Grand Committee
(10 years, 11 months ago)
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Pensions Bill
(10 years, 11 months ago)
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The Deputy Chairman of Committees (Lord Skelmersdale)
My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Clause 27: State pension credit: phasing out assessed income periods
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, the purpose of this clause is to provide for the abolition of the assessed income period in pension credit cases from April 2016. I will just add that I was most welcoming of the reinforcements I had temporarily.
The assessed income period removes the requirement for certain people to notify the department of changes to their retirement provision for a defined period. The assumption when the assessed income periods were introduced in 2003 was that pensioners were more likely to have relatively stable incomes and capital, so a lighter touch to reviews was therefore considered appropriate as a way to minimise intrusion and ease the administrative process.
The logic behind the policy is clear, but operating the system over the past 10 years has shown the reality to be somewhat different. The operation of assessed income periods has proved to be more complex and intrusive for both staff and the individual than anticipated. For example, people can report a change during an AIP and, as a result, their award can be increased. However, because we have to look again at all of their retirement provision, not just the reported change itself, it does not always lead to a change in the award. This is nugatory work for the Pension Service and is confusing for recipients.
More importantly, our assumptions about the stability of pensioners’ incomes and capital have not stood the test of time. Our analysis shows that circumstances change and fixing retirement provision for such a long period leads to inaccuracies in benefit awards, which then remain in the system for some time. Based on a sample of around 100,000 cases that have been reviewed, the pension credit award required updating in 54% of them, and in 36% of cases the award was reduced.
In the current economic climate, we believe it is right that benefit awards reflect the individual’s current financial circumstances. We therefore propose to abolish assessed income periods by removing them for new claimants and phasing out existing fixed-term ones from April 2016. It is estimated that this measure will result in steady-state savings in AME of around £80 million per year in the long term. We recognise that removing assessed income periods will require pension credit recipients to report relevant changes when they occur—however, this will not necessarily result in increased levels of contact for all recipients.
We will be working with stakeholders and partners on communications products to ensure that people are clear about what this change means and what they will need to report and when. For example, there will be no need to report changes in capital provided it remains below £10,000. Currently, only 12% of recipients—around 290,000—have capital above that level. Above £10,000, changes are only relevant where they cross £500 bands. Annual increases in pensions will be taken into account automatically, as now, so only new income streams will need to be reported. It is also worth remembering that the impact of reporting changes will depend on individual circumstances and that not all will lose out. Some may see an increase in their award, while some may not experience any change at all.
Pension credit is a safety-net benefit designed to help the poorest pensioners, and as such it is right that it takes account of the income and capital people have access to. Through the abolition of the assessed income period, we will ensure that pension credit awards are accurate and that, in future, our limited resources are spent on those who require the most support. I beg to move that Clause 27 stand part of the Bill.
Baroness Hollis of Heigham (Lab)
My Lords, I thank the Minister for his explanation of this clause. I would like to explain why I and my noble friend Lord McKenzie have raised this on the stand part debate so we can discuss the issues. As the Minister said, this clause proposes to abolish the current assessed income periods for pensioners claiming pension credit. At the moment, pensioners are means-tested for pension credit at their retirement at 65; then at 70; then again at 75 and not thereafter. I am genuinely surprised and, actually, disappointed that the Government want to make a quick saving of £82 million gross—as the Minister said—or some £60 million-odd or £65 million or so net by introducing annual means testing, although excepting current pensioners over 75 who may be in receipt. It will affect 1 million pensioners a year up to 2020.
Why do we have the current rules? My noble friend Lord McKenzie was instrumental in further enlarging and developing them in 2008. Very wise he was, and very good they were—of course. I hope Hansard records the “Hear, hears” to that. In particular, he introduced the indefinite assessed income period for no means-testing for those reaching 75. In my mind, that was a most important consideration, the one I am most concerned about. Essentially, we know that pensioners loathe means-testing so much that—either through ignorance or stigma—a third do not now claim that to which they are entitled. Those eligible non-recipients are missing out on something like a mean average of £34 a week. That is an average loss of £34 a week, an income that would transform their circumstances.
More means-testing, which is what the Government are proposing, will not, given this strategy, bring more pensioners in, but will deter even more pensioners from claiming what they should. That is why I am so pleased that we are extracting means-testing out of the new state pension, as the former Pensions Commission recommended when considering the old pension. I was pleased that we were removing it from the new state pension, only to find that the Government are foolishly importing it back in again and extending it through annual means tests, rather than five-yearly ones, in pension credit to make a quick buck. Therefore, those who get the more generous pension in future will escape the means test; the older, poorer pensioners—mainly women—will be subject to even more of it. I think that is wrong.
Why was means-testing for pensioners under my noble friend Lord McKenzie carried out with a light touch? It was essentially because pensioners’ income is pretty well stable in their retirement years. The three major events which are likely to affect their entitlement are, first, the death of their spouse. When he dies—and it is, alas, usually “him” ahead of “her”—his modest pension, if it is a single-life pension which two-thirds of them are, dies with him. That is why it is elderly widows who most need pension credit. The second major event is that they may, rarely, get a small legacy—say, from the death of an unmarried sibling. The third is that they may have to move into residential care.
Such big events should be reported, and I have no objection to reinforcing that and making it clear that capital from, say, a generous legacy of more than £10,000 or £15,000, acquired before 75, should be reported. I do not have a problem with that. Apart from that, a five-year check will discover not just whether pensioners are getting too much, which is rare, but sometimes whether they are getting too little. I do not think we have recently had much in the way of a take-up campaign—funny, that.
Now the Government are going to produce annual means tests, and the Bill team—I thank it for this—very helpfully sent me the best statistics we currently have, which show that twice as many people will lose under annual means-testing as will gain. The Government will not make their savings primarily because people are receiving too much, although some money may come from that and will be clawed back, and so on. No, if the Minister will actually make a saving, it will come from pensioners who should get it not claiming, and certainly not annually. The department has a lot of literature, which is entirely decent, about the problems of the means-testing, which informed the new state pension. It was absolutely right to do so, and yet it seems to be ignoring it in its efforts to make a quick £65 million or so saving from the poorest pensioners.
The Minister and his team will so increase the stigma of means-tested pension credit—with people annually reminded that they are suspected of error, if not downright fraud—that more of the poorest pensioners will slip down the snake of further poverty. Pensioners do not cheat on pension credit, but this proposal suggests that they do. Let us not have any spin about increased take-up as a result. This is about savings and nothing more, and I do not think it is decent.
The Government boast of their reduction in means-testing for the new state pension, while quietly importing a massive extension of means-testing for those not joining the sunny uplands of the full new state pension. They are deliberately widening the gap between those who will get the new pension, and those who cannot on grounds of age. Poorer pensioners will be worse off simply because they are a day older or a year older than other pensioners who are eligible for the new state pension.
Single people who are on pension credit because they are on the wrong side of that cliff edge will have £30 of pension credit added to their BSP of £111, giving them a total income of some £140. However, if they acquire any capital savings over £10,000, they will find them means-tested. In some cases they will then lose every penny of pension credit. Meanwhile, other pensioners, who are a day or a year younger, will get their more generous pension of £144, and will also keep every penny of savings they may have or acquire because we rightly float them off pension credit, and all credit to the Government for that.
The older and poorer start to lose if they have any savings over £10,000, so there is not an incentive to save. Yet pensioners a day younger not only have a higher pension, but their savings are not taken into account at all. This problem will of course be made worse by the loss of savings credit. Is this fair? Far from increasing means-testing for the poorest group, in my view the Government should do exactly the opposite. They should reduce means-testing to achieve greater fairness for pensioners who are being penalised for nothing but their age. That would give less of a cliff edge, and more equity between the two groups of pensioners who are divided by one day. It really is shameful to import an unnecessary cliff edge for trivial government savings, and it is also perverse.
Since my noble friend Lord McKenzie wisely reviewed AIPs, there have been huge cuts in domiciliary support for the elderly from social services. Mr Pickles has cut local government budgets by 35%, and inevitably this is passed on in depleted services. Nearly half a million people, mostly pensioners, have lost homecare since 2008—half a million. Only those with substantial or even critical care needs can now expect to have carers who are funded by the local authority.
Pensioners with only “functional” disability may have quite significant mobility or sight problems, and five years ago they could have received perhaps three or five hours per week of help from social services. They now get nothing, and their family may live 100 miles away. If someone’s needs are more substantial and they are frail, and they need help getting up in the morning and at night, the two hours a day which was offered may now come down to two slots of 15 minutes. On top of this has come Dilnot.
The Government’s response has been to emphasise co-payment. I do not disagree with that, but where is the money for that co-payment to come from? If you are a pensioner on pension credit, you have minimal or low savings and your only asset is your home. Outside London this may be worth perhaps £100,000 or double that. Some 80% of pensioners below 60% of median income are owner-occupiers. Half of those on pension credit are owner-occupiers. Equally, three-quarters of those who should claim pension credit—but do not and so lose out on £34 per week—are owner-occupiers.
Pensioners may have to contribute to the cost of their social care, or decide—rightly, in my view—that they wish to live independently outside of residential care, with more domiciliary support than social services can now provide. However, those on pension credit, having been means-tested at 65 and again at 70 and now coming up to 75, have only one way to do that, which is to release some of the equity in their home.
Lord McKenzie of Luton (Lab)
My Lords, I join my noble friend Lady Hollis in reviewing why this clause should stand part of the Bill. This debate gives us an opportunity to review its rationale, as my noble friend has done, and particularly to scrutinise what alternative support mechanisms are to be put in place for those newly required to notify the DWP of changes to retirement provision. As we know, the assessed income period removes the requirement to notify changes to capital and retirement pension for the purposes of pension credit. It will run for five years but is set indefinitely for somebody who has reached the age of 75.
As the Minister himself has said, the concept was based on the assumption that the capital and retirement income of pensioners would not vary significantly, that administratively it was appropriate to have a light touch for claims maintenance, and that it was also less intrusive for a claimant whose reporting of changes of circumstances obligations was significantly reduced. It is now asserted that the administrative burdens will not be forthcoming, in part because a huge volume of cases come up for review at the same time, and there is not the stability in levels of capital and retirement income originally envisaged. So far as the administration issues are concerned, it would presumably be possible to spread the load by modest extensions of the end dates of existing AIPs to even out their reconsideration. Perhaps the Minister can tell us why such an option was not considered.
We learn from the impact assessment that just under 2 million of 2.5 million people on pension credit have an AIP split roughly half and half between those with a specified end date and those of an indefinite period. Given that those with an indefinite period AIP are not to be preserved, it looks as though these provisions will potentially affect some 1 million pensioners. Do we have figures for those within this cohort who are in receipt of savings credit only, guarantee credit only or both? Obviously, savings credit would have no application for those who reach state pension age after 5 April 2016, and to a certain extent these provisions wither on the vine because those who reach state pension age post-April 2016 will get STP generally which will be above the guarantee credit level, so they get floated off and savings credit does not apply to them in any event.
As for changes to income and capital, as my noble friend has made clear, the numbers have been predicated on scaling up and are now, I think, upwards of 99,400 cases. We know that of those cases, 36,000 will see a reduction in their award—13,000 will lose all pension credit—18,000 will see an increase and nearly half will see no change. However, over a five-year period, the impact assessment suggests that 540,000 people will be affected by the change in policy, with one-third gaining and two-thirds losing. It would seem that the reasons for a reduction in award are attributable to increases in non-pension income as well as increases in capital—the former cases, I think, being more numerous.
We know that in a steady state the Government will benefit to the tune of £82 million a year and will gain further savings from housing benefit and rent support. I do not know whether we have an updated assessment for that figure. Incidentally, will the Minister remind us what is happening because we went through a period when an application for pension credit, council tax benefit or housing benefit was going to involve one process of application, and that was then going to be shared? I do not know what has happened to that process. Clearly, the council tax part of it has had to go because of the localisation of that but it would be helpful to have an update on that process.
Ensuring that pension credit assessments of means-tested benefit are accurate is not an unreasonable ambition, but an equally important ambition should be to improve the take-up of pension credit, as my noble friend made clear. We know that about one in three of those eligible for pension credit are currently not claiming it, although take-up of the guaranteed credit is higher. The greater the required engagement with the system, the greater the risk will be that pensioners will fall out of the system or not engage with it in the first place.
As my noble friend asked, what are the Government’s plans to improve take-up of pension credit? This issue must not be underestimated, especially in an environment in which people are living longer, and living at least semi-independently, with support from formal and informal carers. I have seen this in my family: whereas bank statements and pension slips were once neatly filed in date order, they are now tucked away down the side of a chair, scattered randomly in a drawer or thrown out with the rubbish. When you cannot always remember whether you have had breakfast, it is not always easy to remember to pass on a piece of correspondence to a family carer. These are real issues, particularly as people get older.
Of course, there are penalties for failure to report changes of circumstances, and we know that this Government are hot on sanctions. So can the Minister please say, given the changes to the AIP policy, what additional cost is to be incurred in supporting pensioners, both at the point of the change and routinely thereafter? What special protections will be in the system if someone is at risk of being sanctioned?
Finally, on the matter raised by my noble friend Lady Hollis concerning the effect of this change on equity release and capital more widely, it is with a degree of trepidation that I am bound to say that I cannot fully support the position of my noble friend. I know that that is dangerous territory. I agree that AIPs facilitate the accumulation of substantial sums from equity release without impact on pension credit, but that, of itself, is not a reason why it should be retained. It is common ground that AIPs were designed as an administrative easement, not as a route to allow certain types of capital to be outside the pension credit rules. I see great merit in equity release but I am not sure why capital raised just in that way should have more favourable treatment under the benefit system than capital raised in any other way. There is already a series of provisions under which capital is disregarded for the purposes of pension credit and, indeed, other benefits. They include amounts held to buy a home or to carry out essential repairs. There may well be an argument—and my noble friend has advanced these—to extend these capital disregards in effect to cover costs of caring. However, this should be done explicitly, not under the guise of hanging on to something via an administrative easement.
The Government are going down a dangerous path. Thousands of pensioners could be disadvantaged by this provision administratively, and we certainly want to know, if the Government are going to press ahead with it, what support is going to be given. I do not see anything in the figures about extra costs and more frequent reviews. What is in the analysis that states that the Government are going to support pensioners, particularly older pensioners, effectively to make sure that they take up pension credit when they are entitled to it, and that that they are able to comply with the new, more onerous reporting rules that flow from these provisions?
