Lord Bourne of Aberystwyth
Main Page: Lord Bourne of Aberystwyth (Conservative - Life peer)State Pension Regulations 2015
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Lord Bourne of Aberystwyth
That the Grand Committee do consider the State Pension Regulations 2015.
Relevant document: 16th Report from the Joint Committee on Statutory Instruments
Lord Bourne of Aberystwyth (Con)
My Lords, this is the first set of new state pension regulations to be made under the Pensions Act 2014; further secondary legislation will follow over the next 12 months in the run-up to the introduction of the new state pension in April of next year. These draft regulations are largely technical and in many respects replicate the regulations governing the current scheme, although the legal language has been updated where appropriate. However, I should flag up at the outset two provisions governing the new scheme that differ from the current scheme and will be important for people in their planning for retirement.
First, Regulation 10 sets the accrual rate for increments—also known as extra state pension, paid where a person defers claiming their state pension—at the equivalent of around 5.8% per annum. The Government announced their proposal for the deferral rate on 22 July last year. The rate, which is based on advice from the Government Actuary’s Department published at the same time, is slightly higher than the rate of 5.2% assumed in the original estimates.
The rationale for moving from the current accrual rate of 10.4% per annum—set around 20 years ago but not introduced until a decade later—is to ensure that people get an actuarially fair return but not a bonus if they delay claiming their state pension. This is necessary to ensure that the costs of the new scheme do not exceed those of the current scheme. However, there may be other advantages in deferring claiming, such as in relation to tax. Typically this will be where a person continues in work beyond pension age and is a higher rate taxpayer, which means that if they draw their state pension it would also be taxed at the higher rate or alternatively that the higher rate of pension might send them into the higher rate tax band. If, on retirement, they are no longer a higher rate taxpayer, their state pension—including the increments on it for having deferred claiming—would be taxed only at the standard rate. That may be one reason why people would wish to defer.
The second factor to draw noble Lords’ attention to is Regulation 13. This sets the minimum qualifying period for entitlement to the new state pension. As announced on 13 December 2013, the minimum number of qualifying years of paid or credited contributions required will be 10. This is the maximum permissible under the enabling powers in Sections 2 and 4 of the 2014 Act. Setting this minimum qualifying period at 10 years is intended to ensure that entitlement to the new state pension is restricted to those who have a strong connection with and have made a significant contribution to the United Kingdom.
This approach is consistent with that adopted in many other European and OECD countries. Indeed, we in the United Kingdom adopted such an approach to the current basic state pension until 2010. A person needed then to have qualified for at least a quarter of the full basic state pension for any state pension to be payable. This 25% de minimis condition was perceived as having a disproportionately adverse effect on women in the United Kingdom—particularly ethnic minority women—who faced barriers in working outside the home. While this was undoubtedly the case historically, by the time the condition was lifted in 2010, under the changes brought about in the Pensions Act 2007, relaxation of the contribution conditions and improvements in the crediting arrangements, particularly for time spent raising children, meant that very few women in the United Kingdom would have failed the condition even in 2010, had it been retained. In effect, the change addressed a historical problem which, in reality, did not largely apply to the cohorts affected by the change.
Although not explicit in the draft regulation, I should point out that under the European legislation governing the co-ordination of social security systems, insurance or in some instances residence in another EEA member state will count towards the 10-year minimum qualification period but not the entitlement. In other words, it would affect a person qualifying but not count towards the amount they were paid by the UK authorities. I will try to give an example later on that might make that clearer. The same would also apply where people have been insured in a country with which the UK has a bilateral agreement—such as the USA or Israel—that allows for co-ordination of the two countries’ schemes in this way. It is not in my speaking notes but I will try to explain that. If a person has five years’ qualification in the United Kingdom and five or more years’ qualification in Europe, that would enable them to qualify but the pension they would be paid would be based on only the five years they were in the United Kingdom. I hope that that is helpful.
Turning to the remainder of the provisions, Regulation 1 is technical but importantly specifies that the regulations come into force on 6 April 2016—of course, we know that that is the operative date—alongside the state pension provisions in Part 1 of the Pensions Act 2014. It also ensures that the regulations reflect the Act by restricting the new state pension to people who reach pensionable age on or after that date.
Regulations 2 and 3 deal with prisoners under the power at Section 19 of the 2014 Act. These provisions will, thankfully, have only limited application but it is worth noting that the number of older people serving prison sentences has been on the rise over the past decade. Since 2002, the number of prisoners aged 60 and over in England and Wales has increased from around 1,500 to close to 4,000.
