a single lifetime limit assessed at the point of retirement, and we propose to set that limit at £1.4 million. The lifetime limit will be complemented by a light-touch compliance regime based on an annual 695 limit of £200,000. That limit will not affect the majority of people. Further details are contained in an Inland Revenue consultation document published today by my right hon. Friend the Chancellor. As my right hon. Friend announced in the pre-Budget report, the tax-free lump sum will remain, as will existing tax reliefs for pension contributions by employees, the self-employed and employers.
These proposals will help people to make clear, confident decisions. They will encourage more saving, and enable more people to build up a bigger tax-free lump sum. They mean far greater individual choice and flexibility in terms of when and how much to save for a pension. Over 99 per cent. of the population will be able to save more, with tax incentives, than is possible under current rules. The proposals will also reduce administrative burdens on employers and pension providers alike. Taken with the other measures that I am announcing today, they could save employers between £150 million and £200 million a year in pensions administration.
We will match this radical simplification of pensions taxation by breaking down other barriers to pension saving. We will provide individuals with more information about their own circumstances, and our proposals will increase the availability of state pension forecasts and extend the coverage of combined state and occupational pension forecasts. We will promote total benefit statements in the workplace, and highlight the additional value that tax relief contributes to saving in a pension.
To broaden access to advice, we will work with the financial services industry to develop mass-market financial advice in high street banks, and will consult on options for a possible requirement on employers who do not provide pensions to provide financial advice free of charge through the workplace. I can confirm to the House that we will implement the recommendations of the Sandier report to make it easier to save through simpler products, dramatically stripping out regulation and sales costs.
We also propose to offer the self-employed the right to opt in to the state second pension. I can also announce that we will increase product choice and flexibility in the annuities market by consulting on proposals to allow limited-period and value-protected annuities.
The proposals that we are setting out today will also reaffirm the role and responsibilities of employers in the pension partnership. Many employers recognise the important benefits to recruitment, retention and staff motivation that good pension provision brings. But, elsewhere, some employers have been reducing their financial commitment and contribution to workplace pensions, causing anxiety and damaging confidence in pension provision. There is a difficult balance to strike, here. We want to increase member protection without imposing burdens on employers.
I can announce today that we propose to create a new proactive pensions regulator, to focus on schemes where there is a high risk of fraud, bad governance or maladministration. We are also setting out proposals for a fairer sharing of assets when schemes close, 696 with more priority for workers closer to retirement or those with more years of contributions. We propose stronger protection for members where employers wind up schemes, and the capping of provisions to prevent executives abandoning ship and taking the lifeboat with them. We recognise, as good employers already do, the vital interest that employees have in their pension arrangements, so we propose requiring employee consultation before schemes are changed.
We can only expect to enhance protection for employees if we make it simpler and easier for employers to run schemes. Following Alan Pickering's report, we propose radically to reduce the regulatory burden on occupational schemes by simplifying the contracting out rules, including reforming the reference scheme test and ending restrictions on how and at what age contracted-out rights can be drawn. We will also replace the minimum funding requirement with scheme-specific funding requirements, saving companies £80 million a year. We will also consider allowing employers to make membership a condition of employment. I can also announce our aim to consolidate all pensions legislation into a single pensions Act.
These radical reforms mean big cuts in the administrative burdens on employers and schemes. We will also work with a new employer-led taskforce, including trade union membership, to identify and promote good practice.
Enabling people to work a few years longer can make a huge difference to retirement income. The 1980s and early 1990s saw the employment rate for older male workers decline. That trend has been reversed, with 900,000 more people over 50 now in jobs than in 1997. However, we must go further, by doing away with inflexible and outdated approaches to retirement. Our proposals will allow people to choose to work for longer if they want to do so.
We propose to promote flexibility in retirement by building on the success of the new deal 50-plus; legislating against age discrimination; ending compulsory retirement ages; and raising the normal pension age for most groups in the public services to 65 for all new entrants. To smooth the cliff edge between work and retirement, we propose to allow people to carry on working while drawing an occupational pension; and to improve the incentives for those who want to work past state pension age, we will bring forward increases to the extra state pension that people get by deferring. That means that a single pensioner who has accumulated £100 a week state pension and second pension entitlement could choose to take their pension at 70 and get £ 150 a week instead.
