Pensions Bill

Lord Browne of Ladyton Excerpts

Wednesday 8th January 2014 Grand Committee

[Lord Browne of Ladyton (Lab)]

My Lords, I apologise on behalf of my noble friend Lady Sherlock for her absence from today’s Committee. I should explain that she became quite ill over the Christmas holidays and spent part of them in hospital. She is now on the mend but, wisely but reluctantly, as I am sure those noble Lords who know her can imagine, she has accepted the advice of her medical adviser that it is not yet appropriate for her to come back to work. However, she is hopeful that she will be fit to recommence her duties in your Lordships’ House some time next week and hopes to be with us for the next scheduled Committee day. I know that noble Lords will want to extend their best wishes to her for a quick recovery.

I also pray the Committee’s indulgence to express my sadness at the news of the shocking and untimely death of my very good friend Paul Goggins. He was the best of the best. No words can express the sorrow that I feel. I shall miss him a lot, and I just want his family to know that my thoughts and prayers are with them at this very difficult time.

We are now on Clause 5, which, as my noble friend Lady Turner of Camden, explained, deals with the transitional rate of state pension. Once again, my noble friend has allowed the Committee an opportunity for some further clarification and explanation from the Minister. In the House of Commons, the Minister for Pensions, Steve Webb, dealt with this clause in two paragraphs. To be fair to him, it took slightly longer to explain Schedule 1 but most of that was probably, rightly, a paean of praise for the drafting and for parliamentary counsel. It appears that Schedule 1 is a unique piece of drafting and reads logically, simply and straightforwardly. If all legislation were as clear, it would be very helpful.

I hope the Minister will forgive us if we tarry a little in this important provision, given that we do not have a lot to go on from the debate this Bill has been subject to thus far. Clause 5 and Schedule 1 explain how the transitional rate is calculated. My understanding—and if it is not right I am sure the Minister will correct me—is that this rate applies to everyone who, under Clause 4(1)(c), has at least one pre-commencement qualifying year. A pre-commencement qualifying year is one year of national insurance contributions before 6 April 2016 and, for completeness, after 6 April 1978—although I suspect that is not of great relevance. Everyone who has such a pre-commencement qualifying year and who meets the minimum qualifying period will have the foundation amount, which is the higher of either the pre-commencement and post-commencement years added together or the amount already accrued under the old system, whichever is the larger. In short, such a person will get what they would get under the old rules or what they would get under the new rules, whichever is the greater. Thereafter we are working on a maximum of £144 and one thirty-fifth of £144 for each year until they reach the maximum. Over and above that, as my noble friend has pointed out, there comes a point, no matter what age you are, when you cannot accrue any more pension entitlement. It is capped. Indeed, there was some debate in the House of Commons as to whether the pursuit of the word “cap” was appropriate. Interestingly, “cap” is in the schedule itself. You cannot accrue any further pension under the current system. As with the present system, after 30 years you still have an obligation to pay national insurance but you will be contributing not to your pension but to the whole pot.

Beyond that, we knew—I think until the Prime Minister’s recent announcement on “The Andrew Marr Show” on 6 January—that none of this was guaranteed to be triple locked. I digress a little because I am not entirely sure exactly where we stand with the fact that the Prime Minister took the opportunity to make an announcement on “The Andrew Marr Show” on retaining the triple lock for the duration of the next Parliament. This will provide existing pensioners, I think, and those retiring soon after the implementation of this Bill, with some degree of comfort in the rather unstable financial world we are now living in and I venture to suggest that it was calculated to do so. It was calculated by the Prime Minister to generate that degree of relationship between him and those people.

The Opposition have supported the triple lock since it was proposed by the Government. Maybe the Minister can take this opportunity to tell us if this announcement constitutes a Conservative Party manifesto policy pledge or is it—as I think we could probably, in an inspired fashion, guess that the junior partner in this coalition is unlikely to take a different view—now government policy, issued on behalf of both coalition partners? I apologise if I have offended any noble Lords by my reference to “junior”. Perhaps I will just refer to them as “the other party in the coalition”.

Are pensions within the welfare cap now? People are asking whether the winter fuel allowance and other pensioner benefits will be protected. Is the Prime Minister planning to take from one part of a person’s pension pot and put it in another with no gain? Will the triple lock apply to existing pensions? Will it apply to pension savings credit? Is this within the welfare cap itself? Will the triple lock apply to S2P or are we retaining the uplift? There are lots of questions. I suspect the Minister, who carefully prepares for these things, anticipated a significant number of them.

I will resist the temptation to go back over all the ground of the debate on the triple lock which we could not have because there was apparently no guarantee for it. We now appear to have the best we can expect in terms of a guarantee, bearing in mind what the Prime Minister had to say. Maybe the Minister would be willing to engage with that. Perhaps he could also explain a little more than was in the two paragraphs of the Written Ministerial Statement yesterday about the money that has been captured from the reserve in order to build the IT for the accelerated implementation of these provisions. He may have something further to say that could be relevant to our discussions on this Bill, although this may not be the right time to do it.

To a limited degree, we know about the transitional rate of the state pension. This is an opportunity for the Minister to explain it with a degree of clarity that is always welcome in the official record of debates on Bills. I hope that the Minister will engage with the questions posed by my noble friend Lady Turner in relation to this, and I am sure we shall all be much the wiser if he does so.

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[Lord Whitty (Lab)]

My Lords, I fully support what my noble friend has just said and have some amendments in this group which point in the same direction. The issue is fairness in relation to expectations. Under this part of the schedule, if your entitlement under the prior system is greater than the reference point, it is index-linked on a different basis from that on which it would be if it falls below the reference point.

The Minister may regard that as part of the overall approach, but in terms of the expectations of the people concerned there is in essence the same point as was in my noble friend’s previous amendment: somebody who is retiring in 15 years’ time may be able to provide other means of savings to make up for the loss of expectation. However, if they are retiring fairly close to the due date of the single tier, then their expectations cannot be made up in that time. A significant degree of unfairness applies there. The same applies in relation to the subject matter of these amendments if you happen to be one side or another, under the old system, of the proposed reference figure of £144 or whatever it turns out to be. There is no particular reason why one group of workers—who have, by and large, not had the most favourable pension schemes but have saved into the state second pension—should be treated differentially in this way, compared with their expectation.

