Health and Safety at Work
Lord McKenzie of Luton Excerpts(13 years, 8 months ago)
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Lord McKenzie of Luton
To ask Her Majesty’s Government how their proposed changes to the health and safety system will encourage safer and healthier work places.
Lord McKenzie of Luton
My Lords, I am grateful for the opportunity to have at least a short debate on issues of health and safety. It gives us the opportunity to take stock in light of recent developments, including implementation of the recommendations of the noble Lord, Lord Young of Graffham; the impact of the spending review and the 35 per cent reduction in funding for the HSE; and the recent pronouncements of 21 March by the Minister for Employment.
It was not my intent today to cover issues around the HSE’s role in nuclear inspection, but I hope that the report under way by the UK’s chief nuclear inspector will provide this opportunity in due course. Nor do I intend to dwell on major hazard industries, not because they are not extremely important but because the coalition Government have seemingly, and sensibly, determined that regulation of these industries is soundly based and in accordance with best international practice.
Our concern around recent developments is the central message being promulgated, which is that much action on health and safety is burdensome to business and unnecessary. The focus is on what RoSPA refers to as “over-hitting” on health and safety, rather than on underperformance. There is also very little focus on occupational health.
So it is worth reminding ourselves why health and safety is so important. The prevention of death, injury and ill health to those at work and those affected by work activities is not only a legal imperative and a moral one; it is good business. The costs to business of health and safety failures are potentially wide ranging: direct costs of sick pay, compensation, fines; loss on a temporary or long-term basis of employee skills; costs of temporary cover, reputational damage and possible exclusions from procurement opportunities. For individuals and their families the consequences can be devastating—the loss of a loved one, aspirations blighted, family finances wrecked.
We know that good health and safety is linked to leadership of an organisation and that organisations which have good health and safety systems tend to have good management systems, and better economic performance. We also know that the benefits of worker engagement can improve health and safety outcomes but that hardly gets a mention these days—certainly not trade unions and the significant contribution that they have made to the training of safety reps, which is just one example. For government the gains should be obvious; stopping people falling out of work avoids the cost of benefits, retains tax revenues and obviates recourse to expensive back-to-work programmes.
So, given all of this, it is surprising that little effort on the part of the Government is being directed at improving our performance as a country and promoting the strong benefits of the system that we have; rather, there is the focus on health and safety being a burden on business. I will not repeat all the figures, but last year 28.5 million days were lost to workplace ill health and injury. Over 500,000 workers suffered from MSDs, and nearly as many from stress, depression or anxiety. Some 152 people were killed at work, and 740 in work-related road accidents. The cost to the UK economy is many billions of pounds each year. Despite the fact that we have a very strong record in comparison to other countries, there is still much to do.
So how are these recent developments helping? The report of the noble Lord, Lord Young, focused little on occupational health and what might improve our health and safety performance but had wider significance around personal injury claims, food hygiene rating schemes and so on. Nevertheless, positive developments have flowed from the report, perhaps the most important being the establishment of the Occupational Safety and Health Consultants Register. This was formally opened for business by the 21 March announcement but had been in gestation for some time. The health and safety professional bodies which have co-operated with the HSE in bringing it to fruition are to be congratulated, especially IOSH, which has long campaigned for an accreditation scheme. It will provide better reassurance for purchasers of services, helping to tackle the problem of unqualified or unscrupulous consultants who overcharge and overprescribe, adding costs for business and adding to a culture of unnecessary risk aversion.
One of the enduring strengths of our health and safety legislation and the management regulations is that they are non-prescriptive. They set out what must be achieved, not how something should be done. However, this creates a need for more help for some businesses, especially SMEs and micro-businesses. This theme was picked up by the noble Lord, Lord Young, who proposed simplified risk assessments for what he described as low-hazard workplaces. The HSE has responded to this, although it does not appear to be developing the proposed periodic checklist, nor, thankfully, to be exempting employers of home workers or the self-employed from risk assessment. The launch of the website Health and Safety Made Simple with the March statement is to be welcomed.
I turn to what is described as the new health and safety framework. A central proposition of this is to reduce inspections for non-major-hazard industries. In particular, it proposes that there will no longer be proactive inspections for what are described as lower-risk areas, which include light engineering, electrical engineering, the transport sector—air, road haulage and docks—education, and electricity generation, nor for areas of concern such as agriculture, quarries, and health and social care, where such inspections are deemed unlikely to be effective.
Perhaps, in passing, I may comment further that the HSE’s website for January records that one of the successful prosecutions was of a high-voltage electrical engineering company where someone was prosecuted after an employee suffered serious burns from equipment carrying 11,000 volts. On the new basis, it would seemingly be a lower-risk area and not subject to proactive inspections, if I understand the intent. Perhaps the Minister can expand on the evidence base that was used to arrive at this determination. Has the analysis taken account of health issues, as well as the records of deaths and accidents? Do the Government reject the evidence that the prospect of inspections is an incentive for employers to improve?
We have considerable concerns over this blanket approach to designating great swathes of business as low hazard—effectively no-go areas until something goes wrong. As RoSPA suggests, should we not be focused on the risk profile of people’s jobs and not the hazard history of the sector in which they operate? How do the Government intend to monitor and report on this new approach?
Of course, proactive inspection is only one component of the HSE’s and LA’s preventive agenda. Joint working with industry is carried out at the moment and can be developed. The provision of advice and awareness-raising through, for example, safety and health awareness days, and press campaigns such as the Shattered Lives campaign concerning asbestos, have recently been cut back. Given that proactive inspections are to be curtailed, can the Minister say what the future is for these approaches? Is it right that there is still a moratorium on TB advertising, which has been in place since the purdah in the run-up to the general election? IOSH points out that the HSE Infoline is to be terminated later this year, which has provided a valuable source of information as well as a translation service. This has been particularly valuable to SMEs. What is to replace it?
The 21 March document makes it clear that HSE will continue to undertake inspections for enforcement purposes and to follow up on complaints, but seemingly only for those areas of high risk or those of concern. This suggests—perhaps the Minister will confirm it—that there will be no such inspections for those lower-risk areas. Is this right? Is there to be any change to the HSE’s enforcement policy? We obviously await the outcome of the consultation on RIDDOR concerning the manner of reporting, but, in this context, the demise of the Incident Contact Centre, which simplified the process of reporting and reduced admin burdens on business, would seem at least premature.
All this must be seen in the context of the CSR and the requirement for the HSE to achieve savings of 35 per cent over the period—about £80 million a year by 2014-15. Proposals for cost recovery associated with breaches of health and safety law will ameliorate the position to an extent, but it is clearly not possible for the HSE to maintain its current level of operations.
The Government have indicated that cuts can be achieved by administrative savings, but considerable savings have already been made, not least in accommodation costs with the consolidation of the head office in Bootle. What is the number of front-line inspectors projected to be over the CSR period and the capacity of the organisation to carry out even the projected new number of inspections? What are the plans for the construction sector in particular, and is it right that the 20 inspectors on fixed contracts are not to be replaced? The construction sector has come a long way but, as we know, is still high-risk. If not through proactive inspection, how are issues in agriculture, another dangerous industry, to be addressed?
Finally, we have the review of health and safety regulation to be led by Professor Ragnar Löfstedt. We could not object to this, albeit that the starting premise carries the implication of gold-plating despite evidence to the contrary. One hopes that the review will put that myth to bed once and for all, but it would be helpful if the Minister could say when final terms of reference will be available.
Our country has been well served by our health and safety system, by our national and local authority regulators and by that committed and knowledgeable range of stakeholders who are key to past success and future progress. There are those who will continue to misrepresent or misuse the system, sometimes deliberately, sometimes through ignorance. We all have to make the case for H&S, the Government above all.
Lord Freud
I apologise. That was an inadvertent miss-out. Clearly where there is a more responsive, not so proactive system, the unions would have a role in alerting the HSE where there were concerns. Clearly, the role of education and training in reducing health problems in many of these areas will be important.
One area in which I am most interested is what we will find from the sickness absence review. This has now been launched and will be looking at periods of sickness absence of 28 weeks. Stress-related and mental health-related issues account for around 40 per cent of such absence, and it will be very interesting to see whether we can use the new arrangements for managing sickness absence to ratchet up how employers look after their staff. I know that the sickness absence review team is actively looking at that. Therefore, there is a health and not just a safety angle here.
Lord McKenzie of Luton
I am sorry to intervene again and the Minister may wish to write to me, but perhaps I may clarify two points. First, can he confirm that the evidence base on which the categorisation has been determined takes account of evidence relating to propensity for ill health in sectors, as well as accidents and fatalities? Secondly, in relation to reactive, as well as proactive, inspections, the document, if I read it correctly, says that in both areas—that is, the high-risk areas and areas of concern, but not the low-risk areas—the HSE will continue to undertake inspection for enforcement purposes or to follow up complaints when such an intervention appears necessary. Can the Minister confirm that there is no intention of having reactive inspections for what are classed as lower-risk areas—for example, the transport sector, electrical engineering, and indeed education provision, as we know that asbestos in schools is a continuing problem?
Lord Freud
I am happy to confirm both those points. The first, concerning health, is clearly part of the statistical base that will alert the HSE. Secondly, where there is concern, the HSE will respond whether it is a lower risk or a higher risk, and that is exactly as I understood the section of the document to which the noble Lord referred. It says that in as many words.
Lord McKenzie of Luton
My Lords, perhaps we should pursue this matter outside the Committee, as I do not think that it does. The comment seems to relate to the first two areas—areas of concern and areas of high risk—but not those of low risk. However, perhaps we can deal with that in correspondence.
Pensions Bill [HL]
Lord McKenzie of Luton Excerpts(13 years, 8 months ago)
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Lord McKenzie of Luton
I shall speak also to the other amendments in the group. Their detail may appear a little intricate, but their effect should be clear and straightforward. The amendments provide for the retention of the existing timetable for the equalisation of state pension age of men and women at age 65, but to bring forward the increase in the state pension age to 66 for both, in stages, between 2020 and 2022. Noble Lords will be aware that the Pensions Act 1995 provides for the gradual rise of women's state pension age from 60 to 65 over a 10-year period from 2010 to 2020. Also, as part of what we might call the Turner settlement and to pay for re-linking the basic state pension to earnings, the Pensions Act 2007 provided for the SPA to increase to 66 between 2024 and 2026, and then to 67 and 68 in the subsequent two decades.
The Bill also brings forward the increase in the state pension age to 66, but it would be completed between November 2018 and April 2020. Because the increase for men cannot run ahead of women's state pension age, the Government have put themselves in a position where they have to accelerate the date for equalisation of the SPA to November 2018, thereby disturbing the settled timetable of the 1995 Act. The Government propose to move to a state pension age for women of 65 by November 2018, rather than March 2020. The acceleration for that begins in May 2016. Between November 2018 and March 2020, the state pension age will rise for both men and women to 66.
What the Government seek to do is a clear breach of the coalition agreement, which committed that the state pension age for women would not start to rise to 66 until 2020. Had it been honoured, we could have reached a consensus on the way forward. Our amendments accept an acceleration of the move to a state pension age of 66, bringing it forward four years from the current timetable, but because that does not need to start until 2020, when men and women will each have a state pension age of 65, there is no need to change and no justification for changing the 1995 provisions.
The Government’s proposals affect nearly 5 million people, about 2.6 million of them women. Of those 2.6 million, 1.5 million women will have to wait a year longer for their pension, of which 500,000 will have to wait more than a year, including 300,000 for more than 18 months and 33,000 for exactly two years. Those first affected will have just five years’ notice. Our amendments would affect 1.2 million fewer people; they would affect approximately equal numbers of men and women; and no one would have to wait more than an extra year for their pension. There would be a minimum of nine years’ notice for all those whose state pension age will change.
Before expanding on our reasons for that proposition, let me reiterate, as I said in Committee, that we do not dispute the updated information concerning life expectancy and the need to change the status quo. We further recognise that the current timetable for increasing the state pension age to 67 and 68 is unlikely to survive. Whether the Chancellor's wish for a more automatic process to update that will achieve a consensus will depend on what view is taken of such matters as fair notice periods and health inequalities.
It is also accepted that our amendment would achieve only two-thirds of the savings that the Government hope to secure by drawing the line where they have. Our proposition is the same as option 2 in the impact assessment. We will hear from the Government, as we did in Committee, that we cannot forgo the difference of some £11 billion in DWP savings, but let us put this in context. This is a net present value, not an annual figure. The DWP savings forgone on our proposition are spread over about five years and do not exceed £1 billion until 2018-19, with the differential between the two propositions disappearing in 2022-23. These are not small sums, but need to be seen in the context of a GDP which might then be some £2 trillion with annual spending on pensions and benefits of £100 billion a year. The timing of the savings is outside the Government’s deficit reduction plan. The savings are all outside this Parliament and significantly outside the one that follows.
One cannot ignore the medium or long term, particularly on pensions, but intergenerational judgments also involve assessing who is to bear the pain now. Savings to the Government and future taxpayers are pensions forgone by the 5 million individuals, the majority of them women, who are hit by these proposals. If intergenerational issues are to be judged on the basis of the number of years in receipt of state pension or the proportion of adult life spent in receipt of state pension, the impact assessment shows little difference between the Government’s position and our amendment.
We contend that any changes to state pension age have to be reasonable and fair and should not disadvantage any group disproportionately. The Government’s proposals fail this test. Women’s pension age is rising by up to two years; no man will see more than a one-year rise. Some women are being given six years’ notice of a two-year change; men are being given seven years’ notice of a one-year increase. Forty per cent of women in the age group affected by these proposals have no private pension wealth. Many who were part-time workers were excluded from occupational pension schemes until the 1990s. Women’s pension assets are only one-tenth of those of men. Women are more likely to take on caring responsibilities and to have reduced their hours of work or left the labour market on the expectation of a pension at a fixed date. Just on these issues, it is difficult to see that they have not been disproportionately disadvantaged by the Bill.
Of course, it is not possible to redress all the historic disadvantages women have endured in pension provision, but reasonable notice periods for changes to the state pension age is clearly one way of allowing maximum time to adjust. The 1995 Act gave 15 years’ notice. The 2007 Act gave 17 years’ notice. This Bill gives five years’ notice. What is reasonable notice can be judged in part by looking at attachment to the labour market. Analysis shows that women tend to leave the labour market earlier than men. In 2010, 65 per cent of women aged 55 to 59 were still economically active, but by age 60 to 64 this declined to 34 per cent. If individuals are to be able to respond to changes to their economic circumstances caused by a deferral of their pension, they need to know before they make irrevocable decisions about their employment. This assumes that individuals are in a position to mitigate their pension loss by continuing in or rejoining the labour market. We know this is more difficult for some than for others. The impact assessment suggests that ethnic minority groups in particular will be adversely affected. Analysis shows that notice for men should be at least five years and, ideally, 10 years, and for women it should clearly not be less. It will be noted that even our amendment offers only nine years, which is just on the cusp of what should be acceptable.
The Government are right to address the consequences of increasing life expectancy. The much-lauded triple lock has to be paid for, but the Government have gone about it in the wrong way and will cause great unfairness, particularly to women. This group of amendments offers a fairer alternative. I beg to move.
Baroness Howe of Idlicote
My Lords, first, I apologise to the House that due to a previous commitment I was not present to support the amendment of the noble Lord, Lord McKenzie, in Committee.
As other noble Lords have said, there are a number of changes which we welcome, not least that auto-enrolment into occupational pensions will in future help more people to save for retirement. However, as we all know, both from individual letters we have received and from organisations such as Age UK, Saga, the TUC and others, considerable numbers of women are very concerned. A total of some 2.6 million women are affected by all this, and they are very concerned at the Government’s proposed acceleration of the state retirement age. To be fair, they had certainly not expected such a step.
I am sure it will not surprise the House to learn that I want to concentrate on the adverse effect that some of the Bill’s proposals will have on women, particularly on those turning 57 in March and April this year who will now have to wait until they reach 66 to receive the state pension they have contributed to during their working lives. They have had less than eight years’ notice of an additional two years without that state pension. Equally, we need, as the noble Lord has already said, to face two realities: first, that our parlous economic situation will inevitably reduce everybody’s quality of life, and secondly, the realisation that our increasing longevity means that all of us will in future have to work longer to earn a decent state retirement pension. However, we shall as well be seeing—I hope, as finance improves—far more effective equal opportunity practices available at all workplace levels for both sexes, which should mean that men as well as women can genuinely share rather more of the family responsibilities. That in particular is why I want to support the noble Lord’s amendments, for it seems to me that they have indeed faced these realities. On economic as well as longevity grounds, they do not ask for the full commitment which the coalition Government’s agreement promised to give to women to be fully honoured, but merely for a slight increase in what the Government themselves propose. For that reason, I really hope that when the Minister replies he will feel able to accept that compromise.
