State Pension (Amendment) Regulations 2016
(Limited Text - Ministerial Extracts only)
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Baroness Altmann
That the Grand Committee do consider the draft State Pension (Amendment) Regulations 2016
The Minister of State, Department for Work and Pensions (Baroness Altmann) (Con)
My Lords, I shall speak also to the draft Social Security Benefits Up-rating Order 2016. In my view, the provisions in the order and the regulations are compatible with the European Convention on Human Rights. Together, these statutory instruments demonstrate the Government’s continuing commitment to support those who have worked hard all their lives, paid into the system and done the right thing to provide them with dignity and security in old age.
Let me first address the issue of those social security rates which are linked to the rise in prices. This includes the additional elements of the current state pension, working-age benefits, carer’s benefits and benefits which contribute to the extra costs that may arise as the result of a disability or health condition.
Last year, the relevant headline rate of inflation, the September consumer prices index, stood at -0.1%, which means that price-indexed benefits have retained their value in relation to the general level of prices. These benefit rates will therefore remain unchanged for 2016-17 and have not been included in the uprating order this year. For the same reason, the Government have not laid a draft guaranteed minimum pensions increase order.
I add that the Government intend to bring forward additional secondary legislation to adjust rates and thresholds within certain social security benefits that would usually be covered by an uprating order. These include adjustments to pensioner premiums within working-age benefits, pensioner amounts in housing benefit, the level of savings credit and non-dependent deductions. We will be laying these regulations, which will be subject to the negative procedure, before Parliament in due course.
As for those rates that are included in the uprating order, this Government continue to stand by their commitment to the triple-lock guarantee, by which the current basic state pension is uprated by the highest of earnings, prices or 2.5%. This year, the increase in average earnings has been 2.9%, more than inflation and more than 2.5%. This means that from April 2016 the rate of the basic state pension for a single person will increase by 2.9%—that is, £3.35, to £119.30 a week, the biggest real-terms increase of the basic state pension since 2001. Therefore, from April 2016 the full basic state pension will be more than £1,100 a year higher in 2016-17 compared to the start of the previous Parliament. We estimate that the basic state pension will be around 18.1% of average earnings, one of its highest levels relative to earnings for more than two decades and in contrast to the low of 15.8% which it reached in 2008-09.
This Government continue to protect the poorest pensioners. The pension credit standard minimum guarantee, the means-tested threshold below which pensioner income need not fall, will rise in line with average earnings at 2.9%, so that from April the single person threshold of this safety-net benefit will rise by £4.40 to £155.60 a week and will be the biggest real-terms increase since its introduction. Pensioner poverty now stands at one of its lowest rates since comparable records began. Despite the difficult economic decisions that we have had to take, I am pleased to say that this Government are spending an extra £2.1 billion in 2016-17 on supporting pensioners who have worked hard and done the right thing while continuing to protect the poorest pensioners.
The state pension regulations set the new state pension full rate that will apply from April 2016 at £155.65 per week, equivalent to more than £8,000 per year. This will mean that the new state pension will therefore stand at 23.6% of average earnings, and I am pleased to confirm that the triple lock will apply to this full rate for the remainder of this Parliament. Our reforms will see the complicated state pension system become clearer and fairer, providing a solid foundation on which people can build up their retirement savings. They will lift many more pensioner incomes above the basic means-tested threshold for the pension credit standard minimum guarantee.
The new state pension will see many groups better off than they would be on the current system. Around 650,000 women who reach state pension age in the first 10 years can expect to receive, on average, more than £400 a year more than under the current system. Around three-quarters of those reaching state pension age will be better off under the new system by 2030. Carers, lower-earners and self-employed people will also benefit under the reformed system. However, we are ensuring that the reforms in the new state pension cost no more than the present system.
In conclusion, these measures demonstrate the Government’s overall commitment to support current pensioners by increasing their basic state pension through the triple lock, to protect the poorest pensioners by raising their guaranteed minimum income and to reform the state pension system so that it is clearer and fairer for future pensioners. Despite the tough and difficult decisions we have had to take, the Government are rewarding pensioners who have worked hard by providing them with a secure and dignified retirement. On that basis, I beg to move.
Lord McKenzie of Luton (Lab)
My Lords, I thank the noble Baroness, Lady Altmann, for her explanation of these regulations and the uprating order. I thank the Minister also for the follow-up communication dealing with some outstanding points from earlier regulations and note the efforts to be made to publicise the availability of national insurance credits for spouses and civil partners who accompany Armed Forces personnel on overseas postings.
As we have heard, the regulations set the full rate of the new state pension at £155.65. I will say more about this later. The uprating order covers the obligation under Section 150A of the Social Security Administration Act 1992 for the Secretary of State to review certain benefits and uprate by reference to earnings if they do not maintain their value. We are advised that the annual growth in average weekly earnings for the quarter ending in July 2015 was 2.9%. This is therefore applied to relevant benefits.
