Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022

Baroness Drake Excerpts

Tuesday 12th July 2022 Grand Committee

[Baroness Drake (Lab)]

My Lords, I declare my interest as a pension scheme trustee, as set out in the register. I thank the Minister for her helpful and clear explanation of the intent of these regulations. I support them, because they integrate into pensions legislation an order produced by the Competition and Markets Authority to address the weaknesses it found in the investment consultancy and fiduciary management markets.

This instrument integrates two of the CMA’s seven proposed remedies for addressing the weaknesses in those markets by placing duties on the trustees of relevant occupational pension schemes: remedy 1 is the mandatory competitive tendering requirement for pension schemes to follow when it comes to fiduciary management services; and remedy 7 places a duty on trustees to set their investment consultants clear strategic objectives. These regulations also put the regulatory responsibility for the oversight of those trustee duties within the remit of the Pensions Regulator.

The case for the order being integrated into pensions regulation was set out very clearly by the CMA in its report on these markets:

“we find there are weaknesses in the demand side based on a low level of engagement by some pension scheme trustees. In addition to this, for those who engage with the market, the information that trustees need to assess the value for money (by which we mean both fee levels and quality) of these services is difficult to access. These two factors reduce the competitive pressure on investment consultants and fiduciary managers.”

Sadly, the CMA’s report and recommendations, which followed a referral from the FCA, which also identified problems, provide yet another example of a necessary intervention to address instances of poor competitiveness in the pension industry market. Poor practices on the supply side by providers and demand-side weaknesses driven by the well-known drivers of asymmetry of knowledge and understanding, customer inertia and low levels of active engagement lead to customer detriment.

In this instance, the demand-side weakness is the low level of engagement by some pension trustees, most likely in smaller and DC schemes. On a read-through of the detail in the CMA report, its very real concern about how these markets are operating becomes apparent. Lack of information and transparency on fees and performance, incumbency advantage and barriers to switching fiduciary manager rank high among those concerns. It is very depressing that we are still seeing examples of those behaviours in the pensions market.

Investment consultants and fiduciary managers have a very influential role through the advice they give and in the exercising of delegated authority to manage investments on behalf of the trustee—I say, as a trustee, that this is why this is so important. If their performance or value is poor, the result is detriment to the pension savers. The nature of the investment advice and fiduciary management markets means that any negative impact on scheme outcomes because of their performance or value is significant and will accumulate and compound because of the long time horizon over which pension assets are invested.

Addressing market weaknesses is not without its challenge. A very perceptive observation in the Secondary Legislation Scrutiny Committee’s 6th Report of Session 2022–23 in reference to these regulations provides me with an opportunity to articulate something that has been worrying me but which the committee has been very perceptive in identifying. It welcomes the additional protections, but adds:

“This is the thirteenth SI relating to the governance of occupational pensions that we have seen in the last 12 months and the Government need to be mindful of the cumulative impact of the costs and administrative burdens on both pension schemes and trustees.”


It is not only in the last 12 months. Over the last few years, there have been several pension scheme Bills and a plethora of regulations. I completely recognise that some of those regulations are very necessary to address weaknesses in the private pensions market, which are well documented in numerous FCA and CMA reports and other reputable sources of data. But in other instances, regulations are needed to correct the impact of public policy decisions and their implementation in the first instance. Suboptimal policy, or suboptimal implementation of policy, is itself now beginning to generate excessive regulations and is increasing that volume.

There are many more examples, but I will take just a few. The Government failed to anticipate the exponential growth in scammer activity that followed the introduction of pension freedoms. It was pretty obvious to most people in this field that, once you tell people that they can take all of their money very easily out of all their pension savings, scammer activity would grow exponentially. Even with the new regulations to address the scam problem, there is ambiguity between the intention of the primary legislation, the regulations and regulatory guidance.

The supposition of active engagement by savers and the requirement to take advice in certain circumstances has not provided the sufficiency of protection for pension savers. As the FCA reported, a significant amount of the advice given was not fit for purpose. It culminated in the steelworkers’ problems. The FCA confirms that consumers often take the line of least resistance in choosing draw-down products. Lack of transparency, complexity and consumer inertia all lead to poor decisions. We then have markets that did not respond with the degree of product innovation that was forecast. The introduction of value for member assessments, although conceptually the right thing to do, did not make for easy comparison between schemes.

All these issues and others have increased or will increase the volume of regulation. They add complexity and less efficiency in consumer and public policy outcomes. This is genuinely worrying me a great deal. Regulatory overloads that miss the primary target take us back to that very perceptive comment by the Secondary Legislation Scrutiny Committee. If the fundamental issue is not correctly analysed, the policy appropriate and the implementation right it will just lead to layer on layer of regulation to try to correct some of these problems in this market, which will never be a very efficient and functioning competitive market for all the reasons we know.

