Housing: Underoccupancy Charge
Baroness Hollis of Heigham Excerpts(10 years, 10 months ago)
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Baroness Hollis of Heigham
To ask Her Majesty’s Government what plans they have to revise their underoccupancy charge so that, as in the private rented sector from 2008, it applies only to new tenants.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, as restrictions on entitlement to housing benefit based on accommodation size have been in place in the private rented sector since 1989, the local housing allowance introduced in April 2008 could be phased in. We have no plans to make similar arrangements for the removal of the spare room subsidy, which has already been applied, as it delivers a consistent approach to the treatment of housing benefit claimants across both the private and social rented sectors.
Baroness Hollis of Heigham (Lab)
My Lords, the sectors are very different. The private rented sector seeks to make profit out of people’s housing benefit. That does not apply to social housing. Social tenants hit by the bedroom tax, through no fault of their own, are now trapped. They are unable to move to smaller social housing as it does not exist. They are unable to move to private housing because private landlords are rejecting or evicting them. They are unable to get discretionary housing payments because most are refused. Debts are mounting and lives are being destroyed. Will the Government please at least apply the bedroom tax only to new tenants who can cope with the new rules, as in 2008, perhaps over a transitional period until we have enough new housing to meet housing need?
Lord Freud
My Lords, the number of transfers into one-bedroom social rented accommodation in the past year is running at 108,000. There are more people in the private rented sector, not fewer, and DHPs are—if anything—underspent. Our indications are that they will be underspent. I am pleased to say that in Norwich, with which I know the noble Baroness is very closely associated, the spend was a little higher: £166,000 in the six months, against the allocation of £288,000. I am puzzled that Norwich has not put in a bid for additional funding. I urge it to do so because it has until 3 February to do it.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 10 months ago)
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Lord Bates
My Lords, this Government recognise the importance of supporting individuals in making decisions about their retirement income choices. These choices can be bewildering and the implications of choosing an unsuitable product can be devastating, as the noble Lord has very clearly set out for us in moving this amendment. That is why the Government continue to lead on and to support a whole range of initiatives aimed at driving up standards among providers, providing guidance to trustees and education to members. As well as the ABI code of conduct, we welcome the new Pensions Regulator guidance setting out expectations for what trustees should provide for their members. In addition, the Money Advice Service is further developing its support for those approaching retirement to help them engage with how their personal situation relates to products and services which might be appropriate to their needs.
However, we need to understand whether this activity is making a significant difference in terms of value to the consumer. The Government will therefore be assessing the ABI evaluation of the code of conduct planned for later this year, and the Pensions Regulator will be assessing the impact of the new guidance this summer. We will also be looking at other indicators to assess the extent of change in the market.
Wider regulatory activity includes the Financial Conduct Authority’s thematic review of annuities and consideration of a market study. The review will assess the extent of detriment to consumers of not shopping around—the numbers presented this afternoon have been quite startling and stark—and will consider other indicators of risk, such as insurers’ retention rates and whether profits in the market are high or unreasonably high. The FCA will report later this quarter. In addition, Her Majesty’s Treasury and the Department for Work and Pensions are currently reviewing the broad range of available research and statistics on decumulation to explore the impacts and interactions between market and consumer behaviour and government policy.
Our concern about the noble Lord’s amendment is that, while rightly highlighting a key issue, it would increase the risks for consumers and place additional burdens on employers. I will deal first with the risk for consumers. By sending all members to an annuity broker, we would effectively be pushing them away from regulated advice routes, as brokers, unless they are also FCA-regulated advisers, are not required to ensure that the product is suitable for the consumer. At this point, it is worth saying that the range of options available to somebody facing retirement are bewildering but are also many: there is not just the open market option but whether they should be retiring at all or whether they should be using the flexibility that is available, whether they should be drawing down on a pension pot rather than actually purchasing a new version of it, and what type of annuity—
Baroness Hollis of Heigham (Lab)
That is very helpful from the Minister but, if he is going to do that, he is going to have to look at the artificially high base of alternative income—the £20,000 a year you have to have before you are allowed to enter into these arrangements, which was based on not being a charge to public funds but which is unreasonably high. I fully support the Minister’s argument but it follows that he must actually look at his minimum alternative income requirement.
Lord Bates
Those points about alternative income requirement are correct but there are a number of reasons, not just those, as to why annuity rates are historically low, to do with interest rate levels.
Baroness Hollis of Heigham
The Minister may not have understood my point. He was, quite sensibly, making the point—I entirely agree with it—that people should be able to consider alternatives to annuity arrangements, such as draw-down and the like. All I am saying is that to do that, and not to have to cash in, you have to have, under Treasury rules, a minimum of £20,000 in alternative regular income. That is on the grounds that you need to protect people against falling into a charge on public funds if they exhaust their private savings. That figure seems to be artificially high and the Minister will need to look at that again.
Lord Bates
Okay, I have the right answer now: £20,000 is needed for flexible draw-down but not for capped draw-down or trivial commutation of benefits. There are different elements of it. My point, from which I have probably strayed into a trap—I should have stuck to the script—was that there is a range of choices, not simply the annuity rate which people face. That is why it is vital that all members engage early. That is the reason for the wake-up programme which is now being organised, to encourage people to engage with what they should be considering later on.
Also, making brokers the first port of call for all would create a captive market for one part of the industry, without effectively adding to consumer protections. Another risk to consumers is that they could fail to engage with options other than annuities that are more appropriate to them.
The noble Lord’s amendment suggests that a brokerage service would have to provide information on alternative at-retirement services, but it has to be recognised that brokers are not impartial. They make their money if the member buys an annuity, but not if they choose to draw down or defer, or to commute. While it is right that schemes should play a central role in informing consumers of their options, we would be wary of making this part of the qualifying criteria for automatic enrolment. The duty to enrol into a qualifying scheme does, of course, fall on the employer, and so to require them to take this step would be an unwelcome, additional burden.
I make it clear that we are committed to ensuring that consumers have the information they need to make good choices and that the annuities market works effectively for consumers and so, in this respect, we welcome the debate. The noble Lord, Lord Browne, has perhaps chided my honourable friend Steve Webb for raising this matter on annuities but, in many ways, he was doing just what the noble Lord is doing: saying that this is an area which needs to be discussed and debated. In many ways, this debate enables us to do that, but so do the reviews which are taking place and to which I have alluded in my response. I trust that, as part of that, the noble Lord will feel able to withdraw his amendment.
The Lord Bishop of Chester
My Lords, briefly, I listened to the Minister with great interest. I regard the amendment as important because, in a sense, the proof of the pudding is in the eating; it is when you are taking the benefits of the saving.
The Minister’s reply, it seems to me, says that in addition to all the complexities which the noble Lord, Lord Browne, set out, there is actually a whole load of other complexities about whether you should be having an annuity at all. My question is simply as follows. Until now, when we have often had final-salary schemes around, these decisions have been largely managed. However, we are increasingly moving into a position where most people will be on money-purchase schemes, and this will become normal; we will have to engage with these issues. Given the complexities which the Minister has so helpfully set out, is the Government’s view that the obligation to work this out is on the consumer—the person taking the pension—with some information provided somewhere, or is the obligation on the pension provider to provide information which covers all these options? Where does the responsibility primarily lie to advise the person at the point of retirement? I thought it was not quite clear enough as to where that lies in what the Minister said.
Baroness Hollis of Heigham
I will ask another question associated directly with that. To what extent does the Minister expect the Money Advice Service to take on some of this responsibility, given the slightly bumpy ride it has had so far? Or do the Government—and here I declare an interest—expect an organisation like the Pensions Advisory Service to take on some of this responsibility? It has to be free, independent, impartial and professional. Those are the only two organisations of which I am aware which might fit that role at the moment.
Lord Bates
I am grateful for the interventions of the right reverend Prelate and the noble Baroness. The Money Advice Service and the Pensions Advisory Service are, of course, important. However, the argument we are having at present is about saying that individuals need to focus on this issue. It is their responsibility. It is vital to them. That is what the debates about transfers and auto-enrolment are trying to do.
However, we are wary of putting the responsibility for providing information to members solely in the hands of annuity brokers. It is better to drive up standards by ensuring that all the players in the annuity market—providers, schemes, trustees and consumers—are engaged. That is why the Government have led in support of a number of different initiatives to address this important issue and will continue to challenge the industry if there is no significant improvement.
Baroness Hollis of Heigham
I support my noble friend, as that is precisely my recollection too. During a series of meetings with the organisations, the temporary cap came up because of the fear among pension providers that they would lose significant sums of money they had under management and the associated fees. The sole reason for doing it at the time was to get consensus to get it off the ground. Distraction was not a word that was ever uttered, and I must have been in about three years’ worth of those negotiations.
Lord Bates
These recollections will be there. I take it that it was in the mind of the Government that NEST had a huge task to focus on in actually attracting people who had never saved for their retirement before to start saving. That was a major responsibility, and issues were debated around that time relating to the effect that NEST’s creation would have on the market. Certain things were considered. It would be wrong to say that it was the only thing that was considered in terms of restrictions and the need to focus, but it was certainly one of the things which should have been focused on.
Baroness Hollis of Heigham
Does the Minister have any evidence that NEST—its chair, chief executive or board members—wanted this limit?
Lord Bates
I do not have any information to hand on that. However, we have got the point that I was perhaps overegging this by saying it was the only thing, and I need to recognise that other factors were perhaps considered when it came to putting this restriction in place. There was no sinister purpose, it was simply to say that there was a huge task to be undertaken and to ensure that NEST’s systems and operations could actually handle this. We do not want to put excessive burdens on NEST so that it fails when so many are dependent on its success.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 10 months ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, the purpose of this clause is to provide for the abolition of the assessed income period in pension credit cases from April 2016. I will just add that I was most welcoming of the reinforcements I had temporarily.
The assessed income period removes the requirement for certain people to notify the department of changes to their retirement provision for a defined period. The assumption when the assessed income periods were introduced in 2003 was that pensioners were more likely to have relatively stable incomes and capital, so a lighter touch to reviews was therefore considered appropriate as a way to minimise intrusion and ease the administrative process.
The logic behind the policy is clear, but operating the system over the past 10 years has shown the reality to be somewhat different. The operation of assessed income periods has proved to be more complex and intrusive for both staff and the individual than anticipated. For example, people can report a change during an AIP and, as a result, their award can be increased. However, because we have to look again at all of their retirement provision, not just the reported change itself, it does not always lead to a change in the award. This is nugatory work for the Pension Service and is confusing for recipients.
More importantly, our assumptions about the stability of pensioners’ incomes and capital have not stood the test of time. Our analysis shows that circumstances change and fixing retirement provision for such a long period leads to inaccuracies in benefit awards, which then remain in the system for some time. Based on a sample of around 100,000 cases that have been reviewed, the pension credit award required updating in 54% of them, and in 36% of cases the award was reduced.
In the current economic climate, we believe it is right that benefit awards reflect the individual’s current financial circumstances. We therefore propose to abolish assessed income periods by removing them for new claimants and phasing out existing fixed-term ones from April 2016. It is estimated that this measure will result in steady-state savings in AME of around £80 million per year in the long term. We recognise that removing assessed income periods will require pension credit recipients to report relevant changes when they occur—however, this will not necessarily result in increased levels of contact for all recipients.
We will be working with stakeholders and partners on communications products to ensure that people are clear about what this change means and what they will need to report and when. For example, there will be no need to report changes in capital provided it remains below £10,000. Currently, only 12% of recipients—around 290,000—have capital above that level. Above £10,000, changes are only relevant where they cross £500 bands. Annual increases in pensions will be taken into account automatically, as now, so only new income streams will need to be reported. It is also worth remembering that the impact of reporting changes will depend on individual circumstances and that not all will lose out. Some may see an increase in their award, while some may not experience any change at all.
Pension credit is a safety-net benefit designed to help the poorest pensioners, and as such it is right that it takes account of the income and capital people have access to. Through the abolition of the assessed income period, we will ensure that pension credit awards are accurate and that, in future, our limited resources are spent on those who require the most support. I beg to move that Clause 27 stand part of the Bill.
Baroness Hollis of Heigham (Lab)
My Lords, I thank the Minister for his explanation of this clause. I would like to explain why I and my noble friend Lord McKenzie have raised this on the stand part debate so we can discuss the issues. As the Minister said, this clause proposes to abolish the current assessed income periods for pensioners claiming pension credit. At the moment, pensioners are means-tested for pension credit at their retirement at 65; then at 70; then again at 75 and not thereafter. I am genuinely surprised and, actually, disappointed that the Government want to make a quick saving of £82 million gross—as the Minister said—or some £60 million-odd or £65 million or so net by introducing annual means testing, although excepting current pensioners over 75 who may be in receipt. It will affect 1 million pensioners a year up to 2020.
Why do we have the current rules? My noble friend Lord McKenzie was instrumental in further enlarging and developing them in 2008. Very wise he was, and very good they were—of course. I hope Hansard records the “Hear, hears” to that. In particular, he introduced the indefinite assessed income period for no means-testing for those reaching 75. In my mind, that was a most important consideration, the one I am most concerned about. Essentially, we know that pensioners loathe means-testing so much that—either through ignorance or stigma—a third do not now claim that to which they are entitled. Those eligible non-recipients are missing out on something like a mean average of £34 a week. That is an average loss of £34 a week, an income that would transform their circumstances.
More means-testing, which is what the Government are proposing, will not, given this strategy, bring more pensioners in, but will deter even more pensioners from claiming what they should. That is why I am so pleased that we are extracting means-testing out of the new state pension, as the former Pensions Commission recommended when considering the old pension. I was pleased that we were removing it from the new state pension, only to find that the Government are foolishly importing it back in again and extending it through annual means tests, rather than five-yearly ones, in pension credit to make a quick buck. Therefore, those who get the more generous pension in future will escape the means test; the older, poorer pensioners—mainly women—will be subject to even more of it. I think that is wrong.
Why was means-testing for pensioners under my noble friend Lord McKenzie carried out with a light touch? It was essentially because pensioners’ income is pretty well stable in their retirement years. The three major events which are likely to affect their entitlement are, first, the death of their spouse. When he dies—and it is, alas, usually “him” ahead of “her”—his modest pension, if it is a single-life pension which two-thirds of them are, dies with him. That is why it is elderly widows who most need pension credit. The second major event is that they may, rarely, get a small legacy—say, from the death of an unmarried sibling. The third is that they may have to move into residential care.
Such big events should be reported, and I have no objection to reinforcing that and making it clear that capital from, say, a generous legacy of more than £10,000 or £15,000, acquired before 75, should be reported. I do not have a problem with that. Apart from that, a five-year check will discover not just whether pensioners are getting too much, which is rare, but sometimes whether they are getting too little. I do not think we have recently had much in the way of a take-up campaign—funny, that.
Now the Government are going to produce annual means tests, and the Bill team—I thank it for this—very helpfully sent me the best statistics we currently have, which show that twice as many people will lose under annual means-testing as will gain. The Government will not make their savings primarily because people are receiving too much, although some money may come from that and will be clawed back, and so on. No, if the Minister will actually make a saving, it will come from pensioners who should get it not claiming, and certainly not annually. The department has a lot of literature, which is entirely decent, about the problems of the means-testing, which informed the new state pension. It was absolutely right to do so, and yet it seems to be ignoring it in its efforts to make a quick £65 million or so saving from the poorest pensioners.
The Minister and his team will so increase the stigma of means-tested pension credit—with people annually reminded that they are suspected of error, if not downright fraud—that more of the poorest pensioners will slip down the snake of further poverty. Pensioners do not cheat on pension credit, but this proposal suggests that they do. Let us not have any spin about increased take-up as a result. This is about savings and nothing more, and I do not think it is decent.
The Government boast of their reduction in means-testing for the new state pension, while quietly importing a massive extension of means-testing for those not joining the sunny uplands of the full new state pension. They are deliberately widening the gap between those who will get the new pension, and those who cannot on grounds of age. Poorer pensioners will be worse off simply because they are a day older or a year older than other pensioners who are eligible for the new state pension.
Single people who are on pension credit because they are on the wrong side of that cliff edge will have £30 of pension credit added to their BSP of £111, giving them a total income of some £140. However, if they acquire any capital savings over £10,000, they will find them means-tested. In some cases they will then lose every penny of pension credit. Meanwhile, other pensioners, who are a day or a year younger, will get their more generous pension of £144, and will also keep every penny of savings they may have or acquire because we rightly float them off pension credit, and all credit to the Government for that.
The older and poorer start to lose if they have any savings over £10,000, so there is not an incentive to save. Yet pensioners a day younger not only have a higher pension, but their savings are not taken into account at all. This problem will of course be made worse by the loss of savings credit. Is this fair? Far from increasing means-testing for the poorest group, in my view the Government should do exactly the opposite. They should reduce means-testing to achieve greater fairness for pensioners who are being penalised for nothing but their age. That would give less of a cliff edge, and more equity between the two groups of pensioners who are divided by one day. It really is shameful to import an unnecessary cliff edge for trivial government savings, and it is also perverse.
Since my noble friend Lord McKenzie wisely reviewed AIPs, there have been huge cuts in domiciliary support for the elderly from social services. Mr Pickles has cut local government budgets by 35%, and inevitably this is passed on in depleted services. Nearly half a million people, mostly pensioners, have lost homecare since 2008—half a million. Only those with substantial or even critical care needs can now expect to have carers who are funded by the local authority.
Pensioners with only “functional” disability may have quite significant mobility or sight problems, and five years ago they could have received perhaps three or five hours per week of help from social services. They now get nothing, and their family may live 100 miles away. If someone’s needs are more substantial and they are frail, and they need help getting up in the morning and at night, the two hours a day which was offered may now come down to two slots of 15 minutes. On top of this has come Dilnot.
The Government’s response has been to emphasise co-payment. I do not disagree with that, but where is the money for that co-payment to come from? If you are a pensioner on pension credit, you have minimal or low savings and your only asset is your home. Outside London this may be worth perhaps £100,000 or double that. Some 80% of pensioners below 60% of median income are owner-occupiers. Half of those on pension credit are owner-occupiers. Equally, three-quarters of those who should claim pension credit—but do not and so lose out on £34 per week—are owner-occupiers.
Pensioners may have to contribute to the cost of their social care, or decide—rightly, in my view—that they wish to live independently outside of residential care, with more domiciliary support than social services can now provide. However, those on pension credit, having been means-tested at 65 and again at 70 and now coming up to 75, have only one way to do that, which is to release some of the equity in their home.
Lord 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.
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.
“which for a widowed parent shall not be less than three years, or until the youngest child of that person at the time of the death had reached the age of 7 years, whichever is the longer period”
Baroness Hollis of Heigham
My Lords, we move on to a different section of the Bill on bereavement benefits. In moving Amendment 59, I wish to speak also to Amendments 60, 61 and, very briefly, to Amendment 66.
I am unhappy about some aspects of these proposals. I know that they have been out to consultation, as, obviously, I have read the consultation documents, but I wonder whether it was wise to go for a one-size-fits-all approach in the name of alleged simplicity. The background notes go back to our policies in 1925, presumably in the belief that this shows we need to overhaul the system, but, actually, we did review and restructure it in 2000. Why did we structure it in the way we did? I hope that noble Lords will forgive me if I talk about widows rather than deceased spouses or partners.
Currently, widows receive a £2,000 lump sum. We recognised, as have the current Government, that you need money immediately to pay for funeral costs and to tide you over the couple of months while the deceased spouse’s income or, alternatively, childcare are not available and before alternative benefit income, if appropriate, is established. As UC, for example, can be paid in monthly arrears, it could be two months before any money is flowing to the bereaved spouse or partner, so we produced a lump sum. We then sought to support widowed parents with children while the youngest was on child benefit: that is, normally up to age 16. At the time that was consistent with the income support rule for single parents with a taxable benefit. The widowed parent’s allowance is now worth £108 a week—a little less than BSP but more than income support, as it is NI-based. It is not means-tested and no work conditionality is attached. The number of new widowed parents claiming the allowance varies between 50,000 and 100,000 a year. As far as I can see, there is no particular pattern to it. Currently, widowed parents claim their allowance on average for five to six years. Not surprisingly, those with younger children claim it for longer—around nine to 10 years. Only 3.6%—less than 4%—claim it for a year or less.
The Government, to my dismay, while increasing the lump sum to £5,000, are proposing that widowed parents should receive this financial support not until the youngest child is 16 or even 12, but for one year only irrespective of the age of the child, at £400 a month. I believe that this is quite unacceptable. For most, the financial loss will be substantial. Some 88% of widows in work with children will be worse off; 50% of those not in work will be worse off. To put it another way, any widow with children who would have claimed for two years or more, usually because of the age of their children, will in future be worse off. That loss could be £50,000 if eligibility were retained while the child carried child benefit. Instead, within a year, she will probably have to work longer hours if she is in work just to make good her financial loss at the selfsame time that her children need her. Children do not adjust in a year. In my experience they are stressed and distressed for many years longer and need more, not less, care from the surviving parent. My children were grown up when bereavement hit and even then it was very hard, but friends who lost a spouse when the children were young found that their children had nightmares and returned to bedwetting. Those parents experienced broken nights and witnessed their children’s clinging fear of losing their other parent, school phobia, challenging behaviour, miscellaneous, unexplained small illnesses and symptoms of depression. They found that their children needed much extra support, stability and attention as well as affection. The widowed parent—a sole carer and earner—may have to extend her working hours to make good the loss of income at just the time when she needs to be more available to them, perhaps to change childcare, move house and, consequently, change their school.
The more generous working parent’s allowance not only helped to replace his income but could also allow a working mother the financial flexibility to adjust her hours to care for her children to enable them to settle into the new patterns of life that they now experience. Given that few widows claim the full credit that they could, they are making a wise decision for themselves and are in no sense seeking to milk the system. Are we really so desperate for money that we need to take it away from grieving widows with deeply distressed children?
As for work conditionality, if widowed parents are on UC, it is proposed that they are brought within work conditionality after six months. Again, that is quite unacceptable. I am baffled by this lack of empathy or understanding. Of course, if she wants to go back to work—as many of us do, and did—that is fine and we should support her but to impose work conditionality whether she feels ready for work or not seems unbelievably harsh. We talk about advice and guidance and a friendly interview with Jobcentre Plus staff, but the power lies with the staff. The Minister is giving huge discretion to a young single member of staff, however well intentioned—I am sure that they are—but with probably no personal experience of bereavement.
I would not want that. The more, I am afraid, we hear of the culture of targets at Jobcentre Plus, the retraining or demotion of staff who do not meet their targets, and the resulting heavy pressure on claimants who are still numb and barely functioning to go back to work, the more we should all worry. I appreciate and welcome the fact that the Minister has recently offered further consultation to discuss work conditionality and the training of staff with the voluntary groups who support widowed mothers, and I hope that work conditionality pressures, at least, will be properly relaxed.
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.
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 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 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.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 10 months ago)
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Baroness Hollis of Heigham (Lab)
My Lords, the Minister has been very helpful in his introduction, but how can the consultation that he reports he has had with possible users be at all meaningful when they do not know how much they are going to have to pay and what they may be likely to get? Following that, can he give us any indication of the ball-park figure? Say someone is 70: what is the lowest possible price and the range for which the extra year of pension will be bought? Otherwise, people’s views cannot be taken seriously because they have not got the relevant information.
Lord McKenzie of Luton (Lab)
My Lords, following my noble friend Lady Hollis, I support the inquiry about the pricing structure and whether we will know that by the time the Bill completes its passage through your Lordships’ House. I listened carefully to the Minister’s explanation, because at the heart of it this is basically a savings plan. It is effectively an annuity arrangement. It is attached to the additional state pension but you could delete all that and describe the fundamental proposition here very much as an annuity. We know that that cannot be done because the DWP does not have the power to do it. However, we should be clear what this is about.
It is attached to the additional state pension and gives people a chance to enhance provision they have made in that respect. As I understand it, you could avail yourself of this opportunity if there was currently no additional state pension due—or there was a very significant amount of additional state pension due because you had been investing heavily in it, certainly above the level of the single tier of pension. Indeed, if somebody was contracted out of additional state pension I think they would still be able to avail themselves of this opportunity. I am just trying to work out how easily that sits with the whole concept—this is all about people who have reinvested in additional state pension, not just about an investment product.
I did not find the rationale for leaving these arrangements open for only a limited period, and the online survey is a bit difficult to interpret. Can the Minister give us any more information about the expectation of the number of people likely to take this up and the amounts that they are likely to take up? The Minister said—and this was said in the briefing session as well—that nothing has been scored in respect of these proposals so far as the public accounts are concerned, but presumably it will be scored at the next Budget, and certainly credit for any take-up of this will feature in the year 2015-16, presumably with its consequential impact on the deficit and government debt arrangements. Indeed, the lump sum would be taken out in the year in which it is received, and the flow of pension contributions will just score over the years and decades ahead.
Given the nature of this, I am interested to understand the sort of explanations and information that people will be given when they are looking to make their choices. In a sense, the information about their class 3 and 3A voluntary contributions is relatively straightforward, but we are in an environment where we know the annuities market is generally very opaque. The Financial Conduct Authority is on the point of publishing a review of the annuities market. Given the closeness of this product to annuities, what sort and range of advice and information is it proposed that the Government will provide for people thinking about taking up these opportunities? We accept some of the potential benefits. In a sense, it is risk free; it is inflation protected; and it can be shared on divorce. One sees the benefit of those arrangements, but I have one or two queries on the wording of the amendment which I hope the Minister can help me with.
Baroness Hollis of Heigham
Would my noble friend not agree that the Treasury is following the same philosophy as it is in trying to abolish the lump sum as an option for people who have deferred taking their state pension for two years in order to avoid paying out the money upfront and is now trying to do exactly the same thing—a sort of mirror opposite—in terms of this package?
Lord McKenzie of Luton
Indeed, I agree with my noble friend. It is the converse of that. A cynic might say that this is all to do with managing the deficit and the debt in the run-up to a general election, but that is for us cynics, I guess.
Looking at Amendment 62, I wonder whether the Minister can help me out on what will eventually be new Section 14B dealing with the arrangements for repayment of contributions. I am a little unclear about proposed new subsection 14B(4), which states:
“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”.
I am not quite sure whether the benefits referred to there are the additional pension that has hitherto been received or whether there is something else because typically one would not expect extra benefits to be paid if somebody has extra income—quite the reverse. Perhaps the Minister can help me on that provision.
Proposed new Section 61ZA is headed “Shortfall in contributions”. I was a bit bemused by this. It states:
“This section applies to a person who has one or more units of additional pension if the person … is not entitled to a Category A retirement pension, but … would be entitled to a Category A retirement pension if the relevant contribution conditions were satisfied”.
It goes on:
“The relevant contribution conditions are to be taken to be satisfied”,
but in a sense it negates the impact of that in terms of payments as you get only the additional pension attributable to units of additional pension. I was trying to fathom what that was about because if somebody is not entitled to a category A pension presumably they would only be entitled at all if they had a category B or D pension. Or is this saying, basically, that even though you do not have a pension entitlement, we will treat you as having a pension entitlement for the purposes of being able to take up these provisions? That seems to undercut one of the two requirements—and there are only two requirements—to be able to access these arrangements.
I do not know why there needs to be consultation with the Government Actuary or the deputy Government Actuary—I do not know whether you can choose who to go to for advice. I would have thought that going to the Government Actuary’s Department would include going to the deputy if the Government Actuary is not available. But there may be good reason for that formulation. This may well be a nice little earner and deserve support on that basis, but until we know more detail it is difficult to judge. It is an odd formulation to attach this to the additional state pension in the way that is proposed.
Lord Browne of Ladyton
It is the pension cap that this Committee is discussing. I am grateful for that clarification, which was appropriate at this time.
Finally, there are the decision points for individuals. Will they get advice on whether they should buy class 3A contributions? After all, there are significant considerations for individuals, such as their life expectancy, which may be significantly affected by where they live in the United Kingdom; whether they are married or in a civil partnership, or likely to be so; and what other income or savings they have—and, therefore, whether it is a good idea, if it may affect their entitlement to incapability benefits, for example. After all, if someone with £10,000 in savings decided to spend £4,000 of those in buying another £5 in income, would they not simply lose that in pension credit and have 40% less of their savings? For all the reasons that we have discussed, those savings may be necessary at later stages in their life. Crucially, who would sell this to them? In the context of the briefing that we received from the Minister’s team, we were told that engagement between the purchasers of this and the Government would be through the Treasury. Does that mean that the Treasury will have certain responsibilities to people who call to inquire about buying these class 3A contributions? If so, how will they be discharged?
There are many questions to ask. The Committee will not be surprised if the Minister cannot answer them all now, because, with respect, he was unable to answer even any of his own questions on his introductory remarks. We may have to wait and see about some of the detail. I understand the reasons for haste; this legislative vehicle is important for this initiative and, if it proves to be positive, that is a good thing. But the scheme was rushed out in the Autumn Statement and added on to the Bill when it had gone through another place. We have no costings or details on price, and no idea how it will be administered—but we still look forward very much to the Minister’s reply.