It is an issue of fairness. The triple lock seems to have all-round support except in these clauses. It seems that the Government, at a relatively small cost, could make the adjustment here and save quite a lot of aggro and, I suspect, a significant postbag for most Members of Parliament.

[Lord Browne of Ladyton]

My Lords, I have no idea how many persons Clause 6 is expected to relate to, but it seems to be a discrete and relatively small group of pensioners. As I understand it, it deals with those who, after the start date, leave a contracted-out pension scheme where, under the rules of the scheme, they are not entitled to a pension and their transitional rate will be calculated as if they have never been contracted out before, and thereafter by reference to Schedule 1 which will set out the rules whereby that transitional rate will be calculated.

Amendments 25 to 29, as my noble friends have explained, all have similar intentions behind them. They refer particularly to the revaluation of the foundation amount and the protected accrued state pension amount above the single-tier amount for people with pre-commencement qualifying years of practicable pensionable age. As my noble friends have explained, the amendments are designed to ensure that for the revaluation of the foundation amount and the amount in excess of the full single-tier state pension, the protected payment would be in line with average annual increases in earnings as opposed to annual increases in general price levels. I hope that I have understood the effect of these complicated amendments. Currently, the Bill specifies that the valuation of the foundation amount up to the full rate of the state pension is to be revalued by earnings and any excess over that rate is to be revalued in line with the annual increase in the general level of prices.

For all those reasons articulated by my noble friends, which it would be otiose to repeat, I look forward to the Minister’s assessment of my noble friend’s amendment. I ask him to address these additional questions when he responds to the amendment. How will the public be informed of these changes to their pension entitlement in order to ensure that they are able to make adequate preparation for a secure retirement? In the words of my noble friends Lady Turner and Lord Whitty, will they be able to calibrate their expectations? Do the Government plan to review these arrangements at some time in the future? My noble friend Lord Whitty asked a very pertinent question: what are the cost implications of these amendments? In my estimation, they appear to relate to a comparatively small number of people. If the Minister is not able to tell us, will he come back to my noble friend before Report so that that information can inform the debate, if it takes place then?

[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.

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[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.

[Lord Browne of Ladyton]

My Lords, I intend to make a very short contribution to this debate. As my noble friend Lady Hollis made clear in her introductory remarks, this is a simple amendment. If it can be simple and complex in its implications at the same time, then that is what it is. I have no intention of trying to replicate or supplement my noble friend’s understanding of the complexity of this issue, and the implications of the decisions that face people in these very difficult circumstances. My understanding of the element of the pension that can be split by the courts on divorce is as my noble friend Lord McKenzie explained it. We benefited from a briefing from the Minister’s supporting civil servants which, as always, we were grateful to receive; it was very clear and helpful.

We have heard from my noble friend Lady Hollis about some of the challenges and problems that face divorced women in particular, or women in the context of divorce, about the choices that they have to make. They may well spend some significant time thereafter before receiving pension payments, not knowing or losing track of the details of their pension-splitting arrangements. As a supplementary to the questions asked by my noble friend, and because I do not know the answer, can the Minister tell the Committee if there are arrangements in place by which the courts or the legal profession—the justice system—in some fashion notify the DWP of such arrangements? If they do, what are they? If people are not to be sent regular statements of pension credits or debits, how else would the Minister suggest that this information gap be addressed?

Before I sit down, I want to take the opportunity to provide the Minister with the chance to put on the official record information about a very discrete point relating to the devolution settlement, and the implications of these provisions about pension sharing on an area of devolved responsibility. In this Bill, necessarily, there are consequential amendments to the Family Law (Scotland) Act 1985. As most of us have come to know, the devolution settlement requires certain rules to be applied to circumstances where we in this Parliament legislate in areas which are otherwise devolved—and family law is devolved to the Scottish Parliament. I am satisfied—because I raised this matter with the Minister’s civil servants and received an e-mail explanation on 13 December—that this issue has been discussed with both the Scottish Parliament and the Scottish Government. I was told that the Scottish Government were content, within the scope of the devolution settlement; that the provisions in the Pensions Bill fall under a particular category in the devolved guidance that allows legislative provisions to be enacted here without the necessity for the normal processes. I think this is called a Sewel Motion in the Scottish Parliament. I am speaking long enough for the Minister to find some words that he can put into the official record. I am sure he will understand why it would help if there was some recognition of these discussions and the agreement of the Scottish Government to this Parliament legislating in these potentially contentious areas which would otherwise be devolved. I hope I have made myself clear that it would be helpful if that could be addressed in the response to this amendment.

[Lord Freud]

My Lords, by way of background, the additional state pension can be considered as an asset in a divorce settlement and the department is responsible for administering pension-sharing orders ordered by the courts. Basic state pension is not included as an asset to be shared, nor will the new single-tier pension be shareable. However, share orders in respect of additional state pension which are made before the single-tier pension is introduced will still stand and, from 2016, only the protected payment—the excess above the full single-tier pension—will be considered in any share order.

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Moved by

[Lord Browne of Ladyton]

31A: Clause 16, page 8, line 19, leave out subsection (4)

[Lord Browne of Ladyton]

My Lords, I speak to the amendment and to Amendment 31B which are in my name and that of my noble friend Lady Sherlock. These are simple probing amendments which need not detain the Committee for long. Clause 16(4) says:

“A person may not opt to suspend his or her entitlement to a state pension under this Part on more than one occasion”.

Clause 16(5) says:

“Regulations may specify other circumstances in which a person may not opt to suspend his or her entitlement to a state pension under this Part”.

My question is simple. Can the Minister please explain the need for these subsections and what circumstances they are intended to cover? I beg to move.

[Lord Freud]

My Lords, the simple answer is one word: simplicity. However, I will embellish a little. Clauses 16, 17 and 18 allow people to defer their single-tier pension at state pension age in order to build up an increase to their pension. These provisions broadly mirror the deferral arrangements in the current scheme.

