Pensions Bill

Public Bill Committee, 8 February 2007.

Further written evidence to be reported to the House for publication

New Clause 8

Nigel Waterson (Conservative, Eastbourne)

I beg to move, That the clause be read a Second time.

David Taylor (Labour, North West Leicestershire)

With this it will be convenient to discuss the following:

New clause 9—Amendment of the pension rules—

‘(1) Section 165 of the Finance Act 2004 (c. 12) (pension rules) is amended as follows.

(2) In subsection (1) (which sets out the pension rules)—

(a) in Pension Rule 4, after paragraph (a), insert—

“(aa) a withdrawal from a Retirement Income Fund,”;

(b) in Pension Rule 4, after the second appearance of the words “scheme pension”, insert the words “a withdrawal from a Retirement Income Fund”;

(c) in Pension Rule 6, after paragraph (a), insert—

“(aa) a withdrawal from a Retirement Income Fund,”;

(d) in Pension Rule 6, after the second appearance of the words “scheme pension”, insert the words “a withdrawal from a Retirement Income Fund”.’.

New clause 10—Minimum Retirement Income—

‘(1) The amount of the Minimum Retirement Income in respect of each tax year shall be set by the Chancellor of the Exchequer by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c. 16).

(2) Before making an order under subsection (1), the Chancellor of the Exchequer shall consult such persons as he considers appropriate.

(3) An order under this section (other than the order that applies to the first tax year during which this section is in force) must be made on or before 31st January of the tax year before the tax year to which the order applies.’.

New clause 11—Removal of age limit for annuity protection lump sum death benefit—

‘(1) Schedule 29 to the Finance Act 2004 (c. 12) is amended as follows.

(2) In paragraph 16(1) (definition of annuity protection lump sum death benefit), paragraph (a) shall cease to have effect.’.

Nigel Waterson (Conservative, Eastbourne)

Good morning, Mr. Taylor. I am delighted that you and other members of the Committee have been able to make it here through the snow. This is the last day of this Committee, so I wonder what we are going to do with ourselves on Tuesdays and Thursdays from now on.

The argument on annuities is familiar. It is familiar in part because no fewer than four of my Conservative colleagues have used the opportunity of the private Member’s Bill ballot to put forward the proposition. It is an important issue that affects a number of people—including many who are not affected at the moment, because it touches on their future behaviour. I have been toying with the idea of declaring an interest, as I have some private pension provision and I am not yet 75—although, listening to the hon. Member for Yeovil, one does see one’s life flashing before one’s eyes.

I mentioned previous private Members’ Bills. I should particularly like to pay tribute to the Rights of Savers Bill, which was introduced by my right hon. and learned Friend the Member for Kensington and Chelsea (Sir Malcolm Rifkind). It build elegantly on earlier attempts at dealing with the problem, it was extremely well drafted, and it widened out the debate to cover how we encourage saving for the future, so it dovetails well with the argument about the shape of personal accounts. I have drawn heavily on that excellent Bill for the new clauses.

No other country, as far as I have been able to discover, has a compulsory annuitisation rule. I shall be happy to give way to the Minister now if he can tell me of one that does.

Andrew Selous (Conservative, South West Bedfordshire)

Bosnia-Herzegovina.

Nigel Waterson (Conservative, Eastbourne)

I am not going to pursue that. I assume from the fact that the Minister is still sitting that he does not have an answer. Certainly, no country in the western world has such a rule—the United States does not, Canada does not, and nor do many other countries.

It is clear from the difficulties that the Chancellor has got himself into over alternative secured pensions that there is an appetite for change on annuities. That, too, feeds into the debate about saving for retirement. There is a particular issue about what we call the target group for personal accounts, many of them younger workers who are not saving at the moment and are turned off by the idea of pension saving. We have to inspire them with confidence in the pensions system, which we touched on earlier this week, and to make it more attractive. I see that as part of the wider agenda of bringing flexibility and accessibility to pension saving. It is bad enough asking young people to lock up their savings for 40 years; telling them that at some arbitrary date in the future they will have to buy an annuity whether they like it or not adds insult to injury.

Let me anticipate the Treasury brief that the Minister will no doubt treat us to shortly. The state has a legitimate interest in annuities, but only a narrow one. Of course, those with the potential to buy—people who have built up pension pots—have had tax relief. We will hear more about the Liberal Democrats’ current position on tax relief later but, that apart, the only legitimate concern of the state is whether there is a risk that people will blow their pension pots and then fall back on the public purse.

Looking at new clauses 8, 9, 10 and 11, which have been lifted almost bodily from the Rights of Savers Bill, I make no great defence of, or apology for, the drafting, but I make the point that I have made in previous debates: if there is a technical problem with it, I shall be the first to put my hands up. If the Minister is happy to accept the principle of the new clauses he can have them brushed up and improved by his draftsmen and officials.

New clause 8 returns us to the Finance Act 2004 and is on the meaning of “retirement income fund”, a point on which I shall go into more detail in a moment. Crucially, from the point of view of reassuring the Minister, the new clause mentions schemes

“in which investments are approved by the Inland Revenue”

and sets out various conditions for a retirement income fund. One is that funds

“may be invested and withdrawn by the member as and when he elects.”

It is, after all, the member’s hard-earned money that has prudently been paid into a fund. I shall return in more detail to the other conditions set out in the new clause but the third condition, in proposed new subsection (4), is important. It would set an annual maximum withdrawal allowance to ensure that

“no member’s total future annual income falls below the Minimum Retirement Income level.”

New clause 9 would make consequential amendments to another part of the Finance Act 2004. New clause 10 would give the Chancellor the power to set a figure for minimum retirement income, and new clause 11 would crucially remove the obligation to annuitise at a particular age.

I shall try as briefly as possible to take the Committee through what the proposals would mean in reality. I have already made the point that we are the only country that does this, so there must be a pretty good reason why the United Kingdom is out of step with the rest of the developed world. Buying annuities has become less and less attractive in recent years. A great philosophical debate rages about whether that is due to greater longevity, which is very nice. When somebody purchases an annuity it means that they will get the money until they die, which is also very nice. Whether because of that or because of interest rates or any other factor, annuities have become a less attractive deal.

We are not proposing any new obligation on people, which seemed to be the concern of the relevant Minister during the passage of the Rights of Savers Bill. The proposals would place no new burdens on the large majority of people who currently choose to purchase an annuity when they retire. I pause to note that there are interesting statistics that were repeated in “The Annuities Market”, the Treasury document of December 2006. They show that the proportion of people who annuitise between the ages of 70 and 74 is small—from memory I believe it is something like 5 per cent. I am trying to anticipate what the Minister will say but we must consider not people’s behaviour now, when they know that there is a rule that they cannot avoid, but their likely behaviour were that rule changed. In particular, to return to my most important point, we must consider how a change would affect the savings behaviour of people starting their careers now rather than those who have already retired or are nearing the end of their careers.

We propose an alternative way of using a pension fund on retirement and a method of controlling the investments and income derived from it. It is not just a matter for the fat cats, although Ministers tend to dismiss it as something only for the better-off—for Tory voters or people with long gravel drives, Volvos and ponies, who vote Lib Dem, whom we mentioned early in our debates. Well-off people have rights too. It is very old Labour to take the line that because people are better off—in other words, they have worked hard and been prudent enough to put money aside—they should somehow be treated badly. That is a very old Labour concept, and I shall be interested to hear how the Minister develops it.

We are proposing something called a retirement income fund—it was called a RIF by my right hon. and learned Friend the Member for Kensington and Chelsea, which seemed a happy coincidence. It is based on the Canadian system, which is an alternative to annuity purchase. [Interruption.] The Minister grunts from a sedentary position, and there is a world of meaning in his grunts. I take that one to be a grunt of disapproval. [Laughter.] As I understand it, the Canadians have had the system for well over 20 years. It works perfectly well and something like half of all pensioners in Canada have these alternative retirement income funds. In fact they are the most widely held retirement income vehicle for pension saving in Canada. In the last tax year for which I have the figures—I am sure the Minister is more up to date as part of his initiating negotiations to sort out the frozen pensions issue in Canada—some 3 million Canadian citizens were above retirement age. Nearly half of them—1.4 million—received income from a retirement fund of the sort we propose.

The idea is a little bit like self-invested personal pensions. The funds will be self-administered. The individual could select, along with the trustees, which investments could be made or managed by the insurance or trust company. It has been hugely successful in Canada, which is not a wholly different economy from our own. We are not suggesting something that has not been road-tested in another country. An important element of this is choice. People should have a right to make these choices about their income in retirement.

Equally there is the principle, which we accept as a responsible Opposition, that individuals should not become a burden on other taxpayers on retirement. Tax relief provided during the process of pension saving shows the benefit of encouraging people to save so they do not fall into that category. Of course in a sense the Government are part-way there already. In fact they are a quarter of the way there because people can already take a tax-free lump sum valued at up to a quarter of their fund. In a sense the principle has already gone. It is just a question of how we calibrate the proportion of the fund to which people can get access rather than annuitise it.

The mechanics are fairly clearly set out in the new clauses. The idea is that those who choose to withdraw from the fund a lump sum or higher income than they would get under the annuity do not then become eligible to receive pension credit. That is why we have something called the minimum retirement credit, and the mechanics of how that is established year to year are set out. An individual can choose to leave assets in the fund and annuitise later on if they want to, and leave in it only what is needed to maintain them at or above the minimum retirement income or draw a lower amount. In any event they would be required to leave within the fund, sufficient funds to meet any shortfall over their lifetime and only withdraw to that limit.

It is important to touch briefly on the whole issue of alternatively secured pensions. Their introduction was hailed at the time as the Government changing their position on compulsory annuitisation. It was spun as a way of getting round that. The Government have obviously taken fright because of the numbers of people wanting to take up the option of alternatively secured pensions. According to the Library brief:

“When Alternatively Secured Pensions were introduced, they were seen by many as an opportunity to preserve capital built up with the help of pension tax relief and pass it on to heirs on death.”

That is hardly a criminal aspiration; it seems a perfectly sensible aspiration for someone who is prudent and wants to pass things on to their family on death.

The problem with that has been the religious restriction. Strange as it may seem, this policy was designed originally to assist people with a religious objection to pooling mortality risk—to dicing with the Almighty in parlance. That is the risk involved in annuities. It was either the Christian or the Plymouth Brethren who had this concern. It is perfectly legitimate that these concerns should be addressed. According to the last census the total membership of that sect was 781. I suspect that their membership has swelled to a much larger number since then. I am interested to hear the Minister’s up-to-date estimate of how many well-off middle-class people nearing 75 have been queuing up to join. On a serious note, however, there is a hunger for such flexibility.

I have just been handed some briefing which is presumably relevant to my speech; finally the dam has burst on the written evidence. It has been in a large container parked around the corner.

With their amazing blend of cool incompetence and arrogance, the Government did not include in the 2004 Act anything to say that people had to have a religious objection to pooling mortality risk in order to take out an ASP. I love the innocence of some of these Library briefs; I shall quote from this one again:

“It appears that many people who have no religious objection to annuities have been taking out ASPs as an attractive way of avoiding the requirement to buy an annuity at age 75.”

Wow! What a wicked world. That towering figure, the Economic Secretary to the Treasury, has ticked everybody off. On 4 July last year, he said that that was not what was intended at all, but that

“it was always our intention that the rules would apply in the specific and narrow case of individuals with such principled religious objections such as the Christian Brethren.”—[Official Report, 4 July 2006; Vol. 448, c. 728.]

We have had stern warnings from the Economic Secretary, and Treasury Ministers have expressed determination to pass more restrictive secondary legislation if such practices continue. No doubt the Minister will update us on that. If I may say so, the Government are spectacularly missing the point. If people are not harming their fellow taxpayers, why should they not do what they are doing?

There was a good article the other day in Pensions World, which put it rather well:

“Religion should not be a tax avoidance issue. It is staggering that an obscure sect (Census estimate=738 members!) gets special tax treatment. The Bible is the leading Christian authority. Jesus made an important distinction between religion and the state: ‘Render unto Caesar the things which are Caesar's and render unto God that which is God's’.”

Andrew Selous (Conservative, South West Bedfordshire)

I declare a slight interest, as I have quite a large number of Plymouth Brethren in my constituency. They are law-abiding, family-minded people and I am not sure that they would like to be described as a sect. They see themselves as being in the mainstream Christian tradition.

Nigel Waterson (Conservative, Eastbourne)

I do not want to start a schism. I am a Roman Catholic and we have had enough of that over the centuries. I accept what my hon. Friend says and I am sure that he is absolutely right. I think that, as a matter of principle, the Plymouth Brethren do not vote, so I can continue with impunity to refer to them as a sect. [Interruption.]

David Taylor (Labour, North West Leicestershire)

Order.

Nigel Waterson (Conservative, Eastbourne)

None the less, I withdraw the word “sect”; I will use “denomination” instead, which is a neutral word.

A further Government report said that they would introduce changes from April 2007, from which point individuals will be required to take a minimum annual income from their ASPs. There will be a large tax charge, which I will come on to in a moment, on transfer lump sum death benefits. As Her Majesty’s Revenue and Customs sharply put it:

“These proposals will bring practice and policy intention into line”.

Well, there you go. The problem with that is that we shall end up with essentially confiscatory taxation. The over-75s will be crushed by a series of heavy-handed tax burdens. According to the Government’s new proposals, an inheritance tax charge of 40 per cent. would be charged on any remaining sum. On top of the existing tax, that would amount to a crippling 82 per cent. tax raid, which would wipe out any inheritance benefit. That is grossly unfair and shows that, in his attitude to ASPs, the Chancellor’s mind is as closed as ever on an issue that requires flexibility and openness of mind.

Finally, the Minister’s letter to the Committee of 22 January, which mentioned a seminar and promised us draft regulations—they have not actually materialised—also talked about the Treasury report, “The Annuities Market”. That report raised a couple of interesting points that I shall touch on, partly in order to anticipate his comments. It is an interesting report on a subject about which not a lot is known by many people. On page 15, it quotes the Pensions Commission as saying:

“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time.”

Importantly, it also quotes the commission as saying:

“Government should investigate whether there are changes to regulation or tax treatment which can encourage the development of a wider market for drawdown products.”

A great deal of work can and should be done—the Conservative party is certainly doing it—on giving flexibility to savings. I am looking at how personal accounts could mirror some aspects of the 401(k) system in the USA in order to provide flexibility. These are complex issues and we are only just embarking on that process, but it is important, particularly if we are to make personal accounts attractive—especially to younger workers.

