Pensions Bill

Lord Browne of Ladyton Excerpts

Wednesday 26th February 2014 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I begin by welcoming very warmly what my noble friend has said. The Government have done the right thing and moved a long way since we debated this issue in Committee. We see government Amendment 26A as part of that move, but I am glad to say that the Minister has at the Dispatch Box this afternoon said that he will, quite rightly, go even further. I should therefore like to go over the points, perhaps for clarity. The Minister does need to go further, some of the reasons for which he has mentioned. I will not therefore speak to any of the amendments in my name as such because they have been overtaken by events. It is the substance that matters.

There seem to me to be four ways in which further improvement is needed beyond Amendment 26A, the first of which my noble friend has agreed to. That amendment would open the door to disclosure but to a limited number of categories. It is essential that there should be full public disclosure. This is important. For example, all potential members of pension schemes and workers should know what is happening, given that every -one knows that the costs of pension schemes vary enormously, as the noble Lord, Lord Turner, mentioned. This is not in dispute. It is a fact. Studies have shown that that variation bears no relation to performance, and some of the costs are absolutely enormous. In money purchase schemes, that is a direct cost to the pension that the beneficiary will get at the end of the day.

Nobody has mentioned this so far but I do not think that we should forget the press. There are sections of the press that give excellent consumer advice on financial matters, and not just the press: there is the excellent Paul Lewis, with his “Money Box” programme on the wireless. All these people need the information. They need to be the beneficiaries of disclosure if they are to be as effective as they might be for the benefit of members of pension schemes. Therefore, there should be total disclosure, and I suggest in my amendment that perhaps the best way of achieving that is for there to be disclosure to the Pensions Regulator, who publishes a public register which anybody can look at. However, there may be another way which the Government prefer and which is equally good. I was very glad to hear my noble friend say that there will be full public disclosure, which goes beyond that set out in Amendment 26A. That is what is needed.

Another way in which Amendment 26A is inadequate is that it refers to “some or all” of the costs. My noble friend touched on that but it is of the first importance that it says “all costs” and that all the costs are itemised. It is obvious that if only some costs are disclosed, it will be easy for investment managers to load on to their costings costs which are not among those that need to be disclosed. That is a complete nonsense. It is absolutely essential that all costs are itemised and disclosed.

There is another thing that needs to be attended to and where further progress needs to be made, but again it seems that in the spirit of what my noble friend said he is prepared to go there. His amendment concerns disclosure of information about transaction costs. It refers exclusively to transaction costs and, again, that is not adequate; it has to be all costs. There are, for example, investment managers’ fees, performance fees and custody fees, all of which are not transaction costs. Indeed, the Investment Management Association has stated that it does not classify equity commissions as transaction costs. Therefore, clearly the limitation to transaction costs is an invitation to abuse. All costs that are incurred have to be included.

The final way in which the amendment needs to be improved is perhaps less important than the other three ways; none the less, it is still important. The present proposal—my noble friend made this clear—relates only to money purchase schemes. It does not apply to defined benefit schemes. Defined contribution schemes, money purchase schemes, or whatever one likes to call them, are more important because the proposal directly impacts on the benefit that the beneficiary of the fund or pension gets at the end of the day. If it is a defined benefit scheme, one could say, “Why does it matter?”, but I do not think that it is a matter of indifference. Investment managers can say, “We have to control our costs, and reveal our costs, on money purchase schemes and defined contribution schemes. We can get the money back by loading extra costs on to the defined benefit schemes”. That would be wholly unsatisfactory. Most defined benefit schemes may be closed to new members but they are still going on and are substantial. A further point is that on a number of occasions the Government have expressed concern about pension fund deficits. This proposal could have a direct effect on the size of pension fund deficits. Therefore, it is necessary to bring defined benefit schemes into this disclosure. Transparency should not be explicitly and exclusively confined to money purchase schemes.

Those are the four areas in which further progress needs to be made. My noble friend said that he would be happy to discuss how it will be done between now and Third Reading. I would be happy to take part with other interested parties in these discussions, following which we look forward to further proposals and amendments at Third Reading.

I have a further small point for clarification about something that is slightly obscure. I do not think that it has been mentioned yet—certainly not by the Minister. Subsection (6) of the proposed new clause in Amendment 26A states that,

“subsection (5) does not apply in relation to a scheme of a particular description if … as a result of another enactment, requirements are imposed relating to the disclosure of information about transaction costs of schemes of that description”.

The only thing that I can assume—I hope my noble friend will clarify it, as I cannot believe that he has some other Bill up his sleeve—is that there may a European Union directive in the offing that may cover this area. That may be what is being alluded to. It would be helpful to the whole House if he explained precisely what lies behind this curious subsection.

[Lord Browne of Ladyton (Lab)]

My Lords, it is a genuine pleasure to follow the noble Lord, Lord Lawson, and to engage in the debate on this group of amendments. The noble Lord has had an extremely distinguished career in both Houses of Parliament. I have seldom heard his name used with such strength by a Minister from the Front Bench—certainly not for a long time. It may be a lesson to others on the Benches behind the Minister on how to get that level of recognition.

Amendment 29 requires the Secretary of State to,

“lay before Parliament regulations to restrict such charges as soon as reasonably practicable and no later than 30th April 2015”.

We want to ensure that the promise to do so, and the commitment to see this through in this Parliament is not kicked further into the long grass, but is exercised,

“as soon as reasonably practicable”.

This may be redundant now, as the noble Lord, Lord Lawson, has indicated, but my noble friend Lady Sherlock and I support Amendments 27 and 28, which require full disclosure of management and transaction charges for each work-based pension scheme. Amendment 26B amends government Amendment 26A that is broadly to the same effect. Amendment 26B requires the information that the Government now belatedly agree should be disclosed to pension scheme members should also be disclosed to the pension scheme regulator who, in turn, must maintain a public register of all costs. Of course, I welcome Amendment 26A and I thank the Minister and congratulate him on having tabled it. I have the advantage of the Minister’s explanation about why, at this extremely late stage, the Government have—I will not say U-turned—but changed their position substantially by almost 180 degrees on the very issue of transparency and disclosure. I welcome the amendment. When the Minister was explaining this, his overconcentration on the amendments of the noble Lord, Lord Lawson, and his engagement with this process—airbrushing out the contribution of my honourable friend Gregg McClymont, who persistently raised this issue in amendments in the House of Commons—may have given some people the impression that the Government’s change of position is more to do with Conservative Party discipline than their commitment to disclosure and transparency in these issues in the interests of the saver.

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[Lord Browne of Ladyton]

I am very grateful to the Minister for giving way. On this very point about the transparency of transaction costs, my understanding of the Government’s amendment is that they have given themselves the power to exempt from transparency where there are existing FCA rules in relation to transparency. The existing FCA rules on transparency exempt transaction costs, so how will the transaction costs in such cases be dealt with?

[Lord Freud]

I am putting it on the record that we will aim to capture all costs, including all transaction costs. As noble Lords know only too well, when you look into this legislation there are bits and pieces scattered all over the place, but I can summarise it in that very simple sentence. It is very similar to the point about proposed new subsection (6): it is just a drafting requirement that we do not overlay things and that we have a clear line. It is not to do with the EU.

I am sorry that the noble Lord, Lord Browne, was concerned about my overconcentration on my noble friend Lord Lawson. I did not mean to do any airbrushing but I did mean to concentrate on the fact that I believe that my noble friend Lord Lawson’s amendments in Grand Committee and at this stage have been especially helpful in pushing this whole debate forward.

Turning to Amendment 29 in the name of the noble Lord, Lord Browne, I would actually be very disappointed in the noble Lord if he was to decide to test the opinion of the House. I have been absolutely clear about the timing of government action. I do not understand why he would want to start stipulating in primary legislation the timing of when regulations would be brought, given the language that I am using to talk about what we are doing.

Even though I may not satisfy the noble Baroness, Lady Drake, with the clarity of my expression, I will go through what we are doing. Consultations have sought views on policy implementation. Employers made clear that they wanted sufficient notice of any new scheme requirements. The Minister remains strongly minded to cap charges and, as former Ministers know and can tell the noble Baroness, Lady Drake, significant policy decisions must go through due process, but the Government response is coming soon.

I hope that I have made it utterly, utterly clear what will happen. That is the reason that I do not want the noble Lord, Lord Browne, to test the opinion of the House, because that seems purely political, given what I have just said, and that is not in the spirit—

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Moved by

[Lord Browne of Ladyton]

29: Schedule 18, page 103, line 40, at end insert—
“(1A) The Secretary of State must lay before Parliament regulations to restrict such charges as soon as reasonably practicable and no later than 30th April 2015.”

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[Lord Browne of Ladyton]

I beg to move, and I wish to test the opinion of the House.

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Moved by

[Lord Browne of Ladyton]

31A: After Clause 47, insert the following new Clause—
“Decumulation
(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing its members with—
(a) an assisted path through the annuity process;(b) ensuring access to most annuity providers;(c) minimising costs; and(d) ensuring that information and support is available on alternative at-retirement products.(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.”

[Lord Browne of Ladyton]

My Lords, Amendment 31A, which stands in my name and in the name of my noble friend Lady Sherlock, proposes the addition of a simple clause to the Bill. The clause would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. The clause goes on in later provisions to set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed. It calls for an independent brokerage service to assist people to annuitise at the point of retirement. This is hardly a radical proposal. It fits the description of best practice and is what many employers with DC pension schemes already offer.

The ABI code of practice says that providers should tell people decumulating that they can shop around and transfer the funds to another provider and advise them to seek advice before so doing. However, that is not enough. As Dan Hyde wrote in an article in the Telegraph in December:

“The process starts with a ‘wake-up’ pack sent to savers months before their named retirement age, in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.

Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. A one-off appointment would be expensive—equivalent to a week’s take-home pay for workers on average wage—even if they knew where to go.

Undoubtedly, employers’ firms can negotiate a better rate but the scandal of annuities is well known and widespread. In one sense, how often do we need to be told? Only last week, in yet another report, the Financial Conduct Authority confirmed again that the annuities market is not working and that it is disorderly. The number of adjectives that can now be found to describe financial services markets is interesting. The Financial Conduct Authority has ordered a further review but we need immediate action. Each week, more than 1,000 people are buying annuities and those transactions are irreversible. Once bought, you cannot change your mind and getting the right one can be the equivalent of an extra £1,500 in savings. With respect to the FCA, it hardly needs another competition market study to find out why consumers do not shop around. The problem is that the pension companies which sell them are simply not doing enough to explain to people that they can shop around.

When this amendment was debated in Grand Committee the Minister used the same diversionary tactic as Steve Webb, the Pensions Minister, did in the Commons and as the Minister who responded to the Westminster Hall debate on annuities did too. Depressingly, I fear that the Minister can be expected to repeat that argument today. It is all very well to suggest that those reaching retirement age can do many other things—other than plan for an annuity—but it is insufficient, in the face of the continued mass selling of inappropriate annuities, to say to people that they have many different opportunities and need lots of different advice beyond annuities. The fact is that the variety in the annuities offered and the deals available is considerable. Those people—1,000 of them each week—need independent support and advice right now.

The need for independent advice at this point may be obvious but the reasons for it are worth repeating. First, on the complexity of choosing the right annuity option, annuities are a complex product and decumulation is a complex process. Comparison between the providers is difficult. Before we debated this in Committee, I saw a quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life, level escalation, anticipated bonus rates and required smooth return rates—every single one of which was without an explanation. It offered four choices to a “conventional lifetime quotation” annuity described as income-choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most around the £1,200 mark. It is no wonder, with such complexity, that no one should exercise a choice without advice; and so it is no wonder that over 50% of people just go with their existing provider.

The first comparator website has been launched. This is a step in the right direction. However, the independent pensions consultant, Ros Altmann, who gave evidence to the Commons committee, did not think that it was simple. She said that it was disappointing and not easy to use. Annuities are complex products with multi-options and perhaps there never can be a simple comparison site.

At this point I intend to repeat questions that I posed to the Minister in Grand Committee. They demand answers from the Government, to explain their resistance to this amendment, and they were not answered when we were in Committee.

First, does the Minister accept that annuities are complex and that people need independent advice? Does he accept that purchasing that advice is beyond the grasp of most people, particularly those with no knowledge of investments? If he does so accept, how does he suggest that those who need this advice now can be guaranteed to get it?

Secondly, the variety in the kinds of annuities offered and the deals that people can get is bewildering. The NAPF and others have said that annuitising with the pension scheme provider pays on average 20% less than shopping around. In effect, inertia, or being overwhelmed by the complexity of making a choice, is exploited by pension providers. Insurers are making excessive profits from purchasers failing to shop around. On “Newsnight”, Ros Altmann said that if you had an annuity with the worst performers you would have to live until you were 100 to get back just what you had paid in.

Inertia, as I say, is a powerful force that results in excess profits for insurers. They penalise you, not reward you, for loyalty. Estimates suggest that £1 billion of retirement income is being lost to savers every year just by the force of inertia. The report of the FCA Consumer Panel—the FSCP—was published in December and made many points. I have drawn on these points before in debating this issue and I do so again because they are so powerful.

First, the tactics used by insurance companies and brokers were “tantamount to burglary” of old-age pensioners. The report said that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies are making 20 times more profits on annuities than any other financial product. As for poor returns, on a pot of £100,000 Clerical Medical offers £4,664 per annum while Reliance Mutual offers £6,111. Over their expected lifetime people would be just over £36,000 worse off if they made the wrong choice.

As for opaque charges, brokers are incentivised to sell particular products; in some cases they make 6%, or £12,000, on a pot of £200,000. There are sharp practices with brokers shopping around, resulting in a referral fee from each. Many also have exploitative pricing; that is, they have sold a product for a fit person when they are not fit, or an adviser neglects to tell people of other products such as income drawdown because the profit margins are slimmer. Companies can make £35,000 profit over 25 years on a pot of £100,000. I have to say that that was the finding of the report, although the figure was denied by the ABI. The ABI has not, however, said what profit is made.

As your Lordships will be aware, the Pensions Minister, Steve Webb, commissioned a review of annuities from the FCA which reported last week. To no one’s surprise, the FCA concluded that the annuities market was not working. It was “disorderly”, according to the FCA’s chief executive, and the watchdog’s report suggested that four out of five consumers could get a higher income by just shopping around. To many people’s frustration and disappointment, after this extensive review the FCA said that it would launch a further review, a competition market study, to find out what we all already know. Consumers will now have to wait many more months for this second-stage investigation before regulatory action of some description can be started. In the face of 1,000 people a week still making this irreversible decision, that is not good enough.

People who have gone without, who have diligently saved throughout their working lives, are being systematically “burgled”, to use the FSCP’s word, by a profit-hungry industry and its associated sales force. Annuities are building up to be the next scandal and mis-selling crisis. The sector will not sort itself out. We need to strengthen the buyer side, and Parliament needs to take action on behalf of savers. If we do not sort out annuities we will undermine auto-enrolment. This proposed new clause, if accepted, will provide people with guaranteed access—or at least the offer of it—to an independent annuity brokerage service at the point of decision. It will strengthen the buyer side. Annuities are one area of pension policy where the buyer deals directly with the provider and makes choices. With independent support these choices will be better informed choices. Access to an independent service will protect savers from making poor choices that could reduce their income by up to 20%. This small step may help divert us away from the next financial mis-selling scandal—or at least protect Parliament from the criticism that it failed to act when presented with the evidence of the need to do so.

I think that the information I have laid before your Lordships makes the case for the need to provide an independent annuity brokerage service, or at least the offer of such a service, to pension scheme members who are approaching retirement to help the member make wise choices. There are already 400,000 people annuitising each year, and this number will escalate from 2020 onwards when the impact of auto-enrolment starts to kick in. I again urge the Minister to accept the need for it now and in the future. I beg to move.

[Lord Freud]

My Lords, this amendment is identical to the one that we debated in Committee. I will confirm the government position for the record, as well as respond to the new points made.

The Financial Conduct Authority has confirmed the Government’s concerns that the way the annuity market operates may be disadvantaging consumers. This may be—in the language of the noble Lord, Lord Browne of Ladyton—“tantamount to burglary”, and it clearly continues to be of great concern to the Government. We recognise that it is critical that individuals make the right decision about their retirement income, because some of these decisions are ultimately irreversible. However, the solution offered by this amendment is not the answer to a problem which I acknowledge.

What are the Government doing? First, we are supporting the consumer to make a decision that is right for them. We are leading on and supporting a wide range of initiatives aimed at driving up standards among providers, providing guidance to trustees and educating members. The ABI code of practice is designed to tackle the worst of the inertia selling practices—for example, removing the application form from the pack. It talks about the three decisions that the consumer needs to make: whether they should retire now; what type of income is appropriate—it may be annuities, but it may not be—and telling the consumer how to get a better deal on the open market.