Clause 16 specifically provides for the individual to suspend their single-tier pension only once after they have started to receive it, as is the case in the current state pension scheme. This will be particularly important for those who are not certain of their likely retirement income until they have reached state pension age but who could benefit from the ability to suspend their pension and build up weekly increments. At the moment, pensioners can only do this once under the current scheme. This enables people who want to return to work or increase their hours to manage their tax position more effectively. For example if they have the opportunity to work and no longer require their state pension to support themselves, they will be able to suspend their pension and therefore lower their taxable income for that period. They will then build up an increase to their single-tier pension which will be payable when they reclaim it.

The amendments would remove any restriction on the number of times a person may opt to give up their entitlement to a single-tier pension. It introduces new complexity for individuals planning for their retirement and administrative complexity for the department. Allowing people to de-retire later in life increases the risk that they will not live long enough to break even. It would only really make sense for people who would see a significant tax benefit from not claiming their state pension for certain periods of time. Having the option to suspend their state pension once strikes a balance between giving people the flexibility to return to work and manage their tax position after claiming their state pension and ensuring the system remains as simple as possible. I ask the noble Lord to withdraw the amendment.

[Lord Browne of Ladyton]

My Lords, I am grateful to the Minister for his response, to the extent to which he responded. I had hoped, however, that he would have gone further and, in particular, engaged with Clause 16(5), giving noble Lords some indication as to under what circumstances the Government expect that they would want to further curtail the option to suspend. Maybe the Minister has something of an answer to that coming to him at the moment.

I had hoped that the Minister would say that there is a very narrow set of circumstances to which the regulations that could be promulgated under Clause 16(5) would relate, and give some assurance that it was not the Government’s intention to use these powers extensively but in a narrow way, with reference to at least one set of circumstances for which they were planned.

[Lord Freud]

My Lords, the power provides the flexibility to respond quickly should the need arise to amend the scheme—for example, if there is a group of people to whom it would be inappropriate to offer the opportunity to improve their pension once it was been claimed. Under the current scheme, if the individual is not ordinarily resident in Great Britain or another EEA member state and has claimed their pension, they will not normally be able to suspend it in order to build up an increase. The inclusion of this power means that we can use secondary legislation to mirror the current position for the suspension of a single-tier pension. The amendment would mean that any modification of the option to elect to suspend a single-tier pension would require a degree of parliamentary scrutiny via the primary procedure that would be disproportionate to that change.

[Lord Browne of Ladyton]

I am grateful to the Minister for engaging with the challenge that I encouraged him to engage with. I am not entirely sure that it satisfies my curiosity over the need for this power, but this is an issue to which we can return later, perhaps in correspondence. In the mean time—

[Lord Freud]

My Lords, so that we do not waste a lot of extra time on this matter, this replicates the power that we have in the current scheme and does no more than that. There is no substantial change going on or any intentionality towards using it in a different way.

[Lord Browne of Ladyton]

I reassure the Minister that I do not see any malevolent intention masked by this power. It occurs to me that if there is no purpose in this element of the existing structure, there is no purpose in replicating the existing structure, but I do not intend to expand this debate into such philosophical discussions. At the moment, I am content that the issue has been raised and will consider the Minister’s response to it. If I am satisfied when I see it in writing, we will not return to this. If I am not, we may return to this issue. In the mean time, though, I am content to beg leave to withdraw the amendment.

Amendment 31A withdrawn.

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[Baroness Hollis of Heigham]

My Lords, I would just point out that the clock seems to have frozen on the display.

[Lord Browne of Ladyton]

Time has stood still.

[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.

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[Baroness Dean of Thornton-le-Fylde (Lab)]

My Lords, I, too, will not detain the Committee very long. When we go through a Bill, there is always something that comes up quite unexpectedly. My noble friend Lady Hollis has alighted on one here, which I do not think is going to go away. If we are not able to progress it at this level, perhaps we shall need to return to it later in the debate on the Bill.

I do not know where the Government have the mandate for this, but it is there now. They are understandably trying to look at pensions as a whole, and saving for retirement, hopefully through a personal pension scheme and through the state scheme. We would support that. However, it is taking a very different principle to the one that applies in private schemes. It will only apply, of course, where the individual says, “I am going to defer my pension”. It is not a case of saying, “I want to take some of my pension in a lump sum”. It is also taking choice away from people. You cannot say, on the one hand, that we want people to have choice, to save and to be in charge of their own income when they retire, and do everything you can to encourage them, but then, in this particular aspect, say, “No, we the state know better than you do”. Even if the Minister cannot do so today, I hope he will be able to reflect on this and give due consideration to making some movement in the Bill on it.

[Lord Browne of Ladyton]

My Lords, in speaking to these amendments, I seek to achieve a better and more precise understanding of the nature of the Government’s objections to the taking of lump sums. My noble friend Lady Hollis has done your Lordships’ Committee two favours. One is in raising this issue, which has captured the mood of the Committee quite clearly. The second is in rehearsing accurately the explanation by Steve Webb, the Pensions Minister, in the House of Commons, as to why there is opposition to the taking of lump sums. In my recollection, the arguments were as thin as my noble friend made clear.

My noble friends, and the right reverend Prelate the Bishop of Chester, have explained very clearly the case for allowing lump sums. Undoubtedly there is a savings crisis. Too many people do not have the safety net of a rainy day fund or, in some cases, of any fund at all. British households do not have enough money in savings, and the amount they do have has been falling in recent years. This is, perhaps, unsurprising given the cost of living crisis that we have been experiencing. The data on this are very persuasive. ONS data show that 6% of pensioners—over half a million people—live in households where the total financial wealth is less than £10,000. Half—more than 4.8 million—live in a household where it is less than £20,000. However, that is not the whole story. Given the distribution within those bands, there must be a significant number of retirees with little or no cash available in savings. Interestingly, the ninth annual Scottish Widows pensions report stated that, of those already retired, one-third are still paying off debts, including mortgages. The average amount owed is in excess of £5,500—£5,682 to be precise. It is not as if those people are in a position to add to their savings in retirement. In a survey in June 2013, the insurance giants LV reported that nearly 2 million pensioners have an average £8 per week of disposable income. By way of comparison, that is less than the average eight year-old has as pocket money, according to another survey.