Page 17 contains a useful chart on the age at which people currently annuitise. Some 40 per cent. do so between 60 and 64 and 41 per cent. between 65 and 69. As I have said already, only 5 per cent. do so between 70 and 74. I urge the Minister to regard that as current behaviour based on current rules. If the rules change I suspect that behaviour would also change.

The report refers to another recommendation by the Pensions Commission: that the ages of first and last possible annuitisation should rise over time in line with life expectancy. I shall be particularly interested to hear what the Minister can tell us about that. Interestingly, the report states:

“The Government does not believe there is currently a case for increasing age limits.”

In parenthesis, I vaguely recollect that the minimum age is in the process of rising, or indeed has already risen, from 50 to 55. The Minister is nodding so I take that as a yes.

The report goes on to say:

“However, facilitating later retirement is an integral part of pensions reform, and the Government will monitor both limits for consistency with this policy.”

That raises an interesting issue. We need to ensure that everything that we are doing on the pensions front from annuities to personal accounts and state pension reform dovetails together. There must not be inconsistencies and internal contradictions and it seems sensible to look at those ages while putting up the state pension age.

On page 19 of the report, the Turner commission is quoted as saying:

“Government should consider whether there is a case for a cash limit to the amount which individuals are required to annuitise at any age”.

That seems to suggest that the Turner commission would also like to see the kind of flexibility that we are talking about. The report continues:

“Under this recommendation, individuals would annuitise to a minimum income level and be able to withdraw the rest of their fund as a lump sum — subject to an appropriate tax charge. Although no level was recommended, it has often been suggested it should be a level sufficient to keep an individual off state benefits.”

Well, that is exactly what we are saying. A few paragraphs further down, the door is firmly slammed in the face of that proposal with this bald sentence:

“The Government therefore continues to rule out introducing this option.”

I really do wonder why, when we seem to be out of step not only with the rest of the world but with developments in the pensions world.

There is an interesting chapter starting on page 27 on the issue of ASPs and the concerns expressed about people using a religious loophole to get around the tax system. I will finish on that note; of course, people should not abuse religious objections as a way to get around a tax liability, but that is the Treasury way of looking at it. We should be looking at it entirely the other way around; first, why are people keen to do that—yes, there is an appetite for more flexibility in the system—and secondly, if that is the case why should we not give it to them? So, I commend all the new clauses in the group to the Committee.

David Laws (Liberal Democrat, Yeovil)

Good morning, Mr. Taylor, and welcome back to the Chair for this last day in Committee of the Pensions Bill. New clauses 8, 9, 10 and 11 raise some important issues that the hon. Gentleman touched upon and which have been debated in the House many times before. I will therefore just comment briefly on those, given that I shall have plenty of time to speak on some other Liberal Democrat new clauses later today—[Interruption.]—unless, of course, there is a desire for a long speech.

I start by declaring an interest. Like the hon. Member for South-West Bedfordshire, I have a number of Plymouth Brethren in my constituency, including some of the leading lobbyists of the Treasury and of the Department for Work and Pensions; like the hon. Gentleman, I do not regard them as an obscure sect even though they do not vote. In fact, they are becoming a lot less obscure in Yeovil as they are about to build a large church on the edge of the largest town in my constituency, which could therefore become a centre for Plymouth Brethren throughout the country. I congratulate them on the work that they, as a small group, have done in lobbying the Government on this issue.

In fairness, I congratulate the Government—including the Treasury—on taking the time to listen to the concerns of such a small group of non-voters. As we saw yesterday, there are many other examples of rather large groups who do vote that the Government are good at ignoring, so we should not be too ungenerous to Ministers about them taking the time to listen to a particular group.

However, where such potential anomalies and exceptions are created, people exploit them very effectively. The hon. Member for Eastbourne set out what has happened in attempts to use this potential loophole to get around the existing rules on annuities. We have seen that type of experience many times before, particularly in relation to tax policy. We all remember the Chancellor’s film industry tax relief, which was supposed to be targeted at major British films and ended up with programmes like “Coronation Street” relabelling themselves as films to get the benefit of the relief.

The problem here, as highlighted by the comments of the hon. Member for Eastbourne, is that we have a rather antiquated and illiberal system of obliging people to take annuities. That, presumably, is largely built on the fact that we have a low basic state pension and a great deal of means-testing; therefore, the Government have stuck with these rules over time to try and protect the taxpayer interest. We understand the Government’s concerns about compulsory annuitisation, but it is really all a product of Government decisions about the basic state pension, and part of the price that we pay for having a low foundation there.

For those reasons I shall not rehearse all the arguments that we have debated many times before in Committee, but I do want to raise with the Minister a couple of practical issues that spring from the Government’s attempts to give a bit more wiggle room to those people with low pots of money who would normally have to annuitise. The Government have introduced the trivial computation rules to allow people with low amounts of money to get around annuitisation and to take their moneys up front.

I recently met a constituent who had taken that particular route, but who was very concerned about the apparent delays in processing her requirements. Also, although she had a low amount of money and was a low-income earner, she discovered that the Treasury was deducting tax at the 40 per cent. rate, rather than the basic rate, and then requiring people to claim that back. Given that many of the people who are taking their moneys under the rule will be lower-rate or basic-rate taxpayers, I hope that the Minister will look at that issue and respond, if not today, then maybe in a note to the Committee.

The hon. Member for Eastbourne again raised this important issue. I fear that we may be about to hear from the Minister the response that we have heard many times in the past few years. However, we shall wait and see whether the hon. Member for Eastbourne has been successful in persuading the Minister of the strength of his case and of the Canadian model.

James Plaskitt (Labour, Warwick and Leamington)

In introducing the debate on the clauses, the hon. Member for Eastbourne said that the issue was familiar, and it certainly is. He also displayed great perspicacity in anticipating the sort of responses that he would get.

The amendments allow us to discuss the decumulation aspect of pensions, namely turning pension savings into retirement income. I will come to the specifics of the amendments tabled in a moment, but a little bit of background will be helpful. “The Annuities Market”, published with the pre-Budget report of 2006 and already referred to, restated Government policy on turning tax-privileged pension saving into retirement income by purchasing an annuity. It also responded to the views of the Pensions Commission and set out the reasons why we will again be rejecting the clauses today.

Pension saving is about giving individuals an income in retirement, and for no other purpose. The Government provide tax incentives to encourage people to save for their retirement. In the last financial year those totalled £14.3 billion. When individuals come to take their pension benefits, they can take up to 25 per cent. of the pension fund as a tax-free lump sum. In return for such generous incentives, Governments of different persuasions have required, as part of the “deal”, that the remainder of the pension fund is, by age 75, converted into a secure retirement income for life, or used to provide for dependants’ benefits. The most efficient way of doing this is by purchasing an annuity. The arrangements have been in place since 1976 and operated throughout the previous Administrations, as well as this one. Annuities provide the peace of mind of an income for life, regardless of how long that life might be.

Despite some of the criticisms of the scheme that we have heard, annuities provide simplicity, security and a guaranteed income, and at very little risk. Individuals have flexibility on when to annuitise, between the ages of 50—which will become 55 from 2010—and 75, to suit their circumstances. The vast majority in fact annuitise on retirement. Only around 5 per cent. do so after the age of 70. Furthermore, consumers can now choose from an increasing range of annuities, including those that facilitate a flexible retirement or those for people who are prepared to face some investment risk. The hon. Member for Eastbourne called for greater flexibility in the annuities market, but there has been a remarkable growth in what are called mid-market products in recent years. There is a whole variety of ranges of annuities that can be purchased and which introduce a considerable amount of flexibility into the market.

Nigel Waterson (Conservative, Eastbourne)

Before the Minister moves off the issue of age limits, what is the current thinking about changing the limits to tie in with the growth in life expectancy and the increase in the state pension age? Perhaps he was going to come on to that.

James Plaskitt (Labour, Warwick and Leamington)

Yes. We took on board what the Pensions Commission said about that. There is no pressure to alter the current age, especially in view of the choices that people make about when to annuitise, as I have just explained. Given life expectancy trends, the upper age will be kept under review.

Individuals have flexibility about when to annuitise, and only a very small proportion do so at anywhere near the present upper age limit. The Government welcome the Pension Commission’s endorsement of the policy; the hon. Member for Eastbourne has already quoted what the commission said and I will not repeat it. Support for the principle is enshrined in the rules of annuitisation.

New clauses 8, 9 and 10 would establish a retirement income fund as an alternative to annuities to deliver an income stream in retirement. The RIF would remain invested and withdrawals between a minimum and maximum would be permitted. An annual maximum withdrawal allowance would be set by the provider for each member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in a year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider, and we presume that a member must withdraw at least that each year. In setting that allowance, the provider would have to ensure that the member’s total income was at least equivalent to a minimum retirement income as defined in new clause 10.

Nothing appears to stop the minimum allowance being set at zero. Provided that the member’s income from other sources for future years is greater than an MRI, there is effectively no maximum withdrawal from the RIF, in which case the member could draw any income.

The RIF has appeared in various guises in the past—the savers Bill has already been referred to in that respect—and it has not improved on its latest outing. Like previous attempts, the new clause is also silent on how RIF withdrawals will be taxed and what will happen on a member’s death. If the member’s other income outside the pension scheme is above the minimum retirement income, they can withdraw large lump sums of tax advantaged pensions savings. In such a situation, an individual might also choose not to draw any pension income from the RIF in order to pass the fund on to heirs. As I said, tax incentives for pension savings are offered to encourage people to secure an income in retirement. The commission endorsed our view that if people take the tax relief on pension saving, it is only fair that it is turned into a retirement income.

Given the apparent ability to extract RIF savings below the annual maximum allowance at will, there is a danger that it would become a vehicle into which other savings were recycled for tax advantage rather than encouraging new retirement savings. There is no mention in the proposal of what happens to the RIF on death.

John Penrose (Conservative, Weston-Super-Mare)

Is the Minister saying that he would support the principle behind the measures if the technical problems that he describes could be dealt with? I have no doubt that clever people in the Treasury could easily find ways of preventing the sorts of tax avoidance that he mentioned.

James Plaskitt (Labour, Warwick and Leamington)

No; that is certainly not what I am saying. I would not accept what the hon. Member for Eastbourne said either—that it is simply a matter of calibration; the RIF breaches the fundamental point of principle that if tax concessions are given to encourage saving for retirement and that is the purpose for which they are given, that is the purpose to which the fund should be converted. It should not be used for any other purpose. It is not a matter of calibration or tweaking the rules; it is much more fundamental than that.

Nigel Waterson (Conservative, Eastbourne)

I referred to calibration in the context of the existing liberty to take up to 25 per cent. as a tax-free lump sum. What is the difference in principle between what is possible now and what we are suggesting here?

James Plaskitt (Labour, Warwick and Leamington)

I am coming to that in a moment, but there remain fundamental differences between what the hon. Gentleman proposes and the current rules on annuitisation. The existence of the 25 per cent. tax-free lump sum drawdown does not breach the principle, because that must be considered alongside all the other rules that apply to the current annuity scheme, many of which are totally breached by the proposed RIF scheme. I shall elaborate on that in a moment.

There is also no mention of what happens to the RIF on death. That suggests that the new clause might be designed to allow individuals to pass on their pension funds to heirs, rather than to secure a retirement income. There is no rationale for taxpayers subsidising bequests.

Another flaw of the RIF, a serious one in my view, is the risk of running out of money during retirement. I note the hon. Gentleman’s faith in insurers’ ability accurately to predict an individual’s life expectancy, which is necessary to make the RIF scheme work. However, nobody can accurately predict an individual’s life expectancy. What insurers can do is to predict average life expectancy of particular cohorts. That enables them to provide a guaranteed income for life, regardless of how long that life is. That is a unique feature of annuities, and another reason why they are an ideal retirement income product.

The hon. Member for Eastbourne noticed that when he referred to the Canadian experience he elicited a bit of a grunt from me. The reason for the grunt was that if we look into the detail of the Canadian experience, we find that the problem of potentially running out of money during retirement is a feature of the Canadian system. That should give us pause for thought before we recommend it. I draw his attention to the view of the Canadian Bankers Association, which is that

“if you take out too much money, you may outlive your RIF and may be short of funds.”

It is a bit difficult to say to people in their eighties or nineties, “Watch out; you are running out of money.” An implication of the scheme is that it is recommended if one will not live long. What happens under our annuitisation laws is that insurers effectively spread or pool the so-called longevity risk across a range of individuals. Annuities are effectively insurance contracts, insuring individuals against the risk of outliving their pension funds, which makes them fundamentally different from RIFs.

Anyone taking out a RIF would need to simultaneously absorb investment and longevity risk and would be likely to need alternative assets to do so. The ongoing charges of managing a RIF are likely to be significantly more than those for conventional annuities. That is why we think that the RIF would typically be aimed at wealthier individuals.

So the RIF would be a complex product, probably attractive only to the wealthy, for the reasons that I have just given, but funded by the general taxpayer. By contrast, we are committed to promoting better outcomes for all pensioners in retirement. The Government are clear that innovation in pension provision must take place within the principle of tax-privileged pension savings being used to provide a retirement income, and the RIF violates that principle.

Finally, I turn to new clause 11. Value-protected annuities are permitted from 6 April 2006. They allow providers to offer an annuity that includes a repayment on death before 75 of an amount representing the initial capital value of an individual’s pension or annuity less any income paid before the date of death. The new clause would abolish the current age limit of 75 where value protection can be offered.

A concern commonly expressed by consumers with annuities is the risk of dying soon after purchasing the annuity, so that the annuitant might not receive a financial benefit. Such concerns tend to reveal a misunderstanding about the basic insurance properties of annuities and the role of pooling. The benefit of buying insurance is the peace of mind provided even if an event does not occur and no claim is made. If the insured event does not occur, in this case if a person lives longer than expected, there is no return of the premium—the pension fund—so an annuitant’s early death does not result in profit for the insurer; it rather contributes to paying the pensions of those who live longer than expected.

The Government have nevertheless responded to early-death concerns by enabling providers to offer value- protected annuities in the early stages of retirement. The option expires at age 75 and abolishing that limit would tend to benefit those interested in using their pension fund more for inheritance planning than to provide a retirement income.