Baroness Meacher (CB)
My Lords, I support my noble friends. I have just worked out that it was about 40 years ago when I undertook and produced the first research report of the Child Poverty Action Group. The subject of that study was the non-take-up of means-tested benefits. At that time, when I was a young person, I assumed that the important issue was stigma. Of course stigma is a major feature, but what took me by complete surprise was the level of ignorance and complete unawareness on the part of, most particularly, the poorest potential claimants—ignorance that they might even conceivably be entitled to any benefit at all. It just had not crossed their mind. If you do not ask any questions, you do not get the answers to those questions. If he really wants to extend means-tested benefits, I urge the Minister to undertake some research into the levels of knowledge and understanding of potential pension credit recipients, because if the level of ignorance remains today as it was then, the social consequences of these reforms will be very alarming indeed.
Baroness Sherlock (Lab)
My Lords, all noble Lords who have spoken have laid down a significant challenge to the Minister on this part of the Bill. I do not propose to add a great deal, but there are a few questions that I would like to clarify. First, in his opening remarks, I think the Minister said that one of the problems being addressed was that there were significant levels of incorrect awards of pension credit because various assets and income were not being taken into account if they happened after an AIP was set. Does he mean incorrect? Presumably, he does not mean incorrect if they were in line with the rules. If someone is not required to declare it then they do not affect the award, but maybe I misunderstood that point.
Secondly, there is a question about the additional changes of circumstances. I am struggling a little to understand what the department does and does not know about this. The impact assessment states:
“We have limited evidence for the additional number of changes of circumstance that are likely to be reported each year as a result of the change in policy”,
but the impact assessment provides an estimate of £17 million a year as the cost of processing additional changes of circumstances and reviews. What assumptions is that figure based on in terms of the number of changes of circumstances?
Picking up a point made by my noble friend Lord McKenzie, what estimate has the department made of the likely increase in fraud and error as a result of the abolition of AIPs? Will the Minister remind the Committee what sanctions will be imposed on pensioners who fail to report a change in retirement income or capital that is relevant to their award? I would also be interested to hear what kind of support will be given. Will he also take the opportunity to remind the Committee how pensioners will be informed of this, how they will be reminded and what discretion can be exercised in choosing whether to sanction them, and of course what appeal mechanisms are there. That would be very helpful.
There is then the crucial question of the likely effect on the level of pension credit awards to those who have, or would have had, an AIP. The impact assessment was encouraging at first because it states:
“Analysis suggests that many customers are not currently reporting changes which would lead to an increase in their entitlement so they may actually benefit from the simplification of the policy”.
Can the Minister explain the use of the word “simplification”? At the moment, if I have an AIP and an income only from pension and capital, I do not have to tell the DWP about any changes in income, but in future I will. How is that simpler?
On the question of level, the briefing said that despite the fact that many customers may be better off, most people will not be better off as the Minister and my noble friend Lord McKenzie have pointed out. It is obvious that they could not be if £80 million a year is to be saved. Also, my understanding is that not only will there be twice as many losers as gainers, if I have read this correctly the average gainer will gain £6.70 a week but the average loser will lose £13.10 a week, which is twice as much. Will the Minister clarify whether that is right and if so what average means in this context? Is it a mean or median figure?
On the impact by age band of abolishing AIPs, the briefing from the department says that it is not possible to break down savings by age band, but that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Will the Minister help me understand that distinction? Assuming that they are spared, these younger pensioners will go on to be over-75s, who would have been entitled to an indefinite AIP. Is the assumption that that cohort, when they reach 75, will still be less likely to have savings over £10,000 or other pension income and thus less likely to face a change in pension credit entitlement? In other words, is the distinction one of age or cohort?
Just out of interest, did the department make any assessment of the effect and cost of, for example, maintaining indefinite AIPs for pensioners above 80 or 85 or any other age level? There is then the question raised by my noble friend Lady Hollis on equity release. I have no intention of standing between my two noble friends on the question of how they should be treated, being a woman with an ambition to live to at least 75 myself. But this is a serious question, to which the Minister responded at Second Reading simply by saying that,
“equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital”.—[Official Report, 3/12/13; col. 193.]
Of course, that is obviously true; for some people it may, and for some it may not. The briefing on the subject that came from the department had a note attached to it that may have come from the Department of Health, entitled, Reforms to Care and Support: Financial Product Review. That said, on equity release:
“Some people do use this to fund the cost of domiciliary or home care. No data is collected on the number of people who take out equity release to pay for care but it is currently very limited”.
At the risk of being a pedant, if no data are collected, how do the Government know that the number is very limited? I wonder if they are perhaps relying on the Age Concern survey referenced in the DWP briefing note, Abolition of Assessed Income Periods—Equity Release? I think probably not, however, because it suggests that the sample size was too small to be used for extrapolation. So I am sure that is not the source of it. But they must be able to make an estimate to be able to declare that the number is very limited, so can the Minister tell the Committee how many people the department estimates take out equity release to pay for care?
The importance of this question is to understand its implications. Even if the Minister takes the view that he does not regard this as being anything other than administrative easement, as explained by my noble friend Lord McKenzie, the Committee needs to understand whether there will be consequences for the treatment of income that may be needed to pay for care and, if so, how those costs will otherwise be addressed. I look forward to the Minister’s reply.
Lord Freud
My Lords, I shall deal with the equity release issue first. Assessed income periods were never intended to enable people to shield their income and capital from interaction with the means-tested system. Pension credit is a safety net benefit providing support for daily living needs for the poorest and, as such, should be a last resort.
Baroness Hollis of Heigham
I am sorry to interrupt, but I am not sure that that is the case. Certainly equity release providers had discussions with the department, to my certain knowledge, and were told that somebody could acquire capital through equity release between, say, 65 and 70, and that if it was then spent down—that is, it was used for reroofing, or a new boiler, or insulation, or whatever—the department was entirely content with that.
Lord Freud
Yes, I shall come to that. In practice, that is absolutely the case. Money taken for essential repairs is disregarded. I can confirm what the noble Baroness is saying.
To go back to the argument, people should draw on the income and capital available to them before seeking help from the state. If people liquidise assets to release money or generate an income, that should be taken into account, no matter what the source—if they sell some shares, release equity or downsize. It has been suggested that abolishing the assessed income period will deter people from using equity release to pay for care under the new care funding regime proposed by the Government. The planned care charging reforms will provide greater clarity about what people will be expected to contribute. There will be financial advice to help people better meet these costs, and the Department of Health has been working with the financial services industry to help create the right conditions for a new market of financial products to develop that will be suited to this purpose. Equity release may be a product some may consider, but at this stage it is difficult to say how future care charging reforms will influence behaviour in this area.
The Government do not want people to be penalised for making proper provision to fund their care. That is why the Department of Health will consider how the charging system can recognise the provision people have made and why we are working with them to understand the impacts and the potential interactions with means-tested benefits. However, we cannot retain a complex feature of pension credit as a way of protecting the position for what may be a minority of pension credit customers in specific circumstances. This would not be a targeted response; indeed, it could be argued that it moves away from and undermines the rationale of a safety net benefit.
There may be alternative solutions that both departments will need to consider in due course to avoid penalising those who have made provision to pay for care, but keeping the assessed income period is not the answer. I can confirm what the noble Baroness, Lady Hollis, said—that officials have spoken with the Equity Release Council and have agreed to meet with them in due course to talk through the implications of this measure. The council, in terms of the information base, has been careful about providing advice to those on pension credit about the potential impact on their benefit and designed products so that they do not breach the £10,000 disregard.
Baroness Hollis of Heigham
Except, my Lords, in referring to the brief to this extent, that usually the minimum sum from any equity release providers, from looking at the Aviva statistics and retirement statistics, is usually £10,000, at which point any moneys above that are netted off pension credit.
Lord Freud
Once these things are put in place with the social care provisions, there may be ways of dealing with that, but it is premature to address it until we have the shape of those social care provisions. As I said, the way to do that is not necessarily through a wholesale change to our AIP strategy.
Lord McKenzie of Luton
Does the Minister accept that the easiest way to change it would be simply to amend the disregards for capital in pension credits? It would be easy to do that.
Lord Freud
I am grateful for all suggestions. The noble Lord has made the point that I was trying to make: there are probably quite a few ways to skin this particular cat and one would want to look at it in that context. I have confirmed for the noble Baroness that sums of money taken out for essential repairs and so on are disregarded, so there are areas of flexibility as we work through the full implications of this policy.
Lord McKenzie of Luton
Is it possible that this cat might be skinned by the time we reach Report?
Lord Freud
My Lords, my experience of cat skinning is that it takes quite a long time, so I am not sure that I can promise the aforesaid cat in its dematerialised form in the right time.
Baroness Sherlock
Is the Minister able to help us find out how big the cat is?
Baroness Sherlock
I am sorry, but I am pressing the Minister on the comment about the assessment of how many people use AIPs for equity release. The phrase I think he used at the beginning of his remarks was that this may be a minority of claimants, which is about as vague as it is possible to get in terms of a formulation. Can he shed any light on this?
Lord Freud
No, my Lords. We do not have any precision on this, and that is one of the reasons that we want to look at it in the context of social care. Clearly, one will need to build a better evidence base rather than me extrapolating from a very thin one. The cat is small; it is possibly a kitten.
On the question from the noble Baroness, Lady Hollis, about potentially retaining AIPs until the age of 75, while the noble Lord, Lord McKenzie, talked about the age of 80, we do not have a breakdown of age from the sample of AIP reviews that we have taken, but we have no evidence to suggest that older pensioners have more stable incomes than younger ones. Retaining AIPs for older pensioners would prevent us driving many of the inaccuracies out of the system and would lead to a two-tier system, whereas we want to see a single, understandable regime for everyone. Older pensioners are more likely to have indefinite AIPs already in place in April 2016 because they are being retained, so they should not experience any significant changes to their reporting requirements.
On the more detailed question about numbers raised by the noble Lord, Lord McKenzie, on the breakdown between guarantee credit and savings credit, I do not have it to hand behind me right now, but I am happy to offer a letter providing that. I can confirm to him that someone who applies for pension credit can make a claim for housing benefit, but people will be encouraged to seek council tax support. As the noble Lord is fully aware, that scheme was localised in April of the current financial year.
Baroness Hollis of Heigham
As this is not an amendment, I do not have a formal right of reply to withdraw an amendment. Before the Minister sits down, therefore, could I press him on this? Why did he—rightly in my view—support his right honourable friend’s position in the other place, which was based on the recommendations of the Pensions Commission, to get rid of pension credit in the new single pension and therefore to reduce means-testing very significantly? Pension credit served its purpose in taking existing pensioners out of poverty. It possibly deterred other, future pensioners from saving, but it did tackle the problem of poverty. Quite rightly, in my view, the current Government have proceeded to take that chunk—a huge chunk of means-testing—out of the system. Why, then, does the Minister think it right to reintroduce it for some people who are simply a day too old?
Lord Freud
My Lords, I think there is a distinction to be made here, which the Government are making. You can reduce the level of means-testing by providing a higher single-tier pension, while still making sure that where you are providing people with a means-tested benefit, it is accurate, in order that the Government do not spend more money than they need to at a very tight time.
Baroness Hollis of Heigham
But the Government are giving the equivalent of a whole pension credit to everyone who draws their pension after 5 April 2016, so the Minister is not worried about a safety net then, or spending money that is not necessary—he is just doing it. Everybody will get the equivalent of a full pension credit if they fall the right side of the line. If they fall the wrong side of that line, it will be means-tested annually. What is the decency behind that?
Lord Freud
As the noble Baroness is fully aware, the dividing line is actually much more spread given the complicated transitional arrangements between one system and another. There is not the sharpness of a dividing line—I know the noble Baroness is fully aware of that because we have debated it in great detail. I am conscious that we are pressed for time.
Baroness Sherlock
There are three questions that the Minister did not answer. I am happy for him to write to me: I wanted to get them on the record so that they could be picked up before Report. I asked about the estimate of £17 million in the impact assessment for the cost of processing additional changes of circumstance. What assumptions was that figure based on in terms of the numbers of additional reviews or changes of circumstance?
I asked what estimate, if any, the department had made of the likely increase in fraud and error as a result of AIPs going. Also, the departmental briefing says that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Is it that cohort or because they are young and therefore when they become old that will no longer apply?
Lord Freud
My Lords, I will arrange to write to the noble Baroness. I think I can deal with the second point straightaway. We simply do not know whether it is an age or a cohort effect, so I cannot be clearer about that.
Lord McKenzie of Luton
Could the Minister put something on the record? I am very concerned about issues around sanctions, particularly for older members of the pensioner cohort. They struggle, some of them, in later life to deal with paperwork. When we discussed sanctions in the Welfare Reform Bill around people with mental health challenges, the department undertook never to sanction someone without a face-to-face interview or at least a letter—whether that has been complied with is another matter. There should be some sort of process so that elderly people who fall foul of the system are protected before sanctions are levied.
Lord Freud
The noble Lord makes a very fair point. I know that I smiled about that, but it is a real point about older people handling bills. It is best if I come back to the noble Lord and write specifically on that matter.
I can update the noble Baroness, Lady Sherlock, a little more. We are assuming 1 million extra changes of circumstance. That is what the £17 million comes from, and we are assuming a 10% reduction in savings to account for this on the increase in fraud and error. Those are the figures. I will check that I have not missed any other points. I owe the noble Lord, Lord McKenzie, something on sanctions for sure, and probably one or two other things. On that basis, I hope that the Committee will agree that the clause stand part of the Bill.
“which for a widowed parent shall not be less than three years, or until the youngest child of that person at the time of the death had reached the age of 7 years, whichever is the longer period”
Baroness Hollis of Heigham
My Lords, we move on to a different section of the Bill on bereavement benefits. In moving Amendment 59, I wish to speak also to Amendments 60, 61 and, very briefly, to Amendment 66.
I am unhappy about some aspects of these proposals. I know that they have been out to consultation, as, obviously, I have read the consultation documents, but I wonder whether it was wise to go for a one-size-fits-all approach in the name of alleged simplicity. The background notes go back to our policies in 1925, presumably in the belief that this shows we need to overhaul the system, but, actually, we did review and restructure it in 2000. Why did we structure it in the way we did? I hope that noble Lords will forgive me if I talk about widows rather than deceased spouses or partners.
