Mr. Peter Lilley (Hitchin and Harpenden): The greatest domestic problem facing all developed countries is how to finance retirement incomes for populations that are experiencing increasing longevity and declining fertility. People are living longer and having fewer children from which to draw the work force of the future, and that is a serious problem. It behoves us all to participate as constructively and positively as possible in such debates, and I shall certainly approach this debate in that spirit.
Britain is better placed to cope with the problems of an ageing population than most other countries in Europe. That is not only because our expected population pattern is more favourable than those on the continent, but because we have taken steps to encourage people to save and invest for their retirement. We have more funded private provision for retirement than any other European country; indeed, we have more provision than all other European countries together, and the value of our funds exceeds that of all of theirs.
None the less, funded private provision still meets only 40 per cent. of this country‘s future pension liabilities. When the Government came into office, they set a target of raising that percentage to 60 per cent. by the middle of the century, and I unreservedly praise them for that. After all, we require companies to save and invest to ensure that they meet their pension promises to their employees. Even though Governments cannot legally bind their successors, it is extraordinary that they have not considered it necessary similarly to ensure that money and resources are saved and invested so that their pensions promises can be met. I therefore welcome the fact that the Government have at least set the target of making a major step towards more funded provision for our pensions liabilities over the next few decades.
Unfortunately, having set that target, they have, in practice, moved decisively in the opposite direction. They have vastly increased their unfunded pensions and retirement provision liabilities by replacing the state earnings-related pension scheme with the state second pension, which is set at a more elevated level. Furthermore, they have raised the value of the basic state pension by introducing the minimum income guarantee, raising it and extending it across the spectrum through the pension credit.
At the same time, funded occupational schemes are in crisis. Many are closing to new members, many are cutting contributions and, therefore, the benefits to which employees are entitled, and many are in deficit. Insurance companies are advising older members in particular to opt back into the state second pension, which they will receive on a pay-as-you-go basis, not a funded basis.
Occupational schemes are being pushed in that direction largely because of the underlying problem of increasing longevity, which has been accentuated by the decline in investment returns in recent years. However, the situation was aggravated most of all by the extraordinary decision of the incoming Chancellor to impose a ?5 billion a year pensions tax on people‘s pension funds. I christened it the “Maxwell memorial tax,” not only because two of the Treasury Ministers were formerly close colleagues of Robert Maxwell but because up to that point he had been the only person who believed that one could siphon money out of a pension fund and get away with it, because pensioners would not discover until many years later that the money was missing. The Government‘s action undermined private occupational schemes.
That effect was aggravated further by an increase in the regulatory burden and the disincentives to savings created by raising the minimum income guarantee and extending it up the scale through pensions credit. That, in turn, was aggravated by the impact of the financial reporting standard 17, which is not directly the Government‘s responsibility but has caused problems. I hope that the relevant accounting bodies will consider the proposals of the Confederation of British Industry to allow a spreading of the impact of pension liabilities on companies‘ reported accounts.
As a result of all those factors, the savings ratio has collapsed. There has been a serious overall impact that we cannot ignore. However, we must be constructive and consider how the Government might pull back from that decline and meet the targets that they have set and which I welcome. In substance, there are only two ways in which they can do that.
First, they could promote more saving, investment and back up, and supplement state pension pledges. When I was Secretary of State for Social Security in the last year of the last Conservative Government, I proposed a scheme called “basic pension plus”, which would have ensured that every entrant to the labour market?every young person starting work?was given his own pension fund, into which a rebate would be paid that was sufficient, over their lifetime, to fund a pension at least equal to the basic pension and the earnings-related pension. That would have been backed up by a guarantee from the state that if, through any misfortune or bad investment, the fund did not reach that target, the actual pension would be supplemented and topped up to the level guaranteed by the state through the old basic pension system. Those people would have had the prospect of sharing in a buoyant economy on the up side. If their funds did better than the modest projections by the Government Actuary, that would have acted as the basis for the rebates.
The scheme would have guaranteed the basic state pension to everyone in the country, enabled future pensioners to share in economic growth and given a massive boost to investment such that, if it had raised the growth level of the country from 2.2 per cent. to 2.3 per cent., it would have paid for the whole scheme through the extra revenues that it generated. It would have relieved taxpayers of the biggest single element of public expenditure that they faced and brought about the greatest extension of personal ownership since the spread of home ownership that ensued by allowing people to buy their council houses. In so doing, it would have resolved a major issue facing modern Governments: how to provide a decent, secure pension for increasing numbers of elderly people.
