Pensions Reform

With permission, Mr. Speaker, I should like to make a statement on the future of our pensions system. Our first priority has been to tackle pensioner poverty. Compared with 1997, we are spending more than £10 billion extra each year on pensioners, and almost half that spending goes to the poorest third. We have raised the minimum income from a totally inadequate £69 a week in 1997 to more than £114 today. As a result, for the first time in a generation, pensioners are now less likely to be poor than anyone else. We have also tackled the loss of confidence in the private pensions market. We have legislated to clear up the pensions mis-selling scandal, created the pensions regulator and the Pension Protection Fund. We established the financial assistance scheme to help some of those who stood to lose most from schemes that collapsed before 14 May 2004. I know that many Members have been concerned that the scheme is limited to those within three years of retirement. My right hon. Friend the Prime Minister announced in March that we were expediting a review of the financial assistance scheme and I am delighted to announce today that it will be extended to cover eligible people who were within 15 years of their scheme’s normal retirement age on 14 May 2004. Under that extension, the Government will top up to 80 per cent. of the expected core pension for those within seven years of scheme pension age, to 65 per cent. for those within eight to 11 years of scheme pension age and to 50 per cent. for the remainder. We have made real progress on pensioner poverty, but despite those improvements, significant challenges remain. We established the Pensions Commission in 2002 to consider what reforms might be necessary to meet those challenges, and I am grateful to the three commissioners—Lord Turner, Jeannie Drake and John Hills—for the work that they have done. In its report last November, the commission made it clear that there was no immediate ““pensions crisis””, but that there would be one if we did not act soon. They identified four major challenges. First, the Commission found that between 9 million and 12 million people are not saving enough for their retirement. Secondly, it estimated that, by 2050, there would be 50 per cent. more pensioners than today and that the ratio of people in work to those in retirement would halve over the same period. Thirdly, as a result of historical legacy, the current state pension system is complex and delivers unfair outcomes, especially for women and carers. Of those recently reaching state pension age, 85 per cent. of men have a full entitlement to a basic state pension compared with only 30 per cent. of women. Finally, it found that, if we maintain current indexation, the basic state pension might be worth in today’s earning terms only £35 by 2050 and that more than 70 per cent. of pensioner households could be eligible for pension credit—never the Government’s intention. The Commission urged the Government not to duck the long-term challenge of reform. I believe that the proposals in today’s White Paper address the challenges that the Pensions Commission identified. We will therefore introduce a new system of personal accounts that will make it easier for more people to save. We will reform state pensions so that they are simpler and more generous. We will modernise the contributory principle and make the state pension fairer and more widely available. We will increase the state pension age, keeping the proportion of life spent receiving the state pension stable for each generation and helping to secure the long-term financial stability and sustainability of the state pension system. Let me take each of those in turn. A new system of personal accounts will be introduced from 2012, providing more than 10 million people with the opportunity to save in a low-cost savings vehicle. Employees will be automatically enrolled into either their employer’s scheme or in the new personal account, but they will have the right to opt out. The accounts will provide a simple way for people to take personal responsibility for building their retirement income. Employers will be required to contribute 3 per cent. of employee earnings in a band between £5,000 and £33,000. Employees will contribute 4 per cent. on the same band of earnings and a further 1 per cent. will be contributed in tax relief. I recognise that these changes represent a major change in our pension system. Accordingly, we are taking steps to help smooth the introduction of reform. Employer contributions will be phased in over at least three years and the contribution rate will be fixed in primary legislation. In order to minimise the burden on the smallest businesses, we will consult on additional transitional support and on whether a longer phasing period is necessary. However, the Government are clear that reforms to private pensions must go hand in hand with reforms to the state pension system. During the next Parliament, we will re-link the value of the basic state pension to average earnings. Our objective, subject to affordability and the fiscal position, is to do that in 2012, but in any event by the end of that Parliament at the latest. We will make a statement on the precise date at the beginning of the next Parliament. That will help to preserve the value of the basic state pension. We will also simplify the state second pension so that it gradually becomes a flat-rate weekly top-up to the basic state pension. That means that a person retiring in around 2050 who has been in employment or caring throughout their working life could receive a contributory state pension worth £135 a week in today’s earnings terms, which would be £20 a week above the guaranteed income level. Without those reforms, people retiring in 2050 would receive a total contributory state pension worth between £90 and £100 a week—well below the means-tested threshold. We will continue to uprate the standard guarantee in the pension credit with average earnings from 2008, so the pension credit will continue to help the poorest pensioners, but we will also be able to limit the spread of means-testing. We will make an immediate start by modifying the calculation of the savings credit from 2008. That gives a clear indication from the outset of our determination to make clear people’s incentives to save. As a result of that change and our restoration of the earnings link, we estimate that, by 2050, far from rising to 70 per cent., only about a third of pensioners will be eligible for pension credit. Our reforms to the state pension must also achieve fairer outcomes for women and carers, but we do not believe that a residency test for future accruals, as proposed by the Pensions Commission, would be the right way to achieve that. It would offer no immediate help to a group of women aged 45 and above who have poor contribution records and, quite literally, no time now to put it right. That is why, from 2010, we will introduce radical changes to the current system, reducing the number of years needed to qualify for the basic state pension to 30 and improving the system of credits to better reflect the different ways in which people contribute to society. As a result, by 2010, 70 per cent. of women reaching the state pension age will receive a full basic state pension, compared with 30 per cent. today. By 2020, up to 270,000 more women will get a full basic state pension—approximately three times the number under a residency-based approach. We propose to increase the state pension age in line with life expectancy. The state pension age for women is already due to rise from 60 to 65 between 2010 and 2020, to equalise with men’s state pension age. There will be a subsequent rise for both men and women from 65 to 66 over a two-year period beginning in 2024, and further increases—also over two years—to 67, starting from 2034, and to 68 from 2044. However, no one over the age of 47 today will be affected by these changes. Finally, today’s White Paper proposes a number of simplifying measures that will streamline the regulatory environment. We will abolish contracting out for defined contribution schemes at the same time as we restore the earnings link. We will reduce the burdens on schemes by introducing legislation to allow them to convert guaranteed minimum pension rights into scheme benefits—reforms that will, I believe, be of significant benefit to employers and employees. We will introduce legislation to begin implementing these reforms in the next session. In November, I set out five tests for the reform of our pensions system: they needed to promote personal responsibility and to be fair, especially to women and careers, and they needed to be simple to understand, affordable and sustainable for the long term. I believe that we have met those five tests. Today’s White Paper seeks to entrench a new pensions savings culture, whereby future generations can take increasing personal responsibility for building their retirement savings. While there will always be specific individual circumstances, such as debt or stock market performance, that affect people’s savings, fundamentally these reforms mean that people should be better off in retirement by having saved. Moreover, this package of reforms continues to protect the poorest pensioners from poverty and, for the first time, delivers fair outcomes for women and carers with a modernised contributory principle, operating within a simpler overall architecture. Over the period to 2020, our proposals broadly keep spending on pensioners as a proportion of national income constant at today’s levels, thus helping pensioners to share in rising national prosperity. In the long term, the rise in the state pension age will help to secure the long-term financial stability and sustainability of the state pension system. Altogether, this represents a comprehensive integrated package of reform. I believe that it can lay the foundation for a new and lasting consensus on a long-term solution of the pensions challenge that we face as a country. I commend the White Paper to the House.