As far as Section 150 of that Act is concerned, we are advised that the uprating order does not need to include any benefits because these benefits have maintained their value in relation to prices, given that the CPI for the 12-month period ending in September 2015—which was available from mid-October, I think—showed a marginal negative growth rate. This seems to overlap with the benefits freeze in the Welfare Reform and Work Bill, a freeze that extended for four years the previously announced two-year restriction on certain working-age benefits. The Minister will be able to confirm that not all the benefits that are not uprated in this order have been the subject of the freeze provided for in the Bill. These include—I think the Minister referred to them—attendance allowance, carer’s allowance, DLA, ESA, statutory adoption pay, statutory maternity pay, statutory paternity pay, and PIP.
When we discussed these matters the Government made much of certain disability benefits being outside the freeze. The briefing note provided to us when we were considering the Bill—at a time when the CPI rate must have been known—nevertheless stated:
“To continue to ensure we protect the most vulnerable we are exempting benefits for pensioners, benefits relating to the additional costs of disability and care and statutory payments”.
In the event, many pensioner and disability costs are not to be uprated, for 2016-17 at least. Can the Minister tell us what assessment has been made of the appropriateness of using CPI as a measure of the additional costs incurred by those with a disability, so that the Government can be satisfied that the vulnerable are being protected?
Baroness Altmann
My Lords, I thank the noble Lord, Lord McKenzie, for his observations, and I would like to help set some of the record straight or clear up any confusion. He asked about what he called a “freeze”. The fact that some of the benefits are not changing is purely a reflection of the fact that they are linked to prices and prices fell. I assure him that uprating will continue as inflation picks up, so that these benefits will continue to increase in line with any rise in prices in the coming years. This is not a freeze on these particular benefits.
Lord McKenzie of Luton
It is not a freeze on these particular benefits, but they are not being uprated. How would the Minister describe that? That is the first point. On the perhaps more substantive point, which I recognise does not include the specific freeze in the Bill, what judgment have the Government made about the impact of not uprating and the extent to which CPI is relevant to the extra costs of those who claim DLA or PIP, not the generality of benefits?
Baroness Altmann
As I have said, benefits such as PIP, DLA and attendance allowance will be uprated in future years, when there is inflation, but prices have fallen over the past year. I can confirm, by the way, that SERPS, S2P and the other benefits are included in this. The official measure of inflation is CPI, and that is the measure required to be used for uprating benefits. CPI fell last year, so there is a 0.1% real-terms increase in these benefits, and as and when inflation increases in the future, these benefits will be increased to take account of the rise in prices, as is required. Earnings-linked benefits will rise in line with earnings or the triple lock, depending on the requirements of the benefit.
Lord McKenzie of Luton
I am sorry; I do not intend to get up again, unless really provoked. I think the Minister said that the benefits had to be uprated in line with CPI. If the Government judged that to be an insufficient uprating—zero, in this case—because of what had happened to the costs of those concerned, is she saying that the Government would be precluded from uprating further or beyond the zero? Are they bound by that?
Baroness Altmann
As the noble Lord is aware, the Government would have discretion to increase by more, but the judgment is that the appropriate requirement this year is that these benefits be changed in line with inflation, or slightly above the movement in prices over the past year. I reiterate that this is not a freeze. It is not part of any benefits freeze; it is purely a function of the fact that these particular benefits rise in line with the change in the price level, as measured by CPI, which is the Government’s official inflation measure. On his particular question, Section 150A of the Social Security Administration Act does not allow for inclusion of these rates in the order, so the rates that will be increased will be taken by alternative powers. There is nothing untoward or underhand in any way; it is merely a function of how the legislation is framed.
Turning to the new state pension, the noble Lord is absolutely correct: communication is very important. One of the big communication challenges we all face is the perception that if people are not getting what is called the full rate of the new state pension, they are losing out. That is a misperception, and it is important that we try to help correct and overcome that. It is important that we help people understand that the new state pension is a totally new system. The full rate will apply to those who are only in the new system, but for those who have built up state pension under the previous system—the existing system—an allowance will be made for years in which they did not pay full national insurance because they were building up a private pension with some of the rebate for national insurance they received.
Lord McKenzie of Luton
Will the Minister tell me what happens after 2030? What are the projections?