We are also consulting on the chance for those who defer to take a lump sum instead of the enhanced pension. For a single pensioner, that would be a one-off payment of £20,000 on top of their normal pension, or £30,000 for a couple.
I have one further announcement to make about the state pension age. We have received representations for a significant change, with persuasive arguments to move to a higher state pension age, releasing resources for use elsewhere in the pensions system. I have carefully considered that option, but have concluded that it would disproportionately impact on the poorest workers—those most dependent on the state pension, many of whom have had hard working lives.
697 As well as being forced to work for longer, those people would, because of lower life expectancy, see a bigger than average slice of their retirement taken away. I have therefore decided that we should not raise the state pension age. Our measures to give people far greater choice about flexible retirement are the right way to address the issue—not raising the state pension age.
The proposals that we are setting out today seek to renew the pensions partnership in the UK. They show how, with all partners playing their part, the voluntarist approach can be made to work to maximum effect. As I have said, some people believe that the voluntarist approach to pension provision can never be made to work, and that the UK should adopt a system of compulsory pension contributions.
There is a choice. The case for compulsion has not yet been made, but because of the magnitude of such a decision and the need to help to build a wider consensus on the way forward, I am today establishing an independent pensions commission, reporting to me as Secretary of State on whether the current voluntary system is sufficient to ensure that employers and employees rise to the challenge. I can tell the House that Adair Turner, former director general of the CBI, has accepted my invitation to chair that commission. It will report to me regularly on whether there is a case for moving beyond voluntarism.
The time has come for all the partners in the pensions system—the Government, employers, employees and financial services—to rise to the pensions challenge, and I commend the statement to the House.
§ Mr. David Willetts (Havant)
May I begin by thanking the Secretary of State for his statement? It was due in the autumn and it comes not a moment too soon. What is at stake is nothing less than the prospects for a decent retirement for millions of our fellow citizens.
This time, the Government must get their pensions policy right. They have tried many times before. Can the Secretary of State tell the House how many consultation documents on pensions the Government have produced since 1997? When I tabled a question about how many documents there had been, the Department replied that the information could be obtained only at disproportionate cost. That is not a good sign—on my reckoning there are at least 38. In fact, I have some of the previous consultation documents here, and, as they have poured out of the right hon. Gentleman's Department, the crisis in our funded pensions has got steadily worse.
Does the Secretary of State recognise how serious the problem is? Does he realise that the speed at which pension funds are closing to new members has doubled in the past year? Does he know that more than half Britain's leading companies have now closed their pension schemes to new members? Does he know that the number of people who are retiring with an occupational pension is going down and that the number of pensioners claiming means-tested benefits is going up?
Not all the causes are under the Government's control, but that makes it all the more important that Governments get right the things that they do control. Instead, we have had the Chancellor's notorious £5 billion a year grab on our pension funds; another 698 £1.5 billion a year taken from our pensions because contracted-out rebates are too low; and nine out of 10 stakeholder pensions with not a penny in them.
So why did not the Secretary of State come to the House of Commons this afternoon and apologise on behalf of the Government for turning what was one of our great post-war successes into an economic and social disaster? There was no recognition of the scale of the crisis, and there was certainly no strategy for getting out of it. Because they have not got a solution, they pretend there is no problem.
The Secretary of State did not even repeat the Government's original objective, published in a previous pensions Green Paper, to increase from 40 to 60 per cent. the proportion of pensioners' incomes that comes from funded savings. Are they doing so badly that they have given that up altogether? Will he offer any estimate of the increase in pension savings that he expects as a result of today's announcement?
I warn the Secretary of State that he appears to base his arguments on the assumption that flows of savings into our pension funds have grown by 40 per cent. since 1997. He has already had to write me one letter of apology for producing incorrect statistics on the size of our pension flow, and I warn him that he might have to write a second one if he uses such statistics.
We will look carefully at the Secretary of State's proposals in the days and weeks ahead, but there seem to be too many old ideas rehashed and relaunched. Of course we want flexible retirement, but what the Secretary of State has announced—or rather reannounced—today has been announced by the Government five times already. In fact, it was in the original pensions Green Paper, published in December 1998. We do not need more consultation; we need action.