The case made by my noble friends and the right reverend Prelate about why people might need access to a lump sum deserves an answer. The lump-sum payment option was introduced in April 2005. I think my noble friend Lady Hollis was the Minister who oversaw its introduction. The reasoning then was the same as the case she has made today. Even if pensioners go into retirement with a just adequate income, they may well not have enough savings to deal with the rainy day problems we all face. Never mind the challenge of the eventual cost of their own burial, what happens if the boiler fails in a bitterly cold winter? Or the car that they require in a rural environment breaks down and they are otherwise trapped in their home? We can all think of circumstances in which a bit of capital would be of help.

We know who chooses to defer their pensions. Drawing on the DWP’s own statistics, in March 2013, 1.2 million pensioners, or 9%, were receiving an income arising from a deferred pension, of whom 75% were women and 77% were living in the UK. We know that few of those who choose to defer take the lump-sum option; 63,000 payments were made in 2011-12, and the DWP forecasts that that will fall to 35,000 by 2017-18. In 2011-12, the average lump sum was £11,500, with the UK average being £13,700 and the overseas average £4,100. These are not significant sums, and the calculation could be done as to what this is likely to cost based on these statistics.

However, there are things that we do not know. First, we do not know why people choose to defer. Of those deferring, 75% are women, but the question is whether they are waiting until their partner retires to draw their pensions or there is some other motivation we do not know about. Are those who defer still working, deferring their retirement perhaps because they have saved too little and it is too early for them to retire? What do we know about the wealth of those who defer? Very little. The statistics already deployed show that 25% are overseas residents. Do we know why they make the choices that they do? We do not.

These Benches would like to understand the costs better. The DWP tells us that spending on lump sums currently costs about £800 million per annum and is due to fall to £700 million in real terms, although I am not sure by when. Obviously, these people have not been drawing their pensions for the period during which they deferred, so I presume that that is not a net cost—but maybe my presumption is wrong and it is. If it is not, what is the cost of the lump sum minus the pension forgone? What is the net cost of these deferrals in real terms? If there is a net cost, what rate would have to be offered to make the lump sum a cost-neutral choice?

Finally, I would like to understand why the Government want to end this. Is it the cost? Is it the administration? Is it the desire for simplicity? Are the Government sure that they know enough about the impact of this policy and the relatively small numbers who choose to defer? If not, has the Minister or his department considered further research on who is deferring? If it turns out primarily to be people with no or too little savings, what other option would he suggest for those who are retired and have no nest egg now, on what are likely to be low incomes with no means or opportunity to build up such a nest egg or capital?

[Lord Freud]

My Lords, as several noble Lords have said, the Bill does not provide an option for those deferring a single-tier pension to receive a lump-sum payment. Instead, the deferral arrangements will be simplified. Those who defer will receive a weekly increase in their state pension, enabling them to improve their pension income for retirement. Looking at some of the relevant figures, I can confirm the figure given by the noble Lord, Lord Browne, of 1.2 million people receiving an increment in March 2013, which was around 9% of the state pension case load. We had 63,000 lump sums taken in the latest year for which we have figures, 2011-12. In response to the query of the noble Baroness, Lady Hollis, two-thirds of those are women and one-third are men. However, under the new system, we expect that that is likely to change, and I will go into that in a little while. A primary objective for the reforms is to simplify the state pension and to provide a simpler foundation for private saving.

At this point, I was going to give the cost figures, which the noble Lord, Lord McKenzie, asked about. The savings from removing the lump sum in isolation from the change in the increment rate are around 85% of the overall deferral savings for 2030, which are outlined in the impact assessment. That figure will be between £250 million and £300 million in 2030.

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[Lord Freud]

I have to accept that the right reverend Prelate is on a very important and interesting point, on which one could write many a financial essay. I will go back and think about whether there is any generalised approach that we as a Government should take on this. I will resist any indulgence in doing so off the top of my head, though, because this is a huge and difficult issue.

[Lord Browne of Ladyton (Lab)]

My Lords, I am pleased and not surprised that a cup of tea with the Minister can last one a very long time. May I tempt him to look at the challenge that he has been posed from a slightly different perspective? It strikes me that a number of things may be possible. First, I tempt him to express a view on whether he thinks that it would be a good thing to encourage people in their retirement to have some capital, rather than encouraging individual people to defer a pension or whatever. As a point of principle, would it not be better for us if our retired population had access to some capital that would cover these rainy-day situations?

Secondly, is it possible to take advantage of the Bill, in the way in which the Minister has suggested pensioners can do, by deferring taking pensions for a year and then taking that as a lump sum or by some other simple method to create an opportunity for people to take a deferred pension lump sum to provide that capital? I am struck that it should not necessarily be the case that the only way of doing this is to import a very complicated existing procedure as a method of taking a lump sum, and then finding that that confounded the argument for simplicity. Is it not worth spending some time to see whether there is a simpler method of doing this, such as perhaps an extension of what the Minister has tempted us with today as a possibility?

[Lord Freud]

My Lords, if it is a nest egg that noble Lords are worrying about, then the arrears approach is not a huge distance away from what they might find quite attractive. The best thing that I can do is try to spell that out in a bit more detail in a rather considered letter to Members of the Committee, to see if it addresses their concerns. The counterpoint is that a lot of people take their nest egg and blow it on a car. Concern about the no-savings culture is the other side of the lump sum coin and those people will face later old age, if they live a long time, poorer than they otherwise would have been because it is a complicated decision. I will think a little bit harder about the arrears issue we have discussed because it might give noble Lords what they are after, possibly without needing to change very much, but I need to spell out how that might work. My team is looking ecstatic at that offer and will fully support any tea-time activities I might indulge in later.

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[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.

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[Lord Browne of Ladyton]

My Lords, we have the benefit of the Government’s estimate of the cost of uprating those pensions that are not presently uprated, which is in the region of £700 million, plus of course the possibility of significant backdating. Once payment began then the arguments for backdating would subsequently follow; I do not think that that would be unexpected. We on these Benches agree that at present this is not a priority for our country, and that the cost is important.