Secondly, the new Pensions Regulator guidance sets out expectations for what trustees should provide for their members. Thirdly, the Money Advice Service is developing its services for people approaching retirement age. Fourthly, the National Association of Pension Funds has published a guide to trustees and employees about the benefits to scheme members of support at retirement and the range of options available to them on the open market.

Those are just some examples of the initiatives that have recently been delivered under this Government. In addition, the noble Lord mentioned the Financial Conduct Authority’s thematic review of annuities and the fact that it has launched a market study on the annuity market. He did not seem to welcome that wholeheartedly but we are very pleased that the FCA has decided to take this step; it is this Government’s changes to the FCA’s objectives that have enabled it do so. HMT and the DWP are currently reviewing the broad range of available research and statistics on at-retirement options, but with emerging findings from the FCA we will have the evidence to inform any further action required.

On the issue of independent advice, individuals already have access to free and independent information and guidance via the Money Advice Service and the Pensions Advisory Service. I need to pay tribute to the noble Baroness, Lady Hollis, who is a board member of the latter organisation.

I come to the core of why this amendment is not the right response. Indeed, it is rather funny that the noble Lord was quoting examples of sharp practice, with brokers shopping around and not informing their clients of the income drawdown. This is the point about, “While there is a problem, this is not the solution”. Making annuity brokers the first port of call for all would simply create a captive market for one part of the industry without effectively adding to consumer protections. Annuity brokers, unless they are also FCA-regulated advisers, are not required to ensure that the product is suitable for the consumer. I must be absolutely clear on this point: this measure would not provide the member with regulated advice. The Financial Services Consumer Panel recently published a report identifying a number of risks for the consumer in going down the non-advised route.

This measure would therefore push people down a brokerage route and could lead to the next mis-selling crisis, not help to avoid it, as the noble Lord suggested. The amendment as it stands would mean that people would be been pushed into receiving non-regulated advice and might end up locked into unsuitable products without recourse to the protections that regulated advice affords. Furthermore, the measure focuses almost exclusively on annuities; it makes reference to information on alternative at-retirement products, but it has to be recognised that annuity brokers are not necessarily impartial—they make their money if a member buys an annuity. Indeed, that is a point that the noble Lord made in his own speech.

This Government’s position is that it is essential for people to understand all their options, not just annuities, and to work with relevant bodies to ensure that appropriate help is available. Clearly, our work is not complete. However, we do not believe that this amendment, pushing people down a single product path, is the right solution. We are committed to ensuring that consumers have the information that they need to make good choices and that the annuities market works effectively for consumers. It is ongoing work but we will continue to challenge the industry if there is no significant improvement. The Financial Conduct Authority’s review findings will be vital in that assessment.

While I welcome the debate, which is clearly an important one, this amendment would not deliver what the Opposition actually want. It risks making things worse for the consumer. It would legislate to make annuities the foremost option for deriving a retirement income when this may actually not be the right route for many, especially those with small pots. It would put the responsibility for providing information to members solely in the hands of annuity brokers, leaving many without the protections afforded by regulated advice. As I said, if that is not a potential mis-selling scandal, I would like to know what is.

I would like the noble Lord not to test the opinion of the House on this because he should not, and he does not actually want to push it.

[Lord Browne of Ladyton]

My Lords, I am grateful to the Minister. He failed when he played that card last time; he should have learnt.

The use of the word “burglary”, which is not one that comes easily to a Scottish lawyer because we in Scotland have no such concept, is not mine but is from the FSCP’s report. The report which looked into this described such behaviour as tantamount to burglary. I deploy the word because it is evocative but also because it describes quite well what is going on.

I am grateful to the Minister for setting out the Government’s ambition in this regard, which is far-reaching, complicated and, I understand, ambitious, but the scandal continues. While we discuss the complexity of all this and indeed add further complexities to it, 1,000 people a week, most probably through inertia, are buying annuities, many of which are tantamount to burglary of their savings. We are suggesting with this amendment that we must do what we can to try to stem that process, while all the other complex things that need to be done—I accept the detail and the challenge of that—can be done. The scale of the scandal demands a deep and wide perspective of responses; I accept that. However, there is something we can do about this. Given that these people are going down this path without independent advice, the purpose of the amendment is to get them access to that information and that service so that they can make choices.

I now come, in just a few sentences, to the core issue that the Minister used as his principal push-back against this amendment. I suspect that he did not read all of the amendment carefully enough. Had he got as far as proposed new subsection (3), he would have seen that all this advice has to be best practice, defined by the Pensions Regulator after public consultation—a form of regulation—and that that process has to be subject to a continuing review. It was intended, in the flexible sort of way in which I have got used to this Government working, to provide a process of engagement, discussion and consultation that allowed best practice to develop in this area and to improve the performance of those people who provide independent annuity brokerage services. This is a model that I have learnt, in my time in your Lordships’ House, from the conduct of the coalition Government. I commend it to the Minister, I commend it to the House and I wish to test the House’s support for it.

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[Lord Freud]

My Lords, in moving government Amendment 32 I will speak also to government Amendments 33 to 41.

As noble Lords will be aware, we are proposing to change the compensation cap in the Pension Protection Fund to recognise long service in a scheme. The standard cap shall be increased by 3% for each year of pensionable service over 20 years. Schedule 20 contains most of the provisions needed to implement the long-service cap. However, some technical amendments are needed to reflect particular situations and I shall address them in groups.

Amendments 32 to 34 deal with the identification of pensionable service for certain individuals—obviously an important issue, given that the long-service cap kicks in once a person has 21 years of service. For example, a person who has been a member of a scheme for 10 years has that amount of pensionable service. However, they might also have transferred into that scheme a pension built up in a previous employment. Where the PPF has deemed service, say 15 years, in respect of this transfer, these amendments will permit the two periods to be added together so that the individual will be treated as if they had 25 years’ service in total.

Amendments 37 and 38 deal with a scheme in the process of assessment when the legislation commences, where the scheme applies for the decision not to transfer the scheme to the PPF to be reconsidered. While the application is being considered, the current cap will apply for the purposes of assessing the scheme’s protected liabilities.

Amendments 35, 36, 39 and 40 are needed to clarify the scope of the legislation dealing with those who are in receipt of compensation when the long-service cap becomes law, for people sharing compensation and with benefits entitlements arising at different times. Amendment 41 is a minor correction needed to the current legislation.

In Grand Committee, the Government tabled a new clause, now Clause 50, dealing with the compensation cap. As my noble friend Lord Bates explained at the time, the clause was needed to ensure that the legislation reflects the policy and current practice when applying the compensation cap separately to compensation based on benefits deriving from different sources which are payable on the same day—for example, where an individual has entitlement to a pension but also a pension credit deriving from a divorce settlement. Clause 50 has a retrospective effect so as to cover payments already made. However, it applies only to cases where the two benefits were payable on the same date.

Amendment 41 is needed to provide retrospective cover in cases where compensation derived from different sources is payable on different dates. It modifies the relevant provision of the Pensions Act 2004 to allow us to bring forward regulations that have a retrospective effect, so that such payments already made in accordance with the accepted policy and practice are covered.

Getting the long-service cap into legislation has been a long process, requiring amendments at various stages of the Bill, and I thank noble Lords for their patience. I beg to move.

[Lord Browne of Ladyton]

My Lords, on behalf of these Benches, I welcome these amendments. In doing so, I take the opportunity to ask for an assurance that entitlement to a pension credit secured by a spouse as part of a divorce settlement will not be weakened by any of these amendments. If the Minister is unable to respond immediately to that, I will be content for him to write in due course.

[Lord Freud]

My Lords, that position is not affected by these amendments.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 24th February 2014 Lords Chamber

[Baroness Hollis of Heigham]

I will just say a couple of sentences. I am very pleased indeed that the Government are building on the work of the last Labour Government in recognising the particular obligations that go with the military covenant and ensuring that the spouses of service personnel are not disadvantaged when it comes to a full state pension. I welcome this and am very glad that the department and the Minister have been able to meet the concerns raised in Committee.

[Lord Browne of Ladyton (Lab)]

My Lords, we welcome the Government’s amendment, which requires the introduction of regulations to provide for spouses and civil partners of service personnel to gain national insurance credits for periods spent on accompanied assignments prior to 2010. As my noble friend has just said, these provisions build on the reforms of the last Labour Government, who allowed credits to begin from 2010. I thank the Minister for the generosity of his remarks about my noble friends Lady Dean and Lord McKenzie and, indeed, his recognition of my own small contribution to this outcome.

However, it would be remiss of me if I did not express from these Benches that we are in no doubt who is entitled to the greater credit for this amendment being tabled. It is my noble friend Lady Hollis who is the heroine of the hour. There is no question that the Government have acted because she raised the issue so effectively in an amendment in Grand Committee. Before she did so—and I am sure that the Minister will confirm this—the Government’s position was an honourable one, but, as expressed on page 33 of the document The Armed Forces Covenant: Today and Tomorrow, they stated:

“At present the Government has no plans to make further adjustments to the tax and benefits system for Service personnel and their families but will keep this issue under review”.

The Minister indicated in Grand Committee that he would review it and his officials have kept us all informed of that review going on and it is to his credit that it has resulted in this outcome.

The Government deserve significant credit for responding in the way they have done and now at least we can say in relation to this issue that there is no disadvantage and that members of the Armed Forces community have access to the same benefits as any other UK citizen. As the Minister has said, the challenge now is to ensure that, of those potential 20,000 beneficiaries, the maximum number benefit from this opportunity. The current figures for applications for the 2010 credits are disappointing. Either the MoD now needs to build a process for credits to be automated, or it needs to improve its engagement with its own personnel, to inform people of the availability of the credits and to facilitate and encourage take-up.

I accept that the other government amendments are consequential and uncontroversial and we welcome them also.

Amendment 4 agreed.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 24th February 2014 Lords Chamber

[Lord Browne of Ladyton (Lab)]

My Lords, it is a pleasure to follow my noble friends Lady Turner and Lord Whitty, who have robustly set out a fundamental challenge to Clause 24 and Schedule 13, which I think the Minister is required to engage with. Would the noble Lord and the Pensions Minister argue that the loss of the rebate, without some consequential provisions, would lead to the closure of defined benefit schemes? In short, my noble friends argue that this is where it will lead, even with the override which is designed to prevent their loss. There is a fundamental difference which deserves to be addressed in the way specifically asked for by my noble friend Lord Whitty. I am sure that the Minister will be conscious of that.

On the issue of protected persons, I welcome the Government’s concession, set out in Amendment 14, confirming that they will honour the specific undertaking given to the members of these schemes to encourage them to accept privatisation of the industries for which they worked. That is exactly why this undertaking was given to them. It has been promised for some time. Belated it may be in its delivery, but it is none the less welcome and it will be a relief to the 60,000 or more members of those identifiable schemes who have been awaiting this decision.

My noble friend Lord Whitty raised an interesting question about whether this concession can be made to apply in some form to gas workers who have a similar undertaking, but which was enshrined in a different way. I would be interested in what the Minister says about that.

Were my noble friend Lord Whitty’s Amendment 11 enacted it would ensure that:

“The power conferred … on employers to amend occupational pension schemes does not override the powers and duties of Trustees of such schemes nor any duty to consult members of such schemes and their representatives”.

To the extent that this amendment requires consultation with trustees, we support it. We had an extensive debate on these issues in Grand Committee and I made clear then that our position is one of broad agreement with the change to a single-tier pension and the aim of introducing simplicity into the state pension system. We also accepted that this required an end to contracting out. However, we agreed with the arguments put forward in Committee by my noble friend Lady Drake that statutory overrides are strong measures and should be used with care in all cases, at the very least requiring an employer to consult pension trustees before exercising the power to amend a pension scheme.

It would be to the benefit of understanding the Government’s position if the Minister would make clear in his response why the Government had set their face against consultation with trustees, especially when it is preserved in the statutory requirement to consult scheme members. It surely cannot be the case that the different approach to these forms of consultation is that consultation with trustees would be meaningful, but that consultation with individual members would be anything but—indeed it would be pointless. Like my noble friend Lord Whitty, I hope that the Minister’s response to Amendment 12 will be that it is unnecessary. It is my view that this is an expression of the current state of the law.

Finally, my noble friend raised an interesting point about public sector pensions, from his knowledge of the understandings that appear to have been implied by the meeting with the LGA. We would all be interested to know when further follow-up can be expected.

[Lord Freud]

My Lords, under the current system it is possible for defined benefit schemes to contract out of the additional state pension, giving up entitlement for additional state pension in return for a broadly similar occupational pension and payment of a lower national insurance rate for both employer and employee. When single tier is introduced, there will no longer be an additional state pension for defined benefit schemes to contract out of. Employers with such schemes will therefore no longer receive a national insurance rebate in respect of contracted-out members.

Employers will need to find ways to recoup the costs that the loss of the rebate brings. Unless they are able to do that, many employers will be forced to close their schemes. Clearly, members are not served by their pension schemes closing and the Government are committed to supporting the continuation of defined benefit pension provision. To that end, we are providing a statutory override to allow private sector employers to make limited changes to their schemes to adjust for the additional cost due to the end of contracting out. This is part of our wider state pension reforms. The majority of contracted-out workers in the private sector who reach state pension age in the first two decades of single tier will get enough extra state pension to offset the increase in national insurance they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes.

Noble Lords have made clear their concerns that the override is not abused by employers and that trustees and members are properly consulted about any changes. I fully recognise those concerns. The override allows for limited changes to future accruals and/or future contributions where the scheme rules would otherwise prevent that. I make it absolutely clear that the override does not permit the employer to ignore other rules about how the scheme operates. For example, it does not mean that an employer can avoid notifying trustees or members of a change, or refuse to carry out a consultation, if scheme rules would require this. Indeed, existing legislation requires that members are consulted on any significant rule changes before they are made. In response to the query from the noble Lord, Lord Whitty, that will remain the case. In addition, we have every reason to believe that employers will want to engage with trustees about how best to respond to the end of contracting out and believe it is in their best interest to do so.

Schedule 14 provides important safeguards, such as limits on the use of the override to prevent an employer from making changes beyond those necessary to recoup their increase in national insurance contributions, the need for an actuary to certify the changes and protection for members’ accrued rights. We will put further safeguards in regulations—for example, to ensure that the employer cannot create their own assumptions for the purposes of the calculation but must draw on existing assumptions used by the scheme.

Amendment 11 concerns protection for trustee powers and duties. As I have said, the override does not prevent the scheme operating normally. The only powers or duties that the override applies to—and therefore that the amendment would protect—are those that require trustee consent to changes or provide that only trustees can change scheme rules. Where these powers stay in place, they would make the override unusable, which in turn could encourage employers to close their scheme. Amendment 11 also seeks to ensure that the statutory override does not trump any duty to consult scheme members and their representatives. Such an amendment is unnecessary as scheme rules and existing legislation requiring member and representative consultation are not affected by the override.

The Government recognise that a trustee’s fiduciary duty to the scheme’s members may put them in a difficult position if they are required to agree scheme changes that, at face value, are detrimental to the member. However, the statutory override does not prevent the employer from engaging with the trustees on any scheme changes they are considering. It is in the employer’s interest to engage with trustees on proposed changes. Trustees are responsible for administering the pension scheme. All schemes need lead time before any changes can take place, to allow for IT systems to be updated and changes to the title deed to be made.

Part of Amendment 12 seeks to protect current members’ accrued rights. The Government absolutely agree that any accrued rights should be protected and preserved, and I reassure the noble Lord, Lord Whitty, and other noble Lords that the Bill already provides such protection by way of paragraph 3 of Schedule 14. This refers to the protection of “subsisting rights”—the term used in pension legislation—for both scheme members and their survivors.

Amendment 12 would also remove the stipulation that changes made in respect of future members have to correspond to changes made in respect of current members. It is important to remember that the override will enable employers to offset the additional cost of national insurance that arises from April 2016. The amendment would broaden the override. An employer could set different contribution rates or different rates of accrual for current and future members. I do not believe that that would be right. The increased national insurance costs to the employer from 2016 will be the same for both groups of members, and the Bill as drafted ensures that the override reflects that.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 24th February 2014 Lords Chamber

[Lord German]

It is because we have a response in place, which is the universal credit system. What matters more than anything is that the system is in place in time to capture the people who will be most affected by this in the implementation years, from 2016 onwards. That is the fundamental question and I await the answer in my noble friend’s response.