Yes, we need to offer more protection to employees who have been working for a company for years and find their hopes for a decent pension dashed. In fact, the Government had a consultation document on that as well—"Security for Occupational Pensions". It is more than two years old and nothing has been done. Meanwhile, the workers at Maersk and ASW, as well as those in dozens of other schemes that have wound up, have paid the price.
We agree with the Secretary of State that it would be better to offer people more flexibility in taking the state pension, but, again, his proposals are not new. Will he confirm that Parliament passed legislation to make such changes in 1995, in our Pensions Act? That was when the Labour party was arguing for a pension age of 63, by the way. Of course we understand the need for consensus and stability to encourage long-term saving, and we will support his measures where we can, but it is no use pretending that what he has announced today will somehow reverse our pension crisis. It is too little, too late.
We believe that the burden of regulation and red tape on pensions is too great. That is why we supported Alan Pickering's inquiry, but it is typical of the Government that they produced another 251 pages of regulation even after they had introduced the deregulation review. Can the Secretary of State tell us more about the basis on which the new simplified tax regime will be constructed? He has referred to the eight tax regimes that already exist, but it appears as though he is adding a ninth to 699 apply in future alongside the eight that will continue to apply in respect of previous contributions. So will he confirm whether he will be keeping the 1,300 pages of tax regulations for contributions already made and adding another tax regime on top?
Does the Secretary of State accept that we need better incentives for people to save for their pension instead of cutting back on the incentives that already exist in the tax system? Will there be losers in the proposals that he has put forward today? If so, how many will there be, and how much will they lose? Can he give a cast-iron assurance that the Chancellor is not using the simplification exercise as an excuse for another stealth tax?
The other day, the Secretary of State said that he was not offering a quick fix. I agree with him on that. His proposals are certainly not quick and they will not fix the problem either. The truth is that British pensions are in deep crisis. Millions of our fellow citizens face an impoverished retirement. All that has happened while the Government have been consulting and reviewing. At the end of that process, British pensions are in a far worse state than they were before it started.
The Secretary of State could have come to the House and admitted that the old approach was not working and that a radically new one was needed. We need new flexible ways of saving that match the way people live their lives today. We need a far simpler benefits regime for pensioners and we need to reverse the spread of means-tested benefits. Why will the Secretary of State not recognise that problem and do something about it? Without that, there is a gaping hole at the heart of his pensions proposals. He would have had support in all parts of the House for a bold reform, but he missed that opportunity. Instead, he offered us more of the same.
Today's statement simply fails to match the scale of the crisis in the savings of our country. Governments should encourage people to save, but, under this Government, savings are penalised as they never have been before. Pension funds which only five years ago seemed solid and prosperous are now insecure and under threat. After today, and after this missed opportunity, millions of people will face a new era of financial insecurity, knowing that this Government, their mistakes and their wasted opportunities are to blame. Will the Secretary of State start his response today by apologising to the millions of people whose pensions have lost value as a result of the Government's policies?
§ Mr. Smith
What was abundantly clear from that statement is that there is a gaping hole where any alternative policies from the Opposition ought to be. It was very clear that, even in the time that the hon. Gentleman had to study our Green Paper and my statement, he had not grasped the sweep and radicalism of our tax simplification. It does not add a ninth tax regime—that is the sort of thing that the Tories used to do. It scraps the eight and brings in a new simple regime that will encourage and promote saving where the Conservatives—as well as presiding over pension mis-selling—erected, often with the very best of intentions, walls of complexity around pensions and long-term saving, which serve this country very badly. 700 The Conservatives should support not only the simplification of taxation but the stunning reforms that we are carrying through on contracting out the reference scheme test and the guaranteed minimum pension. The right hon. Member for Wokingham (Mr. Redwood) is nodding—he at least realises the radicalism of what we are doing.
The hon. Member for Havant (Mr. Willetts) spoke about the ending of the tax credit and taking £5 billion out of pension funds. But the country will know that the Conservatives' attack is worthless and that they are shedding crocodile tears, as there is no commitment on their part to reversing that position. If it is doing such damage, why has the shadow Chancellor not pledged that his party will reverse it?
The hon. Gentleman, as he has done before, referred to what he called means-tested benefits. As we all know, that is Conservative code for abolishing the pension credit, the measure that we are introducing and which, from next October will reward—as opposed to the Conservative party in government who penalised—those with modest occupational pensions and savings. The Opposition are proposing to take an average £8 a week off half the pensioner households in the country. They should support our proposals.
