Pensions Reform

Turner proposed not a citizens pension but a universal pension for those over 75. We have taken on board a number of proposals, such as the change to the savings credit fix, that will produce the result that I have suggested. I shall return in a moment to the reforms to the contributory principle, but they were not supported by Lord Turner who, as my right hon. Friend will know, favoured the introduction of a residency test that would take time to have the desired effect. Our proposals mean that women will have a fairer pensions deal by 2010 and that, in combination with our other proposals, is how we arrive at the figures that I have set out. By saying that we will aim to restore the earnings link in 2012, subject to affordability and the fiscal position, we have made it clear that we will not risk jeopardising the public finances. We have also ensured both affordability and sustainability over the long term. Over the period to 2020, our proposals will keep spending on pensioners as a proportion of national income broadly constant at today’s levels. They take advantage of the savings realised by the decade of state pension age equalisation and will help pensioners to share in rising national prosperity. In addition, of course, the rise in the state pension age over the long term will match increases in life expectancy. That, and the other changes that we are making, will also help to secure the financial stability and sustainability of the state pension system. Therefore, the four main elements of the White Paper form an integrated package. They introduce auto-enrolment into a low-cost scheme of personal accounts, and provide a firm foundation for private saving by linking the state pension to earnings in the next Parliament. Moreover, we will modernise the contributory principle the better to provide for women and carers, and gradually raise the state pension age to ensure sustainability. As I said earlier—and I intend to labour this point today—we cannot pick and choose from within the package to avoid the tough choices that we have to make. Those who want to change some elements of the proposals need to explain how they could do so without jeopardising the key outcomes of fairness, simplicity and affordability. For example, there are those who favour a residency base for future accruals, as proposed by the Pensions Commission. However, that would offer no immediate help to the key group of women aged 45 and over who have poor contribution records and clearly no time to put that right. Changing the current rules from 2010 to reduce the number of years needed to qualify for the basic state pension to 30, and improving the system of credits the better to reflect the different ways that people contribute to society, will result in an immediate and very significant increase in the proportion of women reaching state pension age with a full basic state pension. The residency approach, like the current system, means that only 50 per cent. of women would get a full basic state pension in 2010, whereas our changes will immediately increase that figure to 70 per cent. By 2020, up to 270,000 more women every year will receive a full basic state pension—approximately three times the number that would be achieved under a residency-based approach. Of course, those who argue for a residency-based citizens pension—which I believe remains the policy favoured by the Liberal Democrats and the nationalist parties in this House—also have to contend with issues of simplicity and affordability. As the Pensions Commission highlighted, it depends on the model chosen: there would either be an immediate and unaffordable increase in costs, peaking at £60 billion around 2040, or—if a transitory approach were adopted—a smaller increase in costs would be coupled with a dramatic and unacceptable increase in complexity during what would have to be a lengthy transition period. Hardly surprising, therefore, that the Pensions Commission rejected the notion of a citizens pension. Some argue that we should introduce the earnings link sooner or delay the implementation of increases to the state pension age until 2030. In doing so, they, too, need to set out clearly what the public expenditure implications would be and how that affects the current crucial question of affordability. For example, under the White Paper, increases to the state pension age will eventually reduce the cost of the package by £30 billion a year, but delaying the timetable for the implementation of each increase in the state pension age by five years would by 2050 increase the cost of the reform package by £5 billion every year. Those who argue for such changes must first argue for how they would find the additional money that would make them affordable and still maintain our progress in tackling poverty and delivering fairer, simpler outcomes. Some Opposition Members have expressed concern about the plans to accelerate the flat-rating of the state second pension and, in particular, the impact on middle-income earners of the withdrawal of earnings relation. The Pensions Commission explicitly recommended that the earnings-related element should be withdrawn. We accept that recommendation, but the savings will be reinvested in the basic state pension, ensuring that no one loses out, so it is nonsense to talk of hidden tax increases. There are none. Indeed, the effect of flat-rating for even the highest earners is more than made up by the earnings uprating of the basic state pension. For example, a high earner who worked from age 25 would get £102 basic state pension and state second pension under the current scheme in 2053, in earnings terms. Under our reforms they will get £140. A median earner would get £100 under the current system and £139 with our reforms. Yes, they lose £1 of state second pension because of flat-rating, but they gain £40 of additional basic state pension. Most people would not describe that as a bad deal at all.