Budget Statement

Lord McKenzie of Luton Excerpts

Tuesday 14th March 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Marlesford, and to hear his imaginative proposal. I wish him luck in his discussions with the Chancellor.

We are entering unchartered waters as we, sadly, start the process of leaving the EU, but it is an opportunity first to take brief stock of the health of the economy and the stewardship of this Government. As others have said, the UK’s position can be characterised by sluggish growth, soaring personal debt and stagnating pay. Some 6 million people earn less than the living wage and 4 million children are in poverty, two-thirds of them in households in which at least one parent works. Zero-hours contracts abound, with all the insecurity they can bring. The OBR reports that business investment remains subdued, inflation is on the rise and our public services teeter on the brink. We have a housing crisis.

The Budget does nothing to change this. Certainly, the funding for skills is to be welcomed, although it will hardly address the FE budget cuts that have been endured since 2010. The additional £2 billion for social care, albeit spread over three years, will help, obviously, but there is nothing of substance which will help the crisis in the NHS. Apart from the modest change to the universal credit taper rate, the Chancellor has done nothing to unpick the brutal regime of social security cuts—to ESA and tax credits, especially—that is the legacy of his predecessor and which continues to drive families into poverty. Someone said earlier—I think it was the noble Lord, Lord Higgins, who is not in his place—that there is no alternative but to live with austerity. I say: who has to live with it? It is never us but always somebody else.

A report produced by the Chartered Institute of Taxation, the IFS and the Institute for Government set out 10 steps to making more effective tax policy. It is to be recommended to the Chancellor. To be fair, he started off rather well by adopting its first recommendation and committing to eschew two fiscal events each year. The report suggests that Budgets themselves have become engines for the proliferation of measures, and instances the past five years, when Finance Acts totalled at least 600 pages every year. Another recommendation was to establish clear guiding principles and priorities for tax policy at the start of a Parliament to deter a Government from falling into ad hoc approaches. Of course, this is to be distinguished from the practice of ruling out any changes to key tax rates for effectively the whole of a five-year Parliament and then finding that circumstances cause the commitment to be broken or some slippery wording to be deployed to justify a departure.

Of course, this brings us to the issue of national insurance contributions for the self-employed, in particular the increase in class 4 contributions from next April. There had been prior consultation—I think the noble Baroness, Lady Altmann, referred to this—around national insurance and the self-employed as a consequence of the decision last year to scrap the regressive flat-rate class 2. That was a recommendation of the Office of Tax Simplification. Because the class 2 rate was the route for the self-employed to gain access to some social security benefits—bereavement benefits, contributory ESA and now the single state pension —replacement arrangements are needed and changes have been proposed to class 4 NICs and class 3 voluntary NICs as the new route to those benefits.

The Government responded to the consultation but, so far as I am aware, at no stage was it suggested that the required changes or the earlier improved access to the new state pension would come with a price tag of increased contributions, nor, as is now suggested, possibly wider access to the social security system. This year’s 2% hike in the Budget seems to have been very much an afterthought—a piecemeal approach running contrary to the principles of sound tax policy-making.

That the growth in self-employment is eating into government tax collections, as the noble Lord, Lord Willetts, said, seems beyond doubt. This is in part fuelled by the growth of the gig economy, which is defined in the Oxford Dictionary as,

“A labour market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs”.


This work is typically available through digital sharing platforms.

Prima facie, this sounds like classic self-employment, but things have not proved to be so clear-cut, as my noble friend Lord Beecham said. The role of the platform as a quasi-agency can have ramifications, as Uber has discovered. Indeed, it is suggested that for employment law there are now three categories of individual—employees, the self-employed and workers—but for tax purposes there are only employees and the self-employed. Of course, there is also the director-controlled company, which has seen the reduction in the dividend allowance.

At present, the self-employed are not entitled to the benefits of auto-enrolment, the national living wage, sick pay, maternity, paternity and adoption pay, holiday pay and redundancy and unfair dismissal protection. The employed do, as, for the most part, do workers. So far as national insurance is concerned, erstwhile employers escape the 13.5% employer contribution if they can persuade people to be self-employed. Where to strike the balance in terms of the respective levels of national insurance contribution requires proper analysis, and I hope that the Matthew Taylor report on employment practices will aid that determination.

As for the current Budget provision, it can be argued that, taken together with the abolition of class 2 contributions, the Budget proposal is progressive up to the level of the upper profits limit. This is the view of the Resolution Foundation, as we have heard. It says that the bottom 54% of self-employed earners will pay less or nothing, while those earning over £16,250 will pay more.

However, this does not justify raising £2 billion of revenue from this source, who by definition are lower or median earners, when the Government are continuing with arrangements which cost taxpayers as a whole but benefit the better-off: a £20,000 limit on ISAs and inheritance tax cuts, to name but two. Spreadsheets notwithstanding, this has been a muddled Budget.

Savings (Government Contributions) Bill

Lord McKenzie of Luton Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 12th January 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I share the frustration of the noble Baroness, Lady Altmann, that procedures on money Bills allow us only a Second Reading on the Bill. Although I see the noble Lord, Lord Young, blanching a bit at the prospect of a Committee stage on this Bill, we are not going to have one anyway.

I start by acknowledging the importance of encouraging individuals to save and accepting that there should be a role for incentivising saving through the tax system—although not necessarily exclusively through that—recognising always that support given through the tax system invariably does nothing for those at the lower end of the income scale. The Minister in introducing the Bill talked about the increase to £20,000 of the annual ISA allowance or the increase in the personal allowance, but those are so far beyond the circumstances of millions of our fellow citizens that it is difficult to see in this context how they will help.

I will concentrate most of my remarks on the lifetime ISA but first I have a few comments about the Help to Save scheme. This is targeted at those in receipt of universal credit and with household earnings at least equivalent to 16 hours at the national living wage, or to those in receipt of working tax credit. Entitlement to the latter—as I understand it—requires an individual aged over 25 to work at least 30 hours a week. If they are aged under 25 they will get it if they work at least 16 hours a week but have a disabled worker element or certain responsibilities for children. Can the Minister explain the differential working requirements for eligibility?

As other noble Lords have said, the impact assessment expects that around 500,000 people will open accounts in the first two years, saving an average of £27.50 a month. This will be from a potential eligible population of 3.5 million from 2.5 million households, 90% of which will have annual income below £30,000. As we have heard, the scheme will cost £70 million. Can the Minister say—or perhaps write to me if she cannot—what proportion of these individuals, who will be individuals in work, are likely to be within the scope of auto-enrolment? Can the Minister also say how the administration of the scheme will seek to ensure that the necessary savings have come from the eligible individuals and not been provided by family or friends, with the opportunity of sharing the government bonus when it arrives? That would seem to be potentially defeating the system.

Given the woeful level of personal savings in this country, the opportunity to build a small nest egg is important. The impact assessment cites the Family Resources Survey, which suggests that half the households with income below £30,000 have no savings at all—no wonder, given the battering they have endured under this Government. We have heard other figures as well leading to the same conclusion. The StepChange Debt Charity published research in 2015 which found that 14 million people had experienced an income or expenditure shock in the previous 12 months. This might have been a job loss, reduced hours, illness, a business failure, a relationship breakdown or even a washing machine breakdown—but without any savings they had to resort to debt to try to cope. The extent to which Help to Save will provide some small level of savings which can be available in such emergencies is to be supported—although, as my noble friend Lady Drake pointed out, the Government’s own ambition for the scheme seems modest.

A year ago, the FT carried a story that the then Chancellor was planning to overhaul the pension tax relief system. No wonder, perhaps, when the annual cost to the Exchequer was running at some £35 billion, including the national insurance issue, but netting for tax receipts on pension income. Moreover, two-thirds of pension tax relief was going to higher and additional rate taxpayers—a wholly unjustified distribution of outcome—notwithstanding a succession of tightenings of the annual and lifetime allowances.

The Chancellor was reported to have his sights on abandoning the current system, by which tax relief is given at somebody’s marginal tax rate, in favour of implementing a flat tax, suggested at between 25% and 33%. Since then, matters have moved on, including the Chancellor himself. The consultation on pensions tax relief has concluded, with no clear support for the Chancellor’s position, but it was expected that Budget 2016 would produce fundamental changes. What we got was the announcement of lifetime ISAs and Help to Save—hence the Bill before us.

The rationale advanced by the Government was that they wanted to help young people save flexibly and ensure that they did not have to choose between saving for retirement and saving for their first house. The lifetime ISA can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn with government bonuses from the age of 60 for use in retirement. Amounts can be withdrawn at any time, but with a 25% charge to recoup the government bonus—the equivalent of which was referred to by the noble Baroness, Lady Altmann.

For retirement savings, the structure of the lifetime ISA is effectively a TEE system: individual contributions paid from taxed income—no tax relief on contributions—investment income tax-free at the fund level and retirement income tax-free. That is a wish of the Treasury secured and some of us—pretty much everyone who has spoken—fear that it is the thin end of the wedge. Despite the impact assessment assuming that individuals will not opt out of workplace pension schemes to save in a lifetime ISA, I share concerns voiced in another place and by my noble friend Lady Drake and the noble Baroness, Lady Altmann, that it could undermine the progress of auto-enrolment and add confusion to an already complicated pension system.

The impact assessment identifies several groups who are expected to save in the ISA, but there seems to be no encouragement to see whether needs currently unmet by auto-enrolment can be brought into that fold. Of course, this is the year of the auto-enrolment review. It is encouraging that opt-out rates have been below original expectations, but we should recognise that these are still early days, as the noble Baroness, Lady Greengross, said, and that, with increased employer and employee contribution rates, they are still due to increase.