I welcome one thing—it is important—that the hon. Gentleman said, namely, that on the simplification proposals where we can build consensus, we will. There is a particular responsibility on pensions Ministers and spokespeople of all parties to endeavour to establish the broadest possible consensus on this issue so that we can together build the foundations for long-term saving and security for older people. I am pleased to see that some Conservative Back Benchers are nodding, even if those on the Front Bench are not.
The other parts of the hon. Gentleman's remarks were muddled, damaging and would hit the poorest hardest. That is not compassionate conservatism but the same old Tory Front-Bench view, which is more extreme than ever.
§ Mr. Steve Webb (Northavon)
If there were an offence of mis-selling Government pension policies, the Secretary of State should be bang to rights this afternoon. It sounded like an Arthur Daley scheme. He says that he will reward pensioners who defer their state pension by five years and go without their £4,000 a year state pension for that time, but what will they get in the end? Only £20,000. Well, that is a great incentive. The Secretary of State has failed to address the tough choices that needed to be addressed. A company such as BAE Systems, which is a large employer, projects a £1 billion deficit in its scheme in three years' time. There was nothing in the statement that was up to the scale of that problem. Is there anything that would match a £1 billion deficit in one scheme?
What about the position of women? I am pleased that, finally, there is a chapter about women in the document. We have put women's pensions back on the political agenda, but I have read that chapter and it is empty. It has nothing for the women who feel cheated by their pension provision. In the past two days, more than 150 women have written to me describing their anger at their pension position. What have the Government got that is concrete for women other than more information? What will they deliver for the needs of women?
701 What about the hope that people will save more? The Government have ducked the tough choice. They have set up a commission to consider the matter, but presumably it will have to wait until the issue has had years to run and then it might recommend compulsion. That would take years more, so it could be 10 years before we make sure that people save. Hoping that people will save has failed. We need to make sure that Government, employees and employers all put money into pension schemes for people on middle and higher earnings. If we do not do that, another decade will be wasted.
The Secretary of State rightly talks about consensus, but that implies that all sides are willing to move. Sitting next to him is a Chancellor who is so wedded to mass means-testing that he is in a minority of one. If the Government will not give ground on mass means-testing, what scope is there for consensus? We have heard about a task force, a commission and a proactive regulator, but we have not had the tough choices for a crisis. This is a missed opportunity.
§ Mr. Smith
The hon. Gentleman talks about mass means-testing. However, the truth is that, with the pension credit, we are rewarding people on modest occupational and savings incomes. Like the Tories, he would obviously take us back to pound-for-pound withdrawal, which penalises those on the lowest incomes.It is difficult to take seriously proposals on public spending from a party that, since the general election alone, has made 80 promises for extra public expenditure.
The hon. Gentleman attempted to deride the opportunity for people who defer taking their pension to receive a £20,000 or £30,000 lump sum. The matter is out for consultation, so, if he thinks that the sums are wrong or that the figures should be actuarially adjusted, he can make recommendations to that affect. However, does he not realise the radical potential of allowing people who have never before in their lives had access to that sort of money to have access to the sort of lump sums that people on much higher incomes in much more generous schemes can have? Why not give those people that choice, which has hitherto been confined to the rich?
I acknowledge the seriousness with which the hon. Gentleman addresses the needs of women in the pension system. He is right to raise that issue. As he says, we have dedicated a chapter in the Green Paper to it. He asks what we are doing for women pensioners. Does he not realise that the majority of the beneficiaries of the very minimum income guarantee and pension credit that he attacks are women? Does he not realise that in introducing the state second pension, the overwhelming majority of beneficiaries will be women, including carers and those with broken work records? It is difficult to take the hon. Gentleman's criticisms seriously when he does not recognise the huge steps forward that our policies have represented for women and other pensioners.
§ Mr. Frank Field (Birkenhead)
May I welcome unreservedly the Secretary of State's statement on simplification, especially the move towards a fairer winding-up system, and on getting those with annuities a better deal? Does he accept, however, that his 702 statement will be viewed as the last throw in making the voluntary system work? As the voluntary system is failing to give a growing proportion of pensioners a minimum adequate pension, does his Green Paper list the criteria by which we will judge the success or otherwise of his strategy? Can we expect to see success, or failure, this side of the election?
