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Pensions Bill

moved Amendment No. 130ZZA: 130ZZA: Clause 89, page 43, line 36, leave out ““uprated”” and insert ““revalued”” The noble Lord said: I shall speak also to government Amendments Nos. 130ZZB to 130ZZM inclusive and 139D. Clause 89 provides a significant further step along the road of simplification of state second pensions. Of critical importance in the design of the reformed state scheme is the need to define the benefits that people can expect to receive when they retire so that they can make a judgment about how much to save. Last year we took an important step in reforming the state second pension so that in the future the pension would accrue largely as a flat rate amount. This would be added to the basic state pension so that overall state pension outcomes and forecasts of the outcomes would be simpler to understand for individual contributors. But that is the future: Clause 89 and the amendments simplify the past. As the Committee knows, the state second pension scheme is extremely complicated. It was complicated when it was introduced in 1978 and every change since then has added to its complexity, to the point where only a handful of people understand a benefit that costs the taxpayer more than £11 billion a year. Left unchecked, the last award of the pre-Pension Act 2007 S2P will be made in the 2060s and, with inheritance, we would still require all the benefit rules and the IT calculation routines for the old system until the end of the century. The bulk of the amendments refine Clause 89, which proposes that we wrap up all SERPS, S2P and graduated retirement benefit accrued to the tax year before we introduce flat rate S2P. We would calculate the contributions made to that date using exactly the same rules as we would have used when the contributor reached state pension age. The sum that the calculation produces will be credited to people’s pension accounts. The sum, known as the consolidated amount, will be revalued during the contributor’s working life by earnings, the same as now, and uprated by prices once the person retires, the same as now. The measures seek to apply the current rules on revaluation, inheritance and appeals to the consolidated amount. However, this is only part of the story, as those who have had the opportunity to read the fact sheet placed in the Library will testify. We want people who have been contracted out of the additional pension to have the same clarity over their pension outcomes as people who have not contracted out. This is challenging technically, especially for the 11 million contributors who will retire after 2020 and who have been contracted out of SERPS at some time between 1978 and 1997. This is a legacy of a variety of different rules on revaluation, to the point that it is almost impossible to calculate the pension that a person with contracted-out rights will receive in retirement. We give them some partial information but we cannot tell them with any degree of accuracy what they can expect to receive from the state when they retire. The department keeps a notional record that says each year how much a person would have secured in SERPS had they not been contracted out, and then when the individual retires the department makes a calculation deducting the guaranteed minimum pension, or the notional guaranteed minimum pension, from SERPS. If this contracted-out deduction is less than the SERPS accrual, the balance is paid to the individual. The difficulty is that there can be up to three different ways in which a guaranteed minimum pension can be revalued before a person retires, so the amounts of SERPS accrued and the contracted-out deduction can often be different. On top of this, these amounts can be uprated differently after retirement. To achieve simplification we need to fix the difference between the SERPS accrued and the contracted-out deduction. If the difference produces a net amount of SERPS, then it needs to be revalued and uprated in exactly the same way as SERPS is now. We need to do all of this in an equitable way. Amendment No. 130ZZE sets out the solution. Through the process of actuarial equivalence, we will estimate the value of the contracted-out deduction at retirement and through retirement and smooth this into a weekly amount that can be deducted from SERPS. The Committee will appreciate that my explanation of this process is somewhat simplified, as the system is extremely complex, but we will end up with a system where the contributor will have a much better understanding of what they can expect when they retire. We will also remove great complexity from the pension scheme. We have taken the opportunity with Amendments Nos. 130ZZM and 139D to bring forward some minor technical amendments which are consequential to the state pension reform measures and which were inadvertently omitted from the Pensions Act 2007. I am conscious that the Opposition have amendments to our amendment. Before they are moved, perhaps I may say that we look with some warmth on those amendments. I beg to move.