Currently, widows receive a £2,000 lump sum. We recognised, as have the current Government, that you need money immediately to pay for funeral costs and to tide you over the couple of months while the deceased spouse’s income or, alternatively, childcare are not available and before alternative benefit income, if appropriate, is established. As UC, for example, can be paid in monthly arrears, it could be two months before any money is flowing to the bereaved spouse or partner, so we produced a lump sum. We then sought to support widowed parents with children while the youngest was on child benefit: that is, normally up to age 16. At the time that was consistent with the income support rule for single parents with a taxable benefit. The widowed parent’s allowance is now worth £108 a week—a little less than BSP but more than income support, as it is NI-based. It is not means-tested and no work conditionality is attached. The number of new widowed parents claiming the allowance varies between 50,000 and 100,000 a year. As far as I can see, there is no particular pattern to it. Currently, widowed parents claim their allowance on average for five to six years. Not surprisingly, those with younger children claim it for longer—around nine to 10 years. Only 3.6%—less than 4%—claim it for a year or less.
The Government, to my dismay, while increasing the lump sum to £5,000, are proposing that widowed parents should receive this financial support not until the youngest child is 16 or even 12, but for one year only irrespective of the age of the child, at £400 a month. I believe that this is quite unacceptable. For most, the financial loss will be substantial. Some 88% of widows in work with children will be worse off; 50% of those not in work will be worse off. To put it another way, any widow with children who would have claimed for two years or more, usually because of the age of their children, will in future be worse off. That loss could be £50,000 if eligibility were retained while the child carried child benefit. Instead, within a year, she will probably have to work longer hours if she is in work just to make good her financial loss at the selfsame time that her children need her. Children do not adjust in a year. In my experience they are stressed and distressed for many years longer and need more, not less, care from the surviving parent. My children were grown up when bereavement hit and even then it was very hard, but friends who lost a spouse when the children were young found that their children had nightmares and returned to bedwetting. Those parents experienced broken nights and witnessed their children’s clinging fear of losing their other parent, school phobia, challenging behaviour, miscellaneous, unexplained small illnesses and symptoms of depression. They found that their children needed much extra support, stability and attention as well as affection. The widowed parent—a sole carer and earner—may have to extend her working hours to make good the loss of income at just the time when she needs to be more available to them, perhaps to change childcare, move house and, consequently, change their school.
The more generous working parent’s allowance not only helped to replace his income but could also allow a working mother the financial flexibility to adjust her hours to care for her children to enable them to settle into the new patterns of life that they now experience. Given that few widows claim the full credit that they could, they are making a wise decision for themselves and are in no sense seeking to milk the system. Are we really so desperate for money that we need to take it away from grieving widows with deeply distressed children?
As for work conditionality, if widowed parents are on UC, it is proposed that they are brought within work conditionality after six months. Again, that is quite unacceptable. I am baffled by this lack of empathy or understanding. Of course, if she wants to go back to work—as many of us do, and did—that is fine and we should support her but to impose work conditionality whether she feels ready for work or not seems unbelievably harsh. We talk about advice and guidance and a friendly interview with Jobcentre Plus staff, but the power lies with the staff. The Minister is giving huge discretion to a young single member of staff, however well intentioned—I am sure that they are—but with probably no personal experience of bereavement.
I would not want that. The more, I am afraid, we hear of the culture of targets at Jobcentre Plus, the retraining or demotion of staff who do not meet their targets, and the resulting heavy pressure on claimants who are still numb and barely functioning to go back to work, the more we should all worry. I appreciate and welcome the fact that the Minister has recently offered further consultation to discuss work conditionality and the training of staff with the voluntary groups who support widowed mothers, and I hope that work conditionality pressures, at least, will be properly relaxed.
Baroness Meacher
My Lords, I will speak to Amendment 62ZA, but before doing so I must apologise to your Lordships—I have already apologised to the Minister—because I am running against a very tight deadline. I tabled this amendment assuming it would come up on Monday. Before addressing the amendment, I give my very strong support to Amendment 59, moved brilliantly by the noble Baroness, Lady Hollis. I have no doubt at all that the replacement of the widowed parent’s allowance by the bereavement support payment has positive features, but the limitation of that benefit to one year is absolutely cruel. The noble Baroness, Lady Hollis, really got across the point that bereavement is not just a short-term problem. It brings several years of very considerable distress and discomfort for the children, as well as for the parent left behind.
The aim of Amendment 62ZA is to remove the widowed parent’s allowance and its predecessor, WMA, from the list of benefits treated as income other than earnings for the purposes of universal credit entitlement. I realise that that would be a very big step for the Government, but the result would be that claimants with no other income or earnings would keep the value of the WPA in full. Those with earnings in excess of the personal allowance would of course pay tax on it, but they would at least receive the majority of the benefit.
This is a probing amendment. The Children’s Society has calculated that, without the amendment, those entitled to widowed parent’s allowance could find themselves worse off by about £400 per year compared to those with no entitlement and no national insurance contributions. An important point is that WPA is a contributory benefit. It is only payable when the deceased parent has paid sufficient national insurance contributions. The clear assumption behind the benefit is that a surviving parent with all those contributions should surely benefit over and above surviving parents with no contributions. We regard it as an anomaly that under the universal credit rules this advantage from having national insurance contributions would be stripped away. Do the Government really intend that outcome? I do not think so. The proposed bereavement support payment, which will of course replace a number of benefits including the WPA, clearly identifies bereaved parents with national insurance contributions as being entitled to benefits which are not available to others. There is therefore a real discrepancy between the two basic assumptions behind the two benefits.
Although the bereavement support payment will be limited in time—hopefully it will be provided for at least three years, which seems to be an absolutely basic requirement—nevertheless it will be of greater value to most of those entitled to it than the widowed parent’s benefit. The contributory principle is well and truly recognised by this new benefit. At the same time, as I understand it, those receiving the widowed parent’s allowance will continue to do so when bereavement support payment takes over for new claimants. The WPA will continue to be treated as income other than earnings, which again is a different principle. This means that the benefit will continue to be deducted pound for pound from the claimant’s universal credit entitlement. The result is that a widowed parent with no other income will experience zero benefit from his or her national insurance contributions, thereby entitling them to the WPA.
The situation is, of course, even worse for widowed parents who continue to work. The gross sum of the widowed parent’s benefit will be subject to income tax. I find that absolutely extraordinary. Working claimants may have their WPA deducted in full from their universal credit entitlement, but will also pay tax on the gross income that they have not received. Those are the parents who could end up £400 per year worse off. I would be grateful if the Minister could confirm that that is a correct reading of the situation.
Can the Minister confirm whether the Government really intend that those bereaved parents with a national insurance contribution record should be no better off than those with no such record and that those in work should really find themselves even worse off? Will the Minister confirm that many current recipients of the widowed parent’s allowance will continue to be disadvantaged in this way even after the introduction of the bereavement support payment? Finally, does the Minister accept that only relatively well-off bereaved parents, whose earnings take them above the ceiling for universal credit, will actually benefit from having a national insurance contribution record? Can that be right?
Baroness Finlay of Llandaff (CB)
My Lords, I support these amendments very strongly. The points about bereavement have been made most eloquently. However, I would like to add the scenario where one parent dies suddenly rather than as a result of a protracted illness, where the shock of the death may be absolutely overwhelming. That could be suicide, murder or a sudden death. There is another scenario, too, which is where the surviving parent was involved in a road accident and does not even start to grieve until much later. The children who are bereaved know that one parent is already dead and, for many months, they may not know whether the other parent will survive or not. The shortening of time is quite cruel, and I use that word advisedly. A year is a very short time in the life of anyone bereaved, and the anniversary of the death often marks a major step change in the way that they live their lives. That applies to children as well as the bereaved parent.
The government proposal to increase the lump sum is most welcome because the current lump sum gets nowhere near the immediate expenses incurred. However, it is essential that the Government consider this proposed three-year period, or until the child is seven, if that would be longer than three years, because pre-school children certainly need that security and will become very clingy when they realise that one parent has gone. A scenario might arise with an accident where not only has the parent died but another sibling. It is not uncommon, sadly, for a family of five or six to be suddenly left as a family of two—multiple losses all in one go in a horrendous road accident.
We know that the outcomes for children who are not well supported in bereavement are much worse. When we think about the cost of bereavement support, it must be put in context of the cost to society of young people who have been bereaved who have not had adequate support and have experienced excessive strain and mental health problems. That increases their risk of suffering from depression, attempting suicide and experiencing drug addiction, alcoholism, underage sex, unplanned pregnancies and so on. That cost must be offset against what appears, at face value, to be a demand for an increase in the amount that the Government will put there for bereaved parents. The long-term continuity becomes really important.
The only other point I will make, which was made to me by a young lady doing work experience with me, is that these days not that many parents are married. The issues highlighted in Amendment 62ZB are therefore really pertinent to the way that youngsters live today. I can see that administratively, if the parents are not married, it can become more complicated for government, but I do not believe that that is beyond the scope of being worked out. It is important to realise that the person who the child has lost and needs support to grieve over may not be their biological parent.
Lord German (LD)
My Lords, I raised this issue at Second Reading and have no hesitation in raising it again. I rise to address the issues that have been spoken of already, particularly those in Amendment 66, which the noble Baroness, Lady Hollis, has tabled this afternoon.
I hope and I am sure that noble Lords will judge the issue of changes to bereavement benefits as changes which would improve rather than worsen the current set of arrangements. We are told that these measures are based on what people were told the Government would provide them with, and that they would provide them with the best support. The Government in turn have told us that they are not about reducing entitlement or making savings. Therefore, the test surely must be whether the changes provide a genuine improvement and are not a worsening of the provision. That is why I have this concern about the one implication of the changes, that bereaved parents will be required to go back to work six months after the death of the mother or father. I am afraid I am unable to see the logic or the compassion that I would expect in this change. In fact, I used the word “cruel” at Second Reading.
For the benefit of the bereaved child or children, I would wish for those bereaved parents with children to have full conditionality relaxed for the whole year. This does not rule out preparation for return to work; in fact, there could still be some limited conditionality after six months—for example, attending work-focused interviews only. It is worth making the comparison with kinship carers. I regard this as an anomaly in the proposed regulations. If a child after bereavement goes to live with an uncle, aunt or cousin, that uncle, aunt or cousin, who may have to forgo work to look after the bereaved child, is exempt from full conditionality for 12 months. Yet the bereaved parent, the mother or father, is given only a six-month relaxation. As we know, a 12-month relaxation will not be necessary for everyone. The noble Baroness, Lady Hollis, said this. Some bereaved parents may determine that their circumstances are different and may want to return to work earlier. One would hope that that is always in the best interests of them and their bereaved children, but that is their choice and not a requirement of the state. There is compelling evidence to suggest that we need to alter the proposed provision.
There are six facts from studies, which I want to draw out. The first is that bereaved children and young people are more likely to have a serious illness or accident than their non-bereaved peers during the first year following the death of a parent. The second fact drawn from the studies conducted in this area is that they have higher rates of substance and alcohol abuse than their non-bereaved peers. Thirdly, one-third will show clinical levels of mental health difficulty at some point during the first two years after the death of their parent, and those bereaved suddenly of a parent are three times more likely to develop depression than their non-bereaved peers. Fourthly, there is an increased risk of suicide attempt and hospitalisation for psychiatric disorder. The fifth element is that parentally bereaved children score lower at GCSE than their non-bereaved peers. In other words, it affects their life chances through the examination system. The death of a parent by the age of 16 is associated with girls failing to gain any sort of qualification, and with men and women being unemployed by the age of 30. Sixthly, bereaved children and young people are overrepresented in the criminal justice system.
Of course, the increased risks outlined above do not mean that every bereaved child will go on to develop such difficulties, but they show that, as a group, they are more vulnerable than those who have not been bereaved. The most reliable longitudinal study that we have, which looks at the impact on bereaved children over a period of two years, conducted by JW Worden, Children and Grief: When a Parent Dies, found that the capacity of the surviving parent to care for their child was—and I am sure that no noble Lord will be surprised by this—the most important factor in securing better outcomes, emotionally and behaviourally, for the children. This included the surviving parent’s availability to the child—obviously emotionally but, more than that, in terms of being able to spend time with them and continuing routines where possible. Successful interventions with families generally involve supporting parents to communicate with and be available to their children, all of which point to allowing the surviving parent as much time as possible to be with their child in the year following the death.
Clearly, the conditions for claiming universal credit are intended to be as close to having a job as possible. It is important to think through the parallels between those who are bereaved and claiming UC, and those who are bereaved while in employment. While most employers clearly would not be able to offer a full year off work to a newly bereaved parent, many parents choose to change jobs, or even stop working, if their employer cannot be flexible, so that they can meet the needs of their children better.
This is the most important of issues and the most difficult time for children—when they lose a parent. Given that this is an anomaly compared to when a bereaved child is placed with a kinship carer, I believe that the Government should think again on this very important issue. I hope my noble friend will consider that.
Lord Browne of Ladyton (Lab)
My Lords, I will speak to Amendments 62ZZA and 62ZB, in my name and that of my noble friend Lady Sherlock, to Amendments 59, 60, 61 and 66 in the name of my noble friend Lady Hollis and Amendment 62ZA in the name of the noble Baroness, Lady Meacher.
At Second Reading, this part of the Bill figured large. The mood of your Lordships’ House then was that these provisions merited further debate and possible revision. We were all particularly indebted to the right reverend Prelate the Bishop of Derby for his powerful contribution that day. A lifetime of providing pastoral care to those suffering bereavement amounts to a wealth of experience and knowledge that we ignore at our peril, particularly when the lessons drawn from it are supported by the best research, as the contribution of the noble Lord, Lord German, has just suggested.
I expect that a strong thread of the Minister’s response will be an argument that the principal aim of these reforms is to make bereavement payments more effective in the 21st-century context. The Government have concluded that doing so requires only short-term intervention to allow a bereaved spouse or civil partner the time to deal with the immediate costs of the death of a partner and to come to terms with the consequential emotional and financial implications. In the longer term, they argue, if support is needed to cope with the consequences of bereavement, the universal credit system will provide that long-term support.