I wanted to take advantage of the comment in the Secondary Legislation Scrutiny Committee’s report, because I suddenly felt not alone. Here was a group of people who probably know nothing about pensions at all but asked, “How many of these things can you lay on people before you create a greater problem than the one you are trying to fix?”

To end on a more positive note—it is not that I do not think that there are positives—I recognise the work of the Minister and officials in increasing the number of eligible poor pensioners applying for pension credit. I understand that the results are very significant, so my compliments on that, having given a list of things that I am unhappy about. I look forward to seeing the figures.

[Lord Davies of Brixton (Lab)]

My Lords, I thank the Minister for her introduction to the regulations. I always prefer to speak after my noble friend Lady Drake and to say that I agree strongly. It can leave the impression that I might have made the same points as forcibly, so I get the credit without any of the hard work that has been put in.

However, on this occasion, I will reinforce this issue of regulations. Just read the regulations as presented to us: this is not a sensible way to tell people how to run their pension schemes. However, it is too late; we have adopted this pattern and we just have to pile regulations upon regulations. We have the report from the committee, and I hope its views will be borne in mind. There is so much to do, and to do it with regulations requires this continual production of additional regulations, but who really understands them? We require the guidance from the Pensions Regulator, so in fact we have two sets: you can look at the regulations and at the guidance. I wish we had not gone down this road of setting out how pension funds should run.

I can claim some experience here because I was a pensions regulator. I was a member of the Occupational Pensions Board, and we introduced contracting out—you can tell it was a long time ago. We made a much better job of telling people what they could, should and should not do. We introduced this extremely complicated process of contracting out over a relatively short period and we did it through issuing guidance. The guidance was what ruled. Clearly, we had very strong enforcement powers, because if people did not follow our guidance they did not get their certificate, so they had to follow our guidance—I suspect it is not quite the same here. In that sense it was a much simpler task. I really feel that some deep thought needs to be given as to how the requirements on schemes should be set out. Doing it by regulations is manifestly not the way to do it but it is the way we have adopted. We are there now, and it would be very difficult to pull back. However, this has some impact on how the regulations are drafted, presented and handled.

Of course, one problem is that the industry will always be one step ahead, so it is not as if we will ever reach a final steady state of regulations—there will be continued processes. All I am asking for, in support of my noble friend, is that an overall view is taken of the way regulations are introduced and incorporated in the structure of pensions law. There is a much better way of doing it. Thirteen SIs in one year strikes one as absurd.

I conclude with a trivial point. I have always been fascinated by this—I have seen these things for many years, not only since becoming a Member of this noble House. What is the strict distinction between Explanatory Notes and Explanatory Memoranda? I told your Lordships that this is extremely trivial, but I note that “the Pensions Regulator” gets a small “t” in the Explanatory Note and a capital “T” in the Explanatory Memorandum.

Gender Pensions Gap

Baroness Drake Excerpts

Monday 27th June 2022 Lords Chamber

[Baroness Stedman-Scott (Con)]

I think that the whole House will agree with the noble Baroness about childcare. There is work going on, first, to ensure that people are claiming what they are due and are receiving the help they should for childcare. However, that does not deal with the problem as it stands. So I can tell the noble Baroness that the Government are looking really carefully at childcare and are working with employers to see what they can do on flexible working to ensure that women can take their rightful place in the workforce.

[Baroness Drake (Lab)]

My Lords, the Minister’s reply reveals a disappointing tolerance of carers’ inequality. Caring is an economic activity, resulting in millions of women having to take periods out of the workforce, work fewer hours and receive lower pay. They are excluded from auto-enrolment into a workplace pension. They pay the penalty of lower pensioner income on a lifetime. When will the Government restore the principle that existed prior to 2016 so that carers are credited with benefits into the second-tier pension? The Government can do that tomorrow if they wish and restore the principle that existed prior to 2016.

[Baroness Stedman-Scott (Con)]

Carer’s credit is a national insurance credit available to people who provide care for one or more individuals for at least 20 hours a week. It can help individuals gain qualifying years that count towards the new state pension. Under new state pension reforms, carer’s credit has equal value to that of someone who pays national insurance contributions. In addition to carer’s credit, as I have already said, there is a wide range of other national insurance credits available to help people maximise their state pension entitlement.

Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill

Baroness Drake Excerpts

2nd reading
Friday 25th March 2022 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I refer to my register of interests, in particular my position as a pension scheme trustee. I support the Bill, which clarifies legislation that enables occupational pension schemes to convert guaranteed minimum pension benefits into other scheme benefits. I congratulate Margaret Ferrier MP, and the noble Baroness, Lady Redfern, who is sponsoring the Bill through the House. This is not an easy issue to pick up and run with, and I compliment the noble Baroness on her speech; it was quite a tour de force on this very technical issue.

How to resolve guaranteed minimum pension equalisation has remained unsettled for 32 years. Although it is very important, the longevity of the issue bears a resemblance to the Schleswig–Holstein question, about which Lord Palmerston said: “Only three people have ever really understood the Schleswig–Holstein business—the prince consort, who died; a German professor, who has gone mad; and I, who have forgotten.” However, having listened to my noble friend Lord Davies, he has confirmed that certain actuaries still have a long memory on the detail of this issue. For lots of other people, it is a mystery lost in the 32-year mists of time.

The GMP equalisation issue arises because, from 1978 to 2002, the state pension had two parts: the basic state pension and the state earnings-related pension, which was known as SERPS. Employers with salary-related pension schemes could contract their employees out of SERPS, so that the employers and employees paid lower national insurance contributions, but the employers remained obliged to provide a guaranteed minimum pension similar to that which would have accrued under SERPS, if the employee had not been contracted out. That the state pension age for women was 60 and for men was 65, at the time, led to some unequal outcomes, the description of which I will leave in Schleswig-Holstein, but the noble Baroness, Lady Redfern, and the Lords Library have done an admirable job in describing how those inequalities occurred.

A decision of the European Court of Justice that occupational pensions constitute deferred pay meant that, from 1990, these unequal pay outcomes had to be addressed. That decision was confirmed by the High Court in 2018; hence the 32-year history we are trying to address. Over many years, pension schemes have sought legal certainty on how to implement GMP equalisation, but the Government have sought to rely on guidance—presumably because of their own liability concerns about being firm and fast in addressing the issue.

There are a number of ways in which schemes can equalise benefits for the differences in outcomes between men and women. As referred to by the noble Baroness, Lady Wheatcroft, the unequal impact of this can affect men as well as women. In 2016, following a government consultation on a proposal to convert guaranteed minimum pensions into scheme benefits under the provisions in an amended Pension Schemes Act 1993, many respondents still expressed concern about the lack of legal certainty in certain respects.

The Government support this Bill, as I do, which amends GMP conversion legislation for schemes that want to use the conversion method of equalisation and makes it easier to use. Guy Opperman, the Minister in the other place, said:

“What the Bill does is key. It … gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions”


and

“who must consent to the conversion of guaranteed minimum benefits”,—[Official Report, Commons, 26/11/21; col. 627.]

when the scheme’s sponsoring employer no longer exists—normally, the employer has to consent.

I support the Bill but have three questions that seek clarity—they are not rowing against the intent of the Bill—that I would like to put to the Minister. Given the Government’s and respondents’ previous reservations about the conversion methodology and what was permissible under the Pension Schemes Act 1993, what confidence does the DWP have that this Bill will now provide legal certainty? Are there any implications for the Pension Protection Fund arising from GMP equalisation, in respect of scheme members who have entered the PPF, who are in schemes in PPF assessment or schemes that might go into PPF assessment in the future, where equalisation issues have been in play?

Finally, there is an important outstanding problem that needs addressing, although it is not in itself a reason not to support the Bill: the lack of clarity on the tax implications of GMP conversion. GMP equalisation could bring negative tax penalties for some scheme members, where an increase to pension benefit or the value of a past transfer payment flowing from equalisation impacts an individual’s annual allowance or lifetime allowance position, and therefore potentially exposes them to a greater tax bill.

Such individuals will have planned their pension savings in good faith, in adherence to the tax rules, unaware of potential retrospective adjustments to their benefits from GMP equalisation and the impact on their tax position. The Minister kindly wrote to my noble friend Lady Sherlock recently, advising that:

“The tax position regarding the conversion method is potentially more complex than other methods. This is because the conversion method can change the form of a member’s benefits and therefore its effects may have a wider impact. More detailed work is being done by HMRC to understand the tax issues associated with the conversion method. HMRC is working closely on this with its industry working group.”


Can I push the Minister to give further reassurance on this matter, given the potential for unfairness to arise from the tax rules, and to give an indication of how soon an answer can be expected? Something of a precedent was set quite recently when the tax rules were favourably adjusted for public sector workers whose pension benefits were retrospectively enhanced to address age discrimination.

