NORTHERN IRELAND ASSEMBLY
COMMITTEE FOR SOCIAL DEVELOPMENT
OFFICIAL REPORT
(Hansard)
Pensions Bill
4 October 2007
Members present for all or part of the proceedings:
Mr David Hilditch (Deputy Chairperson)
Mr Mickey Brady
Mr Thomas Burns
Mr Jonathan Craig
Ms Anna Lo
Mr Fra McCann
Miss Michelle McIlveen
Mr Alban Maginness
Witnesses:
Mr Gerry McCann ) Department for Social Development
Mr John O’Neill )
The Deputy Chairperson (Mr Hilditch):
Welcome, gentlemen. Hansard will record this session. The Department for Social Development (DSD) is represented by Mr John O’Neill and Mr Gerry McCann. Gentlemen, please address the Committee, and questions from members will follow.
Mr John O’Neill (Department for Social Development):
Thank you, Mr Hilditch. We are here because the Minister hopes to introduce a Pensions Bill to the Assembly as part of the legislative programme for the coming year. We are here to explain what is in the Bill and the reason that it is being introduced.
The Pensions Bill will correspond to the provisions of the Pensions Act 2007, which was given Royal Assent at Westminster earlier this year. Subject to Executive Committee approval, it is anticipated that the Bill will be introduced in the Assembly later this year. The Bill is a strict parity measure, in line with the policy of parity in social security and pensions.
As I believe that I have said to the Committee before, the current pensions systems has been described as impenetrable. An article in ‘The Economist’ on the UK pensions system stated that few people understand pensions and that those who do are “boring beyond redemption”. That description might be applied to Gerry and me, but I hope not. [Laughter.]
We accept that the matter is complex, but it comprises a number of strands and affects many people who will build up pensions from a variety of sources with residual rights that go back to former pension schemes.
There are three tiers in the pension system. The first tier is funded on a pay-as-you-go system — that is the basic state pension. Four categories — A, B, C and D — cover various people, and all employees and self-employed persons who earn above a certain limit must pay National Insurance contributions, thereby earning an entitlement to a basic state pension.
The Deputy Chairperson:
Excuse me. There is a difficulty with the audio recording. It seems that someone has not switched off his or her mobile phone.
If nobody is speaking, how can it be established that the equipment is recording properly?
The Committee Clerk:
They will hear the whispering.
Mr A Maginness:
Mr O’Neill could tell more jokes.
Mr J O’Neill:
I have exhausted my repertoire. [Laughter.]
As I said, the first tier of the system is the basic state pension, with which everyone is familiar. The second tier, which again is funded on a pay-as-you-go basis, is the second state pension. That was previously known as the state earnings related pension scheme (SERPS), or additional pension, so it has been given various descriptions over the years. Again, all employees who earn over a certain amount earn additional pension entitlement unless they are contracted employees. People who earn under that limit, such as carers, are assumed to be earning at the limit, and contributions are applied to the scheme for them.
The third tier essentially comprises privately funded incentivised pensions, which are occupational schemes run by employers. If an employee or employer is in one of those schemes, they pay lower National Insurance contributions. If a person has a private personal pension that is not provided by an employer, HM Revenue and Customs will pay a contribution to that person’s pension. That tier is entirely voluntary.
There has been some concern about what happens when a pension scheme runs into trouble. There is now a safety net for employees if an occupational pension scheme fails and the employer is unable to meet its obligations.
Since April 2005 there has been a private pension fund that provides up to 90% of what a person could have expected, up to a maximum of £30,000. For schemes that were affected before the pension protection fund was established, a financial assistance scheme is run by the Department for Work and Pensions. That scheme also covers Northern Ireland. That help has been extended under the Pensions Act 2007 so that the pensions of all eligible members of schemes would have their pensions topped up to around 80% of the core pension rights that they accrued under the scheme. An independent review is considering several issues that relate to schemes that qualify for that assistance, including the way in which assets are currently handled. The aim is to push the level of compensation up to 90%, rather than 80%.
Pension credit is a social security benefit. Through the guaranteed credit, single pensioners have an income of at least £119·05 a week, and a couple receives £181·70. For people over 85 who have saved, there is a savings credit that can award them up to an extra £19·05 a week for a single person or £25·26 for a couple.
That is the background to the pension system. I will now move on to the background to the Bill’s proposals. The Bill contains reform measures flowing from the report of the independent Pensions Commission, known as the Turner Report, after Lord Turner, who is its chairperson. It looked at improving the coverage, generosity and sustainability of the state pension and enacting some simplifications in the field of private pensions. The aim is to recognise the different ways in which people contribute to society by ensuring that carers have better opportunities to accrue pensions. Currently only 40% of women in Northern Ireland have the right to a full, category A pension, which is a pension based on their own contributions. Under the proposals in the Bill, it is anticipated that in 2010, 75% of women reaching state pension age will be entitled to a full category A pension. That is expected to rise to 90% by 2025. Inevitably, given the cost implications of the proposals, there are trade-offs. One of those is increasing the pension age in response to the ageing demographic profile.