Compared to the current pension tax arrangements —an EET system—individuals will typically get a poorer deal from the Treasury by using the ISA route to secure a retirement income. This is particularly because of the tax-free lump sum currently available, and because an individual’s tax rate in retirement will typically be lower than when they are in work. What the individual loses, the Treasury gains. Of course, these matters are not set in stone, and the tax system is likely to change—indeed, it should—but currently, an individual saving for retirement via an ISA rather than an occupational pension scheme, notwithstanding the limited 25% bonus, is likely to be worse off. How are these issues to be communicated to consumers?

As a retirement vehicle, it should be noted that contributions to the lifetime ISA must cease when someone reaches the age of 80. That is hardly a lifetime. The noble Baroness, Lady Altmann, made the point that that is just the age where one would expect pension contributions to be ramped up. Retirement income cannot be accessed tax-free until the age of 60, although there is an opportunity to access savings at any stage with a 25% tax cost.

There is little in the impact assessment about the extent to which it is envisaged that individuals will draw down on their savings for a house purchase or leave it for retirement. One might just comment that contemplating the purchase of a first home at up to £450,000 is a sign of the times.

The Budget 2016 document indicated that the Government would explore the prospect of borrowing against lifetime ISAs, provided the funds were fully repaid. Has any progress been made on that? One can see some merit in having an incentivised savings product that can be available to cover a number of circumstances, but this should not be used to apply a regime, particularly a tax regime, which is less favourable than the stand-alone arrangements would be for any particular component. That is particular mischief of this Bill.

The Bill is a missed opportunity. It was certainly a chance to address anomalies in the tax system and the skewed benefit to the better-off. It was an opportunity to address some of the access issues for auto-enrolment, but perhaps also to move away from tinkering with individual housing initiatives to do something more fundamental. It was also an opportunity to do much more to build resilience for the poorest in our communities.

--- Later in debate ---

[Baroness Neville-Rolfe]

As with all impact assessments, it is an estimate. We looked at the Help to Buy ISA, which is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home. That has not led to a surge in opt-outs. Instead, opt-out rates for automatic enrolment are still much lower than the Government expected, as several noble Lords said; they are currently 9%. The overall programme assumption was, I understand, 28%. We will of course regularly monitor the lifetime ISA going forward to make sure that it is achieving its aim—as the noble Baroness, Lady Greengross, suggested, and indeed as we do with all important policy areas. But I am not convinced, to respond to the point made by the noble Lord, Lord Tunnicliffe, that we need a formal annual review.

The noble Baroness, Lady Greengross, asked how many people using Help to Save were eligible for automatic enrolment. We set out our expectations of take-up of Help to Save. I am afraid that, as with all forecasts, there is uncertainty, so at this stage we are not able to say how many of these people will also be eligible for automatic enrolment.

Several noble Lords talked about guidance and communication. The Government announced in October 2016 that they plan to replace the three government-sponsored financial guidance providers—the Money Advice Service, the Pensions Advisory Service and Pension Wise—with a new, single financial guidance body, which I welcome. Through creating a single body we intend to make it as easy as possible for consumers to access the help they need to get all their financial questions answered. For example, this could be through helping families to balance their household budget or for individuals considering their options in retirement. Consultation on the precise design of the single guidance body is currently live and closes on 13 February. MAS, TPAS and Pension Wise will continue to provide guidance to consumers until the new body goes live.

The noble Baroness, Lady Drake, raised the issue of pensions tax relief, as did other noble Lords. Our responses to the Treasury’s pensions tax consultation indicated that there was no clear consensus for reform and, therefore, that it was not the right time to undertake fundamental reform to the pensions tax system. But obviously the Government have moved, with the Bill, to encourage younger people to save through the lifetime ISA—and that was a key theme that came out of the consultation.

The noble Baroness, Lady Drake, raised the question of mis-selling risk, which was also a concern of my noble friend Lady Altmann. I agree that it is very important for individuals to have clear information on their products. That is why we will publish factual information about the lifetime ISA on GOV.UK, as well as working with the Money Advice Service and its successor to ensure that they make appropriate and impartial information available. As was said, it is the independent Financial Conduct Authority’s role to regulate account providers, including how they sell a product to consumers. It is currently consulting on the approach and has set out its proposals.

Having said all of that, the communication issue has come up under several different headings. If noble Lords would find it helpful, I will undertake to look through Hansard at the various points that have been made on communication and set out in a letter to noble Lords who have taken part in this debate just what our plans are. That will enable me, for example, to check with the FCA about its current plans and take account of any consultation responses that may already be available. We need to make sure that at the point of sale providers are transparent about risks, including any potential early withdrawal charge and with information on automatic enrolment. That theme came through from almost all noble Lords who spoke. It is a very important area. As has been said, this is a Money Bill, but that does not mean that we cannot set out how we see these things being properly communicated.

The noble Lord, Lord Sharkey, questioned the impact assessment. I understand, from checking with the experts, that it is correct. I was glad that he raised housing because it is an important area. The OBR has noted that the effect of the lifetime ISA on house prices is highly uncertain and its predicted impact is significantly smaller than overall house price movements. As we know, a number of factors can affect house prices, which will be subject to change in future years. For example, we are taking steps to boost housing supply. Following the announcement of £5.3 billion additional investment in housing in the Autumn Statement, we expect to double our annual capital spending on housing during this Parliament. We will publish a housing White Paper shortly, which I hope will address some of the supply issues the noble Lord raised and allow this House to have further exchanges on this incredibly important issue for the future of our economy and our industrial strategy. I believe the lifetime ISA is one way to make sure that first-time buyers have the support they need to get on to the housing ladder.

I will address a number of technical points raised by the noble Baroness, Lady Drake. She asked whether the Government would commit to a 50% participation rate for Help to Save. The Government are not setting any specific target around take-up of Help to Save because we want opening an account to be an active decision by those who feel Help to Save is right for them. However, we will continue to work with the account provider and other interested parties to ensure that people are made aware of the scheme and receive the right support and guidance.

The noble Lord, Lord McKenzie, talked about eligibility for the under-25s. A person aged under 25 is eligible for working tax credit if they work a minimum of 16 hours a week and have a child or a disability—I am learning a lot from this debate. Our intention is to passport people into eligibility for Help to Save. This is a well-established way of targeting support at people on lower incomes. Importantly, it removes the need for people to complete a further means test to prove that they are eligible, which we know could deter people from opening accounts.

[Lord McKenzie of Luton]

Perhaps the Minister will write in due course. There seems to be a disparity between the requirements for universal credit and for working tax credit. In universal credit you must have 16 hours at the national wage. For working tax credit, unless you fall within the disability or childcare categories, you need 30 hours of work. Why have the Government used those particular thresholds?

[Baroness Neville-Rolfe]

It is an important but esoteric point. If I may, I will write to the noble Lord. I am sure that in time I will understand these arrangements better. On his point about saving on behalf of others, individuals will pay into accounts and receive a government bonus. There will be no restrictions on what individuals do with the bonus or savings, or where the money has come from. However, HMRC will carry out additional checks on a number of accounts and will respond to any intelligence it receives from third parties where this gives rise to doubt about a person’s eligibility.

The noble Lord asked about the Government’s latest position on borrowing from lifetime ISAs. The Government continue to consider whether there should be flexibility to borrow funds from an individual’s lifetime ISA without incurring a charge if funds are fully repaid, but have decided that it will not be a feature when it becomes available in April 2017.

The noble Baroness, Lady Drake, said that the Help to Save scheme was not generous enough. On increasing the 50% bonus, our pilots for the saving gateway showed that a higher match rate of 100% made people only 5% more likely to open an account than a 50% match, and the amount of money saved into accounts was not significantly affected. On the two-year bonus period, I can make it clear that no one will be penalised for early withdrawals if they need to make any. The rationale of the scheme is to encourage people to develop a regular savings habit that will last beyond their participation in the scheme because it is valuable more generally.

Queen’s Speech

Lord McKenzie of Luton Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, the Queen’s Speech asserts the Government’s objective of increasing the life chances of the most disadvantaged. That is a worthy ambition but lacking in credibility when it is considered that much of the last six years has seen the poorest in our society bear the brunt of benefit and tax changes driven by austerity.

An IFS study published just last September looked at the broad range of policy measures introduced under the coalition Government to estimate how the changes have affected both household incomes and work incentives over the period. It concluded that while there has been some strengthening of work incentives, it is low-income working-age households and the very rich who lost the most in absolute terms from the tax and benefit changes. But measured as a percentage of income, the bottom two deciles have lost the most—that is, proportionately, the poorest have taken the biggest hit.

Sheffield Hallam's Centre for Regional Economic and Social Research has undertaken a different analysis looking at the welfare changes introduced by this Government and the projected financial losses to places and people. This analysis showed that post 2015, welfare reforms impact unevenly across the country, with older industrial areas, less prosperous seaside towns and some London boroughs being hit the hardest, but with much of southern England escaping lightly. As a general rule, it concludes that the more deprived the local authority area, the greater the financial loss of its residents from the post-2015 welfare reforms—so much for rebalancing the economy. The Government will claim that these losses can be compensated for in whole or in part by increases in personal tax allowances, the national living wage, and perhaps the extension of free childcare, but we know that these do not impact fully, if at all, on those so damaged by the cuts.

We have seen a similar pattern with local government finance settlements, not only in the colossal scale of the cuts—a 56% cumulative, real-terms cut in government grant funding for local government—but in the distribution of support, which has shown the most disadvantaged areas doing worse in terms of changes in spending power, and some of the more affluent areas doing the best. My point is that it is difficult to conclude from all this that fairness is truly at the heart of this Government’s approach and that an expressed care for the most disadvantaged will translate into positive policies that will help improve their lives and communities.