Baroness Hollis of Heigham
Can I ask a question following on from my noble friend about the interaction of pension credit, which I was trying to tease out as he was going along? At the moment, if you have savings of more than about £40,000, the first £10,000 of pension credit capital is disregarded for pension credit purposes. Thereafter, you have the tariff income of £1 for every £500, which means that if you have savings at the moment of about £40,000 and you are single—I am not sure how it would work for a couple, because I do not have the figures in my head—you would be just about ineligible for pension credit, because your tariff income would float you above it. But turn that capital into a pension, given the fairly unattractive rates for annuity purposes, and I think as a result you would come into pension credit. I shall try to do some more work on this as the discussion moves on, but, if I am right, what the Minister will get in upfront savings he will lose not only in payments in perpetuity while those people live, through his additional pension, but also the immediate payments he will have to make in pension credit—because, having disbursed their capital, they will now come within the pension credit income rules.
Lord Freud
I need to thank noble Lords, as usual, for a mine of interesting questions, and I shall try to deal with as many as I can. On the point that the noble Baroness, Lady Hollis, raised about the research and the understanding of the prices, we are clearly looking at how much the original research needs to be complemented—and, indeed, we may consider more polling work. The original testing was based on a stylised scheme, and further work, playing in the fact that the scheme is secured in national insurance and state pension, may be beneficial. We will also look to consider qualitative research to find out what sort of barriers there may be to taking up class 3A contributions, and I will be happy to provide further details of that research. On the question raised by the noble Lord, Lord Browne, about whether some of that research needs to be redone, I think we would say that it needs to be complemented.
The example of £1,248 raised by the noble Lord, Lord Browne, was not the cost of £1 for a 65 year-old; it was illustrative only, and we are looking to do some more research on the final price. In answer to questions from both the noble Lords, Lord Browne and Lord McKenzie, about information and timing, we will provide comprehensive information and get it quality assured by stakeholders, and we build on the kind of information we provide for class 3, which noble Lords will be familiar with. This is the standard background that we will build on.
The noble Lord, Lord Browne, raised the question of the amount of financial advice that people will need before buying class 3A. Again, in this document, as in others, we draw people’s attention to the fact that they may wish to take independent financial advice before taking a decision that could affect their current or future income. We also need to note that HMRC, rather than the Treasury, administers this scheme.
On the point about pension credit that the noble Baroness, Lady Hollis, was developing in front of our eyes, she is correct that some people would come within the scope of pension credit, but it is up to the decision-maker to decide whether people deprive themselves of capital in order to derive income. We will look at that point further.
Baroness Hollis of Heigham
There is certainly a rule within all social security, along with the rule that capital may be treated as income and income treated as capital, that you may not wilfully deprive yourself of capital in order to boost income. However, to do so wilfully in response to a government campaign would be very different from handing a gift of £10,000 to your grandchild. I think that the Government would be open to mis-selling claims if they went down that road. I do warn the Minister.
Lord Freud
I am, of course, always very grateful for warnings from the noble Baroness or other members of the Committee. That is clearly one of the areas in which quite a lot of detailed work needs to be done. I suspect that it is a minority sport that she is defining, but nevertheless we will need to look at it.
On the question of the noble Lord, Lord McKenzie, about what pension entitlement is necessary, people can have a pension entitlement that consists of graduated retirement benefit or state pension based on their own record of national insurance, which is a category A pension, or one derived from a spouse or civil partner’s record, which is a category B pension. Proposed new Section 61ZA overrides the rules that prevent people having an entitlement to more than one pension at a time.
On the question about what we call it, I think that the noble Lord called it a savings vehicle. We have to be rather careful in our language, which the noble Lord was good enough to recognise and acknowledge. Class 3A will be a one-off opportunity for today’s pensioners, with a cap on the amount of additional pension that can be bought and a limited window during which applications can be taken. As with other forms of voluntary national insurance, we do not expect it to be seen as an investment in a commercial sense. As class 3A is not an investment product, it does not require regulation by the Financial Conduct Authority and, therefore, people with defined contribution pension savings will not be able to get their pension pot refunded in order to take up class 3A as an alternative to an annuity.
On the point raised by the noble Lord, Lord Browne, about the belt and braces approach of the Government Actuary or the Deputy Government Actuary, this is a provision to cover situations where the post of the Government Actuary is vacant. It enables engagement for consideration. I know the noble Lord takes an Occam’s razor attitude to legislation, but that is the reason.
The question from the noble Lord, Lord McKenzie, on the recovery—
Baroness Hollis of Heigham
My Lords, in moving this amendment, I suspect I will also speak to some of the other amendments in the group en route. Clause 26 states that the Secretary of State must review pensionable age from time to time,
“having regard to life expectancy and other factors”,
he considers relevant. In preparing this report he must consult GAD and a panel appointed by him which will produce their own reports to inform his. All that seems entirely sensible and I welcome it.
This amendment is a limited and modest one, which I hope the Government will find helpful and might even accept. It simply asks to put in the Bill, for the avoidance of doubt, those factors that the White Paper of January 2013 on page 77, paragraph 161 stated:
“are expected to be considered”.
There is also one additional factor, gender, which slightly oddly was omitted.
What factors does the White Paper expect “to be considered” both by the Secretary of State and the review body? The first is:
“evidence of variations in life expectancy … by socio-economic class”,
and therefore, by implication, as my noble friend Lady Turner said, by occupation, and by geographic reason. Secondly, there are,
“trends in healthy life expectancy”,
a point I am sure we will pick up and explore as my noble friend already has done in referring to the Marmot report. Thirdly, there are
“alternative ways of measuring life expectancy”,
and, finally,
“impact on the labour market”.
As I said, all these factors, which the amendment seeks to put in the Bill, come from page 77 of the Government’s own White Paper from January 2013—The Single-tier Pension: a Simple Foundation for Saving. The only missing factor, as I have said, which I have added in was gender, which I presume was an oversight, given the recent fusses we have had over unisex annuity rates and the like. This amendment is very simple. It seeks to put in the Bill that the considerations in the Government’s White Paper will come into play.
Why bother to spell it out in the Bill instead of leaving well alone and keeping it in the White Paper? My noble friend has mentioned the Marmot report, which was highly important. I, and I am sure other Members of the Committee, have read—and I know the Chair of the Committee knows it very well—the recent Lords report from the Committee chaired by the noble Lord, Lord Filkin, called Ready for Ageing?. I have been through all of its 1,000-plus pages of evidence. It was an important and valuable report, especially for the evidence coming in from the wide range of contributors. However, I was surprised to see how relatively little attention, particularly in the recommendations, was paid to these other factors. Instead, there is an insistence on trying to connect retirement age, in some rather formulaic way, to increased longevity, as, I fear, the Minister has just done.
We have recently had the Autumn Statement, in which the Chancellor of the Exchequer again seems to think that retirement age should be mechanistically linked to longevity by defining a set proportion of adult life that should be spent in retirement, irrespective of what happens to whom or what the quality of that retirement is like. It is all, in my view, highly elitist, and I am delighted that the DWP is not following the Chancellor’s approach, which is the easy, mechanistic way, but is seeking appropriate evidence with which to inform its decisions. This amendment would strengthen the DWP’s decent, evidence-based approach against a simplistic, bulldozing Chancellor, now or in the future, who wanted easy money to cut the welfare budget in its entirety by raising the state pension age.
What are the issues? Some have been touched on by my noble friend Lady Turner. Most commentators go over the well worn statistics—a year for every three or four years; the doubling of numbers of those over 85; the trebling of centenarians, and so on. They end up with the glib assumption that we cannot afford it so we must all work longer or, more specifically, delay drawing our pension to pay for all those—not us, of course—who in future will linger too long; and if we do not do this we are destroying the life chances of our children and grandchildren. That argument is pretty well nonsense. The issue of affordability is invariably prayed in aid and is, I think, inappropriately stated—indeed, badly misstated.
The first point is that half the population growth among the elderly, by which we are so financially frightened, is a temporary bulge left over from the baby boomers and will scale down from the 2030s on, at which point we will have one of the best worker/pensioner support ratios in Europe. I do not think the Chancellor told us that, if he actually knew it. The second point is that I remember doing a speech at the Institute of Directors 18 months or so ago and to a man—as, indeed, they were—they thought that the state pension age should be 70 and that they should have the right to dismiss staff at 65. No connection was made between the two. There is little point in raising the state pension age if people do not stay in the labour market. It merely means that they linger longer in the twilight of inadequate working-age benefits.
The latest statistics I have—the Minister’s may be more up-to-date—is that some 30% of men have left the labour market before the state pension age of 65, though the averages are skewed and in practice it is actually a higher number because some men, and women, continue working for a couple of years after 65, a subject we debated when talking about lump sums earlier in Committee. At the moment, that 30% or so of men who leave the labour market early, whether through unemployment or poor health, are protected. This is a point that is never raised in any of these discussions and I do not know why, because it is very relevant. They are protected because they can claim pension credit on the same terms as women and thus, while pension age remains unequal, they have, or have had, a level of benefit equivalent to the state pension topped up by pension credit for up to five years while they linger in the twilight world between leaving work and pension credit age. That will disappear as the state pension age is equalised and poorer men, unable to work but unable officially to retire will find themselves in a no-man’s land on a low level of benefits with no top-up by pension credit as the state pension age continues to rise. As far as I know, no consideration at all has been given to that by anyone, and it should have been.
I come to my third point. What matters, therefore, when we consider the cost of state pensions is their percentage of GDP, which over the next 20 years will actually fall. Why has that not been brought into play as an argument? It depends also on employment levels and productivity during working years; savings ratios, including pensions, which conventionally are not counted in the savings ratio—the difference between outgoings and incomings; rising real incomes, which can buy adequate heating and food, both before and during retirement; and the ability in the later years of retirement, the decade of growing disability, to release assets such as one’s home. Those are also not counted in the savings ratio—and there is a big difference between us and Germany. That could be done by trading down, or equity release, can help co-payment of the cost of old age. Then there is the degree to which heavy-end caring, especially dementia, can be pushed back.
Lord Freud
When I last talked to the noble Lord he was pretty indifferent about his pronunciation, but I apologise to the noble Lord, Lord Stoneham. He made a point which I want to reinforce. When we are looking out for 10, 20 or more years, it is quite difficult to specify all the considerations that a review should take into account. The risk is that that if you specify them, you become restricted.
Baroness Hollis of Heigham
The Minister is being a little unfair in this argument because at no stage did I suggest that we remove the words “other factors”. They would remain. All I am trying to do is transpose the wording from this document into the Bill; they are both the Government’s documents.
Lord Freud
I am very grateful to the noble Baroness for her advice, but we want to make sure that future Governments look at this themselves, take a proactive approach to the review process and are transparent and conscious about what they are commissioning. Stipulating now all the variables and all the factors to be taken into account restricts rather than supports that responsibility. Greater discretion will also allow an iterative approach with future Governments building on the reviews of previous ones.
A lighter touch approach will help to generate more debate at the time when the state pension age review is conducted. This should encourage all interested parties across Parliament and industry to feed in their thoughts and contributions and involve them better in the process.
The noble Baroness and, indeed, the noble Lord, Lord Whitty, discussed quite a lot of the factors. I do not wish to get into a huge debate about healthy life expectancy, and so on, but I will make just make a few points on it. The first is to warn noble Lords that the ONS measure of healthy life expectancy from 2000 onwards was changed to run in comparison with our EU partners, so we do not have a consistent data run for the whole period, although we have evidence that shows that healthy life expectancy has increased consistently since the 1980s. Do not use the run because there is a discontinuity in it.
Lord Freud
It is a very fair point that health is, importantly, attitudinal. It is not a matter of just taking a medical model for this. I accept that point.
However, where we have an unbroken record, which is the time spent free of disability, which runs from 1981 to 2010, the figure for men in Great Britain rose by 2.9 years and by 2.8 years for women. It is possible to take a rather more encouraging attitude towards our healthy life expectancy compared with some of the gloom I sometimes hear. The House of Lords report, Ready for Ageing—the Filkin review to which the noble Baroness referred—concluded:
“The Government were right to raise the state pension age, but they are now adopting a timetable of increases slower than that recommended by the Turner Commission and will have to revisit this with rising healthy life expectancy”.
Baroness Hollis of Heigham
Yes, but one of the problems is that people quote that without reading the 980 pages of evidence that went with it, which show that the summary of those recommendations did not pick up most of the debates in the evidence.
Lord Freud
My Lords, I can only go with the conclusion that I would like to leave on the record alongside my warning to take a little care on some of the conclusions that have been drawn on the progress of healthy life expectancy.
The noble Lord, Lord Whitty, asked whether people can work longer and what the trends are in the labour market. The SPA has remained at 65 for men since the 1940s and the average age of labour market exit in 1950 was just over 67 for men and just under 64 for women. That figure has declined, ironically, along with the nature of the work that we have been talking about—hard physical labour. We have seen a countertrend in what has happened since then.
I genuinely welcome this debate and believe that it is important to keep having these discussions, whether inside or outside the House. But we should not seek to prescribe every last detail in the Bill; we must make sure that each and every Government revisit the issue in the light of the circumstances. I urge the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
Despite being interrupted by a couple of votes, we have had an interesting, valuable and, I hope, important debate. I am very grateful to the number of noble Lords who have taken part in it, including those who had not expected to do so. I was certainly grateful to hear from the noble Lord, Lord Stoneham—not to be confused with the housing association called Stonham.
I am grateful to my noble friends Lord Whitty and Lady Drake for joining me in pressing the Government to put these provisions in the Bill, not to challenge where we are now but for future consideration, when we are thinking about raising the state pension age—and I cannot emphasise too strongly—so that we have a coherent policy across government. We need that, because, as pension credit is withdrawn, with every year that we equalise the state pension age between men and women, we reduce the income of men who are in their twilight and who have dropped out of the labour market early, as 30% or more have and do. That figure will increase as the pension age rises—that 30% will probably go up to 35% and 40%, and so on, as we raise the state pension age, unless we can keep people in the labour market for longer, as my noble friend says.
Lord Freud
Let me just make a point, before we take those figures absolutely on face value. When you have differential incentives—in other words, the point that the noble Baroness is making precisely, when you have a higher level of pension credit than working age benefit—you cannot be too surprised when people elect to go with the better paying structure. That probably tells you less than it could about what is happening to those people.
Baroness Hollis of Heigham
Oh, dear me. Are we assuming that somebody who has a real choice about whether to stay in work is going to make a rational decision to forgo a job that pays £400 a week to take an extra £30 or £40 or £50 in pension credit to top up an employment support allowance? Is that what the Minister is saying—that that person is so rational that he will willingly reduce his income to one-third of what it was because of the enticement of pension credit? Is that the Minister’s position?
Lord Freud
I was referring to the differential between the two benefit structures. I was not referring to enticement; I was just saying that one cannot be too surprised if people select the better of two options.
Baroness Hollis of Heigham
I think that I am right in saying that under 10%—probably about 7%—of those in that position do not choose to go on pension credit when that choice is available to them, and the rest do. So clearly the Government’s position assumes that people are making a choice that is attractive because they have been financially encouraged to do so by the relative generosity of pension credit. I cannot attach any other understanding to the Minister’s position. If pension credit did not exist, the assumption would be that the benefits structure was less attractive and therefore, presumably, that they would stay in work for longer—and that therefore they are being encouraged because of pension credit to leave earlier than they need to and that, therefore, withdrawing pension credit is a wise move in the process of the rationality of economic thought in the labour market. Is that what the Minister is saying?
Lord Freud
My Lords, I am saying that when you have a higher benefits structure, it is not surprising if people select it, other things being equal, over a lower one.
Baroness Hollis of Heigham
I think that the Minister and I have a very different understanding. My view is based on my experience representing—I do not know if the noble Lord has ever had that privilege—one of the poorest wards in my city for nearly 25 years. My noble friends here have either represented such wards or constituencies with very poor members and I can tell the Minister that if people can work they want to work. They want it for self-respect, for income, for social mobility and they regard going “on the club”, as it used to be called in my ward, or taking benefits as something that they are not proud of but reluctantly do because the labour market does not make appropriate provision for them, given the state either of their skills or their health. If that comes from experience of working with people, as I have done and as I am sure my noble friends have done, then I regret that the Minister cannot share that personal experience, which might give him a greater respect for the pressures that some people face in making decisions when they have to leave the labour market. I am not for a moment suggesting that he is lacking respect, but there is a great difference in perspective on this and I do not know that I can bridge it with the noble Lord.
It is certainly the case that, as pension credit is withdrawn, it will reduce the income of people who have already had to leave the labour market, usually on grounds of ill health, and as a result they will have less money for heating, diet and all the other things that we know they will need. People going onto pension credit are already effectively entering that second decade of disability without, in many cases, having gone through the first decade of reasonably healthy retirement. By withdrawing pension credit and putting no substitute in its place, we are ensuring that all we do is increase people’s poverty and thereby progressively increase the rate at which they go into further ill health, since they can no longer afford the heating, the diet, the aids and appliances, the cleaning help and all the rest of it which keeps them more effectively fit and engaged in society. Again, I am really disappointed in the Minister if he does not appreciate that.
Lord Freud
I cannot understand the difference between what the noble Baroness has just been talking about and what she was saying the other day when she was so indignant that men could get pension credit at women’s state pension age. She described it, if I remember right, as a smooth path to the beach before getting state pension.
Baroness Hollis of Heigham
Indeed so—I made the image up on the spot, but I will, indeed, repeat it. What I was arguing there was that women were facing a cliff edge. Men had always had that slow path to the beach, but that is now being withdrawn from them and as a result they have a cliff edge in the future between where they are, on benefits, and state pension. Unfortunately for the Minister, the argument continues to be made.
I do not think that any of us disagree, as my noble friend Lady Drake pointed out so well and as was reinforced by my noble friend Lady Sherlock, that we need to extend healthy life expectancy and that that requires health policies. We need to make the second decade of average life expectancy, of increasing disability, of as decent a quality as we possibly can. The noble Lord, Lord Stoneham, said that factors will change. Of course they will. The Minister said that factors will change, but the point is that that is already covered, as was pointed out by my noble friend Lord Browne, but the wording of Clause 26(1)(a) gives the Secretary of State alone the privilege of determining the other factors. Putting all these factors in the Bill, as listed in the White Paper, does not exclude other factors that may develop as time permits; it is a basis on which I would hope that the DWP has its arm strengthened as it engages in battles for resources with other departments and with the Treasury.
Does the Minister really think that he will have greater powers of persuasion to get those health policies that we would want to extend healthy life expectancy, or those supporting policies from local government or from the DCLG for the second decade if these factors are not in the Bill and if the Government are not bound by the legislative requirement to consider those factors? On the contrary; by putting those factors into the Bill we will strengthen the DWP’s arm in requiring other departments to play their part in seeking to extend healthy life expectancy and to improve the quality of the decade of disability. Without it, his position will be weaker, not stronger. The other factors, as my noble friend Lord Browne has reminded me, remain the same. I hope that this addresses the point made by the noble Lord, Lord Stoneham. We are absolutely right to challenge the assumption of reduced inequality.
My noble friend Lady Sherlock said that we are going to eat into capital. The point is that, for example, somebody who is in a position to draw down an occupational pension has a choice of when they retire and they are not dependent on their basic state pension. The people we are talking about in this Bill are, and they have no such choice. As my noble friend Lady Sherlock said, they will eat into their capital, thus ensuring an impoverished old age as they wait to reach their state pension age.
Lord Freud
My Lords, I start by acknowledging the expertise and experience of the noble Baroness, Lady Drake, as a member of the Pensions Commission, on which she was able to rest when she moved this debate.
The purpose of the review is to inform the Secretary of State. Its job would be to collect and analyse the latest data, compiling a report to give the Government of the day the information they need to make a decision. Of course, we are all keen that the Secretary of State receives a report that is both impartial and credible. We appreciate the attraction of a panel to ensure that a wide range of views are reflected in the compilation of the report. However, we have been clear that we do not think that prescribing a committee is the right way to go. We do not want to restrict future Governments by prescribing exactly what the review looks at and who is doing the looking. There is greater merit in allowing Governments to choose whether to appoint a single reviewer—as with the review of public service pensions by the noble Lord, Lord Hutton—or a larger commission, such as the Pensions Commission. Indeed, the latter, set up by the previous Government, was made up of three individuals, two from the worlds of academia and business, neither of which, incidentally, was mentioned in the amendment.
Both of those cases show that a legislative underpin is not required to set up a review that can win cross-party and wider public support and that there is no consensus on where is the best place to find the right people. We do not think that the proposal by the noble Baroness, Lady Drake, to set up a permanent commission—an NDPB or a standing commission, as she put it—is appropriate. That kind of structure is simply not necessary for a review that will come together and publish a report on a single issue, wide-ranging though it may be.
Baroness Hollis of Heigham
Is that so very different from the Low Pay Commission, which is also a single issue?
Lord Freud
The Low Pay Commission reports on a much more regular basis than the five years envisaged here. To pick up the timings that we have experienced, there is the example of Independent Public Service Pensions Commission. The noble Lord, Lord Hutton, was appointed in June 2010 and reported some nine months later, in March 2011. In the intervening period the noble Lord held two calls for evidence, undertook a research event, published an interim report and published his final report. It is clear that a lot can be done in the space of a year, and that is the kind of period that we imagine is about the right length of time required for a review.
NDPBs also tend to look at a wide variety of regularly changing data in the areas of longevity, healthy life expectancy, socioeconomic variations, trends in the labour market and so on, and they tend to be published on a much less regular basis than this. I want to be clear, though, that the groups indicated in Amendment 57A and many others should all be encouraged to participate and contribute in the process. Indeed, the review has been designed to ensure that both Parliament and stakeholders will have ample opportunity to participate in the process and shape the outcomes. Furthermore, because the reviews will be regular, stakeholders may indeed be able to better prepare and contribute than they are now.
Of course, if the Government decide to bring forward changes to the pension age, then those changes must be secured through primary legislation and subjected to the full scrutiny and approval of both Houses, as now. However, to have such extensive and political input at the data-gathering and analysis stage risks stymieing the process before information can even be provided to the Secretary of State. Indeed, the House of Commons Disqualification Act 1975 prevents MPs sitting on many public bodies, precisely in order to avoid politics influencing their work.
Regarding the publication of this report, subsection (6) of this clause requires all reports prepared under the clause to be published. This means that both the Government Actuary and the report from the independently led review, including any recommendations that that component of the review makes, will be published, so all the evidence that has been taken will be made available. Every report will be laid in Parliament and published, including the report from the Secretary of State. As I said before, any proposed changes will require primary legislation.
It is for the Government of the day to put forward proposals resulting from the reports and to present any legislation to Parliament. Responsibility for publishing any overall report on the outcome of the review therefore has to remain with the Secretary of State. I hope that I have been able to provide some reassurance about how we envisage the review working and why. In this case, less is more. I urge the noble Baroness to withdraw the amendment.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 10 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Freud
My Lords, it might be helpful if I explain the principle behind having protected payments. We recognise that some people who will reach pensionable age under the single tier will already have amounts of additional pension which take them over the full single-tier rate. A key consideration in the design of the transition was that this extra would not be taken away. Revaluing the protected payment, at least by increases in prices, will maintain its purchasing power over time.
Let me deal directly with the point made by the noble Lord, Lord Whitty, about fairness in relation to expectations. Under the current system, the additional state pension is revalued up to state pension age in line with average earnings, but is then indexed only by prices once in payment. A man retiring in the first 10 years of single tier could expect to spend, on average, 20 years in retirement. In single tier, we have shifted this balance between adjustments before and after pensionable age, and the majority of people receiving protected payments will be better off overall as a result of this shift.
In the current system, only basic state pension is uprated by a minimum of earnings. In the future, the full amount of the single-tier pension would be uprated in this way. So using the 2012-13 White Paper figures, this means that people will see the illustrative £144 of their state pension being uprated each year by earnings, or more—potentially the triple lock—not just £107. People with a protected payment will be relatively close to pension age, so the revaluation will typically be applied only for a few years. So, for example, even someone with an above average protected payment of £20 with 10 years left until they reach retirement would find that revaluation leaves them £4 per week worse off upon reaching pensionable age, but £4 better off 10 years later.
The amendments tabled by the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, would effectively incorporate earnings revaluation of the protected payment into single tier. As this is a cost-neutral package of reforms, we would need to make offsetting changes elsewhere. Given that we expect most people to be better off from the combined revaluation and uprating changes, this would be difficult to justify. To give noble Lords a response to their question about the costs we are talking about, I can tell them that using earnings to revalue the protected payment would have annual costs, which would peak at around £150 in about 2040.
Lord Freud
It would be £150 million per annum—I am not doing too well with my millions and billions. Let me be specific: £150 million per annum at the peak in about 2040.
As regards the question from the noble Lord, Lord Browne, on the review, we will look at how we do that as part of our overall communication strategy, part of which will be about providing people with individualised information. I hope that I have covered all the questions and therefore ask the noble—
“( ) Regulations may provide that those entitled to or subject to a pension credit or a pension debit shall be advised annually of their entitlement.”
Baroness Hollis of Heigham (Lab)
My Lords, we move on to a different subject, which is pension sharing on divorce. This is a very simple, short amendment that raises the issues of divorce that were touched on in previous amendments. When we delivered pension sharing on divorce—many of my noble friends were absolutely vital in that activity in the 1990s—it primarily affected private pensions. We thought that the portion that could be set aside as part of the divorce settlement would be the basis of a useful pension for the divorced spouse—usually the woman. We were also anxious that he and she would build on—or, in his case, perhaps rebuild—their pension shares back up again so that both would face retirement with an adequate pension. However, most divorcing spouses do not seek pension sharing. In some cases, obviously, there may not be much pension to share, particularly if the divorce takes place at a relatively young age—often, sadly, younger women do not always properly value their husbands’ pension, and solicitors, I am afraid, are still pretty sleepy about what is quite a technical issue. Many of those who share pensions do not realise the need for or the possibility of rebuilding their separate pensions. However, out of 120,000 or 125,000 divorces a year, an average of 10,000 divorces involve pension sharing, which means that 8% or 9% of total divorces involve pension sharing of private occupational pensions.
This amendment asks what the implications are for the new state pension. Currently, under existing laws—we clarified this again in a previous discussion on divorcees—upon divorce the woman can substitute the man’s NI record for BSP in lieu of her own at the point of divorce, if his is the higher, and she may also be entitled to half of his additional pension—SERPS or S2P—if the court so decrees as part of the sharing of matrimonial assets.
Under the new regime, she will not be able to substitute his NI contributions for her own, a point that we argued a few amendments back. The only element that can be split or shared, if the court decrees it, is the protected pension; for example, the frozen, additional amount from SERPS and S2P, to which my noble friend referred on a previous amendment. What is more, if he has a shortfall in his NI contributions towards the new state pension—possibly because he has a track record in the public sector, I imagine, with contracting out—some of his additional pension will be brought over to make good his NI record and that transferred slice of protected pension will not then be available for sharing. I am assuming a genderised position here, I am afraid. So she takes the double whammy: not only does she not get an ability to substitute his NI contributions for her own for the basic state pension element, but, equally, if he has an inadequate NI contribution—that may well be the case if he has had a lifetime of contracting out, has never had head space and wishes to make good his shortfall in the new state pension—as I understand it, she will then not be able to access that chunk of his protected and S2P or SERPS pension, which will go across to make good the shortfall.
I would be grateful if the Minister would confirm that I have understood this correctly. If so, the woman has a pretty nasty deal and I think some explanation of the implications is required, particularly for women who have childcare responsibilities and so on and who may not be able to rebuild the additional income, particularly once their youngest child hits 12.
Advising people annually of their pension debit—for example, telling him, as it is usually, but not invariably the man, by how much the pension has reduced following divorce, or with regard to pension credit, the fraction that usually has gone to her of the protected additional pension, if the court has so decreed—would allow each of them to know where they stand to make better decisions about their pension futures and, in particular, that might encourage them into NEST to build or rebuild their total pension prospects.
With this amendment, I am seeking to ask the Minister to ensure that women who may not be aware of, but who could well take advantage of, a share of the additional protected pension have the knowledge that they can do so. They may wish to set that against other matrimonial assets that may otherwise go their way on divorce. I hope, therefore, that the Minister will agree with me that as this is techie and this has now been changed substantively in the Pensions Bill, those women who have been married to someone in the public sector—the reverse could equally well be true in terms of gender—will be a loser a second time because he may well dip into this to make good his NI shortfall. I hope that the Minister will agree with me that we need to encourage people to be aware of the situation and I think that the department needs to take some responsibility for ensuring annual information. I beg to move.
Lord McKenzie of Luton
My Lords, I put my name to this amendment because I spent a happy half hour with my noble friend trying to fathom out what the legislation was about, on this occasion, without a bottle of gin. The conclusion that my noble friend has just outlined, which I believe to be correct, is that any protected payment could be shared—I think that was confirmed at one of our briefing meetings and indeed in some of the documentation that we have and this parallels the current situation with the additional state pension—but the protected payment cannot, I think, for some of the reasons outlined by my noble friend, be greater than the second state pension accrued at 6 April 2016; it can, however, be smaller. For individuals who grow up entirely within the single-tier system, with just S2P, as we understand it, there would be no basis for sharing the state pension. The noble Lord’s confirmation would be helpful. The particular thrust of the amendment—to make sure that people are routinely informed—seems entirely reasonable.