In outline, the proposals cover various areas. The first of those is improving the coverage, generosity and sustainability of state pensions. The Bill will link the upgrading of state pension credit, the standard minimum guarantee and the basic state pension to earnings. Currently, some of the links that are made are only to prices rather than to earnings. The Bill improves the entitlement to the basic state pension for women and carers by enacting a single condition of 30 qualifying years. Currently, a man must have 44 years of contributions to qualify and a woman must have 39 years. A basic condition of 30 years will be established for both men and women.
The Department also wants to revise and modernise the credits for caring that will apply to both the basic state pension and the second state pension. A further proposal is to simplify and create a flat rate for the second state pension. The earnings-related component of that will become smaller over time and will disappear by around 2030. Instead, there will be a single, flat-rate component.
As I have said already, in response to the ageing demographic profile, the pension age will be gradually raised from 65 to 68 in three tranches between 2024 and 2046. That will affect other benefits in the system that use the retiring age as an entry point.
The new legislation will abolish the adult dependency increases for category A and category C retirement pensions. That will simplify the rules for state pensions, which are complex and difficult to administer.
This reform flows from the increasingly outdated post-war policy for adult dependency increases based upon the concept of breadwinner households.
If the Bill is enacted, the additional spending on pensioner benefits is expected to be around £600 million — at 2006-07 values. That is in addition to the already projected annual costs of pensioner benefits of £4 billion per annum in 2020, and that is also at 2006-07 values. The total cost is expected to rise to £23 billion per annum by 2050.
We will be looking at simplification measures in private pensions. First, we will seek to permit the trustees of defined benefit contracted-out occupational pension schemes to simplify the scheme structure by converting guaranteed minimum pensions — which relate to certain pension rights earned before 1997 — into ordinary scheme benefits, which must be of at least equal actuarial value. Secondly, we will seek to abolish contracting-out defined contribution schemes. That system is complex. It is difficult even for experts to make a judgement call about whether a person in a defined contribution scheme would be better off contracted out or contracted in to the state second pension. The abolishment of that complex system would remove the need to make that difficult decision.
We want to enable occupational pension schemes to operate simpler internal dispute resolution procedures and remove the requirement for DSD to approve actuarial guidance notes relating to pension schemes. Furthermore, we want the Department to provide for the initial functions of the personal accounts delivery authority (PADA) — which will operate UK-wide — to operate in Northern Ireland to prepare for the introduction of a personal retirement account system, which will be introduced later in the decade.
A quality impact assessment was conducted on that and published earlier in the year. It was circulated, and one response was received from Disability Action, which pointed out that 2·2 million pensioners in the UK live in poverty. The equality impact assessment identified a number of differential impacts — mostly beneficial — on section 75 groups. Some of the impacts were unintentional and incidental. For instance, given the population breakdown, more Protestant women will benefit from the changes to the welfare state pension, because there are more of them in that category. In cases where there is an identifiable adverse impact, for example, the abolition of adult dependency increases and increases in state pension age, there are mitigating factors, and they are part of the overall financial trade-off to help fund the significantly increased costs. The Minister is still considering accelerated passage, but she will seek the Committee’s views on that.
The Deputy Chairperson:
Thank you, Mr O’Neill. It is a difficult topic, and you have put it to us in personal terms. If the Committee were to amend any part of the Bill, what financial, or other, implications would there be?
Mr J O’Neill:
I have already mentioned the figures that are involved. The amounts are substantial, and the costs would mount accordingly. A difficulty will arise if the amendment relates to pensions that are funded out of National Insurance contributions; the rates of those contributions are set UK-wide at Westminster, and the Assembly does not have the power to alter them. There would, therefore, be a difficulty in financing any proposed additional benefits. The costs would mount over time. It is difficult to quantify them unless you know exactly what amendments will be proposed. However, there would be substantial costs: £600 million for the proposals mentioned in addition to what is already provided for pensioners.
The Northern Ireland National Insurance fund, from which is paid the state pension and some other benefits, needs approximately £185 million each year to make it balance. That is the difference between the amount of National Insurance contributions paid in Northern Ireland and the amount of benefits paid out of that fund. Therefore, there is a subvention to the fund from the Great Britain National Insurance fund of around £185 million a year.
The other pensioner benefits come from taxation revenue. That money is known as annually managed expenditure, and it comes to the Department directly from the National Insurance fund or through taxation revenue. Again, the Assembly has no control over taxation rates that would affect that.
The Deputy Chairperson:
It appears that this is 100% parity legislation. Does the entire Bill fall under section 87?