[Lord Browne of Ladyton (Lab)]

My Lords, I support my noble friend’s amendment—and, having listened to the contribution of the noble Lord, Lord German, I am delighted that I do not have to answer the questions that he posed. I suspect that the noble Lord who is the Minister for Welfare Reform had wanted to avoid having to give a date as to when the universal credit system will be functioning well enough to provide the sort of functionality that the noble Lord, Lord German, seems to think that the alternative to this amendment requires. I will listen carefully to the Minister’s response and write down any date that he gives us in relation to that. It is also a pleasure to follow my noble friend Lord Morris, who speaks with significant experience of, and great authority about, the workings of the modern labour market, and who has assisted us greatly in understanding the need for this amendment.

As my noble friend said, this issue was debated in the Commons and in Committee at some length. I have considered carefully the various government responses, as my noble friends Lady Hollis and Lady Drake clearly have. They are to be congratulated for having produced here what could be described as an elegant, permissive, statutory device that adds to the Minister’s armoury in his desire,

“to seize this issue head-on”.—[Official Report, 18/12/13; col. GC 328.]

He used that phrase in our debate when he expressed equal concern—the words are mine—as the rest of us about this issue. I believed, as did all those who were present debating the issue, that he shared our concerns. Indeed, in his contribution to the debate he indicated why he had come to that conclusion.

In support of the arguments that I set out in my own contribution in Grand Committee, I simply want to make three points today. First, the phenomenon of people working in two or more low-earning jobs is not a limited one. They are often on zero-hours contracts but certainly on short hours, with each job under the level at which national insurance contributions are made, and are therefore not building up a contributions record towards the state pension. Nor indeed is it a temporary phenomenon, as has been argued, often coming at the end of a working life. Nor is it an experience limited to rural communities, although it is very prevalent there.

Since I shared the content of my overheard conversation on the Transport for London overground train, I have consciously inquired of young people whom I meet in this city and back home in Scotland how many of them are working for more than one employer. For noble Lords who have not heard this short anecdote, I will repeat it. A few days before we debated this matter in Committee, I overheard a conversation among three young people on an overground train as I was making my way home from your Lordships’ House. It was very clear to me that they had all been working together in what I suppose we would call a mini-job and that they each had two other jobs.

What was significant about them was that two were graduates and the third certainly had a tertiary level of education. I found that surprising. I do not know why I found it surprising, but it caused me to inquire the same of other young people, and I have come to the view that this is the norm for thousands of young people in the first phase of their employed life, even for graduates. It is a significant feature of a flexible labour market and, along with zero-hours contracts, it is part of the reason that politicians, particularly Ministers, and employers celebrate its flexibility. Undoubtedly the number of people in this situation is growing, not declining.

The question of numbers leads me to repeat a point I made in Grand Committee, which has already been made by my noble friends. The Government assert that there are about 50,000 people in this category. I am not convinced by their estimate of the scale of the problem. That is based not on my experience but on evidence that has already been referred to. We await the outcome of the—I think still anticipated—BIS consultation on zero-hours contracts, which was promised in October and is due to report by the end of March, but I have not seen a lot of evidence of it. We should reflect on the fact that in the fourth quarter of 2012, the ONS estimated that there were 250,000 people on zero-hours contracts. However, a contemporaneous survey of employers by the CIPD estimated that in fact the figure was around 1 million.

As we have heard, the union Unite estimates that as many as 5.5 million people are employed on such contracts up and down the UK. Following the CIPD estimate, the ONS conceded that the Labour Force Survey, which is based on responses by individuals, more than likely understated the numbers. The ONS then announced, as my noble friends have told your Lordships’ House, that it would change the way it collected its data from autumn 2013,

“so as to obtain more robust data”.

The importance of this contradictory information is not that it goes directly to the heart of the estimate from the Government, but that clearly it must have informed the Government’s estimate. None of the estimates that the Government have for the scale of this problem is at all reliable. Therefore, your Lordships cannot be convinced that a strategy based on unreliable statistics is a reliable strategy.

Finally, the Government’s responses appear complacent. Steve Webb, the Pensions Minister, suggested in the Commons that there was only a tenuous link between having multiple jobs below the LEL and being unable to build up the required 35 years’ contributions, and referred to this problem as a temporary phenomenon. In our debates in Grand Committee, the Minister promised that universal credit would resolve the issue. The noble Lord, Lord German, has already gone through the pros and cons of that in some detail, and my noble friend Lady Hollis significantly undermined that argument by pointing out the categories of people who are in these jobs who would be denied universal credit in the first place and therefore the consequent crediting of national insurance contributions.

I say with respect to the noble Lord, Lord German, that that is the one point of our argument that he did not engage with. Even if universal credit is the answer for some of those people, it cannot be the answer for all people in this category, and in the absence of reliable statistics, it is not easy to see what proportion of people would benefit from a universal credit system that met the coincidence of engagement with the challenge that the noble Lord, Lord German, set out.

What do we need? We need an alternative. We can have no confidence that the approach of either the Pensions Minister or the noble Lord, Lord Freud, will be sufficient. If it is not, the net effect will not only be to deny access to the modern pension system to a significant number of people, most of whom will be the least well paid working people in our society. As the numbers grow—and they will—it will also, in the long term, severely undermine the pensions policy that is now agreed across your Lordships’ House, because it will increase the number of people who have to depend on means testing in retirement.

We support the amendment tabled by my noble friend. We want to make it clear that this is a solution for now, in the context of the Bill. We hope the amendment will be agreed and will become law. It will then be for the Government to take it away and for the Minister to seize the opportunity to use it to address the issue head-on.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 20th January 2014 Grand Committee

Moved by

[Lord Browne of Ladyton]

62G: Clause 41, page 21, line 37, at end insert—
“(2) In this section—
(a) “charges”; and(b) “transaction costs”,shall be defined in regulations by the Secretary of State.(3) Before making regulations under subsection (2), the Secretary of State must undertake a public consultation, which must include the views of—
(a) the Financial Conduct Authority; and(b) the Pensions Regulator.(4) With reference to subsection (2)(a), any public consultation must consider the different elements which comprise charges and not just the annual management charge.
(5) Such charges, together with any transaction costs incurred by the funds in which qualifying schemes are invested, shall be declared on an annual basis to the Pensions Regulator, which shall maintain a public register thereof.
(6) The Secretary of State shall by regulations set the standards by which pension schemes must declare charges and transaction costs for the purposes of the register and for declaration to their members and their members’ employers.
(7) The standards set out in regulations under subsection (6) shall be reviewed every three years.
(8) The Secretary of State shall have power to make regulations ordering other disclosure arrangements on administration charges.
(9) Regulations under this section may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament.”.

[Lord Browne of Ladyton (Lab)]

My Lords, I will also speak to Amendment 62H, which is again in my name and that of my noble friend Lady Sherlock. Amendment 62G would amend Clause 41, which is the statutory basis for the Secretary of State to make regulations to restrict charges or impose requirements on work-based pension schemes. The amendment would amend that clause to enable the Secretary of State, following a public consultation, to set the standard by which pension schemes must declare charges and transaction costs to their members and the members’ employers.

Amendment 62H would give effect to a DPRRC recommendation and prevent the Secretary of State from amending legislation “whenever made” and imposing requirements on certain work-based pension schemes by secondary legislation, thus bypassing full parliamentary scrutiny. The DPRRC made this recommendation because it was not persuaded adequately by the Government’s justification for granting themselves this power. We agree with the DPRRC. That is the simple basis for Amendment 62H.

While I am dealing with this group, the noble Lord, Lord Lawson, has two amendments in it. Amendment 63 would create a power to require disclosures at least annually of certain management and transaction charges incurred by administration and management of investment portfolios. Amendment 67 would create a power for regulations to be made requiring work-based pension schemes to disclose periodically certain costs and information relating to charges for management of investment portfolios. I shall return to these amendments later. However, by proposing them the noble Lord has made a powerful intervention into this debate and one I hope that his noble friends will treat with the respect it deserves.

Finally, there is government Amendment 70, which would give effect to a DPRRC recommendation that the first set of regulations under paragraph 1 of Schedule 17 should be subject to affirmative procedure. We support that.

In my noble friend Lady Sherlock’s excellent speech at Second Reading on 3 December 2013, in considering this part of the Bill she made the compelling point that the state owes a serious duty of care to the large numbers coming into auto-enrolment. It is crucial that every one of the 10 million auto-enrolled between 2012 and 2017 can be sure of getting value for money from that pension scheme. That necessity for value for money drives all the Labour amendments to Part 5 of the Bill, on private pensions.

In my noble friend’s Second Reading speech, she said:

“This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing”.—[Official Report, 3/12/13; col. 147.]

Her amendments are designed to address those issues. Amendment 62G argues for the full disclosure of all costs and charges, including the costs extracted by fund managers.

I am sure that all Members of your Lordships’ Committee agree that pension charges must be reasonable for people to have the necessary confidence to invest their hard-earned money in pension schemes. From the evidence available now, it is difficult to exaggerate how obscure the charging structure on pensions is. Pensions are pretty complicated to begin with because, in an occupational pension scheme, the employer—not the employee—is the person buying the pension. That pension schemes are then invested in asset classes by fund managers further complicates the challenge of understanding what is charged.

For reasons we have debated repeatedly in this Bill, the market cannot address this challenge. I regret that the Government have been slow to understand the depth of the problem in the pensions market. My right honourable friend Ed Miliband first raised this issue in July 2012. He identified pensions as the next big scandal, warned that savers must be protected from the scandal of hidden pension fees that can see people stripped of huge percentages of their savings, and called for a new regime imposing a clear charging structure on pension funds. He warned that fees need to be capped. He was accused by the Pensions Minister of being irresponsible. Regretfully, the Minister joined industry voices who were making accusations of scaremongering. The next day, the RSA published Seeing Through the British Pension System, which found that 21 out of 23 providers denied that there were any additional charges other than the annual management charge and administration costs. They failed to reveal what is charged for items such as audit, custodial costs and other costs such as taxes, lending fees and broking commissions.

--- Later in debate ---

[Lord Bates]

My Lords, this has been a useful debate with lots of high-quality and thoughtful interventions. I will try to follow that standard by putting some remarks on the noble Lord’s amendments on the record, and also on my noble friend Lord Freud’s Amendment 70.

As your Lordships will be aware, we launched our recent consultation on charging in October 2013, following on from the Office of Fair Trading’s September 2013 market study into defined contribution workplace pensions. That study raised concerns, which the Government share, about the weakness in the buyer side of the market—a point made powerfully by the noble Baroness, Lady Donaghy, in recounting those examples—the complexity of the product and a lack of transparency, which hinders consumers’ abilities to compare schemes. My noble friend Lord Lawson, a distinguished economist, mentioned the principal agent problem, which has at its heart, in an economic context, asymmetry of information. Transparency must therefore be part of the play which somehow levels the playing field between one side and the other.

Our consultation sought views on how the total cost of scheme membership, including transaction costs, might be captured, reported and managed. My noble friend Lord German rightly said that perhaps it was not an “either/or” solution, but more of an “and” solution. That was reflected in the consultation’s remit, which presented not just one idea but alternative measures to improve the transparency and disclosure charges, as referred to by my noble friend Lord Lawson with regard to his proposed new schedule: a cap on charges on default funds of defined contribution workplace pension schemes, a point made powerfully by the noble Lord, Lord Browne; a ban on active-member discounts and commission; and an extension of the ban on consultancy charges to all schemes used for automatic enrolment. Quite a wide-ranging consultation was launched.

By November last year we had 160 written responses from the evidence received. We will be publishing our response to this consultation shortly. In fact, Steve Webb, the Minister for Pensions, will be updating the other place on his response to the issue of a cap on charges on Thursday this week. I know how the machinery of government works; that does not quite deliver what we want before us in Grand Committee as we consider the amendment. But that information will be in the public domain, and I am sure will be a source of debate for others to draw upon on Report. I will offer some reassurances in the interim.

[Lord Browne of Ladyton]

Before the Minister moves off that point, I am conscious that if the FT report of Friday 17 January was based on information that should not have been in the public domain, the Minister will be constrained in what he can say. Those of us who have been in that position understand that. However, does the expected update from the Pensions Minister, Steve Webb, relate to the very consultation that has been reported in the FT as being postponed—I think it says shelved for at least a year—potentially indefinitely? Is the Minister prepared to address the specific piece of evidence which suggests that officials briefed members of the industry that that was the case—last week, it is said, which presumably was the week before last?

[Lord Bates]

The noble Lord was a very experienced Minister and a much more senior one than I will ever be.

--- Later in debate ---

However, I hope that I have been able to offer some further reassurance that the powers in the Bill and previous Acts are sufficient to allow this Government to take decisive action on the breadth of charging structures in operation, and that the public, stakeholders and, of course, noble Lords will have ample opportunity to scrutinise the details in secondary legislation. With those reassurances, I ask the noble Lord and my noble friend to withdraw or not move their amendments.

[Lord Browne of Ladyton]

My Lords, I thank the Minister for his reply to this short debate and for the answers he has given to questions. I am grateful—and noble Lords will be grateful—for his acceptance that transparency and disclosure are a necessary part of the reform that we are engaged in; for his confirmation that he and the Government share the concerns that have been expressed in this debate; and, in particular, for his assurances, in so far as they are assurances, that the response to the consultation can be expected shortly but that we will receive from the Pensions Minister Steve Webb on Thursday in the House of Commons an update on the Government’s response to the consultation.

I feel that we now have to wait until Thursday to see whether this response is adequate and, in terms of what it allows us to expect or anticipate, whether it puts a timeous set of potential actions in place that will meet the challenges of the continued rollout of auto-enrolment and the increasing numbers of people who are being engaged by default in individual pension schemes. I will come back to that in my peroration.

I thank all noble Lords who have contributed to this debate. First, I thank the noble Lord, Lord Lawson, for his engagement. I can confirm that there was some stimulus from the fact that he tabled Amendments 63 and 67. Of course, the fact that he did so first in your Lordships’ House does not detract from the fact that an almost identical amendment was tabled in the name of the Labour Party in the House of Commons by my honourable friend Gregg McClymont before Committee there. I make this point not to in any sense undermine our common interpretation of this problem or our substantially common approach, but to point out that but for the slight difference of wording between the amendment my honourable friend tabled in the Commons and the one we tabled in your Lordships’ House, our amendment would probably have been tabled about the same time as the noble Lord’s amendment. The question of timing does not detract from the fact that we have been engaged with this issue for some significant time.

I am very grateful to the right reverend Prelate the Bishop of Chester for two things: first, for his identifying that the approach of the Labour Front Bench and that of the noble Lord, Lord Lawson, are much more compatible than others who have commented on this appear to believe. These amendments proceed by way of regulation but the regulation is to define what subsequently should be disclosed. I point out to those who have contributed to this debate that we, too, are about disclosure with this amendment. We have an ambition to cap the charges on the administration of pension funds but this is not the vehicle for that policy. This is about disclosure. It is about defining what ought to be disclosed in a very precise fashion through a process of consultation and regulation, and then about disclosure for all the same reasons that the noble Lords, Lord Lawson and Lord German, the right reverend Prelate, my noble friend Lady Donaghy and indeed the Minister all seem to consistently agree with.

The second reason I am grateful to the right reverend Prelate the Bishop of Chester is that he not only put his finger on the problem for the member, or potential member, of a pension scheme but explained more fully than I did—perhaps I should have done—why value for money is so important to our reforms. It is about confidence. If there is no confidence in the market, as the right reverend Prelate pointed out—and drew the Minister to agree—this whole package of reforms will fail. This will be half a reform, if there is no confidence in the private pensions industry. Our whole thrust is to address the issues that have been successively identified by reports and analysis of the issue in a form that is designed to reform the law and to provide the confidence that will be necessary for this whole reform—which we support—to go forward.

My noble friend Lady Donaghy reminded us of the importance of trying to change the culture more broadly in the financial services industry if we are to instil the confidence in the people of this country in saving and, I suppose, the mature handling of their own resources. That is a challenge we face that goes beyond just pensions, but it is crucial to them and she is wise to remind us of that.

I thank the noble Lord, Lord German, for engaging with the debate and for encouraging the Minister to respond to some of the important questions that needed to be answered. I remind him that although regulation and a more straightforward form of disclosure are the difference between the way our Front Bench here and the noble Lord, Lord Lawson, have approached this issue, we are concerned about disclosure as well.

It comes down to this: the Minister, as his honourable friend the Pensions Minister, Steve Webb, did in the other place, rests his case on the statutory structure which is being created and a process of consultation with a promise of significant regulation following thereafter, which will be engaging and confidence building. His case depends on how his honourable friend the Pensions Minister responds to the consultation thus far, which is so important to that process. We will all listen very carefully to that statement.

I fear that there may be more in the Financial Times report than the Minister is in a position to reveal to your Lordships’ Committee today. If that proves to be correct, he will appreciate that it is almost certain that we will return to this issue on Report. Between now and then, I hope that the noble Lord, Lord Lawson, will take up my offer to have discussions about where we agree and what is the best way for us to proceed on this issue. We share an analysis and a common concern, or remedy, about how to proceed.