That leads me directly to the justification and the reason for Amendment 33B. We promote this review for many of the same reasons that the noble Lord, Lord German, promotes his questions on engagement—to help us to reach a definitive and informed judgment on the costs and benefits of uprating. We are not calling on the Government to uprate. If the analysis that we call for, which we understand is capable of being done on a cross-governmental basis, has been done in whole or in part, then we would welcome the information that is available because it would help our understanding of the necessary information and the calculation of the costs and benefits. By this method we seek to inform the debate, and that is the consistent approach of our amendments calling for a review in different parts of the Bill.

Importantly, this issue is not going to go away; I think that we all appreciate that. In fact, as my honourable friend Sheila Gilmore made clear in the House of Commons, it is impossible to be a Member of that House without being assailed by the impressive campaign consistently being run by those who feel aggrieved because they have not benefited from uprating over a lengthy period. Indeed, many noble Lords have also been assailed by these arguments in correspondence. I remember, at the time when I was in the House of Commons, receiving correspondence regularly and indeed, on occasions, people at my constituency advice surgeries who were home-visiting relatives coming to argue and make the points for uprating in a very forceful fashion.

Those who have campaigned for uprating for these frozen pensions have been encouraged in that campaign at various times by senior politicians. Mischievously, I cannot resist the temptation to remind noble Lords that in 2004, when the Pensions Bill was passing through Parliament, the now Pensions Minister Stephen Webb told campaigners:

“I agree that pensioners who earned their pensions by paying national insurance contributions have a strong case for the value of that pension being maintained in line with inflation, and I am actively seeking such a change. As you may be aware, there is currently a Pension Bill passing through Parliament. I will take this opportunity to table an amendment, seeking to uprate the ‘frozen pensions’ of expatriates”.

My researches have not gone to the extent of trying to find out whether or not he did in fact promote such an amendment, but he certainly indicated his intention to do so. He has clearly changed his mind, and I suspect that he may not be the last Back-Bencher to find his words in the surgery haunting him once he is in ministerial office. It was once famously said by someone that when the facts changed, he changed his mind. Here the facts have not changed—they have been consistently the same—but the mind has changed.

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[Lord McKenzie of Luton]

My Lords, this is a probing amendment to give us a chance to have a canter round the passporting issues. The impact assessment has a section on passported benefits. We had a brief excursion into these matters when we last met and have since had a helpful letter from the Minister. The impact assessment sets it out clearly:

“If pensioners are no longer eligible for Pension Credit as a result of the single-tier reforms then they could lose eligibility to some of these ‘passported benefits’”.

That is straightforward. It goes on to state:

“Receipt of Guarantee Credit passports pensioners to the full amount of Housing Benefit and Council Tax Benefit … There is little reduction in Guarantee Credit eligibility resulting from the single tier”.

Therefore, this has a limited impact on the proportion of pensioners who are eligible to be passported. Yet in his letter—and we understand the arithmetic—the Minister tells us that in 2020 there will be a fall of around 15% to 20% of the total eligible for guarantee credit in these cohorts.

Going back to the impact assessment, we are reminded that there are other benefits that are linked to receipt of guarantee credit such as health benefits and Social Fund payments, so that pensioners no longer entitled to guarantee credit as a result of the single-tier measures may also lose eligibility to these other benefits. But again we are told that,

“there is only a small impact of single tier on entitlement to Guarantee Credit”.

The cynic might conclude that, when dealing with passported benefits, the Government are seeking to play down the reduction in guarantee credit recipients but are otherwise seeking to reassure us that single tier will reduce means-testing. I accept the figures in the Minister’s letter that in the 2040s there will be some 50,000 fewer households on guarantee credit than would have been the case under the existing state pension arrangements. It is further accepted that fewer will be on guarantee credit because their income has risen. However, the working assumption is that STP will be set just marginally above the guarantee credit level, so for notionally swapping pension income for guarantee credit some 50,000 are notionally missing out on passporting. Is this correct? What are the estimated savings to government from this? There seems clearly to be no intent to compensate in any way. As our documentation makes clear, the main driver of reductions in pension credit is the demise of the savings credit. Chart 4.1 of the impact assessment shows—as a percentage of the population reaching state pension age after the introduction of single tier—the change in the composition of those eligible for pension credit, but I cannot readily locate the absolute numbers of households which lose savings credits and the notional average amounts. The chart is done in percentage terms. Can the Minister help us on this?

So far as the passporting of benefits is concerned, under current arrangements most depend on guarantee credit. However, receipt of the savings credit can unlock access to such benefits as cold weather payments, affordable warmth obligations of energy companies and, until abolition, working tax credit and child tax credit. How many pensioners will have no access to cold weather payments under STP who would have under the current arrangements? How much money are the Government saving by this, and are there plans to put in place any alternative arrangements? I beg to move.

[Lord Browne of Ladyton]

My Lords, in speaking to this amendment I shall speak also to Amendment 36A in the name of my noble friend Lady Sherlock and myself. Amendment 36A is a small probing amendment designed simply to draw out the Minister on the impact of the abolition of savings credit on mixed-age couples—that is, a couple where one member reaches the state pension age before 6 April 2016 and the other after. The relevant provision in the Bill is to be found in paragraph 85 of Schedule 12, and the mechanism is the insertion of Section 3ZA into the State Pension Credit Act 2002. Subsection (1) of this new section of that Act reads as follows:

“Regulations may provide that, in prescribed cases, a person who is a member of a mixed-age couple is not entitled to a savings credit”.

Subsection (2) reads:

“For example, the regulations could provide that a member of a mixed-age couple is not entitled to a savings credit unless … the person has been awarded a savings credit with effect from a day before 6 April 2016 and was entitled to a savings credit immediately before that date, and … the person remained entitled to state pension credit at all times since the beginning of 6 April 2016”.

