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.
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.
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 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