Social Security (Contributions) (Amendment No. 5) Regulations 2014

Lord McKenzie of Luton Excerpts

Monday 17th November 2014 Grand Committee

[Lord Newby (LD)]

My Lords, as both sets of regulations deal with national insurance contributions and arise from the changes made to the taxation and charging of national insurance consequent to changes made to the treatment of partnerships in the Finance Act 2014 and the National Insurance Contributions Act 2014, it seems sensible to debate them together. The Joint Committee on Statutory Instruments considered these regulations and has not raised any issues relating to them, and I can confirm that they are compatible with the European Convention on Human Rights.

I turn first to the Social Security (Contributions) (Amendment No. 5) Regulations. Section 13 of the National Insurance Act 2014 provides a power to make regulations to modify the way in which the liabilities of members of certain partnerships to class 4 national insurance contributions are determined. That section addressed an issue arising under existing partnership rules whereby the immediate entitlement to partnership profit is restricted by the alternative investment fund managers directive. Under existing partnership rules, tax and national insurance contributions are charged on profits as they are earned rather than when they are received. An unfunded NICs charge can therefore arise on profits that are allocated to an individual partner of an alternative investment fund management partnership and which are then deferred in line with the regulatory requirements of the AIFMD. This is because the partner cannot access the profits in the year they arise. Following discussions with fund sector representatives and the Financial Conduct Authority, the Government have put in place a statutory mechanism to address this issue. These regulations remove the charge to class 4 NICs when the profits are allocated to an individual but access is restricted under AIFMD, and reinstate the charge when those profits are eventually vested in the individual. As a result, the individual will be liable to pay class 4 NICs only when they have unfettered access to the profit. To ensure consistent treatment between NICs and tax, these regulations mirror income tax legislation.

Turning now to the Social Security Contributions (Limited Liability Partnership) Regulations, Section 14 of the National Insurance Act 2014 provides an express power to regulate to treat some members of a limited liability partnership who meet certain conditions as employed earners for NICs. Similar provisions treating these members as employees for income tax purposes can be found in the Finance Act 2014. Previously, all members of an LLP were treated for tax and national insurance contributions as self-employed. They benefited from the tax and NICs rules for the self-employed and the LLP did not have to pay employer’s NICs.

The treatment of members of LLPs as being self-employed for tax and NICs was designed to replicate the position of traditional partnerships. However, LLPs have increasingly been used to disguise employment relationships and to avoid accounting for employment taxes and NICs. The new measures in these regulations and the Finance Act ensure that the original intent—that of treating members of a LLP the same as traditional partnerships—is not used to create a tax and NICs advantage. They create a level playing field for those who have not sought to misuse the rules for a tax and NICs advantage and those who have.

When certain conditions are met, a member of an LLP will be treated instead as an employee for the purposes of NICs. Broadly, that means that they will have employee NICs deducted from payments to them and the LLP will have to account for employer NICs and assume the other responsibilities arising from being the secondary contributor. The conditions were introduced by the Finance Act 2014, and are that the individual member of the LLP has little or no real economic interest or risk in the LLP, no significant influence over its affairs, and is largely rewarded by a fixed salary. During the course of the consultation in 2013 and 2014, HMRC became aware of proposals to create structures with corporate members to avoid the impact of the proposed changes. The proposals involved the individual establishing a personal service company or other intermediary and that intermediary becoming a member of the LLP in place of the individual. These regulations contain measures to counteract the artificial interposition of a company or other intermediary to avoid the impact of the legislation.

The regulations apply where the new tax provisions apply and an individual salaried member of an LLP is treated for income tax purposes as an employee of the LLP under a contract of service. For the purposes of NICs, the salaried member is treated as an employee and their income is treated as earnings, and the benefits in kind regime applies to them. As the salaried members are treated as employees for the purposes of employee NICs, the LLP is treated as an employer for NICs purposes and must account for employer NICs. The employer as secondary contributor is also responsible for statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay. These regulations provide that the LLP will be responsible for these statutory payments in respect of salaried members.

As I have mentioned, HMRC became aware of schemes to avoid the impact of the Government’s partnership proposals. The tax legislation to prevent such avoidance provides that where an individual provides services to the LLP through an arrangement involving a member of the LLP who is not an individual—generally a personal service company—the individual providing the services is then treated as a salaried member. So an individual cannot sidestep the impact of these measures by interposing a company or other intermediary between themselves and the LLP. These regulations ensure that where the tax anti-avoidance measure is in play, the like NICs consequences will follow.

To avoid a double charge arising where the anti-avoidance measure applies and the intermediaries legislation, commonly known as IR35, also applies, the regulations in respect of IR35 are modified so that only one charge under these regulations can occur. To ensure consistent treatment for NICs and income tax, these regulations mirror the tax legislation, relying on mirroring definitions. These provisions are part of a package of tax and NICs measures that will yield £3.2 billion over the period to April 2019. The regulations contain mirror provisions applying to Great Britain and to Northern Ireland.