However, in the mean time, I thank the Minister for his response and engagement with the debate and beg leave to withdraw my amendment.

Amendment 62G withdrawn.

--- Later in debate ---

[Baroness Drake (Lab)]

My Lords, Amendment 62GA is designed to address shortcomings in the governance of pension schemes, particularly contract-based schemes. It would give the Secretary of State the power to set regulations that

“provide for requirements for the identification, avoidance and management of conflicts of duty and interest”.

They would require, in the event of a conflict of interest, for priority to be given to the interests of the saver and to ensure that the duties to the saver are met despite the conflict.

In his review, John Kay criticised FCA rules as falling,

“materially below the standards necessary to establish”,

trust, confidence and respect. He recommended a shift towards fiduciary standards. In an auto-enrolled world, that comment has even more resonance because, increasingly, private sector workers’ pensions will be contract based, where, as the noble Lord, Lord Turner, mentioned in debate last Wednesday, there is a,

“fundamental inefficiency of the market ... It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well”.—[Official Report, 15/1/14; col. GC 161.]

My amendment seeks to capture that governance challenge. To achieve an increase in pension savings, workers are auto-enrolled into workplace pensions. There can be no caveat emptor, as the saver does not buy. The system is designed to restrict the saver to one choice—either stay in or opt out and lose the employer contribution. Current regulation of contract-based pensions is at odds with the assumptions underlying auto-enrolment. Contract-based regulation is built on informed consent and consumer choice. Auto-enrolment is designed and built on the principle of inertia, on a population of savers who do not engage with investment choice. A plethora of reports has revealed the conflicts of interest in the industry. The OFT report confirms a dysfunctional pensions market with a weak demand side and concludes that the market could not be expected to self-remedy and that there is a need for intervention.

The introduction of auto-enrolment has been a success and the Government should be pleased. Opt-out rates have been low. The Government must now secure a level of quality and governance that delivers optimal results for savers in terms of building trust so that workers persist with their savings, thereby setting the ground for increasing contributions beyond the current statutory minimum and improving savers’ chances of achieving a reasonable income in retirement. Measures to encourage savers to engage with their pension savings are important but of themselves are not sufficient. The majority of savers will not actively engage. It is that very inertia that can be used by some providers to create or sustain profitable inefficiencies. The legal framework must protect those who do not engage.

The challenge of inertia means that there is a need for efficient defaults over the life cycle of the pension saver. For example, there is a need to get people saving; to determine a minimum they should save; to determine their investment choice at different intervals in the life cycle on, for example, joining a scheme or following a quality review as they get nearer to retirement age; and, by default, to transfer and consolidate their pension pots. Over time, I suspect that we will be considering default arrangements on decumulation when a person retires. The need for defaults raises the bar on governance because someone is using their discretion on behalf of the saver.

Contract pension provision has systemic weaknesses of governance and a particular feature that constrains efficient default arrangements. For example, looking forward, an employer conducting a triennial review that decides that the current scheme is poor value will be unable to switch workers in a contract-based scheme unless they individually consent. However, the very nature of auto-enrolment means that this active consent is unlikely to be granted by many savers. On legacy schemes and pots, I am sure that any OFT-driven audit will reveal poorly performing funds and high charges, but the solutions will not be effective if they require individuals’ consent.

We have a misalignment between what contract-based provision can do and what it is necessary to deliver in the interests of the saver. How does one respond to that challenge? Recent press comments are peppered with references to making it easier to move contract-based scheme members from old to new schemes. Standard Life’s head of workplace pensions, speaking at the NAPF conference, said that contract law acted as a barrier to moving people from poor-quality schemes to good-quality schemes, and added:

“We need to learn the stuff that works in the trust-based world”.

A recent Pensions Institute report found potential for massive improvement in outcomes where poor-quality legacy schemes transferred en masse into better-quality modern schemes with lower charges. The Pensions Institute called on the Government to facilitate changes to contract law to allow such transfers to be made without the individual consent of scheme members where it is clearly in their best interests. However, there is the rub. Who decides where it is clearly in their best interests? How is the primacy of the saver’s interest protected? Governance requirements must be fit for purpose under auto-enrolment and remove a constraint in contract provision, but in a way that ensures that the interests of the saver trump the interests of others when there is a conflict. Putting the legal responsibility for the best interests of the saver on the employer will be problematic, particularly for the long tail of SMEs and micros.

The Government’s use of statutory overrides has a role to play, particularly in placing new quality and governance requirements into future, existing and legacy pension contracts. I ask the Minister to confirm whether this Bill would give the Secretary of State the power to change retrospectively the terms of existing pension contracts to embrace any new quality or governance requirements.

However, the solution must rest in major part in raising the governance in the pensions industry. Like trustees, it should carry a fiduciary responsibility in the management and provision of its pension products and investments. Conflicts of interest must be resolved in the interests of the saver. An efficient private pension system that requires the default transfer of savers’ pots to new schemes and funds simply cannot happen without that.

There is an imbalance in the duties of contract-based pension providers, compared to those placed on trustees, which challenges the success of auto-enrolment. The OFT stressed the need for stronger measures to improve governance but I fear that the independent governance committees that it has agreed with the industry—here there are shades of what the noble Lord, Lord Lawson, referred to as the fox in the hen coop—will fail to achieve the requirement of aligning scheme governance with the interests of savers.

The proposed independent governance committees have many weaknesses. At the very least, such bodies need both a duty to act in members’ best interests and the power to make decisions. The current OFT proposal fails on both points. As the Law Commission commented,

“there are many difficult questions about how these committees will work”.

They,

“will not have the power to change investment strategies or investment managers ... Furthermore, it is not clear whether ... the committees will be under explicit legal duties to act in the interests of”,

the savers. Introducing independent governance committees accountable to the boards of pension providers, without addressing any of the conflicts faced by these providers, or clarifying that decisions must prioritise the interests of policyholders over those of the shareholders, does little to solve the governance deficit.

As a comparator, the governance requirements for the Australian private pension system have been toughened up recently. It is a sad reflection on my character that I spent a significant number of days over the Christmas holidays ploughing through the regulatory requirements under the Australian system—I promised in my new year’s resolutions to get a more exciting life in future. The Australian Prudential Regulatory Authority enforces a range of prudential standards on pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests and a specific duty to deliver value for money.

The advent of auto-enrolment raises the bar on governance. I welcome the Government’s decision to impose quality and governance requirements on pension schemes, but I think that it is necessary to make it explicit that those requirements should provide for the identification, avoidance and management of conflicts of duty and interest. Conflicts of interest go to the heart of the problems in the private pension system. The regulations, when addressing governance requirements, must address the issue of conflicts of interest. Amendment 62GA, without being prescriptive, seeks to do that. I beg to move.

[Lord Browne of Ladyton]

My Lords, I speak to Amendments 67ZB and 67ZC in my name and that of my noble friend Lady Sherlock. It is always a pleasure to follow my noble friend Lady Drake on issues such as this. She has once again characteristically set out an informed and persuasive argument in her contribution to the debate. To a degree, I accept that it could be said to undermine Amendment 67ZC in that it approaches the same issue but in a distinctly different fashion, accepting the same principle. From my perspective, however, I am not that concerned how the Minister responds to the nature of the challenge that my noble friend set out. If he chooses to accept her amendment—I venture to suggest to him that he would invariably be wise to do so in such matters—he will find no great cavil from these Benches that our amendment fell by the way as a consequence.

Amendment 67ZB is designed to address the issue of scale by way of a new clause. It would promote good value in scheme sizes and would require trustees to consider whether the scheme had sufficient scale to deliver good value. I note that, in the Government’s consultation on quality standards in workplace defined-contribution schemes, the Government reveal that they are “interested” in the idea that trustees should have a duty, and underline their interest in the Australian approach to imposing duties on trustees.

I am glad that the Government are beginning to catch up with the Labour Party’s policy review on these issues, but I also note that they have not yet progressed sufficiently far in its investigations to recognise that the Australian Government, the policies of which have already been prayed in aid by my noble friend, also deploy the regulator in this respect. It is not clear why the Government think that trustees of very small UK schemes, which we know from the TPR surveys self-identify as not incapable of understanding investment processes, will be able to make a judgment as to whether they have sufficient scale. If these trustees fail to act, what is supposed to happen?

In Australia, those intending to supply a pension scheme have to apply to the regulator for a licence, and one of the licence conditions requires a reasoned attestation as to how the trustees of the scheme will meet best practice in terms of scale at the investment and administration layers. This process has a ratcheting effect, as the attestation must be repeated on an annual basis and, as best practice improves, this forces mergers. Failure to attest would mean a breach of the regulatory licence, and commentators believe that there will only be a sixth of the current number of schemes within 20 years. For trustees to move to scale we would need a ubiquitous requirement for trustees, a duty on them to assist scale and a mechanism to require action where they fail to act or mis-assess. That is what we seek to provide the beginnings of with this amendment.

Amendment 67ZC would provide for regulations to require any pension scheme to appoint a board of trustees which will have fiduciary duties towards the members of the pension scheme. Our view is that a minimum requirement for auto-enrolment schemes is that they must be governed in a way which legally requires the scheme to prioritise the interests of members over all other interests.

The Minister may say that they have consulted on governance for automatic transfer schemes; again, it is a good thing if he is catching up with our policy review. However, his quality standards are intended for automatic transfer schemes only. Under our approach, automatic transfer will be limited to aggregators, as the Minister is well aware. Our requirement for trustees applies to all qualifying schemes, not just to automatic transfer schemes, and, in addition, our definition of qualifying schemes includes closed-book schemes, which his does not.

As a further point, these conditions will apply to schemes that wish to operate as automatic transfer schemes, but an automatic transfer system is years away. The requirement for trustees is immediate, however, as my noble friend has pointed out. Why should we adopt a lesser principle than that adopted by the Australians? Their Cooper review found:

“Superannuation must always be for the benefit of members. The superannuation system does not exist to support intermediaries. Trustees must be relentless in seeking benefits for members”.

Thanks to my noble friend Lady Drake, we now know that that has also been translated into regulation in Australia.

[Lord Bates]

My Lords, ensuring that schemes deliver good value for, and are run in the best interests of, their members is a primary concern for this Government, so we welcome this discussion, which was set out with great insight and clarity by the noble Baroness, Lady Drake. We agree that the issues highlighted by these amendments—scale, fiduciary duties and conflicts of interest—are important ones to consider. However, we do not agree that simply encouraging the creation of large, trust-based schemes is the right approach to ensuring good value for members.

We are interested in testing how far scale can help schemes to deliver better quality and lower charges for members. Last year we published a call for evidence on defined contribution quality standards, in which we sought evidence about how a scheme’s size can influence outcomes for members. As noble Lords are no doubt aware, the issue of scale is not straightforward, and most responses to our call for evidence saw benefits to members in both large and small schemes. We are currently considering the responses to the call for evidence alongside the recommendations of the Office of Fair Trading, and will respond in due course.

We would have concerns about compelling schemes to merge in the way that this amendment suggests. Determining what is in all members’ best interests would be extremely challenging for the Pensions Regulator, which simply would not have the capacity or information needed to scrutinise every small scheme and consider whether it should close or merge. There could also be European Court of Human Rights issues in relation to property rights because to force a scheme merger could lead to some members losing out.

Turning to the idea that all schemes should be trust-based, in our call for evidence we set out the importance of ensuring that schemes are governed in members’ interests; of course, we recognise the vital role that trustees play in achieving this. However, we disagree that simply imposing a trust-based structure on all schemes is the way forward. Neither the presence of trustees nor fiduciary duties are a panacea for poor governance. This is shown in the findings of the OFT, which identified governance weaknesses in trust-based schemes of different sizes. The Law Commission’s current consultation on fiduciary duties notes that legal duties are,

“insufficient to ensure good outcomes for members”.

In addition, the amendment suggests that in scheme governance, trustees’ decisions should take precedence over an employer’s decisions in any circumstances. This does not provide any opportunity to balance interests, and would apply even if the trustees’ decisions are unreasonable. Such a broad requirement could lead to significant financial difficulties for employers, which would not be in anyone’s interests.

The amendment moved by the noble Baroness, Lady Drake, highlights the importance of identifying and avoiding conflicts of interest. The Government agree that this is an important area; in our call for evidence we suggested that all schemes should have a governance body that must be able to act freely in members’ interests. The noble Baroness referred to the Australian scheme, as did the noble Lord, Lord Browne. She was very dutiful in reading it over Christmas. I suggest that she would find the Australian pension code less onerous to read if she was reading it in Australia, but she was probably shivering here with the rest of us.

The Australian regulator’s new power is interesting but it is not translatable to the UK pension system. Following the Cooper review, which has been referred to, the Australian pensions regulator—APRA—has been given new powers to drive schemes to merge.

We are interested in this approach and will monitor how it is used and how effective it is, but it should be remembered that the Australian pensions landscape is significantly different from our own. It is our understanding that the APRA does not intend to use the power to target all small schemes but to focus, for example, on cases where there is a link between underperformance and an absence of scale.

The noble Lord, Lord Browne, argued that you need to drive up scale in order to increase consolidation, which has an effect on charges and therefore brings a benefit to members. Scale is not necessarily a determinant of value: bigger schemes are not always better. Consolidation is already happening. For example, in 2012 around half the active members of private occupational defined contribution schemes were in schemes with 10,000 or more members; in 2000 this figure was one in eight. The number of active members in small and medium-sized private occupational defined contribution schemes decreased from 0.3 million to 0.1 million between 2000 and 2012—a reflection of the greater regulatory requirements and burdens that are placed upon scheme managers, as well as the challenge of finding trustees who will undertake the work.

Finally, turning to the comment made by the noble Baroness, Lady Drake, about independent governance committees and whether they would have a fiduciary duty to members, the OFT has recommended a model of independent governance committees to address a number of problems that stem from weaknesses in the buyer side of the market. As part of the consultation on fiduciary duties, the Law Commission has asked about the duties that should apply to members of independent governance committees. Its tentative view is that members should be subject to legal duties to act in the interests of members. We are working with regulators and stakeholders on requirements for independent governance committees, and will respond in due course.

This has been a helpful discussion but I hope that my responses will enable the noble Baroness, Lady Drake, to consider withdrawing her amendment.

[Lord Browne of Ladyton]

Perhaps I might engage with the Minister on the issue of whether or not larger pension schemes provide better returns to their members. I do not intend to delay the Committee long on this issue but I have before me a page and a half of significant research that challenges the assertion made by the Minister. I will say only this: recent NAPF research shows that a person in a larger scheme will get a 28% larger pension pot than a person in a smaller scheme. Indeed, research from Australia supports the assertion that fund size has a positive impact on the performance of not-for-profit superannuation funds there. I shall arrange for the Minister to have access to this research but I could not let that assertion remain unchallenged.

[Baroness Drake]

I thank my noble friend Lord Browne for his supporting contributions in this debate. I thank the Minister for his response but he has not actually answered my question—I did listen; perhaps I missed it but I do not think so—which was: can the Minister confirm that this Bill will give the Secretary of State the power to retrospectively change the terms of existing pension contracts to embrace any new quality or governance requirement? It is a pretty key point because it goes to the heart of what the Government can or cannot do unless they take those powers to themselves. A lot of people are quite interested in whether the Government are taking those powers so that when they decide what the quality and governance requirements are, they have the power to retrospectively apply them to existing pension contracts.

--- Later in debate ---

Moved by

[Lord Browne of Ladyton]

67ZA: After Clause 47, insert the following new Clause—
“Decumulation
(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;(b) ensuring access to most annuity providers;(c) minimising costs; and(d) ensuring that information and support is available on alternative at-retirement products.(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.”

[Lord Browne of Ladyton]

My Lords, Amendment 67ZA is in my name and that of my noble friend Lady Sherlock. It proposes the addition of a simple clause to the Bill which would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. Later provisions set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed; in other words, it calls for an independent brokerage service to assist people to annuitise at the point of retirement.

This is hardly a radical proposal. It is best practice. It is what many employers with DC pension schemes already offer. The ABI code of practice says that providers should tell people who are decumulating that they can shop around and transfer their funds to another provider and that they should seek advice before so doing. But that is not enough. As Dan Hyde, in an article in the Telegraph on 10 December last year, wrote:

“The process starts with a ‘wake-up’ pack sent to savers … in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.

Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. Even a one-off appointment would be expensive, equivalent to a week’s take-home pay for workers on the average wage, even if they knew where to go.