Baroness Hollis of Heigham
The Minister also gave those figures last time, when we debated the amendment on divorcees and the substitution issue. The 100,000 requests and the 150 orders are happening in terms of the protected or state second pension, or SERPS, now. Of course, it is only a tiny fraction of the occupational pensions which are usually the more valuable asset and make up the other 9,900 or so requests.
Perhaps I should have asked this before, and I do not mean to catch the Minister on the hop, but what is the financial distribution of the 150 within the 10,000? Are those 150 simply the largest, or are they associated with people who are tenants in rented accommodation, where there is therefore no unoccupied house to be set off in lieu, or what? What does the Minister know about them?
Lord Freud
Rather than going into the sub-detail of what is already a very detailed point, I ought to commit to getting whatever information we can find and supplying that by letter to the noble Baroness.
When pension sharing disappears, most men and women will be able to build up entitlement to a simple contributory pension above the basic level of means-tested support. This is the most effective way of ensuring that savers have a decent underpin which stays with them however their family circumstances change. More than 80% of those reaching state pension age by the mid-2030s will get the full single tier, a figure with which I know the Committee is familiar. The courts will still be able to take account of private pension provision in the divorce settlement. The expectation is that the vast majority of people will be able to build a single-tier pension in their own right.
If someone is the beneficiary of a pension share order they receive a pension credit. The person the order is made against is subject to a corresponding debit. State pension credits are normally awarded and debits applied from state pension age. If the order is made after state pension age, the payment is increased or decreased at that point. As under the current system, single-tier pensioners who have a state pension debit or credit will be informed of the weekly addition or deduction when the court order is implemented. Individuals will be able to ask for statements of their state pension, but the pension credits or debits would be consolidated within the individual’s single-tier payment or protected payment and so not identified as credits or debits. As now, these elements could be identified on request but I am informed by the department’s pension sharing administrators that no one can recall ever receiving such a request.
On communications, the question raised by the noble Lord, Lord Browne, our statements will give individuals an up-to-date picture of their single-tier state pension position, which includes their foundation amount, and explain how this may change with further national insurance qualifying years through work or credits. The foundation amount included in statements will take into account any pension share debits or credits, as I have said.
Let me make it clear that state pension sharing on divorce affects relatively few people. As I said, in 2012-13 the department implemented only around 150 sharing orders. The changes to the computer system necessary to generate such automatic annual statements would therefore be disproportionately costly to provide this group with information it can in any case request.
Finally, on the devolution issue raised by the noble Lord, Lord Browne, I can confirm that this does not require a legislative consent Motion from the Scottish Government.
I hope that I have been able to go some way in reassuring the noble Baroness that, while there is low demand for this information, it is available if requested. I hope that on that basis, she will feel able to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, I am grateful to my noble friends Lord McKenzie and Lord Browne for their contributions and also to the Minister for a helpful reply. However, I am still not secure on a couple of points he raised, if he would be so kind as to elaborate on them. He said that the recipients—I presume they would be almost all women; the Minister has not challenged me on this so I assume that it is correct—get information when the court order is implemented. Does that mean at the point of divorce or at the point of payment? What does “implementation” mean here? It could be the legal point of when the court has finished with it or the practical effect of when it is actually paid. I am not quite clear.
Baroness Hollis of Heigham
So it is at the point of divorce. Thereafter, from what the Minister has said, if they wish to see what has happened to that payment they can make an inquiry but the Minister says they never have so far.
Lord Freud
That is exactly right. We have the information and people who want to double check it can ask, although they seem to be satisfied with the level of information they had at the outset.
Baroness Hollis of Heigham
If it is 150 people, how much does an inquiry cost to handle?
Baroness Hollis of Heigham
If we are talking about 150 people, how much does it cost to respond to each inquiry?
Lord Freud
My Lords, as I said, in practice we have not had an inquiry. We have to manage 150 sharing orders. Again, I am not sure of the cost of that and how easy it is to extract it. If I can do it, I will include it in a letter that I have committed to send.
Baroness Hollis of Heigham
I am grateful for the Minister’s promise of further information and, on that basis, I am happy to withdraw the amendment.
“( ) If a person’s entitlement under this Part to a state pension has been deferred for a period, that person may receive it as a lump sum, as specified in regulations.”
Baroness Hollis of Heigham
My Lords, I would just point out that the clock seems to have frozen on the display.
Baroness Hollis of Heigham
It does not matter. I am grateful for the additional statistics on this issue provided by the Bill team. That has been very helpful. In 2004, the previous Administration sought to encourage people to stay in work longer by offering attractive arrangements if they deferred taking the state pension for several years, or at least for more than one year. About 9% of pensioners did so—1.2 million people—three-quarters of them women, usually because they were younger than their husbands and worked longer hours, particularly given that their retirement age was earlier than the husbands’ and this way they could retire together. These arrangements had several advantages: they kept people in work for longer; they allowed husband and wife to synchronise their retirement if they wished; and they offered them a higher pension income once retired, with interest rates—until this Bill comes into effect—of 10.4% per annum, or to roll it up into a lump sum, where instead they received the basic rate plus 2%.
The vast majority of the 1.2 million pensioners who deferred their state pension for more than a year chose income. Some 60,000 preferred to take a lump sum. I do not know how many of those are women, but my hunch would be, again, a very high proportion. If by any chance the Minister had that figure, that would be helpful. Some 60,000 preferred to take the lump sum, which on average was £13,700 for GB residents—a considerable sum.
The Bill proposes to remove the option of a lump sum so that in future, if you defer taking your state pension, all that you can do is add to your income. Why? I have to say that the arguments offered by the Minister in the other place did not persuade me. He said that, first, it was a less financially attractive proposition to take the lump sum than to take the money as increased pension, even at the proposed new rate for income deferral of 5.2%. Secondly, drawing their pension rather than deferring it and then putting it into a building society account would give much the same return. And, thirdly, by removing choice, you are giving people something more valuable—that magic word “simplicity”, as though a lump sum payment is really hard to understand.
I think this approach is incomplete at best and, in policy terms, wrong in terms of what we know about pensions income and capital. Why would one want a lump sum when the alternative of income is, in terms of return, more financially attractive, which I accept that it is? The answer, it seems to me, is simple. It may be the only opportunity a couple or an individual—but more likely a couple—get of acquiring any capital before they go into full-time retirement. If they have an occupational pension, they are likely to get perhaps the capital of a 25% tax free lump sum. If they are reliant only on the state pension, they have no such access to capital at all. The problem for pensioners now, and future pensioners, as they face their retirement, is not so much lack of income, thanks not only to what the previous Administration did but what the current Administration are doing, on which I congratulate them—it is above all lack of capital. I do not think that the Government or the Minister in the other place gave the impression of understanding that that is the problem coming up in the lift.
Let us remind ourselves that in 1997 the percentage of pensioners below 60% of median income was 41%. As of now, it is about 14%. Pensioners, as we know, have rightly done relatively well in terms of income. As my noble friend teased earlier on, we now know that the current Administration propose to continue this until 2020, should they return to office. As a result, pensions have already risen three times faster than wages and pensioners will continue to do well. The big problem for pensioners is not income but the lack of savings or capital. That has, if anything, worsened over the past decade: 21% of all pensioners have no savings at all; 37% have less than £3,000—not enough to pay for one funeral, let alone two—and 50% of all pensioners have less than £8,000, which would just about cover two funerals with a bit left over for the high tea. For those able to defer, bringing in an extra £13,000 to £14,000 of capital is magic. It transforms their situation. I repeat that the struggle for pensioners is not so much lack of income, which was how it was treated down the other end, as lack of capital, and the Government are going to close down one of the easiest and simplest routes to acquiring it.
A couple, for example, could make the entirely sensible judgment that one of them—possibly him—adds their deferred pension to their pension income and, as a result, his state pension increases. The other—it may well be her—brings in the lump sum to build some savings for a rainy day or replace the car, build the conservatory, help their grandson with tuition fees at university, and, above all, in time, to help pay for social care and eventually, perhaps, to fund funerals. Yes, they could save that sum out of income instead, as Steve Webb suggested. However, as with auto-enrolment, where we are structuring choice, ring-fencing it into a deferred lump sum may be the most helpful way to build those savings. To assume that people will voluntarily put their income aside into a building society is the exact opposite of what we are doing with auto-enrolment, where we know that we need the nudge theory of inertia to get people to save, not to leave it to a voluntary choice. They can, of course, do as the Minister suggests, but if that is the case, and if we can rely on them to do that, frankly, we do not need auto-enrolment at all because people will look after themselves with private occupational provision. But, of course, we know that they do not and that is why we are introducing auto-enrolment. The same cast of mind applies to deferred state pensions, I suggest.
In my experience, pensioners seldom spend their full income. They cope. Whatever the level of pension—whether it is £60, £80 or £100—pensioners spend £1 or so underneath their ceiling. Indeed, as a result of past and current government policies, including the triple lock, the income from the new state pension for future pensioners will be increasingly adequate. However, what pensioners are badly short of is capital, and that capital, as a proportion of their future, is reducing. They have little or no reserve cushion and the Government are taking away the easiest way in which pensioners can choose to build that up.
Why are we taking this choice away? No one has to opt for a lump sum but, as long as it is an informed choice, it may be absolutely the right choice for them. Government should not second-guess them and deny them a choice. It is very silly. Contrary to what the Government believe, we do not know what is best for all pensioners in all situations and we should allow them to make the decisions they want and which work best for them. In moving this amendment, I hope very much that the Government reconsider their position on this as they are failing to see the issues that are going to affect pensioners in the future, particularly as we move into the field of social care and the need for individual pensioners to pay for it. I beg to move.
The Lord Bishop of Chester
My Lords, I support this amendment. The background seems to be one of a general lack of provision for pensions for older people in the future. There is a major shortage of pension savings, and my impression is that that is getting worse rather than better, for all sorts of reasons. My experience of young people—I use the word “young” to include people in their 30s—is that they do not think about pensions as much as they should. Anything we can do to encourage people to take a long-term view and think for the future must be a good thing. The principle, therefore, of deferring taking the state pension until you really need it seems a healthy principle to encourage in our circumstances. My anxiety is that, in the future, a lot of people are going to be very short of money when they are older. It seems fundamentally right to do anything we can to encourage that culture of not taking the pension until you need to.
If you are going to encourage people to do that, maintaining the flexibility so that they can either take additional income when they do take their pension, or a lump sum in lieu of the money they save, seems to be a sensible inducement. If you just look on it as an issue of encouraging savings, one of the lessons of the last decade or so is that we need to encourage the thought of saving in our culture. It may be just as easy to take the pension and put it into a building society account or whatever but why not offer the option of the Government allowing the lump sum to be taken? Another reason for supporting the amendment is the principle that if it ain’t broke, why do you need to change it? What is wrong with the current arrangements that means that we want to change them?
My third reason for supporting this is that, in principle, I think there should be parity with how we relate the state provision of pensions to private provision, which normally allows the option of taking part of the pension as a lump sum. That is an important principle of flexibility and, indeed, defined benefit schemes now typically make that option more available than they used to. There seems to be a simplicity—to use the Minister’s point—in treating state pension and private pension arrangements in broadly similar ways.
Baroness Hollis of Heigham
Why did the Minister in another place, Steve Webb, argue that one of the reasons for doing this was because the deferred pension, even at the proposed rate of 5.4%, was financially much more attractive to people and a much better buy, and therefore he was helping to protect would-be savers from themselves? If it is a better buy for the individuals receiving it, why does it therefore cost the Government money to keep the less expensive option going?
Lord Freud
It is a timing issue, of course, because you take the money in earlier. That is where the costs to the Government come from.
Baroness Hollis of Heigham
If the Government were making that monetary saving, they would have to show us that that would be a one-off saving and not a continuous saving. If those people then took instead the increased income, the cost of that would soar by comparison because the £62,000 or £63,000 would presumably move across. In order to save some upfront costs of the lump sum, the Minister is committing himself to an increased continued income on the deferred income option.
Lord Freud
I do not have the crossover point figure. I could look into that. Clearly, it would be different depending on the system. I can offer to discuss this with some graphics, which I suspect are essential, in a briefing session before Report.
Lord Freud
Yes. The reason is that that is the equivalent of the private pension provision, which is a purchase. We are drawing a distinction here between public provision and private provision. With the pulling into a single tier, that is where the line is drawn between the two. As private pensions offer lump sums, that is where we would expect people to be taking them.
Baroness Hollis of Heigham
That cannot be reasonable, can it? After all, the new state pension combines the element, including the state second pension, which was bought up by people in lieu of and as an alternative to or an equivalent of an occupational pension and contracting out into it.
Lord Freud
Deferrals of lumps sums are both complex to understand and cumbersome to administer.
Lord Freud
That complexity is illustrated in the DWP information booklet which provides guidance on deferrals. It runs to 60 pages and then recommends after all that that people get independent advice before making their decision. Even so, given the factors and variables, there is no guarantee that such advice would be forthcoming.
Reverting back to the class 3A distinction, that is clearly being directed at existing pensioners who currently get existing increments as a lump sum, so they are within the old system. It is being directed at people who are in the existing system rather than those in the single-tier system.
Baroness Hollis of Heigham
But that means, does it not, that the Minister is giving the option of a deferred lump sum within the state system, even though, a couple of minutes ago, he said that was exactly what he was not going to do because he wished to maintain the boundaries between state and private provision?
Lord Freud
Yes, that is the distinction between the existing system, where there is a lump sum, and the post-2016 single-tier system, where it is proposed that there should not be a lump sum. That is where the consistency lies.
The simplified arrangements under Clause 17 will mean that people will be able to work out both the level of increase they will build up as a result of deferring their state pension and the potential effect this will have on their future taxable income. People will be able to make their own arrangements to save their single-tier pension if they wish and build up savings in that way. This will give them a choice over what and when to save, in a form that meets their needs. We do not think that the state should continue to provide the lump-sum option as an alternative to savings in the long term.
However, there is a way of building up some capital, if people take 12 months of arrears of pension straightaway if they claim after state pension age. That is worth around £7,500 for someone with a full single-tier pension in 2013-14 terms. Our intention is to bring forward regulations for the single tier that will replicate the existing arrangements.
Baroness Hollis of Heigham
Could the Minister help us further? Is he saying that at the end of the first year post the conventional state retirement age you can choose to take your deferred pension as a lump sum for one year only but not for a second year? Is that what the Minister is now telling us?
Baroness Hollis of Heigham
Well, why? Why is it okay to do it for one year and not for two?
Lord Freud
That is the standard position whereby, if you are in arrears for a year, you can take the provision at the end of that year and that is treated as arrears of pension rather than a lump sum. Some noble Lords are very concerned about the issue of the nest egg. If we drop the distinction between arrears and lump sum, there is a nest egg opportunity in that £7,500, which may go a long way to satisfy the concerns that have been expressed with some vigour this afternoon.
Baroness Drake (Lab)
I think that the Minister is right not to give advice as to whether or not it suits an individual to defer. It depends on their personal circumstances.
Lord Freud
I must thank the noble Baroness for keeping me out of jail. Many a seminar that I have been to would have told me that. It is a matter for people to judge.
Baroness Hollis of Heigham
My Lords, I am extremely grateful to all Members of the Committee. I am sorry we did not hear from the Lib Dem Benches as we would then have had a full hand. I am grateful particularly to my noble friend Lady Dean, to my noble friend Lord Hutton for raising the debate in the way he did and to the right reverend Prelate for his persistent questioning. Both my noble friends continue to interrogate the Minister, which is really valuable. The right reverend Prelate said, “If it is not broken, why fix it?”. I have seen no evidence at all, apart from the Minister saying this is not such a good buy for individuals as taking it as income, that the system is broken. The Government are relying on having the upfront savings rather than the longer-term costs. That is not, in my view, a prudent way of handling finance.
My noble friend Lord Hutton, along with the right reverend Prelate, stressed that it is no use saying that we have to go for simplicity and thereby remove choice, if choice would be part of the attraction for people to save and defer taking their state pension. We do not have hard evidence on this, but we know from everything that is coming through from auto-enrolment and the pilots—including under my noble friend—that the nudge theory of encouraging people to stay opted-in and having them opt out rather than choosing to opt in was transformative. I remember when we got the figures from the Newcastle brewery, where something like 43% of its staff opted in to a pension. When it went to opting out, that went up to over 90%, and the only people opting out were students working in the summer vac. It transformed the pension regime in that brewery. It relied on nudge and inertia and ensuring that people could save in the way that was least problematic for them. Unless the Minister can show noble Lords—certainly me—that denying people the right to turn a deferred state pension into a lump sum will not only not have a negative effect on their savings but actually increase their savings, he is storing up problems for himself in the future.
Research last month by the LSE found that 483,000 people—nearly half a million, almost all of them pensioners—had either lost their home care support or were no longer eligible to claim it, as compared with 2008. Now, that home care will need to be funded by savings; it will not come out of income. People are losing the capacity to pay for home care week in, week out, as the cuts bite. My noble friend Lord McKenzie—
Lord Freud
To go back to the point of how people use their lump sum, it is towards the latter end of the pension drawdown period that you are going to need to pay for care. It is exactly at that time that any lump sum taken earlier will have been used up on other expenditure. That is why this is such a difficult area. A lump sum taken at 70 is probably not going to be around when social care is needed in the late 70s, for instance.
Baroness Hollis of Heigham
How does the Minister know? I represented one of the poorest wards in the city of Norwich and the pensioners I know were desperate to have a lump sum. Very often, they cast it in terms of paying for funerals, because that was a working-class, respectable-culture consideration. They desperately wanted savings and they did not have them. They managed weekly. Sometimes their daughters might help out with the odd bit of groceries when they did their shopping but the notion is that you can read across from people in the private sector having a car or holiday.
The same arguments apply to equity release. We know the research on equity release. We know that if people take it very early they may spend it on white-good replacement or on trying to keep up a standard of living but we also know that, as they grow older, they tend to take it for personal care. If, as the Minister suggests, he believes that it is going to be blown, why, for example, are his Government continuing to keep a tax-free lump sum? By his own argument, we should scrap that, on the grounds that the Government know better than the taxpayer how to spend the taxpayer’s money. We should instead roll it into the basic pension that people have from their occupational fund because we know that only between 11% and 13% of pensioners use their tax-free lump sum to increase their pension; instead they use it to give themselves savings. We know that from the private sector. We have no reason to think that it would not apply here. I am amazed that the Minister seems to think that there are different cultures between those who have private, occupational pensions and those who do not. As a result, we are making it harder and harder for the poorest to have what each and every one of us wants—a modest cushion against, as my noble friend Lord Browne said, the rainy day. The Minister, the Government or the department seem to be pulling that possibility away from people for no good reason.
My noble friend Lord McKenzie asked about health impairment. The Minister did not answer that question at all. Under the new scheme, a spouse would not be able to inherit a deferred income that was accumulated by their deceased spouse but they could inherit the lump sum. That, too, is unfair. The couple have made a decision together that that is what they will do. They can take it in one form, but not in the other. Why? That is just the point at which the spouse may wish to have the cushion of a lump sum and is not able to inherit it. It is unfair.
The Minister may also choose to look at my other consideration, which has not been discussed today. Perhaps I should have raised it in my opening speech. Once you hit retirement age, if you carry on working, you are not entitled to continue to build up national insurance contributions. I think you should be able to do so, with employer input, although maybe that is a debate for another day.
Drawing on the report from Scottish Widows, my noble friend Lord Browne emphasised how many people retire with debt, including mortgages. He is absolutely right. Taking a lump sum that actually pays off that debt, which it would take years to accumulate through a modestly increased pension, may be the most prudent thing that those people can do, because that debt may require a much higher rate of payments to keep it covered than any other income that they could get. It could be through a loan company, for example, where they were paying APRs of 300%, 500% or 1,000%. A lump sum would pay that off and therefore increase the robustness of the rest of their income. That is what you can do with capital—you cannot do it with income. Again, I hope that the Minister will reflect on this. I know that he is concerned about people’s indebtedness as they go into retirement, and by freeing them from a burden of debt he would actually improve their financial ability to cope once in retirement.
The Minister argued about the cost of the lump sum. He seemed to suggest that taking away the lump sum would produce 85% of the £800 million savings. I am completely baffled by that figure. What he is doing is removing the up-front cost of paying a lump sum while paying out over a period of time at a higher cost to the Government. There is therefore a break-even point, five or maybe seven years down the line, at which the Government incur additional cost—not reduced cost—by getting rid of the lump sum. Obviously it is less financially attractive; a return of 2.5% or 3% is less attractive than the return of 5.4% that he is proposing. In that case, how can the Government say simultaneously that they are going to save money by getting rid of the lump sum and that if a person takes it as deferred income instead they will be better off? He is going to have to do some nimble footwork—I am sure he will be able to do so—to explain to the noble Lords how he gets to those savings.
The Minister helpfully said that people could already take a deferred pension at the end of one year as arrears of £7,500. If he were able to say that two years could be taken as arrears, I would be satisfied because that would give people the cushion that they would need, or some such flexibility. I take heart from the fact that he has responded, as I was confident that he would, to the range of feeling around the Room that this is simply the wrong way to go. All parties have genuinely attended to pensioners’ incomes, and the present Government—I include both members of the coalition—as well as the previous one are entitled to claim high credit for that. It is a very good achievement for us to have taken pensioners out of income poverty. However, we are sending them into retirement with increased capital poverty. If we wish, we have the option of allowing them to do something about that. To say that we are removing the choice to address capital poverty in the name of simplicity is, frankly, Orwellian, and normally I would expect better from the Minister than that.
Under the circumstances, I will withdraw the amendment and hope that the Minister will be able to find a way through, perhaps around the hook of an assumption that this is actually paid as arrears. I thank again all noble Lords who have taken part in the debate and beg leave to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, I had not expected to come in on this, but I am intrigued by the concept of mutual advantage to both countries. I have never been in a position to support—I use those words appropriately, I hope—the proposition that we have reciprocal relationships. That is primarily because the main beneficiaries are the UK citizens who have gone to the major Anglo-Saxon countries: Canada, above all Australia, to a lesser extent New Zealand, and South Africa. Obviously, there is free movement within the European Union. I am sure that the Minister will correct me if my stats are wrong, but when I last looked at this the reason why it was so costly—the figure used to be £400 million but I understand that it has gone up to over £600 million—was that four times or more British citizens go to those countries than come back to the UK. Therefore, I cannot see how it can be mutually advantageous if the UK is committed to spending four times as much pro rata as, say, the Australian Government—if those are the appropriate figures—in reverse. If it is the case, as I believe it to be, that so many more people are emigrating to those countries than come back to the UK to retire, essentially it is a one-way bid. That is why so many of us are concerned about this proposition. In Australia, particularly—I have less knowledge of New Zealand—there is income-related support which amplifies any state pension that someone may have brought with them from the UK. It is obviously means-tested but it ensures that those UK citizens have at least a minimally adequate income, so we are not talking about dire poverty, particularly as many of these people have retired and gone to join their families.
It is also the case—this was argued all the way up to the European courts, which found in favour of the British Government—that increments to the British pension in the UK were granted in the light of wider considerations of social policy, and to deal specifically with increased costs of living reflected in increased earnings within the UK. If you were to track the relevant figures—for example, in South Africa—you may well find that because of changes in currency rates, employment rates or wages, the British pension may well be worth more in the home country than in the country to which the retired person has moved as it was designed to deal with the UK situation. For many years when the state pension was first introduced there were no automatic increases at all. They were introduced as a regular item under the Wilson Government. Then, fairly quickly, Mrs Thatcher, after four years, separated the provision from earnings and attached it to prices, but only since then have we assumed regular increments, which is why the problem possibly did not arise in those early reciprocal arrangements. The pension was designed to deal with the British cost of living and not with costs abroad.
As long as people emigrating or retiring to those countries where there is no reciprocal arrangement have full information about the financial implications of their choice—that is key—then they make that decision with their eyes open to what it means. Given that the Government are seeking to impose cuts on British pensions here for widows, and cuts in universal credit, income for disabled people and so on, I could not support seeing £600 million go to people who have made an informed decision to leave this country. If we were to have reciprocal arrangements, it would result in cuts to other very beleaguered services.
Lord Browne of Ladyton
My Lords, I wish to speak to Amendment 33A in the name of the noble Lord, Lord German, and to support Amendment 33B, which stands in my name and that of my noble friend Lady Sherlock. I am grateful to the noble Lord, Lord German, for his explanation of the motivation behind his amendment. We had the benefit of his contribution to the Second Reading debate, to which I listened carefully, in which he explained the provisions of this amendment and posed questions to the Minister on them.
However, when I looked at the mechanism he had chosen, I was slightly concerned that he was seeking to empower the Government to act in breach of the EU and international law in the form of bilateral treaties, and that he felt so strongly on the issue that anything which budged the status quo was worth arguing for. However, I understand his motivation and am intrigued by the questions that he asked, and those which my noble friend Lady Hollis asked, about how one can—specifically in regard to Canada—come to some mutually beneficial agreement in these circumstances. He is right to be intrigued by that. These are the words of the Canadian Minister and, if that is the offer that they are making, it would be interesting to know the extent to which the Government know the detail of that offer and whether an argument can be made for it.
However, I move on from that, as I wait in anticipation of the Minister’s response to these interesting questions, to Amendment 33B. Before I come to the argument for it I should say, as was explained by my honourable friend Gregg McClymont in the debate on this issue in the Commons, that we are not hostile to the government position of continuing not to uprate pensions in countries where they are not currently uprated. It would be extremely difficult to explain why we had not done this in years of government if we were now to take this position. We have the benefit of the Government’s estimate of the cost of doing so.
Baroness Hollis of Heigham
I am intrigued by the notion of it being mutually advantageous. The noble Lord raised this—rightly and in an interesting way—at Second Reading and again today and has been understandably careful about not seeking to load a substantial increase on the pensions bill for people who no longer live in this country. When he talks about mutual advantage, he must have thought about what that might look like. What suggestions has he got? What propositions have been made? I cannot understand why it is about anything other than money, to the advantage of people who have left the country. Can he give us some indication of how his thinking might go in that way because I am sure it would be of considerable interest to the Committee?
Lord German
Perhaps I could put inverted commas around the comments of the noble Baroness, Lady Hollis, and refer them, and the precise nature of this debate, to the Minister in Canada. I do not know what was in their mind. My noble friend the Minister here cannot know either, because of course they closed the door to any discussion with the officials from the Canadian Government. However, we need a discussion about this issue. It may well be that it is not with DWP Ministers; it may need to be at some other level.
I do not know the answer to the noble Baroness’s question. All I know is that the Canadian Government believe that they have a mutually beneficial offer to make. That seems to me to be worthy of further discussion; no more than that. I make it clear that I am very much in favour of managing expectations here. The amendment does not call for expenditure at the levels which we have seen before us, and I do not wish to see a reduction in social security expenditure for people currently living in this country as a result. However, when an offer of that sort is made, it is worthy of examination. If there were to be the sorts of things that would make it mutually beneficial, and the Canadian Government believe it to be mutually beneficial to adopt a procedure for Canadian UK pensioners, then it is worth at least finding out what is on the table. If it were to be a successful offer, that of course quite clearly sends the message to other Governments that they can come up with a deal that actually meets the expectations of this Government and the British people.
Baroness Hollis of Heigham
I am sorry to interrupt the noble Lord again; he is being very tolerant, for which I am grateful. Again, I am relying on my memory, which is probably faulty, but something in the order of 85% of overseas pensioners outside the EU are in the four major Anglo-Saxon countries. However, the countries in which most of us would recognise that there are anomalies are not so much the big four Anglo-Saxon countries, which have decent social security systems for poverty relief as a safety net and so on. This is about the mixed history of some Caribbean islands, which came in under the net, before 1979, for protection of overseas pensioners, while others did not. Once we started inflating pensions by the cost of living—I am not sure that this was accidental—bilateral relations disappeared at that point because they started to reflect the British cost of living. Those countries are so poor that they are looking for a form of aid in the form of pensions. How would the noble Lord justify coming to a mutually advantageous deal with a relatively wealthy country like Canada while, because an appropriately mutually advantageous offer could not be made with Caribbean islands, that opportunity would be refused to some of the poorer countries?
Lord German
We have gone a very long way from what might be the first step in this direction. We have not yet been able to answer that first question: what do any Government have ready to offer?
Incidentally, the Government’s figures are quite clear. They say that 85% of all those with frozen pensions live in Canada, New Zealand and Australia. Those are huge numbers. One of the interesting things when you look at these issues, as noble Lords will know, is that other countries produce information, which comes to you in emails. The noble Baroness, Lady Hollis, asked earlier about Australian pensions. I understand that they are means-tested, but only by 50% of total income over the threshold, so if the UK pension was increased by £20 then the Australian pension would be reduced by the equivalent of £10. As we know, it is not always as clear as we suggest.
My intention in tabling the amendment was simply to be able to examine the issue in a different way, and only then to consider it further. However, it seems to me that we need an answer. I have not yet heard the answer, although of course I could not expect to hear an answer from my noble friend since the discussion with officials was not allowed to take place. However, I encourage that discussion to take place, even if it is over a cup of tea with another group of officials at some stage. In a spirit of hope that this will happen, I beg leave to withdraw the amendment.
