HL Deb 18 October 2004 vol 665 cc163-5GC

The Secretary of State shall require the Government Actuary—

  1. (a) to report to him, within six months of the coming into force of this Act, on the operation of the National Insurance system for self-employed people, and
  2. (b) to recommend a rate of National Insurance Contributions which would enable self-employed people to qualify for additional pension."

The noble Lord said: By way of background, in April 2004, in the Standing Committee on this Bill, Ministers committed the Government to publishing a report on the pensions entitlement of women by the end of 2005. The objective of this amendment on self-employed people is aimed at securing a similar commitment for another very large group of under-pensioned people. It is a large group. Something like two-fifths of all workers are either self-employed or in part-time or temporary jobs. Self-employed people are less likely to be saving for retirement than people in employment, less confident about their retirement income prospects than other people, and are unlikely to be making other provision through business or home equity.

5 p.m.

We have an anomaly here. In certain circumstances, self-employed people could have an entitlement to SERPS. However, no self-employed earnings are taken into account under the second state pension, which is generally referred to as S2P. The estimated number of people affected by the change would range from 68,000 to 150,000—again, from the Standing Committee on the Child Support, Pensions and Social Security Bill on 8 February 2000. Bringing self-employed people within S2P would reflect the reality of the modern labour market, in which many people move between employment and self-employment during their working life, as I have done.

The situation is even more muddled because in December 2001 a government-commissioned report from the Pension Provision Group recommended, that periods of self-employment should be brought into the State Second Pension when it has become flat rate, on a compulsory basis but with the option to contract out. Compulsory pension cover for self-employment will then be on the same basis as for employees".

The same paper also noted that, Voluntary participation would be unduly complex and represent a one-way bet against the taxpayer, attracting only those with low, or under-declared incomes with no direct cross-subsidy from the better off self-employed. It would also go against the redistributive nature of the Second State Pension and contrast with the position of employees where membership, or contracting out, will be compulsory". Despite the Pension Provision Group's advice, the 2002 pensions Green Paper suggested allowing self-employed people to opt into the state second pension on a voluntary basis.

I have to say that the policy disappeared from view quite shortly afterwards. What has happened to the policy? Why has the department gone quiet on this? Is the time now right to investigate the situation properly? I beg to move.

Baroness Hollis of Heigham

I could give a long reply or a short one. Basically, I accept the strictures given by the noble Lord, Lord Skelmersdale, that the Government, so to speak, have gone quiet on this—because we did. The noble Lord set out the situation for the self-employed. It is the case that half of them earn less than £11,000 a year and 70 per cent do not contribute to a private pension. In the Green Paper, we asked for views about whether the self-employed should be brought on a voluntary basis within the state second pension, which would be particularly beneficial to those who are below the £11,600 figure of the lower earnings threshold. We proposed various options.

Responses to the Green Paper were not significant in number. Various organisations questioned whether extending S2P on a voluntary basis provided the best way forward. We have been working with colleagues at the Treasury and with the Government Actuary's Department to establish options to bring the self-employed into S2P.

However, there have been difficulties in trying to get schemes that are transparent, fair and affordable for the self-employed which do not require a cross-subsidy. Already the self-employed get the equivalent of something like £1.7 billion of cross-subsidy from national insurance now and, in addition to that, at a relatively tax-advantageous rate compared to employees. Would we be willing to continue that regime if it were cost neutral? Could the people we are talking about and whom we most want to help afford it and benefit from it?

An age-related voluntary scheme would be complicated to understand, but it might be the right way forward. A more transparent non-age-related voluntary scheme would not remove the possibility of financial advice being necessary and would start to move away from the underlying objections of S2P.

There are real problems, but we are working on this. It has not gone to sleep; it is on the back-burner in the sense that it is being quietly worked on. This issue will not go away. We are working on further policy options. The problem is that, if a scheme is compulsory, it will hit people who cannot afford to save; if it is voluntary, there is a risk of either exploitation or mis-selling. We have got those issues to reconcile. We are not yet sure of the right way forward. These issues are being considered but we do not yet have answers. The noble Lord is right to suspect that work is continuing but that it is not in the public domain.

Lord Skelmersdale

I am delighted to hear it. The fact that this matter is still being worked on is very good news for a whole lot of people. As far as "compulsion" goes—I was seeking the right noun—the ABI and I have suggested semi-compulsion. In other words, an opt-out should be allowed for those people who feel that that would be the right course for them—as, indeed, one could do with other sorts of pensions. Currently, that is very much under discussion across the board. I hope that that will continue. With that continuingly thoughtful answer from the noble Baroness, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Skelmersdale moved Amendment No. 335:

Before Clause 284, insert the following new clause—