§ 4.7 p.m.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)
My Lords, with the leave of the House, I shall now repeat a Statement given in another place by my right honourable friend the Secretary of State for Social Security. The Statement is as follows:
"With your permission, Madam Speaker, I should like to make a Statement on pensions, as part of our modernisation of the welfare state.
"All our reforms are driven by the central principle—work for those who can, and security for those who cannot. Welfare reform is well underway. We have launched the New Deal, and announced the 1251 Single Gateway to the benefits system. We are modernising the tax and benefit system to make work pay, with a new Working Families Tax Credit underpinned by the national minimum wage. We have begun to tackle child poverty, with the biggest ever rise in child benefit. We are reforming the Child Support Agency and we have introduced a national childcare strategy. We are also reforming the legal aid system and student finance.
"Over the past few months I have set out proposals for wide-ranging reforms to disability benefits, along with reforms to modernise bereavement benefits. And, today, I set out far-reaching reform to ensure that the pensions system meets the needs of the next 50 years.
"A pension is the most important asset people have, more important even than buying a house. That is why we want to put pensions on a sound footing, where every individual is guaranteed a decent income in retirement, where people can rely once again on secure and effective private pensions. We are delivering security for today's pensioners—and peace of mind for tomorrow's.
"We are already providing security for today's pensioners: VAT on heating cut to its lowest possible level; a winter fuel bonus; help with bus fares; free eye tests; and higher pensions. With this new Labour Government Britain's pensioners are £140 a year or more better off. Real security for today's pensioners.
"And, for future pensioners I am publishing our proposals in a Green Paper, which sets out a new insurance contract between the state and individuals. It is a new public-private partnership for better pensions. Copies are available in the Vote Office and a summary of these proposals is being sent to every Member of this House.
"Why do we need to change? There are three overwhelming reasons for reforming pensions. First, if we do nothing, one person in three could, by 2050, be retiring on income support. Under the current system, you can work hard all your working life and still retire on an income so low that you will depend on benefits for the rest of your life. Secondly, many middle and higher earners want to save more, and should save more, but have lost faith in the pensions system because of the scandal of pension mis-selling. Up to 2.5 million people, including nurses and teachers, may have been sold the wrong pension and have had their peace of mind in retirement shattered. This Government, unlike the previous government, have not turned a blind eye to their plight. We have already toughened up the regulation of personal pensions and taken firm actions to ensure that those who lost out get proper compensation. And for those who do not have an occupational scheme, too often there is not a good place for them to put their savings. Thirdly, the current system gives a poor deal to the millions of mothers and carers who have career breaks and find that they are penalised.
"The principles driving our reforms are clear. Everyone who can save for their retirement has a responsibility to do so. In turn, the Government have 1252 a responsibility to provide security in retirement for those who cannot save enough. Today, I am announcing a radical new pensions policy. It is radical because it guarantees a decent income for all pensioners. For the first time ever, a lifetime's work will not lead to dependency on means-tested benefits in retirement. Our reforms create a new insurance contract combining the price-linked basic state pension with a minimum income guarantee that we will aim in the long run to increase in line with earnings. It is a contract that rewards thrift and savings instead of penalising them. It is radical because for the first time it helps mothers to get a decent pension despite career breaks. It is radical because it will for the first time give carers a right to a decent pension. It replaces SERPS with the new support and a new state second pension to help those on low and middle incomes. It is radical because it builds a completely new privately funded pension that is simpler to understand and has lower charges. These proposals will put the trust back into pensions.
"I turn, first, to the minimum income guarantee. Today I can announce that we are building a new insurance contract between state and individuals. In the past the basic state pension has been the sole focus of the Government's deal with pensioners. The basic state pension will remain a universal, contributory non-means-tested benefit. But the basic state pension alone cannot provide, and has never provided, everyone with a decent income in retirement. This Government will do better. In future, there will be a new contract. The state will guarantee that anyone who retires in poverty will receive a minimum income guarantee well above the current level of income support—beginning at £75 for a single pensioner and £116 for a pensioner couple. We expect that minimum income guarantee to rise in line with earnings.
"The complaint I hear more than any other from the pensioners I meet is that the country gets wealthier but they do not share the gains. That is something this Government will remedy. Today I can announce that our intention is to give the poorest pensioners the chance to share in the rising wealth of the country. Consistent with proper management of the country's finances, our aim is that over the long term the minimum income guarantee should rise in line with earnings. We are also consulting on the best ways of changing the rules so that we reward savings even more.
