Pensions Bill

Genuinely, my Lords; this is a very important issue. I also acknowledge my noble friend’s tenacity and commitment. The sentiment of all those who have spoken is clear. I shall endeavour to point out what I think is a significant difficulty with proceeding with the amendment. I also acknowledge that we are moving from a pension system in which women in particular were discriminated against to one that is much more robust, with a 30-year contribution provision and enhanced credits for care; that is a dramatic change for women in particular. A number of noble Lords reminded me—chided me over this, perhaps—that dealing with national insurance issues involves the Treasury, where a certain amount of responsibility clearly lies. The headline figure is that around 50,000 people in Great Britain reaching state pension age in 2010 will not be entitled to a full basic state pension either on their own contributions or their former spouse's or civil partner's contributions. And, of course, many more people who have worked in the UK at some point in their lives but who are no longer resident here will also reach state pension age in 2010 without entitlement to a full UK basic state pension. Noble Lords have acknowledged that most people at home and overseas can pay voluntary contributions but must generally do so within a six-year time limit. For example, a person has until 5 April 2010 to pay for the 2003-04 tax year to make it a qualifying year for the basic state pension. I say to noble Lords, including the noble Lord, Lord Turnbull, that it is not right that deficiency notices come only towards the end of a person’s working life; they come routinely annually. As drafted, my noble friend's amendment would limit the overall number of years for which a person could pay voluntary national insurance contributions to nine. However, my noble friend confirmed in Committee that this is not its intended effect. What she and the EOC are seeking is a de facto removal of the time limit to allow people to pay up to nine extra years in addition to the years that they can pay for under the current rules. However, the amendment as it stands does not achieve the objective that she is seeking; at the moment, you can make contributions, as my noble friend acknowledged, over 40 years so long as you pay them at each juncture within the six-year time limit. This amendment would—unwittingly; I do not believe that it was intended—restrict that. I cannot believe that we would want to support that. Generally, a person can pay class 3 contributions for as many years during their working life as they wish provided that they pay within the time limit. Class 3 contributions are primarily intended to enable people to fill relatively small gaps in their record. The current weekly rate of class 3 contributions is £7.80 regardless, of the individual's age. Payment for a particular tax year enables that year to qualify for basic state pension and bereavement benefits. As such, the contributions represent extremely good value for money. A number of noble Lords, particularly the noble Lord, Lord Dearing, raised the fact that the Government Actuary’s department estimates that class 3 contributions would have to be charged at around £28 a week, rising to around £38 a week after state pension reform, if the cost were to reflect the state pension bought. The Government have long recognised that raising the cost to those levels would create a barrier for those on low incomes who may want to pay voluntary contributions to enhance their state pension and have, therefore, kept the level of voluntary contributions relatively low. This year, for example, a person who has paid contributions on earnings of around £3,000 can make up the shortfall to accrue a qualifying year for basic state pension by paying about £140 in class 3 contributions. If the contributions were charged at £28 a week the cost would increase to over £500. The current cost of class 3 contributions and the time limits for paying provide a sensible and workable compromise. The time limits prevent those who can afford to from maximising their entitlement to the state pension just before retirement. In the absence of a time limit for payment, a rational person could hedge his or her bets by investing the amount that they would otherwise pay in contributions until they reach pension age. That way they obviate the risk of not surviving to pension age and potentially see a return on their investment well in excess of the increase in the rate at which the contributions were charged over the intervening period. All that said, the Government have sympathy with the spirit of my noble friend's amendment. It would give those who did not have the means at the time, or were unaware that they could pay, a second opportunity to do so at state pension age. However, such an easement could not be restricted to people living in the UK. We would also need to grant it at least to people who have also been insured in another member state of the European economic area. Here, I am afraid, we come to the crunch point, as a number of noble Lords have anticipated, which is the potential cost. Since our deliberations in Committee, analysts in the DWP and HMRC have been doing some further work. Even allowing for the additional revenue flow into the National Insurance Fund and assuming that only 15 per cent of those eligible take up the option to pay extra class 3 contributions, we estimate that the cost of allowing people reaching state pension age from 2008 to 2020—the period of the exercise—to pay for up to six years falling between 1975 and 2010 will be around £260 million a year in 2020, gradually reducing thereafter. If noble Lords wish, I can run through that in more detail. However, on the basis of that analysis, the bulk of the cost—around £230 million in 2020, which is close to a quarter of a billion pounds—would appear to be on pensions for people living outside the UK. At this stage, we cannot say for sure what proportion of those people would be covered by EC law; therefore, we cannot, with certainty, determine to what extent, if any, the costs could be constrained. Without any restriction, we would be spending something approaching a quarter of a billion pounds in 2020 on overseas pensioners to provide a remedy for—on the 15 per cent take-up assumption—fewer than 10,000 UK pensioners each year. By any yardstick, that would be completely disproportionate. Even more disproportionately, if all those eligible overseas were to take up the option, it would mean a cost of about £1.5 billion in 2020. There are significant cost issues associated. If noble Lords want, I am happy to go through the methodology by which those estimates were made.