Broadly, those whom the Government consulted supported that approach, but significant reservations were expressed about the impact of the proposed changes on bereaved families. I believe, like many noble Lords and, perhaps surprisingly, the Pensions Minister himself, that there is a debate to be had about how long support should last, particularly in relation to bereaved families with children. On 29 October, on Report in the House of Commons, the Pensions Minister, Steve Webb, in restating the basic design of his reforms, said,
“there is a debate to be had about how long support should last”.—[Official Report, Commons, 29/10/13; col. 867.]
Thanks to the amendments before the Committee this evening, we have the chance to have part of that debate. I am indebted, once again, to my noble friends and other noble Lords who, in speeches moving and supporting the amendments, have set out the relevant differences in the proposed new financial support provisions compared to the status quo, saving me the need to repeat them and sparing your Lordships the tedium of having to listen to me do it. However, I have some points that complement their contributions and are worth emphasising.
The Bill—certainly this part of it—is cost-neutral, or at least broadly cost-neutral. It achieves its objective of paying out to all bereaved partners, regardless of age, mainly by reducing the level of support for bereaved families and by redistributing that money to those without children. The biggest beneficiaries are bereaved partners under 45—who are also the group most likely to be in work.
Secondly, the Government’s own figures on the number of families affected and what their numbers mean tell us some things, but not everything. The total number of deaths of people aged 25 to 64 in 2012, according to the ONS statistics, was about 73,000: 43,799 men and 29,413 women. The number of deaths increases with age, as one might expect. The number of people in receipt of each of the current three benefits includes 10,000-12,000 receiving bereavement support payments per annum. In November 2012, there were 21,000 people in receipt of one-year bereavement payments and 44,000 in receipt of the widowed parent’s allowance.
If I understand these statistics—and I might not—it appears that only half of bereaved partners in any one year are receiving bereavement benefits. This indicates that either bereaved partners are not claiming, they are not married or in civil partnerships, or they are unable to meet the national insurance contributions criteria. It would be interesting to know whether the Minister has any more detailed statistics than this. The estimated total expenditure of these benefits in 2013-14 is £575 million, falling to £531 million in 2016-17. The total is falling as the number of people dying below state pension age is falling and it is expected to continue to fall as people live longer. Importantly, however, as my noble friend Lady Hollis and the noble Baroness, Lady Finlay, reminded us very forcefully, behind these statistics each death is a great family tragedy. It is the loss of a loved partner or a loved parent, in some cases both.
This reform package includes a simplification of the conditions of entitlement and a relaxation of the qualifying national insurance contributions conditions. At this stage, I want to make two points. First, the contribution record of the deceased partner is still the principle qualification for these benefits, and that is important. This is not a case of something for nothing: it is a payment out for people who have paid in. Secondly, it is argued—although this is not reflected in any amendment before the Committee this afternoon—that in these reforms, the proposed contribution condition is more restrictive than at present. In particular, the proposed contribution condition requires Class 1 or Class 2 contributions, while the existing contribution condition allows payment of Class 3 contributions. Furthermore, unlike the current arrangements, it is argued, where the contributor dies before the end of the relevant year for the necessary contributions, there is no provision for earlier years to be aggregated and treated as if made in the relevant year. Will the Minister tell us whether this was intentional and, if so, why? Would the Government be sympathetic to an amendment that reflected the current rules?
As has already been explained by my noble friends, the existing system is replaced by the payment of a lump sum and monthly payments for one year to all bereaved spouses or civil partners regardless of age. We understand that the lump sum will be tax-free. Although the impact assessment assumes that the monthly payment will also be tax-free, we understand that this is still a matter about which the DWP is in discussion with the Treasury.
Amendment 62ZZA in the names of my noble friend Lady Sherlock and myself would ensure that both the lump sum and the instalment element of BSP would be tax-free. In the House of Commons, the Pensions Minister argued that if BSP is paid for just one year, it is easier to make the case that it is not a replacement for income, but a grant to meet the extra costs of bereavement. Therefore, he told us, it was easier to argue that it should be exempt from tax. Accepting that this is, of course, a matter for Her Majesty’s Treasury, a proper understanding of the effect of BSP requires more certainty than the Government are providing about its tax status. It would be helpful if the Minister could tell us when he hopes to have more clarity about this issue. Would it be helpful to the DWP if an amendment similar to our Amendment 62ZZA were passed on Report?
Amendment 59, in the name of my noble friend Lady Hollis engages directly with the Pensions Minister’s call for a debate about how long support should last. As explained by my noble friend, it seeks to extend the time of payment of BSP to a bereaved parent with children for at least three years or until the second year of schooling is complete for all dependent children, whichever is the longer period. The Childhood Bereavement Network states its confidence that this could be done cost-neutrally by adjusting down the monthly rate of BSP for parents and by reducing the lump sum for non-parents. Is the Minister willing to use his resources to test whether that brief is well founded? If it is, surely it significantly supports my noble friend’s amendment. She has shared not only her own experience of the effect of the loss of a parent on a child, but referred to research to which the noble Lord, Lord German, referred extensively. This demonstrated that the impact of a parent’s death on a child will be significant beyond a period of three years. This proposal is therefore evidence-based and, interestingly, is less generous than the current arrangements that my noble friend herself introduced.
The question that we are all asking is: to what extent are the Minister and the Government considering the needs of children in making this significant change of policy, by moving money from parents with children to those without? We hope that the Minister will engage with that question when he responds.
Lord Freud
My Lords, I start by thanking noble Lords for their thoughtful speeches. I know that they have been considering these issues very carefully and I appreciate and take on board the sentiments that have been expressed. Bereavement benefit forms an important part of state support. Reforms have been made over the years, but they have tended to have been in response to particular pressures, and until now no one has really considered how this benefit fits in with wider changes in society and, indeed, within a new structure of benefits. By not addressing the radical social and demographic changes that we have seen or accounting for the far-reaching changes to the welfare system, the benefit is out of date, difficult to administer and hard to understand. Radical reform is necessary to make it more effective for this century.
Baroness Hollis of Heigham
This benefit was introduced or revised after quite a lot of work and research in 2000. In what ways is it out of date? I can understand that the Minister may wish to make savings, but his proposals are cost-neutral. So, apart from the fact that funeral costs have gone up, and therefore there is a need for a larger lump sum, in what way is it out of date?
Lord Freud
The history is where it is thought that a partner is a dependent rather than an independent agent—and that is a fundamental change in our demography, and something that I know the noble Baroness welcomes, with the rise of women’s equality. It is one of the biggest structural changes that we have seen since the war.
Baroness Hollis of Heigham
I entirely agree with the Minister, but it is my belief that since 2000 the percentage of people in work, particularly mothers with young children, has changed by only three or four percentage points.
Lord Freud
I do not think that I want to get into a debate with the noble Baroness on whether the reforms that she was responsible for and those that I am responsible for are better. Let me try not to do it in that context. I shall describe what these reforms are doing.
The design is for the bereavement and support payment to be a significantly simpler benefit and to provide specific financial support at a time when it is needed most without affecting access to further support through other parts of the welfare system. The evidence from independent social research and our public consultation exercise found that the financial impact of spousal bereavement is particularly acute in the first months. Bereavement support payment is designed to provide a significant cash boost for people in these early months, with a lump sum followed by 12 monthly instalments. We recognise that those with dependent children need a greater level of support, so the Bill provides the ability to set out a higher amount in regulations, which is what we intend to do.
Amendment 61 is intended to allow us to pay a higher amount to those who have been caring for their spouse or civil partner prior to bereavement. Caring responsibilities at the end of life can be particularly difficult and distressing and we recognise this by continuing the payment of carer’s allowance for up to eight weeks after the death of the person being cared for. Under the new system, this will be paid in addition to bereavement support payment as opposed to being taken into account in widow’s parent’s allowance and bereavement allowance.
The Bill does not preclude us from specifying a higher rate in regulations for people who meet certain conditions. However, making receipt of or eligibility for carer’s allowance or carer’s credit a condition is neither targeted nor fair. It would be particularly difficult to prove that someone would have been eligible for carer’s allowance, or would have met any other such conditions, after their spouse had died. Moreover, while we are spending more money on bereavement benefits over the first few years of reform, clearly we are in no position to significantly increase benefit expenditure. Money for increased payments to certain groups would have to be taken from elsewhere in the bereavement benefit budget, either resulting in lower payments for those without dependants or lower payments for all.
On the duration of payment, the 12 monthly instalments are not intended to equate to the period of an individual’s grief, nor are they intended to provide ongoing income replacement; rather, they seek with an initial lump sum to provide support when it is needed most.
To pick up on the points from the noble Baroness, Lady Hollis, on the overall effect, the DWP ad hoc report shows that overall, 52% of recipients are better off under the reform and that 62% of those out of work, who are typically poorer people, are better off, while 100% of those who currently receive the least, the BPT group, who get the lump sum of £2,000 but no regular payment, are better off after the policy change. On average, out-of-work parents in the poorest 25% notionally gain for 12 years. Out-of-work parents in the next poorest income quartile notionally gain for up to eight years. On average, out-of-work childless people in the bottom 50% of the income range notionally gain irrespective of age. In-work childless people in the poorest 25% notionally gain, regardless of age. In the structure I am describing, bereavement support payment must be taken in the context of the provision of universal credit, which is efficiently directed at helping the poorest people.
Baroness Hollis of Heigham
Perhaps the Minister could help me. He is arguing that this is an improvement and an increase in generosity in work conditionality, but he is comparing what would be the case if someone did not get this payment under the new universal credit regime. At the moment there is no such requirement, if the income that has been provided is adequate for someone to live on. As I understand it, work conditionality therefore does not apply. If I have misunderstood, I am very happy for the Minister to correct me, but I think that he is making the comparison that we did not make, and he is therefore answering a different comparison.
Lord Freud
Clearly, if people can live on the current bereavement payments alone, no conditionality is implied. That is the difference between the systems. Under universal credit if people are reliant on universal credit, work conditionality will be implied.
Baroness Hollis of Heigham
In other words, at the moment someone could get a full widow’s benefit under this, together with tax credits, housing benefit and so forth, and they would be free from work conditionality. In the future, I absolutely accept that there will be a different regime, but the point is that at the moment the Minister is making a comparison with the position of people who are not bereaved enjoying universal credit compared with those who will be bereaved under universal credit. I am concerned, as are many other noble Lords, with the position of those who are currently free and exempt from work conditionality with additional incomes coming through tax credits, housing benefit and the like, which therefore give them a higher or sufficient income which does not attract to it work conditionality.
Lord Freud
The noble Baroness is looking at a pretty narrow group where people are taking general bereavement benefits plus an income from work at over 16 hours to get the tax credits, which do not contain conditionality. Yes, there is a different system, but that is what the noble Baroness is describing in that particular example.
There are types of tailored work search requirements. There are no work-related requirements at all for the lead carer of a child who is under the age of one. There would be some work-focused interviews when the child is older, and noble Lords will be familiar with these. The work-related requirements can be limited in cases where the claimant has childcare responsibilities or has a physical or mental impairment. This is a flexible approach to conditionality, allowing it to be tailored to the individual, which ensures that all claimants receive the right support.
I am absolutely committed to making sure that parents who have suffered a bereavement receive an appropriate conditionality regime, so I have asked the Childhood Bereavement Network to advise us on how we should develop this guidance. Of course, the point about this, as noble Lords have made clear, is that we are talking about the married bereaved. Lots of other people suffer equivalently who are not eligible for bereavement benefit, and I know that there is some pressure to widen it. This conditionality regime could have wide benefits and I would be prepared to develop that guidance in a relatively transparent way.
We need to consider other people who are bereaved in order to ensure that the system is fair to everyone. Bereaved people in employment are not likely to be allowed to stay away from work for six months. On parental bereavement leave, which is a statutory entitlement, the ten-minute rule Bill was asking for a statutory period of only two weeks’ bereavement leave for an employed person following the death of a child. An additional 4,000 bereaved, non-married, non-civil partnered but nevertheless partnered people who are on UC will also be exempt, although they will not be entitled to the bereavement payments themselves.
Our analysis from the current flow of bereavement benefit claims indicates that 55% of claimants are in employment. Out of the remainder, only 9% of widowed parents are unemployed and, if they claimed universal credit, would be required to undertake work-related activity six months after bereavement. Given that the policy of not imposing conditionality requirements on bereaved claimants claiming universal credit for six months is already more generous than that for bereaved individuals in other circumstances, and that our flexible conditionality regime allows us to reflect on and respond to individual circumstances, I see no merit in having a longer period.
I turn to the distinction of kinship carers; I enjoy boasting about the one-year concession on conditionality for kinship carers. I did that for very particular reasons. The death of a parent at any time is clearly a huge loss to a family and children need support during the grieving period, which can be a long period of time, as my noble friend pointed out. In fact, the evidence tends to show that grief comes out well beyond the one-year period. The support will be not only for the surviving parent who has knowledge of their child and how best to support them, but in most cases there is an existing support network of extended family, friends, schools and clubs. Unlike bereaved children who still have a parent to support them, other children do not have that support as they move into a kinship situation. They may have moved away from their home and school, meaning that their social support network has also been removed, and they need time to make new friends, settle into school and learn completely new routines. The difference with kinship carers is that this marks a huge change for both the child and the adult. On top of that, the adult concerned may have little or no experience of looking after a child, and will need time to make adjustments to their own life in order to accommodate the child.
On the point raised by my noble friend on the move to part-time work, I can confirm that a bereaved parent who changes their employment to part-time work will still be eligible to claim universal credit.
Removing any requirement to engage with the labour market through universal credit for a longer or even indefinite period could have a negative effect on a person’s recovery and long-term job prospects. We believe that allowing people to engage with the labour market through universal credit is necessary to help them adjust and regain control of their lives.
Baroness Hollis of Heigham
Did the Minister say “allowing people”; in other words, is he suggesting that it is the choice of the bereaved parent?
Lord Freud
Yes, I did. There is an element of push-pull and expectation, and the expectation here is that people would engage with the labour market after six months except where there would be difficulties in doing so. That is exactly why we want to develop a good guidance package, which we shall do in consultation with the key stakeholder.