Lord Freud
The purpose is that we want to retain the ability to avoid cash losers. That is the purpose of this particular power. In relation to the potential impact of the removal of savings credit on passporting, I remind noble Lords that, while pension credit acts as a passport to a number of other benefits, most are linked to receipt of the guarantee credit rather than the savings credit. Housing benefit and council tax reductions are not limited to pension credit recipients; they can already be claimed on low-income grounds regardless of receipt of pension credit, and this will continue. Furthermore, there is a higher applicable amount for pensioners over 65 in housing benefit, essentially to ensure that the savings credit is not itself means-tested away for those paying rent. This higher applicable amount applies to all pensioners over 65, not just those receiving savings credit. This provision will continue for at least as long as housing benefit remains. As noble Lords may be aware, we recently announced that there are no plans to change housing benefit for pensioners until at least 2017-18.
Unlike housing support, entitlement to social fund payments, including cold weather payments, requires receipt of pension credit, and this can include people getting savings credit only. I assure the noble Lord, Lord McKenzie, that we have made no assumption of savings from cold weather payments as a result of the changes in this Bill.
On the question of figures—
Baroness Hollis of Heigham
Is the noble Lord saying that cold weather payments will continue as is?
Lord Freud
No, it means that we do not expect that we will be paying out less in cold weather payments because of these changes.
Baroness Hollis of Heigham
Then I am even more confused. If we are denying a category of people the right to cold weather payments, how is it that the bill is remaining the same?
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 11 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
“(c) regulations may provide that spouses or partners accompanying Service personnel abroad shall receive ten additional credited years backdated to 2000.”
Baroness Hollis of Heigham (Lab)
My Lords, this is a very simple and brief amendment about service wives. Service wives without children who accompany their husbands abroad have in the past relied on receiving the 60% married women’s pension as a default. Obviously the option for NI contributions through work does not easily apply if you are abroad, and voluntary NICs become expensive if you are there for a long period.
The married women’s dependency pension is going to disappear. The previous Government recognised the particular difficulties of service wives when in 2010 they introduced credits for spouses or partners accompanying service personnel abroad, so the principle is rightly established. Since then, there has been easement for JSA and ESA entitlement.
However, if you are in your late 30s you may have a decade behind you with no NI cover until the 2010 provisions kicked in. This amendment simply allows backdated credits for, frankly, an arbitrary 10 years which, if he is on a 22-year contract, should allow her sufficient cover, and later sufficient time to make up the rest of her contributory years. I do not know the numbers, and I do not know the cost. I hope the Minister will help me out. There may be a better way to do it—for example, as with the reduced married women’s stamp election, which is being turned into a 60% dependency pension, which retains the service wife’s eligibility for a 60% dependency pension, although the problem there will be split years.
I believe that the Government may have found a way to address the problem—this was a hint I received from the Minister in the other place. I hope so. If it is true, it would be great to know about it; and if it is not, this amendment, or something similar offered by the Government, might do the job. We owe it under the service covenant to support wives who do the right thing, perhaps, by accompanying their husbands abroad and then pay the price by lacking a pension when they retire. I beg to move.
Baroness Dean of Thornton-le-Fylde (Lab)
My Lords, some years ago I was chair of the Armed Forces Pay Review Body and I saw the way that wives were discriminated against. I remember one case. We went to Belize, where the commanding officer had been offered promotion conditional on his wife accompanying him. She was a very successful lawyer in London and they had to make a decision. She decided to give up her career. While she was abroad—a two-year posting—she was unable to contribute to a private pension fund because she was not doing recognised work. She was working as his partner in Belize on behalf of the British people looking after Army wives. She gave up her career and she lost the opportunity of a good private pension here as she could not contribute because she was not working in this country. She was also losing out at the end of her life because she could not contribute to the state pension scheme either. The changes made in 2010 helped, but this Bill will almost send us backwards. The changes made by my Government in 2010 did not fully resolve this issue. That is one case.
Among the officer cadre in all three services you still find wives giving up their job to accompany their husband, and they get a very raw deal. Until recently, other ranks would have gone to Germany for a two-year posting, and they, too, would lose out. Under the Armed Forces covenant and the updated report issued only this week by the noble Lord, Lord Astor, it is taken into account that we should be looking after families. I have no idea what it would cost and I cannot imagine that it would cost an awful lot of money, but maybe the Minister can help us. As my noble friend says, this may not be the way of dealing with the problem, but somehow it has to be recognised that, in bringing in a Bill that has cross-party support and in general terms is certainly advantageous for most, if not all, women, here we have a group who will continue to lose out, despite the changes that are being made. So it is with a deal of pleasure that I support the amendment, and I hope that the Minister will agree to go back and look at the issue. Perhaps he will come up with something that may not use this wording but which recognises the contribution that these women have to make—and, indeed, by which they lose out when they help their husband’s career, because the post requires accompaniment. If that solicitor, going back those few years, had said, “No, I’m not giving up my career”, the husband would have had to refuse that promotion. There are parts of the Armed Forces where the divorce rate is higher than normal. I am not suggesting that this is the only reason, but I think that it is perhaps one of a whole number of reasons, stress and overreach being another couple.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, the amendment tabled by the noble Baroness, Lady Hollis, concerns the position of spouses or civil partners of service personnel who accompany them on overseas postings, a group in which I know the noble Baroness has a keen interest. The amendment would enable people in this position to be credited with national insurance contributions for the full 10 tax years between 2000-01 and 2009-10.
We have already taken steps to shore up the contribution records of this group. In 2010, arrangements were put in place to allow the spouses of Armed Forces personnel to gain a national insurance credit for time spent accompanying their spouse or civil partner on postings abroad. These credits are awarded for tax years from 2010-11 and provide entitlement to all contributory benefits, including the state pension. Their main purpose was to provide access to contributory working-age benefits to spouses and partners who might have difficulty in finding employment when they return home. I confirm to the noble Lord, Lord McKenzie, that no changes are planned to those crediting arrangements.
The amendment would enable a person to meet the minimum qualifying period for the new state pension and therefore qualify for a reduced single-tier pension. However, if we were to combine the qualifying years that could be gained under the 2010 credits with those available under this amendment, a person could be credited with up to 16 qualifying years.
We should caution that the existing arrangements incur administrative costs for HM Revenue and Customs and the Ministry of Defence. Applications for the existing national insurance credits need to be validated by service welfare officers and processed by HMRC. Similar arrangements would need to be put in place for these new credits, but that would involve more onerous administration because any validation would relate to periods some years past.
The noble Lord, Lord Browne, made a point about difficulties with take-up of the current credits. We are not aware of any difficulties but, on the back of his concern, we will check with the MoD on that.
Currently, around 500 to 600 people a year have been awarded the credits that have been in place since 2010, but it is unclear how many are likely to benefit for pension purposes from the noble Baroness’s proposed retrospection measure.
Baroness Hollis of Heigham
The Minister obviously agrees with my noble friend’s figure of 500 to 600 people, but how many eligible non-recipients does he think there may be? In other words, what would be the total population, of which 500 to 600 are claiming? Does he know the answer to that? I certainly do not.
Lord Freud
Unless I am rapidly informed otherwise, I do not think that we know either at this stage. It is likely that most of the people in this group will have been at work or be covered by other credits during the past periods covered by the amendment. Over the course of a 50-year working life, we would expect many to build the 35 qualifying years to qualify for the full single-tier pension in their own right. That is where this problem lies. That said, I understand the concerns of the noble Baroness and would not want to ignore the position of this group of people if they have genuine difficulties in building the qualifying years that they need.
The Committee will understand the Government’s general concerns about going back in time to treat particular groups in different ways, because there are always issues of fairness and parity when you do that—the noble Lord, Lord McKenzie, talked about some of the relationships with people moving into UC and so forth—and that is the case even though special consideration is reserved for the Armed Forces and their families. However, turning to the point raised particularly by the noble Baroness, Lady Dean, and the noble Lord, Lord Browne, we will consider this further.
I have to warn noble Lords that this is a difficult matter, so I am not promising that anything will come out of that consideration. Sometimes, in saying that, one suggests that there is a solution, but we are finding this quite difficult. We are doing that exercise and I am sure—
Baroness Hollis of Heigham
Why is it difficult? I understand that when most people in civvy life claim X years ago to have done Y it is very hard to check that, but the one thing that the MoD will have is records. So why is it so difficult?
Lord Freud
I will be in a much better position to explain the difficulties in a little while. So, rather than presuming on this, I would say that we are considering it. It is difficult, and I am sure that we will have the opportunity to return to it on Report.
Lord Freud
I will not answer what could in practice be a huge review of everything to make a hard statement on that, but I will write on that point. Having finished, I hope, all the questions asked, I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
My Lords, I thought this was short, sweet and simple. It is now long and less simple but still very sweet, in the sense that I think there is consensus all round the Committee. I welcome that and I am very grateful to the Minister for his responsiveness to the concerns that we raised. Clearly this amendment was a peg for the discussion that we have had. My noble friend Lady Dean is highly knowledgeable about service families and speaks from very real experience. I am very glad that my noble friend Lord McKenzie was able to get on record from the Minister what the Government’s intentions were about easement, which was very useful. I am still slightly surprised that we did not have this information about the eligible population base for claiming credits since 2010-11 and how many have actually claimed. Is it 500 of 5,000 or 500 of 700? We do not know and I would have expected that information, but I am sure that the Minister will write to us with that because it gives us some sense of how problematic it is when you rely on people to claim, as we have experienced with means-tested benefits for pensioners, for example.
Lord Freud
It is a little early to get into the practicalities, but I am sure that we can arrange, one way or the other —either from a spontaneous governmental unleashing of information or in response to an amendment —to get the latest information on the record at Report.
Baroness Hollis of Heigham
I thank the noble Lord. What I would love to see—I know that this has been done in the past because I have done it—is an amendment jointly in the names of my noble friend Lord Browne and the Minister, which will amaze and command total support. In that context, I ask leave to withdraw the amendment.
“( ) Regulations may provide for circumstances in which a person may opt to have a year treated as a qualifying year if by aggregating income from two or more jobs, that person’s earnings is equal to or greater than the earnings factor for that year.”
Baroness Hollis of Heigham
My Lords, this is an amendment about multiple jobs below the lower earnings limit, LEL. There are about 40,000 women and 10,000 men who we know about with two or more jobs each, each of which is below the LEL but which, aggregated, bring them above the LEL and should, I argue, bring them into NI and the state pension.
Who are they? Let me tell some of their stories: all people whom I have met, talked to and canvassed. They are rural women in their 40s with their youngest child over 12, who are patching together what we grandly call a portfolio, the components of which vary over the seasons in rural Norfolk. It might be six hours caravan or boat cleaning on the Saturday—handover day—during the summer, three small house-cleaning jobs during the week for the affluent incomer retirees on the northern coast, some mushroom or fruit picking for a few weeks and, during the winter, two or three evenings working at the nearest pub or newsagent.
One woman averages about 20 hours paid work a week, most of it at minimum wage—as much as she can manage given the danger of five to 10 hours a week travel time between jobs. She has no private car, there is extremely limited public transport in rural counties and she has teenage children to care for and feed. In any case, there are few if any decent 20-hour part-time single jobs, let alone full-time jobs, in rural Norfolk for unskilled middle-aged women without their own transport and with a family to care for. This could be her life for 10 or even 20 years.
Half the jobs in Norfolk, for example, are located in my city of Norwich, which is a 30-mile to 40-mile bus ride away for many people living near the coast, and buses are few. She will never be able to access those jobs, with their better pay and hours. She needs and deserves a pension, and if she cannot build one for herself she will not—this is key—be able to rely in future on any from her husband through the married women’s 60% pension.
A second person whom I met was a divorced Norwich woman in her 50s working as a receptionist for an alternative medicine practice, who told me that her employer would not allow her to work more than 15 hours a week, although she would like to because she enjoys the job, so that he can avoid paying national insurance. He pays three women each for 15 hours a week—because he works a long week—in order to avoid paying NI on any of them. At the time, she was topping up her income, although not her eligibility for BSP, by working extra hours in a florist’s shop. She was desperately worried about her pension situation but did not see what she could do about it.
Another woman’s work patterns are shaped by her caring responsibilities. She does not qualify for carer’s credit, but she fits some pieces of paid work around supporting three elderly relatives in my former ward, plus some cleaning and working in the local launderette.
All those women are working sufficient hours to bring them into the NI system for a pension but because they cannot aggregate them, they do not qualify. When some of us campaigned on this in the past, we were told, first, that you could not reasonably divvy up the employers’ national insurance if there were two or three such jobs, secondly, that the women would not want to pay class 1 contributions and that, in any case, they were few in number, only 15,000, and they were passing through. We were next told that it was a temporary problem for them and they had plenty of time to make up their missing years; finally we were told that they could always buy voluntary NICs and, if all else failed, there was pension credit.
The Government’s supporting papers rebut every one of those arguments and show them to be wrong. We now know that we have 50,000, not 20,000 people caught in this dilemma; two or three times as many. If we do not bring them into NI, they may well cost almost as much on pension credit down the line. That keeps more people in the means-tested legacy system, which we surely want to avoid. The second argument run by the Minister in the other place was that this was a temporary period of their lives. We simply do not know. The Minister is guessing. Some, certainly, may become entitled to a credit or move house into, say, the city of Norwich, and thus have a wider choice of jobs, and as a result may be able to come into NI, but others are stuck. Their patchwork life goes on for years because that is all that is available. We do not have the statistics for them, but 40% of the self-employed have been self-employed for more than 10 years. They include some of the poorest self-employed. The women I have described likewise tell me that they expect their position to continue for many years, often because they need the flexibility that it offers around their caring responsibilities or because they lack realistic alternatives, especially in more rural areas.
They can certainly buy voluntary NICs but, frankly, at £13 a week that is not usually feasible or realistic. It is five times more than we expect a self-employed man to pay. Bluntly, she probably cannot afford it. Is it fair? If she were working those 20 hours on the minimum wage for a single employer, she would get her national insurance but she would be below the PTT and probably would not pay a penny. She would come into national insurance without paying because she would come between the two thresholds. If she were on JSA or a disability benefit and not working a single hour, she would, again, get her NI and not pay a penny. Where she is conventionally self-employed, she will pay £2.70 a week and get NI. If she is employed with one employer, she will pay nothing and get her NI. If she is unemployed, she will pay nothing and get her NI, but because she works 20 hours a week, splintered, she will get nothing at all. Perhaps someone can explain to me why that is fair.
I accept that it has been hard to find a way through in the past, even for those who were sympathetic and did not dismiss mini-jobs as pin money. The Minister has never done that when we have been talking about UC and I am grateful to him. The Bill—bless it—gives us a way through. At last, it is now very simple. HMRC—and the Minister will know infinitely more about this than I do—is building real-time information. Rightly, we are giving the new state pension to all those who are self-employed: 4 million self-employed people will, I understand, gain significantly. Surely we are not going to say to them that we can afford to help 4 million self-employed people, largely men, but not 40,000 people with mini-jobs, mainly women.
Let us now class this woman as self-employed. If she pays the flat rate £2.70 a week, she can, by choice, buy herself a pension for the current year and opt in. We can discuss any backdating rules on retrospective purchase. Equally, we could, say, by regulations, agree that by working a certain number of hours—say, 16 or even 20—she conforms to JSA work search conditionality. She could, if necessary, discuss this with Jobcentre Plus—I have no problem with that—so that she meets the threshold. However, it would be absurd to say that to get an NI contribution she has to stop working 20 hours a week in real, convenient jobs and go and work in Poundland as part of an internship to meet work search conditionality. She is already doing 20 hours a week in work that fits around her caring responsibilities. In this way, she will qualify for a credit just as does someone on JSA who is not working at all.
UC may or may not be available to help her in due course. We do not know how many people it would apply to and by what route. In any case, it would be wrong to rely on it, given the current delays in rolling it out. Realistically, it may be several years beyond April 2016, although not too many, I hope—all years in which she continues to miss out. What number of women in a patch of mini-jobs does the Minister expect to still be unable to build their NI by 2020?
I want to make one final point. I have been describing older women, family women and often rural women, but I ask noble Lords to look around them. I think—it is only an estimate—that 5 million people are estimated to be on zero-hours contracts with uncertain hours, largely in the service sector and usually on the minimum wage. They work perhaps 10 hours one week and 20 the next, and they cannot run a regular job, as we understand the phrase, alongside it, as they always have to be available, so this involves evening and weekend top-ups. It is a major and growing problem in my view. Some may, over the year with one employer, come above the LEL. How many, I do not know. If the Minister has figures, that would be good. However, others on zero-hours contracts will not do that.
Employers love such a flexible, low-paid, semi-casualised labour force—what is not to like for them?—with staff patching together a living wage as best they can around their zero-hours contracts. The price paid is in tax credits from us. There is a burgeoning tax credit bill which, despite the wildly erroneous statements of the Secretary of State, does not come from those who do not get up in the morning but from the working poor, many of whom are on these contracts, as the Minister and this Committee know very well. That cost is paid by us in tax credits and by the worker in poverty, low wages and insecurity in their working lives, and poverty, insecurity and a relatively low pension in their retirement years.
The Bill gives us a way through, either by classifying them as self-employed or possibly by saying that they now conform to JSA conditionality. There are other ways I can think of by which we can do this, but this is a decent opportunity to rectify a problem that has gone on for far too long—that women who are doing their best for their family while contributing to the economy find themselves penalised. We can rectify that. It could be the decent and right thing to do, as I hope noble Lords will agree. I beg to move.
Baroness Drake (Lab)
My Lords, I support Amendment 11. It is always a great pleasure to follow my noble friend Lady Hollis. The disadvantage is that she mobilises the argument so compellingly that one feels rather depleted before one even starts to come in to support her. I will try, in a slightly depleted way, to give support on the very important issue which she has identified.
In the numerous iterative debates on the UK pension system in recent times certain criteria key to the design of that system and appraising outcomes have held constant. One of these has been that it must work for women. We cannot wholeheartedly say yes to that, notwithstanding the reforms that we have seen in the Bill. Clearly there is still room for improvement, and two weaknesses are frequently referred to. First, the level of the earnings trigger set for auto-enrolment is too high and excludes too many part-time workers, mainly women. Secondly, women who undertake mini-jobs—each of which delivers earnings below the lower earnings limit of £5,668, the access point for the national insurance system, but which if added together would put them above that level—do not have access to the state pension system under the contributory system because there is no provision for people with mini-jobs to aggregate their earnings in a way that would allow them to enter the NI system.
If we strip that back to its essentials, a woman with two part-time jobs, earning £100 per week from each job, will not be accruing pension rights unless she is covered by some alternative credit arrangement. Someone who may be working fewer hours but earning £110 per week from one job would accrue pension rights. However, £100 equals about 16 hours on the national minimum wage, so if one was doing more than one mini-job, one would be doing a lot more than 16 hours. Yet in the way that the system operates, they are not allowed access to the NI system.
As my noble friend Lady Hollis so clearly explained, this amendment would allow women and men to aggregate income from two or more mini-jobs and opt to have a year treated as a qualifying year for state pension purposes, and to pay national insurance as though they were self-employed. Having said that, I note from the Peers’ briefing pack that the rate of national insurance payable by the self-employed will be a matter for the Government to decide closer to implementation. If the Minister is able to give us indications of the Government’s thinking on that, which would go to the efficiency of the solution, that would be helpful.
As my noble friend confirmed, the DWP analysis found in 2012-13 that 50,000 people—40,000 women and 10,000 men—had two jobs with a combined income above the lower earnings limit, but were not accruing qualifying years towards their pension. Those may be relatively modest numbers—although the real figure may be higher, given that these things are difficult to measure. However, fairness is not simply a function of the number of people affected, because the disadvantage for these people is very real. As my noble friend Lady Hollis pointed out, the changes in the contemporary nature of the labour market may indeed increase the incidence of what the noble Baroness refers to as a “portfolio of mini-jobs”. We are increasingly seeing an intensity of flexibility requirements within contracts when it comes to the hours of work that employers want in any one week. Certainly, therefore, we need an NI system and a state system able to reflect the developments in the labour market so that it stays fair for people who are working.
Lord Freud
I thank the noble Baroness, Lady Hollis, for tabling this amendment on an issue which I know is of great concern to her: access to contributory state benefits, including pensions, for those who have more than one job but do not earn above the national insurance low earnings limit in any one of them.
We have debated this issue over the years. She will be aware that I have equal concern about this issue. Before we get into the specifics, we have a policy to seize this issue head-on, and that is through universal credit. When you look at the debate this afternoon when we talked about the present system—JSA, tax credits, the problems of going through—universal credit basically combines in-work JSA where you are credited for your pension, and in-work benefits. Therefore, the low paid will be credited in the same way as people on JSA are currently credited. Our estimate is that 800,000 more people will be credited as a result of the adoption of universal credit. Noble Lords may well say that universal credit is taking its time coming in: one or two noble Lords have made that point to me. I can only say that we are going as fast as possible. We are rolling it out.
That is the fundamental solution. Any of the adjustments suggested today would be time-consuming changes to make. One has to take a strategic decision. Does one have a system that sweeps away these problems, or does one make itsy-bitsy changes with HMRC here or there? They all take time. I think it was the noble Baroness, Lady Dean, who said that HMRC is slow to make adjustments, but they are genuinely difficult to do. I have been involved in quite a few government change programmes now and even relatively modest changes are time-consuming and soak up the energy of the people doing them.
The question asked by the noble Lord, Lord McKenzie, about cutting into the RTI system ahead of universal credit is an interesting one. Clearly, we are looking very closely at how we use RTI in different ways. One of the issues in terms of a comprehensive solution for this relatively small group is that we have to be sure they are on the PAYE system in order to use it as a comprehensive cut through. My instinct—again, data are short here—is that this is not a comprehensive solution in the same way as catching them at the UC level. If you are not on PAYE, you can self-declare and get the system to work. I do not think that RTI is the solution.
As noble Lords have pointed out, the numbers are relatively small—some 50,000—but just because the numbers are small does not mean that we should not worry about the issue. That is what universal credit is trying to catch.
Baroness Hollis of Heigham
The Minister said that the numbers were small, which is to restate the 50,000 figure. I thought that my noble friend exploded that pretty effectively. Not only is that itself pretty doubtful, but we now have the issues associated with zero-hours contracts. We specifically asked whether they had been taken into account and what would now be a reasonable basis on which to go forward with shared information.
Lord Freud
My Lords, as I said even before the noble Baroness intervened, even though the numbers today are relatively small, I am not decrying that particular issue. I was referring to the 50,000 figure—the current estimate of those affected. Let me get on with my argument and not worry about that at the moment.
The drive to universal credit is to allow greater flexibility in the labour market, so zero-hour contracts work with universal credit. There may be elements of zero-hour contracts that are of concern, particularly if the balance of power between the employee and the employer is unfair, but universal credit works with that flexibility of the labour market.
Lord Freud
The noble Lord is exactly right. It goes to the point of what we are discussing. It would get you the pension entitlement and the bereavement benefit entitlement but not the contributory entitlements. The current arrangements for crediting a person with national insurance contributions are comprehensive. They cover all the main reasons why someone may not be working, or working only a small number of hours, such as ill health and unemployment, or where people are caring for a child aged nought to 12 or for someone with a disability. They also cover those currently entitled to working tax credit, and we have recently introduced credits to protect the contribution record of working-age grandparents looking after their grandchildren.
Those who fall outside the scope of the crediting arrangements and who can afford to do so—higher paid households are clearly in that category—can make payments on a voluntary basis. The current rate of voluntary class 3 national insurance contribution is a very fair price at £13.55 a week, or £705 a year. The person could recoup the cost within four years of receiving basic state pension benefits.
Using this approach to establish whether a person’s combined earnings exceed the lower earnings limit would require the collation of tax and contribution returns for employees with multiple jobs. That clearly would place a burden on business and require HMRC to develop complicated IT which would take time and money and benefit a small number of people. We would also need to consider collecting the employer’s national insurance contributions in proportion to the earnings in each job, which would add considerable administrative complexity.
The question that one needs to consider is whether those who have aggregate earnings above the primary threshold should be credited or should pay a discount rate of national insurance. That is a question I address to the noble Baroness. It could be seen as quite unfair on someone who is earning just over the threshold in one job and has to pay full national insurance, whereas someone else just below might be credited.
Baroness Hollis of Heigham
That applies if someone is in one job and £1 below the PTT for these purposes; they will still be credited and not pay a penny. I do not see the difference at all.
Lord Freud
That is the issue about whether one wants to introduce this kind of system across for mini-jobs.
Baroness Hollis of Heigham
We already have. All my lifetime, I think, we have had exactly the same cliff edge between those who are below or above the PTT when that diverged from the LEL. That exists now, so there is no difference at all.
Lord Freud
The previous estimate for zero-hour contracts—which is what we are talking about—was that there were 250,000. Let us see the figures today for those on part-time work. I cannot remember the figure offhand—is it 1.5 million? There is a boundary, therefore, about what proportion of flexible working is formally on the zero-hour contracts. Rather than speculate on what the real figure is, I think that we should wait until the ONS comes out with a figure, if it is going to revise that.
On the pointed questions about self-employment rates raised by the noble Baroness, Lady Drake, rates of national insurance are clearly a matter for HM Treasury. However, we have not assumed that self-employed contributions will increase single-tier cost estimates.
I know that the noble Baroness has been a champion of this group and has genuine concerns about it losing out. As the new systems come into sharp focus—universal credit, RTI, single tier—there will be a chance to look at this issue properly when we know exactly what is happening, where the remaining issues are and then to find a precise way of dealing with it. It is simply too early, right now, to get a clean and elegant solution, but we do intend to look more broadly at crediting arrangements to examine the possibilities of modernising and simplifying the arrangements in that light. So there is a process. Her point is taken: it is just about what is the most efficient and effective way of solving a particular problem. What I do not know and cannot offer now is a timetable. It is something to be looked at some years—not a lot of years—in the future, in terms of exactly what should happen. I think that there will be a solution in the medium term. For those reasons, I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
I am extremely grateful to everybody who contributed, including the Minister. The debate was very interesting and revealing and a lot of new issues were raised that had not been raised on previous occasions when we have debated jobs below LEL. That suggests that it is worth going back to some of these issues, as the information that we get and the changes in the labour market make those new concerns increasingly relevant.
My noble friend Lady Drake spoke with all the appropriate authority of one of the pensions commissioners. She rightly emphasised—and sometimes I feel that we are simply retreading the same territory—that every pension issue has to be judged through the perspective of how it affects women, because if we get it right for women we get it right for everybody. Actually, that is not usually what we do; we tend to go on bulk numbers, which are made up by men because they are more reliably, through their working life, attached to a pay grade in the labour market that takes them over the LEL level. As a result, we ignore pockets of women here, there and everywhere, around the system, because, for very good reasons indeed, they do not conform to patterns of male working life.
I honour the Minister in his appreciation of the need to have the recognition of mini-jobs through universal credit. He has never tried to underestimate the significance of these issues, and I put it on record that I appreciate that. However, where we have got to today is not quite good enough.
My noble friend Lady Drake emphasised the need to put up the gender filter and, absolutely rightly, emphasised that women are locked out twice over—in their own ability to get into the NI system and by their ability to go through their husband or partner. They are suffering a double whammy. This Bill makes their default position disappear, which is why the problem has increased urgency from when we discussed it around the universal credit and welfare reform proposals some 18 months ago.
My noble friend Lord McKenzie emphasised the practical feasibility of doing this through HMRC arrangements. Given his lifetime of experience in working with businesses on issues like that, I think that his expertise should be taken very seriously by the department, which may not have had similar experience.
My noble friend Lady Dean, like my noble friend Lady Turner, has fought for women’s pensions since the 1990s, as far as I am aware. She got it absolutely right when she said that this amendment, or an alternative way in which to meet that need, would conform to the spirit of the Bill, and that it should not be left in the hope that, in four or five years down the line, the world may be different.
My noble friend Lord Browne made a devastating critique in talking about the inadequacy of the statistics, how every month the number seems to double—geometrically, not arithmetically—and that very soon we will find that the whole basis on which the Government have estimated their costings and needs, on the basis that it is a tiny minority, will be undermined. He certainly makes me even more uneasy about the neglect of this group than I was before we discussed the issue today.
The Minister is relying essentially on universal credit. I see why he would want to do that, but I am trying to do some back-of-the-envelope calculations. Let us take a group of women and say that the system comes into effect and is rolled out nationally in 2020. It may happen a year earlier than that, but it is unlikely to be more than a year earlier. Following the example of my noble friend Lord Browne, let us say that people leaving school at 18, or college or university, are going to a patchwork or portfolio life for much of the rest of their lives, given the increasing dominance of labour market flexibility. I calculate that when they come into the labour market, if at 2020 they subsequently need 35 years, which they will get through some universal credit arrangements—and thanks to my noble friend there is a big question mark over that—that means that they will qualify for a basic state pension in 2055. They therefore have to have been born in 1990 and are currently aged 23. Under the Minister’s own figures, as far as I can tell, any young woman or man who is older than that probably will not qualify under UC for a full pension by the time they retire.