Sadly, although the scheme was widely welcomed by all the media?apart from the Daily Mirror, and I should have been alarmed if it had supported it?by those across the political spectrum and by commentators, the Government decided not to go ahead and implement it, as they could have done. I should have been only too happy to have seen my ideas purloined. As a result, they have wasted five years, as we are five years further back from entering a system in which everyone has his own savings pot for the future. If we had introduced it, 3 million young people would now have their own pension funds, with ?3 billion invested in them, growing towards their future retirement needs.
The Government went so far, as they often do, as to borrow some of my rhetoric and dress it up in stakeholder pensions, saying that they were adopting some of the substance of Lilley‘s ideas. Unfortunately, stakeholder pensions, about which I have said many favourable things, are as close to basic pension plus as a hologram is to the real thing that it represents?as soon as one gets to it, one finds that the substance has disappeared. The most desirable feature of the stakeholder pension is that it is to be hoped that it will reduce the cost of provision and the element of savings siphoned off for administrative costs rather than being invested for future pensions.
It is said that people will save and invest only if they are either persuaded or compelled to do so. Persuasion costs money. Introducing stakeholder pensions, with their limit on costs, has removed the reward that could persuade people to save without replacing it with any element of compulsion that makes them save. Compulsion was clearly envisaged in the paper produced by the Government, “Partnership in Pensions” when the right hon. Member for Birkenhead (Mr. Field) was still gracing the Government. Since his departure, matters, which were then going in the right direction, have taken a downturn. The famous page 105, paragraph 9 of “Partnership in Pensions” referred to
“compulsory funded pensions for those earning over ?9,000 a year”.
Obviously, that was the Government‘s original proposal, and they failed to proof-read it out of the final published document.
I urge the Government to think again. If they intend to meet their pledge, should they not consider automatically giving to all or some of those accruing the state second pension rights their own pension fund, with a rebate paid into it and a guarantee that their pensions will, at the end of the day, be topped up if, by any misfortune, the fund is not able to provide them with the pensions foreseen by the state second pension scheme? In many ways, the state second pension lends itself to such an approach even better than the basic pension lent itself to basic pension plus. That is because the state second pension is accruing, over a generation, rights to a better pension when people retire. It therefore lends itself to a scheme that comes in gradually, with a generation.
As the scheme is, in essence, a flat-rate one, or will become so for most people, it is rather more suitable for people to opt out of than was the case with the state earnings-related pensions scheme. As SERPS was earnings-related, people with low earnings received a very low rebate, which was inadequate to cover the fixed costs of setting up and maintaining a fund. The state second pension would have a flat-rate rebate paid into private funds that would be more than sufficient to make it worth while for everyone, on all income levels, to opt out of the scheme and have their own fund generating a pension at least as good.
At present, 8.3 million people contribute to employers‘ pension schemes and 5.5 million have personal pension schemes. About 13.8 million in all have, therefore, opted out of the state earnings-related pension scheme, and about 7.5 million have opted in. We are talking of moving from a world in which two thirds of people have the benefit of a private pension to one in which 100 per cent. of those earning above the lower earnings limit have their own pension scheme. The current value of rebates paid into such pension schemes is ?6.8 billion a year. That would have to be increased to cover the third not covered at present.
I have some questions for the Minister. I do not expect her necessarily to respond to them all here and now, but I hope that she will be able to provide answers in due course and that they will be placed in the Library to allow other Members to benefit from them. Why did the Government abandon their original proposal to make it automatic for everybody to have their own personal pension fund, equal in value to the state second pension, rather than leaving many people opted into the pay-as-you-go system? What would the value of the extra rebates be if the Government were to move to that system? What would the value of a fund of an individual on average earnings be if they paid into a fund to meet their state second pension liability by the time that they retired? How many ten or hundreds of thousands of pounds would they have accumulated through investing their rebates over a working life?
Was the reason why the Government were reluctant to move towards automatic opting out that for those who are older the structure of rebates does not fully reflect the rate of accrual?the value of the pension rights accrued by people who are working in older age?because there is less time for those rebates to accumulate compound? How much would it cost if only younger people, perhaps those under 30 or under 50, were automatically opted out of the state second pension? I calculate that if new entrants only were opted out, the net cost of extra rebates for each year‘s cohort of people would accumulate at a rate of ?100 million per annum, but I ask the Minister to check whether that back-of-the-envelope calculation is correct.
The underlying problem facing our pension system is that we are living longer, but we are not working longer. In 1950?52, the life expectancy of a man who had reached the retirement age of 65 was, on average, 11.7 years, which meant that he could, on average, expect to enjoy 11.7 years of retired life. By 1997?99, a man reaching 65 had a life expectancy of 15.3 years. For women, whose retirement age was and still is 60, their life expectancy in 1950 was 18.1 years at 60, but now it is 22.8 years. Roughly speaking, average life expectancy in retirement has been rising by about one month every year for the past few decades.