Baroness Finlay of Llandaff
I apologise if I am interrupting the Minister when he is about to clarify something further, but I have a question about those situations where things are even more complicated. For example, one parent may have been driving the car, the other parent killed and one of the other siblings killed, so that the bereaved child feels anger towards the surviving parent as the person who was in control of the vehicle when the accident happened, as well as being bereaved of another sibling. Are those the sort of situations that the guidance will address, and will it allow a more flexible interpretation and some flexibility, particularly, over the six-month type of requirement? It is incredibly likely that the surviving child will have an extremely difficult time, including in establishing a relationship with the surviving parent.
Lord Freud
One of the key things is that there are clearly some terribly tragic and difficult situations involved here. However, the risk is that one looks at the very worst cases and draws up a policy that suits them, even though the majority of people are not in those extreme circumstances. What we are trying to develop here is a reasonable norm and then a capacity to adjust for the kind of extreme circumstances that do happen. We need to make absolutely sure that we are able to adjust for those—that is the structure we are looking at here. The risk is, as noble Lords know, that we do something for everyone when literally only 2%, 3% or 4% are affected. Noble Lords will have heard the percentages I gave about the number of families, which is 9% of the total. I want to try to avoid designing a system based on one particular example.
Baroness Hollis of Heigham
But why, unless the Minister is actually accusing widowed parents of exploiting or milking the system? Being more generous in the case of the very moving examples given by the noble Baroness, Lady Finlay, would give greater choice for other widowed parents with perhaps less difficult circumstances. Unless the Minister thinks they are milking the system, they will find their path back into the labour market. Why does he have to make it quite so tidy and precise? Why does he have to second-guess all the time?
Lord Freud
It is important that the system sets out some generous norms against other examples we are looking at. There are people in employment, who would very rarely see a norm of six months, and people who are cohabiting—a huge proportion of the people who suffer this are in that situation and, as I will go on to say, it is very difficult to help them any more. We set up a good norm and then have a robust system to make sure that we can make the appropriate adjustments for people for whom that norm is not appropriate. As I said, I have asked my officials to meet with the Childhood Bereavement Network in the coming months to discuss the policy approach in universal credit and to look at the guidance. I hope that I will be able to report back in time to inform our next debate on this.
I turn to the amendment in the name of the noble Baroness, Lady Meacher, and how widowed mother’s allowance and widowed parent’s allowance are to be treated under universal credit. She is not here now but I know she will read very closely what I say. As in the assessment of any income-related benefit, it is necessary to consider the income the house or individual has access to, including income from other social security benefits. As both the two benefits—the WMA and the WPA—are income-replacement benefits, it is right that they are taken into account under universal credit. Disregarding them would increase government spend on universal credit by a commensurate amount of around £300 million. Claimants migrating to universal credit from legacy benefits, where their circumstances have otherwise remained the same, will be transitionally protected.
This is what Cruse Bereavement Care said about the new system:
“It is a simple system that would provide bereaved people with access to immediate help. It gives immediate financial support at a time when other available sources can be rendered inaccessible … If the principle is that the universal credit should ensure that the bereaved family are adequately supported on an on-going basis then a lump sum to help enable them to get back on their feet may be simpler and more appropriate”.
Of course, this is exactly what we are doing.
Baroness Hollis of Heigham
Except that it may be better for some, but what the Minister is doing is making it a requirement for all.
Lord Freud
The noble Baroness is now going back to the conditionality debate, but I am now going on to the actual level of payments, which is a somewhat different point. I understand that there is a concern that there could still be a potential impact on a small subset of those universal credit claimants who also receive widowed parent’s allowance. This is the point about them being worse off by £7.56 a week. This is not an unintended consequence, because we have been clear about treatment of unearned income and that widowed parent’s allowance would be deducted pound for pound in assessing universal credit. As noble Lords know, universal credit is a fundamental reform of the current benefits system and leads clearly to both increases and reductions in the level of entitlements. However, no one already on benefit whose circumstances remain the same will lose out in cash terms as a direct result of the move because of the transitional protection.
The point is that widowed parent’s allowance is a taxable benefit. Working claimants might not only have their allowance deducted from the universal credit entitlement, but also pay tax on it through the tax code in their earnings. The reduction in net earnings as a result of the additional tax will be only partly offset by an increase in universal credit because of the 65% taper. Noble Lords will appreciate that there are good reasons why universal credit works on the basis of net earnings and tapered withdrawal, because that is the mechanism that is designed to incentivise work. Nevertheless, I will look carefully at the points that have been made on this issue in this debate and by stakeholders. I need to emphasise, however, that it would be a disproportionate and expensive response to move to a full disregard for all claimants of either of these two awards.
I now move on to the question of allowing bereavement support payment for unmarried couples and the request for a review within six months following Royal Assent. Our law and tax systems recognise inheritance rights and needs of bereaved people only if they have a recognised marriage or civil partnership. This stems from the founding principle of the national insurance system, which is that all rights to benefits derived from another person’s contributions are based on the concept of legal marriage and civil partnership. Allowing cohabiting couples to have access to bereavement benefits would significantly increase complexity; and proving cohabitation can be incredibly challenging, not to say an intrusion into claimants’ private lives.
On the request for a review, there clearly needs to be a period following introduction of the new payment to allow changes to bed down before we can review its effectiveness and impact on the different groups of claimants. I can assure the noble Lord, Lord Browne, that we have already committed to review the change in our impact assessment at a point when sufficient evidence is available to assess all aspects of the policy.
I want to pick up another point made by the noble Lord on the take-up of bereavement benefits. The take-up is high at around 90%, which has been helped by the rollout of the Tell Us Once information service. The majority may not qualify for the full amount due to the complex contribution conditions. Indeed, this is why we have simplified them into a position where someone is entitled to the new payment on the basis of payments of 25 times the lower earnings limit in any one tax year. I believe that the bereavement support payment will be simpler and fairer than the current system, providing support when and where it is needed most by supporting people to regain control of their lives as soon as they can. These amendments would be a backward step resulting in more complexity in a system that would provide less help to those who need it when they need it.
Lord McKenzie of Luton
Will the noble Lord perhaps deal more fully with the point raised by my noble friend Lord Browne about contributions and be a bit more specific about why Class 3 contributions are no longer a route to qualification?
Lord Freud
We think that it is essential to retain the contributory principle, and it is reasonable for people to have made those contributions for at least six months in order to qualify. However, the noble Lord and the noble Lord, Lord Browne, will appreciate that this is a radical simplification of the contribution conditions.
Lord McKenzie of Luton
We have been considering this for a long time and I do not want to prolong the debate, but that really will not do. All that has been done is that one route has been chopped off for people who satisfy the contribution conditions. Class 3 contributions are payments. We are not talking about credits into the system here, this is a payment. Presumably the noble Lord will argue that one should reduce the Class 3 rate on the basis that someone will get less for it.
Lord Freud
The point is that, depending on if it is a late payment, it would be possible to make a very small contribution and get a large payment of £9,800 back. I am happy to write to the noble Lord with a full justification of that decision.
Baroness Hollis of Heigham
My Lords, I am very appreciative of everyone’s contributions. A lot of issues have been explored, and although the Minister has been as fastidious and careful as he always is in trying to respond to the points, I have to say that, on what is now our fifth day in Committee, I thought that his responses here have been less persuasive than they have been to almost all of our other debates. They will certainly require us to look very carefully indeed at the small print of his responses because I am not persuaded by almost any of his points.
Let me first thank the noble Baronesses, Lady Finlay and Lady Meacher, and the noble Lord, Lord German, who I think actually used the word “cruel”. If the noble Lord wishes to resile from that, I apologise. I think that they all spoke very well and movingly about the situations in which families find themselves—not just singly bereaved but doubly bereaved. Sometimes the surviving partner or spouse may be seriously injured, which means that they cannot support a child in the family in the way they would wish. We know that such tragedies exist and the consequences multiply in what is a ripple effect for families for many years. That is especially the case when there are multiple losses. All sorts of feelings of guilt continue to plague unreasonably and irrationally but completely understandably, those who survive such a situation.
Lord Freud
I want to make sure that the noble Baroness adjusts the figure of 88% on the record, because that is not the figure. I was trying to supply the figures. Across all groups, 50% are better off compared to 48%. The figure of 88% is for a narrow group of those in work who are receiving the widowed parent’s allowance. A lot of misleading figures have been going around on the structure of this. There are effects of the combination of these payments with other benefits in the system, particularly universal credit. You cannot ignore those interactions and our figures show that poorer people in particular do well out of this new system.
Baroness Hollis of Heigham
I emphasise again that without seeing the Minister’s detailed working I will sustain the figures I have, unless, until or if the Minister can show me the points at which they are inaccurate. Is it 88% of widows with children in work who will be worse off, and 57% of those not in work who will be worse off? To put it another way, any widow with children who would have claimed for two years or more will in future be worse off. It may be that the Minister has not fully taken into account the cohort effect with regard to the point people at which join the labour market. Obviously, we should continue this in correspondence.
My noble friend Lord Browne pressed the Minister hard and showed again that targets interlocking with financial need are going to leave very many widowed parents in a far worse position. He encouraged the Minister to consult further with the Childhood Bereavement Network group of voluntary organisations to see whether a rearrangement of these benefits can meet some of our concerns. I am pleased that the Minister is willing to do this. He also argued not just for a reconsideration but, if necessary, a review, especially as regards cohabiting parents. If the Minister is serious about trying to bring benefits up to date, he should recognise that 50% of all children are now born outside marriage, even though the relationship may be an entirely stable one with two committed parents. The Minister deploys the argument of bringing structures up to date to suit his case, but apparently refuses to recognise other people’s positions. He is obviously right to want to continue to keep all benefits under review as an act of stewardship. However, if he is going to take account of this changed world, he is selecting what factors he chooses to take account of and ignoring others that are equally significant—and possibly in many ways more so—in their effects on families and their children.
The Minister made several points. First, as regards structure, I accept that we need to review it but I think that he is going about it the wrong way. Secondly, as regards money, he paraded the gainers against the losers and implied that somehow that is all right because there is some mythical average. It is not all right and I am sure we will come back to that point. The point on which he was least persuasive was that of conditionality. He seems to think that when you have lost a spouse and your children are very insecure, fearful and frightened, and need the surviving parent’s full-time attention, six months’ relief from conditionality is generous. I would tell him that he needs to live in the world that such parents inhabit. It really is not generous. He is making the comparison with, say, a single parent under UC. I accept that a widowed parent in that situation would be more generously placed in terms of work conditionality than a single parent unaffected by widowhood would be under UC, but that is not the point we are making.
I cannot believe that the noble Lord is deliberately bypassing this point. Our knowledge of what those widowed parents and their children experience was built into the previous structure that is now being abandoned. There is an apparent reliance on the fact that the relevant provision is somewhat better than UC, and therefore what have we got to complain about? The Minister needs to ponder some of the literature which the noble Lord, Lord German, identified; perhaps he has. It may shape his perception of this issue of work conditionality. He is so completely wrong on this that I am puzzled because I know that he tries to enter into the situation of recipients of benefit.
Finally, the Minister referred to kinship carers and charmingly boasted that he had been responsible for making their situation better. I am very glad indeed that he did, but the lesson I draw from that is that widowed parents should now turn themselves into kinship carers. Is it his intention to make the regime harsher for the parent and their children who are suffering grief than is likely to be the case for kinship carers, given that the latter are nearly always grandparents? I know they are nearly always grandparents as I have done some work on this. Is it the Minister’s intention that the regime should be harsher for the widowed parent with children than for a grandparent caring for the children, particularly if the maternal grandparent is involved who has suffered not the direct loss of a son but, say, that of a son-in-law? Is that what he is really arguing? I wonder how much experience he or his team have had of engaging with families in that situation. I would hope that at the very least he will take away from this the argument that whatever he may or may not be able to do in terms of budgets and cost neutrality—and that may follow discussions with the voluntary groups, which we welcome—he will at least extend his empathy for kinship carers, which we respond to and recognise, to the similar group of widowed parents, and at the very least not deploy work conditionality until a year has passed. That would at least go some way to meeting our concerns. Unless the Minister wants to respond to me further now, I beg leave to withdraw the amendment.
Lord Freud
ScheduleOption to boost old retirement pensions Part 1Great BritainSocial Security Contributions and Benefits Act 19921 The Social Security Contributions and Benefits Act 1992 is amended as follows.
2 (1) Section 1 (outline of contributory system) is amended as follows.
(2) In subsection (2)—
(a) omit “six”;(b) in paragraph (d), after “making up entitlement;” insert—“(da) Class 3A, payable by eligible people voluntarily under section 14A with a view to obtaining units of additional pension;”.(3) In subsection (4)(a), for “and 3” substitute “, 3 and 3A”.
3 After section 14 insert—
“Class 3A contributions14A Class 3A contributions in return for units of additional pension
(1) An eligible person is entitled to pay a Class 3A contribution in return for a unit of additional pension.
(2) A person is eligible to pay a Class 3A contribution if the person—
(a) is entitled to a Category A, Category B or Category D retirement pension or graduated retirement benefit, or(b) has deferred entitlement to a Category A or Category B retirement pension or graduated retirement benefit.(3) The amount of a Class 3A contribution needed to obtain a unit of additional pension is to be determined in accordance with regulations made by the Treasury.
(4) Before making those regulations the Treasury must consult the Government Actuary or the Deputy Government Actuary.
(5) A person—
(a) may pay Class 3A contributions on more than one occasion, but(b) may not obtain more than the maximum number of units of additional pension.(6) The maximum number of units of additional pension that a person may obtain is to be specified by the Treasury in regulations.
(7) In this section “deferred”, in relation to graduated retirement benefit, has the meaning given by section 36(4A) of the National Insurance Act 1965.
(8) For the meaning of “deferred” in relation to a Category A or Category B retirement pension, see section 55(3) of this Act.
14B Class 3A contributions: repayment
(1) The Treasury may by regulations provide for a Class 3A contribution to be repaid in specified circumstances.
(2) Regulations under subsection (1) may, in particular, make provision about applications for repayments and other procedural matters.
(3) A person is to be treated as never having had a unit of additional pension if the Class 3A contribution paid in respect of it is repaid.
(4) Regulations under subsection (1) may provide for benefits paid to a person because of the unit of additional pension to be recovered by deducting them from the repayment.