The hon. Member for Eastbourne prayed in aid the alternatively secured pension scheme as representing, as he put it, an appetite for change. He suggested that it supports those who try to get around annuitisation. That is not entirely accurate, and I remind the hon. Gentleman of what the then Financial Secretary, my right hon. Friend the Member for Bolton, West (Ruth Kelly), said at the time of the scheme’s introduction:

“We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes needed to preserve the integrity of the tax system.”—[Official Report, Standing Committee A, 8 June 2004; c. 485.]

So, far from being a chink in the defence of the scheme, it was accepted from the outset that that did not represent a rethinking of the principles underpinning annuitisation. It was a specific concession made in response to a specific pressure, and it has been our intention all along to reinforce the tax principle that underlines the annuity system and has done since 1976.

Nigel Waterson (Conservative, Eastbourne)

I take the Minister’s point about intention, but can he shed any light on why the Government took no steps to put that fundamental condition for ASPs in the 2004 Act?

James Plaskitt (Labour, Warwick and Leamington)

I think that the answer to that is contained in the discussion of the matter in the document to which the hon. Gentleman referred earlier, “The Annuities Market”. The Financial Secretary at the time gave an explicit undertaking that the workings of the system would be kept under review, as indeed they have been. Subsequent changes have been introduced, such as sanctions for breaching the minimum withdrawal and the additional measures that the hon. Gentleman mentioned to prevent misuse of the system as a tax-avoiding inheritance vehicle. We have indicated that if further changes are necessary to reinforce and protect the principle of the system, they will be included in the next Finance Bill.

I have taken time to set out our policy on turning tax-privileged savings into a retirement income to show why the proposed RIF is inconsistent with the policy that has been in place since 1976. The new clauses are essentially intended to benefit those who willingly take advantage of the tax relief given to pensions savings to build up substantial pension pots and then break their part of the deal by using that tax-privileged fund for other purposes. For that reason I urge the hon. Gentleman to withdraw the motion.

Nigel Waterson (Conservative, Eastbourne)

I am grateful to the Minister for taking us in some detail through the well-trodden brief from the Treasury about why it does not accept the principle of the new clauses. The fact is that the Minister has been unable to point to a single other country in the entire world that has this system. The Treasury’s view is clear, as the Minister said—that the system is designed to provide income in retirement and has no other purpose. The new clauses deal with the legitimate concerns of taxpayers; we are, after all, considering people’s money. It is not the Chancellor’s money. Those people have of course had some tax relief but it is their money, set aside during their working lives.

The Minister said that the system has been in place since 1976, which is interesting. Compulsory annuitisation, therefore, is a relatively modern concept. However, parties change their minds and my party has changed its mind. That should be abundantly clear, not only from what I have said, but from the series of private Members’ Bills from my colleagues in the official Opposition.

I was interested in what the Minister said about the age limits and so on and pleased that he is going to keep those under review. The trouble with the debate is that everyone knows everybody else’s arguments in advance, so there is an element of formality, a ritual ballet that we go through, and the Minister said what I predicted: that the Turner commission supported the principle. However, I went on to quote other bits of the Pensions Commission report, which suggested that it was in favour of greater flexibility as well.

The Minister talked about the dangers of people trying to avoid inheritance tax. If the Chancellor would only reduce the tax or increase the threshold significantly, perhaps the problem would not be as acute as he believed. He asked what would happen to the RIF on death. I think our intention is that people should be able to pass the fund on, which is not an aspiration that we should look down on—I have made that point. Fundamentally, when my hon. Friend the Member for Weston-super-Mare asked the Minister whether, if the technical difficulties could be overcome, he would accept the principle, he firmly and clearly said no—that it was not a question of technical details but of the principle.

As I said, no other country does this. The Minister has certainly not been able to point to one. We will return to the issue, but for the moment I beg to ask leave to withdraw the motion.

New Clause 12

New Clause 15

New Clause 21

New Clause 22

David Laws (Liberal Democrat, Yeovil)

I beg to move, That the clause be read a Second time. We are now into the last five new clauses—four of them, I am pleased to say, Liberal Democrat and one, no doubt, an expensive probing amendment from the hon. Member for Northampton North. That will allow me to triangulate my prudent and reasonable position wonderfully in the middle of these various contesting parties.

New clause 22 is an extremely important one, and the Minister will be delighted to see that I have tabled one that will help him to save money and, maybe, answer some of the problems that the Government have about funding a decently founded basic state pension. Hon. Members will immediately recognise and, I think, be instinctively sympathetic to the wording of new clause 22. The wording is lifted from the report of the Work and Pensions Committee, which concluded, in paragraph 418:

“We agree with the point made”—

by the right hon. Member for Birkenhead (Mr. Field)—

“that informed discussion, rather than ‘merely shuffling our prejudices’ is necessary for a debate on the future level and terms of public sector pensions. We recommend that the Government commission an independent review, which includes involvement from both the private and public sectors, about the future terms, benefits and financing of these schemes.”

You will note, Mr. Taylor, that our new clause also calls on the Government to establish an independent commission,

“to evaluate the future terms, benefits and financingof public sector pensions.”

So, I am hoping for considerable support from both sides of the House on this reasonable and prudent disposal, which was supported by Labour, Conservative and Liberal Democrat members of the Select Committee. This is not one of the dogs that barked very much during the Pensions Commission report. Lord Turner had, after all, started off with a fairly narrow remit, but had understood that the remit could only make sense if he broadened it somewhat to include a lot of the state pension architecture. It would, perhaps, have been a bridge too far if he had debated the issue of public sector pensions as well.

Nevertheless, it was quite clear in the Pensions Commission report—I think it was in its first rather than its second report—that it was flagging up the growing inequality of provision between the public and private sectors, and the need for public policy to address that issue. In some of the evidence that outside groups gave the Select Committee, there was concern about the growing cost of public expenditure on public sector pensions. Adrian Waddingham, from the Association of Consulting Actuaries, told the Committee:

“I think there will be political resentment in future if we do have the ‘them’ in the public sector and the ‘us’ in the private sector with this huge disparity”.

When Lord Turner himself gave evidence to the Select Committee in December 2005, he took the view that it was perfectly reasonable to have salary-related pensions in the public sector as long as there was a process of “continual adjustment” so that as life expectancy goes up the generosity and cost of public sector pensions is kept reasonably stable.

I think that the Select Committee was particularly influenced by the right hon. Member for Birkenhead, who made a sensible contribution. He pointed out that a lot of the debate about public sector pensions is not informed by statistics and tends to involve a shuffling of people’s prejudices rather than a thoughtful and considered debate. That is why he and the Select Committee argued, as we are doing today, that there is an extremely strong case for establishing precisely the kind of independent commission that the Government established to look at the rest of the pension system in order to investigate that issue and ensure that public policy is informed by facts, not spin or prejudice from either end of the spectrum.

Why is that so important? In a few years’ time, public sector pensions will account for about £2 or £3 in every £100 of public expenditure. Public sector pensions represent an extremely rapidly growing area of public expenditure. At the moment, they account for about 1.5 per cent. of gross domestic product, and even after the relatively modest savings in the existing reforms that the Government are banking, the cost of those pensions will rise by about 50 per cent. as a share of GDP by 2020 to 2030, to about 2.1 or 2.2 per cent.

I suspect that when we get new figures on the cost of public sector pensions, relating to the unfunded liability and their share of GDP in the future, we will find that the rising cost profile will continue more rapidly, and that it will be powered not only by the terms of public sector pension agreements, but by the increasing numbers of public sector workers since 1999, and increasing pay costs, which recently have been a matter for public debate and comment in the NHS and elsewhere. Those things are bound to fuel the cost of public sector pensions.

It is ironic that the Government are constantly telling us that they have no money to repair the state pension architecture. Their figures show that between 2010 and 2020 the share of GDP spent on the state pension architecture will fall by 0.1 per cent. at precisely the time when the cost of public sector pensions will continue to increase rapidly. That looks odd and we wonder why the Government’s priority is not to first restore a decent state pension architecture for every member of the public and then to fund a decent public sector pension on top of that.

James Purnell (Labour, Stalybridge and Hyde)

As the hon. Gentleman knows, the proportion of GDP spent on state pension does grow. The flat period is owing to the state pension equalisation between men and women. In future, I hope that he will make that clear when he mentions that statistic.

David Laws (Liberal Democrat, Yeovil)

I think that what the Minister means is that I am right to suggest that the share of GDP spent on the state pension architecture is going to fall and that that fall can be decomposed into some areas of increasing expenditure offset by savings made from increasing the state pension age for women between 2010 and 2020.

I do not know why the Minister is so grumpy about this. His own regulatory impact assessment, which comes with the Bill, is plain as punch clear that there will be a decline from 6.2 to 6.1 per cent. over the next few years.

James Purnell (Labour, Stalybridge and Hyde)

The hon. Gentleman knows very well that that figure grows over the period covered by the RIA. He has picked one date in order to create a misleading impression. The only reason why that is happening is state pension age equalisation.

David Laws (Liberal Democrat, Yeovil)

The evidence will show that I am not picking one year. I am looking at what the cost is today and at what the cost will be not just in one year but in each year from 2010 to 2019. For all of those years, the share of GDP spent on public pension benefits in the state pension architecture will be less than it is today. That looks very odd with the rising costs to public sector pensions. There is an important cost issue and perhaps we could make some savings here and put them back into the state pension architecture to deal with all the problems that we have discussed during our proceedings.

Then there is the issue of the future stability of these schemes. Frankly, in changing the state pension age, the Government have demonstrated the right way to manage some of these big public expenditure issues. They have taken the decision now and they are making these changes for 20 or so years’ time so that people have a proper chance to plan. What people object to are sudden changes to their pension benefits or arrangements over a very short period so that they have no ability to plan and make adjustments.

The risk of the Government’s closing their eyes to some of the issues and the growing cost of public sector pensions is that at some stage when public expenditure pressures are bearing down on them or on a future Government, as they assuredly will, there will be huge pressure to make changes to public sector pensions swiftly and in a rather chaotic way. Perhaps there will be a risk not only that people will feel aggrieved but that we will throw the baby out with the bathwater and end up getting rid of what in many respects are schemes based on principles that we might want to retain in future. The stability of these schemes depends on making sensible reforms in a timely fashion and not leaving things to the last minute when there is some kind of fiscal crisis to which the Government must respond.

The third issue which relates to the importance of public sector reform is mobility between the public and private sectors. It is increasingly difficult to persuade people, particularly later on in their careers when they have final salary schemes, to shift from the public sector to less highly paid, less stressful jobs in the public sector with a lower final salary or to switch between sectors. The Confederation of British Industry and other business organisations are extremely concerned about the potential disparity between the public and private sectors.

In the past there was a strong argument that some parts of the public sector appeared to have quite low pay rates compared to the private sector so there was a trade-off between pay and pension benefits; the public sector got a better pension deal but a worse pay deal. The figures that have been produced not only by the CBI but by groups such as the Pensions Policy Institute appear to indicate that that is no longer true; there is no longer a pay disparity between the public and private sectors. That obviously depends on how one defines the comparisons. It certainly gives us cause to reflect on the traditional argument that has been used to defend high public sector pension benefits.

I have given three reasons why this issue is so important. What sorts of reform could we expect to see in future and what should those reforms be based on? I very much hope that in reforming public sector pensions we will not simply enter into some sort of race to the bottom. I am not inviting the Government, and I would not invite any independent commission, simply to draw a line between where we are on public sector pensions now and the lowest or average levels of pension provision in the private sector. We would want to ensure that public sector workers have good pensions to retire on. We respect the fact that there are many public sector workers who have quite low pay throughout their careers and who retire on amounts of money that would not appear to be generous in many people’s terms.

The issue with public sector pension reform is therefore not simply to have a race to the bottom but to ensure fairness between the private and public sectors and to ensure that if there are good public sector pension schemes, public sector workers pay for them. We must not rely on the general taxpayer to fill a growing hole in the years ahead, at a time when the taxpayer who does not work in the public sector also has to make greater contributions to his or her own private pension or accept severe cuts in the level of those pensions.

It is disappointing that the Government have been so timid in this area, given that the Prime Minister is always talking about tough choices and suggesting that radical reform is on the agenda. He must be aware of the growing cost and of the Pension Commission’s figures, which show that 85 per cent. of public sector employees are in an occupational pension scheme, compared with 30 per cent. of private sector workers. A big gap is emerging.

I notice that Ministers are not so uncompromising when they have to account for their position in less friendly environments than those to which they are accustomed, such as Labour party conferences or meetings with the unions before the 2005 general election. In other places, such as at the Financial Times business pensions summit, which took place in November last year, what they say is not quite as intransigent as what they say to their hon. Friends on the Back Benches and in private to the union leaders, whose support and finance they are keen to get prior to a general election.

In Pensions Week of 27 November 2006, Daniel McAllister quoted the answer given by the Secretary of State at the Financial Times business pensions summit when he was asked about the cost of public sector pensions and the growing inequality between the public and private sectors. The Secretary of State said:

“It would be a bad place to end up where only people in the public sector had DB pensions. If that happened we would have to go back and review the deals made. The general public would not want to contribute in taxes to a special pension for civil servants that they don’t have access to.”

Nigel Waterson (Conservative, Eastbourne)

I wonder whether the hon. Gentleman is aware that at a recent ABI gathering—he may have been there—the self-same Secretary of State made a similar comment. He said that the Government would have to revisit the deal with the public sector unions that was reached by his Cabinet colleague.

David Laws (Liberal Democrat, Yeovil)

That is interesting, and it adds even more fuel to the fire. It appears that Ministers have been caught saying one thing in one place and something slightly different in another. One suspects that the instinctive modernising tendencies of the Secretary of State are coming face to face with the grim financial realities of the Labour party and the concern of the Chancellor of the Exchequer to ensure that he has support in all the right places.

Sally Keeble (Labour, Northampton North)

The hon. Gentleman just referred to civil servants, but when he talks about public sector pensions is he talking about all the local government employees and fire service employees as well? There is a plethora of schemes that are subject to different pressures.

David Laws (Liberal Democrat, Yeovil)

The hon. Lady makes an excellent point, as ever. I agree that there is a wide variety of different schemes, which I will discuss in a moment. We should distinguish between the different schemes involved, because the level of generosity is often quite different. We should not assume that all public sector schemes are unaffordable just because some of them are.

Sally Keeble (Labour, Northampton North)

I was thinking in particular about different occupational pressures. The firefighters’ pension, for example, is surrounded by particular pressures. It has been subject to the most severe criticism, but it is known that firefighters have particular problems because of the high injury and early retirement rates.