I have to admit that my own preference would be for the commitment to be fully honoured. In my early days as deputy chairman of the Equal Opportunities Commission in the 1970s, pensions were not even perceived as pay. I am glad to say that that situation was very soon seen to be untenable.
I return to what is proposed. A total of some 2.6 million women are affected. Of those, 33,000 women born in the 1953-54 period will see their state pension age increased by at least 18 months. It is estimated that those women will lose around £10,000. We need to remember, too, that when these women were first in the workforce, there were far fewer and far less well-paid jobs available to them than there are in today’s world, especially when they needed to work part-time or flexibly when children or other family members needed care. Two different illustrative figures bring this home very starkly. Women retiring in 2009-10 had on average a state pension of £92 compared with the average male state pension of £124. For those who were lucky enough to be involved in private pensions, an average man’s private occupational savings when aged 56 were £53,000 or nearby, which is no less than six times higher than the woman’s average total of £9,000.
When we consider the just and fair thing to do in this situation, we all need to accept who bore the responsibility for bringing up the generation of healthy, well adjusted young people who are today those responsible for paying our state pension entitlement. We also have to remember that none of the savings that the Government claim to be making will be made during this period of major financial crisis. So why victimise this already exceedingly vulnerable group of women—the poorer they are, the more they will suffer—when no actual money will be saved during this Parliament and not least when, realistically, the likelihood of women in this age group finding or keeping jobs is minimal?
If you add to all that the fact that, in our move towards a unisex retirement age—it is likely to be further increased as our longevity increases—we are asking women to increase their current earlier retirement age by a huge leap of six years compared to the one year expected of men, which was lower than that of men to compensate for the handicap of women in the workplace as a result of their family responsibilities, frankly, we should all be ashamed of doing anything less than what is proposed in these amendments.
Lord Boswell of Aynho
My Lords, perhaps I may respond briefly to this amendment, having spoken on these matters in Committee. It provides a convenient opportunity to differentiate comments that I might make on this amendment from those that I might make on a subsequent amendment in the name of the noble Baroness, Lady Greengross, on the impact on women. I have felt on reflection since I considered the exchanges in Committee that there is an increasing, and I think more intensely felt, acceptance on my part that we have to get on with this and therefore, in order to raise money, accelerate the equalisation of the state pension age. Because of the doctrines that we have on equal treatment, it is only at that point that we are able to effect an increase in the overall unisex state retirement age towards 66 and perhaps at a later stage further in the way that the noble Lord, Lord McKenzie, reasonably accepted.
We know that we have to get on with this and that we have to wrestle with longevity, which has already knocked sideways the assessments under the Pensions Act 2007. While I am aware that we are not discussing private pensions in this part of the Bill, I happened to see some figures the other day on the universities superannuation scheme that totally struck me. They suggested that since 1973 the average pension age has gone up by 13 years. We are not dealing with a static situation; we are dealing with a rapidly exploding situation in people’s state and, where they have them, private pension entitlements on account of longevity.
Therefore, again as the noble Lord very reasonably said, this raises some interesting and rather intense issues about intergenerational transfers. Either we can redistribute this—we might both perhaps wish to return to that in a later group—or we have to consider pushing some of the burden on to today’s working population and taxpayers. It is perfectly true that none of these amendments—even on the Government’s proposed timescale towards equalisation, which I accept is rather rapid—cuts into the present deficit reduction programme, the present Parliament or the immediate outcome of dealing with the crisis.
Nevertheless, we have this inexorable march forward. If we do not do something about it now, particularly if we are anxious to give the maximum possible notice, it will not be possible to tackle the pensions problem before it overwhelms us. The only people who could end up paying for this are our children and our grandchildren through their taxes because of the pay-as-you-go system. We have to grasp the nettle now.
I do know—I was rather appalled at the estimates of costs in Committee—that the noble Lord’s amendment would cost some £10 billion a year. It is a small proportion of the savings which the Government have set out in their indication of the savings. The noble Lord is shaking his head.
Lord McKenzie of Luton
I am sorry to interrupt the noble Lord, but it is not £10 billion a year; it is a net present value figure spread over five or six years.
Lord Boswell of Aynho
The noble Lord is entirely right to correct me. I had added the words “per annum”, which are not in the calculations. However, it is still a very substantial sum, and I do not think that Governments at the present juncture can forgo that. To put it another way, they would have to find an alternative means of financing even proposals that I put forward in Committee, which we may touch on later. Those were alleged to be likely to cost £7 billion, which, frankly, is rather more than I had anticipated or indeed would be sustainable. We are into a difficult calculation, but we cannot, in the circumstances of longevity, responsibly countenance the noble Lord’s amendment as it is at the moment. However, if for some reason the figures are not as pessimistic as we thought, I would very much like to hear my noble friend’s response when the time comes.
Lord McKenzie of Luton
I thank all noble Lords who have spoken in this extremely well informed debate. I entirely accept that the Minister is not insensitive to the timetable and the issues that it has raised. I note that he, too, accepts that the notice period which has been given is less than ideal. He spoke about the simplified state pension, or single-tier pension, in response to a question from the noble Lord, Lord German. I am not sure whether the noble Lord gained much comfort from what was said. Clearly, it is a good idea, but the Chancellor himself, in introducing the Budget, said that this was a long-term project, so how it will help today's debate is less clear.
I accepted when I moved the amendment that there is a difference on costings: our proposition achieves only two-thirds of the savings of the Government's proposal. Several noble Lords, including the noble Lord, Lord German, made the point that it is a matter of where you draw the line. The savings we are talking about are not savings today, tomorrow, next year or the year after that; they begin to accrue in a brief period until there is an alignment of the two in about 2018-19. It is inevitable, when we are talking about millions of pensioners, that the numbers will be big. That does not make them any less important. Dealing with a number in isolation is not very helpful; we need to put it in context. We also need to look at the other side of the equation. The extra savings that the Government said are borne by someone: the pensioners who are the subject of the amendment.
Several noble Lords talked about costs. The noble Lord, Lord Stoddart, widened the terms of the debate a little. He will forgive me if I do not answer in detail each of his points, because I do not want to lose his vote. The noble Lord, Lord German, said that costing was about a judgment: where you should draw the line. The noble Lord, Lord Flight, also raised that point. Neither we nor the Government have yet factored in any changes to our long-term cost profile that would arise from likely changes to the state pension age to 67 and 68 and wherever that leads. The noble Lord mentioned the age of 70.
Several noble Lords talked about the speed of change, including the noble Baroness, Lady Hollins, and the right reverend Prelate the Bishop of Ripon and Leeds. I think that the right reverend Prelate termed it a matter of justice, and that is absolutely right. He obviously speaks with some scars, as he said, from dealing with the Church of England superannuation fund. The speed of change is important. He also made the important point that the Bill is dealing with state pensions, but the changes being imposed and the extent to which they have disconcerted people do not help with general confidence in the pensions environment, which we should all be working hard to improve.
My noble friend Lady Hollis correctly focused on the coalition agreement. She made the very telling point that issues around longevity and the data that are being used to justify what the Government are doing were known when that coalition agreement was written. They are not new data. She talked about the difficulty of women who have been away from the labour market getting back into it to mitigate the effects of these pension changes.
My noble friend Lady Bakewell made the same point in a different way. She said that people formulate attitudes to retirement that are sometimes difficult to change. She also made an interesting point when she called for nuance. When you think about it, the difference between the Government’s proposition and ours is two years in arriving at 66 as the state pension age. The extra problem the Government have by doing it those two years earlier is that they have to mess with the 1995 timetable to change the timetable for equalisation. That does not arise if you do not start that move until two years later. We are talking about two years. It is not a huge gulf, but I accept it has not insignificant ramifications for costs.
The noble Lord, Lord Boswell, talked about not insubstantial sums. As he said, the numbers are inevitably going to be big. When we are talking about millions of pensioners, that will inevitably follow.
I am grateful for the support of the noble Baroness, Lady Howe, on this amendment. She has been a doughty campaigner on pension issues. She was relaying some of the concerns that many people have had expressed to them, especially by those who are going to suffer an extra two-year wait.
The noble Lord, Lord German, focused on the interesting point that we are hearing those who are involved in advocacy. He spoke as though there was somehow a problem with that. Part of the problem with pensions generally is that they are complex. People shy away from them. That is why auto-enrolment and all those issues are rightly being addressed. We need people who understand these things and have that expertise to speak on behalf of, particularly, poorer people who are sometimes less able to deal with the complexities of these issues. The extent to which the noble Lord is relying on the single-tier pension to ameliorate his concerns about these proposals will be interesting, but I am not sure how effectively he will be able to do that.
I hope I have done justice to each noble Lord who has spoken. I do not think the debate has changed my view of where we should be heading. I am well aware that it has not changed the Minister’s. This is a very important issue. There is a lot at stake here. Hundreds of thousands of women are affected by this, and their position could be ameliorated. On that basis, I wish to test the opinion of the House.
Lord German
My Lords, I echo the noble Lord, Lord Boswell, and the noble Baroness, Lady Hollis, in saying that we look to the Minister to address the issue behind the amendment of the noble Baroness, Lady Greengross, which is that no woman’s pension age should be accelerated by more than 12 months. That is the issue that I raised in the earlier debate. It is a concern about equity. I hope that, in the architecture that the Minister may describe to us, he might find a way of answering that question. Whether it is this or some other architecture, as the noble Baroness, Lady Hollis, just said, is not the issue at stake here; it is about the intention. It is the intention to create that level of equity that is important.
Unfortunately, I have a question for the noble Baroness, Lady Greengross, when she comes to answer this debate. It is on a very technical point. This morning we took the liberty of plotting the dates in her amendment on a graph. Unfortunately, there were two kinks in the graph, which meant that it was not a straight line. I wonder whether, in the second line of the amendment, “August 2018” should not read “July 2018”; and, in the third line, whether “October 2018” should not read “September 2018”. That would produce a straight line. However, in the context of seeking agreement—and of the Government’s intention that no woman should wait more than 12 months, which I think was the intention behind the amendment—I hope that the Minister can give some support and succour to the amendment and the intention behind it.
Lord McKenzie of Luton
My Lords, I will be brief. Like others, I warmly congratulate the noble Baroness, Lady Greengross, on tabling this amendment, which addresses an issue of wide concern. It does not go as far as most of us would like; it raises the pension age to 66 one year earlier than we would want and one year later than the Government would want. However, apart from a couple of minor kinks, it smoothes the position so that nobody has to wait for more than 12 months. It is a considerable achievement to craft an amendment of that nature. We should be very grateful to the noble Baroness.
The issues are very much as they were previously. However, I would challenge the Minister. If the response was, “We like the look of this; we’ll try to bring something back, but we’ll do it in the other place”, then it would not be a particularly satisfactory one. The reality is that we stand a better chance of getting amendments through at this end than at the other end. What further information might the noble Lord and his team need to be able to produce an amendment now or at Third Reading? The noble Baroness seems to have given us a very good platform for moving forward.
I was not sure about the costing; the noble Lord, Lord Stoneham, said that it was £7 billion. I would guess, from the Government’s point of view, that that is certainly an improvement from where we were on it. If the noble Baroness was minded to press the amendment, we would certainly go into the Lobby to support it.
Pensions Bill [HL]
Lord McKenzie of Luton Excerpts(13 years, 8 months ago)
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Lord McKenzie of Luton
My Lords, I thank my noble friend for her amendment. I know that she is very committed to this proposition and she has enunciated it with a particular focus on gender issues, which we understand. However, the noble Lords, Lord Boswell and Lord Flight, both pointed out that it is a wider issue and one that is not just for NEST but for pensions across the board. We support the Government’s call for evidence on allowing early access to pension savings, evidence which would consider benefits to individuals and the impact on aggregate saving levels. As my noble friend pointed out, there are various policy models—loans and withdrawals, permanent withdrawals, feeder funds and early access to lump sums—which I think is the model that my noble friend is particularly focused on. But of course these have different impacts and outcomes in terms of the propensity to increase savings, or indeed in some instances, the propensity to reduce savings.
There are few data on how an early access policy might impact on individual behaviour or the pensions industry. Behaviours in other countries—401(k) has been mentioned in respect of the US—give only a limited guide to the UK. The PPI says that for real conclusions for the UK, further research within the UK context is needed. Is there an appetite for early access? Would it encourage savers to save more? What proportion of people would access savings early? These questions need to be considered in the context of other current developments—auto-enrolment, the removal of the requirement to annuitise at 75, changes to taxation, and so on. Where is the balance between encouraging more saving and reducing pensions in retirement?
We need also to think about the application to DB schemes and how that would fit. If we have something that is attractive to DC, what does that mean in terms of DB schemes? I am quite sure that technically something could be provided to work for DB schemes as well, but I think it would be quite complex.
In terms of its application, the noble Baroness focused on pension pots of £10,000. I do not know what data there are about “running away money” at aged 30 or 40; I am not sure whether I was enthused by the concept or not. How many people would have a pension pot of £10,000? When we were debating annuitisation at 75 I remember data that showed that only 5 per cent of people had pension pots in excess of £100,000. Those data may be a little old, but they are illustrative. How many people at the age of 30 have a pension pot? If you are talking about 25 per cent of £10,000, that would not pay for one year’s worth of university fees. We have to explore what the appetite would be for this and how it would work, but it seems to me that it is not altogether straightforward.
There is an issue about whether it changes the paradigm with employers. If you have something which is seen more as a saving scheme than a pension scheme, that will impact on employers’ willingness to fund. I do not assert that it would, but it is an issue that ought to be explored as part of this journey. We all know the Treasury line—I am sure that the Minister has it in his file that pensions are about long-term savings. That is why there is generous tax relief and any deviation from that should not be contemplated. I do not have to follow that line any more as I am not in the noble Lord’s position, but there is an issue about how it would impact on the tax regime for pensions. We also need to be careful about the risks of tax avoidance by these mechanisms. If someone paying the 50 per cent rate gets half of that paid on the way into the pension pot and you can get 25 per cent of it out tax free straightaway, that would seem to be a pretty good deal. Rather than simplifying the tax system, one can see the complexity of the rules that would need to be put in place to deal with that and the constant challenges there would be to those parameters.
We should thank my noble friend for introducing the amendment. I hope and believe that it is probing in nature because the time is now right for this to be fully examined and it seems that the Government are on a path to do that. However, we need more information on a number of issues before I or my party would officially be able to say that this is something we support. But it is certainly something that deserves examination for the sort of reasons that my noble friend has advanced.
Lord Freud
I thank the noble Baroness, Lady Hollis, for raising this very important issue of allowing individuals early access to their pension saving. I was more or less as disconcerted as the noble Lord, Lord McKenzie, about the concept of it being “running away money”, not least because I thought that if the spouses of Members of this House got to hear of it, they might take advantage as we spent night after night in this place rather than at home with them.
The noble Baroness wishes to allow individuals to access a tax-free lump sum of up to 25 per cent, before the current minimum age of 55, when they have pension savings of at least £10,000. I am conscious that this is an issue to which the noble Baroness has repeatedly drawn our attention, and to which she returned at Second Reading when she asked where the Government's consultation paper on early access to pensions had got to. I can answer that particular question; I can report to my Lords that the Government published their call for evidence on early access to pension saving on 13 December last year. It set out the available evidence around early access and some of the potential benefits and risks, and then sought further evidence from interested parties. That call for evidence closed on 25 February. Drawing on the responses to the call for evidence, we will consider the arguments for and against allowing more flexible access to pension savings, based on firm evidence, before we consider further changes to the pensions tax framework.
It is too early to say what these changes might be. However, we need to bear in mind several principles. First, the purpose of tax-relieved pension saving should be, as the noble Lord would like me to say—I have to say it—primarily to provide an individual with an income in retirement. I think 75 per cent probably makes that point anyway. Secondly, any changes to the pensions tax rules must be affordable and sustainable for the Exchequer, and not, as the noble Lord, Lord McKenzie, pointed out rather vividly, create opportunities for tax avoidance. I was pretty impressed that he was able to knock up a tax avoidance scheme so quickly, but we can see where he is coming from. Thirdly, changes should not create disproportionate complexity or administrative burdens for individuals, pension providers and schemes, or indeed for Her Majesty’s Revenue and Customs.
I am sure the noble Baroness will agree with me that it is right for us to examine the evidence submitted before making changes to legislation. On that basis, I urge the noble Baroness to withdraw this amendment.
Lord McKenzie of Luton
My Lords, it is a great pity that the Minister does not have to face the amendments of the noble Baroness, Lady Noakes. Some of us endured that for a couple of years. It seems to me quite outrageous that he does not have the opportunity to do so tonight.