§ Mr. Smith
I thank my right hon. Friend for welcoming the simplification of the provisions on winding-up, the greater security that we are extending to people and the improvements to the annuities regime. Like other hon. Members, I respect his expertise and long-standing interest in such matters. Indeed, the idea that we could give an option on wind-up to pensioners based on the length of their time in a pension scheme is something that he proposed, as we acknowledge in the Green Paper.
My right hon. Friend says that our proposal might be seen as a last throw for the voluntary system. Let me make it clear, as I did in my statement, that by strengthening the voluntary system through introducing measures to simplify the regime, by enhancing protection for scheme members and pensioners through the radical reform of taxation, and by cutting costs on pension schemes and employers, we hold out the prospect of delivering our promise and renewing and refreshing the partnership on pensions.
We are equally clear in the Green Paper, however, that that has to be reviewed. My right hon. Friend asks about the criteria for that. They must include the trends in pension provision and long-term saving. The review must be based on an assessment of whether each partner to the pensions partnership meets its responsibilities. That has to be part of the test. It is why we need a regular review and why Adair Turner, who leads the commission, will report regularly to me. If the evidence shows that we need to move beyond the voluntary system—for example, by additional compulsion—we have a duty to make that clear to the country.
§ Mr. Peter Lilley (Hitchin and Harpenden)
The Secretary of State will know that I welcomed the Government's commitment to increase by up to 60 per cent. the share of pensions liabilities which will be met by funded private pensions. Since then, however, the crisis in private pension schemes, aggravated by the pensions tax and the disincentive effects of increasing means-testing, has moved us in the opposite direction. Although I welcome some small measures announced in the statement, nothing in it is commensurate with the scale of the challenge or the crisis facing private pensions. Is he still committed to that 60 per cent. target?
§ Mr. Smith
That indeed remains our objective. It is why the Green Paper sets out all those proposals for radical simplification. There is a sweep and a stunning simplicity to what we propose, not only on tax, but on the reforms on contracting out the reference scheme test and the rest of it. Coupled with stronger protection for scheme members, that is the way to renew confidence in private pension provision. Of course, I share the right hon. Gentleman's goal of providing a higher proportion through the private sector. With our proposals, we can renew confidence so that we move in that direction.
§ Mr. Terry Rooney (Bradford, North)
My right hon. Friend should be wary of building consensus with 703 people responsible both for raiding SERPS and for the personal pensions mis-selling scandal. Does he agree that over the years all Governments have deceived people about the real cost of providing a decent pension? In the light of that, does he think that a lifetime tax-free limit of £1.4 million, equivalent to £35,000 a year in someone's working life, is the right way to use tax rebates from the Government?
§ Mr. Smith
I hear what my hon. Friend has said about consensus, but I genuinely believe that there must be durability in pension regimes and confidence in pensions that should transcend individual Parliaments and, indeed, individual Governments. We are all responsible for trying to make this work in the best interests of the country and future generations of pensioners—I know that my hon. Friend will want to do so. As for the £1.4 million limit, all that we have done is translate into a lifetime limit the current maximum entitlement on tax relief. That is the right thing to do so as not to disappoint people who have planned their retirement on their expectations of the existing system.
§ Mr. Archy Kirkwood (Roxburgh and Berwickshire)
There is much that the House will welcome in the Secretary of State's statement this afternoon, and much that will repay careful study. However, there will be disappointment about some of the longer-term aspects of what he said. Is the independent pensions commission, to be chaired by Adair Turner, to be limited merely, if I can put it that way, to the question of voluntarism versus compulsion, or is the Secretary of State prepared to expand its remit so that Mr. Turner can consider longer-term cases and continue to give advice about the way in which the pensions industry needs to be reconfigured in the longer term?
§ Mr. Smith
I thank the hon. Gentleman for his welcome. I greatly appreciate the work that the Select Committee is currently undertaking and, as part of the consultative process on the Green Paper, I shall look with great interest at its recommendations and the outcomes of its work. The commission's proposed terms of reference are set out clearly in the Green Paper. First, it will make an assessment of the information that it needs to do its job. I know that the hon. Gentleman, like others in the House, has questioned the adequacy of statistics on pensions in the past—the hon. Member for Havant (Mr. Willetts) referred to that. It is therefore important that an accurate baseline assessment is made. Having done so, the commission will assess long-term trends in savings—not just pensions, but other savings vehicles as well—and how well various partners in the pensions partnership are meeting their responsibilities, and will make recommendations accordingly.