David Laws (Liberal Democrat, Yeovil)

The hon. Lady raises an excellent point, although I think that in the past there were quite a few abuses of early retirement in many public sector schemes. If she looks at the figures for the past few years, she will see that the percentage of early retirement pensions has been falling rapidly, which indicates that something rather odd was happening before.

The hon. Lady raises an excellent point in relation to the differences between different schemes, which is another argument for having an independent commission.

Roger Gale (Conservative, North Thanet)

Good afternoon, gentlemen. We shall do our best to expedite business before the roads start to freeze. I note that a number of Members have the far frozen west and the far frozen midlands to go to, and I am told that England is covered from the Isle of Thanet. We will do our best to make progress without interfering with the due course of democracy.

None

David Laws (Liberal Democrat, Yeovil)

Welcome back to the Chair for the final furlong, Mr. Gale. We have just five fences to clear before we have an opportunity to get home before, as you say, Britain freezes over.

This morning we were discussing public sector pensions, and I invited members to back the recommendation of the cross-party Work and Pensions Committee. We touched on the rather limited nature of the reforms that the Government have so far made to the public sector pension architecture, and the rather different things that Ministers have said in different places about their enthusiasm for reform.

It is fair to acknowledge that a number of the public sector pension schemes have been reformed recently. Some of the reforms are still in the process of being agreed and to a small extent these will trim the cost of public sector pensions in the years ahead. Nevertheless, the figures that I gave this morning for the rising cost of public sector pensions were the costs after reform. So there is still a significant increase in the costs.

As a result of the manner in which the Government have sought to deliver many of the reforms, many injustices have arisen. For example, for a Government who claim to be very female-friendly in their pension policy, it is rather odd that it has been agreed that all existing public sector employees will be grandfathered in relation to their ability to take public sector pensions at an early age. Even individuals who had not joined the public sector when the agreements were struck with the Government will be grandfathered in that sense, or one might say pre-grandfathered.

The people who will pay the price of these reforms, therefore, are the individuals who will join the public services in the future. The reason why that may be unfair to women is that women are far more likely to have career breaks; they may be in the public service now but may need to take a career break and return to it in the future. As I understand it, many of those individuals will lose their entitlement to retire early at 60 and find themselves disadvantaged compared with male members of the same public services who joined at precisely the same time.

The hon. Member for Northampton, North raised this morning the important differences between many of the public sector schemes, and I think it is worth touching on them for a moment. It would be wrong to think that all of the schemes are the same in their characteristics and costs. That is one of the reasons why it would be particularly sensible to establish a commission to look into the issue so that we distinguish clearly between those public sector pension schemes that are more unaffordable and those that are more affordable.

It is worth saying that, of all the public sector pension schemes, only two to my knowledge are funded and therefore have a funding discipline. One of them is the local government pension scheme and one of them is our own, although a sense of discipline in our own is somewhat undermined by the fact that the taxpayer simply fills up the hole in the funded scheme, whatever that may be. The hole at the moment approaches a contribution of 27 per cent. of our salaries. I have managed to ask a number of parliamentary questions recently on how the employer contribution rate varies between schemes. In other words, this is the percentage of salaries that effectively are contributed by the general taxpayer. This seems a more sensible way to look at affordability and fairness issues in public sector pensions than simply looking at the issue of the unfunded liability, which does not necessarily tell us very much in terms of how sustainable and affordable public sector pension schemes are.

So there is an enormous gulf between the employer contribution rates for different schemes. When comparing the public sector and private sector pension schemes and assessing whether or not they are fair, it is sensible to compare the employer contribution rates of both. We know that, in crude terms, the private sector has a lot of defined-contribution schemes, where average contribution rates are about 7 per cent.—the Minister might have a better figure on that. The average contribution rates in private sector defined-benefit schemes are about 13, 14 or 15 per cent., whereas the lowest public sector employer contribution rates are about 13 or 14 per cent. Such rates apply to the pension schemes for local government, teachers and nurses. At the top end, the employer contribution rate to the judges’ pension scheme is slightly less than 30 per cent. of salary. The figure for the MPs’ scheme is slightly less than 27 per cent., and the scheme figures for the police and the firefighters are 24.6 and 26.5 per cent. respectively.

There is an enormous gulf between the different schemes. Some may require relatively little adjustment and reform in the future such as the local government scheme, which is funded and appears to have quite a low employer contribution rate, whereas it appears that others will need a lot more reform. In discussing reform of the larger and, apparently, more expensive public sector schemes, we need a debate about how long we expect people in the public sector to remain in work in the future.

Traditionally, the pension schemes for firefighters, police and the armed forces were expensive because individuals who went into the schemes in those professions had low retirement ages. Until quite recently, it was possible for a police officer who joined when they were 18 and a half to retire at 48 and a half with a full pension. That represents an interesting public policy issue for the Government. At a time when we are trying to encourage people to work longer, should we expect people in the public services who have physical and demanding jobs to be able to access a pension relatively early on in their working lives or should they be looking to make other changes and to take up other employment opportunities?

The same things apply to other areas, such as the armed forces. Understandably, people do not necessarily stay on in the SAS or in other strenuous jobs until they are 65, 66 or 67. In the previous armed forces pension scheme, it was possible to retire with a full career pension at 55. Those who had completed 16 years as an officer or 22 years in the ranks—I am not sure why an officer was able to retire six years earlier than somebody in the ranks, but those were the rules—were entitled to an immediately payable pension.

There are some big issues to address, including the costs of different schemes; how long we should expect people in the public services to work; and whether we should continue with final salary schemes, which can be very inflexible in terms of labour mobility, or whether we should move to career averaging schemes. Given that we have had such an extensive debate on pensions, it seems bizarre that we should be leaving out proper scrutiny of this particular area.

I should have thought that there was a lesson to be learned from the Pensions Commission. We brought in an independent and respected group of individuals representing a range of opinions and experiences—in this case, the unions, business and academia—to report on this area. Such a group is in a strong position to look into contentious issues and clear the confusion that often exists about the statistics and the facts. It can then make recommendations for reform that can command the sort of cross-party support that will be needed to make such contentious changes much easier in the future.

I am little surprised that the Government have been so conservative and so unwilling to move in this area. I can only think that there is nervousness about the guarantees that have been given to the public sector unions. I hope that in the near future there will be a more positive Government line on the issue and a greater willingness to open up the public sector schemes, in the cause not of devaluing them to the lowest common denominator in the private sector but of ensuring that they are affordable and sustainable in the future. They should be fair to hard-working public sector employees and to those working in the private sector who are paying increasing amounts of tax to fund the public sector while the value of their own pensions dwindles away.

John Penrose (Conservative, Weston-Super-Mare)

I rise to support the new clause because, apart from the fact that it is right, I am a member of the Select Committee that proposed it and my name is on the amendment paper. It would therefore be inconsistent of me not to support it.

The hon. Member for Yeovil has given a good, lengthy overview of the arguments that we rehearsed in the Select Committee. [Interruption.]

David Laws (Liberal Democrat, Yeovil)

The short version.

John Penrose (Conservative, Weston-Super-Mare)

I am pleased to hear it. I will not repeat the hon. Gentleman’s excellent tour d’horizon on the matter, but I will re-emphasise one of the points he made and add some others. It is important to remember that the commission proposed by the Select Committee would not be some kind of quango to which a difficult decision could be shuffled off so that it was kicked into the long grass by the Government. We proposed something along the lines of the Turner commission, which is a heavyweight, academic and seriously well-qualified body, to clarify and improve the quality of debate on pensions.

The hon. Member for Yeovil said, rightly, that too often this topic is politically controversial and the so-called debate ends up being a shuffling of people’s prejudices. The Turner commission managed to move away from that and turned the wider pensions debate into a structured, logical, evidence-based process. It was an essential part of the Government’s managing to fashion an admirable degree of political consensus on a very difficult issue which successive Governments have found impossible to solve.

Public sector pensions are no less controversial and complex than others. The hon. Member for Yeovil explained some of the differences between the schemes, and I am sure there are many that he did not mention. Constructive and careful laying of the groundwork would be an essential first step if an intelligent decision—perhaps even a consensus—were to be achieved. That is why the Select Committee suggested the new clause, and I commend it to the Committee. I hope that hon. Members on the Government Benches can bring themselves to support it and that Opposition Members will also vote for the new clause if the hon. Member for Yeovil decides to divide the Committee on it.

The Government have been admirable in establishing the wider pensions consensus—a process in which many people participated. The new clause gives them an opportunity to underpin and strengthen that consensus if they get the issue right. But if they duck it, or allow a debate on public sector pensions to be just a shuffling of people’s prejudices, there is a risk that the moral authority that has been created around the pensions issue will be eroded. The Government, as the employer of people who work in the public sector, need to be seen to be putting their own house in order.

Andrew Selous (Conservative, South West Bedfordshire)

I am listening to my hon. Friend, as is the whole Committee, with great interest. He makes some valid points; we do not want to become two nations in respect of pensions. Was it a consideration of the Select Committee that a commission such as that proposed by the hon. Member for Yeovil would be very careful about retrospective legislation? Many of our constituents are rightly concerned about that matter.

John Penrose (Conservative, Weston-Super-Mare)

That is clearly one of the critical issues that a commission such as that proposed in the new clause would have to deal with. My hon. Friend is absolutely right to say that all of us will have been lobbied by public sector employees of one sort or another in the past over the question of their pensions, their pay and conditions, and in particular the question of retrospectivity on their accrued pension rights to date.

To come back to the point about moral authority, if the Government, as the lead public sector employer, cannot put their own house in order, the moral authority created through the good work that has been done in constructing the pensions consensus that we have today will be eroded. It will be very difficult for any Government, be it the current Government or potentially a Conservative Government, to say credibly that a consensus on pensions is being maintained, if with one breath they are lecturing the voters as a whole—and the private sector world in particular—about the importance of adjusting retirement ages and so on to ensure that pension schemes are sustainable and sensible, and with their very next breath taking a slightly different approach to public sector pensions, or perhaps ducking an important issue in relation to them. It is essential that there is seen to be some fairness between public and private realms, and it is essential for the Government to take the lead on this, because otherwise their ability to lead the pensions debate overall will be damaged.

The hon. Member for Yeovil and my hon. Friend the Member for South-West Bedfordshire made a point that I want to emphasise as crucial above all else. Put simply, it is that we run the risk here—there are already straws in the wind of the debate—of creating a two-nations system. We run the risk of having two systems, one public and one private—the public one being, in the minds of private sector workers, overly generous, with a series of schemes that they could not possibly aspire to themselves, while public sector workers are concerned that they will end up losing out on rights that they have fought long and hard to accumulate over time. That would be extraordinarily divisive and would inevitably be an opportunity for the shuffling of prejudices that we have already described.

If, on the other hand, we have a commission that is designed to shed light on this complicated and potentially divisive issue, we shall have an opportunity to avoid that two-nations approach. By creating the analysis and providing the structured debate that we have enjoyed from the Turner commission, a commission could save this Government, or a future Conservative Government, a great deal of pain by ensuring that any proposals that it makes—to be judged by the Government on their own merits—are properly thought through, carefully balanced, and above all fair between the private and public sectors. I hope that the Committee will support the new clause.

James Plaskitt (Labour, Warwick and Leamington)

I, too, welcome you to our proceedings this afternoon, Mr. Gale.

Between the hon. Members for Yeovil and for Weston-super-Mare, we have just been treated to a variety of arguments in favour of the commission that the new clause advocates. I shall summarise them and then try to respond. I sense that the argument of the hon. Member for Yeovil turned largely on the call for more facts and, as he put it, overcoming confusion, whereas that of the hon. Member for Weston-super-Mare was slightly different and slightly more moderate—it was about improving debate on the issue. He spoke about shedding a bit of light on the matter, and suggested that there were, perhaps, inconsistencies between private and public sector pensions. In response, let me deal with the arguments that have been advanced for going down this road.

I remind the Committee that a number of mechanisms already exist in order to ensure the transparency of public sector pension scheme financing, and to allow scrutiny of the schemes by Members of this House and of course the wider public. Resource accounts covering the major public service unfunded pension schemes are produced annually, and are publicly available. Actuarial valuation reports for the main public service schemes are produced every three or four years and are also publicly available. These documents are prepared to the highest professional standards, and the fact that they are made public ensures transparency and provides the opportunity for detailed scrutiny.

Alongside resource accounts and scheme valuation reports, which both look at the accrued rights of scheme members, the Government annually evaluate the financial sustainability of spending on public service pensions in the long-term public finance report issued by the Treasury. The latest report, published alongside the pre-Budget report last December, makes it clear that long-term spending on these pensions is affordable and sustainable. It increases from the current figure of 1.5 per cent. of GDP in 2005-06, to an expected 2 per cent. in 2055-56, which is somewhat different from the figure given by the hon. Member for Yeovil.

John Penrose (Conservative, Weston-Super-Mare)

Of course the information that the Minister is describing is available, as it was for all the other sorts of pension and the entire pensions system, which was considered by the Turner commission, which was not established simply to review that information, but to frame and analyse it and make proposals. That was the vital building block on which the current pensions consensus was constructed.

James Plaskitt (Labour, Warwick and Leamington)

Yes, but my point was that this information is available for anyone to look at and assess—indeed, they regularly do. There is also an issue about what additional information an independent commission could have to do its analysis that does not already exist. I am not sure that there is any unique insight that could be brought, because the information needed by the commission to do its assessment and consideration is already published and available, as I have explained.

John Penrose (Conservative, Weston-Super-Mare)

The point that I was trying to make is that it is a question not of what information is available but of what the commission does with it. The value of the Turner commission was in what it did with the information that it received and the analysis that it created, providing the foundation stone for the consensus.

James Plaskitt (Labour, Warwick and Leamington)

Yes, but I am afraid that I think this analogy is quite weak when subjected to intense scrutiny, in terms of what we asked the Turner commission to do, which was a very long-term piece of work on a fundamental review of policy on pensions provision. That is something quite different from crunching numbers on accounts within public sector pensions, and I am not convinced that the analogy holds up.

Given the measures that we already have in place to ensure the transparency of the public sector pension schemes, it is not clear to me what an independent commission could add.