Lord Freud
My Lords, I cannot leave that unchallenged. People will have inherited rights, including credits, before 2016. Clearly, many of the examples quoted by the noble Baroness related to people who had had children, so 12-plus years would be credited under the existing system to be pulled forward into the system with the foundation amount, building up beyond that. I also need to remind the noble Baroness that the intention with the universal credit schedule that we have announced is to bring in all people, certainly in the working population, by 2016 and 2017, with a group of ESA recipients left beyond that point for very good reason, because we need to deal with them very carefully. Therefore, under the timings that we have announced, the people about whom she is concerned would be brought in very shortly after the introduction of the single-tier pension.
Baroness Hollis of Heigham
I hope that the Minister is right but I do not believe that he is. It is very unlikely that the UC system will be sufficiently stable to be rolled out to the entire working-age population—the Government are not catching these people in their labour statistics—before about 2019 or 2020. I would like to be proved wrong but I very much doubt that I will be. Even somebody who has had two children, which means that they will have had 14 years-worth of credit under the new rules, would still be stuck at about 43 or 44 with no ability to add to those years if they came within this category of having no single job that took them above the LEL. Therefore, we wipe out people who are something like 20 years off their pension life, and they will go into retirement with a fairly trivial amount barely over the minimum qualifying amount. I do not think that the Minister can rely on that.
He is right that some women will manage. Particularly if they have children, they will be fine, but if they have no children, they may have a husband. They may both be on perfectly modest incomes but when, taken as a household, they are tested for their eligibility for working tax credits, where the threshold is relatively low, she will not qualify through that either under the joint claim.
Therefore, I am not at all confident but I would be delighted to receive the statistics from the Minister about the coverage, under the circumstances identified in today’s discussion, for those whom UC is intended to help.
The Minister wants a clean and elegant solution. The clean and elegant solution would be to get as many people as possible into the new system and not to rely on pension credit, a legacy system which will otherwise continue for 30 or 40 years. Unless we can get this group into the system as early as possible, he will not find clean and elegant solutions to sustain the Bill. I am glad that he is going to work on it. I hope that, certainly before Report, he can come back and give us an idea of how he is going to address this issue, even if it is about extending conditionality as a credit into JSA conditionality. That would work for me. I want some way of bringing these people in. I promise the Minister that, if he does not address it, this problem will not disappear; it will grow. It is his responsibility to bridge the deficit between where people are and where some of them may be when he has introduced UC three, four, five or six years down the road. Under the circumstances, I beg leave to withdraw the amendment.
“( ) Regulations may provide for the transitional rate of the state pension for a person who is ordinarily resident in the United Kingdom and who reaches pensionable age before 6 April 2031 to be increased where the person would have received a higher pension under the previous system based on their spouse or civil partner’s contribution record.”
Baroness Hollis of Heigham
My Lords, I apologise to the Committee that I want to raise another substantial issue. After this, I promise that the issues that I raise will get smaller, but other noble Lords’ amendments may be appropriately substantial.
This is about the married women’s dependency pension. This is the first of three amendments. The second amendment is intended to address the issue that widows may face and the third amendment addresses those that divorcées may face. They try to avoid the cliff edge for some vulnerable women—please forgive the political incorrectness. This also applies to men and civil partners, and later amendments apply to male divorcés and widowers.
The peak cost of some £200 million which was suggested by the Minister in the other place would fall in the 2030s for all three groups, including overseas spouses, I gather, which suggests a lower figure, perhaps £100 million a year, during the next 10 years or so. I am grateful to the Box for giving me some additional information on numbers, although I am still not clear about costs. If the Minister can clarify that, that would be helpful.
The Government have rightly helped 10,000 women—it is a diminishing number—who paid a reduced stamp and have put them effectively on to the equivalent of the former 60% dependant pension. At the same time, they are taking that same pension from about 5,000 married women who would otherwise qualify for it each year. This amendment calls for a transitional period of 15 years, as urged by the Select Committee on Work and Pensions on this part of the Bill, having taken a considerable amount of evidence, including some very effective evidence from Age Concern.
This amendment seeks to help women, not many of them, who have, for one reason or another, lived their lives among an older, shall we call it—although I do not mean this to be patronising at all—Daily Mail model, without any expectation that the Government were going to change the rules around them.
On the one hand, the Government are about to reward about 4 million non-working wives with a marriage tax allowance for their husband worth £3.85 a week, costing £700 million a year, and on the other hand they are taking away a £66 per week pension, also derived from marriage—bingo for marriage—at a fraction of the cost of the marriage tax allowance, from older women who have no time to rebuild. The Government are giving to married women with working husbands and taking away from married women who now face retirement with no pension of their own. Husbands—younger men—immediately benefit from a tax allowance transfer which has come as a windfall, while older women lose support that they have been promised all their lives. It is bizarre. Why not spend the first on the second? It will pay for itself several times over and will be far more useful and far more fair for, given their age and such short notice, older women can do little or nothing to build a pension of their own greater than the 60% that they would get as a derived right. That would take 16 years.
Women approaching retirement age had expected the 60% pension and planned their retirement around it. They had, and have, a legitimate expectation. The younger woman and her husband—they are not just cohabiting—receiving the £3.85 household income have not built their lifetime around it and planned for it, unlike the 60% pension. That is simply a windfall. It is unexpected and unplanned and, in my view, much less deserved than the pension that older women were entitled to expect. That younger woman is likely to have many years ahead both to work and gain income and to secure her own retirement with a full pension. I cannot think what mentality, frankly, has produced that juxtaposition and this disjuncture between those two groups, both of whom derive their rights through marriage.
In the other place, the Minister made much of the fact that a significant proportion—more than two-thirds—were male spouses or partners who were born or lived overseas. I now calculate, with the revised statistics that we have had, that huge number to be all of 2,000. However, I have tried to cover that with my,
“ordinarily resident in the United Kingdom”,
which has a good case behind it and which will not trouble the Government.
Indeed, the Minister may also argue, as Steve Webb did in the other place, that he finds it hard to conceive of women who might fall into this group given the wide array of credits—the up to 50 years of working life, which would mean that you start collecting credits at the age of 15 to bring you up to 65, and the 35 years’ NI record requirement. Let me help him, if I may, with two possible categories of women, both of which I am familiar with; I am sure my noble friends have other examples.
I am aware of at least two groups of women who continue to need transitional protection. To get the equivalent of 60% of the future pension equivalent, they would need cover on their own record of at least 16 years—less than that, and they are worse off. Younger women, I readily agree, have time to reshape their plans. They also have appropriate childcare credits, not HRP, which required you to earn actual NI years for it to come into play. Many may have undertaken part-time work above the LEL and may have signed on for JSA, all of this bringing entitlement to a pension of their own. That is as it should be. But women in their 50s do not have that, hence the 15-year transitional period.
Who are likely to lose? The first group is older women with patchy NI years. They got HRP and perhaps did not understand what happened when we replaced it with childcare credits. They did small jobs below the LEL for many years knowing that they would get the 60%. That is what women have told me. They did miscellaneous caring for elderly relatives, credit for which was introduced only in the past five years, which is too late to benefit most of them.
Perhaps their husband’s job took them around the country and they were unable to keep finding new jobs above the LEL for themselves while they moved house and supported his career. As we have discussed, service wives are an extreme case of this. They juggled untidy lives; lives which did not conform to NI requirements. But they knew—or they thought they knew—that they could count on their husband's pension to give them a dependent’s fund. Virtually overnight, as there are no transitional arrangements, that has been taken away.
The Pensions Advisory Service, which I quoted on Monday, completed its survey of nearly 1,000 women and women often commented with additional views. I quote from one of them.
“Had to give up my part-time job when my grand-daughter was born to look after her full-time while her mother and father worked. I’m now desperately looking for work”,
because the NI years have risen to 35. She thought that with 30 years she was all right. She is now 58 and has tried hard to find work but without success. She continues:
“I am getting very worried about the future. I go to bed thinking about it and wake up to face it all again”.
She has a patchwork. She has missing years and we are told that she cannot buy them back before 2006 once universal credit comes into play. Even if she had voluntary NICs, she could not deploy them in circumstances such as hers.
The second group is women who have had poor health for most of their lives—depression, arthritis, angina or diabetes—and they either did not think about or know about incapacity benefits or perhaps believed that the condition was not so incapacitating that they would qualify, especially given the somewhat deliberate stigmatising in the past few years of benefit claimants. Frankly, there has been humiliating treatment of certain claimants by ATOS. I know that the Minister will not want me to recite some of the cases that I have experienced, but they are relevant to this. Their husbands earned enough and, given their poor health, keeping house and perhaps helping out neighbours or local charities was as much as they could manage. If this sounds improbable to the Minister, we are talking about women approaching pension age where the DWP’s own research on benefit take-up among entitled but not claiming pensioners shows how deeply ingrained is the reluctance to claim means-tested benefits.
Such women may have had a few years of NI work behind them but not enough to bring them over the 10-year threshold. If they had nine NI credits or years, they could at least have received £36 a week that they do not in the conventional way, which would normally not have needed to come into play because the 60% was more generous. That de minimis has been removed, although I hope and expect that some women affected will buy an extra year to get over the 10-year hurdle and enjoy £40 a week. However, they probably do not have the time, good health or employability, or in some cases the income, to bring it up to 16 years, or the 60% level that they reasonably expected.
Let me again quote from the TPAS survey. Asked about how they would cope, one woman wrote that she was,
“sick and disabled so unable to save or plan, though very worried as had break in NI due to illness but never claimed benefit”.
Some, but few, I suspect, of the 30,000 affected will be able to afford to buy back missing years. I am not sure whether they can buy them back previous to 2006—we had confirmation on Monday that they could not—where the missing years may have occurred. That relaxation appears to expire in 2015 and the Minister is not continuing it from 2016 onwards.
The Minister at the other end several times argued that if the DWP introduced any transitional period, this would be found by the courts to be arbitrary and would presumably be overturned. He seemed very nervous about the courts; he introduced this argument at least twice when reading his speeches. I am surprised by this. In my experience, if Parliament’s policy intent is clear—see Roe v Wade—it would not fall to judicial review unless it could be shown that it was a decision that no reasonable person could have made. That is quite a high hurdle and clearly not the case here, so if the Minister is going to argue that, may we have proper information about the legal advice that the DWP has received on which the Minister at the other end so heavily relied?
We phased in the rise in people’s pension age over a decade. We are scrapping the pension that they might have drawn at pension age, effectively overnight. I do not think that is fair. If we feel the need to give adequate warning when raising the state pension age, as we did, we should provide adequate warning and therefore transitional arrangements for the most obvious group of real, not notional, losers. It is not difficult. We have the precedent of the reduced married women’s stamp, which we should follow. I beg to move.
Baroness Sherlock
My Lords, I shall speak to Amendment 23, which is in my name and that of my noble friend Lord Browne, and to Amendment 12 in the name of my noble friend Lady Hollis, who has outlined the basic issue at stake here. I need not repeat that. As we know, the single-tier pension will be based solely on an individual’s contribution or credit record. Everyone will get out depending on what they put in; as they sow, so shall they reap. But we are concerned in this group with people who chose to sow as a couple, expecting to reap in like fashion, when from now on it will be every reaper for himself or herself.
Changes in labour market participation rates and social structures mean that we recognise that, in future, a system built on individual contributions is the right way forward. This year, 75% of those retiring will have complete contribution records of 30 years. It will be interesting to know what happens when that moves up. However, it is obviously important that the appropriate protections remain in place for those who have caring responsibilities or childcare responsibilities and that adequate information is put out. Subject to those caveats, we accept the direction of travel.
However, we are concerned to understand fully the impact of this provision in the short term on those who will lose entitlements derived from a partner’s NI contribution record on which they may have done their retirement planning. It is crucial, for the reasons that my noble friend outlined, that the transitional arrangements are fair and seen to be fair. We have had representations from groups working with older people, particularly older women, highlighting a range of circumstances in which women did not build up any entitlement. There are women who were entitled to credits but did not bother to claim them as they were planning to piggyback off their husbands’ records and there was no advantage in doing so. Then there were women who worked part-time around caring commitments, as my noble friend described here and in the last amendment. There were women who chose to do voluntary work, knowing that their husband’s pension would support them and who were often the pillars of their local community. I see a lot of them in Durham, who helped to support their neighbours and really were the backbone of the local community.
Lord Freud
My Lords, there are three amendments that are closely related, of which this is the first. I welcome the fact that there seems to be general agreement in principle that what I will loosely call “derived entitlement”, established in the 1940s, is past its sell-by date and has no place in a modern state pension system.
I apologise for the fact that I am going to speak at some length, but it is important that I lay out the Government’s argument for removing derived entitlement by reference to the criteria for judging single tier as laid out by the noble Baroness, Lady Sherlock, at Second Reading: that is to say fairness, simplicity, sustainability, the provision of a decent standard of living for all and, at the same time, the encouragement of private saving through clarity of outcome.
First, we believe that fairness means ensuring an adequate state pension for people who have contributed to the system. That is why we are recycling the savings from aspects of the current system being abolished, including derived entitlement, to give a boost to individuals who have historically been excluded from additional state pension, such as carers, the self-employed and the low-paid. Indeed, around 650,000 women who reach state pension age in the first 10 years of single tier will receive an average of £8 per week more in state pension due to the single-tier valuation.
Sustainability and affordability are also key qualities that the Opposition have made it clear that they are looking for. Let me be absolutely clear that we are ending derived entitlement from principle and not to save costs. However, as we have been asked a number of times about this, and as affordability is one of the criteria of interest to the Opposition in judging single tier, I shall respond to the question raised by the noble Baroness, Lady Sherlock, and deal with the cost issue.
Our analysis shows that to continue running the basic pension derived entitlement provisions for people reaching state pension age up to 2030-31, the cohorts targeted in these amendments, would cost around £200 million per annum in the early 2030s, and those are just the costs for Great Britain. We do not think that it would be possible to restrict transitional protection to those ordinarily resident in the UK, as the noble Baroness, Lady Hollis, hoped. While it is difficult to quantify the cost for those overseas, we think it likely that it would cost about the same amount again as in the UK, meaning transitional protection for the first 15 cohorts could have further costs peaking at another £200 million a year.
Baroness Hollis of Heigham
Why does the Minister think that the courts would not support us in having transitional arrangements for those who are ordinarily resident? I am not a lawyer, but, in my somewhat limited experience of judicial reviews, there have been a number of challenges. The two criteria I lay down are: was Parliament’s intention was clear—Roe v Wade—and would it be a position that a reasonable person would think was not unreasonable. The addition of ordinarily resident would seem to fit the criteria for transitional arrangements. If the Minister could help us on why that is not the case, I would be interested.
Baroness Sherlock
My question is slightly different, but perhaps the Minister could answer them both at once. Are the costings net of any additional expenditure on pension credit?
Lord Freud
Yes, it is a net figure. On the legal position, clearly the noble Baroness will remember that we are in the European Union and there are definitions of which kind of payments are transportable, so to speak, and which ones can be restricted. That is where our legal issue comes from. Therefore, rather than go into huge detail on that—
Lord Freud
Perhaps I can make sure that the noble Baroness is briefed on that outside the Committee. The question of which types of benefit are transportable around the EU and which you can justifiably keep is immensely complicated. I think that the definition is that a social support you can keep within an area but a pension tends to be transportable. However, I can arrange a detailed legal session for the noble Baroness if she would like that.
Perhaps I may turn to the figures that the noble Baroness, Lady Sherlock, was talking about. Some 290,000 people would be affected at some point up to 2030, which represents less than 4% of those reaching state pension age up to that point. The 30,000 figure is a snapshot in 2020 of the number of people projected to be receiving less at that point in time. That is the explanation of those two sets of figures.
One point concerning payments abroad is that it does not seem fair on our taxpayers and pensioners who have made contributions to the UK, or indeed even affordable, to spend money on those claiming overseas who have never set foot in the UK.
Simplicity is another virtue that the noble Baroness, Lady Sherlock, concentrated on. If people are to save for their retirement or make sound decisions on purchasing voluntary contributions, they need clarity of outcome. Extending the derived entitlement provisions would run counter to the goal of achieving simplicity of outcome for tens of millions of today’s working-age people. At the moment, we are in the position where we can tell people shortly after April 2016 what they have, in the words of my colleague Steve Webb, banked to date.
The key to being able to do that is to have a full rate of single tier that people work towards and a base entitlement on an individual’s own record. At the moment, we will crystallise people’s national insurance record as at 2016, recognising past contributions, and we will move on from there into the single-tier system. We can say, “You’ve got this to date. If you get this many more qualifying years, then you will get the full rate of single tier”.
However, let us imagine what would happen if we were to put in place provisions that allowed people to continue to draw a pension based on someone else’s record. We would have to tell people, “This is what you’ve got on your record but if you’re married or divorced, or if you get married or divorced between now and state pension age, or you get divorced or are widowed after state pension age, then your entitlement might be different. We can’t tell you what it might be because you would have to look to your partner’s, or even ex-partner’s, record”.
Baroness Hollis of Heigham
My Lords, I support the Government's position on this, as I think we all do, but what will be the position for the reduced married women’s election, where you are effectively introducing—I was going to say inventing—a 60% dependency pension for a whole new group of women which is rather larger in number than the group we are talking about?
Lord Freud
Because we can at that point tell those married women exactly what they will be getting. The difference here is that it is very hard to trace those people to tell them definitively what they will be getting. That takes us back to today’s problem, which is, when you phone up to ask what your pension is going to be in three years’ time, we can give a guesstimate at best. That will remain the case if it is open for lots of people.
Turning to the aim of providing a decent standard of living, we already have an underpin that guarantees pensioners living in Great Britain a minimum amount of weekly income. I confirm the point made by the noble Baroness, Lady Sherlock, that the very purpose of pension credit is to provide support to people in Great Britain who, for whatever reason, have not built up sufficient savings or pension entitlement through their life.
If the current system were to carry on, we project that by 2020, fewer than 10% of people reaching pension age after 2016 would be on the standard minimum guarantee. We have also looked at the group of people who would, under the current system, have been claiming a basic state pension on their spouse’s record—either at the point of reaching state pension age or later, on bereavement. Even if the current system carried on for ever, 40% of the people in that group would be on guarantee credit. That group of people—this 40% of all of our people losing out from the removal of derived entitlement—will get their loss in state pension replaced pound for pound with more guarantee credit. But there will be people not on guarantee credit who experience a loss. If we look at the average changes to household income as a result of removing derived entitlement, we see that the median loss for households affected is about £6 a week. The mean average is about £10 a week. There will undoubtedly be examples where people do lose larger amounts, but again, pension credit is there for them.
I hope that by now it is clear why we have not put in place transitional arrangements and why we have no intention to undertake a review to this effect. We have, however, put in place some protection, specifically to ensure that women who had paid the reduced rate election within 35 years of pension age will get roughly what they thought they would receive. Putting in place protection for these individuals is right: they have clearly participated in the labour market and have contributed. The difference between them and the wider group of people who would have relied on derived entitlement is that those people made an explicit deal with the state.
Furthermore, to address the point raised by the noble Baroness, Lady Hollis, those who have paid a reduced rate election are, crucially, easily identifiable. The message of simplicity for the wider single-tier population will not be affected, and the size of the group enables a bespoke calculation. Were we to apply such blanket protection to everyone, we would simply be awarding everyone with any history of work or credits a 60% basic state pension and, later, a full basic state pension; clearly the costs would become an issue and would not be tenable. We would ultimately be awarding people with just one qualifying year a full basic state pension.
On the point about the married women’s pension, if their entitlement under normal transitional rules would be higher, we will give them that instead, but we are not looking at their husband’s record for that; we will be assuming that they have a full record and award them a pension accordingly. Indeed, we project that, with the vast majority of couples involved, the husband will already have 35 qualifying years. It may be possible for people who are long-term sick but not claiming benefits to apply for credits for a past period. It is not essential for a person to be receiving a benefit to qualify for credits for periods of incapacity, but they would need to meet the entitlement criteria for incapacity for work or limited capability for work each day within the meaning of the legislation that applied at the relevant time. Provided that medical evidence for the whole period can be obtained, it may be possible to apply to a local Jobcentre Plus for credits for past periods. Clearly, I cannot comment on people’s success in that regard or otherwise, but I am glad to be able occasionally to provide some new information to the noble Baroness.
For the individual with 30 years who is looking for work, perhaps after looking after grandchildren, and is now worried, in the example that the noble Baroness, Lady Hollis, gave, we have credits for national insurance for exactly that type of situation.
Baroness Hollis of Heigham
I was talking about someone who had cared for her grandchild before the credits were introduced.
Lord Freud
Okay. On the specific case of someone who has 30 years and wants to get 35, that is part of the issue that we discussed at length at the last sitting. That individual should be able to benefit from the transitional arrangements. I draw your Lordships’ attention to the analysis in our recent ad hoc publication, which shows that the equivalent of the married person’s pension would be achievable even for the majority of those reaching state pension age in the initial period to 2020 through the purchase of voluntary contributions to cover years back to 2006, or by working or engaging in an activity that earned credits between 2016 and pension age.
I turn to the suggestion that we review the possibility of putting in place transitional arrangements. Such a review would be unnecessary and unhelpful. Noble Lords will agree that, in the interval between Royal Assent and implementation of the new scheme, communications will be crucial. A review at a time when we are preparing the implementation of the new state pension system would create great uncertainty just when we are being urged to ensure that we provide clarity. We had a discussion on that matter on Monday.
I make the general point that one problem here is that we are moving from the current system because it is too complicated for anyone to understand. The risk of some of these arrangements is that we just re-import all the complexity that we are trying to get rid of. That is a real and substantial risk, which we believe we must try to avoid.
In summary, we have had to make decisions about how we move over to the new system. In a system where changes to society and to the existing pensions system mean that a majority of women and men already receive a full state pension, these provisions, designed for the post-war era, are now an anachronism. I hope that I have set out the case that our approach in this respect has been as fair, simple and sustainable as possible. I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
Thank you. I would like to push the Minister on the comments made by my noble friend Lady Sherlock, who rightly warned against hindsight and applying modern attitudes to labour market decisions made some time back. That discussion will be repeated when we come on to widows in a moment. The Minister’s references to women being eligible in certain situations to claim pension credit precisely missed the point raised by my noble friend. If someone is in a couple with a husband who has acquired full contributory years, possibly with some minor additional savings, they will be floated off pension credit, so they will not be entitled to claim it, nor will she be entitled to claim it in lieu unless she is indeed solo.
I am grateful for the Minister’s help on “ordinarily resident”. I should like to see the legal advice, because I think it is arguable which side of the bridge it falls on. We have had plenty of debate on that in the past.
The Minister cited the four tests raised by my noble friend on Second Reading. I remind him of the tests in the impact analysis in October 2013: what are the policy objectives and intended effects? Four were offered. It stated that the intended effect of state pension reform was that,
“individuals have a better understanding of the state pension system,”
and how much they can expect to receive,
“and therefore engage more actively with planning for retirement”.
The people we are talking about understood the rules perfectly well. It is the Government who have changed the rules around them, not that they have failed to do anything that the Government think that they should have done at the time. We fail the first test in the impact assessment.
The second test is that the,
“inequalities of state pension outcomes within the current system are reduced”.
Some are reduced, but the Minister is substituting new ones, including those involving the green stamp and the women I am talking about. The third test is that,
“individuals have reduced interaction with means-tested benefits in retirement”.
That is highly doubtful, given discussion on previous amendments. The amount so far established is pretty trivial. The final test is that,
“the state pension system is more affordable and sustainable in the long-term”,
whereas the Minister has been arguing that it is cost-neutral. He failed to address the fact that there appears to be adequate money—£700 million—to introduce a marriage allowance while taking away support for marriage when it comes to pension arrangements. It is a modern world when it comes to pensions; it is what I do not doubt that the Minister would call a Beveridge world when it comes to married women’s tax allowances. I noticed that he did not venture a comment on or pray the modern world in aid against the Beveridge assumptions behind the married women’s tax allowances, as he would no doubt have described them if we had proposed them and he was criticising them.
The Minister says that the present arrangements are an anachronism. I am sure that it will be a great comfort to those women who are going to lose their 60% entitlement virtually overnight to be told that they are an anachronism and that it is their fault that they cannot shape up in the limited time available to change their situation.
Women have always had a lousy pension deal; it has never worked for them. By refusing to permit a transitional arrangement, we are colluding in that lousy deal by picking off an easy, voiceless, vulnerable group. I have to say that I am disappointed by the Minister’s response, but I beg leave to withdraw the amendment.
“( ) Regulations may provide for the transitional rate of the state pension for a person who is ordinarily resident in the United Kingdom and who reaches pensionable age before 6 April 2031 to be increased where the person would have received a higher pension under the previous system based on their deceased spouse or deceased civil partner’s contribution record.”
Baroness Hollis of Heigham
My Lords, I will be pretty brief.
Until the Bill comes into force, a married woman would qualify for 60% on her husband’s record on retirement. A widow would get his full record, which was usually the full 100%. That is a different issue because they claim entitlement to different sums. In future, under the new state pension, she is on her own. If she does not herself have the requisite number of NI years, she gets no derived pension either as wife or as widow; she will be reliant on means-tested pension credit. To change the system in that cliff-edge way is quite wrong.
We know that mortality and morbidity rise sharply with age. There is a threefold increase in deaths between 55 and 65. In that decade, twice as many men die as women. Usually, they will have died from lingering illnesses, such as cancer, heart disease, Parkinson’s or similar, unlike younger men who tend to die from external accidents and so forth. Their wives may for many years have been home, been around, reassuring them, helping and caring but not perhaps sufficiently to get a carer’s allowance, and carer’s credit has only recently been introduced and is not sufficiently known about or claimed. Then, after 2016, he dies. Her own pension record is considerably incomplete and she cannot substitute his contributions for her own.
Lord Freud
I am sorry, I was not referring to the Jack and Jill question; I was referring to the second example, where the noble Baroness asked me whether she had interpreted it correctly. I have the pleasure of telling her that, as always, she is absolutely correct, except of course where she disagrees with me.
I will not go into the arguments on simplicity and clarity or fairness, because the same arguments apply. In the light of my response, I hope that the noble Baroness will withdraw her amendment.
Baroness Hollis of Heigham
My Lords, my noble friend was referring to Jack and Jill. I assumed when I read this that HMRC, with perhaps unsuspected irony—perhaps the people who drafted this have young children—remembered that Jack fell down the hill and no doubt departed from this life, and Jill came tumbling after, thereby losing her 100% derived rights. I suspect that that is what HMRC may have intended, in which case it was all too accurate.
I simply think that what the Minister is doing is harsh, unnecessary and not costly to remedy. People made decisions and plans for their lives many years ago and he is now—this is the same point that my noble friend made about hindsight—projecting current takes on the labour market and women’s role in it back on to a previous generation who shared no such perceptions and perspectives. I think that in all decency we should give them a chance to remedy their situation through transitional arrangements.
We may revisit some of these issues when we come to bereavement payments, and I am sure that the noble Lord is looking forward to that. On that basis, I beg leave to withdraw the amendment.
“( ) Regulations shall provide for the transitional rate of the state pension for a person who is ordinarily resident in the United Kingdom and who reaches pensionable age before 6 April 2031 to be increased where the person would have received a higher pension under the previous system based on their former spouse or civil partner’s contribution record.”
Baroness Hollis of Heigham
This amendment is the last in the series and is, I hope, equally short.
Some dozen years ago, with the help of my noble friends Lady Dean and Lady Turner, we established pension-sharing on divorce. For many couples then, the man’s pension, especially his occupational pension—and it was usually his—was more valuable than the home, but it was not regarded as a matrimonial asset. Even now, not enough solicitors, in my view, seem to be fully aware of that, although couples will often trade: she the house, he the pension.
For less well-off couples, his additional state pension was a structured income that could be shared to help her too. Therefore, at the point of divorce—usually, perhaps, in the couple’s early 40s—she could substitute his NI record, so far accrued, which might be 20 or 25 years, for her own, and in addition they could have attributed to her half his additional pension. As I understand it, in the future she will be eligible to pension-share his SERPS or S2P—that is, his additional pension acquired up to that point—but not to substitute his basic NI contributions for her pension if hers are also more favourable. She is on her own.
Again, it is a matter of age. Younger divorced women, with or without children, will have enough time, through either NI contributions or child credits and, I hope, universal credit, to build their own pension. However, older divorced women in their 50s do not have that head space or do not always have that resilience; they may have been looking after his elderly parents for him or have helped him, as we learnt at the time, unpaid, to build his small, self-employed plumbing or taxi-driving business, keeping the books and booking the jobs. When looking at this in 1995, my friends and I found countless stories of this exploitation where she sinks her labour into his work, he builds up his pension—assuring her that it is for both of them—and then, at quite a late age, she gets dumped, as the phrase goes, for a younger model. I would be sorry to see history repeat itself. We can avoid that by permitting a transitional period of 15 years. I beg to move.
Baroness Turner of Camden
I support what my noble friend has just been saying; nobody likes being dumped. I do not know whether noble Lords have seen from the newspapers lately that there has been a rise in the number of older women divorcing. It is quite remarkable; people who are quite elderly and approaching pension age are getting divorced, whereas formerly they simply put up with it. It can be quite a problem.
Lord Freud
My Lords, I will avoid the issue of divorce rates because I am aware of the quagmire in which I will incredibly rapidly end up if I say anything at all.