§ Miss Anne Begg (Aberdeen, South)
I welcome the suggestion of a flexible retirement age and the rejection of any increase in the state retirement age. There is certainly a job to be done by the Government and employers in encouraging more people to work until the existing retirement age but, to do so, they need to tackle the issue of age discrimination in the workplace.
§ Mr. Smith
I thank my hon. Friend for her welcome. She is absolutely right—good as it is to enable people to 704 work beyond 65 if they wish to, the really important thing is to get more people to participate in the work force up to the age of 65. Building on the work that we have already done in the Age Positive Campaign, which has turned the tide—900,000 more people over 50 are in work now than in 1997—we should move on from the Green Paper to introduce legislation to prohibit age discrimination, as well as introducing other measures to enable and encourage people to carry on working where they are able to, and want to.
§ Mr. John Butterfill (Bournemouth, West)
We would all welcome any simplification of the tax rules, which will help some employers in particular. May I press the Secretary of State on a couple of matters? First, how will the proposals interface with all the legacy schemes introduced by the state—graduated pensions, SERPS, the guaranteed minimum pension and state second pensions? Will all those still be burdens on employers, as they are on our own pension scheme, as I know to my cost and that of the other trustees? Secondly, will the changes that the right hon. Gentleman is making in taxation effectively be retrospective? If so, will there not be some substantial losers, particularly those in pre-1970 schemes where, despite what the right hon. Gentleman said, there were no cash limits on what could be put in? Finally, will the Secretary of State and the Chancellor look at the possibility of allowing the first 25 per cent. of an annuity to be taken tax free, where the annuitant puts all of their pot into a pension, as many poorer pensioners should? At present all they can do is take a tax-free lump sum, which may be to their disadvantage.
§ Mr. Smith
I acknowledge the hon. Gentleman's expertise in these matters and welcome his recognition of the fact that the simplification measures will be of benefit to employers. With reference to the interface with the state system, I think I made it clear that the basic state pension, our proposals for the pension credit and the state second pension remain. There will, though, be a considerable gain to schemes and scheme administrators through the radical simplification of the measures in respect of the guaranteed minimum pension which, as he knows, is a great cause of complexity and cost. As regards the rights that people have under previous regimes, all accumulated rights will be respected and honoured. In so far as there will be losers, there will be disappointed expectations on the part of as few as 1,000 people, who might have been expecting to go beyond the limits that we are confirming with the new lifetime approach.
§ Mr. Kelvin Hopkins (Luton, North)
Does my right hon. Friend accept that for millions of ordinary people on average and lower incomes, a universal state pension at a much higher level than it is now will be the only way to avoid poverty in old age? Does he therefore accept the view expressed by his own adviser in The Times today that we should proceed towards a much better state pension without means-testing and based on compulsory contributions from both employers and employees?
§ Mr. Smith
I addressed that argument in my statement. I acknowledge and share my hon. Friend's concern that those on the poorest incomes should gain 705 security in their retirement through the state system, as well as through their own efforts. However, as I spelled out, the arithmetic is such that if we were to wrap up the minimum income guarantee in the basic state pension, yes, the basic state pension could go up by £10 a week, but those getting the minimum income guarantee—the poorest pensioners—would lose out to the tune of £17 a week. That is the arithmetic, which confirms that we are right not only to have increased the basic state pension, as the foundation, by more than inflation and by more than earnings, but to build on top of it an improved state second pension that will help 18 million people—many of them on low incomes, many of them carers or disabled people—as well as bringing in the pension credit, which will reward modest pensions and savings income, whereas it was penalised in the past.
§ Mr. James Arbuthnot (North-East Hampshire)
I welcome some of the things that the Secretary of State said, particularly about simplification of the tax regime and simplification of pensions in general. Does he recognise that some of the things that the Government have done in relation to introducing a minimum income guarantee and pension credit on the one hand, and on the other pledging themselves to the target of 60 per cent. from private funding, which I was pleased to hear him reconfirm to my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), the former Secretary of State, give the impression that the Government did not really know in which direction overall they were moving? Will the Secretary of State now commit himself to doing his utmost to reduce means-testing, and if so, what target would he introduce for reducing means-testing?