That is why in particular we need to ensure that the proposal to move to 100% business rate retention by local authorities includes an effective system of equalisation between local authorities, transparency on additional responsibilities taken on, and arrangements for the funding of safety nets. An improved system of appeals for business rates is also essential if the full consequences of appeals are to fall on local authorities. We have seen before—council tax support being just one example—government passing responsibility to local government without transferring adequate resources or the means to raise them.

The ink is only just dry on the Housing and Planning Act 2016—a piece of framework legislation hugely lacking in detail, as we debated extensively—but here we are again, looking to change neighbourhood planning, streamline compulsory purchase powers and amend pre-commencement condition arrangements, predicated on the notion that it is the planning system that is holding up delivery of a proper homes programme. Of course we should welcome a commitment for the building of more new homes for so long as there is substance and not just spin in the commitment, but, as our recent debates have made clear, and fairness demands, these must be homes that meet the needs of all our communities—affordable, for rent as well as for purchase, and as supported housing.

Turning to the privatisation of the Land Registry, just yesterday the Competition and Markets Authority expressed concerns about the sell-off, identifying that it could give the new owner a monopoly on commercially sensitive data with no incentive to improve access to the data. Of course, the privatisation of the Land Registry is not a new idea. It was floated under the coalition Government, with the proposed creation of an office of the Chief Land Registrar and the bulk of the registry’s work going to a service delivery company. It is clear that the first and foremost reason for this sale being revisited is to generate a capital receipt for the Chancellor.

Noble Lords may recall that at the time of the earlier proposals the former Chief Land Registrar wrote:

“The Land Registry is a successful and highly regarded department of government with a 150 year history … It conducts its business impartially and free from any conflicts of interest. It grants and guarantees title on all transactions so providing the security of tenure and conveyancing machinery on which a stable society depends and without which the property transfer and mortgage markets could not function”.

We would do well to listen to that view.

Of course, the fattening-up process has already begun, with the Infrastructure Act 2015 providing the means for the local land charges system to be removed from local authorities and operated by the Land Registry. However, this arrangement will fragment the provision currently undertaken by local authorities, with what is termed the CON 29 component of the hitherto joint service remaining with local authorities. The transfer of local land charges to the Land Registry was due to take place from this July. Perhaps we can have an update from the Minister on how that is all progressing, and in particular how the local authority databases are to be valued for these purposes. We do not necessarily argue for the status quo—we can see a wider role for further digitalisation of the service and a wider remit for the Land Registry, particularly in this era of greater transparency of land transactions—but we should oppose the folly of this privatisation.

Budget Statement

Lord McKenzie of Luton Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Holmes. It was the FT which described this Budget as making the best of a bad job. We should endorse at least half that assessment. That the Chancellor’s rhetoric was running ahead of reality was most starkly demonstrated by the expressed aim that Britain should become the most prosperous country in the world. Would that it could, but we are reminded in our briefing of the gap in real GDP per head between the UK and not only the US but Germany and France, as other noble Lords have mentioned. In the case of the US, it is a gap that has widened.

I was proposing to speak just on the issue of housing but was encouraged by the contribution of the noble Lord, Lord Freeman, to divert briefly to the issue of pensions because he, quite properly, raised the issue of where we are on the guidance service. We are a few days away from these new flexibilities coming into being. My noble friend Lord Lea pressed this point as well. Can the Minister assure us that everything is in place, as originally anticipated and promised, to make sure that support is there for people having to make these decisions for the first time? It started off, in the Chancellor’s terms, as “advice”, then it became “face-to-face guidance”. Now I think it is guidance either face-to-face, digitally or by telephone. It is crucial that everything is in place; certain concerns have been expressed about whether that is the case. It is important that we hear tonight that things are properly in place.

The Red Book records that more than 537,000 new homes have been built during this Parliament—not all started in this Parliament, of course—as though this should be a source of some satisfaction. But this amounts to less than 110,000 each year on average, way less than half of what is required if demand is to be satisfied. We have another housing initiative in the Help to Buy ISA but, as my noble friend Lord McFall said, it is relatively small beer: it is modest and does not look at the supply side. The noble Baroness, Lady Valentine, referred to housing zones and a number of other initiatives that have been announced. We have had a number of them during this Parliament, but it is the net effect that is concerning.

Instead of getting on and building, the Government have spent almost five years making empty announcements on garden cities. The Ebbsfleet scheme was announced in 2012 and announced again in last year’s Budget, with £200 million of funds but only £100 million allocated in the Autumn Statement. The Northstowe development is already in the planning system. Nick Clegg promised £225,000 in funding for large-scale housing schemes in late 2012. That appears again in the Red Book this time.

It is estimated that England’s population will grow by more than 7 million over the next 20 years and that we need to build 243,000 homes each year to keep pace, let alone to deal with the backlog of more than 1 million homes. That is why we have a housing crisis: the shortfall is making it more difficult for people to buy, more expensive for people to rent, and has driven increased homelessness. Home ownership is at its lowest level for more than 25 years. The building of social homes has fallen to its lowest level in more than 20 years. Affordable housebuilding has fallen to its lowest level for at least five years. As the Lyons review reminded us, the typical first-time buyer now needs a deposit of 65% of their income; the average home now costs eight times the average wage; and one in four adults between the ages of 20 and 34 are still living with their parents. The private rented sector now houses 18% of all households, including 1 million children, with the average household in the private rented sector spending 40% of their income on rent, compared with 20% for those with mortgages.

At the start of this Parliament the Chancellor removed more than £4 billion of funding from affordable housing—a 60% cut. National government spending has steadily switched from investing in new homes to subsidising housing costs via housing benefit. The coalition now spends 20 times as much on housing benefit as on affordable housing building grants. The cost of housing benefit has risen by 9%, despite curbs on entitlements. The Government’s flagship new homes bonus is failing to get new homes built and is diverting money away from local areas with the greatest need. We would replace this with fairer funding arrangements, since the Government’s approach has unsurprisingly been regressive, with low-income households being disadvantaged by benefit cuts and the better-off being able to access the Help to Buy scheme.

What would we do? We need to get at least 200,000 homes built a year by 2020, providing up to 230,000 jobs in construction, with all the training and apprenticeship opportunities that that would bring. To do this, we would give local authorities the powers and resources to build the homes that their communities need. We will ensure that all councils produce a plan for homebuilding in their area and allocate sufficient land for development to meet the needs of local people. We will give local councils the power to designate new housing growth areas, in which they will be able to assemble land, commission development and deliver the homes that their communities need. We will unlock the supply of new homes by giving local authorities “use it or lose it” powers over developers who hoard land that has planning permission so that they can sell it on for a bigger profit, instead of building on it now.

Generation rent has been ignored for too long by this Government. We need to ensure that private renters get a better deal. We need to give security and peace of mind by legislating to make three-year tenancies the norm, giving renters a stable home and landlords more stability too. We need to end excessive rent increases by putting a ceiling on rent increases during the new three-year tenancies. We need to ban rip-off letting agent fees for tenants by legislating to stop agents charging fees to tenants. We need to drive up standards by introducing a national register of landlords and giving new powers to local authorities to drive up standards in their areas.

We need to allow greater flexibility to individual local authorities for their housing revenue accounts where councils present a business case and an investment plan to build more social homes. The Treasury would be able to ensure that the additional flexibility does not see an increase in total borrowing over and above that currently planned for. We need to strengthen the definition of “affordable housing” in the planning system, and we need to reverse the Government’s changes to affordable homes obligations. The Government have exempted developments of less than 10 homes from affordable housing Section 106 levies and have introduced vacant building tax credits, which will have a disastrous impact on the delivery of affordable housing.

The Government’s record on housing over this five-year term is not good. The Budget has shown no recognition of the scale of the challenge and no credible policies to tackle the crisis. This must be left to others.

Corporation Tax (Northern Ireland) Bill

Lord McKenzie of Luton Excerpts

Tuesday 17th March 2015 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Forsyth. It is certainly safer than preceding him in a debate. I start by congratulating the noble Lord, Lord Hay of Ballyore, on his impressive maiden speech. The noble Lord clearly brings vast experience, which will serve us well in this House. It was with a degree of hesitation that I was going to speak in this debate because it looked as though most of those speaking had a long-standing commitment to this cause. I feel a bit more relaxed, having heard the contribution of the noble Lord, Lord Forsyth.

I do not propose to dwell on the historical or constitutional context of the Bill, other than to say that I am happy to follow my party’s lead, as my noble friends on the Front Bench have and will outline. We know that the Northern Ireland economy has underperformed in comparison with the rest of the UK, with some rebalancing of the economy to bolster the private sector being overdue, and reducing corporation tax for Northern Ireland would be one component of a package. The tax rate has a particular significance, given the sharing of a land border with the Republic, which has worked hard to retain its 12.5% rate.

My starting point and first observation, which other noble Lords have made, is that addressing the seemingly straightforward proposition of devolving the rate of corporation tax to Northern Ireland requires some 87 pages of highly technical legislation, albeit encompassing just six clauses and two schedules. This reflects in part the complexity of our corporation tax system, as well as the arrangements necessary to address state aid requirements. I do not argue that this complexity is unnecessary—that is for purposes of the Bill; I accept that it probably is necessary, although there are consequences of this complexity, which I will speak to shortly.

The proposition to devolve corporation tax and the implicit understanding that it would involve a reduction from the current rate, resulting in a boost to foreign or domestic investment, are perhaps not unreasonable. However, as other noble Lords have said—the noble Lords, Lord Trimble and Lord Empey, in particular—we should recognise that it is not necessary in all circumstances to determine the issue of where investment is undertaken. Investors looking to invest in the territory will have a range of requirements, not all the same. The transport infrastructure may be the most important issue for some; for others it may be availability of manufacturing or office space, and the cost of that. I have known housing for expatriate executives and proximity of international schools also to feature. The availability of a locally skilled workforce may be crucial.