"I turn now to second-tier provision. People, after a lifetime in work, should not have to rely on the minimum income guarantee in retirement. We want to ensure that they can do better than that guarantee. We want to ensure that low earners in work on less than £9,000 a year and people whose work is interrupted to look after children or sick relatives, as well as moderate and higher earners, have a higher income than the guarantee. So we need to do more. Low earners in work currently depend on SERPS for a decent pension. But SERPS is income or earnings related. If you earn little, you get little. SERPS does not give sufficient help to low earners.
1253 "So today I can announce that we will replace SERPS with a new scheme, a SERPS Mark II—the new state second pension. This will deliver a dramatic increase in the value of pensions. The new state second pension will be worth at least double what SERPS currently pays for people earning less than £9,000. Up to 5 million people stand to benefit. Under the current system, a person earning £6,000 a year would get £13 a week from SERPS, but will get £46 per week from the new scheme—£33 a week extra. That is real security for today's low paid.
"We also promised in our manifesto that we would do more for people caring for children, or for sick or disabled relatives, and for people who have worked but now cannot because of disability. So today I can also announce that we will end the unfairness where someone who gives up waged work to care does not have the chance to build up a second pension. This means that a mother, who takes two years off work to look after her two young children, will no longer lose out on her pension. Our reforms will for the first time provide security for 2.5 million carers, by helping them with pension contributions, enabling them to build up a second pension as of right. They will be credited into the new state second pension. Parents of nearly 200,000 disabled children and some 1.5 million people with a long-term disability and interrupted work record will also gain from this proposal.
"The problems of the current system do not just affect those who earn less than £9,000 a year. Too many people earning more than £9,000 get a raw deal. Our plans will change that. Middle earners will get more help. And they and higher earners will have decent products in which they can invest. That is why our long-term ambition is that everyone earning more than £9,000 should be in a secure funded private pension.
"Stakeholder pensions will be attractive because they will be more secure. Independent trustees will ensure that the rights and interests of scheme members are put first. They will be cheap. On average personal pension charges can eat up to 25 per cent. of your savings. Under stakeholder pensions we expect a substantial reduction in charges as a result of simpler regulation. They will be flexible. If a member does not contribute for a period—for example, a mother who is at home bringing up children—no charges will be levied that eat up savings. Similarly, if you change jobs, you will not lose out. Stakeholder pensions will also be of higher quality. We will protect consumers by building quality into the system. We will require all stakeholder pension schemes to meet specified benchmark standards. They will be simpler to understand. Pensions are complicated. Private pensions are often a nightmare to understand. We intend stakeholder pensions to be simpler and more transparent.
"Our proposals for stakeholder pension schemes will give up to 5 million people who today are without a funded second pension the chance to build up a secure, decent income for their retirement. Everyone earning between £9,000 and £18,500 will 1254 receive better pension rights. The Government expect to spend £500 million a year on increased payments for those who join funded schemes. For many, this will make joining a new stakeholder pension scheme more attractive. Someone earning £12,000 a year could increase their stakeholder private pension by almost £1,000 a year in retirement. And, once stakeholder pensions are up and running, we will reshape the system to make private-funded pensions the only sensible option for those above £9,000.
"I strongly believe that those incentives are fairer and more effective than increasing compulsion. I do not think it is the Government's job to make life harder for the person on £12,000 with two children and a mortgage to pay. I want to help middle earners, not penalise them. But I do want them to know where they stand. So I also want to provide another kind of incentive for people to save.
"Today, I can announce that, for the first time, we will provide an annual pensions statement for every working person in the country. It will set out how much private and state pension people are likely to get on retirement. Everyone will know where they stand. And they will know in black and white the consequences of them not saving more. We will work with employers and the pensions industry to make the statement as effective as possible.
"Other options for reform have been urged on us. Some have suggested that we introduce compulsion for all. Some have suggested privatising the whole system. We have looked closely at those proposals. Today I want to tell the House why those options would not work. We already compel more than 20 million employees to save now. So the question is, should we compel them to save even more?
"For low earners, no amount of extra compulsion will help. They simply cannot afford the amounts they would need to save. So anyone who backs compulsion for all has to justify that kind of burden on low earners. I am not willing to do so.
"There are some groups, however, such as the self-employed, who could afford to save more and are currently not saving enough. We are consulting on letting the self-employed join the new state second pension in return for their contribution. We believe it is not right to compel them before stakeholder pensions are properly established. But we will keep under review the case for compulsion once stakeholder schemes have a proven track record, if people fail to save what they need.