I remind hon. Members that we have been keeping all major public service pension schemes under review since the pensions Green Paper was published in 2002. As a result of these reviews, reforms in the major public sector schemes have been proposed, and they will ensure the long-term sustainability of these public service schemes. Reforms will introduce safeguards to ensure that schemes remain affordable and sustainable into the future. The cost-sharing mechanism will ensure that any future increases in costs will be shared fairly between employers and employees. The cost-capping mechanism will impose an upper limit on the employer’s contribution and thus the potential cost to the taxpayer. Those reforms address, I think, the point made by the hon. Member for Weston-super-Mare about a potential two nations.

In summary, I hope that the hon. Member for Yeovil is persuaded that we have the necessary mechanisms in place to ensure that scrutiny of public sector schemes can and does take place. I also hope that I have assured him that we have the right reforms in place to ensure the sustainability and affordability of these schemes in the future. I therefore hope he will agree to withdraw the motion.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the Minister for his brief summary of the Government’s case. It was a little briefer than I was anticipating, given that we are talking about 2 per cent. of the whole of Government expenditure. He made, I think, three points, and I shall deal very briefly with each.

The Minister’s first point was that there was lots of information already hanging around out there in the resource accounts that we could all trawl through. The Work and Pensions Committee called for an

“independent commission to evaluate the future terms benefits of financing public sector pensions”,

which requires not only figures but some kind of evaluation. The hon. Member for Weston-super-Mare put it quite well when he pointed out that the Minister’s arguments on those points could have been used against establishing the Turner commission, and are presumably the automatic default of all Governments when invited to set up commissions. I hope that the Minister will not rule out for all time going down that route, given the success of the Turner model.

The Minister’s second argument was that we were not talking about all that much money—it was affordable and sustainable. He talked about an increase from 1.5 to 2 per cent. of GDP, which is slightly lower than the figures that I have seen of 2.1 or 2.2 percent. Without splitting hairs over the odd 0.1 or 0.2 percentage points, I still fail to see how he can be so casual about sticking on an extra 0.5 per cent. of GDP when every time the poor old hon. Member for Northampton, North pops up with a sensible and prudent amendment that would spend the odd half a billion pounds there is hysteria from the Front Bench. The Minister is talking about £7 billion.

James Plaskitt (Labour, Warwick and Leamington)

Does the hon. Gentleman accept that the figures I gave in relation to public sector pensions and the rise over that period are entirely consistent with overall pension spending, which will rise from 5 to 6.5 per cent. of GDP by 2050?

David Laws (Liberal Democrat, Yeovil)

Well, if the Minister looks at the bottom line on state pension expenditure, as we have discussed a number of times, he will find that the share of the state pension architecture will fall from 6.2 to 6.1 per cent. over the next decade. At the same time, the share of public sector pensions will go from 1.5 to 2 per cent. according to his figures.

James Plaskitt (Labour, Warwick and Leamington)

Perhaps we can clarify this confusion once and for all—I hope so. The hon. Gentleman needs to focus on two lines of the published table. At the bottom of the table, which can be found on page 101 of the regulatory impact assessment, there is a line entitled “Total pensioner benefit” that starts with 2008 at 6.2 per cent. and ends with 2050 at 7.3 per cent. He will see that along the way there is a reduction in the figure of 6.2, as he has mentioned, to 6.1. As we have explained to him a number of times, that is the result of the equalisation process. If he moves three lines up to the line entitled “Total Pension Benefits”, which takes out of consideration issues to do with housing and council tax benefit, attendance allowance and disability living allowance, and focuses on the pension benefit element, he will see a line that begins with 5.1 per cent. of GDP in 2008 and rises to 6.5 per cent. by 2050. The dip to 5 per cent. lasts for only three years—2010 to 2012—which emphasises my point that that dip is down to the equalisation process that will take place at that time.

David Laws (Liberal Democrat, Yeovil)

I cannot remember now whether that was a speech or an intervention.

James Purnell (Labour, Stalybridge and Hyde)

It was Lawsesque.

David Laws (Liberal Democrat, Yeovil)

A Lawsesque intervention, perhaps.

I rest my case. The Minister has acknowledged that the bottom line of page 101, which lists total pensioner benefits, reads “6.2, 6.2, 6.2” and then goes down to “6.1, 6.1, 6.1”. It does not increase above that level until after 2020, and that is my point. Over that period, while total pensioner benefits are going sideways to down, the expenditure on public sector pensions is going up, up and away. It is no use the Minister saying that we will strip out this or that—we are looking at the total pensioner benefits. Even if we go to “Total Pension Benefits” and ignore some of the other stuff, that line does not go up until after 2020 either. I do not think that that is his most powerful argument.

There is a contrast between the prudence or mean-mindedness in investing in the state pensions architecture, which is supposed to be there for every single one of our fellow citizens, and the totally relaxed attitude to blowing away another 0.5, 0.6 or 0.7 per cent. of GDP when it comes to the benefits for public sector workers, including us.

The third point is the one that the hon. Member for Weston-super-Mare made in his good speech, pointing out that we are in danger of having two-nation pension provision in the future. Not only will the public sector have pension schemes with much higher levels of pension benefits and contributions, but they will be relatively low-risk because they will be based on final salary. We might find that people in the private sector experience the undesirable and contrasting effect of the enormous transfer of risk from employers and the state to individuals themselves, along with much lower levels of contribution. If anything will undermine the sense of consensus on pensions, it is that grave sense of injustice, which already exists.

Andrew Selous (Conservative, South West Bedfordshire)

It is useful to bring one other facet into the debate. In recent years, public sector pay has run slightly ahead of private sector pay. That is an important factor in the overall equation.

David Laws (Liberal Democrat, Yeovil)

That is a good point. The Pensions Policy Institute has drawn attention to that. It is one of the things that the commission could look into and about which it could inform the debate properly to ensure that we compare individuals in different professions on a like-for-like basis. It is another reason to accept the new clause, which has its origins in the Select Committee report. Because the Minister has not entirely satisfied me, this will be the last new clause or amendment that I press to a Division.

New Clause 26

David Laws (Liberal Democrat, Yeovil)

I beg to move, That the clause be read a Second time.

I am afraid it is me again. We are making good progress this afternoon, and I am delighted to have had the support of several hon. Members on the last new clause. The last time it was debated or discussed, the hon. Member for Runnymede and Weybridge (Mr. Hammond) said that it was a silly Liberal Democrat gimmick, so I think that I am making some progress in convincing other colleagues of the strength of my party’s policies.

We now come to new clause 26, and I shall start this brief debate, Mr. Gale, by asking how you would feel if in the near future you received through your letterbox an orange envelope with a Swedish postmark. You might be tempted to stick it under the newspaper on your breakfast table, unsure of what it might contain.

Roger Gale (Conservative, North Thanet)

Order. I might be terribly excited, but I am not prepared to be drawn into the debate.

David Laws (Liberal Democrat, Yeovil)

I shall not draw you into it any further, Mr. Gale, but I shall enlighten the Committee by informing you that that is the way that in Sweden you would be informed about your future state pension and, I believe, private pension entitlement. Indeed, the Secretary of State confirmed to the Select Committee on Work and Pensions that he recently visited Sweden, and saw for himself the orange envelope that is distributed to pensioners there.

Our Government are looking into the matter as a result of its having been raised in the Select Committee’s report. In their response to that report, they stated:

“The Government anticipates that DWP will continue to provide information about different types of pension saving, and this will include personal accounts. The Government will be working with external stakeholders to develop an evidence-based information strategy for communicating information about pensions and personal accounts over the next year.”

That is welcome, because the more people know about how much pension they are likely to end up with in retirement, the more likely it is that they will be energised into making pension provision—perhaps. At the moment, there is a great deal of uncertainty about how much people are going to receive in retirement, and that adds to individuals’ complacency and lack of interest in their own provision.

On the other hand, we know how difficult big Government IT projects can be. My hon. Friend the Member for Northavon (Steve Webb) tells me that he believes that the Government were looking into the matter a few years ago, but discovered that such was the complexity of the pensions system, with all its means-tested benefits, that it would be extremely difficult and dangerous for the Government to make forecasts about people’s entitlements. He said—I am sure that the Minister will confirm whether it is true—that the Department had cold feet for a little while about such forecasts.

Mr. Waterson rose—

David Laws (Liberal Democrat, Yeovil)

Perhaps the hon. Member for Eastbourne, whose experience is longer than mine, can help the Committee.

Nigel Waterson (Conservative, Eastbourne)

I remember being shown a prototype of the online pension planner with the hon. Member for Northavon, who was doing the hon. Gentleman’s job at that time. Did he notice the Government’s recent announcement—I think it was in response to a question from me—that they were abandoning work on the online pension planner, having spent some £3 million or £4 million on a project that had gone nowhere?

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman is right. He helps to clarify the point that my hon. Friend the Member for Northavon made. That shows some of the policy and IT dangers that there are in making such forecasts. This brief debate is an opportunity to hear from the Minister about how the work is progressing. It is also an opportunity to clarify whether the Government’s ultimate objective is to ensure that in future people get an indication of both their state pension entitlement and their personal entitlement, including personal accounts. Alternatively, do the Government feel that at some stage they might pursue the obligation in relation to the state pension forecasts, and impose obligations on those who provide occupational and personal pensions to provide separate forecasts for those? This is a probing new clause, and we look forward to hearing from the Minister.

James Purnell (Labour, Stalybridge and Hyde)

As the hon. Member for Yeovil said, we have been providing state pension forecasts for many years. In 2003, we started targeting those who had not received or requested a forecast. Providing people with a forecast is one way of making them aware of how much they will get in retirement, and we hope that it also stimulates extra saving by people who are not saving enough.

Andrew Selous (Conservative, South West Bedfordshire)

I know that the Minister has barely got into his stride, but I am interested in those forecasts, and should like to take him back to the debates that we had on deficiency notices. Is any mention made in the forecasts that are sent to people of the fact that they could pay voluntary national insurance contributions where they have a number of jobs that do not individually bring them above the lower earnings limit?

James Purnell (Labour, Stalybridge and Hyde)

I am afraid that I do not know the answer, so I shall add to the hon. Gentleman’s voluminous correspondence—but not before the end of this Committee’s proceedings, unless a missive is passed to me.

The forecasts that I was talking about provide information, together with a projection of private pension entitlement. By the end of December 2006, more than 9.7 million combined pension forecasts had been issued, covering both state and private pension entitlement. I hope that that reassures the hon. Member for Yeovil that the Department takes seriously its obligation to provide people with information. We are of course looking at pension forecasts in the light of the Select Committee’s recommendations, and in the light of personal accounts and the need to ensure a co-ordinated approach to informing and educating individuals during the reform transition period and beyond. We are currently looking at the role that pension forecasts play, both in assisting people to plan for their retirement and in the context of personal accounts. As has been mentioned, we are working with the Treasury on financial capability in general and generic financial advice in particular.

When personal accounts are up and running, scheme members will of course be provided with an annual statement of their rights. We shall consider proposals on combined pension forecasts as part of those wider considerations. I am about to sit down; if the hon. Member for Yeovil has a question, I should be very happy to take it. Otherwise, I urge him to withdraw the motion.

David Laws (Liberal Democrat, Yeovil)

I was tempted to intervene on the Minister, but given that new clause 26 is probing, I decided not to. There are lots of issues to do with how the Government will deliver the forecasts, how they will integrate them with personal accounts and how frequently the forecasts will be sent out. There might be other ways for the Minister to supply us with that information, so I hope that we can return to the issue at a later date. I beg to ask leave to withdraw the motion.

New Clause 27

David Laws (Liberal Democrat, Yeovil)

I beg to move, That the clause be read a Second time.

The new clause is about the pension credit disregard. It would require the Secretary of State to bring forward a report no later than 1 April 2008 on the labour market disincentive effects of the operation of the pension credit system for people over the age of entitlement to pension credit who are in employment. The new clause is a probing amendment, to see whether the Government will respond to the recommendations of an earlier Work and Pensions Committee report on pension credit, back in the 2005-06 Session, in which the Committee repeated its previous recommendation that the Government should reconsider the treatment of earnings and pension credit, taking particular account of the number of pension credit claimants who might wish to engage in paid work. The point is that currently large numbers of people who pass the age of 60 have a pension credit entitlement. The disregard for work for those people who receive pension credit is £5 a week, but it has not been changed for quite a number of years.

An important part of the Government’s solution to low incomes in retirement seems to be a quite reasonable expectation and aspiration that people should seek to work on for longer, at ages that are traditionally associated with retirement. It seems ironic that, because of the operation of the means-tested pensions system and the pension credit, there is quite a powerful disincentive for people in that situation to carry on working. The Select Committee recommended that the disregard, which has remained static for so long, should be reviewed. If it is not to be reviewed, it would be interesting to know whether the Government have any other ideas about how to remove the disincentives for people in those circumstances.

James Purnell (Labour, Stalybridge and Hyde)

Given that the hon. Gentleman’s policy is to abolish pension credit, what would be the effect of that on people aged between 60 and 65 who currently receive it?

David Laws (Liberal Democrat, Yeovil)

We have never said that we would abolish every element of means-testing in the entire pension system. We said that we would massively reduce the number of people on means-testing, back to below 50 per cent.

James Purnell (Labour, Stalybridge and Hyde)

I thought that the hon. Gentleman’s leader had said that he was committed to abolishing pension credit.

David Laws (Liberal Democrat, Yeovil)

The Minister might be confusing that with the state second pension, which we are committed to phasing out in the long term, respecting the existing accruals, so there is a misunderstanding. I was about to bring my comments to a conclusion, but it would be ungenerous not to give the Minister an opportunity to intervene again on me, as I have often done so on him. However, with those comments, I now hand over to him for his formal response.

James Purnell (Labour, Stalybridge and Hyde)

I shall happily write to the hon. Gentleman about that. From memory, I think that there is a clear quote from his leader about abolishing the state second pension, and perhaps the savings credit as well. I shall be interested in the hon. Gentleman’s answer on that issue and in what he would do with the carer and disability premium in pension credit, an issue that he still has not clarified. He could tell us now if he wanted; it is our last day.

David Laws (Liberal Democrat, Yeovil)

Come to my seminar.

James Purnell (Labour, Stalybridge and Hyde)

Perhaps he will tell us on Report.

The new clause relates to state pension age equalisation. Men aged between 60 and 65 get pension credit because we have to make it available to men and women at the same age. We had to choose between the ages of 60 and 65 and we decided to go for 60.