In essence, Regulation 2 provides that a person is disqualified from receiving the state pension if they are in prison as a result of a criminal offence or are serving part or all of a prison sentence in hospital—typically a secure psychiatric hospital. The basic principle that a person should be barred from drawing their pension while in prison dates back over a century and is based on the premise that to pay the pension would constitute double provision by the state as the person’s “bed and board” is being provided and could therefore be construed as rewarding criminal activity.
The disqualification under the regulations also applies where a person is serving a prison sentence overseas but with the caveat that it does not apply if, in similar circumstances, the person would not have been imprisoned here in the United Kingdom.
The new regulation is more explicit than the current provisions in one respect in that it clarifies that a person continues to be barred from receipt of their pension if they are “unlawfully at large”—a splendidly Dickensian phrase. This is common sense. It would simply be absurd to put a pension into payment—in effect as a reward—if a person managed to escape from his prison or psychiatric unit where they were effectively a prisoner.
Regulation 3 covers the position of persons being held on remand in connection with a criminal charge. The principle here is relatively straightforward and has been applied for many years. Payment of the pension will be suspended while the person is being held on remand. If at the conclusion of court proceedings a prison sentence, including a suspended sentence, is imposed, payment of the pension is barred for the period during which the person was held on remand.
If a sentence of imprisonment is not imposed—typically where the person is found not guilty, but also if the court were to impose a fine—the suspension is lifted and arrears of pension paid for the period the person was held on remand. As I said, this is a common-sense approach because periods spent on remand prior to sentencing will normally count as time served when it comes to a person’s release from prison.
Regulations 4 to 11 deal with deferral of the state pension. In addition to Regulation 10, which I mentioned at the outset, these set out the detailed terms and conditions that underpin, first, inheritance of deferral benefits built up by a person who deferred their old state pension—that is, the state pension that is currently payable until 6 April next year—and, secondly, deferral of the new state pension.
Regulations 4 to 6 deal with the former—inheritance of old scheme deferral benefits—under the powers at Section 8 of the Pensions Act 2014. In the same way as the new state pension will not be inheritable, any increase from deferring the new state pension will not be inheritable either. However, deferral inheritance will continue to be available where the late spouse or civil partner had deferred an old state pension. The rationale for retaining inheritance rights here is that in these circumstances the availability of such rights may have been a key factor in a person’s original decision to defer their pension, particularly where their spouse or partner is, or was, significantly younger than them.
These provisions basically replicate the current provisions governing when and how a survivor can choose a lump sum payment instead of increments, and how and when such a choice can be changed. That is in respect of the old state pension. This will ensure parity of treatment of survivors of people who deferred under the old arrangements, regardless of whether the survivor is covered by the old or new schemes.
Regulations 7 to 9 are made under the power at Section 16 of the Act and cover arrangements for people who, having initially claimed their pension, subsequently decide to “suspend” their entitlement—and thus, in effect, revoke their claim—in order to build up an increase under the deferral arrangements. Although the language has been modernised—the current regulations predate the removal of the retirement condition in 1989 and so are still couched in terms of an “election to be treated as not having retired”—the requirements and restrictions imposed by these regulations mirror those applied under the current scheme. Basically they are that entitlement can be suspended only prospectively, but not more than 28 days in advance, and must be done in writing or by phone; and that the suspension is lifted from the point when a person makes a further claim to state pension, which may be backdated for up to 12 months.
Lord Bourne of Aberystwyth
I thank noble Lords who have participated in the debate on these regulations. I will try to cover the points raised; where I fail to do so, I certainly undertake to write to noble Lords. I turn first to the points made by the noble Lord, Lord German, on an issue that is, perhaps, somewhat tangential to the regulations themselves, but certainly an issue that I know the noble Lord feels strongly about, and is impacted by these regulations. Let me return to the basic point here, and answer some of the points raised by the noble Baroness, Lady Sherlock, as well.
The 10-year period signifies a close connection with the United Kingdom. I suppose there is nothing magic in a period: that is the period chosen, and, of course, we have to do this within the broad envelope of public spending. That is the basic rationale here. The question raised by the noble Lord, Lord German, concerned what happened to pensioners, or prospective pensioners in some cases, who were in countries such as South Africa, Canada, Australia and New Zealand, which did not have a bilateral arrangement with the United Kingdom and were clearly not in the EEA. It is fair to say that they are not able to build up the qualifying period in the same way as people within the United Kingdom and people in the EEA or countries with bilateral agreements with the United Kingdom, such as the USA and Israel, which I mentioned. That has been the position through successive Governments. This is nothing new in these regulations and nothing new with this Government: this has been built up over a period of time. This is not seen as a key priority at the moment, in relation to pensions reform. I do not know the number of people who will be affected or the breakdown of how many are in each country. I will write to both noble Lords with whatever statistics we have on this to elucidate that point. The fundamental point is, however, that 10 years has been picked as signifying a close connection with the UK. The EEA is in a particular position with regard to the co-ordination of pensions policy, so that is why that is affected.