Taxation is not just a matter of corporation tax. Particularly for smaller enterprises, the issue may be the personal income tax regime, and especially how international tax protection packages are treated—typically a feature of arrangements for employees seconded by an overseas investor. As for corporation tax, as our briefing identifies, it is not only the nominal rate of tax which is important; it is the effective rate, taking account of the variety of available reliefs, offsets and credits. The extent of these is illustrated by the detailed legislation included in the Bill to make them fit the devolved system. As well as defining a qualifying trade, the Bill covers variously the treatment of losses, intangible credits and debits, R&D credits, expenditure on land remediation, film tax relief and more besides. Obviously these other levers, as the Minister acknowledged, are not to be devolved.

Another point to bear in mind in all this is how any tax levied in Northern Ireland would be treated from the perspective of a foreign investor. Are the overseas profits untaxed at parent company level, or is the tax otherwise creditable against home country taxes on one basis or another, and when do they apply? The overseas effective rate may be more significant in the former, rather than the latter, case. We were advised at our briefing, which the Minister was kind enough to organise, that the UK’s double tax treaties would continue to apply to a Northern Ireland company, as defined; and this is obviously important. The Minister might just say whether the Government consider that any corporation tax levied at the NI rate on the uplift on back-office expenses brought within the regime would generally be creditable, given that the tax is based on deemed, rather than actual, profits. There is a potential multiplicity of factors which influence the attractiveness of the territory for inward investment. I have no doubt the Assembly is well aware of this but none of it negates the potential benefit of a devolved rate of corporation tax, which provides a strong opportunity to make a statement about Northern Ireland being open for business in a big way and hungry for investment. It is symbolic of a determination to have a business-friendly environment.

Of course, alongside the complexities of the tax legislation there is the necessity to work out the requirements of the block grant adjustment, to which a number of noble Lords have spoken, so that the arrangements do not fall foul of state aid provisions. This involves calculations of tax initially forgone by HMRC by direct and behavioural means—presumably that is at the 20% rate—as well as how a deduction should grow over time. We are told that much work is going on in this regard, particularly to be able to make the judgment of whether or not, for the purposes of the Stormont House agreement, the Executive are able to demonstrate that their finances are on a sustainable footing for the long term.

Can the Minister confirm my understanding that the starting adjustment to the block grant is to take the profits which are going to be taxable at the Northern Ireland rate at a 20% rate as its mechanism, so on day one you are balancing tax through Northern Ireland at possibly a 12.5% rate against a reduction in the block grant at the 20% rate? As I understand it, that is how it is intended to work. How that adjustment is changed thereafter is the particular focus of some work.

Any tax system which has complexity, new definitions and concepts, especially with differential tax rates involved, will inevitably attract the attention of the tax avoidance industry. Doubtless as we speak, countless accountants and lawyers are sharpening their metaphorical pencils to see what tax advantage may be gained when the arrangements are put into effect. In introducing the Bill, the noble Baroness said that we have dealt with the issue of brass-plate companies. That is only one potential part of tax avoidance; other mechanisms will doubtless be brought to bear.

The soundness of definitions around Northern Ireland company, Northern Ireland employee and Northern Ireland profits and losses, for example, are fundamental. For SMEs, as we know, a company will be a Northern Ireland company if at least 75% of its staff time and costs relate to work carried out in Northern Ireland. This is a novel approach for the UK. However, is it correct that this means that up to 25% of employee effort outside Northern Ireland can effectively qualify for the Northern Ireland rate? If so, what will be the overall consequences of this? In theory, this presumably means that this extra tax will be collected and retained by the Northern Ireland Executive but there will be an additional adjustment to the block grant. We were told that on introduction 97% of SMEs will qualify under this test.

A parallel point arises more generally should tax avoiders get away with organising income to be subject to the Northern Ireland rate with economic activity still remaining outside Northern Ireland. In those circumstances, who is bearing the risk of the overall tax forgone? Presumably it would depend upon when this all took place. Will it feature in the initial adjustment of the block grant and how the growth of the initial deduction is to proceed? If the reality is that Northern Ireland bears the risk of tax avoidance, who is going to bear the cost of compliance and making sure that effort is made to tackle that avoidance? Does that rest with the Treasury more generally or with the Northern Ireland Executive?

It is noted that the test for SMEs and staff time is a per company one and on the face of it there is a risk that, within a group, arrangements will be made to have split contracts. How is it proposed to address this? The provisions for identifying the Northern Ireland profits and losses of a large company follow a tried and tested route and adopt the principles that are attributable to a permanent establishment. Nevertheless, this approach can give rise to disputes, although unlike the international situation, the revenue authorities will be seeing both sides of the equation. Internal royalties and interest payable by the Northern Ireland regional establishment are to be ignored, but again this is only intra a single company. It does not seem to look at the wider group context.

I will not speculate about what might happen in the future should corporation tax ever be devolved to Scotland. There could be a three-way tussle to work out to which establishment profits are to be attributable across three territories. We know also that a number of international companies organise their affairs to avoid UK tax and try to sustain that on the basis that they can presumably argue that they do not have a permanent establishment in the UK. Indeed, it would be ironic if the wider avoidance measures now being taken by the Government caused them to seek the shelter of a permanent establishment in Northern Ireland.

Time does not permit me to go into this more. It is a pity that we are denied the opportunity of at least a detailed Committee process on this Bill. I do not argue that so much from a constitutional point of view, just that it would be good fun to get into some of the detail of these provisions. However, I accept that we must acknowledge the position of the elected House. This is an important and, I believe, ground-breaking measure which we hope will have the opportunity to be implemented and prove a stimulus to the economy of Northern Ireland.

--- Later in debate ---

[Lord Newby]

I am afraid that the Government have not taken that view in the way they have produced this. They have thought about it and decided that they did not want to go down that route.

The noble Lord, Lord Shipley, talked about the broader impact of the measure and of APD on the rest of the UK. I agree with him—he will not be surprised to know—in that these things need to be dealt with under a constitutional convention. Nobody could claim that the devolution picture across the UK is anything other than rather piecemeal and the time is long overdue for us to try to bring a bit more coherence to it, not least in terms of the English question.

The noble Lord, Lord Empey, talked about the necessity for the parties in Northern Ireland to agree on the budget reduction. Everybody agrees that the budget reductions should have been embarked on earlier, but the process has now started and we are determined to encourage and support the Executive in the future as they grapple with these issues. We are totally clear that the Executive must balance the budget and, to do that, welfare reform must go ahead.

The noble Lord, Lord Forsyth, ranged widely over our constitutional issues and problems. He did not mention that Yorkshire Day is in the middle of the Summer Recess and therefore I will be denied the possibility of getting a big set of powers devolved to Yorkshire, for which I am extremely sorry—but we cannot have everything. I think the noble Lord’s characterisation of the extent to which this would complicate the system and make life difficult for businesses was slightly overdone. The rules we are introducing for larger companies are based on existing OECD principles which companies already operate. As he pointed out, the design seeks to retain coherence within the corporation tax regime as whole. Only one variable is being affected and the whole system is being administered by HMRC, with which all the companies already have relationships.

The noble Lord, Lord McKenzie, asked a number of detailed questions, some of which I hope I can deal with. He asked whether the notional profit attributable to back office was creditable in the rest of the UK tax computation. This notional profit forms part of the attribution of trading profits to the Northern Ireland regime, so will not feature as mainstream—to use the language of the Bill—profit; that is, non-chargeable at the UK rate.

[Lord McKenzie of Luton]

I am sorry, but my question was about not whether they are creditable within the UK system but whether they would be creditable to a foreign investor.

[Lord Newby]

I shall have to write to the noble Lord on that point, but I suspect that the answer is yes. However, I am not confident, so I shall write to him.

The noble Lord asked about whether an SME that is determined to be within the Northern Ireland regime but has 25% of its activity within the UK has all its corporation tax charged at the Northern Ireland rate. The answer is yes—all its qualifying profits will be taxed at the Northern Ireland rate. It is estimated that more than 99% of the small and medium-sized businesses affected have 100% of their trading activity in Northern Ireland. That seems rather a large figure but, even if it was slightly less than that, the amount of potential tax forgone for the UK in one guise or another is very small.

The noble Lord asked how it would work in calculating the block grant. If and when this power is in place, the Executive’s funding will consist of three elements. The Barnett formula continues to operate, so there is the Barnett-based block grant. There is then a block grant adjustment, so there is a deduction from what they would otherwise have got, to reflect the CT revenues forgone. Then you put back in the CT revenues that you are collecting. That is the principle of it. I accept that actually doing it is quite complicated, but the principles are quite clear.

[Lord McKenzie of Luton]

I shall not make this a dialogue, but is the consequence that on day one the deduction from the block grant would effectively be at the current mainstream corporation tax rate and the benefit at the Northern Ireland corporation tax rate? Clearly there is a differential between the two, which is why you get a substantial negative in the block grant, at least on day one.

[Lord Newby]

Yes, it is the difference between the 20% and the 12.5%.

Pension Schemes Bill

Lord McKenzie of Luton Excerpts

Monday 12th January 2015 Lords Chamber

That is some way from the specific amendment we are discussing. Returning to it, I hope that I was able, in the early part of my remarks, to convince the noble Lord that we are taking the question of monitoring and evaluation seriously and that he will feel able to withdraw the amendment.

[Lord McKenzie of Luton (Lab)]

My Lords, can the Minister help me on two points which arise from the Pension Wise document we got just this morning? Page 7, which recites progress to date, says that,

“until the service reaches maturity, overall responsibility for service design and implementation will remain within the Treasury”.

Will the Minister expand on that and say at what stage he believes the service will reach maturity?

Page 17 says:

“Telephone and face to face guidance sessions will initially be designed as a single session per consumer, though this will be kept under review”.