For good reasons to do with the interpretation of statutory powers, it is unusual to legislate by example, and with this amendment I am seeking to draw out the Minister on why the Government have chosen to do so. The answer may be that there is some existing provision that has to be re-enacted. If that is the case, I would quite like the Minister to go further and explain why there is this particular example of circumstances where a mixed-age couple would not be entitled to savings credit. For the record, I think it would instruct and inform the public and the Committee if the Government explained whether it is their intention that these example circumstances will be the only circumstances in which a mixed-age couple are entitled to savings credit. How many couples do the Government expect will be affected by this very specific change?

On the broader issue of the loss of savings credit, will the Minister clarify precisely how many people are currently entitled to savings credit only? I cannot reconcile the figures from the different case load statistics that I have access to. Will he clarify how much the mean and median loss—the notional loss, if he prefers—will be? Will he engage with the question of whether or not this will create a cliff edge for those who just miss out on guarantee credit?

Turning to my noble friend’s amendment, what will happen to entitlement to those benefits that are passported off savings credit? According to the paper from his officials, these are assisted prison visits, affordable warmth, access to the Social Fund—presuming, of course, that there is anything left of it—working tax credit, child tax credit and the Sure Start maternity grant. Will these people still be entitled to those, based on the maximum income on which they could have been eligible for savings credit?

[Lord Freud]

My Lords, as you know, these amendments seek detailed arrangements of passporting to other benefits for single-tier recipients who would, under the current system, have been receiving a basic state pension with a modest private pension income above that level. They would also ensure that mixed-age couples, where one member has reached state pension age before 6 April 2016 and the other after, would retain access to the savings credit. As noble Lords will be aware, the savings credit, which is currently available to those aged 65 and over, will continue to be available to those who reach state pension age before 6 April 2016, and mixed-age couples who are already in receipt on that date will continue to receive it.

The guarantee credit will continue to be available for the poorest, regardless of when they reach state pension age, and receipt of the guarantee credit will, for example, continue to give access to the warm home discount scheme and to cold weather payments. Moreover, poorer pensioners, in the bottom income quintile, are among the principal beneficiaries of these reforms: more than half will be better off in the first 25 years, with a median gain of £8 a week in 2040 and £5 in 2020.

The full rate of the new single-tier pension will be set above the basic means test. Where both members of a couple receive the full single-tier pension, they will receive nearly a third more than the couple rate of the pension credit standard minimum guarantee, based on 2013 rates. This means state pension income alone will raise them above the standard income level at which pension credit runs out. Savings credit already rewards some couples for their state pension, which muddies the original intention. Mixed-age couples, where one is on a full basic state pension and the other a full single-tier pension, would also have income above the couple’s standard minimum guarantee.

A key principle of the reforms is to remove access to savings credit for single-tier households, which includes couples where one reaches state pension age before 6 April 2016. We need to balance the fairness between recipients and taxpayers in dealing with the conflict between the individual basis of the single-tier pension and the household basis of the savings credit. However, we will allow those mixed-age couples already in receipt of savings credit on 6 April to retain it, if they continue to meet the eligibility conditions.

Amendment 36A would retain means-testing for the mixed-age couple group and continue to reward some with savings credit for their state pension, but without any increase in savings incentives, which is why we oppose it. The cost of the amendment would be up to £20 million per year into the 2030s.

I shall pick up the issue of why we include the example. The power in the Bill will allow us to specify when the restrictions should and should not apply. The example in new Section 3ZA(2) captures one situation where we may wish to allow existing recipients to retain the entitlement, but we may identify more situations as we work through the detail of single tier. The numbers affected are likely to be small, with a maximum of 20,000 couples at any one time, and a total of 40,000 couples affected at some time over their retirement, which is only 5% of an estimated 800,000 mixed-age couples. Of those potentially affected, only around two-thirds would have claimed, because of the low take-up issue. Changes in circumstances during retirement mean that, on average, a mixed-aged couple would miss out for only seven years of their retirement.

The noble Lords, Lord McKenzie and Lord Browne, asked about numbers in receipt of savings credit. There are currently 540,000 receiving only savings credit. The average median loss of savings credit peaks at around £10 per week in 2020, but the net impact on household income is only expected to be £8 per week at that point.

[Lord Browne of Ladyton]

Before the Minister moves too far away from my specific question, which was exploring legislation by example, I should perhaps correct what I said. In explaining this, I remember suggesting that new Section 3ZA(2) was about the circumstances in which somebody would be “entitled” to savings credit. However, the wording is “not entitled to”. I wish to clarify that for the purposes of the record. I am really not clear why the Government choose to legislate by putting into primary legislation an example of the only set of circumstances that they have currently come across in which, specifically, a mixed-age couple would not be entitled to savings credit and then say they expect that there are other sets of circumstances out there but that they have not formulated them yet. Why put in any example at all? What is the purpose of it?

[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—

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[Lord Freud]

My Lords, this is a minor technical amendment. It is being made as a consequence of Part 2 of Schedule 12 which, among other things, amends and consolidates the provisions dealing with category B pensions, which will continue to be available to people reaching state pension age before the magic date of 6 April 2016. These provisions have recently been amended by the Marriage (Same Sex Couples) Act 2013 in order to extend category B pensions to same-sex spouses. This Bill already takes account of these recent amendments. They are consolidated in paragraphs 55-61 and 63 of Schedule 12. The amendments in the Marriage (Same Sex Couples) Act will therefore be redundant when Schedule 12 comes into force so this amendment simply removes them from that point. I beg to move.

[Lord Browne of Ladyton]

My Lords, I am grateful to the Minister for confirmation for the record that this is a genuine and consequential amendment and I accept that. I am encouraged to ask a question, which he may not be in a position to answer, and I would be happy if he could write to confirm what I suspect is a simple answer to this. As a consequence of drawing my attention to this area of the law, I am moved to ask whether the Minister can confirm if there is any difference in the transitional arrangements that will apply to members of a civil partnership or same-sex marriage who divorce if one of them has reached state pension age before 6 April 2016? I do not want to detain the Committee in the detail of that. If the answer is no that is the answer I am looking for.

[Lord Freud]

I am very pleased to give the answer the noble Lord is looking for. No.

[Lord Browne of Ladyton]

I am grateful to the Minister and am pleased to have that on record. I have nothing further to add.

Amendment 36 agreed.