In relation to the point raised by the noble Lord, Lord German, on guidance and communications, I will, again, seek to provide more information in writing. We have a communications campaign going on that will set out the broad principles: they are operational and will influence how the scheme operates. This was launched in November and aimed at broadening awareness and understanding of how the state pension is changing. This has been trialled: there are regional trials in the north-west and the north-east as a control to see how that is being perceived. There is also an online campaign with an offshoot of YouTube—PensionTube—for people to find out more information. We are seeking to communicate the changes being made to the system as things move forward.
Turning to the point made by the noble Baroness, Lady Sherlock, I can confirm that those unlawfully at large are not, so far as I am aware, getting food and lodging at the expense of the public purse. A different point applies there. That is the point in prison. If they escaped from prison, it would be a bit perverse to reward them for escaping from prison or a psychiatric unit by saying that they could have their pension. Presumably if we were in that position, we would know where they were and would recapture them, but that is the point.
The noble Baroness made a particular point about the lump sum or annuity where somebody has deferred and then seeks to crystallise the amount in a lump sum or annuity. The reason for dispensing with the lump sum payment arrangements was that the new deferral arrangements would help to flatten the expenditure profile and offset some of the costs of the early years over a period which, if there was an ability to take a lump sum, would expose us on the public spending front, as I understand it. The new state pension scheme—this may be hard to believe—is simpler, and the deferral arrangements reflect the change. Offering a choice of deferral payments has made the current system rather complex, and people are unsure what is best for them. That is basically the reason. The lump sum is seen as a somewhat inflexible savings vehicle. That is the reason that we have gone for the annuity option.
I will have to write to the noble Baroness on this point. I think I have seen this somewhere, but I had better be careful what I say. I think it is possible after 2016 to buy additional qualifying periods pre-2016. I am not sure whether that affects qualification or only the amount of the pension that could be drawn down. I think that is probably a point on which we need to get back to the noble Baroness. I will write on that point. I think at the very least I have seen something about it affecting the amount of the pension that you can draw down. You can certainly contribute post-2016. Whether you can use that for a qualifying year, I am not sure, but I will write to the noble Baroness on that point. There is a communications campaign.
The noble Baroness raised a number of points. The mini-jobs point was raised by the noble Baroness, Lady Hollis, in the Chamber. I am afraid I do not have the current state of play on that because it is somewhat wide of these regulations, but I will ensure that the noble Baroness gets a response on that point.
With regard to the fact that not everybody will be getting the full amount, the reason is that if those who have contracted out—and many have currently contracted out, although that ends in 2016—were to get the full amount, it would be double-counting. You would have the benefit of contracting out in the other pension and then you would get the full amount with the state pension. That would be unfair, so that is why. Nobody is worse off. There are provisions now to prevent that opting out counting. That is purely what this is. That number will decline over time because opting out is ending, but the figures that the noble Baroness cited are correct. Not all those getting the new pension will get the full amount because they are getting the benefit of the opt-out.
Baroness Sherlock
Did the Minister say that nobody would be worse off? Did he mean that?
Lord Bourne of Aberystwyth
I hope I did not, because I am not sure that is the case. If I did, I certainly correct that point. I am not sure that nobody will be worse off. I could not say that.
When that story broke, as it were, this was not new news; it was old news and the BBC and perhaps others—I should not single the BBC out—were being lazy in reporting. We are clearly correcting that via the media. I think it has been corrected. The reason for this is to ensure that there is no double-counting. As I cannot be certain, I would not go so far as to say that nobody is worse off, but I think it would be perceived as fair by most fair-minded people that if you have opted out of the state system and the state has, as it were, contributed to a different pension, you should not be able to count that again for the benefit of the state pension. I think it is fair to say that most people are better off, but I would not like to put a particular figure on the amount.
If I have missed anything, I will certainly pick it up in writing to noble Lords who have contributed to this debate. I thank them once again for their helpful contributions and commend these regulations to the Grand Committee.