14C Class 3A contributions: power to change eligibility or remove the option to pay
(1) The Treasury may by regulations change who is eligible to pay Class 3A contributions.
(2) The Treasury may by regulations remove the option for people to pay Class 3A contributions
(3) Regulations under this section may, in particular, amend an Act.”
4 If paragraph 3 comes into force before the day mentioned in section 51(5), section 14A(2) as inserted by that paragraph has effect as if the reference to entitlement included the prospective entitlement of a person who—
(a) has not yet reached pensionable age, but (b) will reach pensionable age before that day (assuming that the person lives until pensionable age).5 In section 43 (persons entitled to more than one retirement pension), in subsection (1), after “subsection (2) below” insert “and section 61ZC below (which deals with unusual cases involving units of additional pension)”.
6 In section 44 (Category A retirement pension), in subsection (3)—
(a) in paragraph (b), at the end insert “or where the pensioner has one or more units of additional pension”;(b) after paragraph (b) insert—“For units of additional pension, see section 14A.”
7 (1) Section 45 (rate of additional pension in a Category A retirement pension) is amended as follows.
(2) In subsection (1)—
(a) after “shall be” insert “the sum of the following—(a) in relation to any surpluses in the pensioner’s earnings factors,”;(b) at the end insert “; and(b) if the pensioner has one or more units of additional pension, a specified amount for each of those units.”(3) In subsection (2), at the end of paragraph (d) insert “; and
(e) if the pensioner has one or more units of additional pension, a specified amount for each of those units.”(4) After subsection (2) insert—
“(2A) For the purposes of subsections (1)(b) and (2)(e) the “specified amount” is an amount to be specified by the Secretary of State in regulations.”
8 In section 52 (special provision for surviving spouses), after subsection (3) insert—
“(3A) In subsection (3) the references to additional pension in a Category A or Category B retirement pension do not include any amount of additional pension attributable to units of additional pension.
(3B) If an amount of additional pension in the Category B retirement pension is attributable to units of additional pension, the additional pension in the Category A retirement pension is increased by that amount (in addition to any increase under subsection (3)).”
9 After section 61 insert—
“61ZA Shortfall in contributions: people with units of additional pension
(1) This section applies to a person who has one or more units of additional pension if the person—
(a) is not entitled to a Category A retirement pension, but(b) would be entitled to a Category A retirement pension if the relevant contribution conditions were satisfied.(2) The relevant contribution conditions are to be taken to be satisfied for the purposes of the person’s entitlement to a Category A retirement pension.
(3) But where a person is entitled to a Category A retirement pension because of this section, the only element of that pension to which the person is so entitled is the additional pension attributable to the units of additional pension.
(4) For units of additional pension, see section 14A.
61ZB Shortfall in contributions: people whose dead spouse had units of additional pension
(1) This section applies to a person whose spouse or civil partner died with one or more units of additional pension if the person—
(a) is not entitled to a Category B retirement pension as a result of the death, but (b) would be entitled to a Category B retirement pension as a result of the death if the relevant contribution conditions were satisfied.(2) The relevant contribution conditions are to be taken to be satisfied for the purposes of the person’s entitlement to that Category B retirement pension.
(3) But where a person is entitled to a Category B retirement pension because of this section, the only element of that pension to which the person is so entitled is the additional pension attributable to the units of additional pension.
(4) For units of additional pension, see section 14A.
61ZC Entitlement to more than one pension: sections 61ZA and 61ZB
(1) Section 43 does not prevent a person from being entitled for the same period to both—
(a) a Category A retirement pension because of section 61ZA, and(b) one Category B retirement pension.(2) Section 43 does not prevent a person from being entitled for the same period to both—
(a) a Category A retirement pension, and(b) one Category B retirement pension because of section 61ZB (or, if there is more than one such Category B retirement pension, the most favourable of them).(3) Accordingly—
(a) in section 43(2)(a) the reference to “a Category A or a Category B retirement pension”, in a case in which subsection (1) or (2) of this section applies, includes “a Category A and a Category B retirement pension”,(b) in sections 43(3)(a) and (aa), 51A and 52 “Category A retirement pension” does not include a pension to which a person is entitled because of section 61ZA, and(c) in sections 43(3)(a) and 52 “Category B retirement pension” does not include a pension to which a person is entitled because of section 61ZB.”10 In section 122 (interpretation), in subsection (1), at the appropriate place insert—
““unit of additional pension” means a unit of additional pension for which a person has paid a Class 3A contribution under section 14A;”.11 In section 176 (parliamentary control), in subsection (1)(a), at the appropriate places insert—
“section 14A;”“section 45(2A);”12 In the heading to Schedule 1, for “and 3” substitute “, 3 and 3A”.
Social Security Administration Act 1992 (c. 5)13 (1) Section 162 of the Social Security Administration Act 1992 (destination of contributions) is amended as follows.
(2) In subsection (5)(e), after “those contributions;” insert—
“(ea) in the case of Class 3A contributions, 15.5 per cent of the amount estimated to be the total of those contributions;”.(3) In subsection (8)(c), for “or (e)” substitute “, (e) or (ea)”.
Welfare Reform and Pensions Act 1999 (c. 30)14 In section 47 of the Welfare Reform and Pensions Act 1999 (shareable state scheme rights), in subsection (2)(a), omit “earnings-related”.
Part 2Northern IrelandSocial Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7)15 The Social Security Contributions and Benefits (Northern Ireland) Act 1992 is amended as follows.
16 (1) Section 1 (outline of contributory system) is amended as follows.
(2) In subsection (2)—
(a) omit “six”;(b) in paragraph (d), after “making up entitlement;” insert—“(da) Class 3A, payable by eligible people voluntarily under section 14A with a view to obtaining units of additional pension;”.(3) In subsection (4)(a), for “and 3” substitute “, 3 and 3A”.
17 After section 14 insert—
“Class 3A contributions14A Class 3A contributions in return for units of additional pension
(1) An eligible person is entitled to pay a Class 3A contribution in return for a unit of additional pension.
(2) A person is eligible to pay a Class 3A contribution if the person—
(a) is entitled to a Category A, Category B or Category D retirement pension or graduated retirement benefit, or(b) has deferred entitlement to a Category A or Category B retirement pension or graduated retirement benefit.(3) The amount of a Class 3A contribution needed to obtain a unit of additional pension is to be determined in accordance with regulations made by the Treasury.
(4) Before making those regulations the Treasury must consult the Government Actuary or the Deputy Government Actuary.
(5) A person—
(a) may pay Class 3A contributions on more than one occasion, but(b) may not obtain more than the maximum number of units of additional pension.(6) The maximum number of units of additional pension that a person may obtain is to be specified by the Treasury in regulations.
(7) In this section “deferred”, in relation to graduated retirement benefit, has the meaning given by section 35(4A) of the National Insurance Act (Northern Ireland) 1966.
(8) For the meaning of “deferred” in relation to a Category A or Category B retirement pension, see section 55(3) of this Act.
14B Class 3A contributions: repayment
(1) The Treasury may by regulations provide for a Class 3A contribution to be repaid in specified circumstances.
(2) Regulations under subsection (1) may, in particular, make provision about applications for repayments and other procedural matters.
(3) A person is to be treated as never having had a unit of additional pension if the Class 3A contribution paid in respect of it is repaid.
(4) Regulations under subsection (1) may provide for benefits paid to a person because of the unit of additional pension to be recovered by deducting them from the repayment.
14C Class 3A contributions: power to change eligibility or remove the option to pay
(1) The Treasury may by regulations change who is eligible to pay Class 3A contributions.
(2) The Treasury may by regulations remove the option for people to pay Class 3A contributions.
(3) Regulations under this section may, in particular, amend an Act.”
18 (1) If paragraph 17 comes into force before the new state pension commencement date for Northern Ireland, section 14A(2) as inserted by that paragraph has effect as if the reference to entitlement included the prospective entitlement of a person who—
(a) has not yet reached pensionable age, but (b) will reach pensionable age before that day (assuming that the person lives until pensionable age). (2) In this paragraph “the new state pension commencement date for Northern Ireland” means the date on which legislation in Northern Ireland corresponding to section 2 of this Act comes fully into force.
19 In section 121 (interpretation), in subsection (1), at the appropriate place insert—
““unit of additional pension” means a unit of additional pension for which a person has paid a Class 3A contribution under section 14A;”.20 In section 172 (procedure for regulations etc), in subsection (11A), after “11(3)” insert “, 14A”.
21 In the heading to Schedule 1, for “and 3” substitute “, 3 and 3A”.
Social Security Administration (Northern Ireland) Act 1992 (c. 8)22 (1) Section 142 of the Social Security Administration (Northern Ireland) Act 1992 (destination of contributions) is amended as follows.
(2) In subsection (5)(e), after “those contributions;” insert—
“(ea) in the case of Class 3A contributions, 15.5 per cent of the amount estimated to be the total of those contributions;”.(3) In subsection (8)(c), for “or (e)” substitute “, (e) or (ea)”.”
Baroness Sherlock
Baroness Sherlock
My Lords, as we move on to Part 5 of the Bill on private pensions, I want to take the opportunity to remind the Committee of my interests in the register. I have a remunerated interest as the senior independent director of the Financial Ombudsman Service.
This group of amendments looks lengthy, but its aim is remarkably precise. Amendment 62ZC to Clause 32 is actually very simple; it retains the power of the Secretary of State to put in place the consolidation of small pension pots but removes the part of the sentence that limits this to the pot follows member form of consolidation. I will focus my contribution on Amendment 62ZC, as the other amendments in the group address the consequences arising from that specific change. The Government believe that action is needed to address the large number of dormant small pension pots which will arise under auto-enrolment when employees move to new jobs, as they do on average 11 times in their careers. We from these Benches agree that action is needed, but not the form of action proposed.
The impact assessment confirms that the Government considered two default transfer options. The first option would be pot follows member, where small pension pots follow the member to the new employer’s pension scheme. The second is an aggregated scheme in which the small pension pots are transferred to an aggregator such as NEST. The Government had two choices, and I believe strongly that they made the wrong one.
As it stands, the clause allows only for pot follows member. Our amendments would allow the possibility of using a default aggregator model without the need for new primary legislation. I propose to comment on the problem in order to demonstrate why I believe that the Government’s proposed solution is flawed, to put forward an alternative, and then pose some questions to the Minister. I promise to do it as quickly as is practical.
I turn first to the context. The core issues of trust and confidence which we have discussed previously are still centre stage in getting people to start and to continue saving for their retirement. We were reminded afresh by my noble friend Lord Hutton that we do not have a savings culture in this country in Committee last week. This Bill and auto-enrolment need to give people the confidence that they need to save for their old age. but how can we demand that people save if they do not trust the saving vehicles and they do not trust the pensions market as offering value for money?
The pensions market is not a typical retail market where the consumer chooses the product. Under auto-enrolment, the consumer does not choose the product at all—the employer does. The employee choice is either to stay in or opt out and lose the employer contribution completely. There are also many intermediaries in the pension supply chain. Pensions are a complex product; they lack transparency, and while large employers may have the resources to pay for good advice and assessment of fund performance, SMEs may not. The demand side is weak.
The pensions market also has some very big players who offer pension fund products, asset management, and annuities. The OFT says that the four largest players have between them 68% of the assets, 76% of the schemes and 61% of the members. The results are predictable; the combination of a concentrated supply side and a weak demand side is bad for savers and allows conflicts between the two to go unresolved, which is not in savers’ interests. Those characteristics of the pension market combine, as the OFT report puts it, to make the market “dysfunctional”. The OFT concluded that,
“competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Future clauses and amendments deal with the criticisms raised by the OFT in its report, but this clause and our associated amendments deal specifically with the challenges of small pension pots created by auto-enrolment. The Government estimate that 50 million pension pots will be created by auto-enrolment by 2050, 12 million of them under £2,000. Already, one in six people have lost track of their pension pots, and there are 1 million unclaimed pension pots out there. The evidence is clear that the Secretary of State needs power to make regulations automatically to transfer and consolidate small pension pots. We all agree that a default consolidation mechanism is needed for those people who do not make an active choice to transfer their pensions. The point of contention is how this should be done.
Lord Turner of Ecchinswell (CB)
My Lords, I would like to speak in support of this amendment. When the Pensions Commission addressed the issue of private pensions eight years ago, we had two absolute priorities. The first was the use of inertia through auto-enrolment to increase the number of people involved in savings schemes. I think we all agree that the degree of support for that principle across society, industry and the political parties has been most heartening, and indeed we are now seeing auto-enrolment coming through with a considerable degree of success. Our other absolute priority followed from the first one because once you auto-enrol someone into a pension, you have to make sure that there is good value. It was to bring down the extremely high costs of pension provision for people on modest or low incomes in small and medium-sized enterprises. We observed that if people went through the private competitive system, by the time they retired, 25% or even more of their entire pension pot had disappeared in cumulative charges over the years. We believed that it ought to be possible to get that figure down to something like 5% or 10%, which makes an extraordinary difference to someone’s income throughout their retirement. We are talking about people living with incomes in retirement that are 20% or so higher than they would otherwise have been.
Those extremely high costs derived from the fundamental inefficiency of the market for private pension provision. It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well. We have heard already from the noble Baroness, Lady Sherlock, the quote from the Office of Fair Trading on that.
To get the costs down, it is important to ensure that there are low costs for active members in the scheme to which they are contributing, and it is also important that low charges are levied on those who have already accumulated pots, and on those pots derived from past employment. That requires two things. First, it requires measures to facilitate or require the consolidation of pots, thus removing the costs of multiple proliferation, which are of no benefit either to the industry or to the individual. Secondly, it requires measures to ensure low costs in the scheme into which we consolidate. Again, it is good that a consensus has emerged over the years on the importance of those objectives. I recognise that the pot following the member is proposed as being one way to that end, but I am concerned that while it achieves the first of the two crucial objectives of consolidation, it does not necessarily achieve the second. It does not necessarily achieve low cost in the scheme into which the person is being consolidated because there are dangers that PFM could involve people being consolidated into a scheme where they are paying higher charges than they were paying into the scheme they had been contributing to, and higher charges than necessary. I believe, therefore, that the aggregator option may be the better one and that it needs to be looked at carefully and fairly.