§ Mr. Smith
I accept and welcome the spirit in which the right hon. Gentleman acknowledges the benefits and gains from the statement and the Green Paper proposals that we have set out. On the core of his question, I believe that there is indeed a consistency of purpose in what we are doing. That purpose is to use the available resources to the best possible effect. Yes, we should help all pensioners, as we are doing—on average, they will be £1,150 better off next year in real terms—while giving greatest help to those who need it most in the £1,500 of benefit that will go to the poorest third of pensioners. At the same time, as we are proposing today, we must simplify and reform occupational and private pensions saving so that those who can afford to make more provision for their retirement or want to contemplate a longer working life can do so. At the interface between the two, we have the pension credit, whose great strength is that it gets us away from the pound-for-pound withdrawal of lower levels of saved and pension income to which I am afraid that the right hon. Gentleman's Front Bench and the Liberals would return us.
§ Sandra Osborne (Ayr)
I welcome the fact that the Secretary of State is not ruling out compulsion in the longer term if the voluntary approach does not work. I also thank the Minister for Pensions in particular for listening to the concerns of former United Engineering Forgings employees in my constituency, who stand to lose out greatly on their pension entitlement as the 706 company has gone into receivership. How will the proposals announced by the Secretary of State affect those workers, and how will they help them?
§ Mr. Smith
I acknowledge my hon. Friend's record of work on behalf of the constituents to whom she refers. We are consulting on proposals in the Green Paper that will strengthen protection for workers on the winding up of a company. In the case of solvent employers, we are consulting on options either for a full or partial buy-out of accumulated pension rights, and for insolvent employers, we are considering the opportunity of using a clearing house to get them better value and annuities that protect their future income. As the TUC has urged, we are also consulting on opportunities for mutual insurance, including the possibility of a central discontinuance fund.
§ Mrs. Angela Browning (Tiverton and Honiton)
The more the Secretary of State encourages flexibility for people to work beyond the state retirement age, with which I have no problem, the more important it will be for him to introduce flexibility in the requirement to take an annuity at the age of 75 for all those products that are money-purchase based. Why has he not reconsidered that issue? At the moment, he needs as much flexibility in the pensions market as he can get.
§ Mr. Smith
The problem is that what the hon. Lady advocates could be done only at a cost of hundreds of millions of pounds. She and her party have to decide how much of a priority her proposal is. It is important to underline that annuities remain the only means of guaranteeing an income for as long as people live. It is one of the quirks of human nature that people are inclined to underestimate how long they will live. The Green Paper and tax simplification document contain very important proposals that will help prospective annuitants with the introduction of value-protected and limited-period annuities.
§ Rob Marris (Wolverhampton, South-West)
The target used by many commentators and academics in describing what constitutes a reasonable pension is 67 per cent. of final earnings. Does the Secretary of State agree with that target and, if not, what percentage does he suggest?
§ Mr. Smith
I am very sceptical of the idea that expert commentators, the state or anybody else can specify what the replacement rate or, indeed, the long-term savings rate should be. I think that those decisions are better taken by families and individuals jointly with their employers throughout the country. As I said in my statement, for that to happen, people must have accurate information about their prospects and a simple range of products that they can trust, and they must be incentivised to do the right thing. Our proposals do all of that.
§ Annabelle Ewing (Perth)
The Secretary of State has been less than convincing on how the provision of a decent state pension is compatible with the Government's increased reliance on means-testing. 707 Does he accept that means-testing is demeaning, unduly complex, acts as a disincentive to save, has a negative impact on take-up, and hence is failing our pensioners?
§ Mr. Smith
It is a distortion to refer to the proposal as though it is some old-style measure. Actually, it gets us away from weekly means-testing, with an assessment made every five years. Does the hon. Lady feel demeaned when her tax is assessed on that basis? What is the difference? If we are to make the best use of the limited funds available, it makes sense to give an entitlement that benefits everybody, but to have a system that enables us to get the most help to those who need it most. The logical implication of what the hon. Lady and those who think like her advocate is that we should take money from the poorest pensioners and give it to those who are better off. That does not commend itself to me.