"Others have urged us to privatise the whole system. That would be no help for millions of low earners who could not afford to save enough. It would cost £150 billion, even after the costs of disruptive changes to the tax system. The last government's plans would have meant massive up-front costs, the loss of tax relief and the abolition of the state pension. Alternatively, some have suggested using private schemes that would take money from the private pensions of middle and high earners to give money to the low paid. That is not practical. Nor do I think that would be acceptable. Our proposals are, by contrast, manageable, affordable, and workable.
1255 "By extending individual pensions, and by a better combination of the state pension and the minimum income guarantee, we will provide better pensions and also reduce significantly the share of state spending on pensions in the long run.
"The overall amount spent on pensions will go up, but private pensions will take an increasing share. Instead of 60 per cent. state and 40 per cent. personal provision, that will become 40 per cent. state and 60 per cent private. The reason that this is important is that people live longer—often for 30 years after they retire—creating new demands on the welfare state, such as long term care. Our plans will mean we can afford to tackle those challenges.
"Our radical new contract for pensions will ensure security for those who cannot provide for themselves, and encourage those who can save for their retirement to do so. It will lift many more working people, mothers and carers off means tested benefits. Our plans will help low earners find security for the first time in retirement. They will give a boost to middle earners, with a new secure private pension and money to invest in it. And they will help everyone—no matter what they earn—by proving better regulated and more secure private pensions. Good news for today's pensioners, peace of mind for tomorrow's.
"I commend these proposals to the House."
My Lords, that concludes the Statement.
§ 4.23 p.m.
§ Lord Higgins
My Lords, the House would wish to thank the noble Baroness the Minister for repeating the Statement made in the other place. I must declare an interest, as I am chairman of a company pension fund.
The Statement and Green Paper have been long awaited. They were originally promised in the first part of 1998. The Government have at least managed to produce a Statement inside 1998. It is extremely complicated and important. Its process of gestation has involved the sacking of a Secretary of State and the resignation of a Minister of State. Quite extraordinarily, the latter part of the Statement largely consists of a rebuttal of their views. Indeed, that is something that in many respects was not expected or even leaked to the press in advance.
The theme that those of us on this side of the House have been following is that the Government have been consistently undermining the contributory principle and moving more towards means-testing. To a considerable extent, the Statement and Green Paper move in the same direction. In one respect, it is not so much a question of means-testing benefits; the contributions also will be very much income-related. At present, people who have not yet retired pay on a so-called pay-as-you-go system for those who have already retired. In addition, they make contributions to their own pensions. As I understand it, people who have not yet retired and who are above the income levels that the noble Baroness mentioned will in addition contribute one way or 1256 another—perhaps the noble Baroness will tell us whether by some form of taxation—to the pensions of others who have not yet retired.
It is not clear that the Statement or Green Paper do anything for existing pensioners. Will the noble Baroness make it clear that the basic national insurance pension will, as the Statement said, remain and be means-tested? So far, the Government's commitment extends only to the present Parliament. Will the noble Baroness make clear whether this is to be taken as a statement for all time as far as the basic national insurance pension is concerned?
It is noticeable that the Statement makes no mention of future uprating of the national insurance basic pension. Is it the Government's intention that uprating shall continue in future, as it has for many years past?
A number of aspects of the Statement are welcome. I may not have understood this correctly, but the position with regard to carers extends only to those who take up caring on a basis that interrupts their normal working lives. Am I correct in thinking that that arrangement does not extend to full-time carers in a single-earning family? The proposal does not apparently cover all carers. My understanding is that those who care part-time on a temporary basis, then resume work, account for only 16 per cent. of the total. Is it the case that all carers will benefit from the Government's scheme?
The Government refer to an annual pension statement. How will that work? We know only too well that pensioners who have recently retired under a defined contributions scheme have suffered badly because of the fall in the stock market and annuity rates. Some pensioners can expect barely half the amount they might have expected a year ago. If the Government are to make an annual pension statement, apparently telling people what they may expect in 20 years, given that such variations can occur in the space of one year, how will the Government produce a statement having any significant value? Will the Government guarantee in the far future they are forecasting that they will ensure in some way that people receive the pensions shown on their pension statement?
As to the so-called "stakeholder pension", it was generally supposed that that would be a government stakeholder pension. It now seems that it is a private system. In addition, it would replace SERPS. I am not entirely clear how that will work. The noble Baroness referred to it in an impromptu remark that does not appear in the Statement as "SERPS Mark II".
§ Baroness Hollis of Heigham
My Lords, I made that reference in connection with the state second pension, not the stakeholder pension.