I agree that there are some trade-offs here, but I am not convinced that the impact assessment which has been put before us is a good and fair assessment of that trade-off. The key argument in the impact assessment is that if we go down the aggregated route, we would need to apply it only to “the smallest unprofitable pots” to ensure that the aggregator scheme did not monopolise the market. It states then that the department has interpreted that for the purposes of assessment by assuming that you would aggregate pots only up to a maximum of £2,000, because that was the figure which was suggested in discussions with providers. That compares with the £10,000 assumed when it looks at the pot follows members. Indeed, it is quite noticeable that when it looks at the PFM option, it gives us a set of impact assessments for a variety of options—£2,000, £5,000, £10,000 and £20,000—but when it turns to the aggregator model, it considers only the £2,000 maximum pot.
I accept that if it was really necessary and unavoidable that if we go down the aggregator route we apply it only to pots of up to £2,000, that might be a good argument for taking the PFM route. But I believe that there is no such necessity and that the logic in favour of it is invalid and needs to be challenged. The argument is that a higher level would interfere with the effectiveness of competition in the market and lead to dominant aggregators. However, the whole of the edifice of auto-enrolment, of NEST and of the regulations relating to value for money is based on the recognition that we are dealing with massive market failure and that we cannot rely on fair competition. We cannot therefore consider the argument that some dominant aggregators might emerge to be a valid argument against aggregation. Indeed, dominant aggregators will only emerge if they are lower cost, and that—to go back to my earlier point—is the absolutely central thing and the criteria above all on which we should focus. Will we get the costs down? Will we reduce the total reduction in yield?
I do not believe, therefore, that the danger that the aggregators may become relatively dominant in the market—which is really the only argument put forward against it in the impact assessment—is a valid argument against aggregation. I would urge that, to have a useful impact assessment, we should be considering a range of options with a higher maximum of £2,000 transfer. I see no inherent reason why we should consider having no limit; I certainly believe that if we are to have a fair comparison, we should be thinking about the same limit that applies to the PFM option. I believe, therefore, that this choice between PFM and aggregation should not be concluded at this point. It requires more flexibility and thought to enable further consideration. I am personally, in my gut, in favour of the aggregator limit option, and I think it will be favoured over time, but all that this amendment does is keep that flexibility open for future consideration without the need for later primary legislation. I certainly think that that is required.
Lord Stoneham of Droxford (LD)
My Lords, the previous two speakers have covered the main arguments that I was planning to raise, because there is concern—even from those close friends of the Minister, Steve Webb—on this issue. It is valid, therefore, to register that—there are certainly concerns in our group here this afternoon. The issues have been raised, including the issue of the inefficient market. The issue does not cover the consolidation of old pots. It considers the consolidation of the mobile or live pots. It does not raise the issue of what you do with those people in the labour force who are constantly changing jobs and the costs and the impact on their pension pots every time they do that. It also needs to address the fact that there is a smaller number of aggregators. I agree there is a problem with competition, but it is much easier to supervise them and make sure that the quality of those aggregators is adequate.
The final issue that needs to be raised is that there is a concern that without that supervision, people will be transferring into poor schemes or run the risk of doing so. They need to be protected. For all those reasons, it is right—and the noble Lord, Lord Turner, raised this point—that this is a time for reflection before we make any final decisions.
Baroness Drake (Lab)
My Lords, I will try not to duplicate some of the excellent contributions that have been made. Perhaps I could say that the areas of concern with pot follows member can basically be grouped into three categories. One is confidence in the basis for the Government’s decision to choose pot follows member; the second is differing views on what benefits the saver, and the third is the need to protect dormant pension pots that have already accrued.
When it comes to confidence in the basis for the Government’s decision, the noble Lord, Lord Turner, did a splendid job in identifying the limitations in the impact assessment. I stress that there are significant barriers to overcome before the Government can be confident about the superiority of the PFM model. The consequences of getting this wrong are absolutely huge.
Baroness Drake
My Lords, perhaps I may reiterate for continuity that the areas for concern with PFM can be grouped into three: confidence in the basis for the Government’s decision, differing views on what benefits the saver and the need to protect dormant pots already accrued.
When it comes to the basis for the Government’s decision, where are the significant barriers to be overcome before the Government can be confident about the superiority of the PFM model? The consequences of getting this wrong are huge. Yet the transfer model is in the Bill when there are so many conditionalities still to work through, and confidence in securing lower charges, which is the main benefit claimed for the PFM model, are by no means assured.
PFM requires effective pan-industry collaboration, but what if that is not forthcoming? Are the Government confident that they can overcome industry inefficiencies and conflicts of interest, so well articulated by the noble Lord, Lord Turner? The DWP is working with the industry to find an IT solution to match pots to members. There are significant technical challenges to overcome, standardisation to be achieved and the industry as a whole has to reach a consensus that prioritises the savers’ interests. If and when that is achievable are unknowns, but the Bill locks us into pot follows members.
Some providers will have an interest in getting rid of small, less profitable pots but will also have an interest in setting a pot size cap to defend their more profitable pots. They will have a natural antipathy to an aggregator with a pot cap that increases to a certain level. However, the pot limit chosen for automatic transfer will affect the number of separate pots that a saver builds up over their working life. It is one of the issues that goes to the heart of the efficiency of the aggregator model or the consolidation model chosen. Depending on the assumptions about the aggregator or how many active member and dormant-member pots that it has, the administrative savings can be greater than those that have been estimated in the impact assessment.
The department comments in its impact assessment that, overall, the results of its modelling suggest the aggregator scheme will achieve slightly less consolidation than PFM, but that needs to be set against the greater control that an aggregator scheme could provide in mitigating other risks that come with an automatic transfer mechanism. It would also be interesting to see the results of modelling that includes today’s dormant pots. I would like to come back to this. Equally, pot follows member cannot be implemented without raising quality standards, or the Government risk transferring the savings of millions of ordinary people into myriad schemes over which they currently have little quality control.
Even if the Government succeed in getting all schemes to a minimum quality standard, there will be a wide range between minimum standard and best practice. For example, consider a modestly paid worker who leaves a good scheme provided by a major retailer and goes to work for a two-person employer running a small shop, whose workplace scheme has higher charges, poor governance and a less suitable investment strategy. Would it really be wise to default several thousands of pounds of the worker’s savings into the new employer’s scheme? Regulation could set standards for aggregated schemes above the qualifying standards for automatic enrolment schemes, raising those standards in order to mitigate the risks that can occur on transfer.
Against that, PFM increases the regulatory burden to oversee a myriad schemes into which automatic transfers would be made, rather than focusing on leveraging very high standards in a few aggregated schemes. There is the potential for significant burdens on employers involved in transferring small pots to any number of schemes. Under PFM, every scheme would potentially need to be capable of communicating with every other scheme. Aggregators could pose a lower burden, as there would be—or could be—a much smaller number of such schemes.
Automatic enrolment was intended to carry a lighter regulatory burden for employers, especially SMEs, but this seems to be rowing in the opposite direction. The National Employment Savings Trust, which embraces the most transient low to moderate market, could consequently face higher administrative costs as a result of PFM. What is the consumer detriment to NEST members whose pots are transferred into the schemes of new, small employers, and out of the protection of the high governance standards in NEST?
With pot follows member schemes, the department expects that over the long run average charges would reduce as efficiency savings are made by the industry, but a reading of the impact assessment lacks confidence. Paragraphs 67 to 69 list some of the risks to which I have referred, but paragraph 70 concludes rather sweepingly that,
“the Department would expect the gains and losses from differences between scheme charges and investment performance to cancel out on average”.
When it comes to savers benefitting through lower charges from the administrative savings that providers may make from PFM, paragraph 71 comments that,
“there is a risk that some providers will not experience the resource savings projected”.
Paragraph 72 reminds us of the,
“uncertainty surrounding the assumption over the savings that providers will make”.
This is not the firmest of springboards from which to lock into a solution on the front of a Bill. On the differing views of what benefits the saver, PFM does not currently accommodate people who leave the labour force or become self-employed, as they have no employer scheme into which to transfer their pot. Their ex-employer may nevertheless default them into a poorer personal pension because they do not allow ex-employees in their existing scheme, which I must say is a growing trend. What of women who leave to become carers, move to a new employer, or who work part-time but because of the level of the earnings trigger are not auto-enrolled into the new employer’s scheme?
As has been argued by NAPF and others, pot follows member increases the risk of charges and transaction costs being incurred on the whole pension pot, rather than on the incremental amount saved with the previous employer. If the saver works in an industry characterised by frequent job changes they will be more vulnerable to these risks, which an aggregator could reduce.
Even where individuals choose to transfer to their new employer’s scheme, they face supply-side barriers. Transfers can take weeks if not months, and complexity and lack of standardisation combine to cause delay and increase costs. At decumulation the buying power of a larger pot can be harnessed by the individual, but the buying power is even better if open-market options can be exercised in bulk. Aggregators could facilitate and do this.
I turn to the third element, which is the need to protect dormant pots that have already been accrued. A key weakness in pot follows member is that it excludes existing dormant pots. An aggregator could pool an individual’s dormant and live pots because aggregation would not depend on an active scheme member moving to a new employer. Pot follows member at the point of introduction only consolidates live pots with future live pots. Today’s dormant pots are completely ignored. No start date has been set for pot follows member, as my noble friend Lady Sherlock has indicated, but by 2016 some five years’ worth of dormant pots will have been built up under automatic enrolment, and they will be excluded from the PFM proposition. The summary of the impact assessment points out that those with dormant pots before the start date will,
“remain in their existing scheme”.
That is a key weakness in this solution. Equally, it cannot be right that they should stay with their existing scheme in every instance because some employers will simply default these pots into alternative arrangements anyway if the former employee does not voluntarily transfer. If they are not allowed the option of access to PFM or the aggregator, the employer may well default them anyway into a personal pension.
Finally, the issue of pension pots is not only a future one, it is also one of legacy. Quite a lot of work is being done on standards and reviewing legacy pots by the DWP and the OFT, and there is work to come out of the FCA. I would ask this question: is there to be no synergy on the solution to transferring small pots post-2016 under auto-enrolment, and the solution to the problems that may be revealed in the audit of legacy schemes arising from the OFT investigation? Is it really going to be a set of parallel lines in looking for the solutions to cover the legacy problem, which could also be in auto-enrolment savings pots because of the 2016 dateline and what evolves in the future?
Amendment 62ZC clearly maintains the power of the Secretary of State to make arrangements for the transfer of pension pots, because everyone sees the compelling need to have some way of aggregating or consolidating these small pots. This amendment provides an opportunity to rethink the model to be chosen, but it does not of itself substitute an alternative model. The Government can eventually decide on the alternative model, and new primary legislation would not be needed—but it would not lock us in. The effect of the amendment would not be to lock us in to the PFM model at this stage. The reason for that is, I would say, because the case is not proved, members’ interests are not truly being defended, and there is no synergy with any dormant savings that may exist prior to the implementation of PFM before 2016. I believe that all these issues need much more consideration.
Baroness Turner of Camden (Lab)
My Lords, I have not spoken on this item hitherto except briefly at Second Reading. In my opinion, it is one of the most important issues before the Committee. That is because it is quite obvious that the Government want people to save. Everything they have been telling us about pensions indicates that they want people to save. What happens if people do save, but then they transfer jobs? Nowadays, of course, people do not stay in the same job for their lifetime. They may have several or even many changes of job in the course of a career. What happens to the pension pots that they accumulate? If there is no safety in those pension pots, the whole thing will be a disaster. I support strongly what my noble friends have said. It is clear that this is something that requires a great deal of attention.
Is the regulator to have more powers to deal with this? It is obvious that you cannot have a situation in which pension pots are put at risk because there is no way of handling the market or for dealing with people who will be forced to make choices for which they do not have the necessary skills or experience. They cannot make the right kind of choices and they may end up with a bit of a disaster instead of a reasonable pension, or even a reasonable lump sum to place with another pension provider. Again, I hope that the Government will take seriously what has been said in this debate. It is a very important issue.
Lord Bates (Con)
My Lords, I can certainly assure the noble Baroness, Lady Turner, that we will take very seriously what has been said this afternoon because it comes from such authoritative sources. We have had a high-quality discussion, as is typical of this entire Committee. In fact, at one point I think that we had a Turner commission quorum. This is a very important discussion. We are agreed about the urgent need to tackle small pots and to keep people engaged as regards the value of their savings with a view to their increasing them and being able to purchase a bigger pension when they retire. The savings culture to which the noble Baroness, Lady Turner, has just referred is at the heart of this amendment and the proposals we have put forward.
First, I wish to put some general remarks on the record and, in so doing, speak to government Amendments 62A and 62B, standing in the name of my noble friend Lord Freud. I will then turn to the issues and questions raised and, I hope, give noble Lords some comfort on them.
I think it is worth starting on a note of consensus. Clearly, there is a strong sense that the issue of the proliferation of small pots is one that needs to be addressed. There is some disagreement about how we get there—an issue on which we have consulted extensively since 2011. We announced our preference for the pot-follows-member-model in 2012 and reiterated it in the Command Paper published last year. A full and proper policy-making process has been followed in coming to this conclusion. These amendments seek fundamentally to change our proposals to a type of aggregator model, where pension pots will be moved to a separate nominated transfer scheme. We consulted on the option of an aggregator and there was no clear consensus for a particular type of aggregator. We received views on single, multiple and virtual aggregator models and only 19% of respondents preferred a multiple aggregator which these amendments seek to introduce. Therefore, these provisions, while providing a broad framework, legislate specifically for the pot-follows-member model, providing a clear direction to drive development of the detailed transfer process and to enable the industry to plan for the future.
I will take some time to set out why this Government believe it is right to take this approach. The rationale behind automatic transfers has always been to ensure that individuals have better retirement outcomes and we believe that pot follows member will help to achieve this because it brings greater pension pot consolidation. The proportion of people reaching retirement with five or more dormant pots could fall from one in four without reform to nearly one in 30. We estimate that pot follows member will halve the number of dormant pots and make net administrative savings of £6.4 billion by 2050. That is a key point because the administrative costs of pensions are at the heart of what we are talking about in terms of charges, so therefore reductions in costs mean a bonus for the savers.