Lord Freud
My Lords, I am very sad that the noble Lord is outraged.
Schedule 4 : Pension Protection Fund
Amendment 28
Employment and Support Allowance (Limited Capability for Work and Limited Capability for Work-Related Activity) (Amendment) Regulations 2011
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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Lord McKenzie of Luton
My Lords, the House should be indebted to the noble Lord, Lord Kirkwood, for giving us the chance to debate the regulations this evening. Like me, and other noble Lords I see present, he has been involved in issues concerning the employment and support allowance and the WCA for a long period. The noble Lord congratulated the former Government on insisting on the annual reviews. If memory serves, that may have been an amendment that he pressed on us at the time.
I start by explaining my understanding of the rationale of why the work capability assessment and the employment and support allowance were introduced. It was part of the journey which recognised the importance of work for people's route out of poverty, their self-esteem, well-being and health. The concept was that, for the vast majority, work, or good work, is good for you and that, as a society, we should support people to get into or closer to the labour market. I think that that is common ground between the previous Government and the current one.
As we know, the work capability assessment was designed to focus on a person's capability, rather than their incapacity, as a building block to help them progress, where appropriate, towards work. The switch from incapacity benefit to employment and support allowance was more than just semantics. Although support via Pathways was available before, the introduction of the WCA signalled a determined change to support those who could towards the labour market.
The approach seeks to identify three groups of people: those considered capable of work; those who could work at some point with the right support—the work-related activity group; and those who cannot or should not be expected to work. The concept is to make those determinations by reference to application and a range of descriptors with the objective of determining an individual's functional capability.
There is nothing in the documents that we have received from the stakeholders that calls into question that fundamental approach; and I doubt whether we will hear it called into question by noble Lords this evening. Indeed, the first independent review of the WCA by Professor Malcolm Harrington concluded that the principles underpinning the new assessment remain valid. He stated his belief that the system is not broken or beyond repair; that, at least, is reassuring.
We should acknowledge and welcome the fact that the introduction of WCA has been subject to review—the internal DWP review began in March 2009—and it is the recommendations from that review which, I understand, are reflected in the regulations. Professor Harrington’s independent review, the first required under the Welfare Reform Act 2007, was responded to by the Government in November 2010. It was accepted as a vital contribution to the continuing development of the WCA, and the recommendations were accepted in full.
Although most of the recommendations were to do with process and covered customer experience, the Atos assessment, the decision-making process and the appeals process, there were important recommendations concerning descriptors—in particular, the need for further work to review the mental, intellectual and cognitive descriptors and how they are working for those with fluctuating conditions—issues which were raised at the start of the process and which have continued as the ESA has progressed. We support the recommendations, but that raises the question of how they sit alongside the outcome of the internal review, which has caused some of the challenges about which we will hear tonight.
The Government's response to Professor Harrington's report indicated that they would await a further report on mental health descriptors in late December and early January. Where does that report rest? Why is it considered appropriate to proceed with the current changes to the descriptors without the benefit of that report?
The criticism of the regulations has come from a range of sources, as we have heard from the noble Lord, Lord Kirkwood. They variously cover the points that the review has been carried out too early with limited evidence; that recommendations from the statutory review—Professor Harrington’s review—are still being worked on; and that changes to descriptors will make it more difficult to identify those with limited capability for work, those who should be in the work-related activity component.
The noble Lord, Lord Kirkwood, referred to the Social Security Advisory Committee. It recommended that certain changes be postponed, stating:
“The Committee recommends that the Department does not proceed with the remaining proposed changes to the descriptors until these have been reconsidered in the light of the findings of the independent review of the WCA and the experience of the trial of the migration of IB customers to ESA”.
Why has the department not taken that path?
Mind, and others, has raised concerns about the regulations regarding mental health descriptors. They extend to the simplification of the assessment, reducing the mental function descriptors by a third, from 10 to seven questions. Is that at the expense of comprehensiveness rather than in unison with it? There are deep concerns about how well the WCA descriptors record the impact of mental health issues. The simplification of the descriptors will exacerbate the problem.
Assessment of an individual's awareness of hazards will now simply focus on the need for supervision, rather than the significance and frequency of the risk posed. Ability to get about and cope with change will no longer be assessed in terms of frequency, which will impact negatively on people with variable or fluctuating conditions. The loss of the propriety behaviour descriptor means that the assessment fails to capture the significant distress caused to people with depression, anxiety and paranoia by misinterpreting or overreacting to the behaviour of others.
The National Autistic Society has expressed similar concerns about reducing the 10 mental health descriptors to seven. It states:
“This reduces opportunities for people to score sufficient points to receive the benefit. Five descriptors which specifically address the needs of people with autism have been reduced to 2. The lower-scoring elements of several descriptors have been removed, and many have been simplified. This makes it much harder to represent the complexity of needs many people with autism experience, and barriers to employment they face, through the assessment”.
It has raised many other points.
Doubtless, noble Lords will also have read the brief from the Disability Benefits Consortium, referred to by the noble Lord, Lord Kirkwood. It asserts:
“An individual who ‘cannot mount or descend two steps even with the support of a handrail’ could now be classed ‘fit for work’ … Someone unable to stand at a workstation for more than ten minutes could now be deemed ‘fit for work’… The descriptors for turning star headed sink tap have been removed, consequently there is no functional assessment for the ability to turn or rotate the hand, despite this representing a form of manual dexterity vital in many workplaces … The changes remove all lower-level descriptors in some categories, for example, there are now no six point descriptors within manual dexterity, making it hard for people with multiple impairments to qualify”.
The noble Lord may not be able to deal with each of those points tonight, but those are genuine, practical, real issues raised by people who know. If they are right, that clearly undermines the thrust of the assessment, which we agree that we should be making.
We should have common cause in getting the descriptors and the process right. The Government must convince us that they have not jumped the gun on these changes and answer the searching questions raised by the various lobby groups, which will doubtless be raised further tonight.
We look forward to receiving the Minister’s reply on these issues. The noble Lord, Lord Kirkwood, has initiated a very important debate, because these issues have run with the WCA and the employment and support allowance from day one. I believe progress is being made and certainly can be made, but there is some way to go yet.
Lord Low of Dalston
My Lords, many speakers have already gone over the new regulations in great detail, and I do not wish to repeat what others have said and go into all the ramifications. I propose just to talk about the impact of the new regulations on blind and partially sighted people, which is likely to be quite serious and which illustrates that the regulations as we have them at the moment are not fit for purpose. I think that other speakers have been unduly kind about the regulations. The noble Lord, Lord McKenzie, said that he was in favour of them. I have to say that I am not in favour of them as they stand. I am more with the Social Security Advisory Committee, which has said that they are not yet fit for purpose in a number of respects, that they were being rushed through prematurely, and that the department should take them back to await the second phase of Professor Harrington’s review. There should be more mature reflection on some of the points that have been made about the regulations and further consultation with the stakeholders who have been so critical of them, about which we have heard.
As has been stated by the noble Baroness, Lady Thomas, these regulations fundamentally undermine the structure of the employment and support allowance where claimants with limited capability for work are put into either the work-related activity group or the support group. The new descriptors make the limited capability for work test, the gateway to the benefit, unreasonably difficult to pass for many disabled people, certainly for blind and partially sighted people. By setting such a high threshold for eligibility for the ESA, they transform the limited capability for work test into a limited capability for work-related activity test, which large numbers are bound to fail. This in effect erodes the distinction between the two tests, undermining the intention of the Welfare Reform Act 2007 that there should be two distinct groups of claimants, one moving towards work—the work-related activity group—and the other with no conditionality—the support group. Under these regulations, the number of disabled people able to qualify for the work-related activity group will drop dramatically, as whole groups are largely excluded by the eligibility threshold.
The Merits Committee, in its first report of this Session, stated that the department itself estimates that 23 per cent will be found fit for work and will be required to make a new claim for jobseeker’s allowance, with its obligation to participate in activities to improve job prospects. The Social Security Advisory Committee believes that the DWP has underestimated the support required by this vulnerable group of claimants. It has also said a number of other things: first, that the current descriptors are also inadequate for measuring the capacity of those with mental health conditions, sensory disabilities or fluctuating conditions; and, secondly, that there needs to be a closer correlation between the tests and normal work situations. For example, someone who needs to be accompanied to familiar places by a helper is not sufficiently adapted to their condition to be capable of work, yet this would score only nine points under the proposed new descriptors and would therefore not enable that person to get through the gateway and qualify for the benefit.
The disability organisations that have made submissions to the Merits Committee have also made a number of other points. The perspective on work skills needs to be wider. Someone might be able to pack boxes all day, but not be able competently to find their way to the factory canteen; or again, people with a limited capability for work—blind people are actually instanced for this—may be able to work, but in a very circumscribed set of jobs. There is an insufficient supply of those jobs in a depressed job market.
I wish to concentrate on the impact of the regulations on the situation of blind and partially sighted people, and in doing so I declare my interest, although at my time of life I am not likely to be applying for employment and support allowance. However, I am a vice-president of the RNIB, which has had a certain amount to say about these regulations. Those who know about these things are clear that the new regulations will have a disastrous impact on blind and partially sighted people, who will in all likelihood fail to qualify for the ESA if the regulations come into force. This is deeply concerning, they say, considering that many blind and partially sighted people have limited capability for work and so should be able to qualify for the ESA, where limited capability for work can be demonstrated—which, I repeat, will be very difficult to do under the new regulations.
A person of working age who loses their sight will need to learn new skills such as independent mobility and how to use a computer using screen magnification or speech output software, as well as new everyday living skills such as cooking, dressing, cleaning and so on. It is not appropriate to require someone in this position to end up claiming jobseeker’s allowance, yet that will be the impact of these regulations. Under the proposed limited capability for work test, a blind person’s difficulties in performing most work-related activities would be ignored and only extreme difficulties in navigation and maintaining safety would be assessed. A visually impaired person would be considered to have a limited capability for work only if they were unable to navigate around unfamiliar surroundings without being accompanied by another person.
The RNIB says that it does not believe that Atos has the specialist knowledge and expertise in a medical test centre environment to carry out functional assessments of the mobility of people with sight loss. It says:
“For example, we are unclear how they would determine whether or not a person is unable, due to sight loss, to navigate a familiar route without support, when they will be assessed in an unfamiliar environment at the test centre, under conditions of limited time for the assessment to be completed”.
The department’s internal review stated that it was the department’s intention to continue to work with experts and specialist disability organisations to refine the descriptors related to sight loss. However, this has not happened, despite requests to meet officials. For that reason, the department really ought to look further at the regulations before it has these discussions with interested organisations that it says in its internal review it is its firm intention to have.
For many blind and partially sighted people, the regulations, if brought into force, could see them denied the ESA. This is due to the high qualifying threshold being put in place around limited capability for work and the failure properly to assess the effects of sight loss. The regulations will seriously undermine the distinction between the work-related activity group and the support group, and force people who should be eligible for the ESA on to the JSA, which is not the appropriate benefit for people with limited capability for work. I do not believe that this is either appropriate or that it was the intention behind the Welfare Reform Act 2007.
Lord McKenzie of Luton
My Lords, I did not want to interrupt the noble Lord, but I think he said that I had said I was in support of these regulations. I am not and I do not believe I said that—if I did it was certainly not my intention. I tried to play back some of the concerns that have been raised with us. I certainly support the concept of the ESA and of the WCA, but I do not support these particular regulations.
Baroness Murphy
I will be very brief because the debate has gone on for quite some time now. Other noble Lords have eloquently described the present difficulties with these regulations. However, I sympathise in some ways with the difficulties that the Government have, because we all share the intention that we should get more people who are currently receiving disability support into work; and what the Government are trying to do—and the previous Government were trying to do—is exceptionally difficult to get right. The development of those descriptors and an assessment tool is going to take more than the time allowed.
I am not saying that you should not pilot, try or try to revise the assessment tool, which is actually what the Government have tried to do. That seems perfectly legitimate, so I am not entirely in support of withdrawing these regulations, because unless we continually try to improve them, we will never get to the point at which they are adequate. However, I return finally to what the noble Baroness, Lady Thomas of Winchester, has said, because it is not the descriptors or the work capacity assessment that are the real problem. The real problem, which I think Professor Harrington described so beautifully, is that the process is,
“mechanistic, impersonal and lacks empathy”.
Here we have a population of worried, anxious people with a profound range of difficult disabilities to try to assess accurately, and there needs to be a culture change within Jobcentre Plus, Atos Healthcare and the healthcare assessments themselves. That is the fundamental problem. We could work on these descriptors. I know that the Government are doing so with extra help from specialists in the mental health field. I ought to declare an interest here as a psychiatrist. The work that is going on is essential, but unless we can change the culture of these assessments to make them more user-friendly we will not get people back into the work that would help them to lead better, fulfilled lives.
Pensions Bill [HL]
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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Lord McKenzie of Luton
My Lords, I shall also speak to Amendment 43. Concerns about levelling down have been raised throughout the development of the auto-enrolment proposals. In an attempt to predict the likely occurrence of this, a range of interested parties, including the DWP, have carried out surveys. The Johnson report summarises its view on the position on page 63. It says that,
“taken as a whole, the bulk of evidence suggests only limited reductions in pension contributions as a result of the reforms. Surveys by Fidelity, Capita Hartshead and the CBI consistently report that around seven in ten employers are not planning to revise or reduce their current levels of provision, and the National Association of Pension Funds found only three per cent of employers planning to reduce contributions for existing members”.
The thrust of this is to be broadly welcomed, but we accept that differing definitions of qualifying earnings and perhaps more traditional definitions of pensionable pay can add to uncertainty, although I believe that the previous Government made it clear that it was the quantum of contributions rather than the basis of calculation that was important. This issue prompted the search for a process of certification that allows an employer to certify overall that schemes satisfy the relevant quality criteria for defined contribution schemes. That in theory avoids the necessity of demonstrating in respect of each employee by detailed calculation that the minimum contribution on the basis of qualifying earnings as defined in the Bill has been met. That is easier said than done. I recall a number of meetings with stakeholders trying to unlock this conundrum of wanting to encourage employers to stay with existing but quality schemes on the one hand but being reassured that auto-enrolment worked for all, especially those who had been shut out of pension savings in the past.
Clause 10 introduces an alternative requirement to the quality requirement set down in existing legislation that will enable a scheme to be used for auto-enrolment. It is to this that Amendments 42 and 43 relate. The Bill states:
“In prescribing an alternative requirement … the Secretary of State must be satisfied that, in all or most cases, a scheme will be able to satisfy the requirement only if … for a majority of individual relevant jobholders, and … all relevant jobholders taken together”,
the relevant quality requirements in respect of employer and total contributions are met. Our amendment would require the Secretary of State to be satisfied in respect of all cases and for more than a majority of individual relevant jobholders. We have defined this as 95 per cent or all routinely.
My first question to the Minister is why the Secretary of State cannot seek to be satisfied in respect of all cases for which an alternative requirement is prescribed. What are the sort of exceptions considered desirable or acceptable, and why?
My second question relates to new subsection (2A). The alternative requirement needs to ensure that for all jobholders or a cohort—the relevant jobholders—sufficient employer and overall contributions are paid to satisfy the relevant quality requirement. However, it also requires this to be the case for individual relevant jobholders, but only for a majority of them—50 per cent plus one. Clearly, this could lead to significant numbers of individuals missing out. The aggregate requirement could be met by more generous contributions for some jobholders with less than qualifying amounts for others.
The Delegated Powers and Regulatory Reform Committee refers to this as a significant power, as, indeed, it is. We are obviously aware of the proposed certification model on which the DWP is working. The Minister may want to update us on progress. The proposal is based on employee’s pensionable pay from pound one and has three steps: a 9 per cent minimum for each jobholder; an 8 per cent minimum for each jobholder where pensionable pay in aggregate equals at least 85 per cent of total pay; and 7 per cent for each jobholder where 100 per cent of pay is pensionable. It is understood that this may give some 92 per cent coverage, but the Minister might like to explain precisely what this coverage is. What analysis has been undertaken of the 8 per cent who presumably would not, on an individual basis, have a minimum contribution paid on their behalf?
However, our focus is not only on how this particular scheme would work; it is crucially on the powers that it is proposed to enshrine in primary legislation. Should a Secretary of State be so minded—I certainly do not contend that this is the case at present—an alternative requirement could allow nearly half of all jobholders to be short-changed. This is simply not acceptable to us and we urge the Minister most strongly to look at these powers again. I beg to move.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Lord, Lord McKenzie, for his amendments to Clause 10. These amendments would require the Secretary of State, before making regulations on certification, to be satisfied that in every scheme at least 95 per cent of individuals would receive contributions no less than the statutory minimum. It is my understanding that these amendments may have been introduced to seek assurances that individuals will not potentially lose out under the proposed certification arrangements. The noble Lord made that clear in his remarks. I very much share his concern. That is why we have developed a certification test that balances simplicity with safeguards. The high-level certification requirements in Clause 10 will allow for a straightforward test of scheme quality to be set out in regulations for employers who calculate their pension contributions on basic pay rather than qualifying earnings but offer good-quality money purchase pension schemes. These employers will be able to demonstrate that their schemes meet the minimum quality requirements.