§ Lord Higgins
My Lords, as I say, as regards the stakeholder pension, we appear to be talking about simply an enhancement, with greater regulation—that, of course, is welcome—with regard to the private provision of pensions. The Statement makes a number of assertions with regard to the fact that people will receive double what they would have received under 1257 SERPS. Are we to understand that there will be a greater subvention, and, if so, how will that work? Will it work by way of rebate or in some other way?
The most important point is that all of this concerns the future. We are told that it will be some time before the stakeholder pension is up and running, or indeed that the provision for those on incomes below £9,000, or between £9,000 and £18,500, will come into operation. Can the Minister give us some undertaking as to when that is likely to come into operation? In particular, can we be sure that the extra amount which people will pay in will ensure that they receive a pension—having made the sacrifice of paying in—which will be higher than the level of a means-tested benefit at the relevant time? That is a crucial point because the indications are that one would have to have a high pension indeed before that is likely to be the case. We have debated on many other occasions the problems as regards prudence and the ability to save.
This is a highly complicated Statement which we shall want to pursue in much greater detail. I hope that it will be possible for your Lordships to debate the matter when we have had more time to assimilate precisely what is involved in the Statement.
§ 4.31 p.m.
§ Lord Goodhart
My Lords, we on these Benches can give the Statement a rather less grudging welcome than it was given by the noble Lord, Lord Higgins. Indeed, there is much in it that we welcome warmly. However, there are certain respects in which it does not go far enough. We would have liked a somewhat more ambitious scheme.
I start by mentioning the proposals in the Statement that we particularly welcome. We strongly welcome the minimum income guarantee as a way of ensuring, without excessive expense, that everyone will have an acceptable basic pension on which to live in retirement and will not have to rely on income support as at present. We believe that, certainly at first sight, the replacement of SERPS by the state second pension is an ingenious idea and a good one which will get over some of the previous problems of the interface between those on basic pension and those earning just a little over the lower earnings limit who would have had difficulty in building up anything adequate in SERPS or through a stakeholder pension. We therefore believe that that measure is to be welcomed.
We again warmly welcome the idea of improved provision for those who are unable to take paid work because of their caring responsibilities. We also warmly welcome the introduction of the stakeholder pension. It is clearly desirable that the Government should use their muscle to negotiate acceptable terms with the providers of stakeholder pensions which will enable the contributors to obtain much better terms for their pensions than would be possible if they were to take out individual pensions, with all the charges that they involve. Clearly, the Government can ensure that the terms on which stakeholder pensions are granted involve the minimum necessary level of costs. We also welcome the idea of accreditation for occupational pensions.
1258 I now mention some criticisms. First, we think that the Government should have gone fully, rather than partially, back to the pre-1988 system under which an employer can require an employee to belong to a scheme if it is accredited. We believe that the mis-selling disaster of the late 80s and early 90s was almost entirely due to the deeply mistaken action of the Thatcher government in allowing unrestricted opt-outs. Where there is an accredited scheme, because of the contribution which the employer makes it is frankly almost impossible for an employee to be better off outside that scheme. We therefore think that in general there should be a right for an employer to insist, in the employee's own interests, that the latter be a member of the occupational scheme.
Secondly, we think that the availability of stakeholder pension rebates should go up to the upper earnings limit and not stop at £18,500. This is intended to be a benefit for middle earners and what is called the "upper earnings limit" is really fixed at a level which certainly could not be said to be anywhere remotely near the "fat cat" level. We think such a measure would be an improvement as it would give people better rebates to invest in stakeholder schemes if the availability of the rebates went right the way up to the upper earnings limit and did not stop, as now, at £18,500.
We believe that the Government have "chickened out" of the essential element in stakeholder pensions, which is a compulsion to take one out. One can see problems in the marginal area; namely, that people who are earning a little over £9,000 should not be compelled to switch into stakeholder pensions, particularly when their incomes are variable and they sometimes earn less than £9,000. But for anyone above, say, £12,000, it would clearly be very much in their interests to switch into a stakeholder pension. We believe they should be compelled to do so because—this is a vital element—we think that employers should be required to contribute to stakeholder schemes, along with employees. Unless there is compulsion on employees to contribute, that simply is not possible. Clearly, enormous pressure would be exerted not to take out stakeholder pensions by employers on employees if that meant that an extra burden would be placed on the employer. However, we believe that all employers should either have their own occupational pension scheme or be required to contribute to an employee's pension scheme, whether a stakeholder pension or a personal pension. We believe that that could be phased in over a period of, say, five years without there being an unacceptable burden on employers who find that their non-wage costs increase.