In contrast, by their very nature, aggregator models mean less consolidation than pot follows member. Individuals will have at least two pots in a single aggregator model and they could have many more in a multiple aggregator model. Our research shows that a single aggregator scheme would achieve only around half the net present value of a pot-follows-member system to the new employer’s scheme. Given that people are more likely to engage with pension saving as they see their pot grow, coupled with the fact that most annuity providers require a minimum of at least £5,000 or £10,000 in a pension pot to achieve the market option to which the noble Baroness, Lady Drake, referred, consolidation is a key objective to achieve greater results and economies from the purchase of annuities.
Baroness Drake
Will the Minister accept that, whereas getting every automatic enrolment qualifying scheme up to a minimum standard is an excellent aspiration, getting everyone up to a minimum standard is not the same as setting a very high set of standards for a scheme that you are using to default people’s pensions into?
Lord Bates
The Government are not averse to excellent aspirations in a whole range of policy areas but in that particular area we need to look at the issue of the quality. In many ways, this goes back to the introduction of auto-enrolment, when perhaps it should have been the case that scheme quality was dealt with at that time. That would have made an awful lot of sense.
Baroness Drake
I do not want to get into that political debate because there might be some merit in what the noble Lord said. One of the core issues is that a default pension scheme was not chosen but I do not want to drift there. However, it does not matter who should have dealt with the minimum standards for qualifying schemes and when. If the Government are going to take to themselves the power to say, on behalf of millions of people in this country, “We will automatically transfer”, then the governance standards required in the scheme receiving the pots transferred under those terms have to be pretty high, do they not?
Lord Bates
Yes, and our hope and belief is that there will be higher standards. That cannot be issued by diktat and has not been covered. We are simply giving the powers and setting out the framework as to how we will go about that, but that discussion has to be had with the pensions industry. The conversation is ongoing and we will certainly be reporting on that progress.
I turn to some of the specific points that have been raised. The noble Baroness, Lady Sherlock, talked about the level of support and seemed to be fairly sceptical about whether there was any.
Lord Bates
The noble Baroness always asks an honest and genuine question, and I am trying to give an honest and genuine response, which is to say that we are not necessarily comparing like with like here. Although people understand how the pot-follows-member scheme might work—in other words, they will have just one pot, and everything will be transferred into it—they do not necessarily understand what the noble Baroness is proposing in terms of alternatives, whether they are single, multiple or virtual aggregators. Therefore, to give a clear-cut position on that is somewhat difficult.
It was drawn to my attention today that Adrian Boulding of Legal and General, one of the largest pension providers, in today’s Pensions Expert, formerly Pensions Week, says:
“the concept of your pension pot following automatically to a new employer is now not far off. The long-term benefits of people having ‘one big fat pension pot’, as the minister likes to call it”—
I think the Minister he is referring to is my right honourable friend Steven Webb—
“will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for”.
Lord Bates
He might say that but he is one of the providers and I therefore think that that is certainly well worth listening to. Another reason why we have come to this conclusion is because there is a great deal of uncertainty about what is happening out there. Auto-enrolment in pension schemes has been a huge success and the previous Government deserve credit for introducing it in the 2007 and 2008 Acts, based on the recommendations of the Turner commission. The price of the success of auto-enrolment is that it is creating a larger number of smaller pension pots as people move on. Figures have been quoted of there already being 370,000, and the noble Baroness, Lady Drake, has talked about a future figure of 600,000. That means that the need to make a decision is more urgent than ever. The noble Baroness was asking, “What does the industry think? What are people actually thinking?”. Pensions Expert, in its comment and analysis section said:
“If last year was about policy, then this year it is going to be all about making things work. Government have now clearly set the direction of travel. The success of auto-enrolment—in terms of low opt-out rates—means even more small pots are going to be created than were expected. Previous estimates that auto-enrolment would create around 370,000 new pots of less than £2,000 each year now look woefully low”.
They are very clear in what they are saying: they want direction. That does not mean to say that that direction cannot be changed by a future Government—just that they are getting clear direction. We consulted about it in 2011; in 2012 we issued a response; in 2013 we actually said what we were going to do. It seems as if finally, the industry—and, we hope, members—are getting their heads around the fact that this is the preferred option and the route that we are going down to ensure that we actually make it work.
Baroness Hollis of Heigham
They may be getting their heads around the Government’s position, but that does not mean that they agree with it.
Lord Bates
The noble Baroness says they do not agree with it, but when the ABI actually carried out a survey and asked people which one they preferred, 58% of consumers said they preferred pot follow member.
Lord McKenzie of Luton
Did the noble Lord not say a moment ago that perhaps the aggregator model was initially slightly more difficult to understand than the pot-follows-member model? It is not surprising, therefore, that initially, some of these surveys may have shown less support for that model.
Lord Bates
The noble Lord makes my point: it is more difficult to understand. What are we trying to do? We are trying to make it simpler. We are trying to get people to be able to understand it. That is one of the reasons why it appeals to people. They will only ever have one pension pot; under the other scheme they may have several; they will be able to keep track of that and follow it through. Anyway, we can discuss and debate that, but in all of the consultation that was undertaken, it was clear that there was a strong view in favour—not only from the respondents of the consultation, but also in the opinion polls that followed from the industry.
The noble Lord, Lord Turner, raised the important issue that pot follows member fails to deal with high charges. We strongly agree that driving up scheme quality is of paramount importance. This is an issue wider than just a scheme used for transfers in the aggregator model, but actually should be something that applies to all, to set minimum standards across a broader range of schemes. Therefore, in doing so, it would benefit not just those affected by these pension pot transfers, but also the existing members of those schemes.
The noble Lord, Lord Turner, said he did not accept the pot size comparisons that were being put forward. He spoke about the £2,000 limit: why was it £2,000? We actually consulted not just on £10,000: we consulted on £20,000, £10,000, £5,000, all the way down to £2,000 and even £1,000, which is similar to the amount that is currently used in the Australian model, which is often cited in this context. In all of those different levels, pot follows member came out ahead of the aggregator in terms of individual responses.
Baroness Drake
I would not presume to speak for the noble Lord, Lord Turner—I learn from him, not the other way around—but the point he was making was that one of the Government’s arguments against aggregator was that they would have to limit the pot size, which would introduce inefficiencies, because if they did not do so, it would distort the market. He was saying, I think, that he did not necessarily accept that that was a compelling argument against aggregator.
Lord Bates
It is a shame that the noble Lord, Lord Turner, is not here to respond to that himself or to clarify the point, but I take the clarification from the noble Baroness about where he was going. On the issue of how to drive down costs, the noble Lord referred to the potential and mentioned some horrendous numbers—25% or 30% of accrued pension disappearing in charges and how low it was possible to get that. There are some very interesting findings, which we are consulting on at present, about how technology would be a key ally in this. The noble Baroness, Lady Sherlock, asked about this too, wondering whether we preferred a paper-based system or an electronic system. Our preference, based on the current evidence, is invariably towards electronic, because there are associated costs every time you push a bit of paper around. I was interested to read in various articles that you might be able to get the figure for the entire transaction of a transfer down to £105 for both transmitting and receiving the amount if you do it electronically. There needs to be an electronic element to this and that probably points in the direction of a database. We are still consulting on that. We are open to advice, but that is probably something on which the industry will have to offer views.
Baroness Sherlock
I thank the Minister for that response and am also very grateful to all noble Lords who have contributed to this discussion. The noble Lord joked at the beginning that the Turner commission had been quorate. I think when he reads Hansard he may find that slightly less funny than it seemed on the face of it. If I was sitting where he was sitting and two-thirds of the members of the pensions commission told me that I had got this wrong—auto-enrolment and all that flowed from it was based on their recommendations—I would be thinking very hard indeed at this point.
I am very grateful to the noble Lord, Lord Turner, for what seemed to me a pretty damning indictment of the fact that, although we may share an objective, the way the Government are going about trying to achieve this will not tackle the very grave consequences of market failure in the pensions market for savers who are depending on the results of those investments for their retirement income. As my noble friend Lady Turner pointed out, that is one of the most significant issues facing not just the Government but, frankly, this Committee.
I am sorry. I have a great deal of respect for the Minister but I am afraid that he was unable to answer the major questions that came up today. I do not blame him for that. He did not invent the policy: it was invented in another place and he is doing a good job of defending it. But the fundamental questions are out there unanswered. The noble Lord, Lord Turner, pushed home the consequences of that market failure on high costs and charges and what that does to savers’ incomes, and the fact that, despite the Government's best intentions, pot follows member simply does not contain within it the means for addressing that.
The noble Lord also pointed out the consequence of what happens to savers’ incomes in retirement of not getting that right now. Those effects will run for a long time. I was very grateful for the intervention of the noble Lord, Lord Stoneham. Given the origins of this Bill, I thought it was a brave and helpful intervention. But the questions that he posed about how pot follows member can deal with old pots and multiple moves are still sitting on the table. It will be interesting to hear whether there is some small movement on auto enrolment pots, but we will still have the issue of significant numbers of dormant small pots.
We still do not have an answer, as my noble friend Lady Drake pointed out, to the problem of people who are leaving the labour market altogether either to become self-employed or simply to leave the labour market. What happens to those pots?
We did not really get an answer as to why, when so much of the Bill is remarkably loose, the Government suddenly get very prescriptive in this area and solely specify PFM on the face of the Bill. As my noble friend Lady Drake pointed out very powerfully, there are some major difficulties of implementation. The Minister is calling for speed and action now. He must know that the barriers to implementation described by my noble friend Lady Drake are such that he is not in a position to press that button now. If he is, he might want to respond to the questions that she posed about the IT challenges, the standardisation challenges, the huge issues of implementation and the need to build consensus across the industry to prioritise savers’ interests. If he feels that the Government have all those cracked, I encourage him to stand up and intervene and tell me now. Otherwise, there is a lot more work to be done. All this amendment is trying to do is to make sure that that work does not abandon the alternative option—which may in the end be the saving of our shared objective—when there is no need to do so at this stage.
I am also concerned about some of the points that the Minister raised in response to there being no single model. I would be very happy to work with the Government to see if we can build consensus around a single model of an aggregator. If that is what the Minister offers, let us work together to try to do that.
The Minister said that there would be more consolidation in pot follows member. Leaving aside for one moment the serious concerns about the judgment made in the impact assessment raised by my noble friend Lady Drake and the noble Lord, Lord Turner, if pot follows member does not tackle the full range of risks that have been described, then that simply does not answer the question. The Minister again gave an argument that most annuity providers would require a minimum level of pot and the point of decumulation, but again he did not take on the point made by my noble friend Lady Drake, which is that being able to buy in bulk in the market, which an aggregator could do at the point of decumulation, actually opens up whole opportunities in that area.
He made the point about good and bad schemes and that there should not be any bad schemes. I completely agree with him, but there are 200,000 pension schemes in this country. The chances of getting all those up to an optimum level before this is introduced are frankly unrealistic. Given that, the point made by my noble friend Lady Drake stands even more strongly. Even if the Government could guarantee to get all those schemes up to what they would regard as an acceptable minimum standard in the context of the criticism of market failure made by the noble Lord, Lord Turner, and even if they could do that fast, there will still be a significant difference between the best and worst returns. For reasons I will explain in a moment, that seems to be very difficult in the context of auto enrolment.
I was pleased that the Minister managed to find some backing for his scheme from a survey. Did he say that the survey was conducted by the ABI?
Baroness Sherlock
That is marvellous. So the ABI backs a scheme and the survey conducted by the ABI backs the scheme. That is excellent. I think it still leaves out some possibility that there may be other people out there who do not back the scheme. Perhaps it was the other way round. Either way, I think it is the same point made differently. None the less, I take the point and thank him for sharing that with us.
The Minister also made the point that there will be real attractions—and he quoted someone from Legal & General saying that it was clear that the direction of travel from the Government was for pot follows member. There are—but, of course, this is a Bill, not an Act. It is open to Parliament to make a decision if it does not agree with what the Government are proposing, and so far this Committee clearly does not agree with what the Government are proposing. Not one person who has spoken backed the Government’s plan; all backed the alternative. So we still have an opportunity. He also went on to say that many advantages have been mentioned of people having one big, fat pension pot. Of course, there is no reason why that big, fat pension pot could not be sitting in a well performing, well regulated, successful aggregator.
That takes us to the fact that we have two significant public policy dilemmas or issues. The challenge that we have here is made all the more significant by the fact that it comes on the back of auto-enrolment. This is not an individual employee making a choice to go to a pension fund, place their money in it and take their risks in the market. This is somebody who is not choosing, but is simply choosing a job, and by doing so will be forced by default, if they make no other choice, automatically, without their express consent, their pension pot will be moved from their previous employers to their new employers. That is in the context whereby already the state has auto-enrolled them. So step one, without any active consent, we have auto-enrolled them in a pension scheme. Step two, when they move jobs, without any active consent we default moving it with them to the new employer. Doing that in a context where the level of return that they might have expected to gain with the old employer could, potentially, be significantly higher than that which might be enjoyed with the new employer, creates the possibility that the state is creating consumer detriment on a significant scale. That is a very serious challenge, and in that context I suggest that the Government’s proposal of pot follows member has a very high bar to pass.
Finally, the other public policy point is that, if one of the consequences of this is that significant numbers of savers end up with lower retirement incomes than they might otherwise do, that is bad for them, but it is also bad for us as a country. I think that my noble friend Lady Drake quoted from the impact assessment, which suggested that the gains and losses would balance out across the piece. Even if that is true, and I do not know the impact assessment well enough to be sure—I do not have enough confidence in it yet to be confident of that—that does not help us individually. On average, the life expectancy may be X, but if mine is significantly below and yours is significantly higher, the difference matters quite a lot to me, because although on average we may both die at 84, if I die at 60 and you die at 100, that does not make me happy. So the consequences for individuals are really quite significant.
Given all that, there is also the fact that the distribution will mean that, if savers do not go into retirement with the kind of incomes that the Government expect them to have, the whole strategy for retirement on which this is predicated begins to be called into question. So this whole Bill is predicated on an assumption that future generations of savers will have higher retirement incomes because of all these actions taken. It is, therefore, absolutely incumbent on all of us to make sure that the Government get this right. All this amendment does is to put the aggregator option into the Bill. I urge the Minister to accept it and to work with us in doing that. We will definitely return to this matter at a later stage but, since this is the Moses Room, I beg leave to withdraw the amendment.
Lord Freud
Lord Freud