I commend the statutory instruments to the Committee.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for introducing these regulations. I am reverting to dealing with Treasury matters today because my noble friend Lord Tunnicliffe is in the Chamber.

As the Minister explained, these regulations spring from a review of the taxation liabilities of partnerships, and elements of avoidance related to the conversion of employment income into self-employment income, particularly regarding mixed partnerships, with individuals and corporates, and the allocation of profits and gains on a favourable basis. I should make it clear that we support the tackling of such avoidance; it is absolutely right that we do so.

The Explanatory Memorandum to the second set of regulations made reference to estimated,

“tax and NICs revenue of £3.27 billion over the forecast period to 2018-19”.

In the light of tax receipts to date, will the Minister comment on how robust that figure is and whether there is a revision on the cards? Unless he can respond, we may have to wait for the OBR report in a few weeks’ time.

As I said, we support the principle of those with disguised self-employment income being treated as employees for both income tax and national insurance purposes. Can the Minister say a little more to clarify the precise circumstances under which these provisions will apply? I looked at the summary of responses in HMRC’s document, Partnerships: A Review of Two Aspects of the Tax Rules. Pages 11 and 12 set out the Government’s proposals for when the rules would apply, and state:

“Where all of new conditions A to C (as set out below) are met, then with effect from 6 April 2014”—

I note that these measures are retrospective, and we support that—

“an individual member of an LLP will be treated as an employee of the LLP for tax and NICs purposes”.

Condition A then states that,

“the member is to perform the services for the LLP in his or her capacity as a member, and is expected to be wholly or substantially wholly rewarded through a ‘disguised salary’ that is fixed or, if varied, varied without reference to the profits or losses of the LLP”.

That is one of the three tests, and I understand that all three must be satisfied. If that is one of the planks that the Government are moving forward on, it would not be too difficult to circumvent and seems somewhat flimsy.

Condition B in the Government’s response is that,

“the member does not have significant influence over the affairs of the partnership”.

I wonder about the extent to which that condition reflects what happens in lots of partnerships at the moment. I remember being, in a former life, a partner in Price Waterhouse, but as a new equity partner, with another 120 partners at the same time, frankly one’s influence over the business was quite small. A lot of these partnerships have grown much broader in the intervening years. I would have thought it quite likely that someone who is a genuine equity partner does not have significant influence over the affairs of the partnership. Collectively, equity partners do, but individually they do not. Perhaps the Minister will help us with that.

Will he also say something about the territorial aspects? The regulations refer to partnerships that are constituted under UK law and, clearly, that are operational in the UK. What happens to partnerships that are constituted under the rules of a territory outside the UK?

Do any other consequences flow from treating income as employment income? The Minister referred to statutory payments, but there are issues around employment rights and health and safety. For example, there are some changes in legislation that are looking to exempt a huge swathe of the self-employed from the Health and Safety at Work etc. Act. Would that continue to apply to people who purport to be self-employed, notwithstanding that they are being treated as employed for the purposes of tax and national insurance contributions?

I move briefly to the regulations that relate to the AIFM arrangements. As the Minister explained, these apply to class 4 self-employed contributions. What is the situation of somebody who is treated as an employed person under the other regulations? How does this work for such people? That is very unclear. The regulations seem to focus just on class 4, which presumably applies only to those who have deferred income arising and are accepted as being genuinely self-employed, and not to this other category, which we are seeking to address in the other regulations. I must say, I am a little confused about how that works.

Paragraph 4.4 of the Explanatory Memorandum refers to class 4 contributions applying when profits,

“vest in the individual partner, if that partner is carrying on the AIFM trade at the time of the vesting”.

What if the individual is not carrying on the trade at the point of vesting? I am not sure technically how that would work, but clearly the Explanatory Memorandum recognises that it is a possibility. When does class 4 bite in those circumstances?

I should be grateful for the Minister’s help on those points, in follow-up if not here today. Clearly, we have no problem with these regulations and we support the thrust of the anti-avoidance provisions that they seek to address.

[Lord Newby]

I am most grateful to the noble Lord for his support for these SIs and for his questions. On his first question about the revenue of £3.2 billion, the formal answer is, of course, that as this has just started and is looking at the period to 2018-19, it is far too early to tell. To the extent that there has been any weakness in income tax receipts, it is due to shortfalls in income from people at the lower end of the income spectrum. These people are definitely not there. Given that the sector we are talking about is doing pretty well at the minute, there is certainly no reason to think that that figure is unlikely to be met.

The noble Lord asked about the territoriality of the measure. My understanding is that it applies to UK-constituted partnerships only. He asked about the conditions, of which there are three. Condition A is that reward is largely fixed. The use of “largely” simply allows for small variations to take place but for an individual still to fall within that condition. As regards exactly what is meant by the second condition, HMRC has issued detailed guidance, which was written following extensive consultation and discussion with the sector.