Will the Minister say something more about the components of that review? What will be taken into account in determining whether that single session for consumers is adequate?

[Lord Newby]

It is difficult to give a precise answer to the noble Lord’s first question, about maturity. The Treasury is, for good or ill, going to keep its mitts on this process until we are very satisfied that it is working well and is seen to be in a stable and successful state.

As for the single session, noble Lords will be aware that people will be able to access the service either online, on the phone or in person. The hope is that by giving people all the financial information that they require, by encouraging them, in the case of pension providers, and by explaining to people, before they turn up to their session, the kind of information that we are looking for, it will be possible to give adequate guidance in one session. We accept that that will not be enough for some people; they will have forgotten something or a thought will occur to them once they have left. We hope that of those cases, which we hope will be a small minority, a majority will be able to get an adequate response to a specific query by going to the website.

We accept, however, that for some people that will not be the case, and that in a minority of cases some people will need to go back, either to make a subsequent phone call or to have a subsequent meeting. However, we are working very hard to minimise that necessity—because, obviously, getting things right first time will be in everyone’s interest.

--- Later in debate ---

[Lord Hutton of Furness (Lab)]

My Lords, there has been a great deal of rhetoric surrounding this Bill. Some of the claims for the Bill may be far-fetched, but in one respect they probably are not. Many people have claimed that the reforms in the Bill constitute the biggest shake-up of our pension system for 100 years. If that is true, it is incumbent on the Government to have a clear plan—rather as my noble friend has indicated—for keeping Parliament abreast of the impact of those changes and reporting appropriately on it. None of us knows at the beginning of the extraordinary journey on which we are embarking what will happen and what will be the consequences of giving pension savers these significant new freedoms and flexibilities. It is quite likely that these are responsible people. They have been saving in workplace schemes, in some cases, for decades. Perhaps they are not going to blow their pension pots in a reckless spending spree at the end of their working lives. I tend to agree with that, but we simply do not know. Whereas giving choices is a great policy and one that I can support, it competes with another policy that has similar standing: that is, we must ensure that people approach and enter retirement with enough income to meet their lifestyle requirements.

As has been said by many others in the course of this debate and in another place, these two policies are, to some extent, competing with each other through the Bill. My noble friend’s amendment is really seeking to do one important thing, which is to ensure that there is a proper appreciation of the risks inherent in this approach to the new legislation and a willingness to keep Parliament informed of them. If we get this wrong, not only are we going to impoverish future generations of retirees, but there is, as we know, some risk that the costs of that will fall back on to the shoulders of taxpayers. Either of those two outcomes would be a terrible result of these new freedoms and flexibilities which, in principle, I strongly support.

I hope that the Minister will be able to respond positively to my noble friend’s amendment. I suspect he will say that there is something wrong with the drafting of the amendment. We have all been there before and we know how this process unfolds. If he is not prepared to accept the amendment I hope that he will at least give the House some indication of what reporting the Government are planning to embark on so that future legislators will be able to look back at the detail of this legislation and conclude at some point whether it is working or not. If it is not working, we will have to change it. If it is working, we will all celebrate one of the great reforms of the Government. However, it is clear at the moment that there is no indication, either in the Bill or elsewhere, of what plans Ministers have to keep Parliament abreast of the impact of these changes, given their significance and importance. It is necessary that we hear from the Minister today what the Government’s plans might be.

[Lord McKenzie of Luton]

I will speak in favour of my noble friend’s amendment and address two points. The first is the point my noble friend raised about tax leakage and the risks of salary sacrifice arrangements. I draw the Minister’s attention to Clause 54, which looks at the issue of independent advice and provides, not unreasonably, that that will not be a taxable benefit. However, it precludes it from that exemption if it is the subject of a relevant salary sacrifice arrangement, which is defined in the Bill. Rather than rely on a reduction in the annual allowance as, seemingly, the protection against salary sacrifice arrangements and tax leakage, why not simply adopt the same formulation that is adopted in Clause 54 by precluding salary sacrifice arrangements being available on appropriate definitions?

My second point is to try to get a better handle on the Government’s assessment of behavioural change in the early years as a result of these flexibilities. We can do no better than to focus on the tax projections in the Red Book for March 2014 and the Green Book for the Autumn Statement because those must have been underpinned by some detailed calculations. I am not sure that we have seen that detail to date. I hope that the Minister will follow up in writing if he is not able to deal with all the detail today. How many cases of individuals taking lump sums or other drawdown arrangements rather than annuities are included in those estimates? That must have been the basis on which they were adduced. What is the additional aggregate taxable income expected each year until 2020? How many individuals are estimated to pay tax at higher rates as a result than they would under normal annuitisation? We probed this matter on Report in the Commons but did not get a reply. It would be helpful to have that detail as it would give us an understanding of the Government’s assessment of behavioural change and the number of people who will take more of their pension pots under these flexibilities than would if the annuity arrangements only had been available.

[Lord Newby]

My Lords, the two amendments in this group would require the Government to publish two reviews of the impact of pensions flexibility. I start by completely agreeing with the noble Lord, Lord Hutton, that these changes are welcome freedoms and flexibilities but, like all freedoms, they bring some risks that I hope, in a variety of ways, we shall be effective at mitigating.

Noble Lords will not be desperately surprised to hear that I do not believe that these amendments are necessary. First, when considering new Clause 1 and the parts of new Clause 2 which relate to Exchequer revenues, it is important to note that in the Autumn Statement the Government published estimates of the Exchequer impact of the policy as a whole. These costings, which were certified by the independent Office for Budget Responsibility, cover all the changes made to the policy since the Budget as a result of consultation. The total impact of these decisions was set out in table 2.1 of the Autumn Statement document.

To ensure that the Government were being sufficiently transparent, the Financial Secretary to the Treasury wrote to members of the former Taxation of Pensions Bill Committee setting out these costings. I will now outline them for the benefit of the Committee. Further detail on how these costs were calculated is set out in the policy costings document published alongside the Autumn Statement. However, in the letter sent by the Financial Secretary to the Treasury to the members of the former Taxation of Pensions Bill Committee, it was also explained that the costings published as part of the Autumn Statement were based on the same central assumptions that underpinned the costings published at the Budget. Since the Budget, the Government have explored in more detail two aspects of the policy that affect this costing, which takes us to a point made by the noble Lord, Lord Bradley, about the increased cost of salary sacrifice and the increased cost of welfare as a result of the reforms. The Government have produced costings for these, which have been scrutinised by the OBR. In line with standard practice, these are accounted for as changes to the forecast and are not therefore outlined in table 2.1 of the Autumn Statement document.

Given the concern that noble Lords have expressed, it may be helpful if I detail what those figures are. The revisions to the forecast to account for salary sacrifice, which take account of further discussions and considerations since the Budget, are £35 million in 2015-16, £30 million in 2016-17, and £25 million in each of the following three years. When the forecast was revised to account for the increased cost of welfare, the figures rose from £15 million in 2016-17 to £25 million in 2018-19 and 2019-20. The Government have therefore already published the information that these two new clauses are seeking on the Exchequer impacts of various aspects of flexibility, all of which have been certified by the independent OBR. The Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts at future fiscal events and the Government of course keep tax policy under continuous review. Therefore, there is no need, in the Government’s view, for further reviews of the Exchequer impacts of the policy as the Government have already committed to keep these under review through the usual processes.

--- Later in debate ---

[Lord Newby]

I am saying that in a whole raft of areas, no doubt under successive Governments, the Treasury has made behavioural assumptions. When I used to work in Customs and Excise, that was certainly the case when asking what would happen if the duty on whisky was put up. A whole raft of behavioural assumptions is made in policy-making and I do not think that it has been the policy to make those behavioural assumptions public. What obviously has been, and will remain, policy is to set out the impact of those behavioural changes. The noble Baroness shakes her head. Perhaps when she was a Minister behavioural assumptions were made available. My understanding is that that has not been the policy but I will go back to the Treasury and check.

[Lord McKenzie of Luton]

I wonder whether the Minister can help me. It seems to me that there is potentially a difference with behavioural change which is incidental to the fundamental policy issue. However, here we are talking about a system where the change and the data underlying the tax issues are absolutely fundamental—it is what the whole policy change is about. Just to be clear on that, the Budget Red Book for 2014 refers to extra tax in 2015-16 of £320 million, £600 million the year after, £910 million the year after that and £1.2 billion the year after that. I think we understand that work has been done on those figures and that the Office for Budget Responsibility has accepted them as realistic. However, as I understand it, the Government are not going to tell us the basis on which those figures have been derived. They are not going to give us the opportunity to make any judgment as to whether, ultimately, we support the policy.

[Lord Newby]

My Lords, I was simply saying that my understanding is that it is a long-standing convention regarding the behavioural assumptions that go into producing those figures. The only other thing I would say is that today we have seen another, very different, estimate of the costs. There is a very considerable degree of uncertainty about the figures at the moment but the Government made their best estimate at the time of the Budget and they amended it in the light of further consideration at the time of the Autumn Statement. They will obviously keep the situation under review as we see what people do rather than speculate about how the policy will work.

The noble Lord, Lord Bradley, asked about the effects of the new policy and flexible access on eligibility for means-tested benefits—in particular, social care. The policy aim is to ensure that the decisions people make in choosing between taking their pension as income and keeping more of their pension as capital and drawing it out periodically do not significantly impact on how they are assessed for social care support and how their means are assessed for social security purposes. New statutory guidance and regulations under the Care Act were published on 23 October. They include details on the changing rules for care and support.

In respect of social security, we announced a change in the rule for people above pension credit qualifying age who claim means-tested benefits. The notional income amount applied to pension pots which have not been used to purchase an annuity will be reduced from 150% to 100% of the income from an equivalent annuity, or to the actual income taken if that is higher, in line with the rules for care and support.