On Tuesday, we had a good debate on the overall issue of the state pension age, but I want to correct something that I said during it. The hon. Member for Weston-super-Mare asked me to confirm whether the projected increase in life expectancy for non-manual workers, based on the DWP’s extrapolation from ONS data, meant that the gap in life expectancy between manual and non-manual workers was projected to narrow. I replied that the gap had narrowed in the past and, if extrapolated forward, would continue to narrow. I am afraid that that was completely wrong. The truth is that the life expectancy gap between manual and non-manual workers has grown in the past few years; I was looking at the projected decrease in the life expectancy gap between people in Scotland and England.

ONS projections indicate that life expectancy for the average man in Scotland will increase more rapidly than elsewhere in the UK. Although the life expectancy gap between men in England and in Scotland increased between 1980 and 2006, it is projected to narrow between now and 2050. The figures suggest that longevity may improve more quickly among manual workers, whose life expectancy is currently below the average, although I would not wish categorically to state that that will be the case, given the absence of robust data.

Let me return to the substance of the new clause. As I said, pension credit has to be available to men and women at the same age and is therefore available to men at age 60. Clearly, the availability of the guarantee credit element of the pension credit can be perceived as a disincentive to work for men aged 60 to 64. Although unemployed men in that age group are technically of working age and are entitled to claim jobseeker’s allowance, they are also entitled to choose to claim pension credit. By so doing, they bypass the conditionality elements of jobseeker’s allowance that would require them to engage actively with the labour market.

The income that such men receive is less than what they would earn from working full time, by as much as £46 per week for those working 30 hours per week at the minimum wage. However, the pension credit system enables men over 60, some of whom may face considerable barriers to work, to withdraw from the labour market. As I said, pension credit is available for men at age 60 because of the provisions on equal treatment with women in the State Pension Credit Act 2002. That Act links the qualifying age for the guarantee element of pension credit to women’s state pension age, so by 2020 pension credit will no longer be available to working-age men and its labour market disincentive effect will have been nullified.

The Government’s policies for increasing the labour market participation of older workers centre on increasing the choice and opportunities for individuals to work and plan for retirement. In line with that approach, pension credit is one of the qualifying benefits for the new deal 50-plus. So although pension credit claimants are not required to search for work, they are free to do so and are eligible for extra support through Jobcentre Plus.

The hon. Member for Yeovil raises an important issue: extending working lives is an important goal. If we succeed in increasing the employment of older workers by 1 million, we will also increase GDP significantly and reduce poverty. I understand the valid reasons behind his amendment. I shall be happy to come back to the House if there are further developments, although I do not think that a full report would be justified at this stage. As we have said before, we are constantly considering our policies on extending working lives. If the hon. Member for Yeovil or the Conservative Front Bench have any suggestions, we would be happy to look at them. With that, I urge him to withdraw the motion.

David Laws (Liberal Democrat, Yeovil)

I am not sure whether to be encouraged by those comments. My new clause was valid and I was raising important points—it all sounded quite exciting and unexpected. I was anticipating the normal knockabout stuff. We heard a degree of discomfort from the Minister. He said that this slightly anomalous situation will be extinguished in the fullness of time by the women’s pension age equalising with the male pension age; in the meantime we are left with the slightly odd situation where the Government are trying to encourage people into employment but allowing them to take the pension credit from age 60 and, through the operation of the means-tested benefit system, creating a disincentive to their taking employment.

The Minister is clearly in some discomfort as a result of the tension between the reality and Government policy. He did not say anything about the possibility of increasing the disregard, unless I missed that. It does not look as if he wants to intervene on me now to clarify that. I will simply have to accept that the door was not slammed completely in my face. I will have to pretend that it was a triumph and I will return to this at a later stage. I beg to ask leave to withdraw the motion.

New Clause 28

Sally Keeble (Labour, Northampton North)

I beg to move, That the clause be read a second time.

The new clause touches on people’s inability in retirement to get the carer’s allowance—an issue that has been of great concern to my constituents, especially women. The change proposed in the new clause could be made by regulation, but it is important to debate the subject now.

I understand the reasons for saying that people on the state pension should not get carer’s allowance because it is not payment for caring, but replacement of lost earnings. As pensioners are judged not to be working, they cannot get replacement of lost earnings. That is bitterly resented both by people who have looked after their spouses for a number of years and who lose their carer’s allowance once they reach retirement age and by people looking after disabled children. I have had a number of cases of women who are looking after adult children with learning difficulties, mental health problems, or physical disabilities.

People feel a great sense of injustice. For a number of years they have cared for others. They have often given up work and made it their life’s work to look after a spouse, but suddenly when they reach retirement age they hit the buffers and their income goes down, often just at the point when the need more money. At the same time, if they have mobility impairment, they cannot get access to the mobility components of disability living allowance.

Let me give an example of someone who is particularly hard hit by this combination of factors. A woman in my constituency had spent all her working life with Barclays. She gave up work early to look after her husband, who was in very ill health. I cannot remember exactly what her benefits were, but she certainly got carer’s allowance. When she reached the pension age she lost that. At about the same time the car that she used to drive her husband to his hospital appointments broke down completely. She came to me because she could not afford to get it repaired. She had all those difficulties getting to the appointments and her income had gone down because she had lost part of her allowances. In struggling to work out what to do, it also transpired that she had very severe mobility impairment herself, because she had profound disabilities to her feet. However, she had never got that assessed and had never claimed any disability benefits, which she would almost certainly have got. Because she was also retired, she could not get those benefits, either.

The mere fact of reaching a certain age, plus the accident and the car breaking down, had turned her from being the mainstay of her family and for a neighbour who was ill as well, with a modest but reasonable level of income, to somebody whose income had gone down, who had lost her mobility, and who was completely unable to access any help from the state, purely because of her age. She resented that most bitterly.

Andrew Selous (Conservative, South West Bedfordshire)

It is extremely helpful to have a real-life example, but will the hon. Lady explain in a little more detail why that lady’s income had gone down? Was she not in receipt of a pension or pension credit that might in some way have compensated for the loss of her carer’s allowance?

Sally Keeble (Labour, Northampton North)

I was going to come to that. No, she was not in receipt of that. I cannot recall all the details of her exact circumstances, but the two things that really grated with her were, first, that she had lost her carer’s allowance and, secondly, that she had gone through her life with a very severe disability that she had, quite remarkably, managed to hide. When she was driving the car, her feet could not reach the pedals properly; she needed a properly adapted mobility vehicle, so how she managed to drive everybody around to all the appointments, goodness knows. However, purely because of her age, it was impossible to start to resolve any of the difficulties. The problem was not just her income, but the well-being of a number of people who were dependent on her and who were affected by what happened. She was one of the people who found herself most aggrieved about the retirement age cut-off point for certain benefits.

Quite a lot of the debates throughout this Committee stage have been about people’s changing lives and circumstances, particularly those of women, and the way in which the pension system should adapt to become fit for purpose and to meet people’s needs in those changing circumstances. Among the arguments that have been made is, first, that there should be equity and that women’s role in the workplace and as carers should be recognised much more substantially, and secondly, that people should go on working for longer and should not regard retirement as some sort of cliff edge that they go off and spend the rest of their lives as semi-citizens.

I welcome that, and certainly my constituents have always had the most remarkable work ethic. Both men and women have worked and have done so post-retirement, so it seems particularly unfair that we are saying to people that they should not regard retirement age or state pension age as the end of their lives and they should carry on working and participating—we even have a new deal for older workers—but we then say, “By the way, you are not going to get carer’s allowance, and if you suddenly become disabled, and your mobility decreases, you are not going to be able to get help there.” That seems to be an absolutely basic inconsistency.

My hon. Friend the Minister will remember that, in response to my amendment that proposed spending an extra £14 billion, he said that the research had shown that people wanted the biggest increase in income directly after retirement. That surprised me, because I thought that people wanted more money when they were older, but that is what he said the research showed. Having a cut-off point for carer’s allowance and disability benefits therefore seems to be particularly counter-productive. On the mobility components, people now have the positive expectation that they will be mobile when older. They do not expect to reach retirement, put their feet up and never drive a car again.

The rule about the overlapping benefits runs counter to that. I understand that, of course, people can get the carer’s component of pension credit—some 200,000 people do already. It would be helpful if my hon. Friend would say whether there is any information on under-claiming because, until this Committee, I did not know about the disability or carer’s components. I have done a huge amount of take-up work in my constituency in order to encourage people to claim, and if there is under-claiming, we need to ensure that people know about those components.

Not everybody gets pension credit and some only get the savings element. I am not sure whether the carer’s component can go to those who only get the savings credit. However, quite often, although a husband might be disabled or ill when older, he could still have a good income from a work pension. It by no means follows that the carer, or couple, will always be entitled to the carer’s component of pension credit. I should be grateful if my hon. Friend would respond to that point. In particular, will he explain the rationale for the cliff edge that means that when someone retires, although they might be expected or encouraged to continue to work, they will not continue to benefit from support to replace lost earnings?

Andrew Selous (Conservative, South West Bedfordshire)

Not for the first time the hon. Member for Northampton, North has rendered a service to the Committee by raising an important issue. It has certainly been raised with me by a number of my pensioner constituents, not least by the Dunstable and District Association of Senior Citizens, which I meet regularly.

As the hon. Lady said, her new clause would remove the carer’s allowance and the state retirement pension from the overlapping benefit rule, which says that it is not possible to receive more than one earnings replacement benefit at the same time. It does not just apply to those two benefits, but to contribution-based jobseeker’s allowance, incapacity benefit, maternity allowance, widow’s or bereavement pension, widowed mother’s or parent’s allowance and severe disablement allowance.

Sally Keeble (Labour, Northampton North)

This might be a cheap point, but I do not think that maternity benefit comes into the equation of state pensions.

Andrew Selous (Conservative, South West Bedfordshire)

The hon. Lady is, of course, generally right, but in our advanced scientific times, we do read the occasional story in the newspapers of such things happening. However, I take the general point that she is quite rightly making.

On the specific amounts of money, I understand that in 2006-07, carer’s allowance is £49.65 a week, which is a significant income for many pensioners; losing it would be a real blow. As the hon. Lady said, it is possible for those entitled to carer’s allowance to receive the carer’s addition in pension credit, which I think is £26.35 a week, when they become entitled to a state retirement pension. That represents a net loss of income of £26.30 a week. One would hope that that would be more than made up by the receipt of state retirement pension—although that will obviously vary from case to case—or, perhaps, by the receipt of pension credit. Will the Minister, when he responds, address what action the Government are taking to help more people take up their entitlement to the carer’s addition within pension credit?

That issue has been raised by the Select Committee, when Jim Dickson of Lancashire county council’s welfare rights service gave evidence on that point and specifically called for greater liaison between the carer’s allowance unit and the Pension Service. He also made the practical point that, in order to be entitled to the carer’s addition in pension credit, pensioners have to fill in the complete carer’s allowance form as if they were applying for that allowance, when they are obviously not entitled to it if already in receipt of state retirement pension. Perhaps a simplified form could be organised for people who are already in receipt of state retirement pension.

David Laws (Liberal Democrat, Yeovil)

Is the hon. Gentleman’s position that people should, once they have got to retirement age, still be able to claim carer’s allowance on top of the pension allowance?

Andrew Selous (Conservative, South West Bedfordshire)

No; that would be a huge spending commitment. If the hon. Gentleman is proposing to get rid of the overlapping benefits rule, I hope that he will tell us how he would fund that. We would probably all love to go that far, but it is a question of cost, is it not? So, I am not proposing that but focusing on the important issue of ensuring maximum take-up of entitlement—for, as the hon. Member for Northampton, North quite properly said, many people do not realise that they can get the carer’s addition. They know that they are not entitled to carer’s allowance and think, “That’s it”; many then suffer a loss of income that need not be as severe as it is. The issue is: how can we get the carer’s allowance unit and the Pension Service dovetailing together to ensure greater take-up? I look forward to hearing what the Minister has to say.

James Purnell (Labour, Stalybridge and Hyde)

Well, it is not quite a golden rivet, Mr. Gale, nor indeed a silver one, but it may be a silver foil rivet in my telling the hon. Gentleman that, this spring, the Pension Service plans to introduce an additional question in the pension credit application process to identify relevant carer responsibilities in order to invite the customer, where appropriate, to claim carer’s allowance using a new, shortened claim pack specifically for people of pension age. This is the last but one clause, Mr. Gale, but we have added value.

I am genuinely disappointed that the hon. Member for Yeovil did not make a speech in that debate. He could have told us his proposals on the carer’s element of pensions.

David Laws (Liberal Democrat, Yeovil)

Will the hon. Gentleman give way?

James Purnell (Labour, Stalybridge and Hyde)

I will make a deal and give way to the hon. Gentleman if he tells us what his plans are for the carer’s element in pension credit. Will he do that?

David Laws (Liberal Democrat, Yeovil)

I was going to ask the Minister whether he understands that I am not supporting this expensive new clause 28. In my earlier intervention, I was merely trying to find out what the hon. Member for South-West Bedfordshire had been telling the Dunstable pensioners group, which sounded intriguing.

James Purnell (Labour, Stalybridge and Hyde)

I will take it that the hon. Gentleman did not make a speech to cover up his plans to take the carer’s element from people on pension credit. That is obviously his secret plan; otherwise, he would deny it.

My hon. Friend the Member for Northampton, North is a long-standing and passionate campaigner on the issue of carers, and I am grateful to her for giving us an important opportunity to debate carer’s allowance. This goes to the heart of what carer’s allowance is for. Some people regard it as a payment for caring, but that is not the case when it is, in fact, a benefit that provides income maintenance for people who are unable to work full-time because of their caring commitments; that is an important distinction.

When Barbara Castle introduced what was then invalid care allowance she told the House that it would

“provide new, non-means-tested help for those of working age who are deprived of the opportunity to earn their living and who have no rights under existing contributory insurance schemes.”—[Official Report, 21 November 1974; Vol. 881, c. 1555.]

Carer’s allowance, the successor benefit to the ICA, is designed to provide an income to a person who, because of caring commitments, cannot work full-time. Conceptually, that puts it on a par with other benefits that step in to provide help when, for some reason, the mainstay of an income from work is not available. There are several benefits, such as the widowed parent’s allowance and incapacity benefit, for which the outward contingency may differ but whose purpose, replacing income, is a constant. In those circumstances the overlapping benefit rules operate so as not to duplicate payment.