It might help if I briefly describe the certification test in the form that it is envisaged it will take in regulations. Contributions start from pound one and the test itself is based on three graduated tiers. Setting the first tier of the certification test at 9 per cent of basic pay provides a straightforward benchmark for schemes. We expect that a contribution of 9 per cent of basic pay will be a better deal than 8 per cent of qualifying earnings for 95 per cent of individuals who work in the private sector and who are eligible for automatic enrolment. Employers who make slightly lower contributions of 8 per cent or 7 per cent of basic pay will be able to certify that contributions must be based on a set ratio of pensionable pay to total pay. In the latter case, all pay must be pensionable. Employers using certification will be able to increase their contributions gradually. The precise details of how this will work will be set out in secondary legislation.
We worked collaboratively with key stakeholders, including the National Association of Pension Funds, the Association of British Insurers, the Confederation of British Industry, the Society of Pension Consultants, accountants and lawyers in designing the certification model. Employers and trade unions have broadly welcomed the certification arrangements as a pragmatic solution to a difficult problem. I hope that we have managed to unlock the conundrum referred to by the noble Lord, Lord McKenzie.
In designing the certification model, we addressed two risks: first, that there would be a significant detriment to individuals; and, secondly, that any certification test would be too complex. It is important that we get the balance right, as we do not want to encourage employers to level down to the statutory minimum, resulting in lower contributions for many of their workers. To protect individuals, the certification test broadly equates to the statutory minimum quality requirements for money purchase schemes: a contribution equivalent to 8 per cent of qualifying earnings. However, it uses basic pay from pound one rather than qualifying earnings. Basic pay is the key to simplification and to risk, as it varies across employers. Based on the analysis that underpins the certification model, we estimate that, for more than 90 per cent of people employed in the private sector who are eligible for automatic enrolment, basic pay is greater than or equal to qualifying earnings—I hope that that answers the question posed by the noble Lord, Lord McKenzie. That is because the basic pay calculation is made from pound one, rather than on just a band of earnings. In view of this, we believe that many people will get higher contributions under basic pay. We can monitor and mitigate the risk to individuals and take action if necessary. The bigger risk here is levelling down.
The amendment would require the Secretary of State, before introducing certification in regulations, to be satisfied that for every relevant scheme 95 per cent of the individual jobholders receive at least minimum-level contributions. We would not be able to regulate for the certification test that we currently envisage, which has been welcomed by employers and key stakeholders. In effect, we would be back to square one and would have recreated the conundrum. To make regulations, the Secretary of State would have to introduce a test that required the individual checking of each jobholder’s contribution records. That would make the test more complicated. Alternatively, he would have to set a much higher bar. Employers have told us that the former would impose an unacceptable burden and they would seriously consider levelling down to the legal minimum.
We are aware of the risk of individuals losing out, as the noble Lord pointed out. We have made a commitment to fully evaluating the effects and implementation of the reforms. This will include a proportionate check to ensure that the regulations are operating as expected and that there are no unintended consequences for individuals, employers or industry as a result of the reforms. To minimise the number of individuals losing out, we will monitor trends in the various components that make up an individual’s wage packet in our annual surveys. The data will enable us to monitor trends in pay and reward packages to identify any significant shift in earnings patterns. Our data collection enables us to monitor pay patterns by firm size, occupation and industrial sector. If the data suggest that self-certification is being abused, or more individuals than expected are losing out, the Secretary of State will have the power to tighten or repeal the legislation.
The noble Lord asked about clarity and what Clause 10 means by “a majority”. In this case, a majority means 50 per cent plus. However, the analysis on which the certification model was developed suggests that we can surpass this and other conditions. As I said, we estimate that, for 90 per cent of people employed in the private sector, basic pay is greater than or equal to qualifying earnings.
I believe that we have the right balance that allows an administrative easement for employers and provides safeguards for individuals. I hope that this will go some way towards reassuring the noble Lord, Lord McKenzie. I therefore urge him to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for his explanation of what is proposed for the certification model, its monitoring and the follow-up work that will be done. However, our basic concern is not the certification model, which has been worked up and, I accept, will be taken forward, but what is in primary legislation about what a Secretary of State can do. As it is written, a Secretary of State could bring forward alternative regulations that meant that only 50 per cent plus one of individual relevant jobholders would be provided for as they should be. It is the broad nature of the primary power that is our main cause of concern. It is a very wide power. What is to stop a Secretary of State bringing forward alternative models?
Lord Freud
I need to answer that, as it is clearly the noble Lord’s core question. The Bill circumscribes the Secretary of State’s powers by providing that, when prescribing certification requirements in regulations, the Secretary of State must be satisfied that, first, in respect of all or most cases, the total contributions paid by the employer and the jobholder together will not be less than if the scheme had met the relevant quality requirement; and, secondly, this must be the case both for a majority of the jobholders in a scheme and for all the jobholders in a scheme taken together.
Lord McKenzie of Luton
My Lords, I am grateful for that, but it does not help me. My problem is that there might be arrangements whereby some of the relevant jobholders—under the provision, you can choose what cohort of jobholders you want to look at; it is not all employees at any one time—could be well provided for and others not. The second part of the test, which looks in aggregate, would be met; all you have to do to satisfy the first part is for 50 per cent plus one of the individuals to be covered. Unless I am misreading that, and I do not think that I am, that is our bone of contention.
Lord Freud
I can give the noble Lord some reassurance. The regulations are affirmative, so we will have the opportunity to debate them at that point.
Lord McKenzie of Luton
With great respect to the Minister, I have trotted that one out myself a number of times. As we know full well, we cannot amend affirmative regulations, although they give an opportunity for debate.
This is a serious issue and a potential loophole in the legislation. I do not suggest for a moment that the Minister or his current colleagues would seek to exploit it; I accept that they are focused on working up a practical scheme. However, this is too wide a power to be left in primary legislation. I urge the Minister to reflect on that and perhaps discuss it with his colleagues to see whether it could be narrowed. We would be more reassured if the terms of the certification model were placed in primary legislation. We do not think that that is necessarily a perfect fit, but it would be a good deal better than the very wide discretion that the Secretary of State will have at present. I accept that that is not in the Government’s thinking at the moment, given the model that is being developed.
I am reassured about the monitoring of the model to be undertaken. I will need to read the record, but I thought that the Minister was saying that we could still end up with 10 per cent of people in schemes who would not fall within its ambit. If that is right, 10 per cent is a big chunk of the people whom we are trying to get into pensions saving. On that point, unless the Minister has anything further to say, I am happy to read the record, because I know that we will come back to this point on Report.
I seriously urge the Minister to consider my first point, because it is a serious problem with the clause and one that we want to follow through. Having said that, I am grateful for the information that the Minister has provided and beg leave to withdraw the amendment.
“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””
Lord McKenzie of Luton
The amendment is not moved, although I think that my noble friend Lady Hollis wants to bring it back on Report.
Lord Boswell of Aynho
My Lords, I oppose the amendment. I should perhaps declare that I, too, have members of my family—two daughters, in fact—who are in public sector pension schemes, and of course one hears comments of the sort that have been honourably and properly recorded by the noble Baroness. There are many people in the private sector who for a variety of reasons, not necessarily where their schemes have collapsed into the Pension Protection Fund, are feeling some stress as well. That needs to be said.
I would just say that although I did not respond to the Minister on his remarkable presentation last night with regard to the social security uprating orders, I was actually convinced by it, which I am not wholly sure that I had been until he gave that presentation. It is a change that we have to make, particularly bearing in mind that there are alternative arrangements for retirement pensions which will meet the triple test and will accelerate state retirement pension levels rather faster than the CPI.
I will make one further comment on Amendment 48A and the scheme proposed by the noble Lord, Lord McKenzie of Luton. I understand the motivation, but it is asking for a report on one-hand clapping, as the Zen Buddhists would say. It would be better expressed if it called for a report on the relative impact of the use of the CPI and of the retail prices index. We would then have some measure of comparison. As all noble Lords are aware, historically the CPI has run ahead of the RPI. My noble friend last night made representations about why this was overstating the problem and arguably would overcompensate recipients.
That leads me to make a technical comment of my own, to which my noble friend may want to respond. As one takes the heat off the RPI, it will become less immediately salient, although it will still be used and reportable for a number of purposes. As that happens, given the types of interaction and substitution effects that were rehearsed last night, it may be that it will cease to be of quite the utility that it was. Somewhere at the back of my mind—I must say it while I remember it, and hope that I still can—are my scribbled lecture notes of 45 years ago that I took on the Laspeyres and Paasche indices, and on all the different impacts of these complications. I implore noble Lords not to ask me to explain to the Committee how they work, but I will make the point that as we shift the emphasis to the CPI—that will surely be an irreversible shift, and I have given reasons for supporting the concept—the RPI will move out of focus and could become distorted in the uses for which it is still employed. Perhaps the Minister will give me some assurance that it will retain its integrity even if it is not being used for these uprating purposes.
Lord McKenzie of Luton
My Lords, I will speak to Amendment 48A in this group. I start by acknowledging the criticism made by the noble Lord, Lord Boswell, of the drafting; I very much take his point. I am also intrigued that he can read his notes after 45 years. I struggled today to read the notes that I made yesterday.
Amendment 48A calls for a triennial report to assess the impact of using the consumer prices index as the measure of inflation. It seeks that assessment from, among others, pension scheme members, employers, taxpayers and PPF levy payers. It is an opportunity to reflect on what has become known as the RPI/CPI switch. We stated in the other place, and again in our debate yesterday on benefit uprating, that we cannot support the decision to adopt on a permanent basis the CPI as currently constructed for the determination of benefit uprating and of pension revaluation and indexation. However, if our understanding of the process and legislation is correct, we do not need more amendments to the Bill to secure any change in future—which may help my noble friend Lady Turner. Issues of uprating pensions, including the BSP, S2P, public sector pensions and occupational pensions, are determined annually. These are undertaken by the increase in the general level of prices, which is generally not specified to be RPI or CPI, or indeed any other measure. Therefore, if I am right, a future Secretary of State could take a different view on the most appropriate measure of the increase in the general level of prices, and without the need to change primary legislation. The situation with regard to the PPF is similar. Clause 15 removes references to the retail prices index and substitutes,
“the general level of prices in Great Britain”.
But that does not lock in the CPI for all time. If I am wrong on that, perhaps the Minister will let us know, because we might want to table further amendments on Report. That runs also for the provisions of Clause 14, which my noble friend has addressed.
The change to uprating the various facets of pensions by CPI—subject to statutory caps—will, as we know, have a significant impact, particularly over time. We obviously accept that for the basic state pension, where we support the re-linking to earnings, which will provide the long-term determination of the basic state pension. For private sector occupational schemes, the extent to which the CPI ends up being used for revaluation and indexation depends on the scheme rules, and we support the Government in not pursuing the override. Nevertheless, the updated impact assessment produced by the DWP in February shows that the total cost in terms of reduction in the anticipated value of members’ pension rights—including the stock as well as the flow of pensions—is something like £86 billion, which is a considerable sum. This is not a deficit-reduction saving; it is an almost equal and opposite benefit for sponsoring employers, and there are consequential benefits to the PPF and levy payers.
Lord Freud
My Lords, I thank the noble Baroness, Lady Turner, and the noble Lord, Lord McKenzie, for their amendments, which I will address in detail in a moment. Before I do, I would like to set the context.
The legislation covering statutory increases to private sector occupational pensions requires the Secretary of State to make a judgment about the increase in the general level of prices in Great Britain up to the end of September each year. This judgment forms the basis of an annual order setting minimum statutory indexation and revaluation percentages to be used by occupational pension schemes in the next calendar year. As noted yesterday by the noble Lord, Lord McKenzie, the revaluation order was laid in December last year and the order providing for public sector pension increases will be laid shortly. They are not the subject of the Bill.
Clause 14 could best be described as technical and consequential. It makes changes to important but relatively minor provisions. I know that many noble Lords hold strong views on the Government’s decision to use CPI; it was the topic of extensive debate on Second Reading, and it was discussed at length yesterday. In response to the question of the noble Lord, Lord McKenzie, about how much the hands of a future Secretary of State are tied, I can let him know that he is correct in his presumption that the Secretary of State can take a different view and go back to RPI without a Bill if that is their decision. The CPI is a matter of coalition policy now.
It is not my intention to labour any further the methodology or our reasons for adopting the CPI. I think that that is now a matter of record. I will just pick up the noble Lord on one little point that I cannot resist: he asked whether people really substitute. I tried to explain yesterday how there has been extensive research into whether the practice matches the theory, and the research has all come out to say yes, it does. That is how I respond to that point.
Lord McKenzie of Luton
That was not my own judgment; I am not a statistician. It was the Royal Statistical Society that raised that issue.
Lord Freud
I am most pleased to take this opportunity to inform the Royal Statistical Society of the results of extensive research, which I know it will take into its considerations when it looks at this again.
I think that it would help if I set out exactly what Clause 14 does and why. It does two things. First, it addresses some peripheral references to RPI in occupational pension legislation that need to be removed or amended to ensure that the Government’s decision to use CPI as the best measure of inflation is applied consistently from now on. Secondly, it addresses the so-called “CPI underpin” issue. That arises where a scheme carries on increasing pensions in payment by the RPI. As the statutory minimum is calculated by reference to the CPI, such schemes would be required to track both the CPI and RPI and pay the higher, a bit like the old escalator in the funhouse in Tivoli in Copenhagen. We have made it very clear that statutory increases are minima, and we do not want to discourage schemes from making higher increases. Consequently, the clause before us ensures that schemes that continue to increase by reference to RPI are not subject to this funhouse ratchet effect.
The first reference to RPI is in Section 84 of the Pension Schemes Act 1993. This is a fairly obscure provision that caters for special arrangements in schemes which provide full uncapped revaluation on the whole pension including the guaranteed minimum pension. Clause 14(1) to (3) replaces the explicit reference to RPI in Section 84 with a requirement that these schemes must maintain the value of the pension in line with the rise in the general level of prices. This ensures that Section 84 provides for uprating in the same way as the other pension legislation.
The noble Baroness’s first amendment, reinserting a reference to RPI, effectively does nothing more than revert Section 84(5) to what it already says. It will certainly not restore RPI indexation or revaluation more generally.
The second reference we are addressing in Clause 14 is in Section 40 of the Welfare Reform and Pensions Act 1999. This concerns the indexation of pension credit benefits, which are pension rights deriving from a pension sharing order made as part of a divorce settlement. Clause 14(6) to (8) replaces the existing reference to RPI with a cross-reference to the inflation percentage adopted by the Secretary of State for the purpose of the annual revaluation order. The remaining part of the clause concerns Section 51 of the Pensions Act 1995. Section 51 sets out the requirements for indexation of pensions in payment.
The amendments to Section 51 of the Pensions Act 1995 in Clause 14 will also ensure that where schemes continue to increase pensions by RPI they need not carry out an annual comparison of the RPI increase required under the scheme rules and the statutory increase using CPI and pay the higher of the two. If a scheme increases pensions by reference to RPI, and has done so since the start of January 2011, then it will escape the statutory requirements of Section 51(2). This deals with the CPI underpin issue to which I referred earlier.
The amendments in Clause 14 also make amendments to ensure that Section 51(3) continues to apply as intended now we are using the CPI to measure inflation. Section 51(3) exempts schemes from the statutory indexation requirement where they increase pensions in payment at least by capped RPI measured over an annual period defined in their rules. Inflation for statutory indexation is measured at 30 September, but some schemes want to continue measuring at a different time and that is fine—Section 51(3) currently allows them to do that. The clause has the effect that if schemes increase by CPI, RPI or a combination of the two under their rules, they will continue to be exempt from the statutory indexation requirements. At the moment it is only schemes with RPI rules that would be exempt. All we are doing is making sure that an existing provision, which is very convenient for a number of schemes, is carried forward into a world where some or all pensions in payment will be increased by reference to CPI as well as RPI.
I am afraid that the noble Baroness’s second amendment would undo the part of the clause that allows schemes that increase by reference to CPI to use their own inflation reference period. Again, it will do nothing to restore RPI indexation or revaluation more generally. For that reason, and for the reasons that I set out earlier in respect of Amendment 47, I urge the noble Baroness not to press her amendments.