We note that the Statement largely ignores the self-employed who are merely going to be the subject of consultation on further planning. We believe that every self-employed person should be required to have their own stakeholder pension, once he or she rises above a certain limit of earnings. Certainly, the position of the self-employed at the moment with regard to national insurance is highly anomalous. We believe that the position of the employed and the self-employed should be brought closer together. One element in that would 1259 certainly be the requirement for the self-employed—again, those earning above a certain limit—to take out a stakeholder pension.
We realise that this is a complex scheme. We shall have to consider it with considerable care and in much more detail than we have been able to do so far. We believe that it offers many improvements over the present scheme. To that extent, we give a warm welcome to it and congratulate the Government on coming up with some sensible and ingenious ideas in the scheme. However, it has not gone far enough and the various elements I mentioned are matters that we wish the Government had taken on board.
§ 4.40 p.m.
§ Baroness Hollis of Heigham
My Lords, I thank the noble Lord, Lord Higgins, for his comments and accept the welcome given by the noble Lord, Lord Goodhart. First, I wish to apologise to the House in regard to the Green Paper. I asked my noble friends to check on the situation: apparently, the Stationery Office could not deliver it in time because a skip was parked in the way. Unfortunately no one managed to tell the Printed Paper Office. However, the Green Paper arrived at around 4 o'clock so I apologise to your Lordships. I realise how exasperating it must be, with a complicated and detailed Green Paper, if people do not have enough time to read it properly.
Although I wish to address the points raised by the noble Lord, Lord Higgins, I start with some wider remarks. We all accept that the partnership with the private sector has produced a pensions success story for those in secure and well paid jobs. That is undeniable and people have benefited from it. However, the lowest earners now cannot afford a pension because they do not have the income. Those in unwaged work are at the moment ineligible for pensions and those with a broken work record cannot have continuity of pensions provision. Of those who are self-employed, half are not covered by a second pension. Those who have moderate earnings and have taken out a personal pension have been hit by high charges. They have a well founded mistrust of the whole enterprise. So there is currently much that needs to be addressed, particularly for those who are low paid, self-employed, have intermittent earnings or are carers.
The noble Lord, Lord Goodhart, was generous in his recognition that the main thrust of the Green Paper seeks to provide security and opportunity for pensions provision for the low paid. For those who are well paid, there is no problem; they can afford to save and they do so. Perfectly proper tax privileges are associated with that.
The problem is that those who most need a decent pension to float them off poverty in old age are those who can least afford to pay for it. That is what we seek to do by a SERPS Mark II through the state second pension.
The noble Lord, Lord Higgins, asked whether we were moving to means-testing. No, on the contrary. The second state pension, SSP, will lift hundreds of 1260 thousands of people off means-tested benefits in their old age. If we did nothing, between one in two and one in three of all people now in work would find that when they retire in 2025 they will be on a means-tested benefit. Hundreds of thousands of those will now be floated off that by a second state pension. Those who need to remain on a means-tested benefit with the minimum income guarantee will find that the safety net is far more generous than currently. It is a safety net that we expect and aim to raise in line with earnings.
The noble Lord asked about funding costs. As noble Lords will see in the Financial Memorandum attached to the Green Paper, the initial cost is about £100 million a year. As he will know, with pension schemes the full cost builds up slowly over time. We expect there to be an additional cost of around £5 billion by the year 2050. To put that in its context, the noble Lord probably knows about the new inter-generational study comparing the US with the UK. What really matters is whether one is in a decent, adequately paid job, whether inflation is under control and whether productivity has been enhanced. If that happens and as a result the country's growth is secure, pensions can be well afforded. The inter-generational study estimated that deficits of that order could well be funded within modest expectations of economic growth.
The noble Lord asked whether we were committed to not means-testing the state old age pension. I can only repeat what was said in the Statement: it will remain a universal, non-means-tested benefit. It will therefore rise at least in line with prices, but if we add the income guarantee, we expect the total package to rise in line with earnings, as resources allow.
§ Lord Higgins
My Lords, I am grateful to the noble Baroness for giving way. The phrase is qualified by the use of the expression "over the long term". What does that mean?
§ Baroness Hollis of Heigham
My Lords, it means that we expect it to rise as earnings rise. In other words, we expect it to be a forecast. What we cannot do—and what I am unable to do at this stage—is to guarantee that every year it will be actuarially increased by whatever the earnings gap was the previous year. We expect it to rise broadly in line with earnings. There is no commitment to the equivalent of the Rooker-Wise amendment. The Chancellor makes those decisions and the expectation is that it will rise in line with earnings in the long term.
