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National Insurance Contributions Bill

The characterisation of Clause 3 as a stealth tax and as cherry-picking is completely wrong. I can understand from a political point of view why the noble Baroness would wish to project it in that way, but it bears no relation to the facts. On the point that she pressed about restoring the link between pensions and earnings, there is a clear legal certainty around that. We made it clear in the legislation last year that our intention is that the uprating of the basic state pension will be relinked to average earnings from 2012, or, in any event, at the latest by the end of the Parliament, subject to affordability and the fiscal position. That is a clear commitment that it will happen by the end of the next Parliament if not from 2012. This is probably not the occasion to go over again all the issues around pensioner poverty and the support that this Government have provided to pensioners, but we are spending something like £12 billion more each year than we would have done had we simply brought forward the policies of the noble Baroness’s previous Government. When pressed on matters of relinking the basic state pension to earnings, we might just remind ourselves who broke that link in the first place. Dealing more specifically with the substance of the amendment, Clause 3 brings forward the introduction of the upper accrual point as the cap on earnings factors in the state second pension from 6 April 2009. This means that the upper accrual point will become the new upper threshold for the calculation of both state second pension and contracted-out rebates. It has been introduced early to ensure that the Government’s personal tax package announced in the Budget 2007, and the reforms to the state pension introduced in that, can be delivered as planned. We are making sure that we end up where we expected to be. I am sure that the Committee would agree that the state second pension is poorly understood and that of those who are aware of it, few have any idea of how their entitlement builds up. In the current tax year, everyone who pays into the state second pension or is credited into the system is assumed to earn at least £13,500 whether they do or not, in effect providing a flat rate amount of benefit. In addition, earnings over £13,500 and up to £40,040 attract an earnings-related component. The Pension Commission, as we have heard, recommended that the Government should focus resources on providing a more generous flat rate state pension and that the earnings-related component of state second pension should be withdrawn to make way for personal accounts. As the noble Baroness said, we had common cause on this at the end of our deliberations last year on the Pensions Act. Following the views of respondents to the White Paper on pension reform and to the Work and Pensions Select Committee, we also set about the task of radically simplifying the state second pension, and there is more to come in the Bill that we will consider shortly. The Pensions Act 2007 provides the mechanisms for both the withdrawal of earnings relation and simplifying the system. For a typical contributor earning above the lower earnings limit, earnings up to £13,500 a year and state second pension credits will attract the new flat rate amount of £1.60 a week for each qualifying year. The current earnings-related element built up on earnings over £13,500 will be gradually withdrawn, so that, by 2030, only the flat rate element will be left. Different rules apply where a person is in contracted-out employment. As I said, these measures were welcomed during the passage of the Pensions Act last year and will simplify a greatly complex benefit. The savings from the gradual erosion of earnings relation will be reinvested over time in the earnings uprating of the basic state pension. In the 2007 Pre-Budget Report, the Chancellor announced that to ensure that reforms necessary to simplify the state second pension take place as originally intended following the alignment of the upper earnings limit with the higher rate income tax threshold, the start date for flat-rating state second pension would be brought forward to April 2009. The original intention was that measures to simplify and standardise accruals of state second pension would be introduced from April 2012 at the earliest through the introduction of the upper accrual point, among other measures. However, the above inflation increases in the upper earnings limit announced in the Budget have a knock-on effect on the timetable for delivery of a flat rate state second pension as originally envisaged in the Pensions Act 2007. This is because the state second pension accrues on the proportion of earnings between the lower earnings limit and the upper earnings limit. Increasing the upper earnings limit by more than inflation means that high earners would potentially gain. A further effect of the Budget 2007 changes is a slight increase in the overall cost of the contracted-out rebate, because it is payable on the same band of earnings on which the state second pension accrues. It was never our intention for the personal tax package to have these effects on the state second pension. To cancel those unintended consequences and get us back on track with the abolition of earnings relation for the state second pension, we have decided to bring forward to 6 April 2009 the introduction of the upper accrual point, which was the rational thing to do. The Pensions Policy Institute has reacted by stating: "““While this may sound like a significant policy change, widely reported to save the Exchequer £2 billion, it in fact refers to a technical change introduced to restore the flat-rating of S2P back towards the path originally envisaged in the Pensions Act 2007””." As I mentioned earlier, the Pensions Commission’s proposals and the consequent measures put forward in the Pensions Act 2007 reinvest earnings-related state second pension in basic state pension. As a result of the total package of reform measures, people will be better off in the new system than in the current system. For instance, under the current arrangements, high earners will receive total state pension of around £110 a week in 2050; under the reformed system, they will receive around £160 a week of state pension in 2053, taking account of increases in state pension age. Higher earners will also receive a slightly higher state second pension benefit or contracted-out rebate than in the outcomes above, as they are still likely to receive a small gain as a result of the increase to the upper earnings limit in state second pension in 2008 for the contracted-out rebate between 2008 and 2012. I hope that the noble Baroness will accept that this is a technical adjustment to make sure that we are back on our intended track and that the package of measures that we discussed in the Pensions Bill last year was finely balanced and affordable. The changes in Budget 2007 upset that package so far as higher earners in S2P are concerned and this measure simply puts us back to where we should be. I was asked whether 2030 was just an estimate rather than a target. It was always intended that S2P would eventually become flat-rated. The Pensions Commission in its second report set out as one option earnings-related accrual within S2P ceasing in around 2030. That is the best way forward as it accelerates progress of the state system towards a focus on flat-rate provision but maintains some element of earnings-related inflation in the system until personal accounts are well established and proven. Under provisions in the Pensions Act 2007, entitlement to S2P was built on a completely flat rate basis by around 2030. I hope that I have dealt with each of the points that were raised. I am sure that the noble Baroness will come back to me if I have not done so.