Those are my three questions, but the noble Baroness, Lady Redfern, very kindly referred to the wonderful Lord McKenzie of Luton, and I have not had a chance to comment on him in this House. I remember on my second day in this House, I was proverbially pinned against the wall by him. He said, “You’re working on the Equitable Life compensation Bill because I know you’re going to know about guaranteed annuity rates.” I thought gosh and said okay. I assured him that I had many other qualifications and many other interests but I would work with him on it, and that was the start of a very strong working relationship over 10 years in this House. I personally, let alone the House, sadly miss the quality of the contribution he brought on these issues.

Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022

Baroness Drake Excerpts

Wednesday 23rd February 2022 Grand Committee

[Baroness Janke (LD)]

My Lords, I thank the Minister for her presentation, which was clear and to the point. I would like to raise two issues for consideration.

The first is the possibility of widening the scope for CDCs to smaller companies and how the Government view that. The current legislation has been written very much with Royal Mail in mind but if the CDC scheme goes well, others might want to follow suit, including smaller employers. But they would want to join something bigger; for example, a multi-employer or industry-wide CDC scheme or master trust CDC scheme. Will this require new primary legislation to allow multi-employer schemes, or does the Pension Schemes Act give the DWP sufficient power to do this? If it would require new secondary legislation, how long does the Minister think this might take? Does she share the view that multi-employer schemes are key to unlocking CDC? Not everyone has the resources or scale of the Royal Mail to do it for themselves. Please can she explain the process for multi-employer CDCs?

Secondly, can the Minister say something about retirement-only or decumulation CDCs and the position of the DWP on these? One of the discussions over the new pensions freedoms is that individuals take all the risk of managing a DC pot for themselves, including the longevity risk. In a pooled CDC retirement scheme, this is shared with others, so it is an attractive option for people to join at retirement. What is the scope for these and what is the position of the DWP on this? NEST has hinted that it might be prepared to look at it, but it would be helpful to know whether the Government look on these suggestions favourably. I look forward to the Minister’s response.

[Baroness Drake (Lab)]

My Lords, I refer to my registered interests: I am trustee of the Telefonica pension scheme and the People’s Pension master trust. I thank the Minister for her helpful presentation of the regulations, and the DWP staff who kindly took the time to answer my many queries. My contribution is rather long. The only consolation is that it would have been even longer had I not had that discussion with colleagues.

Collective defined contribution schemes are clearly a welcome addition to the pensions landscape, whereby employees can, in effect, share their investment and longevity risks and remove some complexity from individual decision-making. But with only one employer committed to date, there is a risk that the regulations are bespoke for the Royal Mail scheme but may need adapting for others set up subsequently.

There is considerable uncertainty over the fuller impact of the CDC proposal, which is reflected in the detail of the regulations and the draft code. The code contains a list of matters more likely to satisfy the Pensions Regulator, but some lack a qualitative feel or benchmarks or triggers. Take the example of trustee governance. The draft code says that the regulator is

“more likely to be satisfied”

if there is clarity as to

“who decides in a scenario where both the employer and trustee have an interest”,

but it does not express a view on good practice in such scenarios.

A CDC scheme is set up under an irrevocable trust by an employer. In a single or connected employer scheme, sustainability can be influenced by employer behaviour and changes to corporate control and structure. A regulator’s expectations for the governance framework and the extent of trustee discretion are therefore particularly important. I ask the Minister: is it the intention to set out good practice expectations on the governance framework and the extent of trustee discretion?

The approach to authorisation, supervision and continuity reflects that for master trusts, but there are differences. For authorisation, it is the actuary who confirms the soundness of the scheme and issues the viability certificate. There are a lot of requirements for the actuary to meet before issuing a certificate, including a novel role in considering non-actuarial matters. Is this considered a materially extended level of obligation on an actuary when compared with other forms of pension schemes?

--- Later in debate ---

[Baroness Drake (Lab)]

Before the Minister sits down, I am conscious of not going back to a supplementary question, so will be quick. On the small pots problem, I understand why it was said that it is not anticipated with, for example, nursery schemes, but we do not know what every scenario will be. I was seeking an assurance that these regulations do not set a precedent for removing de minimis protection for small pots, where needed. That is what I was looking for. I can see why a nursery scheme would address that, but it may not be the only solution.

I think I heard the Minister say that the regulator can consider the impact on existing sections when considering the authorisation of a new section, but could that be made clear in any letter? It is inevitable, as night follows day, that employers will want to change their pension arrangements at some point. This is just to be clear about the consequences, not to argue against what she was saying.

[Baroness Stedman-Scott (Con)]

On the two points just raised by the noble Baroness, Lady Drake, the answer to the first is no, and we will write to the noble Baroness on the regulator and the sections and place a copy of that letter in the Library. I commend these regulations to the Committee and ask for approval to implement them.