I am describing a fundamental principle of insurance. If my hon. Friend’s car were stolen and burned, she would not expect to receive the value of the car twice over just because she had had it insured against both fire and theft. In the same way, a person not working for two reasons—because of caring commitments and because of having reached state pension age—should not expect to be paid twice in full. I appreciate the fact that an individual can work and still receive the state pension, but that does not alter the fact that the purpose of the state pension is to provide an income in retirement.

We are entirely sympathetic to my hon. Friend’s aims of ensuring that the contribution of carers is properly recognised.

Sally Keeble (Labour, Northampton North)

Does my hon. Friend accept that a lot of women do not get the state pension? They might have got carer’s allowance but not qualified for the state pension. The idea that when they retire they necessarily get the state pension does not work, which is one reason why there is such a grievance among so many women about the fact that when they hit retirement age they hit the buffers and lose everything.

James Purnell (Labour, Stalybridge and Hyde)

At the risk of having to correct myself again, if carer’s allowance gives people more than they would get from the state pension and they are not entitled to pension credit, they can keep their carer’s allowance. In answer to my hon. Friend’s main point, which was valid, the majority of women in that situation would be able to claim pension credit, including the carer’s element of it. That is how we deal with the situation of women such as those whom she talked about. I hope that I have avoided having to write to the Committee again.

Sally Keeble (Labour, Northampton North)

I am sorry to press the matter, but one issue to consider, which has driven the debate on women’s pensions, is equity. If a woman works but does not qualify for a state pension, she might then lose her carer’s allowance. Although her husband might have a reasonable pension entitlement, she will therefore have little or no income despite having been completely financially independent for all her adult life.

James Purnell (Labour, Stalybridge and Hyde)

My hon. Friend is right that one of the key thrusts of the Bill is to give women independence in retirement. My point is still valid: a woman in that situation would at least be able to keep getting the same amount of carer’s allowance. If her state pension were less than she was getting in carer’s allowance, she would keep the latter. We have introduced that.

Sally Keeble (Labour, Northampton North)

She would keep it?

James Purnell (Labour, Stalybridge and Hyde)

Yes.

Sally Keeble (Labour, Northampton North)

Post-retirement?

James Purnell (Labour, Stalybridge and Hyde)

Yes, post-retirement.

I assure my hon. Friend that we are sympathetic to her aim of recognising the contribution of carers. Indeed, a large part of the Bill is about doing exactly that. I am sure that the debate on the matter will continue on Report and in another place. The carer’s credit provisions that we are making and the reduction in the number of qualifying years to 30 will make a great difference to people who care, whether for children or for those who are sick or disabled. As a consequence of the Bill it will be possible to build up a full entitlement to the state pension entirely through caring contributions throughout one’s life. That is an important change.

Sally Keeble (Labour, Northampton North)

Is it for the state second pension or the basic pension that the carer’s credits will have to go on for 43 years, not 30 years?

James Purnell (Labour, Stalybridge and Hyde)

That is for the state second pension.

With that, and without resorting to my brief about the cost of the new clause, I urge my hon. Friend to withdraw the motion.

Sally Keeble (Labour, Northampton North)

I shall do so, and I look forward to seeing the proposals for work on the take-up of the carer’s element of the pension credit, which will benefit a lot of women. I beg to ask leave to withdraw the motion.

New Clause 31

David Laws (Liberal Democrat, Yeovil)

I beg to move, That the clause be read a Second time.

I said this morning that a couple of dogs had not yet barked in the Committee. This is one of the two dogs—the other was the issue of public sector pensions. I was tempted not to raise this particular issue because it has not been fundamental to the debate on the Bill and was a relatively modest part of the Pensions Commission proposals. Yet when we consider how much money is at stake in pension tax relief and how devastating the Pensions Commission’s second report was in its criticism of the Government on this matter, it would seem a little odd to complete our debate without at least touching upon this issue. In that report, the Pensions Commission concluded that pension tax relief is costly, poorly focused and not well understood. It is also true—and I anticipate that we will hear this from the Minister in a few moments—that the Pensions Commission said that it would be quite complex to change pension tax relief and did not make recommendations for immediate changes.

James Purnell (Labour, Stalybridge and Hyde)

Does the hon. Gentleman recognise that the report actually said, on page 319, that it was “very complex”?

David Laws (Liberal Democrat, Yeovil)

Yes, it said it was very complex but also that it would not recommend changing it in the short term—in other words, in the next few years. It did not say that it was so complex that people of the Minister’s brilliance and all those in the civil service, the Treasury and the Department for Work and Pensions could not start doing some work on this in order to produce a better system.

Therefore, I hope that the Minister will not use that as an excuse not to take this issue full-on, although I fear that he might. I anticipate a speech in which he will say that this is a matter for Treasury Ministers, not for his Department. He will say that this is extremely complex and difficult to deal with, that other changes to the regime of pension tax relief are taking place and that it would be imprudent to introduce other measures at the same time, as it might destabilise them. I have seen this speech outside; I have read it.

Despite all that, I will not be knocked off course. Not only did the Pensions Commission come up with this devastating criticism, but the right hon. Member for Birkenhead (Mr. Field), in his evidence to the Work and Pensions Committee, said he very much hoped that this issue would be pursued. The Select Committee itself asked the Government to look into that.

What I want to find out from the Government today is not the bit about the complexity—because I know that bit, have already read it and am probably going to hear it again—but whether the Minister agrees with the conclusion of the Pensions Commission report that this tax relief is costly, poorly focused and not well understood. The main issue will not be whether it is costly or well understood, because we already have information on that, but how focused, fair or unfair it is. We have Government figures on the cost of pension tax relief and they are pretty significant, which is another reason why we could not leave this whole debate without airing the issue.

In 2005-06, the net cost of pension tax relief, after clawing back the money on tax from pensions in payment, will be approximately £14.3 billion. That must be something north of 1 per cent. of GDP, which is quite a lot of money. That figure has increased by almost £2 billion since 2004-05. It is up by something like £5 billion from 2001-02, which is a pretty significant increase.

If some of this week’s newspaper reports are correct that the demand for pension products is increasing as a consequence of the recent simplification of pension tax relief, we may find that the net cost of pension tax relief continues to rise quite rapidly in the future. Therefore, it is quite a large element of total tax relief and very large in relation to this whole debate.

We also know from the Pensions Commission’s excellent second report that pension tax relief is not well understood. Page 317 of the report provides two very useful charts, which show basic rate and higher rate taxpayers’ understanding of how pension tax relief works. Almost half of basic-rate taxpayers had no idea about their entitlement to tax relief on their pension contributions, 26 per cent. thought it would be better than the basic rate and only 17 per cent. got it right at the basic rate. Higher rate taxpayers, as one might expect, were a little better informed about the enormous benefits of tax relief to them, but even there only 28 per cent. got it right that they would get a 40 per cent. rate of relief. Almost the same figure as for basic rate taxpayers, 27 per cent., could come up with no idea at all about what the tax relief was worth.

I hope that we can establish that tax relief is costly and that it is not very well understood. The issue is whether it is well focused and fair. Before I get an intervention, I should point out that it is a reasonable presumption within our tax system and, as I understand it, most other tax systems of developed economies that there should not be a double taxation of pensions. One should not be taxed on the income used to put into a pension and again on money as it is drawn out. That principle, in one way or another, is embedded in our whole savings regime. However, the Pensions Commission’s point was that we do not seem to have that kind of tax neutrality in relation to our existing system in the UK but, rather, an unbalanced system that seems to give greater relief to one proportion of the population. In crude terms, something like 50 per cent. of the tax relief goes to the top 10 per cent. of income earners and 25 per cent. to 2.5 per cent. of the income earners. That would not necessarily matter, if that simply reflected the amount of participation in pension savings by those two groups and the need therefore to neutralise the effects on taxation. However, it seems to be not simply neutralising, but actually skewing the tax system in a way that benefits people on very high incomes.

We already know that in this country we have an extraordinarily unequal distribution of income, wealth and opportunity. There are question marks about whether social mobility has been declining over recent years. So, it is very striking and also bizarre and extraordinary that we should have a tax system that the Pensions Commission considers to be skewed in favour of those people with the higher incomes. The second report of the Pensions Commission points out this extraordinary situation, which we have been discussing throughout the Bill, where those people on very low incomes potentially suffer enormous withdrawal of benefits in retirement and therefore may have their incentives to save cut away from them. In the earlier debate the hon. Member for Eastbourne talked about the effect of means-testing essentially operating as a tax on saving.

At the same time, to those people who already have a lot of money, more is given. There is an extraordinary graph on page 313 of the Pensions Commission’s second report, which shows the impact of the tax advantages on returns from savings. Looking at it, one will see an extraordinary rise in the tax advantage of saving for those people as they go over the threshold for upper-rate tax. The Pensions Commission made the issue very clear on page 312 of the report:

“The benefits of this significant cost to the Exchequer are...extremely unequally distributed”.

It continued:

“But the overall message is clear: the beneficial impact of tax relief on the rates of return of savings is much higher for higher-rate taxpayers than for basic rate or lower-rate taxpayers. And this is not simply because tax relief undoes the higher detrimental effect on rates of return which higher tax rates would impose on non-tax privileged saving: higher tax rate payers can achieve through pension savings higher post-tax rates of return than those enjoyed by basic-rate taxpayers”—

which includes those at the bottom end of the income distribution.

We have a bizarre, eccentric system. It not only uses tax relief on pensions to give a special bonus to those who already have a lot, rather than just neutralising the tax consequences, but it disincentivises saving among people with very little money, because there is so much means-testing. Enormous incentives to save are being given to people at the upper end of the income distribution. It seems bizarre that we should be giving massively generous incentives to affluent people while creating disincentives for people at the bottom end of the income distribution

James Purnell (Labour, Stalybridge and Hyde)

I am following the hon. Gentleman’s speech with interest. I should be even more interested if he were to tell us what his policy was.

David Laws (Liberal Democrat, Yeovil)

I shall move on to that. I am encouraged to go further. We published a policy last year—I am sorry that the Minister missed it—to reorganise tax relief on pensions so that tax relief is paid at the basic rate and the savings are recycled as a cut in the basic rate of tax. If the Minister has an alternative we will listen to it, because there are other ways of better using the money.

Our policy would avoid the current situation, from which most Members of this House will probably benefit. We can take the enormous benefit of 40 per cent. tax relief as we save, in the knowledge that many of us will be paying only the basic rate of 22 per cent. when we retire. A large proportion of the people who receive tax relief at 40 per cent. will pay only the basic rate of tax in retirement.

Figure 7.8 on page 313 of the Pensions Commission’s second report is an interesting graph that shows the average tax rate for people in different income bands in retirement. The average rate of about 20 per cent. applies to people on incomes of up to about £55,000 a year. Someone who has been a higher rate taxpayer during their working life has to earn an awful lot of money in retirement to miss out on that enormous freebie from saving in pension accounts. Notwithstanding all the criticisms that have been made of the Chancellor of the Exchequer for tinkering with tax relief on pensions, I should have thought that removing that anomaly, which enormously advantages the advantaged, would be extremely sensible for a Labour Government who are, on the face of it, passionate about social justice.

I know that the Minister will say that such changes are far too complicated, but in its contribution to the Select Committee inquiry, the Pensions Policy Institute said:

“Discussions between the PPI and practitioners suggest that reform”

of the type that we suggest

“would be possible. A review of value for money to the taxpayer of current and alternative systems of tax incentives for pensions and other forms of savings would help address a remaining significant policy issue.”

Elsewhere, the PPI has said:

“Discussions between the PPI and practitioners have indicated that it would be possible to resolve the problems identified in Lord Turner’s report.”

I think Lord Turner would acknowledge that he was hardly encouraged by the Treasury or other parts of Government to look in great detail at tax relief on pensions. One suspects that the Chancellor would have gone potty if Lord Turner had gone that far into the Treasury’s area.

We should not regard the Pensions Commission as having drawn a line under the issue with its conclusion that resolving it will be complex. We should note instead its criticism of the unfocused nature of the existing relief. In the Minister’s reply, I hope to hear an acknowledgment that tax relief is badly focused and that the door should not be closed to consideration of that issue.

Sally Keeble (Labour, Northampton North)

I should be very interested if the hon. Gentleman would again go through the proposals. I am unsure about the detail. I understand that pension relief on the contributions would be capped at the basic rate. Then would the money saved be provided to broaden the band that is only taxed at 10 per cent., or would thresholds be increased? Or would it go into other forms of support for pensioners’ income?

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Lady for raising that issue. There are a myriad different ways in which tax relief could be redesigned. It could simply be redesigned so that it was given to every member of the community at the same rate, rather like the proposal for personal accounts where everybody gets the same rates of pension tax relief. It could be that the money saved in that way is used to incentivise saving in some other way. Our proposal is to restrict relief to the basic rate and then to funnel that money back into reducing the basic rate of tax. But it could be used for many other things.

Sally Keeble (Labour, Northampton North)

For everybody?

David Laws (Liberal Democrat, Yeovil)

Into the basic rate of tax for everybody. But it would be open to the hon. Lady and others to bring forward their own proposals. There are plenty of other ways of doing this.

I hope that the Minister will not only give us the guarantee that he regards pension tax relief as badly focused, but clarify the purpose of pensions tax relief and whether it is to give incentives to save or whether it simply seeks to deliver neutrality in the tax system.

Nigel Waterson (Conservative, Eastbourne)

I do not wish to detain the Committee long, particularly at this late stage in our deliberations, but I could not not intervene in this debate.

I apologise—although I would not wish to lull him into a false sense of security—to the hon. Member for Yeovil that I missed the policy announcement he mentioned. As with buses, however, if you miss one Lib Dem policy announcement there will be another one along at any time, probably saying exactly the opposite. I am grateful for his confirmation that indeed his party’s policy is the same as it was before the last election, which is to remove the tax relief available to higher earners for making pensions contributions. He has twitched so I will give way. [Laughter.]

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman clearly has not been following the twists and turns of Liberal Democrat policy as well as he should have been. This policy was passed a year ago. It was not the policy at the last election.

Nigel Waterson (Conservative, Eastbourne)

I apologise again. I was only going on what his hon. Friend the Member for Northavon said in the House. In any case, it does not really matter, as there is no Liberal Democrat Government following that election and we are now looking to the next election.

So that my constituents among others can be absolutely clear about this, the Liberal Democrats would remove the tax relief on pension contributions for higher earners.

David Laws (Liberal Democrat, Yeovil)

And reduce the basic rate.