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[Lord Browne of Ladyton]

My Lords, I shall speak to all the amendments in this group, particularly Amendments 38ZB, 40A and 68A, which are in the name of my noble friend Lady Sherlock and myself. In total, this is a comprehensive grouping of amendments that deals with what my honourable friend Gregg McClymont described in the Commons as,

“the more granular aspects of the ending of contracting out”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; col. 236.]

However, it is important to recognise that, although these amendments are almost comprehensive, there is one aspect of the ending of contracting out with which they do not directly engage: the abolition of contracting out itself. I feel motivated to say that with the honourable exceptions of my noble friends Lord Whitty and Lady Turner of Camden, there is broad agreement that the change to a single-tier pension and the aim of introducing simplicity into the state pension system require an end to contracting out, so we are dealing here with the consequences of contracting out, not the fact of its abolition. I will leave my noble friends to speak eloquently for themselves, and I have had private conversations with them to articulate their position on these issues.

When the Committee last met on this Bill, we debated in part the consequences of the ending of contracting out but only for public sector schemes. There were a lot of good questions for the Minister but, with respect to him, his response was essentially—this is not a direct quote—“How to deal with these consequences is a matter for future Chancellors”. The provisions that we are debating here and these amendments make it clear that that is not a luxury that employers with private sector defined benefit pension schemes have available to them.

As my noble friend, Lord Whitty, made clear in his contribution, and this has been his abiding concern regarding aspects of this Bill since his engagement with it, the ending of contracting out could have fatal consequences for occupational pension schemes. The Government’s response to that challenge is to give employers, through the vehicle of a statutory override, the powers to increase employee contributions and/or reduce accrual rates of defined benefit schemes in order to reflect the cost of the extra national insurance that the employer will now have to pay as a result of the end of contracting out. However, these powers are limited by the mechanism set out in Schedule 14, which precludes the use of them beyond the cost of the extra national insurance that the employer will have to pay.

Amendments 37 and 38, in the names of my noble friends Lord Whitty and Lady Turner, seek to delete that override power completely. While we on this Bench do not directly support these amendments, they raise a number of interesting questions. The Pensions Minister in the other place has said repeatedly, in public and in debate, that he is keen to help employers to maintain their defined benefit schemes.

I have some questions for the Minister today. Have the Government consulted employers to assess whether the changes may have the consequence that my noble friend Lord Whitty fears and lead them to close their defined benefit schemes or move employees on to career-average schemes, which are still good but not as good as defined benefit schemes? Should the costs of the additional amount of national insurance fall on to employees, my noble friends are fearful that employees will be unable to pay this from their salary and be forced to leave their schemes. Even a 1.4% additional contribution may be more than can be afforded by some workers living with static salaries and the rising cost of living. This is clearly not in their long-term interest, but if a large percentage of workers withdraw it will also threaten the viability of some pension schemes. As my noble friend Lady Drake has pointed out, 5% is a huge amount to find between employer and employee at a time when so many small businesses are seeking to get back on their feet. My noble friend reflects the views of trade unions, but have the Government discussed the changes with employees and employers, especially small businesses that will be affected by this?

However the changes are achieved—by consultation, as we advocate, or by imposition, as this Bill permits—employees will not be happy. They will struggle to understand the changes to single-tier pensions that are justified. I shall share an anecdote of my consistent experience as a Member of Parliament: I was regularly assailed on the main streets of Kilmarnock by pensioners who asked me why they had to pay tax on their pension. I became quite adept at replying. I will not bore the Committee with the explanation, which is simply that you make up the pot from untaxed income and the deal is that you pay the tax as you draw down. Try as I might, though, I do not think that I ever, even with charts, persuaded one pensioner that that was the case with regard to their pension. I spent from 1997 to 2010 as the MP for those people, and I would be surprised if I persuaded one person of the mechanism for their pension scheme and the operation in this fashion and how it was taxed, despite my very best endeavours to develop skills and take advice in order to do this.

Will employers end up saying, “We’re going to have pain over these changes whatever we do”—I am imagining the kinds of conversations that I have had with people—“so we might as well bite the bullet and close the final salary scheme.”? We know that the Government, particular the Pensions Minister, are keen to help employers retain the remaining defined benefit schemes. That is a justification for the override, as he said at col. 245 of the eighth sitting of the Committee in July 2013, but have the Government discussed with employers how many of them will use this as an opportunity to consider the closure of schemes? These are important questions that need to be tested. My noble friend Lord Whitty asks us all the time what the consequences will be.

This is a complex and expensive matter. Actuaries are costly, and scheme changes are extremely costly to achieve. The amendments tabled by my noble friends Lord Whitty and Lady Turner are helpful in raising questions that we should know the answers to, if they exist. If these measures will lead to employees being forced or inclined to leave schemes and schemes being forced to close, then we should debate that matter as I accept that it is not an intended consequence of the Government’s position.

The second issue engaged by these amendments reflects the fact that, apart from being subject to an actuarial check, this Bill gives the employer largely unfettered power. In particular, as we have heard, the employer does not need to reach agreement with, or even to consult, pension fund trustees or scheme members. As I understand it, existing employers’ rights under the Pensions Act 2005 are already quite significant. As my noble friend, Lady Drake, made very clear from her extensive experience of this, further extensions of that power should be done with great care, if at all. As she explained in convincing fashion, statutory overrides are very strong measures and should be used with care in all cases.

The opposition Benches do not believe that the override power, in this form, is needed or desirable. Amendment 38ZB, tabled in the name of my noble friend Lady Sherlock and myself, would require that changes to pension schemes could be made only with the consent of pension trustees. I accept that it is unlikely that the Government will accept that amendment, but my noble friend Lady Drake offers more of a compromise position that the Minister may find acceptable. In her Amendment 39, she proposes that an employer has the power to amend a pension scheme after consulting pension trustees, and her Amendment 50 states that regulations may require employers to reach agreement with trustees.

It is interesting that in the debate in the Commons, the Pensions Minister, Steve Webb, said—I am keeping this short but I promise the Committee that I have not changed the meaning of it; I have merely taken out extraneous words:

“To encourage … firms to be willing to carry on offering defined benefit pensions, which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching … agreement. That would be the norm. It would be quite proper … The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; cols. 244-45.]