Underpayment of Benefits: Compensation

Baroness Drake Excerpts

Tuesday 18th January 2022 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I refer to the Minister’s comment about payment of compensation to others being discretionary with a quote from the ombudsman:

“If Ms U’s decisions were typical, DWP will have declined to make others special payments on wrongly applied grounds, will have told them they could not complain to its Independent Case Examiner and will not have told them about the Ombudsman. That means that likely routes for such evidence were closed off.”


In the face of that clear statement from the ombudsman, how can the Government continue to refuse to commit to paying compensation to all other victims of the same maladministration?

[Baroness Stedman-Scott (Con)]

I can only tell the House the position of the department. I understand completely the situation and the depth of feeling about compensation for others, and I have to leave that to the Minister for Welfare Delivery and others in the department to consider, although there is no need to. As I say, if people feel that they are a special case and have experienced the same things as Ms U, we would want them to make their case.

Social Security (Up-rating of Benefits) Bill

Baroness Drake Excerpts

Committee stage
Tuesday 26th October 2021 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I will speak to probing Amendments 2 and 3 in this group. The triple lock is not legislated for; it rests on a commitment given by successive Governments since 2011. However, indexing pensions at least in line with earnings is legislated for. Through this Bill, the Government are neither applying the triple lock nor the underpin of earnings indexation. Both have gone as a consequence of this Bill—albeit that the Government say that they will not do it next year.

It is not surprising, therefore, that the removal of both is causing concerns that the Bill is trailing the Government’s consideration of lowering the value of the state pension going forward. While recognising the anomaly in the data behind the 8.3% earnings figure, the pandemic will not account for all of that increase. The decision to raise the state pension by the consumer price index in response to the anomaly comes without any analysis of how that change might impact the value of the state pension in relation to actual earnings.

In fact, the Pension Policy Institute has done such an analysis and, assuming that the CPI increase is of the order of 3%, which it is, the PPI’s recent analysis stated:

“Increasing the State Pension by CPI means that overall, State Pensions will rise by less than the real increase in earnings over the past two years. An alternative approach would have been to consider the rise in earnings over two years to give a more realistic estimation of real wage increases without the artificial impact of the pandemic impact in the year on year earnings statistics. This would need a pension increase of 5.3% in 2022 to match the increase in earnings since the setting of the State Pension level in 2020. Increasing the State Pension by this amount would save £3.1bn in 2022”.


So, increases in pensions will not reflect the real rise in hourly wages over that two-year period—which rows against the clear intention of the underpin of earnings indexation that is in the legislation.

The PPI approach of considering earnings over two years would reduce much of the methodology challenge in establishing an adjusted earnings index for one year, which the Minister refers to as the Government’s main defence for the approach they are taking. In fact, we have not heard a proper explanation from the Government as to why they could not consider different approaches. Several could have been taken, such as looking at earnings over the two-year period. So can the Minister give a fuller explanation of why they cannot take a different approach to that contained in this Bill? How do the Government intend to address the fall in the value of pensions against earnings over the last two years?

The triple lock was intended to address the extended fall in the value of the basic state pension. As the Minister states in her letter of 25 October, following Second Reading,

“the triple lock was introduced in order to boost the value of the basic state pension”.

It was to recover from those years of decline against earnings—a sort of accelerator, to get back to a reasonable comparative position.

With the Library’s help, I looked at the hypothetical value of the basic state pension and the pension credit as if they had been uprated in line with earnings, rather than the triple lock, since 2011. Currently, that triple-lock boost delivered a basic state pension of approximately £18 higher a week than it would have been if it had been indexed by earnings alone. When the Bill passes, in 2023 the basic state pension boost will fall to approximately £12 a week higher than if uprated by earnings alone. The pension credit minimum income guarantee, targeted on the poorest pensioners, is approximately £14 a week higher currently than it would have been if uprated by earnings alone. In 2022-23, it will be only £6.79 a week higher.

I am sure that the Government will produce more precise figures than mine, because their ability to do so is greater than mine, but what I am absolutely confident that they will not be able to contradict is that there will be a clawback from the cash value of the current triple-lock boost. The pension credit minimum income guarantee is targeted on the poorest pensioners and, as the noble Baroness, Lady Altmann, said, it is not uprated by the triple lock, although earnings uprating is legislated for. The Government have mitigated that omission by applying the underpin of a cash increase, to give what they feel is a fair increase, rather than conceding the full principle of the triple lock.