The scandal of annuities is well known and widespread. When this amendment was debated in the House of Commons, Steve Webb, the Pensions Minister, used the same diversionary tactic as did the Minister, Mark Hoban, who responded to the later Westminster Hall debate on annuities. It is all very well to suggest that those reaching retirement age can do many things other than plan for an annuity, but it is insufficient to say that people should have many different opportunities and lots of different advice. The fact is that the variety in the kinds of annuity that are offered and the variety of deals available is considerable and an annuity is invariably the default position of most of those retiring. They need independent support at that time.

The need for that independent support at this point may be obvious but the reasons for it are worth repeating. The first is the complexity of choosing the right annuity option. Annuities are complex products and decumulation is a complex process. Comparison between providers is very difficult. I saw a recent quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life; level escalation; anticipated bonus rates and required smooth return rates, all without explanation. It offered four alternatives to a conventional lifetime quotation, annuity was described as income choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most about £1,200. With this complexity no one should exercise a choice without independent support, so no wonder more than 50% of people—according to the Telegraph—go with their existing provider.

I understand that the first comparator website has been launched, and I suppose that is a step in the right direction, but Ros Altmann, the independent pensions consultant who gave evidence to the Commons committee, did not think that it was particularly simple. She said that it was disappointing and not easy to use. Annuities are complex products with multiple options and it may be that there never can be a simple comparison website. Does the Minister accept that annuities are complex and people need independent brokerage support at the point of decision-making? Does he accept that obtaining that support is beyond the grasp of most people, particularly those with no knowledge of investments? If he does accept that, how does he suggest that those who need that support can be guaranteed to get it?

The variety in the kinds of annuity that are offered and the deals that people can get is just bewildering. The NAPF and others have said that annuitising with some pensions scheme providers pays on average 20% less than shopping around. Ros Altmann said on “Newsnight” that if you had an annuity with the worst performers you would have to live until you were 100 to get back the money that you paid in. In effect, inertia or, alternatively, being overwhelmed by the complexity of making a choice, is exploited by pensions providers. Insurers are making excessive profits from purchasers failing to shop around. Inertia is a powerful force that results in excess profits for insurers. They penalise, not reward you, for loyalty. Perhaps it was that which drove the Pensions Minister, Steve Webb, to make his announcement on portable annuities last week—a Statement, by the way, that went down like a lead balloon in the industry. Well, it would, wouldn’t it?

The current system is a lovely little earner, as they say in my new adopted home in the East End of London. The FSCP report published in December made many points. To assist my analysis of it, I have drawn the following points from the report which states that the tactics used by insurance companies and brokers are “tantamount to burglary” of old age pensioners, and that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies make 20 times more profits on annuities than on any other financial product. There are poor returns: on a pot of £100,000, Clerical Medical offered £4,664 per annum, while Reliance Mutual offered £6,111. Over their expected lifetime, the pensioners would have been just over £36,000 worse off with one rather than the other.

--- Later in debate ---

[Lord Browne of Ladyton]

My Lords, I am grateful to the Minister for his response. I am disappointed, although not surprised, that his speaking notes sought to deploy what I would call a diversionary tactic in addressing the issue that this amendment seeks to address, and that clearly concerns a number of Members of this Committee. I am grateful to my noble friend Lady Hollis for her intervention and for the detail that she extracted from the Minister. I am also grateful for the intervention of the right reverend Prelate the Bishop of Chester, who encapsulated in a couple of sentences the fact that the Minister had compounded the complexity and the difficulty of the challenge facing those approaching retirement in such pension schemes, rather than giving them any comfort.

Of course, we must all accept what the Minister says about the variety of choices facing those who reach this point before or at the same time as they engage with the issue of annuity. However, the fact is that the level of understanding of the vast majority of those retiring is such that significant numbers—400,000 a year—are entering into annuities. They are taking out these complex insurance policies at the point of retirement and the results that they are achieving, even within the annuities themselves, suggest that they are not making the best choices for their own futures. This amendment seeks, within the confines of this Bill and in the context of other work that must be done in relation to annuities, to provide at least a step in the right direction now, demonstrating that Parliament understands and engages with this issue and wishes to prevent it from becoming the next mis-selling scandal of the financial services industry.

With respect to the Minister, it is no answer to say that, of course, the answers can be bewildering but that these same people should engage with a whole other set of bewildering choices in order to avoid the bewildering nature of the choices in relation to annuities. That is hardly a way to move forward. This is a relatively simple initiative. It is not perfect but it seeks, within the body of the clause as drafted, to address the very issue that was the target of the Minister’s principal criticism. It seeks to establish a method of ensuring that best practice is adopted by those brokerage services and gives the regulator a role in defining what best practice is. Surely this is acceptable, if only as a place marker while we go on to deal with the much more difficult issues that have been revealed, through the reports and the information that I have shared, and that the Minister knows exist in the annuities market. There is something fundamentally wrong with the market and it is driven by exactly the same motives as we have engaged with in other parts of the private pensions industry and in our debates in this Committee.

I understand why the Minister gives this disappointing reply to this amendment. I understand why his Government are reluctant at this point to engage with this initiative. However, I am determined that, at some stage, your Lordships’ House will have an opportunity to consider whether or not this is something that it wishes to engage with. I predict with some confidence that this matter will come back on Report but, given where we are in these proceedings, I will look forward to the debate on this issue in the Chamber and to discovering how much those who hear that debate will be reassured when the Minister or others put forward the arguments that we have heard this afternoon. At this stage, I beg leave to withdraw the amendment.

Amendment 67ZA withdrawn.

--- Later in debate ---

[The Deputy Chairman of Committees (Baroness Harris of Richmond) (LD)]

My Lords, if Amendment 68 is agreed to, I cannot call Amendment 68ZA by reason of pre-emption.

[Lord Browne of Ladyton]

My Lords, I speak to government Amendments 68 and 69, and to Amendment 68ZA, for what that is now worth, and Amendment 68ZB in the name of my noble friend Lady Sherlock and myself. As the Minister pointed out, Amendment 68ZA is now unnecessary in the light of government Amendment 68.

We welcome the government amendments in this group. As the Minister explained, they have been tabled in response to some of the recommendations made by the DPRRC. I am pleased to see that the Government have come to accept the DPRRC’s recommendation that Clause 17 powers relating to the effect of pensioners postponing or suspending state pensions should be affirmative; that was the purpose of our Amendment 68ZA.

Amendment 68ZB is purely a probing amendment, and has been remarkably successful in drawing from the Minister an extensive explanation of the regulation-making power under Clause 42, and why the Government felt that it was appropriate that it should proceed by the negative resolution procedure. I am extremely grateful to the Minister for that detailed explanation and, in the light of his full explanation, which is now on the record, I will not press that amendment.

[Lord Bates]

I am grateful.

Pensions Bill

Lord Browne of Ladyton Excerpts

Wednesday 15th January 2014 Grand Committee

[Lord German (LD)]

My Lords, I raised this issue at Second Reading and have no hesitation in raising it again. I rise to address the issues that have been spoken of already, particularly those in Amendment 66, which the noble Baroness, Lady Hollis, has tabled this afternoon.

I hope and I am sure that noble Lords will judge the issue of changes to bereavement benefits as changes which would improve rather than worsen the current set of arrangements. We are told that these measures are based on what people were told the Government would provide them with, and that they would provide them with the best support. The Government in turn have told us that they are not about reducing entitlement or making savings. Therefore, the test surely must be whether the changes provide a genuine improvement and are not a worsening of the provision. That is why I have this concern about the one implication of the changes, that bereaved parents will be required to go back to work six months after the death of the mother or father. I am afraid I am unable to see the logic or the compassion that I would expect in this change. In fact, I used the word “cruel” at Second Reading.

For the benefit of the bereaved child or children, I would wish for those bereaved parents with children to have full conditionality relaxed for the whole year. This does not rule out preparation for return to work; in fact, there could still be some limited conditionality after six months—for example, attending work-focused interviews only. It is worth making the comparison with kinship carers. I regard this as an anomaly in the proposed regulations. If a child after bereavement goes to live with an uncle, aunt or cousin, that uncle, aunt or cousin, who may have to forgo work to look after the bereaved child, is exempt from full conditionality for 12 months. Yet the bereaved parent, the mother or father, is given only a six-month relaxation. As we know, a 12-month relaxation will not be necessary for everyone. The noble Baroness, Lady Hollis, said this. Some bereaved parents may determine that their circumstances are different and may want to return to work earlier. One would hope that that is always in the best interests of them and their bereaved children, but that is their choice and not a requirement of the state. There is compelling evidence to suggest that we need to alter the proposed provision.

There are six facts from studies, which I want to draw out. The first is that bereaved children and young people are more likely to have a serious illness or accident than their non-bereaved peers during the first year following the death of a parent. The second fact drawn from the studies conducted in this area is that they have higher rates of substance and alcohol abuse than their non-bereaved peers. Thirdly, one-third will show clinical levels of mental health difficulty at some point during the first two years after the death of their parent, and those bereaved suddenly of a parent are three times more likely to develop depression than their non-bereaved peers. Fourthly, there is an increased risk of suicide attempt and hospitalisation for psychiatric disorder. The fifth element is that parentally bereaved children score lower at GCSE than their non-bereaved peers. In other words, it affects their life chances through the examination system. The death of a parent by the age of 16 is associated with girls failing to gain any sort of qualification, and with men and women being unemployed by the age of 30. Sixthly, bereaved children and young people are overrepresented in the criminal justice system.

Of course, the increased risks outlined above do not mean that every bereaved child will go on to develop such difficulties, but they show that, as a group, they are more vulnerable than those who have not been bereaved. The most reliable longitudinal study that we have, which looks at the impact on bereaved children over a period of two years, conducted by JW Worden, Children and Grief: When a Parent Dies, found that the capacity of the surviving parent to care for their child was—and I am sure that no noble Lord will be surprised by this—the most important factor in securing better outcomes, emotionally and behaviourally, for the children. This included the surviving parent’s availability to the child—obviously emotionally but, more than that, in terms of being able to spend time with them and continuing routines where possible. Successful interventions with families generally involve supporting parents to communicate with and be available to their children, all of which point to allowing the surviving parent as much time as possible to be with their child in the year following the death.

Clearly, the conditions for claiming universal credit are intended to be as close to having a job as possible. It is important to think through the parallels between those who are bereaved and claiming UC, and those who are bereaved while in employment. While most employers clearly would not be able to offer a full year off work to a newly bereaved parent, many parents choose to change jobs, or even stop working, if their employer cannot be flexible, so that they can meet the needs of their children better.

This is the most important of issues and the most difficult time for children—when they lose a parent. Given that this is an anomaly compared to when a bereaved child is placed with a kinship carer, I believe that the Government should think again on this very important issue. I hope my noble friend will consider that.

[Lord Browne of Ladyton (Lab)]

My Lords, I will speak to Amendments 62ZZA and 62ZB, in my name and that of my noble friend Lady Sherlock, to Amendments 59, 60, 61 and 66 in the name of my noble friend Lady Hollis and Amendment 62ZA in the name of the noble Baroness, Lady Meacher.

At Second Reading, this part of the Bill figured large. The mood of your Lordships’ House then was that these provisions merited further debate and possible revision. We were all particularly indebted to the right reverend Prelate the Bishop of Derby for his powerful contribution that day. A lifetime of providing pastoral care to those suffering bereavement amounts to a wealth of experience and knowledge that we ignore at our peril, particularly when the lessons drawn from it are supported by the best research, as the contribution of the noble Lord, Lord German, has just suggested.

I expect that a strong thread of the Minister’s response will be an argument that the principal aim of these reforms is to make bereavement payments more effective in the 21st-century context. The Government have concluded that doing so requires only short-term intervention to allow a bereaved spouse or civil partner the time to deal with the immediate costs of the death of a partner and to come to terms with the consequential emotional and financial implications. In the longer term, they argue, if support is needed to cope with the consequences of bereavement, the universal credit system will provide that long-term support.

Broadly, those whom the Government consulted supported that approach, but significant reservations were expressed about the impact of the proposed changes on bereaved families. I believe, like many noble Lords and, perhaps surprisingly, the Pensions Minister himself, that there is a debate to be had about how long support should last, particularly in relation to bereaved families with children. On 29 October, on Report in the House of Commons, the Pensions Minister, Steve Webb, in restating the basic design of his reforms, said,

“there is a debate to be had about how long support should last”.—[Official Report, Commons, 29/10/13; col. 867.]

Thanks to the amendments before the Committee this evening, we have the chance to have part of that debate. I am indebted, once again, to my noble friends and other noble Lords who, in speeches moving and supporting the amendments, have set out the relevant differences in the proposed new financial support provisions compared to the status quo, saving me the need to repeat them and sparing your Lordships the tedium of having to listen to me do it. However, I have some points that complement their contributions and are worth emphasising.

The Bill—certainly this part of it—is cost-neutral, or at least broadly cost-neutral. It achieves its objective of paying out to all bereaved partners, regardless of age, mainly by reducing the level of support for bereaved families and by redistributing that money to those without children. The biggest beneficiaries are bereaved partners under 45—who are also the group most likely to be in work.

Secondly, the Government’s own figures on the number of families affected and what their numbers mean tell us some things, but not everything. The total number of deaths of people aged 25 to 64 in 2012, according to the ONS statistics, was about 73,000: 43,799 men and 29,413 women. The number of deaths increases with age, as one might expect. The number of people in receipt of each of the current three benefits includes 10,000-12,000 receiving bereavement support payments per annum. In November 2012, there were 21,000 people in receipt of one-year bereavement payments and 44,000 in receipt of the widowed parent’s allowance.

If I understand these statistics—and I might not—it appears that only half of bereaved partners in any one year are receiving bereavement benefits. This indicates that either bereaved partners are not claiming, they are not married or in civil partnerships, or they are unable to meet the national insurance contributions criteria. It would be interesting to know whether the Minister has any more detailed statistics than this. The estimated total expenditure of these benefits in 2013-14 is £575 million, falling to £531 million in 2016-17. The total is falling as the number of people dying below state pension age is falling and it is expected to continue to fall as people live longer. Importantly, however, as my noble friend Lady Hollis and the noble Baroness, Lady Finlay, reminded us very forcefully, behind these statistics each death is a great family tragedy. It is the loss of a loved partner or a loved parent, in some cases both.

This reform package includes a simplification of the conditions of entitlement and a relaxation of the qualifying national insurance contributions conditions. At this stage, I want to make two points. First, the contribution record of the deceased partner is still the principle qualification for these benefits, and that is important. This is not a case of something for nothing: it is a payment out for people who have paid in. Secondly, it is argued—although this is not reflected in any amendment before the Committee this afternoon—that in these reforms, the proposed contribution condition is more restrictive than at present. In particular, the proposed contribution condition requires Class 1 or Class 2 contributions, while the existing contribution condition allows payment of Class 3 contributions. Furthermore, unlike the current arrangements, it is argued, where the contributor dies before the end of the relevant year for the necessary contributions, there is no provision for earlier years to be aggregated and treated as if made in the relevant year. Will the Minister tell us whether this was intentional and, if so, why? Would the Government be sympathetic to an amendment that reflected the current rules?

As has already been explained by my noble friends, the existing system is replaced by the payment of a lump sum and monthly payments for one year to all bereaved spouses or civil partners regardless of age. We understand that the lump sum will be tax-free. Although the impact assessment assumes that the monthly payment will also be tax-free, we understand that this is still a matter about which the DWP is in discussion with the Treasury.

Amendment 62ZZA in the names of my noble friend Lady Sherlock and myself would ensure that both the lump sum and the instalment element of BSP would be tax-free. In the House of Commons, the Pensions Minister argued that if BSP is paid for just one year, it is easier to make the case that it is not a replacement for income, but a grant to meet the extra costs of bereavement. Therefore, he told us, it was easier to argue that it should be exempt from tax. Accepting that this is, of course, a matter for Her Majesty’s Treasury, a proper understanding of the effect of BSP requires more certainty than the Government are providing about its tax status. It would be helpful if the Minister could tell us when he hopes to have more clarity about this issue. Would it be helpful to the DWP if an amendment similar to our Amendment 62ZZA were passed on Report?

Amendment 59, in the name of my noble friend Lady Hollis engages directly with the Pensions Minister’s call for a debate about how long support should last. As explained by my noble friend, it seeks to extend the time of payment of BSP to a bereaved parent with children for at least three years or until the second year of schooling is complete for all dependent children, whichever is the longer period. The Childhood Bereavement Network states its confidence that this could be done cost-neutrally by adjusting down the monthly rate of BSP for parents and by reducing the lump sum for non-parents. Is the Minister willing to use his resources to test whether that brief is well founded? If it is, surely it significantly supports my noble friend’s amendment. She has shared not only her own experience of the effect of the loss of a parent on a child, but referred to research to which the noble Lord, Lord German, referred extensively. This demonstrated that the impact of a parent’s death on a child will be significant beyond a period of three years. This proposal is therefore evidence-based and, interestingly, is less generous than the current arrangements that my noble friend herself introduced.