Mr J O’Neill:
Yes. That intention is to bring the law in Northern Ireland on those aspects of the pensions system into line with that in Great Britain. The two systems are aligned very closely, particularly as regards private pensions, but there is no indigenous private pensions industry in Northern Ireland. All of the pension schemes that are sold in Northern Ireland are provided by companies that are generally based on the mainland.
The Deputy Chairperson:
Are you aware of the Minister’s mind on accelerated passage?
Mr J O’Neill:
The Minister is still discussing the matter her with Executive colleagues. There are certain time constraints in the legislation. For example, benefits are uprated annually in April each year by an uprating Order, which is made in March. From next April, pension credit will have to be uprated in line with earnings, rather than in line with earnings and prices as it is at the moment. Therefore, we need the legislation to be in effect by the end of February 2008 so that the uprating Order in Northern Ireland can provide for that change from next April.
Mr F McCann:
Can the Committee, if it wishes, recommend changes to the Bill? As regards accelerated passage, the Committee was advised previously that accelerated passage would have an impact on the Welfare Reform Act 2007. However, we were then told in the Assembly that because we did not speak out against accelerated passage that it was guaranteed.
Mr J O’Neill:
Under Standing Orders, any Member of the Assembly or any Committee can propose amendments to the Bill at Consideration Stage, and it is up to the Assembly to decide whether to accept those amendments. We would have to examine the implications of the amendments in relation to expenditure and various other issues. Accelerated passage simply means that certain Standing Orders would apply to the Bill. In this case, if accelerated passage were granted, the Committee Stage would not take place. However, that does not remove the opportunity for Members to raise points either at Second Stage or Consideration Stage, when the Minister would propose that certain clauses stand part of the Bill. Any Member could speak at those Stages.
Mr F McCann:
What I am trying to make clear for the benefit of the witnesses and the Committee is that when the Committee discussed the passage of the Welfare Reform Act 2007, it was advised that not agreeing to accelerated passage would have an impact on the payment of benefits. When we allowed the Act to go through, our Committee members were criticised in the Assembly for not raising the issue of accelerated passage. I am just putting a marker down.
Mr J O’Neill:
Regarding the Welfare Reform Act ( Northern Ireland) 2007, we were referring to proposals in relation to mesothelioma, and we wanted the new provisions to be available as early as possible so that more people could benefit. We did not say that people would not be refused benefit: we said that we wanted the legislation to go through as soon as possible so that those who suffer from mesothelioma could take advantage of the new provisions. There was nothing in the Welfare Reform Act ( Northern Ireland) 2007 that affected the payment of benefits to anyone.
The Deputy Chairperson:
While we note that the Committee can support accelerated passage, the Bill must be passed in the Assembly by cross-community support.
Mr J O’Neill:
Yes, and supporting accelerated passage does not commit the Committee to making a decision on the merits, or otherwise, of the Bill. The Committee would be agreeing on how the Bill would be handled by the Assembly. It would still be up to the Committee or any Member to decide whether to put forward any amendments at Consideration Stage.
Mr Brady:
That is the point. When amendments were tabled, we were castigated because they had not been brought up in Committee. With respect, it was my understanding that the parts of the Bill that you were talking about that related to accelerated passage could not be dealt with in isolation to the rest of the Bill. Perhaps I got that wrong. We were told that if there were delays, people’s benefits would be affected.
Mr J O’Neill:
There is only one way in which they would have been affected. People in Northern Ireland who would have been able to make a claim under the provisions would have had to have waited longer, until the legislation went through, to make that claim.
Mr Brady:
It is an important piece of legislation that will have an impact on many people, and it contains major proposals for pensions. It needs to be explored in some detail.
The Deputy Chairperson:
We were caught up in a timing issue previously.
Mr J O’Neill:
There is certainly more time available in this instance. The Welfare Reform Bill had already been enacted at Westminster when the Assembly came into being, and there was an incentive to get it through as quickly as possible. There is certainly more time now; for instance, in this case, we have been able to publish a full equality impact assessment and seek views on it.
Mr Brady:
I want to raise a further point. As the Committee will know, this is age awareness week. As my party’s spokesperson for older people, I have attended a lot of meetings this week. Certainly, the Pensions Bill has been mentioned as an important piece of legislation that will have an impact on older people. That must be taken into account.
Mr J O’Neill:
It will have a greater impact on those who are not yet older people because it deals with future pension provision. We have to approach pension provision on two levels. We must deal with existing pensioners, and doing so will have an impact mainly on the benefits system. We must also consider those who will be part of the pension system in the future and make plans for that.
Mr Brady:
We are all galloping rapidly towards it.
Mr J O’Neill:
Hopefully, we will all end up as beneficiaries of the pension system in some form or other.
The Deputy Chairperson:
I thank the witnesses for their attendance and their briefing.