If I understand this legislation correctly—and I have to admit that I cannot always guarantee that I do, given its complexity—without the statutory provisions for override in the Bill, that is what all employers would have to do. As is clear, many Members of the Committee, and all of us on these Benches, are at a loss to understand why that best practice, endorsed by the Minister himself, is not what the Government are legislating for.

Our amendments, including Front-Bench Amendment 38ZB, ask these questions: why are the powers set out in the Pensions Act 2004 not sufficient? Why is it necessary to legislate for an override in this fashion at all? Why is it necessary, as the Government are doing in Amendments 48 and 49, to give employers even more powers than in the original drafting of this Bill? What possible reason can the Government have for not reflecting their own Pensions Minister’s endorsement of best practice in their Bill? Where is the opposition coming from to consultation at least, if not to consultation and agreement, if not—as it clearly is not—from the Pensions Minister himself? I hasten to add that I reinforce that I am not reading the Pensions Minister’s words from the debate in a way that misrepresents his argument; I have taken out some extraneous words but that is all.

It is just good management practice, never mind in pensions, to consult staff. Consultation assists implementation and, consequently, staff buy-in to the need for changes. To seek the agreement of pension trustees to changes to schemes, as we propose under Amendment 38ZB, can only prove helpful to employers. As we have heard, trustees have fiduciary duties and responsibilities to act in the best interests of scheme members, so why should the Government not think it sensible, as well as best practice, to consult trustees and seek their approval?

I turn to the limitation on the power to override and the effect of the amendments in relation to this. There is a limitation on the exercise of this override power. As has been said, the employer’s override powers are limited to recouping the cost of the extra national insurance that the employer would have to pay as a result of the end of contracting out. Under the terms of Schedule 14, the exercise of this power must be certified by an actuary as doing no more than that.

My noble friend Lady Drake’s amendments, which I do not intend to engage with in any detail, given her eloquent and convincing arguments for them, are designed to put more definition in the extent of this power. In particular, her Amendments 37ZA, 45, 46 and 47 are designed to define more clearly the values that limit the exercise of the power and would clarify the power of override in a way that I am sure the Government would find helpful. They are within the spirit of the Government’s proposal and the Minister’s intentions, as explained by him repeatedly.

I have some experience of engagement with actuaries when I practised law in Scotland. Given that it is improbable that actuaries, who are notoriously independent of each other and seldom ever agree on discount rates, are likely to come separately to different conclusions, is it not better that the statutory limitations on the use of this power are expressed in such a way as set out in my noble friend’s amendments, rather than in the way that the Government have chosen to do it?

I turn to the issue of protected persons. We have not had an extensive debate on this issue or protected pension schemes, but I have been subject to some very powerful arguments, made not only by noble friends and other parliamentarians but by those with whom I have engaged in preparing for the debates on the Bill, about such persons. I have studied carefully the words of the Pensions Minister, which I encourage people to do—they are very instructive about the thinking behind some of this legislation. To me, his words clearly imply his preference for exempting protected persons. Having done that, one cannot but feel that there is a special set of circumstances arising from the privatisation of nationalised industries in respect of these pension schemes.

Curiously, the Bill is drafted in a way that allows the Secretary of State the power to keep the promises that were made to the members of the schemes. I am really interested in why this has been done. What was the motivation behind it if there was no inclination to do it?

--- Later in debate ---

[Lord Freud]

My Lords, given our time constraints, I will pick up those issues—the shared cost and the rebate over time. With the negative and affirmative, there is a time saving and a certainty. The difference is that you get them in and, within a matter of a month, they are effectively law and they can then be prayed against, but they are in shape unless they are undone. Affirmative has to be approved. So there is quite a process and a time loss in going one way or the other, which I hope I have spelt out. Let me rush to—

[Lord Browne of Ladyton]

I am grateful to the Minister. I am conscious of the time, but I am also conscious that we should not move on from this particular part of the Bill with all its complexity because we are pushed for time, due to the accident of when we held this debate. I say this for a good reason. The Minister read a speaking note about affirmative resolution procedure in relation to regulations which was not written to respond to the amendment that I proposed but was a much more general speaking note. The amendment tabled by me and my noble friend Lady Sherlock related only to Section 24(8)—a very specific part that would not involve the complex regulations which the Minister narrated. The regulations in Section 24(8) will probably be two short paragraphs.

The Minister has given us a lot of other food for thought about how the regulations will be promulgated more broadly. He tantalisingly gave us some of the detail about what may be in there, which may answer many of our questions. It is inappropriate that we just move on from Committee in relation to all these issues that he has raised in his response, and which none of us has had the opportunity to tease out. There are three or four other issues that he raised in response to my contribution with which I would like to engage, because I am not certain that these arguments would stand the test of debate.

[Lord Freud]

Well, my Lords, I was responding to the comments of the noble Baroness, Lady Drake, on the negative procedure generally. It is fairly odd to have two separate procedures going on within one process. That is the point.

I will try to deal with government Amendments 48 and 49. Schedule 14 currently provides that regulations can create exceptions to the limits set out in paragraph 2(2). This was originally provided to deal with unusually funded schemes, such as fixed cost-share schemes, which I hope goes to the issue raised by the noble Baroness, Lady Drake. The Delegated Powers and Regulatory Reform Committee raised concerns about the power. In light of this and our ongoing discussions with the pensions industry, we no longer believe that we need this power—we believe that something different is required—so Amendment 49 removes it. Amendment 48 then makes specific provision for employers with atypical scheme-funding arrangements, such as cost-share schemes. It allows those employers to recover their increased costs without affecting the safeguards provided by Schedule 14.

In the statutory override we have designed a process whereby employers can continue to sponsor defined-benefit schemes without losing the rebate. We have included provision to allow for a pivotal role for actuaries in signing off any changes but we have not restricted the ability of trustees, and indeed members, to express their views to the employer. We have ensured that trustees are not forced to decide whether to accept scheme changes or risk closure of the scheme. I hope that this reassures noble Lords and I urge the noble Baroness to withdraw her amendment.