However, many older pensioners still face declining incomes, and women are particularly sensitive to changes in the state pension indexation. On average, women are more likely than men to have lower incomes at older ages: 60% of those in relative poverty over the age of 65 are women; and women are more likely to be eligible for pension credit—so there will be a direct gender impact if one starts to tamper with less generous indexation, and there is nothing about future accrual of pensions that suggests that that gender bias would not persist.

Pensioner poverty is rising, and we are now seeing falling life expectancy in areas with the greatest incidence of pensioner poverty. We have accelerated the state pension age; pensioner poverty is rising; and in those areas, life expectancy is falling. That trend was emerging before the pandemic—before anybody says, “Well, it’s the product of the pandemic”, no, that trend was there. I am sure it has been accelerated, but it was there before.

So why are the Government not taking a different approach to the uprating of pension credit targeted on the poorest pensioners and applying a cash increase greater than the value of the uprating by CPI? There need be no complicating legal or methodological issues in doing so. There is a clear precedent for the Government choosing to apply a cash increase.

Some argue that the triple lock unfairly advantages older people and should be scrapped for reasons of intergenerational fairness. But not all older people are experiencing a higher standard of living—older pensioners even less so. In 2020, benefit income was the largest component of income for both pensioner couples and single pensioners, and nearly two-thirds of the total income for single female pensioners.

In fact, younger people arguably have more to gain from the triple lock than older people because, when the state second pension was replaced by the new state pension in 2016, which will apply to future pensioners, its full value then was set at around 24% of average earnings—and that is low in comparison with any other advanced economy. But that is the base on which one is looking to make private savings work. To achieve a replacement income in retirement of 45% for the average earner, privately saving 8% under auto enrolment, the new state pension needs to be nearer 30% of average earnings. The Government argued when they introduced the new state pension that it was set because it was part of a package, together with the triple lock and the accelerated increases in the state pension age, which have been banked.

Again, research by the Pensions Policy Institute indicates that, without the triple lock, it will be harder, at least until the new state pension rises above a certain level, for young workers to achieve an adequate income in retirement, because it is the base on which their private savings will assist in securing them an income in retirement, and the dominance of the role of the state pension in pensioner income will persist long into the future.

--- Later in debate ---

[Baroness Lister of Burtersett (Lab)]

My Lords, these amendments raise important issues about the impact of the Bill on poverty. I simply want to raise a point about the measure of poverty that should be used.

At Second Reading, in her response to the debate the Minister referred to a fall in pensioner poverty since 2009-10 as measured by the so-called absolute poverty measure, and she did so again earlier this evening. In fact, it is not a measure of absolute poverty as such but is better described as an anchored measure which measures any change by adjusting the 2010-11 poverty line for inflation. In contrast, the House of Commons Library briefing, using the relative poverty measure, recorded an increase in pensioner poverty from an historic low of 13% in 2011-12 to 18% in 2019-20, as my noble friend Lady Sherlock said. With reference to Amendment 8, single female poverty is higher than the overall figure—a point already made.

However, the Minister was dismissive of the use of a relative measure, stating:

“The Government believe that absolute poverty is a better measure of living standards than relative poverty, which can provide counterintuitive results”.—[Official Report, 13/10/21; col. 1885.]


Criticisms of the relative poverty measure as potentially counterintuitive have tended to focus on when it is used for short-term, year-on-year comparisons, but, in this case, we are talking about a rise in relative poverty over a period of eight years, which surely should have triggered some alarm bells in the department.

Relevant here is a recent Work and Pensions Committee report. Although its focus was on measuring child poverty, what it has to say is relevant also to pensioner poverty. It states:

“The Secretary of State is of course right to say that a relative measure can, in the short term, produce counter-intuitive results—but it has great value for assessing long term trends. We are concerned to see Ministers focusing on a single measure, rather than drawing on the rich information offered by DWP’s own set of income-based measures, which combines relative, ‘absolute’ and broader material deprivation statistics … Ministers should reaffirm their commitment to measuring poverty through all four measures”.


Similarly, I have a Written Answer from the Minister’s predecessor, dated May 2018, which states:

“No one measure of poverty is able to fully capture the concept of a low standard of living in all economic circumstances.”


Yet increasingly, Ministers use the so-called absolute measure, as if it is the only appropriate measure. Will the Minister reaffirm that commitment as called for by the Work and Pensions Committee? After all, I remind her that, when he was leader of the Conservative Party, David Cameron explained:

“We need to think of poverty in relative terms—the fact that some people lack those things that others in society take for granted. So I want this message to go out loud and clear: the Conservative Party recognises, will measure and will act on relative poverty.”


Can the Minister explain why that is no longer the case? What has changed, other than that the Government’s record on poverty looks worse using the relative poverty measure that Mr Cameron championed?