On Amendment 48A, I stress again that deciding the increase in the general level of prices is an annual duty, and that as the Government have made clear many times over, we believe that the CPI is the most appropriate measure. Publishing a triennial report on the impact of using the CPI will not change that. That is not to say that we are not interested or do not care about the impact—of course we do—but it is important to look at the broader context, not one part of the picture in isolation.
We are also mindful of the impact on private sector pension schemes and their members. That is why we issued a consultation paper in December about the impact of using the CPI on private sector occupational pension schemes. That consultation finished on 2 March and we are currently considering the responses. The noble Lord, Lord McKenzie, has asked when we will be able to share those responses. I can only ask him to show us a little more patience. I think that we have around 150 submissions, and some of them are extremely detailed and complex. We are also conducting social research to investigate the impact of the change from RPI to CPI for statutory revaluation and indexation of private sector pensions. We hope to publish findings from this research before summer.
Baroness Turner of Camden
I thank the Minister for that detailed response. My aim in putting down the amendments was to give voice to a lot of the opposition that has been voiced to me in the letters and complaints that I have received after people have been notified that they are likely to have a different arrangement with regard to indexation from what they have hitherto expected. There is a lot of anger about it, so I put the amendments down. I am not exactly committed to the wording, but I wanted very much to voice that opposition and to say that the people concerned have real worries about what will happen to them and their pensions in future.
I also thank my noble friend Lord McKenzie for what he had to say in support of his amendment. In default of getting anything like my amendment on to the statute book, his amendment seems very worthwhile because it means that the situation has to be reviewed and there is an attempt to ensure that what has happened is placed under survey at intervals. If it seems to be what you might call a soft answer, at least it is an improvement on what people think that they are facing in future.
I will read carefully what the Minister has said. I found it interesting that modifications can be made, surveys are conducted and so on. That is very useful and I will look at it carefully.
Lord McKenzie of Luton
Before my colleague withdraws her amendment, and I certainly do not intend to press mine, it seems a bit hard for the Government to say that their policy is fully evidence-based when they are only just gathering the responses to the survey and will take some while to analyse the consequences. The survey of the consequences of the switch to CPI for occupational schemes is an important one, and one might have hoped that the Government would wait for that analysis and research before they committed to the switch long-term.
Lord Freud
The consultation exercise informs how we do these things in some detail in regulatory terms, but it does not affect the decision and direction of travel.
Lord McKenzie of Luton
My Lords, I wish to speak briefly to Amendment 48C. I stress that it is simply a probing amendment designed to get a better understanding of what the alternative to obtaining a current actuarial valuation will entail.
Currently, determination of the funding position has to be underpinned by a fresh actuarial valuation. This supports the decision of whether the board must accept responsibility for the scheme. Perhaps the Minister can say a little more about the circumstances when the alternative approach is expected to come into play and the type and range of information that might be used in place of the actuarial valuation. The provisions in new subsection (5C) require the board of the PPF to issue a statement setting out how it will make determinations. Can the Minister give us a flavour of what the statement is likely to include? To what extent is it envisaged that reliance would be placed on third-party data? Generally, what level of assurance will be looked for in the use of such data?
I should stress that the purpose of this is not in any way to challenge the proposals but just to get a broader understanding of what is envisaged. It is presumed that these arrangements have been positively sought by the PPF and will help its operational efficiency. I am a fan of the PPF. When we discussed some SIs last week, I took the opportunity to say that the PPF has made a considerable contribution to the current pensions landscape. It is a very professional organisation and it is in that spirit that I move this amendment. I beg to move.
Baroness Garden of Frognal
My Lords, I will first speak to the government Amendments in this group and then respond to the amendment tabled by the noble Lord, Lord McKenzie. Clause 17 and Schedule 4 make a number of amendments to legislation in the Pensions Act 2004 and the Pensions Act 2008 that governs the operation of the Pension Protection Fund. They have been developed with the Pension Protection Fund and reflect the experience gained in the light of live running since April 2005.
Paragraphs 20 to 26 of Schedule 4 replace an existing regulation-making power within paragraph 25A of Schedule 7 to the Pensions Act 2004. Regulations made under the new powers would enable a person to postpone payment of their pension compensation past their normal pension age. Paragraphs 27 to 33 of Schedule 4 make amendments to the Pensions Act 2008 in parallel to those in paragraphs 20 to 26.
Regulations made under the new powers would enable a person who is entitled to pension compensation by virtue of pension compensation sharing to choose to receive compensation from a later date than normal benefit age. To explain further—in response to the noble Lord—for someone who chooses to postpone payment of pension compensation, three things would happen. First, the pension compensation cap would apply as at the time the person first becomes entitled to pension compensation, which would be their normal pension age. Secondly, revaluation would apply up to a member’s normal pension age. Thirdly, the board of the Pension Protection Fund would provide an appropriate increase in pension compensation when it comes into payment, calculated on an actuarial basis to take account of the postponement of the start of payment.
Amendments 49 to 52 amend the legislation in Schedule 4 dealing with the commutation of pension compensation. We intend to use these powers to make regulations to provide a person with the option to commute a portion of their pension compensation for a lump sum at the end of a period of postponement.
This group of amendments enables the Government to make regulations that will provide people with an additional flexibility. Current legislation already allows a person to decide to commute to a lump sum part of their pension compensation. All in all, this provides a person in the Pension Protection Fund with a good deal of flexibility to decide how and when to take their pension compensation.
I turn now to the amendment in the name of the noble Lord, Lord McKenzie, about funding determinations to be made by the board of the Pension Protection Fund and the degree of reliance on independently assured data. For a scheme undergoing assessment for entry to the Pension Protection Fund, an actuarial valuation of a scheme’s assets and protected liabilities under Section 143 of the Pensions Act 2004 will no longer be required in all cases. A scheme’s protected liability is the cost of providing benefits equivalent to pension compensation, any non-pension liabilities of the scheme and the estimated cost of winding up the scheme. Instead, the board of the Pension Protection Fund will have the power to determine whether a Section 143 valuation scheme is required or whether it can use other information that it has in order to decide whether the scheme should transfer into the Pension Protection Fund.
Practical experience since the Pension Protection Fund opened for business in April 2005 has shown that in a number of cases there is already sufficient independent information held about a scheme to allow the funding position to be accurately assessed without requiring a fresh actuarial evaluation. For example, a valuation by an actuary under Section 179 of the Pensions Act 2004, undertaken for the purposes of calculating a scheme’s pension protection levy, may be used. These changes will avoid schemes incurring the expense of an actuarial valuation where one is not necessary for a fair decision to be made.
The noble Lord is concerned to protect the interests of members of schemes that will not undergo full actuarial valuation under Section 143. I should make it clear that the Government are not intending to change outcomes for members; rather, these changes are intended to avoid costs where they are not necessary to ensure fair outcomes for members.
New Section 143(5)(c) requires the board of the PPF to set out how it will make determinations when it does not commission a full actuarial valuation. This statement will have to take account of any requirement set out in regulations under Section 143(4). We expect the PPF to set out examples of the sort of information and methodology that it would use in place of a full actuarial valuation in this statement so that it is clear how a meaningful judgment of a scheme’s funding position at the assessment date—that is, the date when the scheme began assessment for PPF—was made.
The Government have no problem with requiring the PPF to make evidence-based decisions. Indeed, the board of the PPF is clear that it will be appropriate not to commission a full valuation only where there is adequate alternative evidence. However, I suggest that the more appropriate place to detail any legislative requirements for that evidence is in regulations under subsection (4) rather than in the Bill. As an example of when an alternative determination would be used, it would be where a scheme was very clearly underfunded on the basis of existing information but not where there may be some doubt about it.
I welcome the noble Lord’s interest in the changes to requirements to undertake actuarial valuations in all cases where a scheme is being assessed for entry to the Pension Protection Fund, but I hope that the explanation that I have given is sufficient for him to withdraw his amendment and that the Committee will be prepared to accept government Amendments 49 to 52.
Lord McKenzie of Luton
My Lords, I thank the Minister for her full response to my amendment. Indeed, I welcome her to her first session at the Dispatch Box on pension issues—the first of many, I am sure. The explanation that she has provided in response to my amendment is totally satisfactory. I think that I understand it fully and it has been a helpful clarification of what is in the Bill. The government amendments are a sign of the growing practical experience and maturity of the organisation. I have no particular points to raise and am happy to support the amendments. I beg leave to withdraw the amendment.
Lord McAvoy
My Lords, I rise as a former Unite shop steward to come to the rescue of my trade union colleagues among the legal fraternity. I am impressed by the campaign launched by my fraternal trade union colleagues. The noble and learned Lord, Lord Mackay of Clashfern, would have made a wonderful shop steward in Unite.
I started off by listening to the point, the sums and the principle. I am sure that it was not organised, but the turnout of legal colleagues had perhaps a whiff of vested interests about it—legitimate vested interests, but vested interests nevertheless. The more that I listened and thought about it, though, the more I thought that there is a trade union principle involved in this that has led me to support the amendment. That principle is that when you come to an agreement with your employer, it should not be changed in this manner. I hope that my saying this does not result in any more furniture being damaged but there is a principle here, a wonderful trade union principle, and I am delighted to be able to support my comrades.
Lord McKenzie of Luton
My Lords, I was going to be simply in listening mode on this, awaiting the wisdom of the Minister, with a few questions that may or may not be helpful but with a few comments as well.
I shall start with a point that I raised with my noble and learned friend Lord Falconer just before our proceedings about the precise wording of the amendment. We would not be happy with anything that linked any change to the CPI. We are having a broader debate about that switch and there is an issue, were there to be progress on putting in place a structure like this, about whether that should be linked to some sort of price base or to factors relating to longevity. That is a point of detail.
What we have in the Bill is a framework opportunity. The Minister can tell us about what specifically is currently proposed in respect of that. Can he say anything about the process of making regulations? The Bill just says:
“The appropriate Minister may, by regulations made with the concurrence of the Treasury, make provision”.
Is it envisaged that there would be some parliamentary process attached to that? Yes; he is nodding. I would hope that there would be, but how would that proceed? The point about any changes to the pension arrangements possibly being a slippery slope to undermining the judiciary is one that we need to be mindful of. I accept that, although we do not need to see it as the overriding point. If changes were to be a sort of Trojan horse, though, we would all deplore that.
I was going to raise the issue that the noble Lord, Lord Stoneham, raised—he made the point very effectively—about what counts as a diminution in the terms of service of a member of the judiciary in circumstances where the benefit of the pension, because of longevity, is actually increasing. There is a point there that needs to be answered. I can see that that itself creates difficulties. If you have a judge who has served for 20 years, longevity projections 20 years ago would have been quite different from what they are now; if you have someone who is new in post, that is potentially a different issue. That is a reasonable point. If you are looking at a reduction in someone’s terms of service, if you have a component that is improving in terms of the value of the pension, could you, at least in theory, net them off?
The movers of the amendment seem to have accepted the principle of some change to the pension arrangements because it would relate to new appointments. I wonder whether there are issues about what it would mean for a profession where you basically have two different sets of terms and conditions. Is that a particularly healthy position to end up in?
I wonder whether in all of this there is some sort of process of discussion to try to reach agreement on the way forward which current members of the judiciary would feel comfortable with; or will it always be the position whereby current judges will simply put up the shutters and say, “We don’t have to do this because we have a contract that says you can’t do it”—if that is what the contract says? As has been said, across the public sector people are taking pay cuts and facing large-scale redundancies and increases in contributions to their pensions, and it seems difficult for the judiciary, notwithstanding the constitutional arguments, potentially to be seen as standing aside from that. We should be eternally thankful for our judiciary in this country; they have a quality and integrity, and the public generally support them. However, is there not a risk that if you hold out on this, the trust and standing of judges might be undermined?
I have another point on which I should caution noble and learned Lords, although I hesitate to do so. I accept entirely the argument that judges have given up high-flying careers and high earnings because they want to put something back. That is a motivating force. However, you could say that equally of many others in the public sector. In our schools, how many first-rate, first-class teachers have given up or never pursued high-flying careers in the City because they had a passion, wanted to teach and put something back? I am sure that that is true in respect of the judiciary, but I caution against advancing that as part of the noble and learned Lord’s argument.
Does the Minister accept that the amendment would break the contract arrangements for existing judges, because that is the bone of contention here? Is that not the slippery slope towards undermining the independence of the judiciary? If he does not accept that analysis, it would helpful if he explained, from the Government’s point of view, why he does not. If we are in an environment where it is accepted, because we are all in this together, that there should be provision for new judges to make a contribution, it would be entirely reasonable for those provisions to be constrained in terms of how they might be used so that the floodgates are not opened with a fear that the measures could be used arbitrarily. I am sure that all sorts of legal remedies could be advanced, should the Government seek to do that. However, some sort of constraint would not be unreasonable.
Is there not, in all of this, some process for trying to achieve agreement with existing judges to participate and come into the fold on some basis, rather than have this stand-off and all the negative connotations that that entails? I should be interested to hear the Minister’s responses.
Lord Boswell of Aynho
My Lords, I will be even briefer on this amendment, having regard to the hour and the common wish to finish.
This amendment arose as the result of an approach that I received from the National Association of Pension Funds. The intention of the new clause would be to put what I might call a forward gear into the work of the Pensions Regulator. As I have explained to the Committee in the past, I have quite a lot of people in my family with a background in education. My wife for one would always say, “Emphasise the positive, don’t go around looking at the negative”. That is a good maxim for this Committee.
At the moment, as the NAPF reasonably reminds us, the Pensions Regulator has three basic statutory objectives, all of which are, at least to some extent, slightly passive, although I do not mean that they are improper: first, to protect the benefits of members of work-based pension schemes, which is hugely important; secondly, to promote the good administration of work-based pension schemes, which is also important, although administration is something that serves rather than being the main driver of the event; and, thirdly, to reduce the risk of situations arising that might lead to claims for compensation from the Pension Protection Fund. At the moment there is an interest in preventing that getting out of hand; we have discussed the levy and the burden on pension funds and, indirectly, on contributors of all kinds. No one is arguing that those objectives are wrong, but the NAPF’s concern, which I warm to, is that the last obligation—trying to avoid benefit run-off—is beginning to dominate the regulator’s activities. The overall work of the regulator is insufficiently focused on the continuation of good-quality workplace pensions. It is in the interests of the NAPF and of everyone across the Committee that that should be sustained.
What is proposed here is a simple provision that would give us a positive forward gear to promote the provision of good pensions and to ensure their health and longevity. Nobody here would dissent from that. Arguably, large parts of the Bill, particularly in relation to the NEST scheme, are focused on it, and it would be helpful to have the Minister's response in due course. He will recognise a probing amendment when he sees one. I am not committed to the exact wording, nor to the vehicle involved: but I hope that somehow we will be able to signal that the focus should be on supporting, sustaining and maintaining the positive, rather than on simply cleaning up the mess where things go wrong.
I will take one final shot. Perhaps the Minister would report on any elements of deregulation or decluttering of the business obligation that he has undertaken within the spirit of BIS’s one-in, one-out approach. That would be helpful. I beg to move.
Lord McKenzie of Luton
My Lords, I will be brief. I understand the thrust of the amendment. However, I have some concerns, mainly over the wording. To place on the regulator an objective to ensure the health and longevity of good pensions is stretching a point. The regulator is focused on workplace pensions. As written, “pensions” could range over a raft of different situations, including contract-based ones as well as DB ones.
From my experience, I challenge the assertion that the regulator is overly focused on protecting the PPF. Perhaps it is easy to forget the circumstances of 2004, when DB schemes were dropping out of the system like flies. The regulator's role then made a real difference. I recall also that over the past 18 months to two years there have been constant challenges to the regulator on the grounds that requirements under recovery plans were too severe. The regulator responded in a very effective way, being clear about what flexibility there was in the system but also recognising that what was important to DB schemes was the employer covenant. Unlike insurance-based contractor arrangements, these entities are capitalised and support the provision of annuities or whatever else through that structure. For DB schemes, it is the undertaking of the employer and sponsor that is the driver. Therefore, the regulator's role in holding them to account is good.
No one would object to anyone’s role in promoting the provision of good pensions. However, in this case I would not impose the obligation to ensure their health and longevity, because these will depend on a whole raft of things, not least the commercial situation of the sponsor and what their future may be. The regulator has played an important role, and I will be interested to hear if the Minister has any proposals to change their current remit and focus.
