Pensions Reform

I should like to pick up some comments made by the hon. Member for Aberdeen, South (Miss Begg) who, like me, is a member of the Select Committee on Work and Pensions. She said that we are debating something that is important not only to us and to people outside the House today, but to future generations, as it will make a difference to their lives. She was right to highlight the comments of the right hon. Member for Birkenhead (Mr. Field), who said that it is not enough to try to forge a consensus, either in the House or across the nation, that is effective today—we must forge a durable, stable consensus that will last not for a few years or even the life of this Parliament, but for decades and generations. That durability is vital not only because the working life of someone who is 16 and about to enter work today will be potentially 50-plus years—and therefore they have a right to expect that any pension scheme and pensions environment that they are saving into will be stable throughout their working life so that they can plan effectively for their retirement, however distant that may be—but because instability is the enemy of simplicity. In other words, every time we change our pensions system we add another layer of change, another layer of regulation and another layer of complexity to our existing pensions organisation. Politicians and external stakeholder groups being what they are, there is no shortage of good ideas about how to change the pensions system. Every five, 10 or 15 years, one of those good ideas bubbles up and the temptation is to make an adjustment. That has happened consistently over the life of the existing pensions settlement, and has led to us having one of the most complicated pensions environments in the developed world. Therefore, stability and durability are vital if we are to avoid the same ratchet effect continuing for the next 20, 30 or 40 years, and even more complexity being added to the settlement that we are trying to debate today. These are not just theoretical possibilities. As we stand here today, we can all see issues on the horizon that could lead to a need to reopen the debate that we are having today. We have already heard about the issue of pensioners overseas, some of whom have their state pensions frozen. I suspect that that will not go away and will probably come up in years to come in this House. The temptation to reopen the debate on that point, and potentially to debate an injustice, will be great. In the White Paper is an acknowledgement that when the earnings link is restored at some point in the future, a caveat will be built into that date—namely, that it will be reinstated subject to it being affordable. If, when we get to that date, it is not affordable, that will undermine much of the so-called consensus that we are building up today. Again, the temptation, quite legitimately, on both sides of the House will be to reopen the debate at that time. Finally, in the White Paper the Government also acknowledge that there is an issue over changing life expectancy, so they have quite properly built into their projections on how the pension age will rise in future a series of review dates, to check that those rises in pension age still make sense. If they do not, those review dates will inevitably be an opportunity for instability, for this pensions consensus to fracture and for the debate to be reopened. Those are just three examples of potential issues on the horizon that could lead to instability over the lifetime of this consensus. I am sure that all here would agree that if we can see three or four of those today, the chances are that there are several dozen more that we cannot spot that will almost certainly crop up unexpectedly during the course of the next decade or two. Therefore, I urge the Government to consider mechanisms to reduce that uncertainty—mechanisms to build stability and durability into this consensus so that we have fewer opportunities to reopen the debate, and so that the pensions consensus has built-in stabilisers that will allow it to ride out any changes, or most of the changes, that we can reasonably foresee. Let me give some examples. How do we ensure stability and consensus? The weakest way of doing that, I am afraid, is what I can see in the White Paper, and that is to try to establish a pensions consensus today. That, on its own, is no mean feat and I am not trying to downplay that achievement. It is a vital and necessary part of achieving a proper pensions settlement for a generation. However, it is not enough on its own because future generations of MPs will inevitably come up with new ideas and have the urge to reopen the debate, doubtless for genuine and valid reasons. So what else do we need to build into today’s consensus to allow that settlement to ride out the years? There are a couple of examples elsewhere. Sweden has a balancing mechanism—it is effectively a mathematical formula that allows its state pension system to adjust automatically for changes in national growth rates and longevity rates, and for other external macro-economic shocks. It is probably not perfect, but it does mean that when something comes up that might otherwise fracture that consensus, the system adjusts automatically. The debate can be reopened, but it does not have to be. The system has a built-in stabiliser. I offer that as just one example for the Government to consider, perhaps in relation to longevity and retirement age, where establishing some principles, and potentially even a formula today, might very well allow the system to ride out some shocks in future. In fact, the Minister for Pensions Reform was at a meeting that I attended this morning where a member of the Turner commission urged him to do something similar to that to establish some principles that would guide future generations. I would argue that in fact we could go a step further than that and build a formula into the Government’s published proposals today. Another alternative is one that we can pluck from one of the ideas suggested by the right hon. Member for Birkenhead. I am not signing up to all his proposals, but one of his ideas is to have an independent board of trustees, which he models on the governors of the Bank of England, that is at arm’s length from the Government, that is independent and that is charged with commenting on and maintaining the consensus and the settlement that has been established today. We could build that into the role of the trustees for the NPSS. I am not trying to tell the Government how to do it—all I am saying is that if they can establish an external, arm’s length body of experts who have access to high quality analysis and have a duty and obligation to comment on any proposed changes to the pensions settlement, they will be a vital item of ballast and a way to ensure that the debate in 10 or 20 years’ time does not diverge from the central principles that we are setting out today, or if it does so diverge, only does so for the very best reasons and because it is founded on solid analysis. Those are just two or three possible examples—