Welfare Reform Bill

Baroness Drake Excerpts

Thursday 3rd November 2011 Grand Committee

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[Baroness Drake]

52D: Schedule 1, page 107, line 26, at end insert—
“( ) Regulations may specify that the pension contributions of single or either of joint claimants are to be disregarded in calculating their income.”

[Baroness Drake]

My Lords, the purpose of this amendment is to allow regulations to specify that pension contributions made by single or either of joint claimants are disregarded in full in calculating their income for the purposes of calculating entitlement to universal credit: in effect, that 100 per cent of contributions made to an Inland Revenue approved pension are deducted from earnings that are brought to account in the calculation. The current tax credit rules disregard the whole of any pension contribution, and housing benefit takes half of that contribution into account.

Briefing note 3, which I read again this morning, states that only 50 per cent of pension contributions will be deducted from income under universal credit. I find this decision to allow only 50 per cent of pension contribution to be deducted—as against the current 100 per cent—quite disturbing when we are on the eve of beginning to auto-enrol millions of people into a workplace pension, many of whom will be modest-income earners and many of whom will be in receipt of universal credit. I find it disturbing for three reasons. First, it will undermine the incentive to save—I will come back to this. Secondly, it will impact those on lower incomes. Thirdly—and this is an argument to which I will return on another occasion—it is another example of a government policy measure, of which there have been several over a short period, which results in little or no asset accumulation strategy for low to moderate income earners.

The arguments for auto-enrolment and the 8 per cent base load of contribution included an analysis of financial incentives to save. It included the fact that this 100 per cent of contributions was allowed in the deduction under working tax credit. That analysis was carried out in three instances: once by the Pensions Commission—we were aware of it and it influenced our thinking—and twice by the DWP in its research report 403 Financial Incentives to Save for Retirement, and its report on the savings incentive work programme. The latter report was a very high-profile event; it was carried out in a rather heated environment around incentives to save and means-tested traps. The DWP was full and transparent in its engagement with all relevant stakeholders, sharing data and analysis. The report was widely accepted at the time. In all of these reports it was clear that the way in which pension contributions were treated under the tax credit system was part of the incentive to save and the payback analysis on every pound saved for low to moderate-income earners.

I cannot do justice to the reports in moving an amendment, but I refer to one or two selected examples. Looking at £1 of saving by a low earner under current benefit and tax credit rules, paragraph 4.5 of the DWP Research Report 403 advises;

“the expected payback for a low earner per £1 contribution net of any offsetting benefit effect is £2.81, compared to £2.52 with no such offset”.

The same paragraph, in brief, goes on to illustrate, admittedly for a very stylised individual, how receipt of working tax credit throughout working life by someone on a lower level of income can increase the return on their savings to 4.1 per cent from 3.2 per cent after all the effects of these offsets. Even if tax credits are received only at certain points and not throughout the whole working life, they still boost the net return on savings. If one were to take the difference between 3.2 per cent and 4.1 per cent and express it in terms of a percentage difference in a rate of return over 30 to 40 years, what would that mean? It would mean a pension pot of the order of 20 per cent or perhaps 25 per cent less than it would otherwise be.

Then we come to those on the lowest incomes who are hit hardest. I come back to a point that I made in a previous amendment about the purpose of the tax credit, which was to make work pay. It made it easier for people to get a real return from being in work and accept responsibility. This is very important to those on lower incomes. Clearly, a very strong incentive to save will be lost by changing the rules on pension credit and, inevitably, it is going to trail through to a gender dimension. I always get very stressed when I look at these things in terms of the gender impact.

Referring back to Appendix D of the DWP report on the savings incentive work programme, again this shows that those on modest incomes in receipt of tax credits and housing benefit effectively pay 52p for an individual contribution of £1, which, with the employer match, means that £2 is contributed to their pension. That clearly enhances the payback from saving for these individuals. I know that there will be instances where some people whose incomes are below the earnings limit at which withdrawal begins will not get that benefit. None the less, for significant numbers of people— and that number will increase in an auto-enrolled world—under the current arrangements the payback would be much higher by allowing the 100 per cent.

I come on to the broader point. It is very easy to look at a piece of policy incrementally and say, “We have to make difficult choices. We can do this and save that”, but I am always really concerned when I see a series of incremental policy decisions. When you look at their cumulative effect, they are quite exponential in their impact and much greater than the people who made the individual incremental decisions thought they would be. This is almost disassembling asset accumulation strategy. Policies focused on improving the benefits system and policies directed at asset-building by lower income groups are not alternatives. I get a feeling that there is a debate that says that they are. Certainly when I participated in the debate that led to the scrapping of the savings gateway, that was the debate that was running at that time.

It is not a matter of either/or; you address the low income policy and income redistribution or you address the asset accumulation strategy, but recognising that addressing inequality and enabling people to take responsibility, stay in control and be empowered, and everything that we aspire to for people to achieve, have and be, requires both sets of policies. Yet we see in this Bill and elsewhere other measures by the Government that have the effect of disassembling asset accumulation strategies. We have the one that I am talking about, where the amount of pension contribution deductions that can be made is now to be halved. We saw the removal of the savings gateway. We are seeing the application of quite aggressive capital rules to the savings of those in work under universal credit. We are seeing the application of aggressive capital rules where one partner has reached pension credit age and the other has not. We have seen the aggressive taking into account of ISAs and assumptions about income flow from ISAs, which were a product that was supposed to be targeted at lower to moderate-income earners. It was a high-advantage, simple, cash savings product.