Lord Freud
My Lords, we have reached the last amendment in Committee on the Pensions Bill with a little nostalgia—and perhaps with relief for some. I will deal with my noble friend Lord Boswell’s amendment on the objectives of the Pensions Regulator, and will start by providing some background. Many noble Lords will be aware that Parliament legislated, through the Pensions Act 2004, to establish an independent, risk-based Pensions Regulator whose job was to regulate work-based pension schemes based in the UK. The Act gave the Pensions Regulator his main statutory objectives. These include protecting the benefits of members of work-based pension schemes and limiting calls on the Pension Protection Fund. Noble Lords may be interested to know that, in its 2007 report on the Pensions Regulator’s progress in establishing a regulatory approach, the National Audit Office found that the objectives provided a sound framework for pensions regulation.
Some of us may also be aware that the NAPF, in its 2010 report Vision for Pensions, recommended that the regulator’s activities should be reoriented. They proposed that this should be done by giving the regulator a new objective, to promote good pension provision and to ensure their health and longevity. My noble friend is well aware of the interests of the NAPF in this area, given the nature of this amendment.
Social Security Benefits Up-rating Order 2011
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I also speak to the draft Guaranteed Minimum Pensions Increase Order 2011. I am satisfied that the orders are compatible with the European Convention on Human Rights.
The Guaranteed Minimum Pensions Increase Order provides for contracted-out defined benefit schemes to increase their members’ guaranteed minimum pensions that accrued between 1988 and 1997 by 3 per cent. Such increases are in line with the growth in prices or 3 per cent, whichever is the lower.
The uprating order embodies two notable changes this year. This is the first uprating after the restoration of the earnings link for the basic state pension, and the order introduces a clear and consistent approach to price measurement with the move to the consumer prices index, thereby putting the annual uprating of social security benefits on a sustainable footing for the future.
I know that noble Lords will welcome the coalition Government’s immediate fulfilment of the promise to restore the earnings link for the basic state pension. Not only that, but we have also given a triple guarantee which means that the basic state pension will be increased by the highest of earnings, prices or 2.5 per cent. As a result of those actions, it is estimated that the average person retiring on a full basic state pension in 2011 will receive £15,000 more in basic state pension income over their retirement than they would have done under the old prices link. Through these policies for the basic state pension, we will provide a solid financial foundation for people’s retirement income.
The basic state pension goes to more than 11 million pensioners in this country, and is the most efficient and equitable vehicle for distributing resources to pensioners. From this April, the standard rate for the basic state pension will increase by 4.6 per cent. That means an increase of £4.50 a week, taking the weekly rate from £97.65 to £102.15. This is in line with a promise made at the Budget to increase the basic state pension in line with the retail prices index in 2011. In subsequent years the triple guarantee, with the consumer prices index used to measure prices, will apply.
In the other place, there was an accusation that we have had to override the triple guarantee this year because the relevant CPI figure—3.1 per cent—would have resulted in too low an increase. This is not the case. We made a promise to increase the basic state pension in line with the RPI in April 2011 if it showed the highest growth. It did, so that is what we are doing. There is no override here; we are simply fulfilling a promise. We have also ensured that our poorer pensioners see the benefit of the increase in the basic state pension by ensuring that the standard minimum guarantee in pension credit rises by at least the cash increase for the basic state pension this year. Therefore, from April 2011 single people on pension credit will receive an above-earnings increase to their standard minimum guarantee of £4.75, which will take their weekly income to £137.35. For couples, the increase will be £7.30, taking their new total to £209.70 a week.
I will now turn to the second notable change I mentioned; namely, the switch to the consumer prices index as the measurement of prices for benefit and pension uprating. This is not the first occasion on which we have discussed the CPI and it will not be the last. Indeed, we will be returning to it tomorrow in our deliberations in Grand Committee on the Pensions Bill. Nonetheless, I hope noble Lords will permit me to take this opportunity to outline our thinking on the matter again. It has been said before but bears repeating that the purpose of the annual uprating exercise is to ensure that the purchasing power of social security benefits is protected against inflation. It is not to give the highest increase possible.
We believe that the CPI is the most appropriate measure of inflation and one that is fair to the taxpayer. As the Chancellor announced at the Budget, the move will save almost £6 billion a year by 2014-15. We do not claim that it is a perfect measure of inflation, but it is the most appropriate and is the measure used by the Bank of England to measure the general level of price inflation. The key difference between the RPI and the CPI is the so-called formula effect. Put simply, the CPI is calculated in a way that takes account of the choice available to consumers who can trade down to, or, in the jargon, substitute cheaper goods when prices rise. RPI is not and arguably overstates inflation as a result.
A basic principle of economics is the law of demand, which states that, all other factors being equal, a rise in the price of a good will cause consumption to fall and vice versa. A key driver of this is substitution: as prices rise, consumers will substitute away from higher-priced goods, choosing less costly alternatives. Substitution can occur in different forms. There can be substitution among brands or types of products, such as brands or types of ice cream; across different store outlets and across time. This is known as elementary or lower-level substitution. There can also be substitution among items in different product categories—such as between ice cream and cupcakes, or bus rides and train rides—referred to as substitution at higher levels of aggregation.
The geometric mean in the CPI is used only at the elementary aggregation, or lower level. There is no higher-level substitution assumed. A good way to think about substitution is to employ the concept of elasticity. Price elasticity is a measure of how responsive demand is to changes in price. Higher-price elasticity means that small changes in price lead to a large shifts in demand and vice versa. Where a good is described as having unit elasticity, a 1 per cent rise in price will lead to a 1 per cent fall in consumption and vice versa. This is a common way to represent demand behaviour in economic literature, in the form of the Cobb-Douglas utility function. For a given basket of goods, the Cobb-Douglas function assumes a unit elasticity of demand for all goods in the basket.
How does this relate to the geometric mean? Economists have shown that the geometric mean is an exact reflection of the cost of living if the elasticity of substitution is equal to one; that is to say, if a 1 per cent change in price leads to a 1 per cent change in consumption. The arithmetic mean is appropriate if the elasticity of substitution is equal to zero; in other words, if price change has no effect on consumption. Clearly, there are some goods for which price change will have little or no effect on consumption, because there is no recourse to a substitute good which has increased less in price. One example would be petrol. That is why the arithmetic mean is used in the CPI to combine petrol prices. In fact, the arithmetic mean is used in 30 per cent of the CPI’s basket of goods for precisely that reason. Other goods it covers include electricity, newspapers, transport and postal services.
What about the remainder of the index, the 70 per cent where substitution is implied by the use of the geometric mean? Do people really substitute away from goods which have risen sharply in price to those which have not? Is the geometric mean appropriate? Noble Lords will not be surprised to find that there is a body of empirical evidence that people do substitute and that the geometric mean is an appropriate reflection of that. In Australia in 2009 a study by Ivancic, Diewert and Fox found that, in the overwhelming majority of cases, elasticity of substitution was much closer to one than to zero and therefore that the geometric mean was a more appropriate reflection of consumer behaviour. One of their key findings was that consumers are very responsive to price changes at the elementary aggregate level, the level on which the geometric mean operates. However, the study went further, finding that even the geometric mean might not fully capture substitution, with some elasticities exceeding one. There is separate evidence, for example, that brand-level elasticity is often more in the one and a half to two range.
Closer to home, also in 2009, the Scottish Government published an overview of evidence on food prices. Within this, the use of TNS Worldpanel market data showed that consumers do respond to higher food prices by substituting within a general category of food. I hope that this reassures noble Lords that consumers do substitute when prices rise; not necessarily that they substitute all the time, for the geometric mean does not demand that; simply that some people will substitute when an item has risen sharply in price and there is a good substitute.
The CPI deals only with substitution on the elementary aggregate level, the lower level. In the United States a widespread view developed that their consumer prices index was overstating inflation by not taking account of substitution behaviour. The US Advisory Commission to Study the Consumer Prices Index, also known as the Boskin commission, was concerned about substitution bias—concerned that their CPI was overstating inflation by not taking into account consumer substitution. However, the commission’s report made the point that higher-level as well as lower-level substitution was an important part of consumer behaviour.
Suffice to say that the theory and evidence for consumer substitution is compelling, that the geometric mean is an appropriate method of capturing that behaviour and therefore that the CPI’s method of aggregation is superior. That is why the geometric mean is used in the consumer prices index of the United States, Canada, Australia, Denmark, Finland, Ireland, Italy, Luxembourg—I could go on; I will go on—France, Portugal, Spain, Sweden and Austria. You get the picture.
Once we accept that the use of the geometric mean, where appropriate, is superior, then we have accounted for most of the gap between the CPI and the RPI. In fact, it has accounted for an average 0.53 percentage points of the average 0.88 percentage point gap since 1997, or 60 per cent of the gap. Already it seems that the CPI is the more suitable index. People tend to gloss over the fact that most of the gap is contributed by methodology, which experts agree is superior, and concentrate on the basket of goods instead, so it is to that factor that I will now turn.
The CPI excludes mortgage interest payments, which are not relevant to the majority of pensioners and benefit recipients. Only 7 per cent of pensioners have a mortgage, and many working age benefit recipients can get help with their housing costs. As noble Lords will know, it was mortgage interest that caused the RPI to fall in 2009 and, consequently, many pensions to be frozen. Without mortgage interest, the RPI would have grown 1.3 per cent rather than fallen 1.4 per cent in the relevant period. The CPI grew by 1.1 per cent in that same period. This illustrates the significant effect that mortgage interest can have on RPI inflation, and it is not a cost relevant to most benefit and pension recipients. There are other housing costs, of course—rent, for example—but, since the CPI already includes rent, we need not concern ourselves with that.
What about owner-occupiers though? The ONS is working on incorporating owner-occupier housing costs in the CPI. It is not something that can simply be dropped in, and the work is currently at an early stage. We will monitor this work closely and look seriously at the new index when it is close to production.
In correspondence with the UK Statistics Authority, the Royal Statistical Society has made some suggestions with regard to the CPI. Naturally, we welcome the ONS’s continuing statistical development programme. However, let us not lose sight of the fact that the Royal Statistical Society has issues with the RPI, to which I shall return in a moment.
Increases in line with the growth in the CPI maintain benefit and pension value as well as putting the system on a more sustainable footing, allowing the Government to focus help where it is needed most. In short, it is fair to recipients and to the taxpayer. I mentioned the Royal Statistical Society. You will often see reports of its concerns with the CPI in correspondence to the UK Statistics Authority. Have any of those reports mentioned its repeated calls for the RPI’s methodology to be improved, given that it arguably overstates inflation? I suspect not. The Institute for Fiscal Studies’ report on the Budget said that the CPI’s methodology was,
“a sound rationale for the switch”.
For a final word on the CPI, let us look no further than that longstanding Chancellor, Mr Brown, who said:
“It is more reliable ... It is more precise”.—[Official Report, Commons, 10/12/03; col. 1063.]
That is the consumer prices index—not a perfect index, but more reliable, more precise and more appropriate. I commend these orders to the House. I beg to move.
Lord McKenzie of Luton
My Lords, I thank the Minister for introducing these orders and for that journey through geometric means, elasticity of demand and Cobb-Douglas. I am certainly reassured to know that the geometric mean works only at the elementary aggregate level. He has certainly given us plenty to read this evening in time for tomorrow’s further debate on this issue when we get to pensions.
The Guaranteed Minimum Pensions Increase Order presents no problem to us. Although the general level of price increase has been based on the CPI, not the RPI, the limiting factor is the 3 per cent cap, and we can support this order. However, the more substantive benefits uprating order is an altogether different proposition. Of course, we are not supposed to vote against it as it is includes matters that we support, such as the uprating of the basic state pension by the RPI, but we will not vote for it since, as we have heard, it is the start and signals the continuance of the switch to uprating by reference to the CPI. When it comes to debating these things, the Minister is right that there is no perfect index; an index measures what it measures.
The Minister made great play of the triple lock and the re-linking of the basic state pension with earnings. This is something that we support, and why not? After all, we locked it in as a requirement into primary legislation. We should remember that it was a Conservative Government who broke that link at a stroke. It was a consequence of this that when we came to government in 1997, our priority was to target maximum resources on the poorest pensioners. This was helped through measures such as pension credit, which meant that by 2007-08 there were 900,000 fewer pensioners in relative poverty than in 1998-99, as measured by the 60 per cent contemporary median income. On average, pensioner households were £1,500 a year better off in 2009-10 as a result of the tax and benefit changes than if the 1997 policies had simply been rolled forward. The poorest one-third of pensioner households were over £2,000 a year better off.
Lord German
My Lords, perhaps I may follow that speech by the noble Lord, Lord Beecham, by also declaring an interest. I am in receipt of my basic state pension and I suppose that I should be thanking the Minister for his announcement that I will be earning, on average, £15,000 or more during my lifetime. However, I am particularly grateful that the measure increasing pensions restores the link with earnings. For many of us here who have campaigned on platforms at election time, the issue of re-linking pensions to earnings has been asked for on virtually every occasion when there has been an audience of prospective and actual pensioners who were concerned that the link had been broken and wanted it to be restored. I am therefore deeply grateful that the triple lock will replace the double lock.
I shall come to the issue of RPI and CPI in a moment, but I should first say that the orders demonstrate that we need a less complex system. Noble Lords on the other side have said on several occasions that this is a weighty document containing many changes. That reflects the complexity of the arrangements in our benefits structure and the calculations that flow from it. I welcome the simplification that will occur when the Welfare Reform Bill is enacted.
However, I agree that my noble friend will have to respond to the question of whether these measures will satisfactorily protect the worst-off in our society. That is the test we must put before him. Some measures that are not in the orders will support particularly the long-term employed—the Work Programme, more apprenticeships, and the more rigorous, enlarged and targeted work experience programme that will produce dynamic changes and have an impact upon the take-up of benefits overall.
I turn to the CPI/RPI debate. It is clearly difficult to produce a set of proposals that will be understood by people who are not in this Chamber and who want to hear a simple explanation. Geometric and arithmetic means are not words that roll off the tongue as you sit talking after watching the evening news on television. It is difficult to understand the complexity unless you can understand what lies behind it. What I take from this is what I call the old Tesco/Waitrose test regarding upper and lower shelves, whereby when you make a substitution, you might move shop or shelf when choosing products, in order to make savings in your weekly bill. There is something in that, given that the former Prime Minister, when he was Chancellor, said that CPI is a better measure of substitution. That is a matter which the mathematicians are beginning to grapple with.
However, it is clear that when compared with the UK no country in the western world has such a statistical difference between the two indices. The majority of other countries use the CPI index, but why is there such a difference here between the two indices? We need to understand why, and that was what the Royal Statistical Society was attempting to do. It is not just about whether there is something wrong with using the CPI, but about why there is a gap between the two indices that does not occur elsewhere. That again relates to the way that the formula is constructed. As we know, the formula includes a difference of between 0.5 per cent and 0.8 per cent, and we need to understand that better in future.
Therefore, it is not a question of which is the better index, but of which is the right index. It is not that one is a good index and one is a bad index; we are looking for the right index which measures inflation and how prices are rising. It may well be that we have not got that right in the past and that we are now looking for a change. However, I note that the opposition party in the shape of its leader, and reinforced here tonight by the noble Lord, Lord McKenzie, is prepared to accept CPI as an interim but not a permanent measure. That means that there is a sense that they generally agree with the former Prime Minister that there is a role for this index, although they may disagree about its long-term purpose.
What we do know, as international comparisons tell us, is that CPI is a much more stable measure. I was interested to hear the remarks of the noble Lord, Lord Beecham, concerning the pension. One effect of the methodology used by the previous Government was that the pension rose by 75 pence a week. Of course, it is not reasonable for people to be told that prices have not risen appropriately in that period. We need a stable measure which reflects people’s understanding of how prices have risen during the year.
As we heard from the Minister, housing is reflected in CPI in terms of rent but not mortgages. Work is now being done to improve the involvement of house prices and housing measures within CPI, although we know that only 7 per cent of pensioners have a mortgage. It is important to reflect on the value of the basic state pension, to note that in future the triple lock will work to the benefit of pensioners, and, if I read the newspapers correctly, that the basic state pension will be uplifted even further, which will give people a basic entitlement in tier 1. I hope that that will occur.
Lord McKenzie of Luton
I hope that the noble Lord will forgive me for interrupting. I accept what he says about the triple lock on the basic state pension, but does he acknowledge that applying CPI to S2P on a long-term basis would reduce what would otherwise be payable?
Lord German
The basic pension is bigger than the additional pension. In the long run, the earnings link is worth 2 per cent more than prices, and CPI is 0.8 per cent less than RPI. Therefore, the increase in the basic state pension can be set against the change which will occur with CPI for S2P. It is very important to see the connection between the two. Of course, as the noble Lord, Lord McKenzie, will know, there is much talk in the ether about an improved single-tier pension, and I think that that will be the test. Not only would it benefit people through the measure that I have just described but in the future it might improve matters even more.