The final amendment tabled by the noble Baroness on the issue of derived entitlement focuses on the impact upon divorcees and people whose civil partnerships have been dissolved. Under the current system, divorcees can—through a somewhat complex mechanism colloquially known as “substitution”—use their former spouse’s or civil partner’s contribution record to qualify for a full, or enhanced, basic state pension. With the ability to derive a pension ending for post-2016 pensioners, we accept that some divorcees may be affected, and they are likely to be those divorced relatively late in their working life. We estimate that these individuals could number about 70,000 up to 2031.
Turning to the specific situation of divorced women, it is likely that single individuals who themselves have not achieved a record sufficient to build up a full basic state pension will be eligible to claim guarantee credit, which is considerably higher than the maximum a divorcee could derive from a former spouse through the current, complex substitution arrangements.
These provisions are extremely complex and, as with the married woman’s and widow’s pensions, there is no longer any substantial need for these arrangements because the vast majority of women will receive a pension in their own right.
I repeat that in designing the transition to single tier, we have had to make decisions about the way that we spend the money we have available and about how to achieve the simplicity needed for people to make decisions about their retirement plans. A safety net will remain in place and absolute losses will, on average, be relatively small. I therefore urge the noble Baroness to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, the Minister is absolutely right to say that it is a problem for late divorcees, as it is for widows or for women who married in their 50s and expect but then have removed from them the married woman’s dependency pension. Those people do not have time to rebuild their lives. My calculation is that that involves perhaps fewer than 5,000 people a year.
What interests me is that, given that the impact analysis claims that the Bill is determined to reduce means-testing, I have checked back in my notes and in something like five out of the last six amendments to which he has spoken the Minister has referred to pension credit and top-up, thus re-importing back into the system pension credit means-testing for cohorts of people that he could perfectly well take out if he was willing to contemplate transitional arrangements. He is getting rid of complexity for him and giving it over to them, because they will be required to go through all the stumbling blocks of pension credit and a reluctance to claim a means-tested benefit, which we discussed at some length on Monday. His position is harsh and unfair on all three amendments, particularly when we take into account that the Government are willing to find money for the married women’s tax allowance—which he still has not addressed, after three amendments—but not on these amendments, when older women are losing rights around which they have built their lives. I beg leave to withdraw the amendment.
Lord Freud
JSA is, I think, already a class 3, is it not? I have a comprehensive list of national insurance credits. Rather than running through them all, perhaps I should just forward it to the noble Lord and the Committee to make the point.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 11 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Flight (Con)
My Lords, I have encountered more upset in relation to this aspect of the Bill than what I would hope was support for having a state pension above the level of income support. Quite simply, we are talking about individuals who have paid their national insurance, who are too old to benefit from the 2016 changes, whose pensions are less than that, and who feel somewhat aggrieved that many people who have not paid their national insurance will qualify for the increased pension after 2016 when they will not. I appreciate that it is all about money, but I wonder whether a full calculation has been done of the net real costs of putting everyone who is entitled to a pension on to the new arrangement in 2016; I suppose that is unless they have qualifications that exceed that. However, I can only think that there would be a significant net-off in terms of other welfare payments if people’s pensions were slightly larger. This is a fundamentally good piece of legislation on which there is relatively cross-party support. However, I slightly warn the Government that this issue—that those who are too old to benefit from the 2016 reforms will often be worse off than those young enough to benefit—is rather spoiling the welcome to these changes.
Baroness Hollis of Heigham (Lab)
My Lords, I would like to ask a simple question that relates to one of the hopes that some of us had a year or so back. The greatest proportion of those claiming pension credit tend to be elderly widows—when the husband died, the pension died with him—over the age of 80 or 85. I fully understand that to bring all pensions on to this would be a big-ticket item for any Government to contemplate; that is not in doubt, as the previous speaker mentioned. However, what if we were to introduce the pension not just for people reaching pension age in 2016 but for those over 85, and then for the next decade bring the 85s down by a year, with the 65s going up a year, as they will? They would meet in about a decade for men, perhaps slightly later for women. In about a decade or so, virtually all pensions would be covered on an incremental basis. I have not been able to cost that. I was told, teasingly by the Minister in the other place, that he thought it would probably cost half a billion pounds, but whether that was per year or in total was not made clear to me. Have there been any thoughts about how we might progressively increase the coverage?
Lord Stoneham of Droxford (LD)
I would like to make three points. I hope that there will be cross-party support but, if we are now saying that the higher pension should apply to everybody, clearly we need to know the cost. I have to ask the question: why did Labour not do this in its 13 years if it does not cost money? The point has to be made. Resentment could build up among those who see younger people coming forward on larger pensions. We know that there is a problem with women in the 1951 to 1953 age group. We have to understand exactly how much this is going to cost. The noble Baroness, Lady Hollis, is absolutely right: it is not necessary for this legislation, but in the future obviously we should look—as the country can afford it—at how we can phase in for various groups of pensioners the higher rate and get rid of means-testing for them. We need to know about the money but we also have to be realistic. You have to start somewhere on this higher-rate pension, and where the Government have tried in difficult circumstances to start is the best that can be done at the moment, I think. Obviously we should look at the future at some stage, once we are aware of the cost and how we can afford it.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, I thank the noble Baronesses, Lady Turner and Lady Greengross, for their amendments, which cut to the heart of the rationale for these reforms and provide an opportunity to discuss how this Government are committed to a decent and secure income for all pensioners.
Clause 1 is a landmark in the history of British state pensions. It creates a single state pension in place of the current two-tier system. It marks a return to the simplicity that Beveridge had in mind in 1942 and a withdrawal of the state from earnings-related pension provision. The fact is that we now need a new pension system to meet the needs of today’s working-age population. We estimate that 13 million people are not saving enough for retirement.
The single tier will provide a flat-rate pension above the level of the basic means test to most people in the future. This goes hand in hand with automatic enrolment and will help to give those saving today for their retirement far more clarity about what they can expect from the state. The reforms will also help to dispel any perception that people’s own savings could be offset by a corresponding loss of means-tested benefit.
The key point here is that the reforms are about restructuring spending to support saving. They are not about spending more or less on future pensioners, and they have been designed to stay within the amount that we were projected to have spent if we had rolled the current system forward. In designing the transition, we have been able to right some historic wrongs, as the Minister for Pensions has often said.
I turn to the question from the noble Baroness, Lady Turner, about what she calls the cliff-edge effect. Around three-quarters of pensioners retiring in the five first cohorts will see a change of less than £5 a week compared with if we rolled the current system forward.
Lord Freud
I think that in practice it will be a mean average. However, I will make that absolutely clear.
By withdrawing the facility to build a pension above the flat rate and modernising the system, removing elements such as savings credit and derived entitlement that no longer reflect the needs of the working-age population, we are able to fund the single-tier pension and improve the outcomes of groups such as the self-employed, carers and low earners, who have historically seen lower state pensions. It follows, therefore, that there are two means by which we could apply the new state pension to existing pensioners.
First, we could simply increase the pension of all existing pensioners to the full single-tier rate, if they are currently receiving less. In response to the question asked by my noble friend Lord Flight, we estimate that this would cost around £10 billion.
Baroness Hollis of Heigham
I think that by the time we have a rolling cohort, by definition that cannot be the case. I realise that we are pressing the Minister for information while he is on his feet. It would be very helpful if, perhaps towards the end, he could pick up points on which we have asked questions.
Lord Freud
I will confirm the precise parameters around that £10 billion figure to the Committee as soon as I have that information.
On the question raised by the noble Baroness, Lady Hollis, on rolling together from an 85 base, we do not have those particular costs, as she might imagine. However, we can look at the numbers, although it will be a very complex exercise, not least because some will have a current pension in excess of the £144 base we are using on an illustrative basis.
If we were to take those extra costs they would fall to today’s workers; the risk would be that that would undermine the trust between the generations, which is at the heart of our pay-as-you-go national insurance system.
The alternative would be to assess the single-tier entitlement of this group and pay this amount. If we did this, and fully brought forward the single-tier rules for existing pensioners, this would entail removing some pension already in payment, such as derived entitlement and the savings credit. I suspect that we would all agree that this would be totally unacceptable.
However, this Government are equally clear that it would be unacceptable for today's poorer pensioners to get left behind, and have taken many steps to ensure this is not the case. We have restored the earnings link to the basic state pension. The coalition’s introduction of triple-lock uprating on top means that the level of the basic state pension is now at its highest proportion of average earnings in more than 20 years.
To ensure that the poorest pensioners benefit from the triple lock, this year the pension credit standard minimum guarantee was increased by the same cash amount as the basic state pension, and that will happen next year. These measures have been particularly key in the unusually uncertain economic climate we have seen in recent years. In a time of austere spending decisions, we have protected key benefits for older people, including winter fuel payments.
The noble Baroness, Lady Greengross, is right to highlight the importance of effective monitoring of pensioner poverty and the effects of these reforms on retirement incomes; indeed, her sterling work as the co-chair of the All-Party Parliamentary Group for Ageing and Older People has continued to champion this cause. The latest figures, for 2011-12, show that the rate of relative poverty among pensioners is close to the lowest ever recorded. It is at 14%. I recall with slight irony that when we debated the Child Poverty Bill in 2009, the expression “eradication” was used about bringing the poverty figure for children down there to 10%. The DWP publishes annually the households below average income report, a national statistic which provides a full analysis of the levels of relative and absolute poverty for pensioners, and pensioner material deprivation. In addition, in order to look at the impact of the Government’s pension reforms as a whole, the Government published a framework for the analysis of future pension incomes in September 2013, which provides an overview of projected future retirement incomes.
I will pick up the question from my noble friend Lord Kirkwood, who asked for reassurance on the delivery plans for the single-tier state pension. As noble Lords are all aware, it will be introduced from 6 April 2016. The single-tier programme was set up in early 2012 to undertake early feasibility work and test deliverability of the policy as it was being developed. It is a DWP programme, with changes being delivered by the DWP and HMRC.
We are confident of delivering by April 2016 for several reasons. First, there is broad consensus on the main principles of the reform, which provides a helpful basis to plan for implementation. The main development of systems will commence once the Bill gets Royal Assent, at which point the key legislation will be settled. This will ease the challenge of developing systems while policy is likely to change.
Secondly, the key change needed to deliver single tier is to reform the way we calculate state pension, based on an individual’s national insurance contributions. We have long-standing experience of using national insurance contribution records held on HMRC systems to calculate pensions. Single tier is just a variant of that process. We will, however, aim to use this opportunity to make improvements to the way that we deliver our services.
Thirdly, both departments have the capacity to deliver the programme, have a good recent track record of making major changes to pensions calculations to tight timescales and have successfully delivered previous pension reform changes. The programme will use a process of phased development of systems and processes to minimise any risks to delivery of single tier. Both the DWP and HMRC will use existing staff who have expertise in dealing with NICs and pensions to deliver these reforms. HMRC also has experience of managing the end of contracting out for defined contribution schemes in 2012. This will stand it in good stead for introducing the changes for defined benefit schemes.
Finally, we will engage users and interested parties in a very practical way, helping us to test each stage of developments to make sure that they work to provide an accessible and easy-to-use service. The new systems will be tested in advance of April 2016, through the advance claims process. Additionally, we are building in contingency to ensure that the existing telephony channel can be used, just in case the digital solution does not work on day one.
A clear governance structure exists to manage the implementation. A DWP programme board, on which HMRC sits, is in place to oversee delivery of single-tier pension and delivery teams have been set up in both departments. Both departments believe that delivery of the single-tier reform is challenging but doable. The main change needed to deliver single tier is to reform the way we calculate state pension and that remains the focus of the programme. We do, however, need to take this opportunity to move to a more efficient and customer-focused business delivery that meets the government commitment to deliver more services digitally. To achieve this, the programme team is working closely with the Cabinet Office. The department is also building its capability in developing digital services through the appointment of a director-general with introduction of single tier as a digital service as his primary responsibility.
To conclude, I agree that reducing pensioner poverty is crucial. The steps already taken by this Government will help to do so and the measures in the Bill will provide for a more secure future for generations to come. I therefore ask the noble Baroness, Lady Turner, to withdraw her amendment.
Lord Freud
My Lords, I am happy so to confirm. As I say, for existing pensioners we have no plans to make any changes to the way that pension credit works. I have got a little bit more information. The cost of £10 billion is to get everyone on to single tier, and that is the cost to get all current pensioners to the illustrative £144 per week. I can confirm that cost is £10 billion per annum. This is a figure taken at 2016 and clearly that would reduce over time. The other issue that we discussed as we went through this was the 75% of people who see a change of less than £5 a week: this is not an average and most people will see only a small change compared to the current system.
Baroness Hollis of Heigham
I will first follow up on my noble friend’s point on savings credit. The Minister says that it will remain unchanged, but given that it is going to be CPI uprated, where the guaranteed pension credit is earnings related, at what point does the Minister expect savings credit to no longer exist because the guarantee has caught up with it? Therefore, although it is technically true that there will be no changes none the less it is surely also true that, X period of time on, given assumptions about inflation and so on, savings credit will in practice no longer exist.
Baroness Sherlock
I thank my noble friend. I think that when the Minister comes to read Hansard, he may notice that I asked him to confirm that its value would not change and I am sure that he meant to clarify the level rather than the value. One of the reasons is that, since they came to power, the Government have frozen the maximum level at which savings credit can be obtained. I wonder whether they intend to carry that on, in which case would we find that its value did, in fact, diminish.
Lord Flight
I am sorry to bother the Minister but is the £10 billion figure what I call gross or net? The key issue is that many older pensioners who would not otherwise qualify will qualify for various forms of income support in whatever is left of pension tax credits, and there really is a need to net all those projected costs off if they are not covered in the £10 billion to see what the actual net extra cost is. If, in that exercise, the Government discovered that the cost was much less than that, then I think this is something that could be thought about.
Baroness Hollis of Heigham
In particular, my Lords, given that the Government are proposing to remove AIPs for those over 75, there is therefore going to be an annual means-testing of pensioners who, if they were 10 or 12 years younger, would have that £144 as of right.
Lord Freud
My Lords, I shall respond where I can. I think that I shall have to write on the future of the savings credit as a result of an earnings increase of guaranteed credit, as it is quite complicated. At this stage, I shall also have to write to confirm exactly where we are on the question of whether the figure is gross or net. In practice, I think that I will end up writing quite often on these figures because they are quite complicated and one wants to double-check them carefully. Offering responses on the hoof may be a little dangerous and I shall be reduced to writing more often than would be the case with some of the other things that we discuss. With those issues raised and with a process to deal with them, I again ask the noble Baroness to withdraw her amendment.
“( ) Notwithstanding subsection (2), regulations may provide that any woman born between 6 April 1951 and 5 April 1953 and ordinarily resident in the United Kingdom shall be eligible to receive benefits under this Part.”
Baroness Hollis of Heigham
My Lords, to try to pre-empt any teasing I shall apologise for putting my notes on a stand, but the alternative is to have them in very large font.
I support the equalisation of the pension age, although I think it has been too compressed. However, one cohort of women feel that they have been unjustly treated. I want, in particular, to raise the issue of those women born between April 1951 and April 1953. Women older than them will have retired at a younger age and enjoy their pension for longer. Women younger than them will qualify for the new higher pension. They are caught in the middle. They have experienced up to three years’ delay in receiving their own BSP from the age of 60, only to find that men born in the same year as them will, unlike them, get the new state pension.
Men are sailing smoothly towards the new pension, and for them nothing has changed. Women have faced mounting instability as their pension age is deferred. They have waited longer but got nothing for it, and they cannot afford to defer which, if taken as a pension increment, might bring them to the new state pension level. This is essentially the problem of government introducing a new and very welcome state pension, while being still in the process of equalising the state pension age. I recognise the difficulties that inevitably come with that.
I suspect that the Minister will say that given that women are drawing the old pension for two extra years, and that given women’s greater longevity, they will on average—and I bet it will be another mean average, not a median—be better off than men. There will be a sort of bell curve; they will be better off at the beginning, then not better off, and if they live that long, there will be a crossover point where women who live longer—it could be at 81 or 82—finally draw ahead in this lottery.
Averages, as the Minister knows very well, are deceptive. A working-class woman is likely to live less long than most of your Lordships—male Lordships—in the House at the moment, and therefore those figures will not apply. We will return to that debate obviously at much greater length when debating life-expectancy increases. Therefore any particular women may well be worse off.
However, it was noticeable that the Minister in the other place, while using those arguments in the debate on this issue in the first amendment there, did not draw the Committee’s attention at any point to the pension credit rules. Those rules are very interesting, very relevant, and, I think pretty devastating of the Government’s case. Is it not funny that they were not mentioned?
At the moment, many poorer men who have dropped out of the labour market between 60 and 65 are able to draw full pension credit on equal terms, ages and rates with women who are getting the BSP plus pension credit. In the same way—and this is, of course, part of the European directive on equality—men could get a winter fuel payment or a bus pass at the same age as women, which was at women’s BSP age, from 60 on, not at their own retirement age. The same rule applies to pension credit.
Therefore, when women’s BSP age was 60, men could draw pension credit to top up their IS for five years before becoming eligible for their own BSP at 65. When women’s BSP age rose to 62, men could draw pension credit from 62 until their retirement age—there are no cliff edges for them. They are now effectively getting an income the same as the BSP and the same as women at age 63.
Currently 167,000 men between 60 and 65 draw pension credit. That tops up their income support of nearly £70 to the standard pension credit figure of nearly £140. It doubles it. Incidentally, a higher number of men between the ages of 60 and 65 draw pension credit than the number of men between 75 and 79. To put it another way, just under a fifth of all men who draw pension credit—although some, of course, may be in couples—draw it before their state pension age. That is great for them. However, unlike women, when they reach 65, after 5 April 2016, they move smoothly on to the new and more generous state pension. We did not hear a word of this down the other end but, in other words, men have had a double protection: pension credit on women’s terms, followed by the new state pension on men’s terms. Not only were they not disadvantaged by being male, they were actively protected and, to that degree, favoured.
Lord Freud
I will have to write with that estimate. There is every way of doing these estimates that one can imagine. That brings me to the amendment tabled by the noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, which is to review how many women in this cohort are projected to derive a pension based on their spouse’s record. We have published a paper on derived entitlement, which covers the projected outcomes for people as a result of removing these provisions. As one may expect, individuals reaching pension age in the few years before April 2016 will have similar national insurance records to those reaching pension age in the few years after April 2016. As such, we can assume that the proportion of women in the cohort under question retiring under the current system who benefit from derived entitlement is broadly similar to the proportion of women reaching pension age just after 2016 who may be disadvantaged.
Baroness Hollis of Heigham
Will the noble Lord write to us and spell that last comment out? If I understood it correctly, it was very revealing. He might like to repeat that last sentence for us and then perhaps enlarge on it in a subsequent letter.
Lord Freud
My Lords, it is now in Hansard. We will spend some time on derived entitlement in later clauses, rather than going through that issue now. We will, I know, spend an awful lot of time on derived entitlement thanks to a certain set of amendments from the noble Baroness, so I have no fear at all that I will not be utterly explicit on this matter before the end of this Committee.
At Second Reading, the noble Baroness, Lady Sherlock, recognised that a line had to be drawn somewhere, but she asked the House to think carefully about whether it is right that twins of different genders should find themselves in different positions. Equally, one could ask whether it would be fair for people who reach state pension age on the same day—for example, the 65 year-old man and the 61 year-old woman—to be in different positions. The noble Baroness, Lady Sherlock, is absolutely right that a line has to be drawn. We have been clear and consistent that only people reaching pension age after the new system is implemented may receive a single-tier pension.
The noble Baroness asked whether these women would lose out. It is not a question of this particular cohort losing out; they simply will not receive a single-tier pension, just like everyone else reaching pension age before 2016. The Government have not changed these women’s state pension age and so there has not been a change in the pension that these women were expecting. Regarding the leading question on discrimination raised by the noble Baroness, I can confirm that any difference in treatment is as a result of the legislation providing for the change in pension age, which is not in this Bill, and we are satisfied that there is no breach of Article 14 of the ECHR on grounds of sex. This is justifiable in helping to pursue legitimate aims and achieving them in a timely way to achieve an equality of state pension outcomes between men and women generally.
Lord Freud
That legal advice covers the full gamut of the legal position. On pension sharing, the average number of share orders is currently running to around 100 a year, so there is in practice a negligible impact on the gains and losses. We have written to all the cohorts affected by equalisation—
Baroness Hollis of Heigham
We will come on to pension sharing later in much greater detail, but I am sure that the Minister will want to confirm to my noble friend that, as I understand it, the number of inquiries is 20,000-odd, compared to the number of take-ups. Secondly, I presume that what he is talking about is pension sharing in future only of the additional state pension, whereas of course at the moment anyone divorced can also take on the existing NI record—the basic state pension—of their former spouse if it is more favourable than their own. There are two sets of preferences or advantages to divorcees in play and only the first of those will continue, while the second will go.
Lord Freud
I can confirm what the noble Baroness says: I am talking about the additional pension, not the state pension.
To summarise: the women in this group are getting the pension that they expected when they expected it. We have produced analysis on this group of women as well as on the impact of changes to derived entitlement. We need a clear start for the changes and, in line with the 2010 reforms, believe that that should be based on reaching state pension age. I urge the noble Baroness to withdraw her amendment.
Lord Freud
It will be easier if I push that analysis of the figures into the letter-writing process rather than trying to summarise it off the top of my head, because it is quite complicated.
Baroness Hollis of Heigham
The Minister has been generous in giving us access to his Box, but a lot of our queries and questions came up as we were writing our amendments, after we had talked to the Box. We therefore fully understand that the Minister is not able to give us some of the detail, which requires some fairly elaborate statistical cross-cutting behind the scenes.
Lord Freud
I thank the noble Baroness for that. I was going to suggest that we can come back to this. We have run some sessions with the team, who are doing a magnificent job. This is central stuff; all the things that we are covering today and on Wednesday are technical and difficult. One of the things that I could offer would be another session on this area between Committee and Report. I think that on Report we will want to boil down what the real issues are and what the real amendments should be, because otherwise we will spend a lot of time, sound and fury on issues that are not quite the point that anyone was trying to make.
Baroness Hollis of Heigham
I think that that is prudent. We are dealing with a lot of stats. Certainly, I read the evidence from people who were witnesses to the Committee in the other place, as well as some of the stuff that came out in the Minister’s interrogation and speeches in Committee. Some of the discrepancies between that and what I call the “Apple Green Paper”—as that White Paper is neither white nor green—are because they cut the stats in different ways, and it is very difficult, if you do not have research staff, to recalibrate them to address some of the questions. We are not in any sense trying to put the Minister on the spot; we just want to elucidate, as far as we can, the information, so that we have a shared common body of knowledge on which we can base our estimate and analysis of this Bill. As the noble Lord will agree, that is primarily the job of this House, above all others.
I thank the noble Lords, Lord Paddick and Lord Kirkwood, for commenting on this amendment. In response to the noble Lord, Lord Kirkwood, I took it for granted that there would be accrued rights. However, if there had not been, the courts would have rather a lot to say about that. In every pensions Bill we have ever done—the 2004 Act, and so on—that has been established. It is good that the calculations, certainly in the paper and all the rest of it, are so clear as to what people can expect. That is very welcome.
To the noble Lord, Lord Paddick, I say that the point that I was trying to make is not that all men were in the same position as all women between the ages of 60 and 65. However, essentially, of men who chose to take early retirement only about 2% or 3% chose to go on to JSA or incapacity benefit in that period. The others went on to IS and were topped up by PC. Those men who chose to take early retirement were effectively retiring at the same age as women. That may, to a degree, have been forced on them by unemployment, but they had a choice. They could have gone on to JSA but, perfectly sensibly, they chose not to do so. Instead they went into effectively a pension regime, originally from the age of 60, which was when the age for women was the same.
Of course, other men, who were in work, carried on building up their pension until age 65, primarily because those between 60 and 65 on PCs still carried on adding to their NI years, as I recall. However, those other men were able to build up their additional pension and thus protect it as they went through—essentially, SERPS. Women of that age would have had little, if any, entitlement to SERPS. They would have had entitlement—as will younger women—to S2P, primarily because of the extension of the credits that apply to them, particularly for childcare. Those were introduced quite late, so those women will not, for the most part, have had access to an additional state pension. Men who continue to work to 65, as most of them will—the noble Lord is right on that—will continue to build up that additional pension, which will be protected after they are 65.
The Government are taking a swings and roundabouts approach on this. I think that 167,000—originally 235,000 in 2009-10, and before that a higher figure—had the choice of the same pension as women, age for age. Women have had no such choice. That is why they face cliff edges in a way that men do not. The problem for us has been about cliff edges. The point that I was trying to push was that men did not face any cliff edges. Whatever their age when they retired after 60, they could have a smooth pension level that was the same as women, then they progressed quite nicely at 65; if that happens after 5 April 2016, they will move on to the new pension. Women have no such choice. If they tick their pension, the same as the men, at 63 the shutters come down and they can never move that next step on to the new state pension, which men could in their situation. Women have a cliff edge, while men have a nice smooth path down to paddling in the sea. That is what I was primarily concerned about.
The problem comes as we recognise that we should try to equalise the state pension age at the same time as the Government are introducing the new state pension. I recognise the difficulty. When I started work on this I took pretty much the Minister’s line—that this was on the one hand or on the other—but the more I worked on pension credit, the more I saw the number of people claiming it and how substantial their numbers were. Not 5,000 or 10,000 but a fifth of all men claiming pension credit claim it before they are 65. That means, in terms of savings and the rest of it, that many of them will have gone on to claim that after 65 under the old system. Given that substantial number, it is worth emphasising that women have had a double hit and men have had a smooth transition throughout. Whatever the Minister may argue—and I understand his stats—if you hold up the gender filter to this issue, you can see exactly, as my noble friend said in her speech, why women, rightly, feel hard done by. They are faced with a cliff edge and have no way of ameliorating it, unlike men have had over the past few years—in some cases the past five years—of their working-age lives.
However, we have gone as far as we can until we get further information from the Minister that may or may not help us to progress on this issue. With the consent of the Committee, I beg leave to withdraw the amendment.
Lord McKenzie of Luton (Lab)
My Lords, this is a gentle, probing amendment designed to give some respite to the Minister and to explore further the details of what is planned about the nature and extent of the communication strategy envisaged for the introduction of the single-tier state pension. The noble Lord, Lord Kirkwood, touched on this, as did the Minister in responding to the first group of amendments.
We have been provided with a certain amount of information in the various briefing packs and we have had the opportunity to peruse the overarching strategy for communicating the reforms, which has been made available in the Library. I take this opportunity to commend the Bill team. We do not want to heap too much praise on them, as this is just the start of our proceedings, but I think that we have had some genuinely good information packs, which have helped. The problem with good information packs, of course, is that they generate additional queries, so forgive me if I pursue some of them.
One objective of the strategy is, rightly, to inform people about the impact of the reforms on their individual circumstances and the actions that they may take to improve them. That aspect is of particular relevance to the amendment. It seems to me that the state pension statement is to be the key way in which this communication is delivered, so the Minister may wish to comment on the statutory underpinning of such statements, if it exists, and on whether this might be improved.
Although the amendment focuses on STP, it does not negate the need to communicate to those who retire before 6 April 2016, especially in relation to the extended arrangements for paying voluntary NICs and the new class 3A NICs to improve state second pensions. I ask the Minister specifically what is planned in this regard. I suppose, given our earlier debates, that the key communication issue for those who retire before 6 April 2016 is why they are in a separate category, although I do not want to revisit the debate that we have just had.
Issues relating to the new class 3A have obviously not yet been fully developed and those who might be eligible are a definable group of all those who reach state pension age before 2016. The group that are particularly in need of information are those who are entitled to a state pension at the transitional rate. If they are to be encouraged to make rational savings decisions, such information as their foundation amount, any protected payments, the rebate derived amount where appropriate or any derived and inherited entitlement is key. Individuals should be made aware of how the revaluation of the various components is to work and they will need to be alerted to their potentially not meeting the minimum qualifying period, having fewer than 35 qualifying years, as well as not being able to add further to their STP.
It is understood that this information is still to flow via state pension statements, but following implementation of the STP it is not planned to make it proactively available, either as soon as the NIC information is available up to 5 April 2016 or otherwise. A post-implementation statement will be provided on demand and digitally but not otherwise, as I understand it.
A number of questions therefore arise. Can the Minister clarify precisely what is to happen between Royal Assent and in advance of implementation so far as state pension statements are concerned? Will these be made available proactively or will individuals have to ask for them? It is understood why a digital service is to be developed for post-implementation—that is to be welcomed—but there will be some for whom the digital approach will be difficult. That is surely the experience of universal credit. What other support will be available to these people? There is clearly some merit in being able to take stock of one’s state pension provision as close to 6 April 2016 as possible, so can the Minister say how long it is expected to be before the 2015-16 national insurance data will generally be available at individual level? How long does it take for that to filter through to the records?
Given more complex situations, how quickly is it envisaged that individuals will be informed of all their pension components, including the rebate-derived amounts, after 6 April 2016? What, if any, capacity will there be in the system for individuals to query, challenge or even appeal the details that they receive? We are told that there is not the capacity in the system to provide full details to everyone proactively—like the noble Lord, Lord Kirkwood, I think that there is a measure of concern about that. Just what is the capacity to provide such details for those who would likely be entitled to a state pension at the transitional rate? We are told that, post-implementation, state pension statements are to be provided on demand. Those who are clued up and digitally savvy will cope, but what monitoring will be undertaken to see what is happening to those who are not? What particular communication strategies are to be focused on the self-employed, who will be brought more fully into the system than hitherto?