Nigel Waterson (Conservative, Eastbourne)

Yes, well, we await some of the detail. I am amazed, if that is the case, that the hon. Gentleman has not had the courage of his convictions because, if he does not mind my saying so, his rather mealy-mouthed new clause only talks about having a report whereas it seems to me he claims to have a thoroughly worked out, hard-edged policy, which I think he might just have managed to form into a new clause, but there we are. There is always Report stage to consider.

Speaking for my party, at this crucial stage where the last thing we want to do is remove incentives to people to save into pensions for their retirement, to start fiddling with and reducing the tax relief available is exactly the wrong way to go. The hon. Gentleman is wrong when he says it is not understood. It may be true, as he indicated, that a lot of people do not understand all the complexities and the detail but they do understand the central point that if they pay into a pension fund they get tax relief.

David Laws (Liberal Democrat, Yeovil)

That is not the point I made; it was Lord Turner’s point. Does the hon. Gentleman disagree with Lord Turner’s suggestion that tax relief is poorly focused?

Nigel Waterson (Conservative, Eastbourne)

Well, I agree with Lord Turner’s point that it would be, I think the phrase was, “very complex to do anything about it” but it is a luxury available to the hon. Gentleman’s party to have very complex policies because they are never going to be called upon to put them into effect in the real world.

We on the Conservative side of the Committee would have great reluctance in supporting any such proposal, even if it were actually contained in the new clause. We think it will not be well received at all among the many higher earners out there who are aware that there is tax relief and may well for that reason be saving in their pension. This is at a time when we are really worried as a party that, if anything, people need more encouragement to save into pensions, particularly with the coming of personal accounts and the whole issue of levelling down, which I will not go into again.

James Purnell (Labour, Stalybridge and Hyde)

I am tempted to say that the hon. Gentleman has given my speech, so there is no need for me to do so, but I shall gild the lily slightly by saying that I look forward to the “Focus” leaflets in Twickenham, Richmond and Guildford highlighting the importance of higher-rate tax relief, explaining to people how it works and how the Liberal Democrats are going to take it away.

David Laws (Liberal Democrat, Yeovil)

And in Yeovil.

James Purnell (Labour, Stalybridge and Hyde)

And indeed in Yeovil. I also look forward to seeing the detailed calculations that the hon. Gentleman will provide at his seminar. He rather gave the impression that he was going to be able to pocket £14 billion from this. As he well knows, the higher rate element of it accounts for only about a quarter, and there is no guarantee that the savings will materialise because, people being what they are, having lost one form of tax-advantaged saving, they might well find another to allow themselves to make provision for the future. Perhaps, therefore, all he will achieve is to shift money from pension saving into another form of tax-advantaged saving, perhaps housing. Given that the thrust of our debates has been to encourage pension saving, I am not sure that that would necessarily be a brilliant policy.

I am also tempted to read out to the Committeepage 319 of the commission report. I can see that you would be delighted for me to do so, Mr. Gale, but I shall just send it to the hon. Gentleman again so that he can read the bits that do not suit his argument quite so well, especially the bits that say that it would be very complex to make the changes.

David Laws (Liberal Democrat, Yeovil)

Will the Minister give way?

James Purnell (Labour, Stalybridge and Hyde)

Absolutely; it will give me time to find the place.

David Laws (Liberal Democrat, Yeovil)

If it could be demonstrated that it was not very complex, would the Minister then be in favour of the change?

James Purnell (Labour, Stalybridge and Hyde)

I did not have time to find the quote. However, the hon. Gentleman has again demonstrated that he is cleverer than the Pensions Commission and, indeed, John Hills, who looked into the matter in some detail. John Hills gave a lecture on this, which was posted on the PPI website—that is not the right quote. Here we are: the Pensions Commission said that it would be extremely complex to make the changes so long as there is a significant element of DB—defined-benefit—provision in the system.

The point is that, as is explained on page 319, which all hon. Members will read before the hon. Gentleman’s seminar, making the changes would deal a potentially fatal blow to defined-benefit schemes because of the extreme complexity that would be involved, the fact that individual tax obligations would have to be calculated—for every member, we think—and the fact that members who had significant increases in their salaries might be required to pay significant in-year tax bills.

David Laws (Liberal Democrat, Yeovil)

Does the Minister agree with Lord Turner that pensions tax relief is poorly focused?

James Purnell (Labour, Stalybridge and Hyde)

We are implementing the Pensions Commission’s recommendations pretty much in full, and they did not include making that change. If the hon. Gentleman wants to make policy suggestions that are potentially very damaging to final salary schemes, that is very much at odds with his previous concerns during our proceedings about levelling down. We do not think that that would be the right approach, and in that we follow the Pensions Commission. I suspect that he is trying to find a sum of money that he can recycle into something that enables him to make a simple claim about basic rate tax. I am sure that the money will be spent in a number of other areas as well, such as on increasing the basic state pension, and it might fund some other policy suggestions that the hon. Gentleman has made. I do not think that that is a practical solution, and neither did the Pensions Commission, and I urge him to withdraw the motion.

David Laws (Liberal Democrat, Yeovil)

It has been an interesting debate, and this is the last new clause. I was not going to propose it until I got stuck at Basingstoke station on the way home one day, and had nothing better to do than read the Pensions Commission report. I then decided that it would be negligent to end this Committee without airing serious criticisms of the pension tax system. I anticipated, and wanted to flush out, just how conservative both sides were going to be. I wanted to test out whether all this new model Conservatism and Toynbeeism really added up to much. We found out from the hon. Member for Eastbourne that it does not. It comes down to a defence of traditional privilege: the traditional privilege of those highest earners in society who are tax-privileged and are getting an enormous subsidy to save in pensions. The Conservative party is still determined to defend that.

Andrew Selous (Conservative, South West Bedfordshire)

Is the hon. Gentleman aware that moderately senior nurses in the NHS and other people of that ilk are higher rate tax payers? Does he think they are hugely privileged people?

David Laws (Liberal Democrat, Yeovil)

The hon. Gentleman should know that the people who are upper rate taxpayers are among the 10 per cent. richest and the most affluent people in the country. The idea that we should have a pension system that gives powerful disincentives to the poorest people in Britain not to save, and gives enormous subsidies and incentives to the richest to save is crackpot. Eventually, whether or not the other parties agree, we will end up with a grand consensus based on this little phrase from Lord Turner that we have got to change the system.

The briefing will change and the Chancellor of the Exchequer will become Prime Minister and decide that this is a good idea. The leader of the Conservative party in a cuddly moment will decide that it is something that he must support too. I look forward to hearing the hon. Member for Eastbourne and the Minister eating their words and commending me for my proposal to end the immoral and wasteful system of tax relief. I detect that I may not at the moment command a majority on the Committee. With those deeply consensual words, I beg to ask leave to withdraw the motion.

Nigel Waterson (Conservative, Eastbourne)

On a point of order, Mr. Gale. I do not want to detain the Committee long, but it would be wrong not to say a few thanks at the end of this constructive and good-natured Committee. The golden rivet has proved elusive, except for the concession made following the intervention of my hon. Friend the Member for South-West Bedfordshire on new clause 28. We can take that away and claim a success, although the hon. Member for Yeovil will even now be drafting a press release claiming that it was all his idea.

David Laws (Liberal Democrat, Yeovil)

I have done it already.

Nigel Waterson (Conservative, Eastbourne)

I should like to thank you, Mr. Gale, and Mr. Taylor, for your excellent chairmanship. I should like to thank our Clerk, who has striven manfully to keep our amendments in order, the Hansard writers, the police and the security officers and all the officials who have kindly supplied the Minister sometimes with the right quotations and sometimes not. They have supplied us all with loads of information and with loads of letters, but not all at the same time. I should like to pay an especial tribute to the Committee Office scrutiny unit who have laboured long and hard to deliver two, two-page submissions. I do not regard this Committee as having been a wonderful example of the new rules of written evidence, let alone oral evidence. But do not get me started on that.

I should like to thank all my hon. Friends and all members of the Committee. I should particularly like to thank my hon. Friend the Member for South-West Bedfordshire for his all hard work on the Committee and my own Whip who, sadly, is not here. I should like to thank my hon. Friend the Member for The Wrekin, who is not here either. I see from his biography that he is a member of the Miniature Schnauzer Club of Great Britain. I assume that he is out walking his dog today. In addition to his activities as a Whip, my hon. Friend is a bomb disposal expert—he has recently returned from Iraq—as well as working in the family firework manufacturing firm. Let us hope that he does not light the wrong blue touch paper.

We have been very honoured to have two very good Ministers. I looked on his website and saw that when asked what motivates him, the Under-Secretary of State for Work and Pensions, the hon. Member for Warwick and Leamington said:

“You need to keep the belief that there is far more good in the world than evil.”

Let us hope that this Committee confirms that view of life. The hon. Member for Solihull has experience as a prison governor and I hope that this experience has not been too different. We established in a previous debate that the earnings link was broken when the Minister for Pensions Reform was still in primary school. There has been a great historical sweep in our debates.

I thank the Government Whip for whipping the Committee with an admirably light touch. The visits to the Liberal Democrat Santa’s grotto have been interesting; I hope that the Minister has kept a running tally of the spending commitments, the prize for which must go to the hon. Member for Northampton, North who came up with a modest, probing amendment that would have cost £14 billion. I wonder whether she has considered joining the Liberal Democrats.

The hon. Member for Yeovil seemed determined to upset every aspect of the electorate, particularly higher earners, except, of course, for the Christian Brethren who, as he conceded, cannot vote for him or, indeed, for anybody else.

Finally, I had a letter from the Minister this morning that contained a sentence that should send us on our way cheerful and happy. It said:

“Cross-party scrutiny of the Bill’s proposals is an important part of deepening the existing consensus around the future of the UK pension system.”

That is a wonderful sentiment. In our case, the deepening consensus has become rather more shallow and we shall return to some of the issues on Report. I take my share of the credit for delivering this Bill entirely according to its agreed timetable. Everyone has had their say; we have considered all the important parts of the Bill with full justice.

David Laws (Liberal Democrat, Yeovil)

Further to that point of order, Mr. Gale. I thank you and Mr. Taylor for chairing our proceedings in such an excellent way and for your tolerance and patience throughout the last three weeks. I thank the Clerk, the officials who supported the Ministers and the Committee, the Hansard reporters, the police and others. I also thank the hon. Member for Northampton, North for her expensive probing amendments which, as I said earlier, allowed me to triangulate between those and the Gladstonian candle-end pinching of the hon. Member for Eastbourne and to find myself firmly on the rational centre ground of British politics.

We enjoyed the contributions made by the hon. Member for Eastbourne and his dry and frequent wit, and those made by the hon. Member for South-West Bedfordshire, who was always rational and constructive in managing the debate. We also enjoyed the Ministers’ contributions; they did not concede very much, but it was done in a gracious way, and he gave way frequently and with great tolerance. We look forward to Report and to Third Reading.

James Purnell (Labour, Stalybridge and Hyde)

Further to that point of order, Mr. Gale. This has indeed been a very constructive and pleasant Committee to be part of. I hope that it will be seen as having added to the consensus. There are some issues to which the hon. Member for Eastbourne wants to return on Report, but, particularly in respect of the clauses on the state pension, I hope that there is broad agreement on the direction of travel in the reform of the pension system in the UK.

I was lucky enough to go out with the local Pension Service recently to see their work in action. We visited the home of a wonderful 85-year-old lady and on the way in, the gentleman from the local service turned to me and said, “How shall I explain your presence here? Shall I say you are a Minister or a trainee?” He then looked at me and said, “I think trainee is probably more credible, don’t you?”

The lady asked me to open a can of condensed milk for her, which is not something I had done before I must admit, certainly not with the implement that she pointed me towards. I did not know how to use it and decided to use brute force instead, with the result that I spilt condensed milk all over her kitchen. On that occasion, my trainee status cover was not blown.

That was a long segue into an acknowledgment of the fact that both I and my hon. Friend the Member for Warwick and Leamington are both trainees here—this is our first Committee as Front-Bench Members and we have been delighted to have learned along with everyone else. Indeed, I would like to start by thanking my ministerial colleague for all his expert, overshadowingly brilliant, support during the Committee. He dealt with a large number of important clauses.

I would like to thank the Conservative Front-Bench spokesmen for their constructive and serious approach to our policies, as well as for their wit in describing many of them. I would also like to thank the hon. Member for Yeovil for being such a gracious butt of the jokes of the hon. Member for Eastbourne throughout the proceedings and for ensuring that we have been able to use all of our 12 allotted sittings. It would have been a shame had we not been able to do so. Without his contribution, we would definitely not have used a number of the sittings that the Conservative Front-Bench Members asked for.

I would also like to thank our Whip, who, as the hon. Member for Eastbourne said, is the crème de la crème of Committee whipping. He is a most experienced Whip and has dealt with us with a very light touch. He only once said to me that I had made rather heavy going of a clause, which I took to be a nuclear warning given his normal approach to such matters. I can only apologise for new clause 2, which I know is embedded in the memory of your co-Chair, Mr. Gale.

In particular, I would like to thank my officials, who have done a brilliant job. If we have appeared like a duck across the surface of the water without too much stress, it is only because they were furiously paddling underneath—they stayed up till all hours of the night dealing with people’s amendments. I hope that the Committee will join me in thanking them, as well as the drafters of the Bill. They have given us a Bill far more comprehensible than is normally the case.

I would like to thank the Clerk and all his staff as well as the members of Hansard. Not least, I shall finish by thanking all the organisations that provided so many of the briefings and amendments, and the police, who have prevented great hordes of Bosnians, the Plymouth Brethren, mothers over 60 and, in the last sitting, a whole horde of upper-rate taxpayers from invading the Committee. Without their protection the Room might have been stormed, although I cannot see them—ah, there they are, fighting off hordes of higher-rate tax-paying nurses!

Finally, I thank you, Mr. Gale and Mr. Taylor, for your brisk and effective chairmanship. I wish everyone a very good weekend and half-term break.

Roger Gale (Conservative, North Thanet)

It is one of the wonderful eccentricities of Committee work that we always end with five minutes of points of order that are totally out of order. But then, as points of order on the Floor of the House are usually out of order, I suppose that it is a convention that the House has established. As we have been completely out of order, I am interested to note that the Committee feels that I have been tolerant. Clearly, I shall have to look to my laurels.

On a more serious note, I add my thanks to the staff and Officers of the House without whom we could not do our work. I also thank every member of the Committee for making this a congenial and constructive event.