Lord McKenzie of Luton
I am sorry to interrupt the noble Lord again, but how would he factor into his assessment occupational pensions which, in terms of future indexation, could be subject to CPI rather than RPI?
Lord German
I was very grateful that the Government did not put the override in place, because of course it should be up to occupational pension schemes to make up their own minds according to their rules. Clearly, if RPI were written into the contract that already existed, that would apply and the schemes would be able to stay with that. Most pension schemes will be able to make that choice, and I hope that there will be a debate among pension fund members about the way in which that might be put into place. It is also very important that pensioners with accrued benefits under RPI should have those benefits maintained and that, if the choice is made to change, CPI should occur only after the CPI regulation hits the deck.
Going slightly beyond this issue, I want look at the packages in the round and I also want to ask the Minister some questions. I am pleased that there was no override, and I wonder whether the Minister can confirm what I have just said regarding accruals for occupational pension schemes. Will the switch to CPI see the pressure on occupational pension funds reduced? I know that some figures have been produced regarding the reduction in pressure on some occupational pension funds. I should be grateful if the Minister could update us on the current thinking on that matter and on the current analysis of who is going to move and in which direction.
My final question relates to the much bigger world of the reforms proposed by the noble Lord, Lord Hutton. What are the Government’s thoughts about the direction of travel of the matters that we are discussing today, and how will that impact on the public sector pension funds? Will the Government be responding to the noble Lord, Lord Hutton, and in what timescale? People will want to understand the Government’s direction of travel, both on the basic pension and on public service pensions, which I imagine are a cause of concern to many people at present.
Pensions: Britons Living Abroad
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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Lord Freud
My Lords, this is a much more complicated issue than it seems on the surface, because it is not a question of making a payment to a pensioner the entirety of which they then put into their pocket. The country where they are living will often supplement their pension, so it can often be a case, for instance, of us making a higher pension payment and the equivalent of pension credit being reduced. It is money out of the UK taxpayer’s pocket into the pocket of the taxpayers of another country. It is a far more complicated issue than it seems on the surface.
Lord McKenzie of Luton
My Lords, I agree with the Minister that now is not the time to change the uprating of pensions paid abroad. The priority should be to push back against the aggressive acceleration of the state pension age for women. However, does he agree that British pensioners overseas have the benefit of the reduced number of years of contributions to receive a full basic state pension, which came in under our legislation in April 2010, and still have the ability to top up entitlements by class 3 buy-backs on a basis whereby for £655 you can buy extra pension of about £170 a year for life? That seems a pretty generous deal.
Lord Freud
My Lords, I am happy to congratulate the noble Lord opposite on those changes, which I know that he was involved with. I think they have been valuable. The point about costs in the current environment is that this change to uprating in the frozen areas would cost us £620 million a year, and in the context of the austerity position that we are in—all noble Lords will be very familiar with the terrible dilemmas that we face as we look to get the budget under control—we should consider how much that £620 million represents.
Mesothelioma Lump Sum Payments (Conditions and Amounts) (Amendment) Regulations 2011
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I start with the formalities. It is a requirement that I confirm to the Committee that these provisions are compatible with the European Convention on Human Rights. I am happy to so confirm.
I am pleased to introduce two sets of regulations, increasing by 3.1 per cent the lump sum amounts paid under the Pneumoconiosis etc (Workers’ Compensation) Act 1979 and the mesothelioma scheme set up by the Child Maintenance and Other Payments Act 2008. These new amounts will be paid to those who first satisfy all the conditions of entitlement on or after 1 April 2011.
The increases in the amounts paid under these two schemes are not part of the process that increases the benefit rates across the whole range of social security benefits. As a result, there is no statutory obligation to increase the rates paid under these schemes. However, previous Ministers have made a commitment to annually increase the rate of payment benefit alongside the general increases applying to all social security benefits. I am very pleased to make the same commitment.
At this point I must briefly refer back to the increases made to the payments under these two schemes in 2010. As a result of the economic downturn, the retail prices index in September 2009—the date at which the rates for the following year are fixed—was negative for the first time in 50 years. Notwithstanding that negative figure, the rates were increased in 2010 by 1.5 per cent. It was planned that this increase would then be set against the amount of the increase in 2011—in other words, the planned increase for this year would be reduced from 3.1 per cent to 1.6 per cent. I am pleased to report that this reduction in the increase for this year will not be made. It is proposed instead to increase the rates under these two schemes by the full 3.1 per cent. I am sure that noble Lords will endorse this approach. I would also add that, as the retail prices index at September 2010 was 4.6 per cent, not seeking to offset the 1.5 per cent interim payment now means that people will not lose out from the change to using the 3.1 per cent CPI figure as the measure of inflation to increase the rates of payment in 2011-12. The figures happen to be the same.
Noble Lords will be aware of the background to these Acts but it might help if I briefly recap. A person who is injured or contracts an industrial disease as a result of their work may sue the employer for damages. However, some diseases can take a long time to develop and may not be diagnosed until many years after the exposure to the agent that caused the illness. This is particularly so for asbestos-related diseases such as mesothelioma.
The understanding of diseases linked to exposure to asbestos continues to expand. It is now recognised that it may be up to 40 years between the original exposure and the linked disease, which is longer than first thought. Because of that long latency period, the employer responsible may no longer exist and it may be very difficult for that person to obtain compensation. The Pneumoconiosis etc. (Workers’ Compensation) Act 1979 was introduced to help such people by paying lump sum compensation to sufferers of certain dust-related diseases, or their dependants, if they are unable to pursue civil action. The 1979 Act covers a number of respiratory diseases, many of which are directly related to asbestos exposure. The scheme also covers a number of non-asbestos-related diseases such as coal-workers’ pneumoconiosis.
Noble Lords will need no reminding that all of the terrible diseases covered by this scheme are a heavy legacy of our industrial past. Although people who develop mesothelioma through their employment have had access to lump sum payments through the 1979 Act for some time, there was previously no provision for people who developed mesothelioma outside the workplace. This weakness in the provision of compensation was remedied by the introduction of the mesothelioma scheme in 2008. This scheme provides, for the first time, lump sum payments for mesothelioma sufferers who have been exposed to asbestos outside the workplace.
As a result of these regulations, from April 2011 the amount payable to a person under both the 1979 Act and the 2008 mesothelioma scheme will, for a person suffering from mesothelioma, increase to £59,896 for a 50 year-old and £36,422 for one aged 60 at the date of diagnosis. As these two figures show, the amount of money paid as a lump sum varies depending on the age at which they are diagnosed. The highest amounts are paid for those diagnosed at an early age and for those with higher levels of disability.
All payments made in respect of mesothelioma are paid at the full 100 per cent rate appropriate to the age at diagnosis. Your Lordships will not be surprised to learn that about three-quarters of payments made under the 1979 Act are in respect of mesothelioma—a particularly unpleasant and fatal disease, caused almost exclusively by exposure to asbestos. Those diagnosed with mesothelioma usually have a short life expectancy, generally of between 12 and 18 months. It is common that the sufferer is severely disabled soon after diagnosis.
I am saddened to report that the number of deaths from mesothelioma in Great Britain continues to rise. In 1968, 153 people died from it; by contrast, more than 2,000 people a year are currently dying from the disease. I have a further great regret in stating that we will not reach the peak in the number of deaths from mesothelioma until around 2015. The latest estimates are that between 2006 and 2020, 30,000 people in the UK will die of the disease. Put another way, one out of every 100 men born between 1940 and 1950 will die from mesothelioma. These are chilling figures.
The rise in the number of deaths is reflected in the continued rise in the number of payments made under these schemes. In the year 2008-09, a total of 2,351 payments were made under the 1979 Act; the following year, there were 2,625 payments; and for the full year from April 2010 to March 2011, we expect to make about 2,900 payments.
It may also help if I briefly give you some figures to illustrate the important role fulfilled by the two schemes in providing financial support. In the three years from April 2008 to December 2010, 7,088 payments were made under the 1979 Act, amounting to over £95 million. In the time since the 2008 scheme was introduced in October 2008, about 1,200 payments have been made at a cost of just under £20 million.
These regulations increase the levels of support through the government compensation schemes; and noble Lords will, I am sure, agree that while no amount of money will ever compensate individuals and families for the suffering and loss caused by mesothelioma, those who are suffering rightly deserve some form of monetary compensation, and it is essential that sufferers receive compensation before it is too late. I commend the uprating of the payment scales to noble Lords and ask approval to implement them. I beg to move.
Lord McKenzie of Luton
My Lords, I thank the noble Lord, Lord Freud, for introducing these orders in a very sympathetic way. As we have heard, one of the orders increases the amount of compensation paid to sufferers of mesothelioma under the scheme legislated for in 2008, and the other uprates payments made under the Pneumoconiosis etc (Workers’ Compensation) Act 1979. My noble friend Lord Jones has spoken passionately about the scheme in the past and was involved in it from the start. I am sure that we will hear from him further this afternoon.
It is noted that in both cases the uprating is by reference to CPI, at 3.1 per cent. Given the Minister’s reference to what uprating by RPI—minus 1.5 per cent—would have done this year, we are in the same place on that issue. Nevertheless, had it been uprated by RPI at the top end of the scale, there would be something like an additional £1,000 of compensation. However, within the context of our overall position on the change to CPI, we can and do support both of these orders.
The scheme brings some relief to sufferers of certain industrial-related diseases. They are all terrible diseases. As the noble Lord said, they are a dire legacy of our industrial past. We have heard that the number of deaths from mesothelioma continues to rise and is still a few years away from its peak, which we were told will be in 2015. I was going to ask the Minister whether he could give us an update on the number of payments made to date in the current year under the 1979 and 2008 Act arrangements, with an estimate for both for next year. I think that he may have given us that, so I will look at the record. If it does not fully cover that query, perhaps he will drop me a line, unless he has the figures available today.
The resources for the 2008 Act payments were to be found from compensation recovery from civil claims related to the 1979 and 2008 Act schemes. Will the Minister give us an update on the current level of successful claims and the compensation recoverable? What amounts are estimated to be due to be received in the current year and next year? He will recall that last year we were able to announce an alignment of the 2008 Act scheme payments with those of the 1979 Act for sufferers of mesothelioma and their dependants. This was about a year earlier than we had originally expected. It would appear that this parity which has been obtained is to continue, and we welcome that.
However, we also took steps last year to reduce the gap between awards to sufferers and awards to dependants. Seemingly no further progress has been made in this regard with the current year's uprating. We should recognise the terrible effect that these diseases can have on families who have to cope with the effects of pain and suffering on their loved ones. Differential payments between sufferers and dependants can put pressure on the former at the most difficult time in their lives. What are the current Government's intentions in this matter? Is it still their intention to narrow or to close the gap, and when is further progress likely to be made?
Lord Freud
My Lords, this has been a debate in which I think we are all in exactly the same place. It is a very difficult area, as we all know. I shall try to deal with the issues that have arisen as well as I can.
With the consent of the noble Lord, Lord McKenzie, I think that we might just park CPI/RPI in this context. We will have another chance to look at it today, another on Monday and another on Tuesday. I shall say a few words on it later, but it is one of those things that, in this context, might feel slightly uncomfortable. I am very relieved that the figures are such that we do not need that debate.
The noble Lord, Lord McKenzie, asked for some figures on payments and so forth. I can give him some up-to-date figures. The payments made in 2009-10 amounted to £42.3 million. In 2008-09—I am sorry that I am going down the years—the payments amounted to £37 million. In the current year, up to January, in combination, they amounted to £38.8 million.
Lord McKenzie of Luton
Can the Minister clarify whether that was under both the 1979 Act and the 2008 Act?
Lord Freud
Yes; it is a combination of both Acts.
The recoveries picture is also improving. In 2008-09, it was £5.3 million; in the following year, 2009-10, it was £16.1 million—which, as a percentage, is 38 per cent; and in the year to January 2011, it was £12.4 million. We are estimating, next year, to get recoveries of £20.7 million. So recoveries are currently running at roughly one-third of the payments.
Both the noble Lords, Lord McKenzie and Lord German, were interested in the relationship between the sufferers’ and the dependants’ rate. As they both mentioned, historically, that has been lower. The gap was closed by £5,000 and because of the age factor in many cases, the dependants’ rate can be the same as the sufferers’ rate, and that might not be a particularly valid argument in people’s eyes. At the moment, all I am empowered to say is that raising those levels by CPI is what we have decided we can do. Currently, we are not looking at any acceleration of that gap.
I should perhaps emphasise that the department is currently engaging very actively with customer groups to try to ensure that claims are made before death. That maximises the rate at which payments are made at the sufferers’ rate rather than the dependants’ rate.
The noble Lord, Lord Jones, brought a historical perspective to the subject. One of the horrific things about mesothelioma is that a single fibre can trigger the disease; he talked about snowballs made with blue asbestos. That is almost overkill, but as we see, and as the noble Lord, Lord Boswell, pointed out, people can also get this disease without knowing where they have got it from. It could be contracted from air conditioning even when they had not been in work. I suspect it is the most dangerous thing that we have.
There were other questions on the regulations for small businesses. In practice, the regulations ensure that anyone suffering from mesothelioma can get compensation, so there is not a problem with employment.
On the matter of public versus private bodies, raised by my noble friend Lord German, I do not have the figures. We are trying to improve the tracing, but I shall write to interested Peers with that figure when I get it.
The noble Lord, Lord Boswell, asked about the profile of suffering. We expect it to peak in 2015 but, thereafter, we are expecting a gradual decline in the numbers. From earlier estimates, we might see a slight pushing back of the rates but the shape of the curve has not changed dramatically.
The most difficult questions, slightly wider than these regulations, concern what we do with the tracing and with the bureau. The ABI’s ELTO database will begin to operate from this April, which is a positive step.
The court case, as the noble Lord, Lord McKenzie, pointed out, is a real issue. The Court of Appeal handed down its judgment in October and said that insurance policies should be interpreted on actual policy wordings. That has thrown an important level of uncertainty into what we do about tracing and the bureau because if we do not know what the actual wording was, it creates an extra problem. The judgment has been appealed to the Supreme Court and for obvious reasons it is quite difficult to do anything absolute until we know where we are.
This area is part of my portfolio of responsibility; I am taking very seriously the idea of an insurance bureau or something to find out how we can get compensation for people for whom the records are no longer there. I know there has been a relatively long gap since the public consultation that closed in May 2010. I assure the Committee that I have been in very active talks with various interested parties. I am pursuing some strategies, and hope to be able to achieve an appropriate outcome and bring the proposals forward to the House in due course. Sometimes it is better to get a result than to do things in a hurry. That is what is happening here. I can only give a personal assurance that I am taking this very seriously.
I think I have dealt with virtually all the questions. There is just the public-private split to deal with. The Government recognise that these two schemes perform a very important role and that it is vital that the value of these payments is maintained. I am pleased to confirm the Government’s commitment to review the level of these payments on an annual basis and, where necessary, to increase the payment. I am sure that noble Lords are in full agreement with these sentiments. Indeed, they have expressed that. I therefore commend the uprating of the payment scales and ask for approval to implement them.
Occupational Pension Schemes (Levy Ceiling) Order 2011
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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Lord McKenzie of Luton
My Lords, I thank the Minister for his eloquence in introducing these orders. If I am not mistaken, the first two will no longer be subject to the affirmative procedure as a result of provisions in the Pensions Bill, so perhaps we must make the most of this occasion. Together with the levy ceiling earning percentage increase order, they set the compensation cap, as we have heard, limiting the amount of compensation payable by the PPF and the levy ceiling which controls the maximum amount of levy the PPF can charge pension schemes. As we heard, the levy ceiling for the year commencing 1 April 2011 is £892 million, which is comfortably above the proposed levy for that year, which the Minister told us is £600 million. In respect of that levy, I do not know whether the Minister is able to give us a split between the risk-based and scheme-based components. Could he take the opportunity to say something about collection rates and how we are doing in terms of collecting what we think is due?
The increase in the general level of earnings for the period 1 August 2009 to 31 July 2010 is 2.4 per cent. On the current compensation cap, the maximum level of compensation which is payable before applying the 90 per cent requirement is increased by 0.5 per cent to £33,219. In this case, the uprating is still by earnings but by reference to a different period.
We have no problem with these two orders, although, not surprisingly, they prompt wider questions. First, it is right to reflect on the importance of the PPF and how, alongside the Pensions Regulator, it has played an important role in ensuring some stability in a turbulent period for defined benefit schemes. It has ensured that something like 55,000 individuals already receive, or can expect to receive, a decent income in retirement which, because of the insolvency of their employers, they might otherwise not have achieved. From my experience, it is a highly professional organisation. According to the website, some 212 schemes are in the PPF at the moment and, as at January 2011, almost £236 million has been paid in compensation, with the oldest recipient being 105 and the youngest four.