In theory, if people worked for a bit longer and were therefore retired for a correspondingly shorter period of time, they would have more time to save and they would be able to buy a higher pension at a lower cost for the slightly shorter remaining period of their lives. Ideally, people should be free to make that choice and should be equipped with their own pension fund. When they reach the sort of age at which they may want to think about retiring, if they have a fund sufficient to cover a pension at least equal to the minimum that the state deems to be adequate or appropriate for them, they could decide to retire. Alternatively, they could decide to work a bit longer and build up a bigger pension fund to have a higher pension for their retired life.
The evidence?I seem to remember seeing it when I was Secretary of State?that people would behave like that is provided by the fact that those with money purchase pensions, predominantly the self-employed, have been working for longer, while those with defined benefit pensions or those who are reliant on the state pension have been retiring earlier, despite their longer life expectancy. When people have a money purchase pension to which they can continue to add by working a bit longer, they do that to enjoy a higher standard of living during a slightly shorter period of retirement.
Other countries have encouraged that process to a considerable degree. I was in Washington a while ago, and my taxi driver told me that he was 92. At first, I was slightly shaken by that, but he pointed out that he did not drive at precipitate speed, he drove with great caution, he had more experience than most taxi drivers and he drove extremely safely, which was proved because he had lived so long. People can continue working to very considerable ages if they so wish. Ideally, it should be up to them, but the Government have effectively repudiated plans to move towards a position in which all of us have our own pension funds, and all of us are free to make our own decisions about when we retire and whether we decide to work a bit longer. The Government have to face taking that decision collectively on our behalf rather than leaving it to us as individuals to make the decision.
In the Scandinavian countries and America, Governments have already begun to consider moving the pension age, or have already legislated to raise the state pension age, from 65, typically, to 67. I believe that it is time for the Government, working within there own parameters, to launch a debate about the future retirement age that they will be able to afford. They must consider whether it is more logical to raise the pension age by, for example, a month per year, so that those starting work now would probably work for three or four years longer than did the previous generation, just as they would expect to live three or four years longer.
The decision will be important, whether the Government decide to go down that route or not. I emphasis that it is a decision that they face because they have chosen to rely largely on state pay-as-you-go obligations. They have increased those obligations and unless they do something about that they will not be able to meet their target of reducing the cost of state unfunded liabilities to just 40 per cent. of the total by the middle of this century.
My decision to equalise the state pension age for men and women at 65, rather than reducing it to 60 for both sexes, was extremely important. That was actually the biggest single cost-saving decision that any Government or Minister have or has ever taken. I am glad to say that it was endorsed by the then Opposition. Effectively, a consensus was achieved through the process of launching a debate, floating the arguments and allowing discussion. I believe that if the Government did a similar thing now, they would receive a similar constructive response across the political spectrum.
I have a question for the Minister. Are the Government considering that process, or have they closed their eyes to that option? What is the cost to the taxpayer of a failure to reflect in any way longer life expectancy in the state pension age? My calculation is that a single month‘s deferment of the state pension age would save about ?3 billion gross?perhaps ?2 billion net?of any extra benefits that would have to be paid. That is a very significant decision.
Mr. Tim Boswell (Daventry): Does my right hon. Friend agree that it is interesting and remarkable that the incentives for deferment of state retirement pension to a greater age are relatively modest and provide very little return to those who do put it off? That may be reflected, as the memory of the earnings rule dissipates, in the much lower number of people who are deferring retirement and claming their benefit at the age at which they are entitled to it.
Mr. Lilley : I announced an increase in incentives for those who chose to defer retirement. Under the long-established system?I think, since 1948?anyone who deferred taking their state pension for a year subsequently received a pension that was 7.5 per cent. higher. I announced that that would be raised to 10 per cent. I am not sure whether that promise is being honoured by the Government, but I hope that it will be. I do not expect a huge impact from that. The evidence suggests that it will not be as effective as people having their own pension fund to which they can pay in extra if they work a month or two longer and buy a slightly higher pension at a lower cost as a result.
I reiterate that the Government have created the problem, not us. I pay tribute to my hon. Friends the Members for Daventry (Mr. Boswell) and for Havant (Mr. Willetts) for the constructive way in which they have approached the problems of longevity. I hope that the Minister will give a similarly positive and constructive response, rather than descend into the scaremongering and point-scoring that we saw during the 1997 general election. The problem is too important for us to take too partisan an approach.
In practice, pension provision over the years has been a case of each Government building on predecessors‘ work rather than undoing it. I hope that the Government respond to the building blocks that we have put in place, and to the ideas that I have put forward in today‘s debate.
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