The words are clear in the Statement: we expect—the aim is for—the minimum income guarantee to rise in line with earnings so that pensioners will share in the general and increasing prosperity of the country. That is in the Statement and has been repeated today.
The noble Lord then asked about carers and whether they will be covered. All carers who are recipients of ICA, who are caring for people who have AA or DLA and who qualify for home responsibilities protection, or who are carers of children under the age of five will be credited into the scheme. In broad terms, the carers will receive about £1 a week in pension for each qualifying year of caring. There will be no limit on the number of 1261 years of caring which are treated in that way. I believe that that answers the noble Lord's question. In other words, a carer need not have been in the labour market if he or she has been caring throughout the whole of his or her working life. Under those conditions such carers would receive an appropriate credit. However, of course, in practice most carers are likely to be in and out of the labour market with rather more fluidity than that.
The noble Lord asked about full annuity rates. As he knows, those full annuity rates reflect the market and the market's expectation of medium to long-term interest rates. We know that the best guarantor of those is a low rate of inflation and tough control on inflation.
The noble Lord asked how the stakeholder pension would replace SERPS and in what ways it would be different from SERPS. The stakeholder pension will probably bring into its orbit the top two-fifths of current holders of SERPS, with the bottom three-fifths holders of SERPS likely to go into the state second pension. The stakeholder pension will be different from SERPS. First, it will be funded. Secondly, people can add to it as and when they wish to, including putting in other savings, possibly putting in an ISA or whatever is appropriate. If people are unemployed for up to five years, they can continue to pay in, perhaps through their savings or through a contribution from their spouse. It will be a money-purchase scheme, so it will be linked to the equity market which could and should in time give a good return. It may attract employers' contributions above and beyond the national insurance rebate. So in all those ways we believe that the stakeholder pension should, in the longer term, offer a better deal, above SERPS, for most people with earnings over about £9,000 to £12,000.
Finally, the noble Lord asked whether people would get a pension and whether we guarantee that the pension—I presume he means the state second pension—would be higher than a means-tested benefit? That would be true provided people had a full working credit, a full working record, but clearly their entitlement to the state second pension will depend on the number of working years. If they have only a modest number of working years, they may still be dependent on means-tested benefits, as now.
The noble Lord, Lord Goodhart, asked about compulsion and why we were not going back to the pre-1988 situation in which employers could require employees to become members of occupational schemes. That has been considered. As this is a Green Paper, it is a point that can be made again as part of a consultation exercise. However, most of us recognise that occupational pensions may not always be the most suitable pension package, particularly for temporary staff, contract staff, part-time staff or mobile staff. For them, a stakeholder pension may be a more appropriate alternative. We are determined that employers in that case, particularly small employers who may not have a decent occupational scheme, shall ensure full access to a stakeholder pension for their employees.
The noble Lord, Lord Goodhart, also asked about the self-employed. He is right that currently at least half of all self-employed people are not in any pension scheme. 1262 They can be vulnerable. We know that a proportion of self-employed people are very prosperous, but many others, about two-fifths, are on very modest incomes. Effectively, they pay themselves to do work with an average income of only about £8,000 to £10,000 a year. We are consulting on whether they should become eligible for the state second pension with appropriate adjustments to national insurance contributions as a result. But, for many, their business may be their best retirement pension and we do not want to imperil their cash flow by requiring them to make compulsory contributions at the expense of the survival of their business.
It is a difficult issue. As I am sure would the noble Lord, we would like to see all self-employed people with a secure old age. It is not immediately clear that compelling those who are on very low self-pay to pay into a pension is the right way to ensure that. However, we are consulting on the matter. If there is consensus that that is the way we should go, we shall.
I hope that your Lordships will welcome the Green Paper. Apart from a minimum income guarantee safety net which is more generous than we have had in the past, we suggest offering those on an income of £9,000 a year a state second pension which would be twice as generous as they would currently receive on SERPS. Anyone between the lower earnings level and the £9,000 figure would receive a flat-rate state second pension as though they were earning £9,000 a year. So there is a significant increase in pension provision for those between the lower earnings limit and £9,000; and a more generous scheme which gradually tapers out between the £18,500 and £20,000 figure.
Secondly, we are ensuring a stakeholder pension to make good the gap between on the one hand occupational pensions, which are relatively less flexible, and the insecurity and risk of personal pensions on the other.