The question that we are all asking is: to what extent are the Minister and the Government considering the needs of children in making this significant change of policy, by moving money from parents with children to those without? We hope that the Minister will engage with that question when he responds.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 13th January 2014 Grand Committee

[Baroness Drake]

I was drawing to a close. I have a final point on the negative procedure. In response to my suggestion that there could possibly be time limits on consultation in order to meet the spirit of what I aspired to achieve before the constraint of April 2016, the Minister said that seemed too prescriptive and asked why one would want to put constraints on the consultative process. It seemed rather contradictory to say that one cannot go for negative procedures because affirmative procedures take too long and could push up against the efficient way in which employers could adjust in time for April 2016. If the balance were a trade-off between defined periods or timetabled periods of consultation with the employers and the opportunity to deal with the regulation by affirmative procedures, it would be fair.

[Lord Browne of Ladyton (Lab)]

Like my noble friends, I am grateful to the Minister for engaging more generally with the issues of statutory override in his remarks in support of Amendment 44. That has been of some assistance to the Committee. It is obvious from the engagement he has already had with my noble friends that they believe that to be the case. I, too, wish to be associated with the words of thanks to the Minister for the offers of further briefing and engagement. They will be taken up.

Before I take advantage of his generosity to ask him a few additional questions, one of the advantages of anticipating that he would do this—because he was gracious enough to indicate that he was prepared to do it—was that I was able to read the official record of the previous debate we had in Committee, and there are one or two things that occurred to me that he could expand upon.

Before I turn to that, I shall deal somewhat formally with government Amendment 44, which I accept is a consequential amendment. I have to say—I do not expect the Minister to engage very fully with this—that reading the statutory provision which he seeks to amend, the section of the Pensions Act 2004, I am slightly at a loss to understand why the amendment is necessary. It makes the precise provision more elegant, but I am not sure that it changes much of the content. It is genuinely consequential. Section 258(2)(c)(ii) already contains these words, although they are further qualified.

In the more general debate I shall try to be complementary to the points already made and not go back over the issues that my noble friends have addressed, although I have some notes here which are similar to some of their observations. I turn first to the issue of whether it is appropriate to deal with the regulations anticipated by these provisions by affirmative procedure in your Lordships’ House and in the House of Commons, or by negative procedure, and consequently whether it would be appropriate to deal with the limited issue of the extension of the period by negative or affirmative procedure. It seems to me, first, that it is improbable in the extreme, given the way the Minister has described these regulations in terms of their comprehensive nature, their complexity, and the difficulty associated with understanding them, that they will not be debated in some form in both Houses. It is unlikely that there will not be a desire to engage with some aspects of them to—at the very least—achieve some further clarification.

My second point to the Minister is that it seems to be counterproductive to the argument that negative procedure is appropriate to go to such length to explain just how complicated the regulations are. It seems to me that the more complicated the regulations are, and the more the primary legislation has to be supplemented by complicated regulations, the weaker the argument for doing this by negative procedure becomes. I suspect that that is why, reflecting on the Minister’s words, he referred again to the issue of parliamentary time. With respect to the Minister, getting parliamentary time in our current Parliament is the weakest argument possible.

I am struck by the number of times the House of Commons rises before what I consider to be its normal rising time. I do not know whether that is a function of the fact that the coalition Government have run out of agreement about what they can legislate on —that may happen; it is a perfectly natural thing with coalition government—but I am also struck by how much time is spent in the House of Commons debating what is now called “Members’ Business”. As far as your Lordships’ House is concerned, I am struck by the fact that we are all expecting—and I think we will see—that an extraordinary amount of time will be found to debate a Private Member’s Bill over the coming weeks.

If regulations are debated in the normal way, it seems to indicate an expectation that there will be no great competition for parliamentary time between now and the general election. In fact, I go so far as to suggest that the business managers of the respective Houses may have difficulty in filling the time they already have, so I do not think the argument about parliamentary time is all that strong. If the Minister is to continue to promote the idea that these regulations—complicated, difficult, comprehensive and substantial as they are—are still best dealt with by negative procedure, then, with all due respect, I think he will need better arguments than those he has already deployed.

Secondly, perhaps I may take advantage of the opportunity to debate these issues and ask the Minister to give some clarification about information that he gave us when we last debated these issues about the effect that the abolition of contracting out will have on people’s expectations. Early on in his contribution to our last Grand Committee, he came to engage with the issue of trustees and pension funds and their responsibilities. I will quote him fully, not in short. He stated:

“Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes”.—[Official Report, 8/1/24; cols. GC 430–431.]

That is an argument that was deployed by the Pensions Minister in the House of Commons, too, when addressing that issue. It is clearly designed to allay, and does allay, the concerns of a significant number of people about the denial of their expectations. However, in col. GC 433, when the Minister was discussing the issue of protected persons under statutory override, he deployed a similar but different argument. I shall quote it to him, because I am interested in the difference, and what it actually means. He said:

“We also have to factor in that the design of the single tier reforms means that those with a long history of contracting out will in most cases build up significantly more state pension. Around 75% of people in the private sector who pay higher national insurance contributions and reach state pension age during the first two decades following implementation will receive enough extra state pension over their retirement to counterbalance the increase in national insurance contributions”.

He went on to say:

“This is a very complicated issue with many different and conflicting interests”.—[Official Report, 8/1/14; col. GC 433.]

But we know that.

Were these different ways of saying the same thing, or were they different things—and, if so, what is the difference? Why does he say “two decades” in one case and one decade in the other, and why is there a reference only to counterbalancing the increase in national insurance contributions in one while there is a reference to eventual benefits in the other? It may not be easy for the Minister to answer that immediately, and I apologise if it is not, but I would be interested to know whether he intended those two things to mean the same—and, if not, why there is a difference.

On the issue of protected persons, in col. GC 433, the Minister addressed my question about the defeated expectation that the decision that the Government promised following the consultation would be made clear to Parliament. He told the Committee that a decision following the consultation about protected persons would be made as soon as possible, and that when it was made, Parliament would be informed. But what he did not say was important. The Pensions Minister in the other place said at one stage that it would be done in the summer of 2013—and we know that that is now long gone. No matter how generous one might be with Governments who use seasons to give an indication as to when something might be done—and having been a Minister myself I know how wise it is to do that sometimes—in no one’s view are we still in the summer of 2013.

The Pensions Minister gave both the Standing Committee and the whole House of Commons to believe that, at the very worst, a decision may be made when the Bill was still before Parliament. That is not a phrase the Minister used. Was that deliberate or can he repeat the phrase? It is important for the 60,000 people who consider themselves to be protected persons. Their expectation is that the decision and therefore some engagement with the consequences of that decision will still be a live issue while the Bill is still before Parliament.

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[Lord McKenzie of Luton]

Indeed, I agree with my noble friend. It is the converse of that. A cynic might say that this is all to do with managing the deficit and the debt in the run-up to a general election, but that is for us cynics, I guess.

Looking at Amendment 62, I wonder whether the Minister can help me out on what will eventually be new Section 14B dealing with the arrangements for repayment of contributions. I am a little unclear about proposed new subsection 14B(4), which states:

“Regulations under subsection (1) may provide for benefits paid to a person because of the unit of additional pension to be recovered by deducting them from the repayment”.

I am not quite sure whether the benefits referred to there are the additional pension that has hitherto been received or whether there is something else because typically one would not expect extra benefits to be paid if somebody has extra income—quite the reverse. Perhaps the Minister can help me on that provision.

Proposed new Section 61ZA is headed “Shortfall in contributions”. I was a bit bemused by this. It states:

“This section applies to a person who has one or more units of additional pension if the person … is not entitled to a Category A retirement pension, but … would be entitled to a Category A retirement pension if the relevant contribution conditions were satisfied”.

It goes on:

“The relevant contribution conditions are to be taken to be satisfied”,

but in a sense it negates the impact of that in terms of payments as you get only the additional pension attributable to units of additional pension. I was trying to fathom what that was about because if somebody is not entitled to a category A pension presumably they would only be entitled at all if they had a category B or D pension. Or is this saying, basically, that even though you do not have a pension entitlement, we will treat you as having a pension entitlement for the purposes of being able to take up these provisions? That seems to undercut one of the two requirements—and there are only two requirements—to be able to access these arrangements.

I do not know why there needs to be consultation with the Government Actuary or the deputy Government Actuary—I do not know whether you can choose who to go to for advice. I would have thought that going to the Government Actuary’s Department would include going to the deputy if the Government Actuary is not available. But there may be good reason for that formulation. This may well be a nice little earner and deserve support on that basis, but until we know more detail it is difficult to judge. It is an odd formulation to attach this to the additional state pension in the way that is proposed.

[Lord Browne of Ladyton]

My Lords, I, too, thank the Minister for his explanation of these provisions. I take this opportunity to thank his Bill team on behalf of my noble friends and myself for the briefing that it provided to explain some of the issues that have been raised. When the Chancellor announced the scheme in the Autumn Statement there was much excitement among financial journalists, I recollect. It was hailed as a great deal for consumers by commentators, many of whom missed crucial words in the small print that it would be at a broadly actuarial fair rate. My understanding—and the Minister's explanation confirmed this—is that the price will vary according to age at purchase, much as an annuity would, and that it would be gender-neutral.

The Minister has effectively confirmed that the only factor that will be taken into account in pricing a class 3A contribution will be age. No account will be taken of any regional or occupational differences in life expectancy, which are issues that will engage the Committee later in this evening’s debate. As that is not going to be the case, have the Government done any work on the likely distributional effects of this scheme? If this scheme is broadly actuarially fair in pricing and the proposal is that over time the policy will be broadly cost-neutral as the briefing paper says, if some people are getting a good deal others must be losing out. Those who lose out will be those with shorter than average lives, and there is a clear socioeconomic correlation there.

There is much that we do not know about the scheme and the Minister was absolutely candid about that. In fact, there is much that the Government do not know about the scheme because they have not worked it out. We know, however, that it will start in October 2015 and that the Government are minded to run it for 18 months or two years only. I digress here to point out to the Minister the irony of telling us in one short unqualified sentence that the affirmative procedure will be used for the regulations for this in a scheme that is due to start in October 2015 when he spent a significant amount of his last contribution to the Committee explaining that it would be very difficult to find time for affirmative regulations in this Parliament. That irony was not lost on the rest of us. He may find that fact being played back to him at some time in the not-too-distant future.

We do not know the range of prices, but the illustrative price given in the briefing paper sent to Peers showed a charmingly named couple, Mr and Mrs Average, who will be 65 in 2015. They could be expected to live for another 24 years. It suggests that they would have to find £1,248 to acquire another one pound a week. That would be a better deal for them than going to the market, said the briefing, because the extra pension that it would buy would be uprated by CPI and without charges, and would be inheritable under the additional state pension rules. I am not sure whether that was meant to be the price for them to receive an extra £1 per week each because it seems in the polling reports that the prices tested were between £300 and £800 to buy an extra £1 per week, depending on age. I make this point because the value of polling is of course dependent on the nature of the questions asked. If the questions that were asked in the polling were on an expectation that one unit per week would cost between £300 and £800, and in fact it is likely to cost £1,248 to acquire, that polling may need to be redone as it will be of limited value.

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[Lord Freud]

It does not count. I can answer that straightaway because the discussions on the welfare cap have been around working-age benefits, not pension benefits. The Labour Party may have been discussing a wider pension cap but that is not what we—

[Lord Browne of Ladyton]

It is the pension cap that this Committee is discussing. I am grateful for that clarification, which was appropriate at this time.

Finally, there are the decision points for individuals. Will they get advice on whether they should buy class 3A contributions? After all, there are significant considerations for individuals, such as their life expectancy, which may be significantly affected by where they live in the United Kingdom; whether they are married or in a civil partnership, or likely to be so; and what other income or savings they have—and, therefore, whether it is a good idea, if it may affect their entitlement to incapability benefits, for example. After all, if someone with £10,000 in savings decided to spend £4,000 of those in buying another £5 in income, would they not simply lose that in pension credit and have 40% less of their savings? For all the reasons that we have discussed, those savings may be necessary at later stages in their life. Crucially, who would sell this to them? In the context of the briefing that we received from the Minister’s team, we were told that engagement between the purchasers of this and the Government would be through the Treasury. Does that mean that the Treasury will have certain responsibilities to people who call to inquire about buying these class 3A contributions? If so, how will they be discharged?

There are many questions to ask. The Committee will not be surprised if the Minister cannot answer them all now, because, with respect, he was unable to answer even any of his own questions on his introductory remarks. We may have to wait and see about some of the detail. I understand the reasons for haste; this legislative vehicle is important for this initiative and, if it proves to be positive, that is a good thing. But the scheme was rushed out in the Autumn Statement and added on to the Bill when it had gone through another place. We have no costings or details on price, and no idea how it will be administered—but we still look forward very much to the Minister’s reply.

[Baroness Hollis of Heigham]

Can I ask a question following on from my noble friend about the interaction of pension credit, which I was trying to tease out as he was going along? At the moment, if you have savings of more than about £40,000, the first £10,000 of pension credit capital is disregarded for pension credit purposes. Thereafter, you have the tariff income of £1 for every £500, which means that if you have savings at the moment of about £40,000 and you are single—I am not sure how it would work for a couple, because I do not have the figures in my head—you would be just about ineligible for pension credit, because your tariff income would float you above it. But turn that capital into a pension, given the fairly unattractive rates for annuity purposes, and I think as a result you would come into pension credit. I shall try to do some more work on this as the discussion moves on, but, if I am right, what the Minister will get in upfront savings he will lose not only in payments in perpetuity while those people live, through his additional pension, but also the immediate payments he will have to make in pension credit—because, having disbursed their capital, they will now come within the pension credit income rules.

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—

--- Later in debate ---

[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.

--- Later in debate ---

[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.

Pensions Bill

Lord Browne of Ladyton Excerpts

Wednesday 18th December 2013 Grand Committee

[Lord McKenzie of Luton (Lab)]

My Lords, I speak briefly in support of my noble friends and the thrust of this amendment. I should like to ask one or two questions. As I understand it, there is currently a class 1 credit going to people in this service category, which helps to build up not only pensions but access to contributory benefits such as JSA and ESA. In respect of the latter, there is also an easement that was introduced in 2011 in respect of the first contribution condition, because for contributory ESA and JSA you need both to pay an amount in a certain period of time and to have sufficient credit. My first question is whether that credit arrangement is going to continue under the new regime and whether the easement will be continued, because that is important, too.

Of course, the credit has to be claimed; it is not automatic. I wonder whether we could do something to address that issue, because we have a group of people here who would qualify only under certain clear conditions, and one would have thought that arrangements for these individuals could somehow be organised centrally, or perhaps by the separate Armed Forces, so that the information goes in directly and there is an automatic credit, rather than people having to claim. I understand that the take-up is limited at the moment, with only 601 applications in 2012-13, or maybe in the previous year. That is not as many as one might have expected. Perhaps we could also have clarification as to who is treated as a member of the Armed Forces for these purposes. I am not sure that the TA or reserves will be included within this.

This issue draws a wider question about crediting national insurance contributions. My understanding, based on some helpful information from the Bill team this morning, is that if, at the moment, you are in a category of benefit or activity that gave rise to a class 1 credit, that would continue post-April 2016. If you are receiving a class 3 benefit for a particular activity or being in a particular position, that would become a class 3 contribution credit also, under the new regime. So nothing has changed in that respect. These things are important, because a class 3 contribution builds up entitlement only to the state pension and bereavement benefits, not to contributory benefits. This gives rise to the broader question of universal credit. At the moment, if you are on JSA or ESA, you would get a class 1 credit. In the world of universal credit, my understanding is that you would get a class 3 credit, which means that you do not build up entitlement thereby to contributory JSA and ESA, which sit outside universal credit.

I apologise for this rather convoluted series of questions, but this very important issue prompts them, and it would be useful to have clarification on them either today or later by correspondence.

[Lord Browne of Ladyton (Lab)]

My Lords, I am grateful to my noble friend Lady Hollis for tabling the amendment, for the very reason that it allows your Lordships’ Committee to engage in this important issue. As we have already heard, successive Governments have committed to end any disadvantage that armed service causes members of the Armed Forces and their families—a group of people who have come to be known in these circumstances as the service community.

In July 2008, the Government set out to put flesh on the bones of that commitment in a command paper entitled, A Nation's Commitment: Cross-Government Support to our Armed Forces, their Families and Veterans. In pursuit of the ambition of that document, the DWP announced and introduced on 6 April 2010 new rules that allow spouses and civil partners accompanying service personnel serving overseas outside the United Kingdom to be eligible to claim class 1 national insurance credits during such periods.

