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Pensions Bill

I thank the noble Lords, Lord Oakeshott, Lord Kirkwood and Lord Skelmersdale, for their amendments and for providing a chance for us to debate the restoration of the earnings link to the basic state pension. The Pensions Commission made it clear that there was no crisis for today’s pensioners, but there would be for future pensioners unless reforms were made to address the issues that they faced. We are following the thrust of the Pensions Commission’s proposals by developing solutions for the future. Uprating the basic state pension in line with earnings is one of those solutions. I start by confirming the Government’s commitments on earnings uprating. First, we will continue to uprate the pension credit standard minimum guarantee in line with earnings beyond 2008 and over the long term. At present, there is no legal obligation to do this. This Bill puts that commitment in primary legislation to provide certainty on that point. Secondly, during the next Parliament, we will link the uprating of the basic state pension with average earnings over the long term. Our objective, subject to affordability and the fiscal position, is to do that in 2012, or by the end of the next Parliament at the latest. That commitment was set out in the Government’s pensions White Paper of May 2006, and Clause 5 legislates for it. We will make an announcement at the beginning of the next Parliament specifying the date for introducing the earnings link for the basic state pension. This group of amendments seeks to bring forward either the date from which the earnings linkis restored or when and how that date should be announced. The noble Lords, Lord Oakeshott and Lord Kirkwood, tabled an amendment that seeks to bring forward the date for introducing the earnings link for the basic state pension so that earnings uprating takes effect from the tax year 2008-09. Some noble Lords have expressed disappointment that we are not promising to restore the earnings link earlier than 2012, but the costs arising from introducing it earlier are considerable. Introducing the earnings link from 2008-09 would cost an extra £2.2 billion in 2012 alone. Costs would continue to rise over time to about £6.5 billion a year in 2050. Those costs might be affordable if we were restoring the earnings link only in the short term or in isolation from other changes, but not if we want to link pensions with earnings over the long term as part of our wider reforms. Earnings uprating is part of a package of complementary reforms, and trying to unpick the timing of this element of those reforms fundamentally changes that package. Many Members of the Committee will knowthat the Pensions Commission recommended that earnings uprating should be introduced from 2010 or 2011. The noble Lord, Lord Turner, has confirmed that a short delay in the introduction of earnings uprating, to our objective date of 2012, does not undermine the overall direction of our reforms. The second amendment of the noble Lord, Lord Oakeshott—Amendment No. 23—seeks to ensure that the latest tax year in which earnings uprating of the basic state pension takes effect begins before6 April 2013. In other words, the amendment would dictate that earnings uprating had to be in place no later than the tax year beginning April 2012. It is important that the Committee is assured of our clear commitment to restore the earnings link. Although we have said that our objective is to uprate the basic state pension by earnings from 2012, it is right that the Government have a degree of flexibility to consider its timing in the light of the prevailing economic circumstances of the time. Committing any Government now to restoring the earnings link in 2012 without any flexibility to take account of the fiscal position at that point in time would not, I suggest, be a sensible proposal. The noble Baroness, Lady Greengross, tabled Amendment No. 22, which also seeks to bring forward the date for introducing the earnings link for the basic state pension and industrial death benefit but only for people aged over 80. Earnings uprating for this group would take effect from the tax year 2009-10, which would mean that this group would get a head start over younger pensioners. One effect of the amendment—unintended, I feel sure—is that the rate of basic state pension for the cohorts of people who benefited from earnings uprating in this way would always be higher than for those who reached the age of 80 after earnings uprating was introduced. Indeed, this could lead to the existence of a number of different rates, thereby adding complexity to a system which we are attempting to simplify. As I said, I doubt whether that was the intention behind the amendment. We will continue to uprate the pension credit standard minimum guarantee in line with earnings beyond 2008 and over the long term. Pension credit already helps well over 1 million people over the age of 80 and they will continue to benefit from this. Much of the additional money which we have given to existing pensioners over the past 10 years has gone to older pensioners—for example, through higher winter fuel payments and free TV licences. As I said, earnings uprating is part of a package of complementary reforms, and trying to unpick the timing of this element, even for older pensioners alone, changes that package. The costs arising from earlier introduction, even for people over 80, are not inconsiderable. In the first year alone, it would add some £100 million to state pension costs and by 2012 that would grow to around £400 million. I reiterate that the Pensions Commission made it clear that there is no crisis for today’s pensioners but there would be for future pensioners unless reforms were made to address the issues that they face. We are following the thrust of the Pensions Commission’s proposals by developing solutions for the future. Our reforms will go further, locking in the gains already made against pensioner poverty and providing a more generous state foundation on which to save. As I have already confirmed, we have said that we will make an announcement at the beginning of the next Parliament specifying the date for introducing the earnings link for the basic state pension, and that is reflected in the Bill. The final amendment in this group—Amendment No. 24 tabled by the noble Lord, Lord Skelmersdale—concerns the timing and manner of that announcement. The amendment seeks to specify, more precisely than in the Bill, when the Government will make an announcement on the commencement of earnings uprating. In effect, it commits the Government to making such an announcement within the first six months of the beginning of the next Parliament and to do so by an oral Statement to Parliament. Clause 5 not only guarantees that earnings uprating will happen in the next Parliament but also commits the Secretary of State to make an order before 1 April 2011 identifying the designated tax year—that is, the first year in which a review with regard to earnings will take place. This announcement could be made within the first six months of the start of the next Parliament or earlier, or by oral Statement under current arrangements. I do not believe that we have to stipulate that in legislation. Our policy for introducing earnings uprating of the basic state pension is absolutely clear. Clause 5 ofthe Bill provides certainty by legislating for the commitment we have given, guaranteeing that earnings uprating will happen in the next Parliament. Earnings uprating forms the majority of the costs arising from our state pension reforms. Although we have made clear when we intend to restore the earnings link for the basic state pension, the timing for this has rightly been framed with regard to affordability and sustainability of the overall package of reforms over the long term. That flexibility is essential if the package is to stay within the envelope of affordability. The Bill already provides certainty on the Government's commitment to introduce earnings uprating in the next Parliament, and in an affordable way, by guaranteeing this in legislation. For those reasons, I urge noble Lords to withdraw these amendments.