Finally, in the Green Paper we are ensuring that those who remain within the more traditional occupational pension will have the flaws of the 1995 Pensions Act—I put it another way: the amendments which the noble Lord did not accept at the time—reviewed in terms of regulation, consideration of a central discontinuance fund, consideration of the minimum funding requirement, and the like, and increasing the strength of the role of trustees, including putting a pensioner on the board of the larger pension schemes.
I hope that your Lordships will welcome the Statement which proposes a more generous safety net, a good lift out of poverty for those on low earnings, an increase in pensions for those on moderate earnings and better regulation for those on higher earnings. I think that we have done something here that is really important and valuable to our people.
§ 4.52 p.m.
§ Baroness Castle of Blackburn
I am sure the Minister will be the first to agree that this is a detailed and complex Statement. Therefore I must not be accused of being begrudging if I approach it cautiously, in particular, as, to coin a phrase, the devil is in the detail. 1263 I have had the detail put in front of me in the form of a Green Paper only a few moments ago. I know that the Minister has tried hard to be as frank and honest with the House as possible. But many doubts and questions must linger in our minds until we have had time to discuss matters more thoroughly and to think over the implications of some of the remarks she made.
Perhaps I may give one or two examples. Let us take the earnings link. I am glad that the Government have recognised the strength of our argument that to uprate a pension in line with prices, and not with earnings if those are leaping ahead of prices, is to condemn that pension to a slow death. So we are glad to know that the minimum pension guarantee is to be linked to earnings. Its uprating is linked with the movement of average earnings. However, the noble Baroness must forgive us if we are a little less than over the moon because she qualified the Statement with phrases such as "our aim is" and "we expect to". There is no exact chronology, and no exact commitment on a large number of these matters.
The fact then remains that the basic state pension—we are told that it remains a universal non-means-tested benefit—is not to be uprated in line with earnings but may be with prices. In other words, it is intended deliberately that it shall wither on the vine and disappear; and we shall be left only with the means-tested pension. That is one of the Government's aims. I am sure that the Minister, who is an honest and honourable person, will accept that that is what will happen.
My second worry in a number of queries is about the "stakeholder" pension. The word is somewhat dazzling. It sounds so noble. We all have a stake in the community, and that kind of thing. But what exactly what does it mean? I am still not clear how it is to be financed. I agree with the Minister that those who have a good occupational pension scheme are lucky people; and that firms should be encouraged to cover their employees with such a scheme. We always said so in drawing up the original SERPS policy. If the scheme is to be a form of occupational pension scheme for those who do not happen to enjoy one at present, presumably the employer and employee will share the funding. Is the noble Lord anxious to interrupt me?
§ Lord McIntosh of Haringey
My Lords, I am very reluctant to interrupt my noble friend. However, she has taken four minutes out of the 20 minutes allowed for all Back-Bench questions and answers. I must ask her to come to an end.
§ Baroness Castle of Blackburn
I am just explaining why some of us will be cautious in our reception. Others have had a good fling and I do not see why I should not do so as well. It is not my fault that you limited us to 20 minutes.
I wish to know how the proposal is to be funded. If it is to be funded, as Margaret Thatcher always visualised people funding their contribution to personal pension 1264 schemes, by generous rebates from the national insurance fund, you are undermining the finances of the fund on which SERPS depends.
I have one final query. We are told that there is to be an annual pensions statement. Can there therefore be a statement of clear choice to put before the people of this country: keep alive the state pension scheme on a pay-as-you-go basis, and tell people what they would have to contribute to obtain a defined benefit. We are not told that the stakeholder pension will be a defined benefit.
I leave those questions with the Minister with the promise that I shall return again to the matter.
§ Baroness Hollis of Heigham
My Lords, I shall try to be brief. I realise that other noble Lords wish to speak.
Apart from many other achievements, my noble friend was responsible in 1978 for introducing SERPS. The difficulty with SERPS, as we know, is that because it is earnings-related, those who earn the least receive the least. That is why with the state second pension we seek to rebalance very heavily in favour of those earning under £9,000 and, more generally, those earning under about £12,000 or £15,000 a year.
My noble friend's specific question on the old age pension was why we were not effectively linking that with earnings. If we did so, those who were poorest would receive nothing because it would come off their means-tested benefit. Those who were more generously off, including, I suspect, most Members of your Lordships' House, would gain every penny. I do not believe that that is necessarily the most appropriate public expenditure.