[Baroness Drake (Lab)]

My Lords, I will speak to Amendment 3. To quote from a publication by the Institute for Fiscal Studies,

“We’ll know we are on the way to levelling up when differences in health and life expectancy across the country start to drop. Sadly, that’s one measure of inequality that has clearly been moving in the wrong direction over the past decade.”


Associated with those growing inequalities is pensioner poverty, which, as we have heard, has risen from 13% to 18% and is likely to rise even further. For older pensioners, the rise is even higher. With the rising energy and food costs that we can all see coming down the track, there will be a lot of old people this winter with very little money, sitting in cold houses, fearing that they will not get any help when they fall ill. That will be the reality for many thousands of people in the coming winter months.

We know that there is a major problem generally of households on low incomes with rising debt who will not be able to weather the storm of the growing cost-of-living problems that we are beginning to see. Then again, looked at from a regional perspective, in the majority of regions in England pensioner couples have average weekly incomes below the pensioner couple average, and we are seeing this problem in particular regions: in the north-east, the north-west, east Midlands, West Midlands, Yorkshire and indeed in London, which now has the highest relative level of pensioner poverty. As Imperial College research now shows us, life expectancy is falling in urban areas in these regions—in Leeds, Newcastle, Manchester, Liverpool and other areas. Cuts to health and social spending will have contributed to that trend, and we have not yet experienced a winter with the backlog that the NHS is dealing with.

Pensioners with low incomes are more sensitive to indexation changes because they are more dependent for their income on those benefits. Yet we have seen no assessment of the impact of suspending the triple lock, or indeed what could be the implications of decisions the Government will take next year or the year after, given that through the Bill they have suspended both the triple lock and the legislative underpin of earnings. We know that projected levels of pensioner poverty will vary according to the uprating provisions applied to the state pension, given its dominance in pensioner income. If you play negatively with pensioner income, pensioner poverty will go up. That sensitivity to indexation will continue to increase, as fewer and fewer pensioners reach state pension age without the generous defined benefits or defined contribution pensions which, in the past, cushioned the fall in the state pension that occurred under successive Governments.

Pensioner poverty is not a legacy issue. State pension is and remains a dominant source of income for the majority of both current and future pensioners. Research by the Pensions Policy Institute—your Lordships can tell that I am a governor—reveals that the UK is currently on course for a quarter of people approaching retirement being unlikely to receive even a minimum income. Of the 11 million people in the UK between the age of 50 and state pension age, around 3 million will not receive a minimum income.

Social Security (Up-rating of Benefits) Bill

Baroness Drake Excerpts

2nd reading
Wednesday 13th October 2021 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I recognise that while the 8.3% increase in earnings figure will reflect the exceptional pandemic impact on labour markets, it will not account for all of that increase. I have two real concerns flowing from this Bill and the public debate surrounding it: first, the growing assertion that pensioners have been excessively benefiting over recent years; and, secondly, that the removal of the earnings uplift for this year may be a Trojan horse for removing earnings on a permanent basis.

The state pension provides both an income for existing pensioners and a firm foundation on which workers can save and build for their income in retirement. Providing such a foundation was an integral part of pension policy reforms, which included increasing savings through auto-enrolment and raising the state pension age. It was the stated premise for the new state pension introduced in 2016. The Government presented it to Parliament as supporting pension savings so that current generations of workers had a decent foundation on which to build for retirement.

A fall in the value of the state pension against average incomes impacts existing pensioners but makes future pensioners poorer as their private pension savings would go to replacing the fall in the state pension, rather than improving their overall retirement income. Earnings are an essential part of the uprating formula to avoid future generations becoming poorer relative to average or median incomes and because of the spread of means testing.

Figures published by the DWP and the ONS reveal that in 2020 benefit income, including state pension, was the largest component of total gross income for both pensioner couples and single pensioners. It was 57% for single pensioners, and nearly two-thirds of the total income for single female pensioners was benefit income.

Pensioner poverty, when measured against median disposable income, has risen from 13% to 18%. That dominance of the role of state pension income will persist long into the future and may well increase. Although income from occupational pensions was 32% of total gross income for pensioner couples and 27% for single pensioners, those figures are likely to fall as future generations have declining access to more generous occupational pensions.

Looked at from a regional perspective, in the majority of regions in England, pensioner couples have average weekly incomes below the UK pensioner couple average. This includes the north-east, the north-west, the east Midlands, the West Midlands, Yorkshire and Humber, and London.

Pensioner incomes have been stable for 10 years. In 2020

“pensioners had similar average incomes after housing costs … to … 2010”—

a statement I lifted from the DWP’s own figures and statements. Pensioner average income did increase significantly between 1995 and 2010, which also saw the introduction of the pension credit minimum income guarantee for the most impoverished pensioners.