In certain circumstances, spouses and civil partners may get credits on their national insurance contribution record for state benefit purposes, and as my noble friend Lord McKenzie pointed out, that helps protect their eligibility to a state pension and contribution-based benefits. Application for the credit is made at the end of each accompanied assignment outside the United Kingdom, but there are complications about that. My noble friend is right to say that it has to be claimed. I understood that the services had in place default arrangements to ensure that everyone who could be entitled to make such an application was advised fully of that. Can the Minister elucidate the current situation?

I do not think that one need go into the complications that service abroad generates for service families, but one can imagine that service abroad may mean that the family is split up. For example, some of our troops are based in Germany, or the families may be there but the service member might be serving somewhere else overseas. All of these complications are accommodated. Indeed, circumstances may arise where there is a need to make an application part way through an assignment, and provision is made in the regulations to facilitate that. There is helpfully discretion—and the DWP is to be commended for this—as to the time that an application can be made. It is already provided for to accommodate the lifestyle of the armed services community. Importantly, however, this improved benefit was not made retrospective.

We have already heard from my noble friend Lady Dean’s experience of her engagement with the service community the sort of circumstances that can lead to the need for this provision. At the heart of it, there is a clear and good reason why we need this. Members of our Armed Forces are commanded to work in overseas environments. If they stay in the services, they have no choice where they work, and often they are there for extended tours. Often their spouses and civil partners are unable to accrue a full national insurance contribution record because of that. Fairness demands that they not be disadvantaged by that service in so far as is possible.

When my noble friend Lady Hollis introduced this amendment she described it as simple, but it has become slightly more complicated in the debate. I am not seeking to complicate it because it is a relatively simple policy issue, although it may have complex consequences. She implied that the trend would suffer regression as a consequence of implementation of the Bill. My noble friend Lady Dean specifically said that the Bill would have a consequence of regression in relation to the position of service wives in particular. It is important for the Minister to address that position. If it is indeed the case that the direction of travel is being regressed as a consequence of the Bill, that needs to be identified. I am sure that all parties, including the coalition parties in the Government, would wish to deal with that situation in the context of this Bill. I do not think that there will be any division, in terms of policy, in relation to ambition here.

Unfortunately, when the change was made in 2010, it was realised that this was a “start”. My noble friend Lord McKenzie has identified, with his characteristic care in these matters, that there has already been a minor change in relation to this provision to improve it. Indeed, the coalition Government are to be congratulated: they have built on the work of the previous Government in pursuing the commitment of “no disadvantage” which is at the heart of the military covenant. In May 2011 they published the Armed Forces covenant. In paragraph 5 on page 7, under the heading “Scope of Covenant”, it states:

“Members of the Armed Forces community should have the same access to benefits as any UK citizen”.

Page 33 of the guidance document that accompanies the covenant, The Armed Forces Covenant: Today and Tomorrow, states that,

“the Government has no plans to make further adjustments”,

to the benefits rules. Importantly, however, it goes on to say that they will,

“keep this issue under review”.

--- Later in debate ---

[Lord Freud]

I will be in a much better position to explain the difficulties in a little while. So, rather than presuming on this, I would say that we are considering it. It is difficult, and I am sure that we will have the opportunity to return to it on Report.

[Lord Browne of Ladyton]

I am extremely grateful to the Minister for giving way at this stage, and I am not ungrateful to him for his undertaking to consider this and report back. That is the most that we could have expected. However, I ask him to consider two things. First, there is certainty that the Ministry of Defence will have records—there is no question about that. Secondly, I direct his attention back to the provision in the guidance note issued on the covenant, in which the Government promised to keep the issue of access to benefits under review. It might be helpful if the Minister explored why that promise was made and what was in mind at that time. Clearly some consideration was given to it, which instructed that promise. Surely it was not just a cosmetic promise, with nobody having any idea what could possibly be offered in the future.

[Lord Freud]

Let me take the two issues there. It is not necessarily the case that the MoD will have records on this, especially of an accompanying partner. That is clearly one of the issues. I think what was envisaged was exactly to look at this kind of thing and other benefits, which is exactly what we are doing. We are, as I say, treating it very seriously, but that is not the same as being able to say that there is a ready solution. We will come back to this issue.

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[Lord Browne of Ladyton]

Can the Minister also confirm whether the Bill, if it becomes law as drafted, will have a regressive effect on the position of service spouses or civil partners, as is believed to be the case by at least one of my noble friends and suspected by another, and whether that will in fact be the case when the review is conducted?

[Lord Freud]

I will not answer what could in practice be a huge review of everything to make a hard statement on that, but I will write on that point. Having finished, I hope, all the questions asked, I ask the noble Baroness to withdraw her amendment.

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[Lord McKenzie of Luton]

My Lords, perhaps I may raise a point about the level of the single-tier pension, and couple it with a reference to passported benefits in the impact assessment. I looked at the assessment again this morning and there was a point that I had not identified, or did not understand before. This is to do with the interaction with the guarantee credit. This passage is about passported benefits, but it says:

“Receipt of Guarantee Credit passports pensioners to the full amount of Housing Benefit and Council Tax Benefit, if the pensioner is eligible for these benefits. There is little reduction in Guarantee Credit eligibility resulting from the single tier”—

about 1%. I thought that the whole thrust of this simplicity as a base for people to be able to make judgments about saving was that, in a sense, it floated people at a level which was above the guarantee credit. Here we are saying that only 1% of people who get STP will not be affected by guarantee credit in the future. Can the Minister explain that to me, please?

[Lord Browne of Ladyton]

My Lords, by tabling and moving these two amendments my noble friends have done the Committee in general and the Minister in particular a favour by creating an opportunity for him to expand on what his right honourable friend the Pensions Minister was able to tell the House of Commons about Clause 3. Despite the fact that my noble friend Lady Turner’s amendment is to Clause 2, I think that most of the issues raised can be dealt with within the context of Clause 3.

The provisions of Clause 3 set out a mechanism for calculating the full rate and the reduced rate of the single-tier pension for those whose contribution record commences post 6 April 2016. As we have already established, that does not actually set out in monetary terms the full rate; and as much of Monday’s debate made clear, that is at the root of some nervousness, not to say anxiety—or, on the other side, a possibly optimistic expectation—on the part of future pensioners, a state which, rightly, we anticipate will heighten as we approach these provisions’ implementation date.

Many are concerned as to what the single rate will be, whether they will be worse off as a consequence of change versus their expectations of the continuation of the status quo, and whether the actual rate will keep the new single-tier pension rate above the level of the pension credit sufficiently for it to prove an incentive to save, which is the relevance of my noble friend Lord McKenzie’s point, based on his characteristically forensic examination of the paperwork that is before us, and picking up this key point which instructed much of the debate in the House of Commons on these matters: the degree to which a prime objective of this policy—that is, to reduce in the longer term dependence on means-testing—will in fact be achieved by the full implementation. In addition, people need some predictability of future pension arrangements to enable them to make appropriate decisions to prepare for their retirement, confident that they will live up to society’s expectations of them now and avoid financial difficulties in life and a life of poverty. My noble friend Lord Whitty described the central issue as whether there could be certainty that this figure would not disappoint people’s expectation to such a point that they would fail to support the policy. By the device of these amendments, my noble friends have created an opportunity for the Minister to engage with these challenges.

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[Baroness Dean of Thornton-le-Fylde]

My Lords, I shall not detain the Committee long except to give my support to this. It is quite interesting that the changes that HMRC has carried out actually help this particular argument. The situation as it stands is completely counterintuitive to what the Government are trying to achieve, which is that we all save while we are working so that when we retire we have built up a state pension. If people do not have a state pension, they will be reliant on welfare benefits, or whatever the Government of the day decide. So it is a matter of independence.

My noble friend Lady Drake is so right: women find it offensive that they are excluded from contributing when they are able to towards their own pension. I said “women” deliberately, because the nature of work today will change that argument. Since the recession, we have seen more and more men also working part time. So what has been traditionally an argument on equality for women is being diluted by the nature of work in the country today. The argument that we are putting forward is not just for women—it is for citizens who may, by force of circumstance or choice, have more than one job.

The Inland Revenue has no problem in finding solutions to quite complex issues when it comes to collecting tax, and this goes hand in hand with that. Citing the excuse or reason that it is very complex and impossible to do is wearing very thin. Given the remit to do it, I am sure that the Revenue would have to find a way through. The issue is not going to go away; it will be raised at every opportunity, and it is one that runs four-square with what the Bill is trying to achieve, which is for us all to contribute to a state pension while we are working.

[Lord Browne of Ladyton]

My Lords, in engaging with this issue, your Lordships’ Committee has had the benefit of comprehensive speeches by my noble friend Lady Hollis and, despite her reluctance, my noble friend Lady Drake. Between them they have demonstrated a level of adequacy on the detail of this which, for the rest of us, makes her feeling on following our noble friend Lady Hollis pale into insignificance.

In the interest of brevity I intend to ignore a substantial number of the notes that I have before me and engage with just two issues in order to focus the Minister’s mind on them. I shall make these two points because we also have the benefit of the Government’s position. It is summed up in one sentence, which is that addressing this issue by combining hours in some way addresses a problem which is a perception rather than a reality. That is not a direct quote, but it is what the Pensions Minister said in the House of Commons. That argument relies on all those elements that my noble friend Lady Hollis articulated. I have a list of them here which is presented in a slightly different way.

At the heart of them, there are two arguments. The first is that this is a temporary phenomenon, often coming at the end of a working life, and as one will get a pension for 35 years’ contributions over a working life of about 50 years, the better option for most people is not to pay national insurance. It was argued that at present many of these people are not paying insurance and would not thank the Government for requiring them to do so because no one volunteers to pay tax. If that is true, it is a powerful argument.

The other argument is that the Government’s estimate is that only in the order of 50,000 people are in this position, that that number has grown only slightly recently and that, in any event, one in five of them may be on national insurance credits as a result of claiming universal credit. If that is true, that is also a powerful argument. It does not undermine all the arguments that my noble friends have made, but it is powerful.

I want to address both arguments. Of course it is difficult to challenge them because the data do not exist, but we all live in this world. My sense is that large numbers of people working two or more low-earning jobs, many of them on zero-hours contracts, is a phenomenon that is growing throughout the country. That is my experience of living in the United Kingdom and of travelling, because of where I live for parts of the week, across two very distinct communities. I see it growing in both communities that I have contact with.

In fact, I believe that this is a strong and growing characteristic of the modern UK labour market. It is at the heart of the flexibility that has allowed the UK labour market to be able to maintain and grow jobs in circumstances where one would intuitively have expected unemployment to have increased significantly more because of recession. It is a part of the flexibility of the labour market that, in a sense, we celebrate, and spent a period trying to get other countries to follow.

My sense is that this is much greater, and I shall share this short anecdote because it is instructive about how it is affecting people in the communities in which we live. On my way home from our debates on Monday, I overheard a conversation among three young people in a very quiet overground train. I sometimes find it difficult to estimate age, but they were all in their mid-20s. They were all coming back from employment with one employer, which was a mini-job. From their conversation, it was clear that they had, by my reckoning, seven jobs among them at least. Each of them had at least three jobs. Most importantly, they had all had the benefit of a tertiary level education. I could not guarantee that they were all graduates, but at least two of them were, from what they said, and the third also had the benefit of a tertiary level education. These were not your traditional B&Q employees at the end of their life. They were well educated young people coming into a labour market where that was the expectation. That fundamentally challenges the idea that this is a temporary phenomenon and that it can be dismissed, as it has in the past.

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[Lord Freud]

Clearly, under universal credit, there would be a crediting arrangement for everyone within that system anyway, so I accept the point to that extent. I agree with the point on zero hours made by the noble Lord, Lord Browne, in that robust data are currently simply lacking and we are waiting to see the ONS data when they arrive. As I say, the universal credit system that is coming in adapts very elegantly to that kind of flexible labour market.

[Lord Browne of Ladyton]

Before the Minister moves off the question of the data, the fundamental point about the zero-hours contract estimate that I was attempting to make was that that was despite it being part of the Labour Force Survey. There was an apparently robust basis for a figure that turned out to be, potentially, 300% wrong. We are being asked to debate this against an estimate of a figure that every single part of our experience of life suggests to us is grossly wrong—that is, the figure of 50,000.

[Lord Freud]

The previous estimate for zero-hour contracts—which is what we are talking about—was that there were 250,000. Let us see the figures today for those on part-time work. I cannot remember the figure offhand—is it 1.5 million? There is a boundary, therefore, about what proportion of flexible working is formally on the zero-hour contracts. Rather than speculate on what the real figure is, I think that we should wait until the ONS comes out with a figure, if it is going to revise that.

On the pointed questions about self-employment rates raised by the noble Baroness, Lady Drake, rates of national insurance are clearly a matter for HM Treasury. However, we have not assumed that self-employed contributions will increase single-tier cost estimates.

I know that the noble Baroness has been a champion of this group and has genuine concerns about it losing out. As the new systems come into sharp focus—universal credit, RTI, single tier—there will be a chance to look at this issue properly when we know exactly what is happening, where the remaining issues are and then to find a precise way of dealing with it. It is simply too early, right now, to get a clean and elegant solution, but we do intend to look more broadly at crediting arrangements to examine the possibilities of modernising and simplifying the arrangements in that light. So there is a process. Her point is taken: it is just about what is the most efficient and effective way of solving a particular problem. What I do not know and cannot offer now is a timetable. It is something to be looked at some years—not a lot of years—in the future, in terms of exactly what should happen. I think that there will be a solution in the medium term. For those reasons, I ask the noble Baroness to withdraw her amendment.

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[Lord McKenzie of Luton]

My Lords, briefly, I commend my noble friend Lord Whitty and the noble Lord, Lord German, on trying to focus on solutions to deal with what seems to be a major problem, particularly in relation to local authorities. My noble friend Lord Whitty said that the annual cost of losing the 3.4% rebate is in the order of £700 million a year. Today, we had the local government finance settlement, which reinforced what was announced in the spending round: a further real terms cut of 2.3% in overall local government expenditure. Sir Merrick Cockell, who is a Conservative and the chairman of the Local Government Association, said that local authorities will have lost one-third of their budget by 2015. He said,

“This is the calm before the storm. We do not know how big the storm will be or how long it will last”.

The Audit Commission last year found that 29% of councils showed some form of financial stress. Council tax increases to cover this, even if they were contemplated at the level that the noble Lord suggested, simply are not on because of the need to have a referendum to go beyond a very small increase. Do the Government see this as a new burden which central government is placing on local authorities and therefore a burden which it should it meet?

[Lord Browne of Ladyton]

My Lords, I am content to join in commending my noble friend Lord Whitty and other noble Lords for bringing and developing this argument. They will forgive me if I do not join in the nostalgia for 1966. The removal of contracting out from April 2016 has significant implications for all occupational pension schemes. I shall make my speech short, given the time. It is bad enough to be between somebody and their dinner; it is impossible to be between somebody and Christmas.

It is clear just how significant are the figures quoted by the noble Lord, Lord German. I did not immediately recognise them, but they are in the same ball park as the figure, which I understand to be the Government’s figure, which suggest in excess of £5 billion a year going to the Treasury in extra NI contributions from 2016 when the new state pension scheme begins. Because of the scale of public service pension schemes, the lion’s share of that increase will come from them. It is far from clear, in the complexity of the Bill, how the increased NI contributions in the public sector can be met. Not surprisingly, those who have responsibility for these schemes—bearing in mind that they have just, in many cases, entered into agreements to reform them—are seriously concerned about the impact these changes will have on local authorities, health services, fire and rescue services and policing.

I note that in Committee in the Commons, Oliver Colvile correctly also put the Armed Forces Pension Scheme in the frame in the context of public service pension schemes. If that is correct, if the Minister is minded to accept Amendment 42, the definition of public service pension scheme will include the Armed Forces, which will answer more clearly the question asked by the noble Lord, Lord German, about what is a public service pension scheme. Rightly, Oliver Colvile was concerned that the defence budget should be spent on defending our country and should not be directed back to the Treasury. If it encourages the Minister to engage with this issue in a positive way, I promise not to tell noble and gallant Members of your Lordships’ House that this issue may impinge on that aspect of public policy. If he considers that, I will keep it quiet in the mean time until we see whether we can make some progress on this issue.

The Local Government Association has been in touch with all of us and has advised us that it supports my noble friend Lord Whitty’s amendments, which defer the end of contracting out for public service pension schemes until the tax year beginning 2018, and require the Government to credit public service pension schemes with amounts equivalent to the money lost through the end of contracting out.

It is understandable why it supports them, because, in the absence of an alternative from the Government, the choices they face are extremely unpalatable. They include loss of services or increased council tax, for example, or, as we are advised, the certainty that low-paid workers will leave the schemes or that settlements, including the settlement of the public service pension scheme, would have to be renegotiated. I am also told by those who know that it will mean the renegotiation of a lot of contracts in relation to privatised services, because assumptions were made about commitments in relation to pensions in the TUPE environment that no longer stand true.