My noble friend's second question was how the stakeholder pension was to be funded. The stakeholder pension will be available to those employees for whom an occupational pension is currently not available. It is primarily an alternative to a private pension. It will be financed by more generous rebates, and, we hope, also by employers' contributions. Research suggests that between one-third and one-half of employers say that they are willing to contribute to a stakeholder pension. It will be based on affinity groups. It will be cheaper, better regulated and within the framework of trust law, unlike personal pension schemes now. I hope that my noble friend will recognise that the Green Paper meets a real problem in the pensions world.
Finally, my noble friend asked whether the statements to go out to people will offer a clear choice between the state second pension, which is pay-as-you-go, and the stakeholder pension, which is a funded scheme. Clearly, people will have that choice. I shall ensure that my noble friend sees the papers as and when they are available. Obviously, a good deal of this will be part of 1265 the framework to be set out in legislation in due course. My noble friend will no doubt then be able to move amendments to that effect, should she so choose.
§ Lord Clark of Kempston
My Lords, while everyone agrees that any incentive for a second pension is welcome, can the Minister explain when either the stakeholder pension fund or—
§ Lord McIntosh of Haringey
My Lords, how much of the Statement did the noble Lord hear? He was not here at the beginning of the Statement.
§ Lord McIntosh of Haringey
My Lords, I do not believe that the noble Lord should intervene when he was not here for the Statement.
The Earl of Clanwilliam
My Lords, the noble Baroness, Lady Castle, has asked the question that I would have asked. First, is it the case, as the answer suggests, that the stakeholder pension will be compulsory and will have to be provided either by the employer or the employee or both? Secondly, where the sums are under £6,000 a year, from where will the money come? I assume that the money is to come from the national insurance contributions—yet another compulsory contribution. Thirdly, how will the ISA compete with the stakeholder pension?
§ Baroness Hollis of Heigham
My Lords, there is no greater compulsion in what we propose than under the existing arrangements, except that there will be more and it will be better. At the moment, anyone who is in work who pays national insurance contributions if his earnings are above the lower earnings limit can either use his rebates to enter a private pension scheme or come within SERPS. That basic structure remains. But for those national insurance rebates we shall offer a better quality scheme, whatever the income, and a more generous scheme, particularly for those who earn less than £18,500 a year. Stakeholders will be subject to as much or as little compulsion as with any other pension scheme that is now on the market. If one is in work and pays national insurance, one pays for one's pension.
As to the relationship with ISAs, stakeholder pensions are not in competition with them. The ISA may be a more appropriate savings vehicle. For example, one could put one's ISA money into a stakeholder pension if one wished particularly during periods of unemployment. We see these as complementary products in the marketplace.
§ Baroness Pitkeathley
My Lords, the noble Baroness and I have worked so long together on this issue that she will know with what pleasure I rise to welcome the recognition that the responsibility for caring, which I remind noble Lords is given willingly and with love, works against the ability of carers to provide for their own old age. Enabling carers to share in rising prosperity is proof that the Government recognise the 1266 enormous economic contribution that they make and the loss of income that they suffer as a direct result of their caring. This is good news since carers are in the lowest income group and in future they will find themselves in a more beneficial situation. That, together with the national strategy for carers on which the Government are working, will make a real difference.
I also welcome the emphasis on telling people where they stand because the mysteries and complexities of pension provision create huge difficulties. Will my noble friend assure the House that in addition to the consultation programme that I am sure she will undertake with carers' organisations and those for people with disabilities, she will involve them in providing information about the new situation? Carers are notoriously reluctant to claim anything. It is extremely important that we let them know that the new provisions are available to them.
§ Baroness Hollis of Heigham
My Lords, I am very glad that my noble friend was able to be here and to make a contribution. She has done so much to bring the situation of isolated carers out into the light so that we recognise the quality of their unwaged work. For the first time, we are now able to do that. At the moment, people can get credits on their basic old age pension, but they cannot take them into SERPS. As a result of what we propose today, they will be able to take those credits into the state second pension. We expect about 2.5 million carers to begin building up credits from the inception of the scheme, which we expect to be in April 2002. By the year 2040, at least 4 million people, mainly women, will have their pensions augmented by the carer's provision. We expect the gain to be almost £50 a week in today's terms, which represents a very significant increase. Carers who have given up the opportunity to work will not port poverty into their old age.
My noble friend asks whether we will be able to work with the voluntary organisations to ensure that carers have full knowledge of all the options open to them. I am very happy to confirm that not only do we want to do that, but we need to work with those organisations, particularly the Carers National Association, to make sure that carers know what they are entitled to get and that they claim it.