Although it is clearly beneficial, we should be measured about the extent of the impact of the triple lock, particularly given that most current pensioners reached state pension age before the new state pension was introduced in 2016. For them, the triple lock does not apply to all of their state pension. It does not apply to the state second pension element and yet this accounts for 20% of state expenditure.

The triple lock has also operated at a time of significant cuts to health and social care spending, on which older people are so very dependent. These cuts will have contributed to the slowing down of improvements in life expectancy. We have yet to see how the NHS backlog aggravates that trend. A just-published Imperial College report now reveals falling life expectancy in urban areas such as Leeds, Newcastle, Manchester, Liverpool and others.

Pension credit, the means-tested, minimum income guarantee for the poorest pensioners—for which nearly 2.5 million are eligible but only 1.5 million claim—is not covered by the triple lock. The Government mitigated that omission by an underpin of a cash increase, but not by extending the triple lock. Pension credit is also a passport to other benefits such as reduced council tax and a free TV licence, which some 1 million of the poorest pensioners are missing out on. In the other place, the Minister advised that the department was engaged in a publicity campaign to raise awareness, but there are no figures available on any increase in pension credit claims occurring as a result. That underclaiming will be contributing to the rise in pensioner poverty.

Of course, the state pension has to be sustainable, and there are two key levers for controlling expenditure. One is making the state pension less generous over time, the other is increasing the state pension age. We risk losing sight of the significant accelerated rises in the state pension age already introduced, with more to follow. The number of pensioners has seen a fall. The full basic state pension is 10.3% higher than if it had been earnings-linked since 2011, but some of that gain will be clawed back through benefits and not applying an earnings uplift for this year.

We need to see this in total. Successive Governments allowed the value of the basis state pension to decline relative to earnings, from 26% in 1979 to around 16% by 2008. The Labour Government agreed to restore the earnings link, and the triple lock has resulted in the basic state pension rising from 17% of average earnings in 2011 to 19% in 2020. However, the new state pension has now replaced the basic state pension and the second state pension, and it applies to those reaching state pension age from 2016. It was set, as reported by the Government and the DWP, at a value just above the pension credit guaranteed income for the poorest pensioners, indexed by earnings, which the Government stated was sustainable and reduced pensioner benefit expenditure over the long term as a percentage of GDP, even taking into account the triple lock.

There is a cohort of retired people who are clearly better off, with access to generous occupational pensions, but that should not affect the perceptions of the financial position of pensioners as a whole. For the top fifth of pensioners, the largest source of income was their occupational pension, and they received a larger percentage of their income from earnings. Legitimate intergenerational fairness concerns, when looking at the most well-off pensioners, may be better addressed through the tax regime and national insurance rules for those working over the state pension age. Indeed, the Government have taken such a step in applying the 1.25% national insurance levy to the earnings of those over the state pension age. Weakening the state pension would be regressive, hurting those pensioners who most depend on it, and having the least impact on those who have a larger alternative source of income.

Turning to my second concern: the removal of the earnings uplift provision, even for a year, may be a Trojan horse for its permanent removal. When at the meeting that the Minister referred to, I asked whether there was a guarantee that it would be restored. I had the rather ambiguous answer that that will have to be argued next year.

The OECD figures reveal that in the UK, the average earner receives a replacement rate of income of 28.4% at retirement from the state pension, well below the OECD average of 58.6% and the EU average of 63.5%. However, in the UK, when workplace pensions are included, the net replacement rises to 61% compared to OECD and EU averages of 65.4% and 67% respectively. That tells us that the UK pension system relies heavily on private pension saving to fill the gap. Auto-enrolment is intended to maintain such a reliance, but it can do so only if the state pension is maintained as a firm foundation for those savings, at least holding its value over the long term against earnings. Otherwise, the savings of younger workers will be covering the fall in their state pension rather than improving their retirement income, and they cannot fill that gap.

Private pension contributions above the statutory minimum will be impacted by the rise in national insurance contributions. There will be a substitution effect, particularly in the private sector where, prior to the pandemic, some 60% or more of workers were in SMEs and a very significant proportion of them in small and micros. Therefore, it is very important that this combination of the firm foundation and private savings is protected.

Can the Minister tell us—for the record and on the record, unequivocally—whether the Government are committed to maintaining the state pension as a firm foundation, holding its value against average earnings over the long term as a minimum upon which future workers, including young workers, can build for their retirement? Can the Minister also confirm that this Government will not reduce the value of the basic state pension relative to average earnings?