State pension age to rise to 68

A radical reform of the pensions system, including raising the state retirement age to 68, was announced today by the Government.

Work and Pensions Secretary John Hutton was cheered by Labour MPs in the Commons as he confirmed the basic state pension would be re-linked to average earnings during the course of the next Parliament.

He also announced plans for a National Pension Savings Scheme in which employees will automatically be enrolled but may opt out.

In a statement on the White Paper, Mr Hutton said the state pension age would rise in line with life expectancy.

It would go up for both men and women from 65 to 66 over a two-year period starting in 2024; to 67 over two years starting in 2034; and to 68 over two years from 2044.

"No one over the age of 47 today will be affected by these changes."

Mr Hutton said the changes would help "entrench a new savings culture" to encourage people to build retirement savings - in a "comprehensive package" of reform.

Much of the White Paper had been leaked in advance but Mr Hutton did announce, to further Labour cheers, an extension to the financial assistance scheme launched to help those hit by collapsed pension schemes before May 2004.

Many MPs were concerned that it was limited to people within three years of retirement, he said.

"The scheme will be extended to cover eligible people who were within 15 years of their scheme's normal retirement age on May 14, 2004.

"Under this extension, the Government will top-up 80% of expected core pension for those within seven years of scheme pension age, 65% for those within eight to 11 years of scheme pension age and 50% for the remainder."

Turning to the White Paper, he said: "We will introduce a new system of personal accounts that will make it easier for people to save.

"We will reform state pensions so that they are simpler and more generous. We will modernise the contributory principle and make the state pension fairer and more widely available."

The new system of personal accounts would be introduced from 2012, providing over 10 million people with the opportunity to take advantage of low cost saving.

Employers will contribute 3% of employee earnings in a band between £5,000 and £33,000, while employees contribute 4% and a further 1% will come from tax relief.

Employer contributions will be phased in over at least three years.

Mr Hutton said the link between pensions and average earnings would be re-established during the next Parliament.

"Our objective, subject to affordability and the fiscal position, is to do this in 2012 - but in any event by the end of the Parliament.

"We will make a statement on the precise date at the beginning of the next Parliament," he said to Tory laughter at the presumption that Labour would be still in power.

Someone retiring in 2050, who had been in employment or caring all their working life could receive a pension worth £135 a week at today's prices - instead of £90 to £100 under present terms.

Mr Hutton said this would help limit the spread of means-testing, with only a third of pensioners eligible for pension credit by 2050, instead of an expected 70%.

To help women and carers, the number of years needed to qualify for the basic state pension would be reduced to 30 from 2010 - enabling 70% to receive a pension then, compared to the 30% today.

"By 2020 up to 270,000 more women will get a full basic state pension - approximately three times the number under a residency-based approach."

Mr Hutton said he had set five tests to judge the reforms - to promote personal responsibility, to be fair, simple to understand and affordable and sustainable.

"I believe we have met these tests.

"Today's White Paper seeks to entrench a new pensions savings culture where future generations can take increasing personal responsibility for building their retirement savings.

"In the long term the rise in the state pension age will help secure the long term financial stability and sustainability of the state pension system."

Shadow Pensions Secretary Philip Hammond said the Opposition welcomed the key elements of the package but had a number of detailed concerns.

He said that the Conservatives fought the last election on the restoration of the earnings link to curb the growth of means testing.

"We welcome the package of measures that will address the unfairness suffered by women under the present system."

Mr Hammond; "Cross-party consensus is essential to a lasting pensions settlement. But it is bad news for Britain that the consensus-building which the Government promised us has been the victim of the internecine warfare between the neighbours in Downing Street."

He said that the delay in naming a date for the restoration of the earnings link meant that the most important element of the package was "being kicked into the fiscal equivalent of the long grass".

Mr Hammond: "The Prime Minister's legacy is left to a decision that won't be taken until the next Parliament. No wonder they are so keen now to building that cross-party consensus."

He said the Opposition shared the Government's determination that the proposed settlement must be affordable and sustainable.

"No party which seriously aspires to be in Government can take any risks with the public finances or the stability of the economy. We will not make promises which we cannot deliver."

Mr Hammond said that if there was to be an affordability issue, there had to be transparency about the cost and financing of the package.

He said the package improved the situation for women with broken contribution records - "and we welcome that".

He accused the Government of saying nothing about public service pensions. "Can this Government really look the British public in the eye and tell them they have to work until they are 68 when they cravenly surrendered to pressures from the public service unions about their pensions?"

Mr Hammond said that public sector workers should share in shouldering the burden. "We cannot be bound by a deal based on favours and not fairness."

He went on: "It is now our duty to do what is right for the long-term interests of Britain and that means building that cross-party consensus. We are willing to engage in that process if the Government is willing to do so with us."

Mr Hutton agreed that the affordability of the system was "absolutely a fundamental issue".

On the question of public service pensions, Mr Hutton reminded Mr Hammond that before the general election the Conservative Party had said they had no plans to change these pensions. Now, with the election behind them, the Tories were saying something different.

Frank Field (Lab Birkenhead) a former Welfare Minister, congratulated Mr Hutton on trying to make a silk purse out of a pig's ear.

He spoke, too, of the "extraordinary support" on their side of the House for the part of the statement that Labour wished to give much greater justice to working women.

The Liberal Democrat spokesman, David Laws said there was a very great deal in the White Paper that his party welcomed and agreed with, although they did have some concerns.

"We agree fundamentally that the direction you are taking on pensions is the right one."

He said they also wanted to find as much cross-party consensus as possible.

Mr Hutton said he was grateful for the Liberal Democrats' support.

Sir John Butterfill (C Bournemouth West) and chairman of the all-party pensions group, said it was a very thoughtful package which he welcomed.

On the question of the return of the link with earnings, he said: "I am concerned that it is going to take so long. Those who fought in the last war and who created the conditions of freedom we now enjoy will be in their 90s before the earnings link is reintroduced."

He asked whether it was possible to bring the date forward.

Mr Hutton congratulated Sir John on what he had done for pensioners, but said the date of 2012 had been agreed as part of the affordability issue.