The noble Lord, Lord Bradley, asked about unwinding annuities already bought. This is not government policy. It was a suggestion of my colleague Steve Webb, the Pensions Minister, in the context of future Liberal Democrat party policy. It was not a statement of government policy.

I am sure that there are other specific issues raised by noble Lords in this debate to which I have not given a full answer. I will read it again.

[Lord McKenzie of Luton]

I promise not to delay the Committee any longer. However, I would just refer to the point about why the Government have not taken the opportunity to specifically deny the benefit of the flexibilities when there are salary sacrifice arrangements. They have done it in another small part of the Bill, so it is technically achievable. Why have they eschewed that—to allow at least some element of salary sacrifice arrangements to have the tax benefits that they are designed to?

[Lord Newby]

My Lords, one thing I have not responded adequately to—and I am not sure whether what I am going to say will adequately answer the noble Lord’s point, but I will write to him if I do not—is about salary sacrifice and the question about the £10,000 allowance, which the noble Lord, Lord Bradley, and others, referred to.

The £10,000 allowance is, we think, a sensible middle way to allow the majority of people the flexibility to withdraw or contribute to their pension as they choose from age 55, while also ensuring that individuals do not use the new flexibility to avoid paying tax on their current earnings. However, there are clearly circumstances in which it will be in an individual’s best interests to gain access to part of the pension pot early—at 55 or 56—while by the time they are 60 their circumstances have changed and they can then start contributing again to a pension. We did not want to deny that entirely. Equally, as noble Lords have said, we did not want individuals recycling money out of pension pots just in order to avoid tax. It is therefore a pragmatic compromise figure which we think strikes the right balance.

Pension Schemes Bill

Lord McKenzie of Luton Excerpts

Monday 12th January 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, this amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings during the actual decision-making and purchasing process, as distinct from a duty to protect savers receiving guidance from designated guidance providers. In particular, the amendment sets out that the FCA should require pension providers to take active, not just passive, steps to check that people are made aware of the factors that will impact their decision.

I will begin by highlighting the problem that drives this amendment. Steve Webb, the Pensions Minister, commented at the end of the Public Bill Committee sessions:

“To be clear, if we thought everything was fine in the world of retirement income choices the FCA would not be doing a thematic review of annuity sales practices or a retirement income market study … those studies are being undertaken because we are aware that there have been problems in this market. We are prepared to introduce further measures, if that is what the studies suggest”.—[Official Report, Commons, Pensions Schemes Bill Committee, 4/11/14; col. 309.]

I believe that that is exactly what those two studies suggest. Since the Bill arrived in this House the FCA has in fact delivered its two reports: the thematic review of annuity sales practices and the interim report on the retirement income market study. Perhaps I may capture the essence of what it reported.

The review found that annuity sales practices were contributing to consumers not shopping around, buying the wrong type of annuity or missing out on a potentially higher income. The consumers’ tendency to buy from their existing pension provider weakens competition. The FCA identified the non-adherence by providers to the ABI’s own retirement choices code. In fact, the ABI urged the FCA to replace its code with regulation because it recognises that with the new freedoms more needs to be done.

As to the FCA retirement income market study, that was initially focused on how to get competition working more effectively for consumers; but following the Budget the emphasis was shifted towards looking at how market conditions might evolve from the advent of the reforms in April 2015. Its interim report suggests that consumers will be poorly placed to drive effective competition; that the retirement income market is not working well; and that the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value.

Even after repeated analysis of these issues by the Treasury, the FSA, the FCA and others over a period of six years, and just three months away from the introduction of major reforms to the UK pensions framework in April 2015, too many consumers are still being failed by their providers. As my noble friend commented, the FCA research confirmed the well known biases that savers reveal that make them so vulnerable to being sold products that do not best meet their needs, and that the choices consumers make are strongly influenced by how options are presented to them. Martin Wheatley, the FCA CEO, said in a recent interview—published just this weekend—that the timescale to deliver the new freedoms and design suitable products was challenging; providers have been struggling to complete proper due diligence testing on their products.

Turning to the savers, the new freedoms bring with them an even greater onus on individuals to make an active decision about what to do with their pension pot. It is very important, therefore, that consumers are well placed to make decisions that are in their interests. We know the challenges to achieving this: provider behaviour; product design and complexity; savers’ behavioural biases; and financial capability. The noble Baroness, Lady Greengross, is president of the International Longevity Centre, whose new report on making the system fit for purpose reveals the extent of the limited knowledge of savers about relevant products and services, despite the new freedoms being just three months away.

The guidance guarantee is a key policy measure for helping people to navigate the complex retirement options arena from April 2015. I know that there are people working very hard to make its delivery a success. I certainly want it to be successful, as it will provide a very important service to savers. In support of that guaranteed guidance the FCA has confirmed that it will expect providers to check whether a customer has used the guidance service and encourage them to do so if not. It has also recommended that the pensions guidance service incorporates tools to support consumer decision-making. This provides a first line of defence against consumer detriment. The provision of guidance is extremely important, but what the customer does with the guidance also matters. The success of guidance can be achieved only by the whole industry working together. Some people will choose not to take the guidance even if encouraged by their provider.

The Government are very dependent on market behaviour to ensure the success of the new freedoms. Beyond guidance, the saver has to move into the process of making a decision and selecting or purchasing a retirement income route. It is what happens at that stage—the exchange between the consumer and the provider—that is causing so much anxiety.

This amendment is directed at that exchange between the provider and the consumer and puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. That is what is popularly referred to as the second line of defence, to mitigate the risk that savers make detrimental and irreversible choices. After the pension provider has asked the customer whether they have accessed guidance, it should be required to make active interventions, not just the current passive and paper-based disclosures. The FCA reports show that these are clearly failing savers, particularly where they buy a product from their existing provider through inertia, rather than making an active choice. The FCA should require pension providers to take active steps to make people aware of factors passively referred to in the literature and key facts documentation, by asking key questions of the consumer to highlight such matters as the potential impact of health, income tax, dependants, longevity, investment risk and income needs through retirement. That will highlight factors whose impact can lead to poor choices if overlooked.

The FCA analysis, as my noble friend said, revealed that the take-up of enhanced annuities because of health factors by those who remained with their existing pension provider was just 5%, while for those who shopped around the take-up was 50%. That is strong evidence that consumers need an active prompt to consider factors that have a bearing on their incomes in retirement. It is all the more important because decisions on pension savings can be irreversible. This Bill and the Taxation of Pensions Act create unprecedented options for retirees, so the passive approach is no longer sufficient.

The FCA is expected to publish its final market study report in early 2015. It is consulting on certain proposals, as my noble friend detailed, and it will continue to monitor the market. However, this is a reactive approach, waiting to see what problems emerge, and the amendment is underpinned by the belief that prevention is preferable to later cure. With around 400,000 consumers expected to access the new pension freedoms in 2015, yet another review may be required without the additional protections proposed in the amendment, to discover why thousands of pension savers did not make good decisions or get good value for money.

The amendment would introduce a general duty on the FCA and allow protections in time for April 2015, but it would not prevent the Government setting such other further requirements as they considered appropriate in the light of how the retirement market evolved. As the noble Baroness, Lady Greengross, stated when moving her amendment, consumer advocates, industry groups, providers and members of the Work and Pensions Committee have all expressed concerns that, without a second line of defence, mis-selling and poor decisions remain a key risk.

[Lord McKenzie of Luton (Lab)]

My Lords, I support the amendment and have added my name to it. As we have heard, it is about placing a duty on the FCA to set regulations for pension providers to deliver adequate protection for consumers—the second line of defence. However, having heard the contributions of my noble friends Lord Bradley and Lady Drake, I find myself with nothing further to say. I could go through some partial repetition but I think that, in the circumstances, I will desist.

[Lord Newby]

My Lords, I thank all noble Lords who have spoken on this amendment, and perhaps particularly the noble Lord, Lord McKenzie of Luton.

The amendment relates to the FCA’s duty to secure an appropriate degree of protection for consumers making a decision about their retirement income, with or without guidance. It is important to recognise that, as noble Lords have said and as was mentioned in a previous debate today, not all individuals will seek to take up the guidance offer, and that is their choice. I agree with noble Lords that, whether a consumer has taken guidance or not, they should be assured of their protection in the financial services market and be furnished with the right information to make an informed choice. I completely accept the point made by noble Lords —and as demonstrated in the FCA’s market studies—that in the past this has often not been the case.

First, the FCA is a relatively new body with new powers. I assure noble Lords that it has a duty to ensure that the retirement income market is working for consumers. That is captured under its statutory objectives, including its objective to secure an appropriate degree of protection for consumers in this market, which already extends across retail financial services markets. The FCA has specifically committed to closely monitor how the retirement income market develops and to take action where appropriate. It has broad powers to take action if there is evidence of mis-selling of products that are clearly inappropriate for consumers. It also has product intervention powers, which allow it to ban features of products or require products to be sold with certain protections or restrictions in place.

It is also important that consumers have the right fundamental information that they need to inform their choices, whether they take guidance or not. For those who choose not to take up the offer of guidance—the amendment is about people who choose not to take up the guidance; the issues raised here will be covered in the guidance sessions—the FCA’s rules, which it recently consulted on, in respect of these pension changes will require firms to provide a description of the possible tax implications when people apply to access their pension fund. The FCA has also made it clear that firms can question a customer’s decision where they feel it is inconsistent with their circumstances without fear of overstepping the boundary into regulated advice.

As noble Lords have pointed out, the FCA has committed to reviewing all its rules in the first half of this year. I assure noble Lords that it is considering what additional consumer protections should be put in place to support people making choices about their pension savings and the implications of those different choices. This is not simply a reactive approach; the FCA is doing this in the light of the work that it has already done and in the light of its extensive understanding of the market.