Baroness Altmann
I am coming on to that because it is important to understand that these reforms are designed to make the state pension system affordable and sustainable over the long term. We have an ageing population and an increasing number of expected future pensioners, which is good news. The proposal and the overall framework of our pension reforms, taken together, are to ensure that the state pension system is sustainable. Over the years from 2030 and certainly from the 2040s onwards, the general level of the state pension will be set at a base of around £8,000 a year in today’s money. On top of that, people will be expected to have built up a private pension under the auto-enrolment reforms. It is true that in the 2030s and mainly from the 2040s onwards, the general level of the state pension will not be as generous as it would have been if the current system had been sustained. However, the current system is not sustainable. That is expected to be combined with a better private pension to ensure adequate pension provision—indeed, better pension provision—for more pensioners in future because the state pension system will not penalise private savings in the way it currently does for those who are going to end up in the bottom half of the pensioner income distribution in later life.
The new framework, with a base level of state pension that is not earnings-linked, topped up by a good private pension that comes from auto-enrolment, with help from the employer, which will be earnings-linked, is meant to make our system more sustainable and affordable. Having said that, as the noble Lord rightly said, there will be people who will need a safety net; for example, because they do not have the full 10 years required for any state pension and so end up with no state pension, or for other reasons. They will still have access to the means-tested pension credit, but that will be set below the full rate of the new state pension to maintain the incentive.
The question about the 5p differential between the pension credit minimum guarantee and the full rate of the new state pension was relevant to this point. We are committed to ensuring that the new state pension is above the pension credit standard minimum guarantee, but it is also important to remember that the 2012-13 illustrative rate for the new state pension was £144 a week, while the pension credit standard minimum guarantee for a single person was expected to be £142.70 a week. Since then, we have increased the pension credit standard minimum guarantee by the full cash increase given to the basic state pension, so that the poorest pensioners benefit from the triple lock as well. That means that the pension credit standard minimum guarantee has grown faster than the new state pension illustrative rate.
As far as the savings credit is concerned, it is true that the savings credit maximum rate is being reduced, but this should be more than offset by the increase in the basic state pension, and the triple lock. As well as being catered for, depending on what happens to each individual element of a pensioner’s income, the fact that the maximum savings credit is falling by approximately £2 a week will be more than offset by the £4 or £3.35 increase. Our forecasts are that pensioners will, on average, still be £2 a week better off in cash terms. I am assured that there will be absolutely no cash losers from this. The expectation is that the poorest pensioners will still see an increase in their overall income.
The noble Lord also asked about the rebate savings from contracting out. It is true that the additional national insurance revenue raised by the withdrawal of the contracting-out rebate will be received by the Government. However, it will be received by the Treasury; it will not flow to the DWP. It is not expected to be spent on the state pension; otherwise, it would mean that significantly more would be spent on new, rather than existing, pensioners, which was never the intention of these reforms. It is a matter for the Treasury how it allocates the departmental funds that it raises after the removal of the rebate and how that revenue is subsequently spent.
I think that that covers the points raised, if I am not mistaken.
Lord McKenzie of Luton
I am grateful to the Minister for a very full response on most issues. Unless I missed it, I do not think she dealt with those who may have no entitlement to the equivalent of the basic state pension, or with transitional protection. We touched on those paying reduced national insurance contributions before 1977, which might be one category, but is that it? Is that all the transitional protection that will be available?
Baroness Altmann
I apologise. I thought that the noble Lord had, in a way, answered his own question by saying that there is transitional protection for those women who have paid the married women’s stamp—the reduced rate election. There is also protection for Armed Forces spouses, who will get credits in the system. It is also the case that some people might have inherited a pension from a spouse but no longer will under the new system because the new state pension will treat individuals in their own right. It is very difficult for us to predict who will become widowed. However, as the noble Lord rightly said, this will form an important part of the communications on the new state pension: to explain that in future most people—as I say, there will be exceptions for the Armed Forces and the married women’s stamp—will be treated for state pension purposes on the basis of their own record, rather than being assumed to be able to inherit or transport an entitlement from a partner.
Lord McKenzie of Luton
Just to be clear on that point, my understanding is that the Government have estimated that up to 2030 some 290,000 people will be affected by the withdrawal of that opportunity. I understand what the Minister has said about those who paid reduced national insurance contributions before 1977 and those accompanying armed services personnel, but how many of those 290,000 people does that cater for? What is the level of the transitional protection likely to be for those who paid reduced national insurance contributions before 1977?
Baroness Altmann
I do not have the breakdown, but I am happy to write to the noble Lord with whatever figures we can give him to satisfy him on that particular request. Pension credit remains for anybody who does not have sufficient income to bring them up to the £155.60, which is usually far more than the pension that one would have inherited. Under the new state pension, widows or widowers will also inherit the protected payment that their previous partners would have been able to build up under the new state pension system rules.
I thank the noble Lord for his contribution to this important debate. This Government are taking the necessary steps to protect pensioners, many of whom have worked hard all their lives and are no longer in a position to increase their income through work. Our triple lock, our protections for the poorest pensioners and our new state pension reforms mean that we will be able to provide pensioners with dignity and security in their retirement.