Although the components of the calculation will generally be more straightforward for those who grow up entirely in the new system, they will still need information so that they can be reassured on their likely level of state pension income and the desirability of saving. Of course, some may enter the new system part way through their working life because, for example, they had been working abroad or had just decided to join the labour market. What in terms of communications is planned for those in this position? I accept that much of this will be work in progress, but I do not want to miss the opportunity to get an update on the latest position before we leave Committee. I beg to move.
Baroness Hollis of Heigham
My Lords, I want to comment very briefly. I declare an interest, which I know is relevant to this amendment, as a board member of the Pensions Advisory Service. TPAS has recently completed a survey of just under 1,000 women on their pensions which makes the point absolutely for my noble friend’s request for an information and communication strategy to go out to prospective pensioners and pensioners. Of that 1,000 women, 36% did not know when their state pension would be paid; 74% did not know how much they would receive; 57% did not know whether there was a shortfall in their NI record; 25% do not know that the age is likely to change again; 54% have made no changes to their retirement plans; 27% wonder whether they will have to work longer; and 76% do not expect to be financially comfortable in retirement. I have before me a lot of quotes, some of which I may choose to use later on. Those figures suggest how wilfully uninformed far too many women are about what will happen to them over the next couple of years. That evidence from a TPAS sample substantiates my noble friend’s points.
Lord German (LD)
My Lords, I shall have to speak very quietly because I have lost my voice, so if anybody fails to hear to me, I will shout a bit louder after a few days. I just wanted to add to the important points made by the noble Lord. I can always remember receiving my state pension statement. It was a bit of a shock, because I always thought that I was so young that I would never receive one, but it did happen.
The most important aspect of this legislation is clarification of the words as they are written out, because this is a very complex set of arrangements and they need to have clarity of language. Those statements which I have seen are quite clear. I do not hold so negative a view as to how people will see the future world of their pensions. Just today, we have heard that we have now reached 2 million people enrolling in auto-enrolment for pensions—that is, 2 million more than there were 12 months or so ago who know about a pension because they have got into it. We have 3,500 employers. I welcome the British Heart Foundation, which has recently enrolled all its staff. So we know that people are becoming more involved and engaged with their pensions.
The second thing relates to something which happened to me last Friday. I was doing Lords outreach with two schools and the pension question came up. I do not know whether it had been planted by a teacher in advance but it came up. It is quite clear that when these matters are scrutinised, young people are beginning to realise that if we do not put those matters right they, too, will be having to pay more. I always save for my grandchildren, who are enthusiastic to hear that they will be paying to sustain me into older life—but, of course, I am not a recipient of the new single-tier pension. However, when we talk about this issue I wonder whether we should also try to include in it education from a younger age, so that when people receive any financial education within their school life, they can understand that pensions are not a matter for tomorrow or for when you are retiring; they are a matter for the day on which you start to pay and earn. This is a probing amendment but it is very important that, along with other measures which are going on, pensions are seen as an issue for all from now on and not one for when you are retired.
Lord Freud
My Lords, I thank the noble Lord, Lord McKenzie, and the noble Baroness, Lady Greengross, for this opportunity for the Government to set out our actions to support people in this area. I need to point out that when the noble Lord, Lord McKenzie, says that he is offering some relief, I am reminded of the song by Tom Lehrer about sliding down the razor blade of life, but there we are.
On the noble Lord’s first question about the new class 3A voluntary NICs, we will have a debate in the new year, and will work with stakeholders to get a clear and simple offer to pensioners, which will include how we publicise that new scheme, so that information will be available.
Including financial education in the school curriculum and increasing young people’s financial capability is an issue of importance to this Government and apposite to the point raised by my noble friend Lord German. In July 2013, the Department for Education published a national curriculum framework with increased focus on financial literacy in both the mathematics and citizenship curricula. This will be taught in schools from September 2014. In 2012, we established the Money Advice Service to help people manage their money more effectively and better understand financial products, including pensions. The Money Advice Service is one of our key partners in providing information to individuals who are being automatically enrolled into workplace pensions. The department has also played an active role in developing the Money Advice Service’s new financial capability strategy to help tackle the knowledge gaps which can inhibit individuals from saving in pensions.
We know that the delivery of information and government policy around financial capability has the potential to build trust and engagement in pension saving, and we are proud of our progress in this area. Our Automatic Enrolment and Pensions Language Guide, developed with partners in the pensions and financial services industry, promotes a consistent and simplified use of language in order to ensure that individuals seeking advice can better understand the information. In October this year the Government published updated regulations setting out the information that occupational and personal pension schemes are obliged to provide to their members, and the frequency with which this is to be done.
I turn specifically to the state pension reforms in the Bill. We are committed to taking action to help people to understand the reforms that we are making and what it will mean for them. As noble Lords know, the current state pension system is fiendishly complicated. In a 2012 survey, in response to a simple true/false question, only one-third of people agreed that it was true that the Government provided a second state pension related to previous earnings. The noble Baroness, Lady Hollis, noted its complexity and gave lots of saddening statistics. That is precisely why we are reforming the system to make it—in principle—comprehensive to as many people as possible. We are tackling this systemic problem by creating a simpler state pension so that everyone can know both what counts towards their state pension and how much they can expect to receive. However, we recognise that the benefits of this simpler system can be realised only if we communicate the changes effectively to the public.
I turn to the noble Lord‘s amendment about the timely provision of individualised state pension information. The Department for Work and Pensions currently offers a state pension statement service, which allows people to request an estimate of how much state pension they may get, based on their national insurance record to date. Last year, 2012-13, over 600 statements were provided.
Lord Freud
Six hundred thousand statements were provided. I assure the noble Lord that we intend to continue to provide people with an on-demand state pension statement service after the introduction of single tier in 2016. Our intention is that the service will be predominantly, though not exclusively, digital—
Lord Freud
The cost of providing it to absolutely everyone in the country would be large and, in capacity terms, would be too great to be able to cover everyone on that basis.
Lord Freud
One of the issues here is that we will need to talk, or write, to people who cannot get the information in the digital way that we are planning as our primary way of communicating. Clearly we will be in a position to do that but, until we have the service up and running, it is difficult to estimate what the underlying demand might be.
Baroness Hollis of Heigham
The more the Minister describes this, the unhappier I get. The people who most need the information are those who least know that they need to know it—they do not know what they do not know. For me, that was the clear result from the TPAS survey: they did not know that changes were happening and they did not know when they were going to retire or how much they were going to get, and they had not done anything about it because they did not know what to do. That is the first problem: that those who request it—the Minister’s 600,000 a year—are those who are probably more alert to pension issues and more capable of responding in that way.
The second point if we are going to do this digitally is that we are talking about a group, particularly women, who may very well not have access to any such digital back-up at all. My housing association is already seeing issues with this in spades regarding the universal credit. I am doubly worried if, first, we are only responsive to requests and, secondly, if we propose to do this digitally, those who most need help will not get it and they will be the ones who suffer an impaired pension, even though, had the Government acted differently, they might have had enough time to turn the situation around.
Lord Freud
Well, my Lords, I can just take you through our plans in this area so let me continue to do that. For those who cannot get digital information, we will ensure that they can still get the information they need. Our statements will give individuals their up-to-date state pension position, including their foundation amount, based on their national insurance record to that point. Where appropriate, the statement will tell them how many further national insurance qualifying years they need to reach the full amount of single-tier pension. As noble Lords will appreciate, it takes a few months at the end of every tax year to ensure full consolidation of national insurance records. However, as now, people will still be able to get a statement based on their contributions up to the previous tax year, and we will update our statements to reflect people’s full record for their pre-2016 years as soon as the relevant data are in place.
PAYE records are now mainly electronic but we are working on an assumption that records on account should be ready by October 2016 for the April introduction. As for the timetable for sending out statements, we can give people accurate information on their single-tier position when all their contribution and credits to that point are recorded on their national insurance record. From Royal Assent, we will include simple information about single tier, including the relevance of this estimate in terms of working out their single-tier foundation amount. From implementation in April 2016, our intention is to provide an on-demand, largely digital, statement service.
Regarding the noble Lord’s question on querying the details, in practice relatively few people currently actually do query. However, we want to ensure that the default position is as simple as possible and we will, as now, ensure that where it is required people can get a detailed breakdown of the calculation. For people who are unable to access digital media, we will ensure that they receive the support they require in a non-digital way and we will work that up. To revert to the point on the implied question of issuing everyone with a statement, the issuance of a large number of unprompted statements—potentially millions of statements—would be expensive in terms of IT costs, production costs, postage and staff. Our evaluation of previous unprompted statement exercises show that there has been little, if any, benefit, and solicited statements are a better way of getting information to people.
I turn now to the amendment of the noble Baroness, Lady Greengross. We know that the statement service alone will not be sufficient to inform and educate the public about the simplifications to the state pension system. We are developing a wide-ranging communications strategy, informed and supported by work across government to build financial capability. This will sit alongside the work I described earlier around improving the provision of information across the pensions industry.
To communicate on the single-tier reforms, with HMRC we are already carrying out research, testing language and building on the lessons learnt from automatic enrolment. We are in contact with front-line workers and consumer representative groups. Clearly, it will be important to have an effective mechanism in place for assessing the impact of our communications activity. This will form a key part of our communications strategy. We will publish a detailed update of our communications strategy in the new year, setting out how we will raise awareness and understanding. We will of course communicate that with noble Lords from the outset.
I hope that I have assured the noble Lord and the noble Baroness that the Government are fully committed to ensuring people will continue to have access to information on their state pension position to enable them to plan effectively for their retirement and, as previously stated, we will share our communications strategy with noble Lords.
Lord McKenzie of Luton
As ever, I am grateful to the Minister for his full reply. I think that I have ended up slightly more concerned than when I started on this amendment. I also thank all noble Lords who have participated in this debate. First, specifically the Minister referred to the opportunity to challenge a statement to see whether the information was right, which is not routinely done at the moment. I can understand that. Is there technically a right of appeal or does that arise only when the pension falls due for payment?
I do not think that we got an answer to the point made by my noble friend Lady Sherlock as regards at what point someone would receive a communication. I think the answer to that is that it would be only at the point at which they asked for it. I can see that an educational policy, financial literacy, and all those issues dealt with by the noble Baroness, Lady Greengross, and the noble Lord, Lord German, are important and may give an enhanced understanding for people. I am trying to understand what would happen if there is no proactive approach. You could end up with very few people asking for a statement, and the percentage of people in the new system getting an early statement seems to be low. I still do not think that we have the answer to the question about the capacity of the department to respond to queries if there are more than the current 600,000 requested statements. I would have thought that there is at least some prospect of a bit of a flood of inquiries at least at the start when people seek to understand the new position, particularly if the broader education approach is to help and encourage people to understand what their potential provision will be in due course and, therefore, what additional saving they might, if they are able, undertake.
I am grateful to my noble friend Lady Hollis, as ever, about some very helpful data which really underlines the importance of getting these communications right. The noble Lord, Lord German, made the point that this is not just for people who are retired or just about to retire. This is a broader issue about helping young people as well to understand the importance of saving. I had not heard the figure of the 2 million people who auto-enrolled. I am grateful for that. It is a huge achievement and it is great to have it announced while sitting next to my noble friend who was so instrumental in getting that under way.
Obviously, I will withdraw this probing amendment. I hope that the Minister may be able to fill in some of the gaps but I am still left very uncertain as to how most people will get that information expeditiously. I would have thought that most would want it.
Baroness Hollis of Heigham
Will the Minister think about the possibility of, say, when someone hits the age of 50, a pension statement or whatever being sent out? The whole push of the Government’s programme has been that people should have enough time to be able to make good any shortfall in their record.
They cannot do it six months before they are due to retire. If a statement was sent at 50 and then the usual one was sent a year before retirement when people may or may not be in a position to consider voluntary NICs or something like that, even that would be helpful if a statement cannot be sent out each and every year. I take the point about cost and effort but people need some snapshots so that they know what the position is as they go along at the ages of 50, 55, 60, 64 or whatever. Otherwise, we will find that a hell of a lot of people are going to remain on pension credit and two legacy systems will be running for 40 years.
Lord Freud
My Lords, I shall try to consolidate where we are here. We will provide full information on our communication strategy, and noble Lords will see that. We know that how and when you communicate is very important, and having a generalised communication strategy may not be most appropriate. As the noble Baroness said, there are particular points where we might want to get over particular bits of information, as is currently the case where people are informed about, for instance, the number of years of national insurance contributions that they have made when they reach a certain age. I would imagine that a sensible communication strategy, which we will show to noble Lords, will incorporate that kind of thing.
To pick up the point made by the noble Lord, Lord McKenzie, on appeals, people can appeal but not until state pension age, not least because, as the noble Lord will be fully aware, before then the pension is often a guesstimate. We are not able to tell people in advance what they are likely to get because the issue is so fiendishly complicated. The real question, which the noble Lord may ask, is whether, when the matter becomes dramatically simpler, we can provide that information, but then there will probably be no need for appeals.
The department tried automatic statements between 2003 and 2006, when more than 17 million were sent out. We stopped this activity after research showed us that it had a limited impact.
One issue on which we need to communicate is shortfalls and the opportunity to buy voluntary NICs. Rather than generalised information, some very targeted bits of information, particularly around that area, are far more likely to get people to respond and focus their attention on their interests.
Baroness Hollis of Heigham
Perhaps I may give the noble Lord another example, and this will apply to other amendments later on. You begin to get an increasing degree of ill health among some people at the age of 50. Women are now very often entitled to a carer’s credit, which, as the Minister will know, is much less heavy in its requirements than the carer’s allowance. However, the take-up is very low. Most people do not know about it at all and it is very hard to claim it retrospectively. Only when the Minister says to people at, say, the age of 50, “You’ve got this but the following credits may be available to you under certain circumstances”, will we know whether women, as they approach 63, 64 or 65, have built up an NI record on their own. The Government cannot be passive about this; they have to provide appropriate information to allow people to know both what they need and what they can do about it. It seems that the Minister is basically responding to those who already know that there is an issue and not to those who do not but should.
Lord Freud
My Lords, just to wrap up this position, I do not think that any noble Lord in this Room will be under any illusion that we are not utterly determined to drive forward a transformation in both working-age and pension-age systems. One of the guiding principles for both those is simplicity so that people can understand what they are entitled to and there is an automatic process where you do not have to do so much work. It is an example of the kind of chaos that we have at the moment that people do not understand what their entitlement is. I am equally conscious of the figures in universal credit, where you have a clean working-age benefit. Two-thirds of the uplift of more than £2 billion per year that we are able to put through to people is due to giving them benefits that they do not currently claim. I do not think that there is any difference. Clearly, simplification and transformation are right at the heart of the Government’s strategy.
“Calculation of state pension
Regulations may provide that the state pension shall not be less than the single rate of the standard minimum guarantee pension credit plus 2%.”
Baroness Hollis of Heigham
My Lords, I hope that Committee will forgive me if just for a second I revisit Amendment 3 and pension credit costs. I pressed the Minister, but he did not give me an answer—I would be very happy for him to write me—about the annual savings from each cohort of men falling out of pension credit and where those savings go to. That was not part of his reply and it would be good to know.
This amendment proposes a 2% head space between the new state pension and what someone would get on pension credit. Obviously, it is a probing amendment, a peg to explore what the future level of the state pension vis-à-vis pension credit will be, and to give us information about some of the winners and losers on the income analysis, on which I am sure that my noble friends will be pressing the Minister.
In particular, I want to focus on the issue of means-testing. As far as we know, eventually only something like 3% of the means-testing in the system will drop out as a result of the proposed changes. One of the great virtues of the new proposed pension was that by bringing together the BSB, S2P and pension credit, it was to leapfrog some means-testing. As my noble friend Lady Sherlock said, we had to use means-tested pension credit when we came into government because pensioner poverty for the bottom third was so acute and the number was so large that we could not financially manage a sufficient flat-rate rise for all. So we targeted our resources, and the policy worked. However, as my noble friend Lady Turner will remember, although we pushed the policy through, it was not without insistent, noisy and continuous haranguing from the late, splendid Barbara Castle, who used to sit right behind me, muttering very loudly to Muriel as I would reach some fancy point in policy, “What’s she trying to say now? What’s she trying to say now?”, to the great amusement and glee of those on the opposition Benches.
That policy removed hundreds of thousands of people from poverty, so pensioners are now less likely than any other group to come within that category of poverty. However, it came at a price. As we know, means-testing is disliked, especially by older people and, no, it is not the same as giving your income details to HMRC for tax purposes. It is highly expensive to administer and open to error—I will not say fraud—for this group.
Above all, as the Minister rightly and sympathetically identified in his previous answer to my noble friend Lord McKenzie, those entitled to pension credit, such as the self-employed unsure of their income or elderly widows whose husbands’ pensions have died with them and who have never handled the financial pension arrangements between them, do not always claim. Unlike lone parents, who are savvy and feisty about their benefits—well, usually—and have very high claim rates, pensioners do not. For example, fewer than half of those entitled to savings credit claim it. In the past, fewer than two-thirds of those entitled to council tax benefit claimed.
Endless studies were undertaken into why, and I congratulate the DWP on its fascinating in-house research published last year by Maplethorpe et al on whether we could get a significant increase in the take-up of pension credit if pensions were made to the department’s random sample of 2,000 entitled non-recipients automatically and a further 2,000 ENRs who were followed through by DWP visitors. That was an imaginative and welcome piece of research.
It is a pity that the results were, for everyone I think, really rather disappointing. The money was welcomed at the point but after the trial period of three months DWP had added only about 10% to the number claiming pension credit, which was useful but not a breakthrough, when pensioners were required to submit their own forms—in other words, take the initiative in a means-testing pension credit. As the research identifies, it is about stigma and difficulty with the forms, but also we have long found that if a pensioner had applied in the past for another means-tested benefit—HB, for example—and been refused, they thought they were ineligible for any other means-tested benefit so did not apply. If a friend or member of their family had been refused after applying, they assumed that the case applied to them too.
Many of them felt that the money they got at the end of a lengthy process was too little to be worth it. They may be right because although the savings credit mean figure is something like a loss of about £34 a week, the median is infinitely lower because it is skewed by a few very high numbers at the end. However, pensioners worried—this is partly the result of some of the problems with tax credits—that if they were wrongly paid they might face having to repay money that they subsequently could not afford. Nor are they clear about income and savings rules; some pensioners with £5,000 tucked away for funeral costs think that that disqualifies them. A few thought that as they could manage without pension credit, although they were entitled, it was morally wrong to claim it.
This research, which builds on two previous pieces of research that the DWP has done over the past 15 years on pension credit that I am aware of, suggested to me that means-tested benefits are almost inherently troubled by the failure of a substantial number of pensioners to claim, and that the new state pension is absolutely the right way to go for the future. It has to be on an automated basis. Whatever may happen to other means-tested benefits, we hope that at least pensioners’ basic income in the new state pension will be safely delivered and in full. However, means-testing will continue for the 25% of future pensioners who are not owner-occupiers but who are on housing benefit in the rented sector, or for those with incomplete NI records. The reduction in means-testing is mainly because the new pension incorporates the means-tested guaranteed credit while abolishing the means-tested savings credit. That is actually why the numbers fall.
However, if the new pension is to reduce means-testing, as we hope it will do—though at the moment the statistics do not suggest by as much as some of us had hoped—it must, to use the phrase, put clear blue water between it and the new pension. At the moment, the difference between what a pensioner would get under the three tiers of state pension, possibly some additional pension and pension credit under the new state pension, could be less than £1 a week, although the triple lock for the pension, unlike the earnings link for pension credit, should widen that gap over time if the triple lock remains. Age UK has provided figures showing that means-testing will have fallen by just 3% by 2014 from what it would have been as a result of this. However, as my amendment suggests, 2% would provide a rounder figure—a £3 gap, I guess.
I am hoping that the Minister will give us some guidance on the difference in income for each path that a person registering for the new pension will take, and the winners and losers as a result, so that we can work further on those stats before Report. The Select Committee recommended such a clear space, although it did not suggest a specific sum. The Government’s response was rather interesting. They agreed it was necessary to establish,
“a firm foundation for saving”,
but believed that it was not necessary to put that in the legislation. I do not think that is good enough. Put very crudely, there is not much point in having a massive and welcome reform of pensions structure if at the end of the day many future pensioners, mainly women, lose derived rights, and many other pensioners, mainly women, are no better off than they would have been on pension credit because the new state pension is financially not sufficiently distinctive. I beg to move.
Baroness Drake (Lab)
My Lords, I shall take advantage of the helpful peg of this amendment moved by my noble friend Lady Hollis. I completely accept that moving more rapidly to a flat-rate pension will bring losers and gainers. However, we need to have some confidence about the initial value of the single-tier pension and how its value will be maintained over time, in order to have confidence about the assessments of gainers and losers.
The figures and statistics that we have are based on the assumption of triple-lock uprating, which is far from assured over time. We know that the single-tier pension has to produce a series of outcomes: it has to be above the guarantee credit to address the disincentive to save; it has to be set at a level which reduces reliance on means-tested benefits; and it has to provide a firm foundation for private saving. However, whether it achieves those intentions depends in part on the starting value of the single tier and how its value moves over time. The White Paper therefore suggested that a single-tier pension should be worth £144 in 2012-13 earnings terms, but the extent to which the single-tier pension figure is to be set above the pension guarantee credit is very unclear.
At the time of the White Paper’s publication in January 2013, the illustrative £144 was only £1.30 higher than the guarantee credit—less than 1%—which was lower than the figure in the Green Paper, when the £140 illustrative figure was £7.40 above the guarantee credit, which is nearly 6% higher. In 2013-14 earnings terms, £144 would be worth £146.30—just 90p above the guaranteed credit of £145.40. We therefore have a lack of confidence about what the level of the single-tier pension will be at its introduction, what its uprating is likely to be over time and what its relationship with the guarantee credit is likely to be.
The rate of the new state pension will be set in regulations, and it is important to have some confidence about government thinking. The Delegated Powers and Regulatory Reform Committee commented that,
“we draw to the attention of the House that, for the first time, the rate of the state pension will be specified only in subordinate regulation”.
The Government’s impact assessment assumes uprating by the triple lock, but the assumptions about gainers and losers and pension adequacy could be significantly different if the triple lock were not applied. I also note that, when it comes to assessing gainers and losers, the notional figures include the previously contracted-out individuals. In one of the very helpful briefing sessions that we have been afforded, I asked whether we could see the notional figures for gainers and losers, excluding those contracted out at April 2016, in the hope that we could get a clearer picture of winners and losers. I was particularly interested in understanding more clearly who the winners and losers were from the base of the actual amounts that contracted-in individuals receive. I was interested to read a report this weekend, albeit in the Corporate Adviser. I quote from the article:
“The figures for mean gross state pensions, which give the clearest official picture of the level of combined basic and secondary pension of contracted in workers, have been omitted from the ONS’s 2013 Pension Trends paper”.
I understand that the reason for that is information provided by the DWP. For the sake of debate and for clarity, net state pension figures are only those payments paid directly by the state, whereas gross state pension figures are estimates of the total entitlement to additional state pension, which include those elements paid by private pension schemes that are contracted out.
Lord Freud
For the noble Baroness’s sake, I shall repeat what I just said. I will write to confirm that they are net, although I hardly need to do so. I will write to say what the position is with gross analysis at this particular moment. I do not know whether that is to say that they are available, not available or whatever. I will just write to let the noble Baroness know the position.
Baroness Hollis of Heigham
I am sure that the Minister will understand our need for clarity on some of these issues—whether it is net or gross; mean, median or average and so on—because they completely reshape the statistical base on which some of us are trying to base some of our contributions. The Minister is patient in taking our comments on this point, but we really need to know and we have not always had the statistics in ways that have allowed us to read across in a straightforward and simple form. This is not the fault of the Box; it is simply because that is the way in which, classically, statistics have been collected.
I am grateful to my noble friend Lady Drake, who emphasised both the need to deliver the Green Paper promises of a substantial headspace between the pension credit regime and the new state pension, and the way in which this is becoming narrowed. As my noble friend Lady Sherlock said, it is becoming very hard to calculate. I was checking back on what the Select Committee on Work and Pensions actually called for, and I really do not understand why the Minister cannot do this for us. The committee said in paragraph 34:
“There is no certainty about how long the triple lock will be in place and we believe that it is important that there is as much clear water as possible between the rate of the STP and that of Pension Credit. There appears to be scope for a bigger differential (either at the outset or over time) given the increased National Insurance revenue that the Government will derive from the ending of contracting-out and the overall long-term savings which will be made on”,
pension credit,
“expenditure as a result of the introduction of the STP. We therefore recommend”—
and I do not understand why the Minister cannot go along with this—
“that, when the Bill is before Parliament in the summer”—
that is, in the prior discussions at the other end—
“the Government publishes an analysis of (a) the cost of setting the STP rate at a range of higher levels; and (b) the level at which the STP could be funded if the additional NI revenue was used for this purpose”.
The Minister says that the whole of this project has to be cost-neutral. Yes, to an extent, but of course it is cost-neutral within a growing demographic population. When he talks about it being cost-neutral, I am never sure how much he is looking at the rise in life expectancy and so on and therefore at the number of claimants coming through, particularly for the post-war bulge. After all, the GDP figures show a drop for this group in going to pensions of something like 8.9%—I think I am right; I am doing this from memory—or about 8.23%. That is a significant drop in projected GDP going to a cohort that will actually have increased in number. When the Government say that this has to be cost-neutral, therefore, it seems to me that in practice, unless I have misunderstood the Minister, that could be achieved only by allowing the real value of the new state pension to fall simultaneously with the real value of pension credit. Perhaps he might like to write to us to confirm whether that is the case. However, as I have said, I do not understand why he cannot respond to what seems to be an entirely appropriate piece of analysis that was recommended by the Select Committee. Perhaps he could write to us and explain why it cannot be done.
Lord McKenzie of Luton
Before my noble friend sits down, does she agree that the drop in the share of GDP would have been even greater had the uprating been by way of earnings rather than by the triple lock? It is maintained even at that 0.6% drop because of the triple lock assumption, which is far from guaranteed, as I understand it.
Baroness Hollis of Heigham
My noble friend is exactly right and I thank him for that. Perhaps the Minister could write to us on why this is not possible. Why we cannot follow previous legislation in doing pension Bills, I do not understand.
Lord Freud
Maybe to save myself a bit of ink in letters, I should point out that we have done the range of start rates. In the White Paper, we showed it at the £144 point and the £145 point, and to increase the figure by £1 would cost £500 million by 2030.
Baroness Hollis of Heigham
On what price basis—is that in real terms, in today’s money? What are we talking about?
Lord Freud
Clearly, a quote done at that time would be using the money of the day. We would not be doing it in cash terms; we would be doing it in today’s money, or the money of that day. Yes, it was 2013-14 money.
On the question of neutrality, the reforms would cost no more than the current system overall and will not be more generous to future pensioners, so the additional national insurance revenue will not be recycled within the state pension system but will contribute to other reforms such as the cap on social care costs and the employment allowance, as announced in the Budget 2013.
Baroness Hollis of Heigham
My Lords, I have to say that I am not persuaded by those responses but at this point, I will withdraw the amendment.
Baroness Hollis of Heigham
My Lords, Amendment 7 is another probing amendment so that we understand the buyback rules. By virtue of the Bill raising the number of qualifying years from 30 to 35, there will be some people, mostly women, who will come to retirement age with an incomplete NI record. I should emphasise here that in terms of buyback I am not talking about class 3A—the new proposals for the additional pension. Some of those missing basic years may have occurred before 2016; some may occur afterwards. It is crucial that we help people to have a complete record, otherwise many will need topping up by pension credit.
Buyback, as members of the Committee will know, comes through making class 3 contributions—what we call voluntary NICs. They cost around £13 a week, which is about £700 for the purchase of one year, and add £3 to £4 to your pension, for life, so that you get a payback within three to four years. That is a return of more than 25% on your capital, so it is a very good deal if the arrangements stay the same. Obviously, the class 3A proposals are meant to be actuarially neutral, so I imagine that they will not be as attractive. You can buy those extra years in the year that you are missing a class 1 contribution—husbands have sometimes bought them for their stay-at-home wives and rich kids have sometimes had their parents buy them for them—or you can revisit the record of your NI contributions close to retirement and see how many more you need to get a full state pension. If you can afford to, you can then buy back contributions for the missing years.
In the past, you were allowed to buy back your missing years either as you went along, so that they were current, or to buy back the last six years, especially at retirement. If you had missed a year, say 15 years before, it meant that you could not retrospectively cover it by buyback. That was changed after 2006 so that you could buy back any six years. That was particularly useful to women who might have taken a year or three off, say 10 years before, when they accompanied their husband to his new job in a new city or because her working life had, for a couple of years, been interrupted by caring responsibilities for which she could not then have been credited.