This debate highlighted an important issue of FCA protection. I hope that I have been able to assure noble Lords that not only does the FCA already have a duty to secure an appropriate degree of protection for consumers, regardless of whether they have used the Pension Wise service, but it has the appropriate powers to fulfil this duty without this amendment. Its attention is suitably focused on the development and treatment of consumers in the retirement income market. I hope that the noble Lord will therefore see fit to withdraw his amendment.

--- Later in debate ---

[Baroness Warwick of Undercliffe]

I do not think I should enter into a conversation about that and I do not think it is really relevant to this argument.

[Lord McKenzie of Luton]

My Lords, I thank the noble Lord, Lord Balfe, for giving us an opportunity to air this issue this evening and for organising a meeting with the Minister. I thank the Minister and his officials for participating in that meeting. No one can be comfortable with the position of employees in this situation, who approach retirement with a likely pension significantly below the expectation which is derived from an employer promise which can no longer be met. This is not diminished by the fact that, while the pension expectations would be well above average levels, they are commensurate with remuneration levels which reflect the skill of pilots and the responsible jobs they undertake. As we have heard, some 67 Monarch pilots will lose, in aggregate, some £900,000 a year in lost pension because of the operation of the PPF cap and other pilots are in a similar position.

We should acknowledge that the Pension Protection Fund introduced by the previous Government, but on a cross-party basis, protects millions of people throughout the UK, as we have heard, who belong to defined benefit pension schemes. According to the Purple Book, which monitors the risk of DB schemes, there are some 6,057 mostly private sector DB schemes covering more than 11 million scheme members with more than £1 trillion of assets. In broad terms, as we have heard, the fund takes over the responsibility of pension obligations in the event of employer insolvency, but it does not seek to replicate, in every respect, the employer promise. There is, in particular, a cap on levels of payment for those below normal retirement age when the scheme enters the PPF. This is a source of the problem we are discussing tonight.

We know that the PPF is a highly professional organisation dealing with a complex market situation with great skill. On recent data, some 745 schemes have been transferred, covering 217,000 members. Compensation paid to date amounts to £1.53 billion, but the average yearly payout is, as we have heard, some £3,500 only. Tens of thousands of people now receive compensation from the fund and hundreds of thousands will in the future, potentially making the difference between retirement in poverty and retirement in a degree of comfort. This may not be the occasion to discuss how the PPF will operate in shared risk schemes, but that is doubtless a matter we will return to at some stage.

The thrust of the amendment in the name of the noble Lord, Lord Balfe, is generally to improve the position of those whose compensation is limited by the cap. The position of those with significant pensionable service with one employer has already been improved under the Pensions Act 2014, but this does not cover pilots, who tend not to have pensionable service substantially in excess of 20 years. Of course, the origin of the cap was to address issues of moral hazard, as we have heard, but also to be some restraint on the overall costs of the arrangements—it is not just a moral hazard issue. It is accepted that the moral hazard is not present in the case of pilots and the amendments would not lead to 100% compensation. However, the amendments would not apply just to Monarch; we simply do not know who might be entering the scheme at some future date and therefore the costs associated with that. As an aside, I ask the Minister: if the levels of compensation were raised, what if anything would that mean for the arrangements entered into with Monarch that allow for continued trading? Would that arrangement have to be recast?

The bottom line is that amending the rules in the way suggested would lead to higher payouts from the PPF. That raises the question, as my noble friend Lady Warwick has made clear, of where the funding is going to come from. The answer, of course, is the levy, which ultimately feeds back to individual schemes and sponsoring employers. Although the amounts related to pilots may be relatively small in the context of the overall PPF scheme, we simply do not know how many more might be affected and what the overall costs would be. As I have just said, there was an attempt in the 2014 Act to ameliorate the effects of the cap for individuals whose pension entitlement was derived mainly from one source for at least 20 years, although this does not particularly help the matter in hand unless there were to be some recasting of the spread in coverage to affect it in a different way. However, presumably this would involve losers as well as gainers.

It seems that any improvement in the lot of the pilots who might find themselves in a similar position, now and in the future, would involve more resources for the PPF. So, while having great sympathy for those whose legitimate pension expectations have been significantly impaired, I do not think we have been presented with a compelling argument to make the specific changes that the amendments suggest. However, the Government may take the opportunity to reflect on and review how the cap is generally affecting entitlements, bearing in mind the need to ensure the sustainability of the PPF in the current, and future, DB environment.

[Lord Bourne of Aberystwyth]

My Lords, I thank my noble friend Lord Balfe for so eloquently moving this amendment, and other noble Lords who have participated in this debate—the noble Lords, Lord Monks and Lord McKenzie, and the noble Baroness, Lady Warwick. I found the meeting very useful, and I assure the noble Lord, Lord Monks, that, as a former trade union member, I was certainly taking everything very seriously when he put forward the points that he made.

The amendment relates to the position of certain members of pension schemes that have entered the Pension Protection Fund. I am sure that we all have a great deal of sympathy with the situation that these people find themselves in. This amendment, which offers two alternative methods of changing the cap, very helpfully allows me to talk to the Committee briefly about the level of the PPF compensation cap. I understand that my noble friend’s principle is that he would like an increase in that cap to provide higher compensation to those who had accrued a relatively large pension, but who, because they had relatively short service in their scheme, will not be affected by the long-service cap amendments. I will therefore deal initially with that principle rather than concentrating on the actual effect of this amendment.

I start by making a small but perhaps important point: the loss of these pensions is not a consequence of the PPF cap. The fact is that the schemes were underfunded and could not meet the costs of the accrued pensions. Those pensions have already been lost. What we are discussing is the level of compensation that should be paid to the affected people.

The Pension Protection Fund does not replace lost benefits in full. That is not an uncommon approach; for example, deposits in banks are covered up to a limit of £85,000. The PPF pays compensation at the full rate of the pension in payment at the insolvency date to anyone over their normal pension age. Pilots as a group, with their relatively low pension age of 55, benefit from this, as more of them are likely to be over that threshold than if the scheme had a more usual pension age of 60 or 65. It is those below their normal pension age who have their compensation set at broadly 90% of the pension accrued at the insolvency date. Further, it is this group—those below their scheme’s normal pension age—who are affected by the compensation cap.

The current cap produces what many would think was rather a generous entitlement of £32,761 per year at the age of 65. The cap is of course reset for anyone who chooses to take their compensation at an age lower than 65, to reflect the longer period of payment. So a person with an unusual pension age of 55, such as pilots, would have a cap of £26,571 precisely. Noble Lords might also wish to be reminded that the Pensions Act 2014 contains provision for a long-service increase to the cap, which has been referred to during the debate, of 3% for each year of service above 20 years, although I accept this may not be relevant for many pilots because of the lower retirement age.

Pension Schemes Bill

Lord McKenzie of Luton Excerpts

Tuesday 16th December 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I start by congratulating the noble Lord, Lord Jenkin, on his splendid speech this afternoon, and I give him my personal best wishes for his retirement. It has been a privilege to work with the noble Lord on a number of pieces of legislation. I have always found him incredibly knowledgeable and there is an old-fashioned kindness about his approach, as well as enormous stamina. There have been times when he has still been going at 10 o’clock at night, or 10.15 or 10.30 and beyond, when other noble Lords were flagging and wishing that somebody would call the House to order and to be adjourned.

We have two Bills before us this afternoon but, sadly, no opportunity to undertake a line-by-line consideration of one of them—the Taxation of Pensions Bill. It may contain only four clauses, but there are some 75 pages of schedules to add to the nearly 3,000 pages of tax legislation that the coalition has visited on us to date. If there were a Committee stage, we would have the chance to examine the very important issues that my noble friend Lord Hutton raised earlier.

The Government herald these two Bills as introducing a radical reform, giving greater choice for individuals and business. Indeed they do, but whether it will mean better outcomes in terms of retirement income for individual savers is another matter. As my noble friend Lord Davies of Oldham has said, we support the principle of increased flexibility for people in retirement and reform of the pensions market so that people get a better deal, but the changes undoubtedly bring forward a more complex landscape with different choices for consumers and the prospect of new, more diverse pension products. Given the huge significance of the decisions which individuals make at or when they approach retirement, affecting their lives and that of their partners for 20, 30 or even more years, it is vital that they are supported to make the choices that are right for them.

The Government’s rhetoric has been about the benefits for retirees, and they have been a little coy about the benefits expected to accrue to government. The Taxation of Pensions Bill, after taking account of changes to taxation of death benefits and the reduction in the annual allowance, will generate increased taxation for the Government of £3.86 billion in the period to April 2020. Can the Minister confirm that figure? Increased income tax receipts are expected through to 2030, with modest reductions thereafter.

With taxation receipts for government falling short of expectations, it is doubtless welcome news to the Chancellor that pensioners will be contributing more. However, we do not know much about who is going to bear the extra tax, and in what circumstances. How much of the extra tax will be derived from individuals putting themselves into higher rate tax bands? We know that for any sum taken from uncrystallised funds, 25% will be tax free and the balance taxed at marginal income tax rates. So those wishing to access the whole of their erstwhile tax-free amount will have to subject the whole of the balance to income tax in one go. Perhaps the Minister can give us some breakdown of all of this.

What percentage of retirees is it estimated will continue to take annuities, and what percentage will take their pension pot in one go? Notwithstanding this tax bonanza for the Government, there are lingering concerns that some, with resources and compliant employers, will see the new flexibilities as an opportunity to reduce their tax bills by the use of salary sacrifice arrangements, thereby saving national insurance and tax on the 25% tax-free withdrawal. The Government have addressed this issue in part, by reducing the annual allowance from £40,000 to £10,000 once flexible drawdown is under way, but there still appears to be the prospect of tax leakage in pre-flexible drawdown periods. Are the Government accepting of that?

