Brooks Newmark on Pension Reform

During a Commons debate on Pension Reform, Brooks Newmark raises concerns that, irrespective of the contributory principle behind the new scheme, uprating of the basic state pension will be "subject to affordability and the fiscal position".

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Mr. Brooks Newmark (Braintree) (Con): I should like to address three concerns that arise from the Government's proposal for pension reform. Reform is, as we are all acutely aware, urgently needed in order to jolt us out of what, as Lord Turner told the Treasury Committee, has become "a collective fool's paradise".

None the less, my first concern is that the Government are pursuing what appears to be an attempt to reinvent the wheel by suggesting that they are merely reintroducing the contributory principle. That particular principle would not need to be reinvented if the Government had first not undermined it.My second concern is the Government's caveat on the uprating of the basic state pension being

"subject to affordability and the fiscal position."

That statement is itself characteristically nebulous. But more importantly, Lord Turner's remit and the subsequent White Paper also failed to include a review of public sector pensions, where affordability and long-term fiscal position are most uncertain.

Lastly, I want to address the danger posed by any reform that does not tackle head-on the purpose and scope of means-testing within the pensions system. There is a danger that a lack of fundamental reform of the scope of means-testing will undermine public confidence in the benefit of the proposed savings scheme, and consequently undermine the purpose of the reform.

First, I come to the contributory principle. The pensions White Paper declares:

"We are creating a system which establishes a new contributory principle for state pensions."

The fact that part of the statement appears in bold type does not unfortunately mean that it is boldly going where no one has gone before. The rhetoric is over60 years old and any new substance is somewhat lacking. National insurance contributions were originally intended to be hypothecated-or reserved-for certain purposes. Sixty years later, what was envisioned as a national insurance fund is more hypothetical than hypothecated. The Government's return to the something for something rhetoric of the contributory principle is disingenuous, because uprating the basic state pension apparently remains dependent on future affordability. Those who are contributing today, and may have done so for their whole lives, will still depend for their retirement income on the Chancellor's assessment of the fiscal position over the next few years.

I come now to my second concern, that the Pensions Commission remit did nothing to address the mounting public sector pension deficit. If we are to be confident that the basic state pension will in fact be relinked with earnings, we must be reassured about the Chancellor's assumption regarding affordability. But the Treasury has consistently understated the extent of public sector pension liabilities. According to the consultancy firm Watson Wyatt, Britain's underfunded public sector pension liabilities reached a total of nearly £1 trillion in March 2006. That is a one with 12 noughts after it. That is more than 80 per cent. higher than the most recent Government estimate and amounts to a whopping £40,000 per household in the UK.

Stephen Yeo, a senior consultant at Watson Wyatt, has described the Government as

"taking a rosy view of the cost of public sector pensions".

The White Paper does nothing to address the cost of public sector pensions, which is a significant omission. Without action to address the long-term affordability of public sector pensions, it is difficult to have confidence in the Chancellor's assessment of affordability and the fiscal position with regard to the basic state pension, which is to be re-linked to earnings.

Perhaps most significantly of all, I must turn to the seemingly ubiquitous burden of means-testing, which is certainly not a new concern. In 1942, Beveridge noted

"the strength of popular objection to any kind of means test"

before warning that "discouraging thrift" would be the inevitable result of a

"permanent system of pensions subject to means test."

Yet Beveridge went even further in 1942 than the Government are prepared to go in 2006. He warned:

"The State in organising security should not stifle incentive, opportunity or responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family."

To propose a personal pension savings account without a radical reappraisal of the use of means-testing will continue to stifle any incentive to save.

The Treasury Committee heard time and again in the evidence provided in the course of its inquiry into the national pension savings scheme that the existence of means-testing would be one of the most important factors influencing the success of the proposed scheme. Lord Turner was adamant:

"A way forward has to be found which achieves affordable and sustainable reform of state pensions which makes sure that means testing does not grow in the way that it would otherwise grow and ideally reduces in extent."

Yet it is still not clear at all that the Government are pulling in the same direction on the issue of means-testing. Worryingly, Lord Turner also said:

"We have not had detailed discussions with the Treasury over the course of the last few weeks which would clarify exactly where they stand on the issue of the spread of means testing."

The Work and Pensions Committee received evidence from the Pensions Policy Institute stating that, even after the reforms proposed by the Pensions Commission, 45 per cent. of pensioners-not the 33 per cent. claimed by the Government-would still be eligible for means-tested benefit in 2050. The Chancellor was quite clear during his evidence to the Treasury Select Committee earlier this year that

"the long-term solution for pensions is that people are in a position to make their private savings over the course of their lives."

His commitment to ending the means-testing of pensioners is much less clear, yet it is on that commitment that the success of the proposed reforms hangs.

It is not just important to encourage people to save; pensioners must also be freed from the indignity of means-tested benefits. Earlier today, I met two of my constituents, Phyllis Webb and Barbara Shillabeer, who are members of the Braintree pensioner action group. I want to be able to go back to Braintree to tell them unequivocally that the basic state pension will, in future, provide them with an income. Just as importantly, I do not want to have to tell my constituents that there is no point in saving because it will not leave them any better off when they come to retire.

Sixty years ago, Beveridge's recommendation for the introduction of national insurance contributions noted:

"A revolutionary moment in the world's history is a time for revolutions, not for patching."

Perhaps we live in less revolutionary times but the lesson remains valid. If we wish to achieve a lasting pensions settlement, we must not deal in half-measures. Uprating the basic state pension and introducing personal pensions savings accounts must go hand in hand with a decline in means-testing to give people the confidence to save for their retirement.

Perhaps most important, the Government must take steps to account for their unfunded public sector pension liabilities to encourage greater public confidence in the future affordability of all state pension provision. After all, if the Government cannot properly account for their pension liabilities, they cannot hide behind the caveat that an increase in the basic state pension can come about only

"subject to affordability and the fiscal position."

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