It is not unreasonable in those circumstances to ask the Government how they will resolve the additional expenses and how they expect those who run public service schemes to deal with the increased cost and, for that matter, how they expect the individuals affected to deal with the increased costs. Will the Minister address the advice that we have been given and the concerns of those who run these schemes? Does he accept that there will be a perverse incentive unless this is resolved and that low-paid workers may decide to opt out of their public sector pension schemes? Does he accept that there is genuine worry that this will undermine agreements to reform that have already been reached? Does he accept that there is genuine concern that this will impact on existing contracts for provision of services by the private sector?

[Lord Freud]

As a consequence of ending the additional pension for those reaching pension age after 2016, we are ending contracting-out. This means that individuals in defined benefit schemes—public sector and private sector—and their employers will no longer be entitled to pay a lower rate of national insurance contributions by contracting out of the state second pension. At the moment, they receive a rebate of 1.4% for employees and 3.4% for employers on earnings up to £40,000.

The abolition of contracting out will result in additional national insurance revenue for the Exchequer. Of this, about £4 billion is national insurance contributions from public sector employers and employees. That is the money that the noble Lord, Lord Whitty, is most concerned about.

The extra information that I can provide to my noble friend Lord Flight is that the cost of the public sector schemes of paying extra employer national insurance is about £3 billion per annum. We do not have any breakdown of which schemes are at local authority level. I will speak to Her Majesty’s Treasury to find out whether any further information is available.

Noble Lords will know that the Government have not set a fixed spending envelope, nor one for individual departmental budgets, beyond 2015-16, and contracting out is abolished in 2016-17, so is outside the current settlement. Public sector employers will have to absorb the burden, as is always the case with tax changes. Any spending review in the next Parliament will, of course, consider the £4 billion cost in the round. This does not affect our commitments on protecting spending on health and education in this Parliament. Treasury officials have already met with Local Government Association officials concerning the impact on the local government pension scheme. This follows conversations between the Chief Secretary and the Local Government Association, and I would expect similar discussions to take place concerning other schemes when settlements are set.

Turning to the noble Lord’s amendments, I note that he moved back from 1966 to 1963, but then he would, would he not? The amendments would effectively defer the loss of the rebate to public service pension schemes for two years—until April 2018—but in doing so would defer the introduction of the single tier to more than 4 million people.

Amendments 19, 20 and 21 would change Clause 4 by redefining pre and post-commencement qualifying years, so that public service pension scheme members have them counted up to and from 2018 rather than 2016. Amendment 24 would change Schedule 1—the detail of the transition—to bring into account the old scheme and introduce the new scheme two years later for public sector workers, with a tidying-up clause in Amendment 43.

Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 16th December 2013 Grand Committee

[Baroness Hollis of Heigham]

My Lords, Amendment 7 is another probing amendment so that we understand the buyback rules. By virtue of the Bill raising the number of qualifying years from 30 to 35, there will be some people, mostly women, who will come to retirement age with an incomplete NI record. I should emphasise here that in terms of buyback I am not talking about class 3A—the new proposals for the additional pension. Some of those missing basic years may have occurred before 2016; some may occur afterwards. It is crucial that we help people to have a complete record, otherwise many will need topping up by pension credit.

Buyback, as members of the Committee will know, comes through making class 3 contributions—what we call voluntary NICs. They cost around £13 a week, which is about £700 for the purchase of one year, and add £3 to £4 to your pension, for life, so that you get a payback within three to four years. That is a return of more than 25% on your capital, so it is a very good deal if the arrangements stay the same. Obviously, the class 3A proposals are meant to be actuarially neutral, so I imagine that they will not be as attractive. You can buy those extra years in the year that you are missing a class 1 contribution—husbands have sometimes bought them for their stay-at-home wives and rich kids have sometimes had their parents buy them for them—or you can revisit the record of your NI contributions close to retirement and see how many more you need to get a full state pension. If you can afford to, you can then buy back contributions for the missing years.

In the past, you were allowed to buy back your missing years either as you went along, so that they were current, or to buy back the last six years, especially at retirement. If you had missed a year, say 15 years before, it meant that you could not retrospectively cover it by buyback. That was changed after 2006 so that you could buy back any six years. That was particularly useful to women who might have taken a year or three off, say 10 years before, when they accompanied their husband to his new job in a new city or because her working life had, for a couple of years, been interrupted by caring responsibilities for which she could not then have been credited.

The Government have said, as I understand it, that up until April 2023 you can buy back missing years to 2006, which is good news. I have some questions. First, will that happen if you have already retired? In other words, could someone retiring in 2021 decide to buy back additional missing years? Or must, as in the past, that purchase take place within a year of retirement? Secondly, are you limited in the number of years you can retrospectively purchase to, say, six years within those 16, or could you in theory purchase up to 16 years at or after retirement—for example, if you are lucky enough to have a legacy, or something?

Thirdly, are you still able to purchase up to six missing years in any years before 2006, or has that now been wiped out? That is key. Those were the years for which women particularly suffered before the credit system was made more generous. I think that I am right to say that women who gained NI credits for their children up to 16, which is now reduced to 12, should be okay, given buyback to 2006, but what of the situation of a woman carer not eligible for the carer’s allowance but who today would be eligible for carer’s credit, which did not exist before 2006? If she were caring for a couple of elderly relatives, between, say, 2000 and 2004, she might well have lost several years of NI credit. Can she buy those years back?

As I said, I am not referring to the new class 3A. I would be grateful if the Minister could clarify that and put the rules on record. I beg to move.

[Lord Browne of Ladyton (Lab)]

My Lords, I am grateful to my noble friend Lady Hollis for opening what appears, from the expressions of those in the Minister’s Box, to be an unexpected line of engagement in the complex issues with which we are dealing.

The issue of buying back national insurance contributions has been engaged with most recently, as the Minister will realise, in 2006, when the six-year buyback was relaxed in certain circumstances of some complexity. I am conscious that we are moving inexorably towards the clauses in the Bill which in the House of Commons were described as being the complex clauses, which deal with transition. Clauses 2 and 3 deal with entitlement to single-tier pension where the national insurance contributions are all close to 2016, because of the provision in Clause 4(1)(c), but this seems as good a place as any to deal with this issue, which may well have been properly engaged with under a later clause because it lies within the years that my noble friend is interested in—more in the transitional phase than the projected phase of post 2016.

It is none the less a valuable issue. It allows me to take advantage of a completely coincidental e-mail which I received at exactly 4 pm today. With the permission of the Committee, I will read this set of personal circumstances to the Committee. I think that it illustrates the real challenge that the limitations generate for real people. I cannot imagine that this woman who has written to me and, probably, to other Members of the Committee, is unique. I will protect her identity by anonymising her, but will read just a couple of paragraphs to the Committee, if I may.

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[Lord Freud]

I thought that I said the 2008 Act.

[Lord Browne of Ladyton]

I am grateful to the Minister. On this side, we heard 2000.

--- Later in debate ---

[Lord Freud]

No, let me provide clarity. The system does not let people buy back years before the 2006-07 point. We have relaxed the time limits because of the uncertainty around the new system. However, it is an insurance system, with the basic principle that you cannot insure after the event.

[Lord Browne of Ladyton]

I may need to go and do some research, but my understanding of the 2008 Act was that there were circumstances in which you could buy back beyond the six years for a further six years, under very limited circumstances. It was open to married women in particular, I think, though I am not entirely sure and I will need to go back and check all this. However, maybe the Minister may just conclude this debate on the point at which the six-year limit is fine.

[Lord Freud]

My Lords, I thought that I had just said that we had made that concession a general one in practice.

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[Baroness Hollis of Heigham]

My Lords, I shall withdraw the amendment, but I would have thought that the Minister would do everything possible to reduce the number of people having to fall back on pension credit as a safety net as opposed to getting them into the new system provided they pay their way. They have taken on these family responsibilities and are willing to pay for it, and the Minister is saying no.

[Lord Browne of Ladyton]

My noble friend may wish to take this opportunity to have recorded the apparent inconsistency between the new policy, which allows class 3A national insurance contributions to be paid in an unlimited fashion—or if not entirely unlimited then in an extensive fashion—and the restriction of six years on class 3 national insurance contributions. She may wish to consider whether there is some indication of a relaxation of the clear policy until now of restriction in relation to national insurance contributions.

[Baroness Hollis of Heigham]

My noble friend is absolutely right, but we have probably pushed this matter as far as we can tonight. However, I am simply very unhappy about this. It is an unnecessary abatement of the possibility of allowing women who have done the right thing and put their family first at difficult points in their lives to make good their deficit in the NI record, whereas if she were wealthy, well informed, stayed at home and bought a year every year, she would be okay. That is not only a failure to recognise her family responsibility but a failure to recognise the position in which low-income women have always been placed in relation to pensions. We can do better than that. I hope that the Minister might want to see whether he can meet us on this in any way. I beg leave to withdraw the amendment.

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[Baroness Turner of Camden]

My Lords, this amendment is about the 35-year qualification period to get the full-rate single-tier pension—of course, that also applies to the reduced rate pension. I have tabled the amendment because a lot of concern has been expressed to me. Presently, there are 30 qualifying years for the basic state pension. That period of 30 years has been achieved after a fair amount of agitation in the past, and people are anxious to retain it. The Government, however, apparently argue that the 35 years is associated with a higher benefit, but this argument ignores the fact that most people will also have established some rights to the second-tier pension at that stage.

Under the present framework, a low-paid employee can establish an entitlement to a level of state pension equal to £144 if they have 30 qualifying years’ contributions or credit for the basic state pension, and of course they have to have 22 years for the second state pension. Putting in 35 years instead of 30 seems to a number of people simply to be going backwards. It is obvious that other people feel like that as well because my noble friend Lady Sherlock has tabled Amendment 16, with which my amendment is grouped and which again raises doubts about the 35-year provision. That amendment suggests that there should be a review to determine costs and benefits and so on.

I would be in full support of that if my amendment was not accepted. I would prefer of course to have 30 years rather than the 35, but my noble friend’s amendment at least suggests a review and would ensure that the matter was thoroughly discussed and a report issued to both Houses of Parliament. I would be in support of that as well. I beg to move.

[Lord Browne of Ladyton]

My Lords, I am grateful to my noble friend Lady Turner for her amendment, which, as your Lordships will have noticed, is grouped with an amendment in my name and that of my noble friend Lady Sherlock, which calls for a review of the phasing.

For the sake of some chronology in our thinking, a similar amendment to this was considered in the House of Commons after Clause 4. That was to the benefit of the debate in relation to it. The call for a review really belongs with Clauses 3 and 4 because it relates to transition whereas, as I have indicated earlier, Clauses 2 and 3 relate only to people whose qualification in terms of contributions has been achieved post-2016. In the words of the Pensions Minister, that makes it much easier and simpler to understand Clauses 2 and 3 than it does Clauses 3 and 4, which are significantly complex. However, my noble friends will be pleased to hear that I do not intend to go into the detail of all the elements of the transition. There are complexities there, some of which it would be helpful if the Minister explained to the Committee so that we had an understanding of the complexity and the consequences of it for individuals.

I will first address the amendment in the name of my noble friend Lady Turner, which challenges the imposition, as it were, of a qualifying period of 35 years so soon after we changed the law to reduce the qualifying period for the state pension to 30 years. It would be to the benefit of the Committee’s understanding of the Bill and the policies that instruct it if the Minister addressed himself, as I am sure he will, to the way and the processes by which that figure of 30 years was arrived at. It was probably best explained by the Pensions Minister at col. 141 of the House of Commons Committee stage on 2 July. He set out broadly that the existing state pensions structure had two elements to it: the basic state pension, for which there was a 30-year qualifying period, and then the additional pension—as we have come to know it in terms of the Bill, but which has different elements depending on which years one looks at—which could be built up from rights that have been built up over as much as 49 or 50 years of a working life.

The Minister then explained that in arriving at a period of contributions that should entitle one to an amalgamation of these two rights, he looked for a “weighted average”. He was challenged, probably correctly, as to why in earlier consideration of where it should lie he had favoured or indicated—at least in his evidence to the Select Committee—the figure of 30 years as opposed to any later figure. He was asked pointedly by my colleague Gregg McClymont whether there was a financial consideration as opposed to just some broadaxe approach at trying to work out somewhere that was appropriate, and which could do justice to those two elements as they were brought together.

The advantage that my noble friend Lady Turner gives the Committee is that she gives the Minister an opportunity to explain in more detail how the 30-year figure was arrived at and how it can be justified, as opposed to some broadaxe, weighted average-type judgment. If it is just a judgment that had to be made for speed and efficiency, the Committee ought to know that it is about the right figure and there is nothing more to it than that. That is the strong implication of the way in which the Pensions Minister approached his explanation in the debate in the House of Commons.

We on these Benches support the single-tier pension and recognise that at some stage, judgments have to be made, but it is much easier to support judgments if there is an explanation of the reasoning behind them to convince us why it should be 30 years rather than 32, 33 or whatever. Those figures are very important.

I do not think I will detain the Committee for nearly as long as my honourable friend Gregg McClymont engaged the Committee in the other place on the amendment that now stands in my name and that of my noble friend Lady Sherlock. However, in introduction, I want to tease out one or two observations about the amendment that I think should properly lie in our discussion after the debate about Clause 4, to explain why a review is necessary. Once one gets a sense of the complexity of the transition and the interaction of different calculations, one begins to realise just how important it is to have a review informed by reality. Of course, a part of that reality is the level at which the single-tier pension is fixed so that one knows who are the losers and who is being affected

What really instructs the review is a defeat of expectations. The Pensions Minister engaged with the perception rather than the reality. I am not keen on trying to argue policy changes on the basis of perception. That is principally because for two years I was a Minister in Northern Ireland, where I was repeatedly told, “In this country, Minister, you have to understand that perceptions are much more important than facts”. No matter how good my arguments were, I was told, “But that is not how it will be perceived” in one community or another, and that perceptions were much more important than facts—so much so that I thought for a period of having one of those famous signs on the desk that Ministers and executives often have made, reading, “In this office, facts are more important than perceptions”, but I thought that that might have been provocative and decided that it would not be a good idea.

Greg McClymont argued, and I support him, that there is a significant group of people who have a similar experience to that expressed in the e-mail that coincidentally I received this afternoon—people who have a set of expectations that are defeated. Unless there is engagement with those issues and some sense of fairness, the fairness, simplicity and other measures that the Government have set for these changes will not be met.

In this case, there is a group of people who have an expectation that they will get the full rate of whatever the state pension is after 30 years of work or 30 years of national insurance contributions. They will be met with the reality that it now requires 35 years. I will come to this in some detail—I am not going to take that long about it—but I know that one can say to them that 30-35ths of this figure is more than 30-30ths, or more than 100%, of the figure that they were expecting. However, they are retiring into an environment in which other people are getting not 30-30ths of the figure that they were expecting but 100% of what the new figure will be. That is an important point to make.

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[Lord Stoneham of Droxford]

With respect to the noble Lord, it is slightly unfair to criticise this document for being so long and then not get the point that the pension for 30 years is £110, and the pension for 30 to 35 years will be £123. That means that somebody is better off. That is the point, is it not? It was unfair to attack civil servants for writing that long brief to make that point, when I am not sure that the noble Lord got it. They will be better off under this system.

I should like to make two other points. If we set it at 30 years now, there is no going back. We might like it to be 30 years, but the fact is that if we set it at 30 now there will be no going back if it does not work out. If we cannot afford it, it will not go up to 35 and we will have to stay with it; whereas, if it is at 35, there is the possibility of review and it could come down.

[Lord Browne of Ladyton]

Clearly, my carefully constructed argument was utterly wasted. I just want to make two points to the Minister, who may well not have been intending to look at me. I am not arguing for 30 years; I am arguing for a review. I was commenting on an earlier amendment, which is not in my name and which I do not support, for a reduction to 30 years, suggesting that it opened up an interesting debate about why it is 30, not 32 or 35. That is not for me to explain. The noble Lord can be reassured that I understand the mathematics, or the arithmetic, on this. I am just arguing for a review for reasons to do with the expectations of people whom I think are entitled to have those expectations.

[Lord Stoneham of Droxford]

I am sorry if I lost the noble Lord’s argument in not realising that he was arguing for a review; I thought he was arguing to reduce it to 30. I think that makes my point, actually: it is easier to have the higher figure to start with and then review it down than to start with something lower that you then cannot afford.

My other point is that the additional contributions are very beneficial in their rate of return. Under the scheme, we are trying to encourage people to save. That is one of its main merits and motives.