The Government have said, as I understand it, that up until April 2023 you can buy back missing years to 2006, which is good news. I have some questions. First, will that happen if you have already retired? In other words, could someone retiring in 2021 decide to buy back additional missing years? Or must, as in the past, that purchase take place within a year of retirement? Secondly, are you limited in the number of years you can retrospectively purchase to, say, six years within those 16, or could you in theory purchase up to 16 years at or after retirement—for example, if you are lucky enough to have a legacy, or something?
Thirdly, are you still able to purchase up to six missing years in any years before 2006, or has that now been wiped out? That is key. Those were the years for which women particularly suffered before the credit system was made more generous. I think that I am right to say that women who gained NI credits for their children up to 16, which is now reduced to 12, should be okay, given buyback to 2006, but what of the situation of a woman carer not eligible for the carer’s allowance but who today would be eligible for carer’s credit, which did not exist before 2006? If she were caring for a couple of elderly relatives, between, say, 2000 and 2004, she might well have lost several years of NI credit. Can she buy those years back?
As I said, I am not referring to the new class 3A. I would be grateful if the Minister could clarify that and put the rules on record. I beg to move.
Lord Browne of Ladyton (Lab)
My Lords, I am grateful to my noble friend Lady Hollis for opening what appears, from the expressions of those in the Minister’s Box, to be an unexpected line of engagement in the complex issues with which we are dealing.
The issue of buying back national insurance contributions has been engaged with most recently, as the Minister will realise, in 2006, when the six-year buyback was relaxed in certain circumstances of some complexity. I am conscious that we are moving inexorably towards the clauses in the Bill which in the House of Commons were described as being the complex clauses, which deal with transition. Clauses 2 and 3 deal with entitlement to single-tier pension where the national insurance contributions are all close to 2016, because of the provision in Clause 4(1)(c), but this seems as good a place as any to deal with this issue, which may well have been properly engaged with under a later clause because it lies within the years that my noble friend is interested in—more in the transitional phase than the projected phase of post 2016.
It is none the less a valuable issue. It allows me to take advantage of a completely coincidental e-mail which I received at exactly 4 pm today. With the permission of the Committee, I will read this set of personal circumstances to the Committee. I think that it illustrates the real challenge that the limitations generate for real people. I cannot imagine that this woman who has written to me and, probably, to other Members of the Committee, is unique. I will protect her identity by anonymising her, but will read just a couple of paragraphs to the Committee, if I may.
Lord Freud
My Lords, I must have swallowed my “eight”. I apologise for my grammar. I add that there is no cliff edge with these reforms.
I welcome the opportunity to put on the record that single-tier pensioners will continue to be able to fill gaps in their national insurance record by buying back qualifying years of voluntary national insurance contributions. These will be taken into account regardless of when they are paid. If they correspond to a pre-2016 tax year, they will be included in the calculation of a person’s foundation amount. If they are paid in respect of a post-2016 year, they will count towards their total single-tier amount.
Given that we are in the process of reforming the state pension system, the Government have recently made changes to the arrangements for voluntary contributions to ensure that people can wait until they are able to request their foundation amount after implementation, before making decisions on buying additional years. We have adjusted the rules for people reaching state pension age under single tier to extend the time limits for paying voluntary contributions to 5 April 2023, for the tax years from 2006-07 to 2015-16. Usually, contributions are paid at a higher rate if more than two years have elapsed from the year in which they were due, but this rule will be suspended until 6 April 2019. This will mean that a person retiring after 2016 will have had a considerable amount of time, up to 17 years since the relevant gap occurred, in which to decide whether to pay voluntary contributions.
So people will be able to buy after the state pension age point. They can buy back as many as they need, right down to 2006, so if someone reaches their state pension age in, for instance, 2018, they can buy 12 years. I hope that I have addressed the noble Baroness’s points, and ask her to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, what the Minister has said is what I expected to be the case. However, he has failed to say whether the changes that we made in 2008 will be sustained—that is, whether, either before 2016 or after it, you can buy back years that were missed before 2006. I am perfectly well aware that you can go back to 2006 and carry on buying back to that date right up until April 2023, and I am pleased that the Minister was able to confirm that for us, but can you buy back years that were missed in, say, 2000 or 2003, up to 2006, which was sustained as a result of the 2008 Act? This all came into being in the first place because NIRS2 was flaky, and we turned mechanical failure into a moral virtue.
Lord Freud
No, let me provide clarity. The system does not let people buy back years before the 2006-07 point. We have relaxed the time limits because of the uncertainty around the new system. However, it is an insurance system, with the basic principle that you cannot insure after the event.
Lord Freud
Without indulging in too much nostalgia, particularly as I was not present in 2008—or was not present here—that relaxation was because of the change from 39 qualifying years to 30. That was specifically introduced to exclude the cliff edge, and the concession was only for people reaching their state pension age before 2008. As I said, I do not think that we need to get over-nostalgic. As they move through into the new single-tier system, both before and afterwards, people now have a broad ability to purchase extensive voluntary national insurance contributions, and of course we are adding to that capability with the new class 3A voluntary contributions. Therefore, there will now be a substantial opportunity for people to buy state pension.
Baroness Hollis of Heigham
My Lords, I am sorry but I really disagree with the Minister on this. My noble friend Lord Browne showed rather movingly how losing the 60% dependency pension along with a failure to claim credits and the limitations on buyback that will continue to happen interlock to ensure that a woman who has done “the right thing” by her family at every point that she has been asked to make a decision, putting her family interest ahead of her own, will end up with an inadequate, incomplete and pretty minimal basic state pension. That was why we fought quite hard in those years to enable people to buy back missing years. I can see no moral difference between a rich kid living in Antibes having the money paid for them by their father as they sail around the place and a woman who failed to complete a year’s contributions because she accompanied her husband when he moved jobs or because she was caring for somebody and was not eligible for carer’s credit and is not allowed to buy back. The time limit of six years or so is entirely arbitrary to suit the convenience of the DWP and to try to impose this measure on people’s very different and complicated lives.
I still think that our position was right and that the position taken by the department and the Minister is wrong. By 2030 or so this will not be an issue, but a lot of people are going to retire in 2016 and their missing years will not be from 2006 to 2016 but from 1995 or 2000. The Minister is now telling us that those people cannot buy back the missing years, even at an appropriate price, although it will be no problem for somebody 10 years down the road to buy back years from 15 years beforehand. That inconsistency, as well as a failure to recognise the problems that many women have had in the past—which have bedevilled pension issues—in building up a coherent NI record, will remain with us if the Minister is not able to move on this front.
Lord Freud
Perhaps I may respond to a clearly impassioned speech by pointing out that we have announced the introduction of the purchase of voluntary national insurance class 3A contributions, and that is there precisely for the reasons that concern the noble Baroness. There will now be an opportunity to buy voluntary NICs and we will give full details of that.
Baroness Hollis of Heigham
Forgive me, but class 3A is for the additional state pension and not for the BSP. It will also be actuarially neutral, which means that it is going to be infinitely more costly. Nor have we heard any details. Unless I am mistaken, I do not think that this addresses the fact that a diminishing cohort of women will have spotty NI records by virtue of putting their family first at key points in their lives, just as my noble friend so eloquently described to us. The Minister has made no provision for them at all.
Lord Freud
My Lords, I need to point out that we have a comprehensive means-tested system. People who have fallen through the net will be supported by that system. That is the way in which we have devised the support network for people who do not have a contributory record.
Baroness Hollis of Heigham
My Lords, I shall withdraw the amendment, but I would have thought that the Minister would do everything possible to reduce the number of people having to fall back on pension credit as a safety net as opposed to getting them into the new system provided they pay their way. They have taken on these family responsibilities and are willing to pay for it, and the Minister is saying no.
Lord Browne of Ladyton
My noble friend may wish to take this opportunity to have recorded the apparent inconsistency between the new policy, which allows class 3A national insurance contributions to be paid in an unlimited fashion—or if not entirely unlimited then in an extensive fashion—and the restriction of six years on class 3 national insurance contributions. She may wish to consider whether there is some indication of a relaxation of the clear policy until now of restriction in relation to national insurance contributions.
Baroness Hollis of Heigham
My noble friend is absolutely right, but we have probably pushed this matter as far as we can tonight. However, I am simply very unhappy about this. It is an unnecessary abatement of the possibility of allowing women who have done the right thing and put their family first at difficult points in their lives to make good their deficit in the NI record, whereas if she were wealthy, well informed, stayed at home and bought a year every year, she would be okay. That is not only a failure to recognise her family responsibility but a failure to recognise the position in which low-income women have always been placed in relation to pensions. We can do better than that. I hope that the Minister might want to see whether he can meet us on this in any way. I beg leave to withdraw the amendment.
Housing: Underoccupancy Charge
Baroness Hollis of Heigham Excerpts(10 years, 11 months ago)
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Baroness Hollis of Heigham
To ask Her Majesty’s Government how they will achieve the predicted savings from the underoccupancy charge if affected tenants move into the private rented sector.
Baroness Hollis of Heigham (Lab)
My Lords, in asking the Question standing in my name on the Order Paper, I declare an interest as chair of a housing association.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, moving into the private rented sector is one of a number of options available to people affected by the removal of the spare room subsidy. The published impact assessment considered tenant responses, including moves. Savings from the policy are expected to be around £500 million a year. There is currently no reason to amend this assessment. The independent evaluation that is currently under way will provide more detail of the individual behavioural responses that are being made.
Baroness Hollis of Heigham
My Lords, the Minister wants social tenants with a spare bedroom to free up their homes for the waiting list by moving to smaller flats, mostly in the private rented sector, where rents and therefore housing benefit will be £50 a week or more higher. If they move, the Minister will not make his savings. If they do not move and are fined, the Minister will not make his policy of helping those on the waiting list. The Minister can have his savings or he can have his policy, but he cannot have both. Which does he want?
Lord Freud
My Lords, you have to look at the whole transaction, a bit like a housing chain. If a single person moves into the private rented sector out of a large social sector home, clearly that frees up room for people to move into that home from the private rented sector. That is where either you get a much more efficient allocation or you get the savings.
Universal Credit
Baroness Hollis of Heigham Excerpts(10 years, 11 months ago)
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Lord Freud
My Lords, as the Secretary of State mentioned in the other House, one thing that influenced us a lot was what happened with tax credits, which was why we took the decision to move in early and do this reset. Tax credits were announced in 2001 and rolled out from 2003. In the first three years of operations, £6 billion was overpaid and 400,000 claimants received their payments late, a third of cases monitored by Citizens Advice had their payments reduced below the poverty line, and IT systems were deemed unstable and not fit for purpose by the PAC. We have not done that. We have moved in early and made sure that we go safely and securely, and that when we introduce a system it is one that will not let people down.
Baroness Hollis of Heigham (Lab)
My Lords, I hope very much that the Minister is right; we will be cheering him on if he is. Most of us, I am sure, support universal credit but the House has made its views clear on utility bills when they are entirely online and people cannot have a paper back-up. The more we learn about the potential instability of the IT system that will handle universal credit, the more I would urge the Minister to ensure that there is a paper system as back-up for those whose entire income may come, or not, depending on the stability of the IT system. If the Minister is wrong on this, they will go hungry. Can he ensure that we have a paper trail, at least while the system is bedding down?
Lord Freud
My Lords, we already have an electronic payments system, so nothing is different or will change in the actual payments system. I think that the noble Baroness was asking: is there a proper back-up to the IT information systems? Clearly, in any IT system—and in today’s legacy systems, which are kept on computers, albeit somewhat older ones—we need to record that information and make sure that we have back-ups in case of loss. We will maintain that principle.
Pensions Bill
Baroness Hollis of Heigham Excerpts(10 years, 11 months ago)
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Baroness Hollis of Heigham (Lab)
My Lords, I declare an interest as a board member of the Pensions Advisory Service. In that capacity perhaps, I suggest to the noble Lord, Lord Paddick, that he should consider buying some voluntary NICs to make good his shortfall and he will get a 25% return on his capital.
Private DC pensions are deeply problematic. Most people, especially poorer women, do not understand them. They do not trust them; they cannot afford them; they cannot access them; and they do not know what income they would get from them. Pensions for them are high risk. I think the Minister once said that the poor can better cope with risk as they have less to lose. In my view, the exact opposite is true: when you are a week’s wages away from going hungry, you cannot afford any risk at all.
For me, the great virtue of the new state pension, unlike private pensions, is that it removes risk. So my test of the Bill, not dissimilar to that of my noble friend Lady Sherlock, is: does it make pensions simpler, easier to understand and more transparent? Will it produce an adequate replacement income in retirement while being affordable both to individuals and society? Is the Bill fair, recognising women’s unpaid as well as conventionally paid work, and not leaving groups of women unfairly outside the system? Is it also fair in its assumptions about retirement age? Does it encourage savings where possible by removing means-testing, which inhibits them? My acronym is SAFER. The Bill must make pensions: simple; adequate and affordable; and fair; encouraging savings; and removing means-testing. Does it do so?
Is it simpler? Yes, although it is not yet simple. By bringing together the state retirement pension, S2P and pension credit into one single state pension, people can predict their state pension if they have full contributions. But they still have to work out whether their mix of contributions and credits will cover 35 years. Over time, it should do so given a full working age life, but it may not.
Is it adequate and affordable? Will the new state pension continue to address pensioner poverty? S2P, which redistributes to poorer earners, and pension credit, which especially helps older widowed women, were both in Bills that I took through this House. Together, they targeted pensioner poverty and succeeded. Since 1998, pensions have increased three times faster than wages. In 1997, pensioners were the poorest group of our society—the poorest of the poor. When we left, they were less likely to be poor than any other group in society.
But helping existing poor pensioners through means-testing has potentially the perverse effect of deterring future pensioners from saving. By building a stronger state platform, as the Bill does, we both target poverty and support saving. Is it adequate? A middle-aged couple, he on average earnings and she on a modest part-time job, might expect a replacement state pension in future of around 70%—adequate for them, yes. On top may come NEST, its value depending on their age, contributions and the markets.
Is it affordable for us? Given the raising of the state pension age, the capping of S2P and the overall £5.5 billion of NICs windfall from ending contracting out, which will go to HMRC, then, yes. Indeed, HMRC will make such a profit, no wonder we are bringing forward the new Bill by at least a year. In that case, some small fraction could be available for decent transitional arrangements.
Is the Bill fair? For me, that raises two questions. First, will all those who should do so get the new pension? No, it is not that fair. If I were the Minister I would want as inclusive a structure as possible. Those left out of the new single pension will continue to get pension credit, and the cost and confusion of running two systems for a further 40 years is clearly undesirable. Obviously, pension credit will remain as a residual safety net, but we want as few people as possible to fall into it. Who gets left out? Service wives do, possibly, depending on their age, and I will table an amendment on that. Women with several mini-jobs will also be left if they perhaps work 20 hours a week yet are not building their own state pension and are denied a future married women’s pension.
The problem in the past was the employers’ contribution and how we divvied it up. In 2007, the Government thought that there might be 15,000 affected women. We now think that it is almost three times that—40,000 women and 10,000 men—working above the lower earnings limit but still not coming within the NI system to give them a state pension. With real-time information—one of the bonuses of UC—and treated as self-employed as this Bill rightly does for all other self-employed people, we can and must bring those 50,000 people into the new pension.
Steve Webb said in the other place, in a slightly male way, that such women would not thank us for paying £2.70 a week NICs. How does he know? Has he asked them? He also believed that their situation was short-lived and that they should have enough contributing years. How does he know? Has he asked them? He said that they could pay voluntary NICs, but that costs five times as much and might not cover early missing years—that, we do know. I am not myself willing to see 50,000 or so excluded on the beliefs—not facts—offered by the DWP. Those 50,000 should be treated as self-employed unless they opt out. It would allow them to move seamlessly between mini-jobs and a longer-hours job, as we want them to do, as their caring responsibilities require.
The second question of fairness is around the state pension age. I am pretty fed up with people, usually in well paid, interesting, salubrious and physically undemanding jobs, pronouncing that as we are now living longer we must all work longer and what is more—the final insult—it is good for us. This House will know that we have three stages of older age. Most of us who reach 65 in good health can expect another decade of healthy retirement. From our mid-70s, we develop functional disability—mobility, sight, hearing and reach—which increasingly limits what we can do for the next decade. We need support. Then, in the last three to five years of life in our upper 80s, we need care. As the Government’s analysis in the ONS stats shows, between 2000-02 and 2008-10, male life expectancy rose by over two years. But—and this is key—only a third of that was healthy life expectancy. It was 0.7 of one year by the Government’s own stats. So we gain, as the noble Lord, Lord Paddick, said, three to four months every year, but only one month of that may be healthy.
Between 2007 and 2010, the most deprived fifth of the population had a healthy life expectancy of just 55 years—15 years less than the most affluent. The gender gap is narrowing, but the class gap is now widening. So those extra years that we are living are not, alas, years extending healthy retirement but additional years of increased disability and dependency, especially if you are poorer off. Every year that we raise the state pension age is deeply unfair on those who have had hard lives. They start work five years earlier than those who enjoy higher education, and they can expect 10 to 15 years less of overall life expectancy and of healthy life expectancy. By raising the state retirement age, we eat into and reduce their few healthy retirement years even further, all to subsidise the pensions of people such as me—the longer lived, healthier, better educated and better off, including those of us in your Lordships’ House. Our single-age retirement policy—one size fits all—is regressive and unfair. We do not need to shrug this off as Borisconi tough luck. We can do better than that, and I welcome the proposed independent review.
I proceed along with my SAFER acronym: simple, adequate, fair. Will the new state pension—E—encourage savings? Will it—R—reduce means-testing? Yes it should. It will do so by removing the perceived disincentive that having savings costs you benefit. Savings credit actually supported small savings, but under half of those entitled claimed. Its value is eroding and overall the doorstep line I always encountered when canvassing was, “I’m not any better off for saving”. There is one point here about AIPs—assessed income periods. We should not add to yet more means-testing for those on pension credit, which is what the Government propose, while stripping it out, rightly, for those on the new pension. I implore the Government to leave it alone.
The sums saved will be small—I calculate them to be £60 million a year net at best. The stress for older pensioners will rise. The implications for funding social care from equity release for the over-75s—over half of whom are owner-occupiers—on which the social care bill is premised will be catastrophic, overwhelming any savings that the Government may get. Do not go there. What you may save in pension credit, you will overwhelmingly lose in people not being able to co-fund social care. It is really not worth it.
Importantly, under the new state pension, auto-enrolment will be safe. Without the platform of a non-means-tested predictable pension we could, with some justice, be accused of mis-selling NEST. However, NEST was meant for women with low earnings. It originally kicked in at £5,700; from April it is £10,000. Every time you raise the tax threshold, another tranche—mainly women—drop out of auto-enrolment. There are 420,000 in 2013-14. Of course, consultation exercises show that employers like it. What is not to like? The last lift saved them £6.4 million. The losers—poor women—do not know and do not complain.
At the 2017 review we must reconsider NEST’s trigger, perhaps the PTT, and in the mean time strengthen opt-in arrangements. Some 1.1 million women have already lost the opportunity of auto-enrolment. Next spring, still more women will be excluded. Unless we intervene, NEST will lose the very group for whom it was designed.
I want also to register my disquiet at the proposed new bereavement benefit; the loss—proper stats, please—of the state pension lump sum; the interaction with other benefits, especially HB, after five years; the transitional arrangements for married women relying on the 60% pension; divorcees; and widows’ inherited rights. We can pursue all that in Committee.
Do I support this Bill? Yes. On the state pensions front, indeed I do. I even wrote a pamphlet calling for something similar before the last election, and was delighted to corral Steve Webb, then a Back-Bencher, into contributing to said pamphlet. All credit to him and the DWP team behind him for delivering the SAFER pension; I am really pleased. It will continue to reduce pensioner poverty; it will eradicate for very many the snakes and ladders of means-testing; it moves us closer to a decent state pension for all, but one rightly clothed in a contributory system. It will make it safe to save. Those are really valuable contributions. However, it can be improved. The Minister will be delighted to learn that there will be quite a few amendments in Committee. I look forward to them; I hope that he does, too.
Lord Freud
My Lords, I expected an interesting and valuable debate and I got one. I congratulate my noble friend Lord Balfe on his remarkable maiden speech, which I know we all enjoyed. I hope we provided him with adequate intellectual stimulation this evening of a kind he will remember. Whether we met the challenge set by the noble Baroness, Lady Sherlock, in making the topic interesting, at least we will, as my noble friend Lord Paddick pointed out, have all gained an extra hour in our lives during this debate.
I shall focus first on the transition which many noble Lords rightly focused on. There are some tough issues around it. People who have contributed to or been credited into the national insurance system have expectations, so we cannot switch to the new system overnight. I assure the noble Baroness, Lady Sherlock, that this is not a hard, fast transition. It is pretty difficult to design a transition that strikes the right balance and takes account of people’s expectations as far as possible while also ensuring that those who are part of the transition—in other words, those who will retire over the next 50 years—will see the benefits of the single-tier pension. I believe this Bill has been successful in this difficult endeavour, and for that reason I expect it to outlast by a considerable factor the 10 years predicted by the noble Baroness, Lady Donaghy.
The foundation amount allows people to see the value of their pre-2016 national insurance record in one figure, which gives simplicity to the single tier but also recognises past contributions. It is a smooth transition. For the vast majority of people reaching state pension age in the years after single-tier is introduced, their outcomes are similar to what they would have got under the old system. Nearly three-quarters of those reaching state pension age in the first five years will see a change in their state pension of less than £5 a week. Of those who see a larger change, five times as many gain as lose. Those who see this boost are likely to be those who have traditionally been badly served by the state pension system: women, carers and the self-employed.
While moving to a modern system based purely on individual entitlement, the transition provides, for example, for inheritance of additional state pension where one member of the couple is in the current system. There is also transitional protection for those who paid the married woman’s stamp. Difficult decisions and trade-offs have been necessary to redesign the state pension within its cost-neutral envelope, and inevitably this means that while some people get more than they would have done under the current system had it continued into the future, some people get less.
I shall move on to as many of the specific points as I can—there were a lot. The noble Baroness, Lady Donaghy, said I would delight the 1951 to 1953 generation of women by moving. I think I might delight them a little bit. Ninety per cent of these women will get more in state pension and other benefits over their lives by drawing their pension in the current system at their state pension age than they would if we gave them a state pension at 65 and single-tier pension. The women in this cohort will reach state pension age between two and four years before a man born on the same day, which means that they will get between £13,000 and £26,000 more state pension than a man of equivalent age. To correct the point made by the noble Baroness, Lady Dean, it is not a double whammy. They have not seen their state pension age rise, except for the equalisation under the 1995 Act. The only change this group has seen recently is in the triple lock.
The noble Baroness, Lady Sherlock, raised derived entitlement. We will clearly go into this in some detail, but we estimate that in 2020 fewer than 30,000 married and widowed women—less than 5% of single-tier pensioners—will be affected by loss of derived entitlement to a basic state pension based on their spouse’s national insurance record. I know this is an area we will debate in great detail.
Baroness Hollis of Heigham
This is an area of some concern to a lot of us. Will the Minister be kind enough to give us all the stats he has, including how many of those getting the married women’s 60% were born or live overseas, do not have UK residence and so on, which was the argument in the Commons? We are very short of detail on this.
Lord Freud
My Lords, as I hope everyone in the Chamber knows, I have arranged to run a series of briefings at the appropriate time—about a week ahead of every Committee session—particularly to try to go through this detail. It really is extraordinarily complex, to reuse a tired word. One needs to go through it with examples and graphs and so on, which is much better. We will get all the information that we can, but we will do it in that context and will then be able to look at it in Committee on the basis of that process.
The noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, asked what the start rate will be. We will need to decide that closer to implementation when the level of the pension credit standard minimum guarantee for 2016-17 is known. I am afraid that I cannot reveal all tonight.
The noble Baroness, Lady Dean, asked about cost-neutrality. The reforms are designed to be cost-neutral in terms of spending on persons. The spending on the single tier should be within 1% of projected spend on pensions until the late 2030s. In the longer term, after that, the single tier will slow the rate of increase in pension spending, helping to make it a sustainable system.
The noble Baroness, Lady Sherlock, raised the savings credit. One of the things that the single tier does is to clarify savings incentives, so that people will know what pension to expect from the state and be able to plan the additional provision that they want. The issue of passporting was raised by the noble Baroness and the noble Lord, Lord McKenzie. Clearly, passporting will be through the guarantee credit, not the savings credit, although in practice the numbers are not that different. On the difference between being on the single tier and being on a credit, and whether you get various passporting, that is always the case when you have a system of passporting. However, it is worth bearing in mind that when you look at the relative rates for members of a couple, the single-tier rate is much higher than the credit guarantee rate; the single tier comes out at £288 for a couple in 2012-13 prices, against £216.55 at 2012-13 prices. So there is a very big gap for couples on that passporting issue.
My noble friend Lord German asked me for the latest correspondence on bilateral agreements. I regret that I just do not have that information to hand right now. I will search the cellars of the DWP to see if I can do any better and write; it is probably very heavily buried there.
Several noble Lords—the noble Lord, Lord Whitty, my noble friend Lord German and the noble Baroness, Lady Donaghy—raised the abolition of the rebate and the costs that would go to the public sector employers. The noble Lord, Lord Whitty, asked whether we would talk to the LGA. The Chief Secretary to the Treasury has met with the LGA and I can confirm that Her Majesty’s Treasury is happy to meet with them.
We will spend a lot of time on multi-jobs in Committee. One point to make is that the effect of welfare reforms will naturally be to improve coverage. All adults on universal credit, many of whom will be the lower paid that the noble Baroness, Lady Hollis, is rightly concerned about, will get their pension correctly that way. In that way, the crediting system is extremely comprehensive. By the 2040s, more than 80% of people will receive the full single-tier amount based on the 35 qualifying years. Clearly, we will be reviewing the crediting arrangements in the light of reforms and will look at the position of these people as part of the review. The noble Baroness is as familiar as I am with the quite revolutionary opportunities which Governments can look at, now or in the future, around RTI when that is built in. I know that we will spend a lot of time on that.
A lot of noble Lords raised the age review and some of the relevant issues: the noble Baronesses, Lady Sherlock and Lady Hollis, and my noble friend Lord Paddick. Clearly, one point of having a review is that longevity on its own is not the only factor. That is exactly what is being realised here. We have debated that in the past, and I know that we will debate it further.
On equity release and the AIP change, income-related benefits take account of any income and capital generated by liquidating assets. However, equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital.
The right reverend Prelate the Bishop of Derby and the noble Baroness, Lady Sherlock, raised bereavement support. This is clearly driven substantially by the change in the welfare system when you have universal credit as a basic bedrock for people. Bereavement benefits were another way of producing that kind of income in an entirely different way. We are now targeting this support for the period of financial need, as we heard that it was required; we did a survey on that. One therefore needs to separate it from bereavement, and maybe the right reverend Prelate’s point about what we call it is relevant there. It is a financial support which is underpinned by the universal credit but, clearly, we do not offset it against universal credit which, if it went on for a long time, we would do. By not offsetting it, we are targeting help at those with the greatest need, whether they are a widow or parent or not. It is a very progressive structure in that way. It means that 62% of the very poorest are actually better off. We will go into this in great detail in Committee; I will not do so now. However, that is the structure and the thinking behind it.
The noble Baroness, Lady Sherlock, and my noble friend Lord German raised conditionality. The structure is that all recipients of bereavement benefits—not just partners, but also if you lose a child—have access to Jobcentre Plus, purely on a voluntary basis, for the first three months; no conditionality for the next three months; and at the end of the six months, advisers will use their discretion to ensure that individuals’ capability and requirements are taken into account.
We will have a major debate in Committee and, I suspect, beyond on the pot-follows-member approach versus the aggregator approach. At this stage I will make a few minor protests about why we have chosen the former rather than the latter. However, I will make an impassioned defence as we go through it in great detail. The pot-follows-member approach maximises the consolidation, is in the best interests of savers and will reduce by half the number of dormant pots by 2050. We estimate that an aggregator approach would achieve just half the cumulative administrative savings for the industry by 2050. We will spend more time on that.
The question from my noble friend Lord Brooke is a suitable last question: what more is there on which to legislate? We will probably have some open questions left after the Bill on how much people are saving. Quite a few noble Lords suggested that perhaps people are not saving quite enough for what they anticipate they will want to spend when they retire. There is also the nature of the savings vehicles—we talked about defined ambition. Those are the two big areas in pensions. I suspect that there are probably several more, but perhaps I would pick those two.
I close by thanking all noble Lords who contributed to the debate, which was informed, measured and interesting. As I said, we will hold a number of briefing sessions. I am keen that in this debate we deal with the real issues on an informed basis and do not waste time. That is what these sessions are for—so that we have full information. I will endeavour to make sure that noble Lords have all the information they need to make the contributions they want to make. In particular, I want to make sure that the noble Baroness, Lady Hollis, is able to table all the many amendments that we all look forward to.
The Bill does a remarkable job of creating a pension system fit for the 21st century—nine times as long as the noble Baroness, Lady Donaghy, thinks. It is a return to the simplicity of Beveridge’s model for the state pension, it strengthens the private pension system, and it will enable today’s and tomorrow’s working-age population to plan for and build towards a secure retirement income. I commend the Bill to the House and ask for it to be given a Second Reading.