As we have heard, the Pension Schemes Bill allows for the establishment of collective defined contribution schemes—an arrangement that we support, and indeed have called for. Similarly, we support the concept of shared-risk schemes. It is high time that pension provision was broadened to offer more than just defined benefit or defined contribution schemes. Increasingly, the binary landscape has left new savings going into DC schemes as the longevity, investment and inflation risks, coupled with accounting rules, became too difficult for many employers to sustain. Efforts to chip away at some of the perceived more burdensome obligations of DB schemes have not stemmed the tide of closures in the private sector.

As the NAPF 40th annual survey identifies, active membership of DB schemes has reduced by two-thirds since 1975, to just 1.1 million today. Active membership of DC schemes outnumbers that of private sector DB schemes for the first time ever, and the success of auto-enrolment is expected to reinforce this shift.

At the same time this is taking place, decumulation of DC schemes is happening in an environment of sustained low interest rates, with quantitative easing helping to create an environment of miserable annuity rates. All this has been accompanied by a substantially dysfunctional market. So the defined ambition elements of the Bill which provide the framework for risk sharing between employers, employees and third parties are to be welcomed—as is the prospect of collective benefits involving risk pooling between members, with the opportunity of greater stability of outcomes.

I understand that it is hoped that the necessary secondary legislation will be ready for April 2016, to coincide with the abolition of contracting out. Does that mean that we will not see drafts of the key regulations during the passage of the Bill?

Undoubtedly the aspect of the Bill which has attracted most comment involves the new flexibilities around decumulation of DC schemes. The speed with which these changes were announced and are being introduced is, as other noble Lords have said, worrying. The lesson from previous major reforms, such as the single state pension, auto-enrolment and most changes to the state pension age, is surely the benefit of laying the groundwork, through extensive consultation and stakeholder engagement, and building a consensus where possible.

The guidance service—the deliverer of the guidance guarantee—is especially important, because the availability, scope and effectiveness of the service will be key if the new flexibilities are to work as intended. As a very recent PPI report shows, we will have to recognise the changing circumstances that face individuals as they approach retirement—such as rises in state pension age and the normal pension age in private sector schemes, removal of the default retirement age, increases in longevity, and current economic challenges. These factors are changing the way in which people approach retirement and pension transition. It is no longer necessarily just a case of leaving work and taking a pension—although accessing DC pensions is, as we have heard, currently considered the most challenging aspect.

Just at the time that inertia is being put to good effect to encourage accumulation by auto-enrolment, the Bill seeks to galvanise engagement and enthusiasm when it comes to decumulation, as my noble friend Lady Drake said. This engagement is expected initially of a generation who have generally not saved enough for retirement, whose longevity is increasing, but where men in particular underestimate life expectancy, and who tend to overestimate their income returns.

So far as the current market is concerned, let alone one selling more diverse products, as two recent reports by the FCA make clear, providers are not generally treating customers fairly. One of its reviews showed that 60% of retirees with DC pension savings were not switching providers when they bought an annuity despite the fact that around 80% of those consumers would obtain a higher income on the open market. I think that my noble friend Lord Hutton made that point. As for those with medical conditions and lifestyle factors, the FCA estimated that 91% could get a better deal on the open market. The review identified that only 5% of annuities sold by providers to their existing pension customers were enhanced, compared with 50% of annuities sold in the open market.

So how can we have confidence that the guidance guarantee will facilitate better outcomes, especially over time when the vacated space of compulsory annuities will engender a wide range of products? There are a number of concerns. The first is whether people will seek to access the service in the first place, and some piloting by Legal & General was not encouraging. We know from the “near final” rules published by the FCA on 27 November that they will introduce a requirement —the first line of defence—for DC providers to ask consumers whether they have used the guidance service or received financial advice, and to encourage them to do so if not. That is all well and good, but a growing number of voices are calling for a second line of defence—we heard some of these this afternoon, particularly that of the noble Baroness, Lady Greengross —which requires providers actively to prompt consumers, to ask whether they have considered matters such as tax, their partners’ needs, benefit implications, medical or lifestyle needs, including social care ramifications, the impact of inflation and the risks of running out of money. The FCA reviews certainly give emphasis to the need for such a second line, and we will doubtless explore this further in Committee. But perhaps the Minister can say whether it is intended that there will be only one free session at which guidance is provided. How will this work over a lifetime in circumstances where an individual does not opt for an annuity and new products are coming on stream over his or her lifetime?

There is much else that can be explored in Committee —matters that are in the Bill and, indeed, some that are not. Certainly, we will wish to pursue the issue of removal of restrictions on NEST. I take this opportunity to say that my attention has been drawn to the operation of the PPF and how it affects certain categories of employees. In particular this issue has been raised by pilots of BMI and Monarch. BMI entered the PPF in 2012 and Monarch is in the assessment period. However, the operation of the PPF cap is raising the prospect of such pilots receiving pensions dramatically below their original scheme expectations. Can I meet the Minister to explore that issue rather than raise it endlessly in Committee?

These Bills have the potential to change the pensions landscape and we have a duty to engage with them constructively but rigorously.

Autumn Statement

Lord McKenzie of Luton Excerpts

Thursday 4th December 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I should like to touch upon three issues in my five minutes. The first has been prompted by a splendid article in the IFS’s Fiscal Studies, written by Paul Johnson, which encouraged a glimpse of what has been happening to tax policy in the UK, from the perspective of consistency and coherence. This is a chance to take some stock.

So far as income tax is concerned, we know that the Government’s focus has been on raising the personal allowance, at a cost of some £12 billion currently. There has been less focus on reducing the marginal rates of tax, specifically the basic rate. Policy under the coalition has complicated the starting point in a number of ways. The starting point for national insurance contributions has diverged from the point at which income tax has become payable; the contributions threshold has been maintained in real terms. I am not sure that we have ever heard a good reason and justification for that from the Government, particularly because they claim to be helping hard-working families—who of course pay national insurance contributions. Marginal income tax rates have been increased because of the transferrable allowance for married couples. That is because it is withdrawn once higher-rate tax becomes payable, so an extra £1 of income at the threshold can result in a £210 tax bill. Marginal tax rates are also affected by the taxing away of child benefit at income levels above £50,000. This can reach more than 70% for larger families. Marginal rates rise again, once income reaches £100,000, to 62%, then fall away. Can the Minister explain the thinking behind this rate structure and what coherence is attached to it?

We see again short-termism and the sticking-plaster approach in the treatment of the annual investment allowance for business. It was increased to £100,000 in 2010, cut to £25,000 in 2012, increased to £250,000 in 2013 and raised again to £500,000 in 2014. Can the Minister explain how this helps business to plan for the long term? However, we should acknowledge that changes have at last been made to the structure of what has been described as the UK’s worst-designed tax, stamp duty land tax. However, it is clear that our current tax system is far from coherent and consistent in all its aspects. I would not lay this charge just at the door of this Government, but we need to find a way to build a coherent tax system on a long-term basis.

My second point concerns the tax avoidance measures referred to by others. The thrust of these should be supported. Of course, much of the avoidance and evasion can be effectively challenged only by international efforts—by a global response. There is much being done by the OECD and the G20, particularly around base erosion and profit shifting, exchange of tax information and anti-hybrids. However, these wheels grind slowly. The measures listed in the Statement for domestic action demonstrate the scale and ingenuity of those who seek to avoid their obligations.

All this heralds another bumper finance Bill to add to the more than 2,500 pages the coalition Government have brought forward so far. It is inevitable that sophisticated avoidance is met by detailed, sophisticated anti-avoidance legislation, but it raises the question of how the parliamentary process can readily cope with all this, let alone have processes for post-legislative scrutiny. The headline measure is the diverted profits tax. This principle should obviously be supported, but it raises questions about how it is to be successfully implemented. Is it intended that it will be introduced as part of the BEPS—the base erosion procedures—with the OECD initiative or otherwise? Can the Minister say what discussions have taken place with the OECD on the proposal?

My final point is a reflection on the overall impact of this Government’s tax and benefits policy, which my noble friend Lady Donaghy touched on. The Minister will doubtless be aware of last month’s report, authored by the LSE and the Institute for Social and Economic Research at the University of Essex. This work examined the distributional impacts of changes to benefits, tax credits, pensions and direct taxes from an indexed May 2010 base. It is suggested that that analysis is not displaced by yesterday’s Statement. Its conclusion is that, overall, the net effect of these changes, so far as the public finances are concerned, is neutral. However, the distributional effect has certainly not been neutral. Overall, the poorest 20th of the population lost nearly 3% of their incomes and the next five-20ths nearly 2%. Apart from the top 20th, the income groups in the top half of the distribution were net gainers, as were the top 1%. This is largely because benefit reductions were greater for the bottom half than their gains from lower income tax. Remarkably, without having any net effect on the public finances, the effect of the reforms has been an income transfer from the poorer half of households to most of the richer half. How on earth does the Minister justify this? Why should the poor bear a disproportionate share? Is this truly a legacy of which the Government are proud?

Autumn Statement

Lord McKenzie of Luton Excerpts

Wednesday 3rd December 2014 Lords Chamber

[Lord Deighton]

It is absolutely the Government’s policy to upgrade our infrastructure in the rolling stock. The Chancellor is the architect of the northern powerhouse, so his commitment to getting that done quickly and effectively for the north is right at the top of his priorities.

[Lord McKenzie of Luton (Lab)]

My Lords, the diverted profits tax is to be welcomed, although I suspect it will be difficult to implement. Can the Minister say whether it is intended to be applied to profits diverted from England to Northern Ireland and Scotland, should those countries end up with lower tax regimes?

[Lord Deighton]

I think that other countries will be treated in exactly the same way.