Things seem to be in a far from steady state, with 10 schemes just transferred into the PPF and 409 schemes and 200,000 members in the assessment stage. Perhaps I can ask the Minister about the time taken for assessment. Clearly in some cases the assessment has not been completed within two years, although in the Pensions Bill we are considering removing the requirement for the assessment period to last for a minimum of 12 months. I accept that there is no inherent inconsistency between those two positions—we support that—but what are the barriers to speeding up the assessment process?
Given the levy ceiling we are discussing, perhaps we could get an update on the PPF’s exposure to the universe of eligible schemes. It would appear that before taking account of the RPI/CPI changes, the number of schemes in deficit and the aggregate deficit has declined over the past year. It is presumed, therefore, that the headway created by the levy ceiling is something with which the Minister is wholly content. In the past, the ability of the PPF to fund the consequences of a big influx of schemes was often called into question. I think that we responded robustly then and I imagine that the Minister is in a position to do at least that this afternoon, given the change in the background to those schemes. Can he say how many compensation payments are currently limited by the cap? I tried to get my mind round this issue—I am not sure that I have completely—but, going forward, what will be the relationship between the level of the cap and what would have been provided for by underlying schemes and the PPF arrangement? If the cap gets uprated by earnings, but compensation amounts going forward are uprated generally by earnings, because that is the nature of defined benefit schemes, and partly by reference to the CPI, is there potentially a divergence of the cap from underlying compensation which thereby would weaken its purpose?
The order concerning the financial assistance scheme puts into effect, as we have heard, the RPI/CPI switch for revaluation, indexation and annual increases in the maximum cap. The Minister will be aware that we have concerns about the switch to CPI, certainly as currently constructed, as an appropriate measure of inflation. Doubtless we will have a substantive debate on that in Committee next week and on subsequent occasions.
I share the Minister’s view that no index is perfect and I was interested in his example about the formula effect and switching. When he referred to it in the Chamber he spoke about moving from one kind of biscuit to another. I am comforted to know that we can go from one jammy dodger to another and we will be okay. It was good to hear about the work going on in the ONS.
As we have heard, FAS, unlike PPF, is funded by government—net of assets taken in, of course—and a reduction in costs can make a contribution to deficit reduction. We could, in principle, support this for a period, but there is a dearth of information about how much is involved and no impact assessment has been provided. Perhaps the Minister can help on that
I am aware that the final settlement for FAS arose from a tortuous process involving, among other things, legal action in the UK and in Europe. I presume that there is nothing in the CPI/RPI switch which could be said to negate that settlement. Perhaps the Minister can confirm that. I welcome the proposals dealt with in the Explanatory Notes to consolidate the FAS regulations.
For both FAS and PPF, before entry into the appropriate scheme there would have been a judgment of what an individual could have obtained in the market and whether FAS and PPF would provide a better outcome. This judgment, presumably, would have been made on the basis that FAS and PPF payments would be uprated by RPI. If this is not the case, is there the prospect that individuals will be worse off in retrospect because of the decisions made? What analysis have the Government made of this situation? If it is not to hand, perhaps the Minister will write to me.
Let me make one further point on the PPF levy. It appears that there is to be a new levy framework introduced in 2013. What can the Minister tell the Committee about this and what are the ramifications, if any, for the levy ceiling? I look forward to his responses in due course.
Lord Stoneham of Droxford
I support these regulations and I have only limited points to make on them. The role of the Pension Protection Fund is very important—all credit to the previous Government for introducing it—and we want to make sure that it is maintained and sustained. Obviously in the current environment the investment levels on the stock market have helped some of these schemes, but can the Minister give the Committee his view on how the economic situation is impinging on companies, particularly those on the borders of insolvency, and the pressures that that is likely to place on the fund over the next couple of years as we move, we hope, towards economic recovery?
I accept that we will be discussing the CPI issue in the coming week but I make the point that none of these indices is perfect; they measure inflation for all consumers on different bases. The Minister will perhaps answer this point more fully next week, but is any further research being done on the CPI to ensure that, as we are now moving towards using it more fully across a number of measures which affect pensioners particularly, we can make the index more representative of pensioners’ expenditure and fairer in the long term? I support the regulations.
Lord Freud
My Lords, again I thank noble Lords for taking such an active part in the debate and, as ever, looking at these issues in real detail. I will aim to answer as many of the questions as I can before I resort to the expedient of the letter.
The noble Lord, Lord McKenzie, is completely right about this being our last opportunity—last unforced opportunity, if you like—to do this under the affirmative procedure, so we should—and we are—taking advantage of that opportunity. He asked about the spilt between risk-based and scheme-based. Eighty per cent of the quantum is designed to be risk-based. That varies slightly, but the figures have held pretty firm over the years so, without going through endless figures, if we look at the £600 million for 2011-12, which I referred to at the outset, the risk-based element is estimated to be £480 million and the scheme-based element is £120 million.
The noble Lord, Lord McKenzie, and my noble friend Lord Boswell asked about the impact of raising the cap and about how many people are affected by it. As at January 2011, 92 scheme members receiving compensation were affected by the cap. The noble Lord, Lord McKenzie, asked about time in assessment. The real driver in that is legal action, which can take many years. As he saw, that is connected to the change in the Pension Bill. The problem we have is that resolving some of these issues can take a lot of time. On top of that, assessment is often delayed by poor scheme data and uncertainty about what the scheme rules are. It is not people being dilatory; there are genuine problems.
My team has just informed me that, in opening, I made a mistake. I said that the newer cap applies to people entitled to compensation before 2011 and I should have said after 2011. I am sure noble Lords knew what I meant. I apologise to the Committee.
The noble Lord, Lord McKenzie, asked whether the cap was overrated if it was linked to earnings. That is not the case because, to take an example, the comparator is the position of a 50 year-old at the insolvency of the employer. We want someone whose employer goes bust this year to be capped at the same relative level as someone whose employer went bust, for example, in 2005.
The calculation of the levy formula is something for the board of the Pension Protection Fund. The proposals concern the distribution of the levy between schemes and not the overall quantum. Will individuals be worse off due to the switch from RPI to CPI? The current market conditions mean that the cost of providing RPI or CPI are equal, but we have to recognise that there may be a divergence in future and we shall review that over the summer in the light of emerging evidence.
The noble Lord, Lord Stoneham, asked about indices. Without going into a full-blown techie analysis, the question was about whether we can make CPI a better fit with pensioner inflation. The ONS is working to include owner-occupied housing costs in its statistical programme. It is a very active programme. Rather than using mortgage costs, according to its research, the likely outcome—I may be jumping the odd hurdle to reach that conclusion, but bear with me—would be to take the cost of an average house and see how that moves up and down. I cannot see that happening much before two years, but an active process is taking place and the ONS will work very closely with European statistical organisations because it would need to be a general move.
One of the most interesting things is that the CPI has been adopted as the main measure, certainly for comparative purposes in Europe. The Americans took the decision to go down this route because of the geometric approach, which basically gets elasticities closer to one, which reflects substitution, as opposed to any elasticities closer to nought, which do not show much substitution, and that is seen in the arithmetic mean used mainly in the RPI. In the CPI, interestingly, about 70 per cent is done geometrically. The other 30 per cent of goods, which are hard to substitute—oil, for instance—are left at that low-elasticity arithmetic mean. We will have more of that next week.
The noble Lord, Lord McKenzie, asked whether the implications of this switch to CPI mean that some FAS members would find that the total value of their protection from the UK Government is reduced to a level that the European Court of Justice indicated would be below the minimum lawful percentage for protection. Perhaps I slightly overinterpret the question, but we have looked at that closely and we believe that the Government continue to meet their obligations under Article 8 of the European insolvency directive.
Lord McKenzie of Luton
My question was slightly broader. It was not just on the EU judgments but on whether, given any of the negotiations—there were quite complex and tortuous discussions with various lobby groups—the switch is true to that position as well.
Lord Freud
I think that I hesitate to answer that on the Floor. Is that sensible? Yes, my team is nodding, not vigorously, but gently. We should write the noble Lord a letter on that matter.
The last real question was on the impact assessment on FAS costs. The overall change to CPI for FAS purposes is estimated to deliver around a 10 per cent reduction in assistance costs over the lifetime of the FAS, which has been projected at about 90 years. Clearly, the impact on individuals will depend on the characteristics of the member, such as age and period of service.
On the economic situation, I think I have some data on what has been happening to the overall level of surplus in the PPF. I was asked about that and I know that I have those figures. It would be easier for me to tell the Committee than to write, but if I do not have them in a microsecond I will write. I cannot put my hand on them but the question raised was: where is the overall level of surplus, by schemes, and how many of them are in deficit and how many in surplus? I wanted to look at the overall risk levels but I cannot put my hand straight on that. If we could deal with that issue of economic conditions and the place that the market got to, that would also address the question from the noble Lord, Lord Stoneham. I am irritated with myself for not having it absolutely to hand.
As your Lordships know, the Government recognise the difficulties experienced by those who lost their pensions through no fault of their own.
Lord McKenzie of Luton
I am grateful for the full reply that the Minister has given us on a range of questions but I wanted to make sure that we had covered this point or that he was going to respond to it. Looking at the PPF before a judgment is made, for example, as I understand it before somebody enters the PPF you look and see what the market would have produced. If the market would have produced something which was at or above the PPF levels, that is what would happen. Presumably when those judgments were made, they were made on the assumption that PPF levels would be uprated by RPI—obviously, that is not going to happen, at least for a period—with the expectation that indexation would be lower than RPI. Is there the prospect that that means—at least with the benefit of hindsight, and it may not matter that it is hindsight—that judgments were made that might have been made differently? In some instances, the market would have been able to do better than the PPF on a CPI basis.
Lord Freud
The answer is that currently CPI is the same as RPI in terms of current annuity pricing. Clearly that may or may not be the case in the future. At the current time, that does not make a difference. The Pension Protection Fund and the Financial Assistance Scheme will continue to provide help to people whose pension schemes fail them. These regulations will enable the continued delivery of that help in a manner that is fair and equitable to both scheme members and the taxpayer. I commend these draft regulations to the Committee.
Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order 2011
Lord McKenzie of Luton Excerpts(13 years, 9 months ago)
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Lord McKenzie of Luton
My Lords, I again thank the Minister for his full explanation of this order, which sets out the revised national insurance rebates for contracted-out pension schemes. As we have heard, the figures are provided for contracted-out money purchase schemes and appropriate personal pensions, although the planned abolition of contracting out on a defined contribution basis from 6 April 2012 means that these will never come into effect.
Again, as we have heard, these changes are based on a report by the Government Actuary which, in contrast to previous reports, sets out three alternative valuation approaches. The Government, of course, have adopted the basis which provides the lowest level of rebate—4.8 per cent—and taken account of the changes in state pension age provided for in the Pensions Bill. I noted that the Minister hinted that should those changes not proceed, there would be a review of the 4.8 per cent figure. The rate is below the 5.3 per cent rate adopted for the five-year period to 2012.
The Explanatory Notes make it clear that the annual savings to the Exchequer from reducing the rebate is about £600 million. I am trying to understand what the other side of that saving is. Is it that the cost is greater on employers and employees; and/or is it that the cost of providing the relevant benefits is reduced? What is the other side of the saving that the Government make?
The note also states that a full impact assessment has not been published because it will have no new impact on the private sector. How does this differ from public sector employees and employers, where it is confirmed that there will be a small increase in national insurance contributions by each? I do not fully understand how it can have an impact on the public sector but not on the private sector.
More fundamentally, can the Minister expand on the rationale for adopting the best estimate approach? Paragraph 6.4 of the actuary’s report states that this basis of valuation means that the rebate,
“is expected to be sufficient, half the time, to cover the cost of providing benefits equivalent to the state second pension forgone”.
What about the other half? On what basis were the other valuation approaches rejected? To the extent that the best estimate falls short, where are the costs and risks being borne? It will be interesting to have data on what the difference will be for someone on median earnings and at or above the UAP.
The Government Actuary’s report is a complicated document and I am not sure that I have absorbed all of it. I hope the Minister and his team will be able to help us out on those particular inquiries.
Lord Freud
My Lords, I thank, in particular, the noble Lord, Lord McKenzie, for his interest in this and the noble Lord, Lord Stoneham, for making that point. To summarise, this sets out the level of contracted-out rebate rates that will apply to employers and employees within defined benefit contracted-out occupational pension schemes from April 2012. As I said earlier, while we have provided rates for defined contribution schemes, that is purely to meet the statutory requirement. As I said before, we are looking at a reduction for contracted-out defined benefit schemes from 5.3 per cent to 4.8 per cent.
As I understand it, the central question that the noble Lord, Lord McKenzie, put was about why we have picked that one rather than the funding basis or the gilts basis. I shall go a little into the concepts behind the three different approaches. Each approach is designed to provide the employer with a different level of guarantee about it being sufficient to cover the cost of the additional state pension foregone. Taking into account the considerable cost to the taxpayer of providing the reduction in national insurance contributions, the Secretary of State decided that adopting the best estimate approach was the most reasonable. When you think about it, the point about it working half the time is really saying that we have reached the point of indifference between whether you provide a pension scheme or do not do so and rely on the state. There is a rationale there. The other approaches in practice provide a much more powerful bias towards contracting out.
The noble Lord’s supplementary question was about defined benefit schemes. The risk is now essentially being run by the schemes. Different schemes will, of course, have different contributions rates for employers and employees, so there is no simple answer. The core answer is that moving to the point where, on balance, there is a point of indifference between whether you go in or out means that it is a neutral decision.
On the question about public versus private, for public sector schemes there is no extra cost to the employer as the Government are the employer so there is a degree of funds being recycled. Both public and private sector employees will see a slight reduction in take-home pay as a result.
Lord McKenzie of Luton
Perhaps I can clarify that. The note to the order, which I cannot now put my hands on, refers just to the public sector in that regard. It puzzled me because I understand that these rebates operate between the LEL and the upper accrual point, which is fixed in cash terms, in order to move towards a flat-rating of the state second pension, so I would have thought that there would potentially be a loss to all contracted-out employees. Therefore, I do not understand the distinction that is made in the Explanatory Memorandum between public and private sector.
Lord Freud
I think the noble Lord is right in saying that the loss is shared by the public and private sectors. Clearly, there is something slightly confusing in that note that has led him in a different direction. There should be an equalised effect.
Lord McKenzie of Luton
I am looking at the Explanatory Memorandum to the Social Security (Reduced Rates of Class 1 Contributions, Rebates and Minimum Contributions) Order that we are discussing. The impact paragraph states:
“There is no new impact of the changes to the contracted-out rebate rate. However, the reduction in the rebate rate will lead to a small increase in the National Insurance contributions of public sector employers and employees. The value of the increase will depend on individual employee earnings”.
Lord McKenzie of Luton
That is paragraph 10.1. Paragraph 10.2 states:
“A full impact assessment has not been published for this instrument as it has no new impact on the private sector and civil society organisations”.
Lord Freud
The impact is common across both the public and private sectors. The noble Lord asks about the impact assessment. I imagine that that is a reference to where the obligation to have an impact assessment is, rather than to the differential impact. By definition, we are saying that it does not have a new impact on the private sector and civil society organisations. By reference, that would also apply to the public sector.
Lord McKenzie of Luton
I am happy for the noble Lord to write to me on that. It is confusing. It specifically identifies public sector employees and employers as taking a hit. Paragraph 10.2 suggests no new impact on the private sector. That did not make sense to me.
Lord Freud
It is easy to see that confusion. I shall write to the noble Lord, but I am comfortable in stating that it is a reference to where the obligation to have an impact assessment is, not to who is getting the impact. That is the reason for the difference. However, I shall write to the noble Lord to lay that out very clearly. I am very impressed that anyone has got to note 10.2. I think I have dealt with all the outstanding issues.
Lord McKenzie of Luton
I am sorry to press the noble Lord but this may be part of the discussion we have just had. Is the £600 million saving by government just replicated as an extra £600 million of costs on employers and employees?
Lord Freud
Yes, I can confirm that, obviously. There is an argument there: it is a rather complicated sum, not just the sum of what has gone in and out in terms of all of the factors. To the extent that there is an extra cost, it is partly because it has become more expensive to get pensions for one reason or another. Some of that reflects the marketplace and what it costs to purchase annuities outside the Government’s scheme. Rather like me, the noble Lord will, I suspect, have gone through this understanding some, but not all, of the bits in it. However, that is the process, so the saving becomes a cost for employers and employees, given how we have split it.
I have one main item on which to write formally to noble Lords but, with that, I hope that I have dealt satisfactorily with the issues. As everyone in this Room will realise, they are highly technical. I commend the draft order to the Committee.