§ Mr. George Mudie (Leeds, East)
I welcome the Minister strengthening the position of workers when a final salary pension scheme is wound up, but does that mean that he is giving up the ghost on final salary pension schemes, or is there enough in the Green Paper to persuade employers to continue to run them? On shareholders, does anything in the Green Paper increase the 1 per cent. cap in view of the low take-up? If not, what measures are in the Green Paper to increase take-up?
§ Mr. Smith
We certainly have not given up on final salary pension schemes. Employers, together with their employees, must determine those matters for the future. One welcome implication of our proposals is that employers will have to consult their employees before they change a scheme. I hope that hon. Members on both sides of the House support that. We shall encourage employers to provide good schemes by cutting administration costs by £150 million to £200 million.
As has been acknowledged in the industry, the 1 per cent. cap on charges has been of great benefit in driving down the level of charges. We shall consult early next year on the stakeholder suite of products, and evidence on the impact of the cap will be taken into account.
§ Angela Watkinson (Upminster)
Will the Minister clarify his intentions for the many very small businesses that are struggling for survival? Will there be a lower limit, in terms of annual turnover and the number of employees, below which there will be no requirement to participate in employees' pension schemes?
§ Mr. Smith
We are consulting on the proposals in the Green Paper precisely to take those views closely into account. Earlier, Conservative Front-Bench Members complained about our consulting. I think that it is right that we consult, so that we take into account the interests of the general public and, importantly, of small businesses as well as larger ones.
§ Paul Flynn (Newport, West)
As it is virtually impossible to convince young people that they will ever grow old and need a pension, and very difficult to persuade young couples in the early furniture-buying, 708 child-rearing days of marriage to make adequate pension contributions, is not the only practical long-term solution a scheme based on compulsory contributions, guaranteed and underwritten by the Government because all parts of the private sector are no longer to be trusted? If compulsion is inevitable, why not have it sooner rather than later?
§ Mr. Smith
I take my hon. Friend's point about the difficulty of encouraging younger people to save. There are plenty of pressures on them to consume and spend their money in other directions. Our proposals include working in partnership with the Financial Services Authority and the financial services industry to intensify the drive to promote education and improve financial literacy so that people better understand what they need to do to save for the long term. The evidence shows that sending people a combined state and occupational pensions forecast has an impact, even on younger people's saving behaviour. However, the great merit of our lifetime limit on taxing pension contributions is the greater flexibility that it gives people to determine the period in their lives when they want to make the bulk of their savings for retirement.
My hon. Friend made the point that any compulsory system would have to be underwritten. If it were compulsory to contribute additional sums towards a pension, people would expect the state to stand behind what was guaranteed. That would resemble a tax to many people. I do not perceive much enthusiasm among young people for higher taxation.
§ Rev. Martin Smyth (Belfast, South)
The Secretary of State knows that self-employment is a growth industry. Many self-employed people in manual and construction industries live their lives according to the proverb that a bird in the hand is worth two in the bush. In the light of past pension mis-selling, and even the occasional failure of Governments to advise women about the reality of their choices, what guidance will be given to self-employed workers to take up a state second pension?
§ Mr. Smith
We must ensure that the self-employed are a priority for receiving the pension forecasts that we will give out to an increasing number of the working population. Evidence shows that the self-employed are polarised in their savings behaviour between those who have made adequate provision and those whose undersaving is potentially calamitous. It is important that they are alerted to the need to save more.
The Green Paper contains two pieces of especially good news for the self-employed. First, they will be able to opt into the state second pension. They need to judge for themselves whether to do that. Secondly, our new tax regime will allow much greater flexibility, for example, for people to transfer savings that are in an individual savings account, or released from housing or business equity, into a pension plan later in life that will attract tax relief. That could be especially beneficial to the self-employed.
§ Ms Candy Atherton (Falmouth and Camborne)
I welcome the Government's intention to legislate against age discrimination and enable older workers to choose when they retire. However, many employers find it 709 difficult to obtain insurance to enable them to continue to employ older workers. Will my right hon. Friend look into that?
§ Mr. Speaker
Order. Hon. Members know that we shall return to these matters. I therefore now call the next statement.