Therefore, when one stands back, I have a general concern about the impact of a series of measures on the asset accumulation strategy for people on low-to-moderate incomes. I honestly do not know how one expects people to embrace responsibility and long-term saving, and think about preparing for retirement, when one of the significant things that contributed to the payback on your savings, apart from the employer contribution, was the way in which your pension contribution interfaced with the benefits system. It is unfair and it is certainly inefficient as a piece of policy, either as pension policy or in helping people to exercise more control and responsibility.

May I also ask about some operational issues that flow from this? It is not clear how personal pensions that are not paid through the employer will be handled when someone says, “I am not engaged in the auto-enrolment arrangements with the employer but I am paying into a personal pension, so how do I get account taken of that?”. Secondly, it strikes me that this will be quite a complicated procedure. If someone is on universal credit and paying a contribution, only 50 per cent of which is taken into account, you cannot take the gross earnings figure and you cannot take the net earnings figure because the Inland Revenue would have given a more generous allowance for that pension contribution. Therefore, you have to create another figure for the 50 per cent allowance that you are going to give on pension contributions. It just struck me as a rather complicated calculation or procedure, so I should like to understand how that will be done. I also dislike and disagree with the intention to reduce it from 100 per cent to 50 per cent. I beg to move.

[Lord McKenzie of Luton]

My Lords, I do not want to add anything to the very full argument around the policy that my noble friend has laid out. I just re-emphasise the issues about the practicalities and how they will work. I understand that employer contributions will not be treated as income for universal credit purposes but only 50 per cent of the employee contribution will be deductible. As my noble friend says, the data that come from the system would be net of tax, net of national insurance and net of occupational pension contributions, not the full contribution. Therefore, some adjustment would have to be made to that. How does that sit with the collection through real-time income and the related point that my noble friend made about when those contributions are made directly to personal pensions? Presumably there will need to be some additional reporting requirement. I guess this just emphasises that, in the world of universal credit, all is not as simple as we would wish and sometimes portray.

--- Later in debate ---

[Lord Freud]

Yes, we have commissioned that as part of the requirements.

[Baroness Drake]

I appreciate that the Minister has to give the Government’s reasoning behind this decision, but I am absolutely aghast at the argument that it will cost £200 million to restore 50 to 100 per cent of the pension contributions being deducted. There was a pension settlement, which said that the state pension age had to go up but the earnings-related element would be removed from the state system and go flat rate, and that individuals, supported by their employer, would have to take on greater responsibility for personal saving. They would be auto-enrolled, and that was part of them taking responsibility for a sustainable pension system over the long term. As part of that, the incentive to save had to be right; that was a huge debate. In the third leg, between the state pension age going up, flat-rating the state system and moving private savings up and earnings-related out of the state system, the incentive to save had to be right.

At the time, there was a huge debate and a huge argument that it would not work unless you got the incentives to save right. At the lower end, how the benefit system interfaced with the pensions savings system was a very important part of the payback. It was also a very important part of the explanation to people—including shadow Conservative Ministers at the time, who were very vocal on this issue—that this was what the payback would look like, with incentivisations to saving that came through the tax credit system. This is what I mean about incremental decisions. Now somebody says, “Well, we can just remove a chunk of the payback for a particular group of people and save £200 million by reducing the figure from 100 to 50 per cent”. I really struggle with that because it is saying, “Never mind what the strategic analysis was or where we are trying to go; this convenient incremental policy will save us £200 million”—and somehow it is a fairer deal for the taxpayer. Maybe in 30 years’ time it will not be a fairer deal for the taxpayer if more people present themselves for benefits. I struggle with that line of reasoning for doing this for that group of people. Okay, it is £200 million. I am not avoiding the need to make tough decisions, but again one stands back and looks at the contribution that the taxpayer makes to the incentive to save across the piece.

My noble friend Lady Hollis is right. You can get £50,000 per annum incentivised right up to 50 per cent tax relief. I know that the noble Lord is going to shout at me that this will allow more people to keep their income and that it is a different analysis, but I do not accept that, particularly in the context of a sustainable pension strategy. We have all sorts of tax advantage savings arrangements that the well-off can take advantage of. You can fund a tax advantage stakeholder account for your child. You can fund a tax advantage ISA for your child or your non-waged spouse. I have taken advantage of some of these for my children. However, I struggle against the decisions on the incentive to save for low-to-moderate-income groups, which was inextricably linked to the in-work benefit system, when somebody says, “It saves £200 million. Just undermine the incentive to save and the payback for this arrangement”. It just does not stack up intellectually. It does not stack up when there is a consensus which says that everyone should buy into a pension solution that holds over the very long term. We have just taken £10 billion from a group of women who should not be bearing that level of savings, and we are now going to take £200 million out of low-to-moderate-income earners. My argument is losing subtlety because the quality of what I am pushing back on is unsustainable. It is £200 million for an irrational reason. Extremely reluctantly, I beg leave to withdraw the amendment, although I am sure I shall be coming back to this.

Amendment 52D withdrawn.