I am sure that I have not responded to one or two points and I am very grateful to the noble Lord for being willing to accept a letter dealing with those remaining points. With those responses to the noble Lord’s comments, I commend the regulations to the Committee.

Pensions

Lord McKenzie of Luton Excerpts

Thursday 26th June 2014 Lords Chamber

Asked by

[Lord McKenzie of Luton]

To ask Her Majesty’s Government when they propose to announce details of plans to guarantee all retirees face-to-face pensions guidance from April 2015.

[Lord Newby (LD)]

My Lords, the Government recently consulted on how best to deliver the guidance guarantee through their post-Budget consultation, Freedom and Choice in Pensions. They are now processing the responses and aim to respond before the Summer Recess of Parliament.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for that reply, but I am not reassured. We have a clear case here of a policy being announced and the Government now trying to work out when, how and whether it can be implemented. The Budget Statement was very clear: the guarantee was for “free, impartial, face-to-face” guidance, not the opportunity to attend a mass meeting or have some group therapy. I took the guarantee of face-to-face provision to be an opportunity for those who want or need it to interact individually and directly with another human being. Is that still the policy?

Budget Statement

Lord McKenzie of Luton Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I think it is clear that this Budget had more than an eye on next year’s general election. Aspects of it are, of course, to be welcomed. There is the U-turn on the annual investment allowance, now to be doubled, up to the election at least, after originally being cut, and the doubling of export finance—albeit that the Government are to miss their export targets and are struggling to rebalance the economy. There is the news that the economy is growing again after three damaging years of flatlining, albeit with no recovery for millions of families who are experiencing a fall in living standards. There is good news for savers also, if you are one, but the prospect of being able to tuck away £15,000 per year into a NISA or to have the first £5,000 of savings income subject to a nil rate of tax will seem but a distant dream to those who the Centre for Social Justice refer to in its report entitled Maxed Out. I refer to those millions of people in the UK who are struggling under the weight of their personal debt, with squeezed household budgets, zero hours employment contracts and a rising cost of living. The budget does nothing for them—nor has it protected public services, which provide vital support for the most vulnerable in our society.

The noble Lord, Lord Holmes of Richmond, advised us when we were discussing these matters to reflect on the fact that the Budget was about real people’s lives also. I very much agree. I had brought to my attention just yesterday—and I pass it on to the Minister—the example of Mapledown School in Barnet, a secondary school for disabled children that provides vital care for 65 pupils, so as well as educating the children it also supports their carers. Because of cuts to the council, passed on by the council, the school has had a reduction of funding of some 25%, with heavy restrictions on the services that it can provide. So in winding up, perhaps the Minister could give that school some sort of message about when it is expected that it might be able to share in the benefits of recovery.

I propose to concentrate the rest of my contribution on the announcement on scrapping compulsory annuitisation—or, more accurately, the compulsion to take an income by way of annuitisation, or drawdown, from a DC scheme. It is, in the words of the IoD,

“the most radical reform to the pensions savings architecture in decades”.

That is possibly true and, given its ramifications, it is all the more to be regretted that this announcement came with no prior consultation, and with a paucity of underpinning analysis. Then there are major issues, such as the impact on the gilts and bond markets and government investment—a point stressed by my noble friend Lord Haskel. Also, how much of it can or should work for private sector DB schemes, what does the guaranteed guidance amount to and how can it be delivered? What does it mean for the future of the annuities market—a point just raised by the noble Lord, Lord James? Will it fuel a buy-to-let market? These are left as open questions for changes which are due to start in a year, and transitional changes which are due within days.

In his rush to get a favourable headline, the Chancellor forgot something else. The Government have eschewed the opportunity of building a consensus for this policy in advance. They ignore all the efforts which have underpinned so much of pensions policy development in recent decades, from the Pensions Commission through auto-enrolment to the single-tier pension. The policy is predicated on the importance of consumers having choice—choice, that is, in the decumulation of their pension pots. The mantra is that it is their money and we should trust them to make the right decisions about how it is deployed. Perhaps begging the question as to whose money it is, given that DC schemes get a contribution from the taxpayer on original investment and again on accumulation, we can agree with the importance of choice, provided individuals have the opportunity for an informed choice. However, we recognise that informed choice can be difficult given the complexity of the pensions marketplace.

The NAPF saw the Budget announcement as perplexing in its juxtaposition to auto-enrolment, which was designed to counter the fact that often people are ill informed and make poor decisions about planning for old age. It says:

“On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last”.

The prospect that those in retirement will take more of their pot earlier produces considerable extra resource for the Treasury. There may no longer be the 55% exit tax charge, but there are still substantial revenue gains for the Treasury, reaching £1.2 billion in 2018-19, and some £3 billion overall by the end of that year. What are the estimated withdrawals from DC pots which generate these numbers, and what is the assumption about how they are invested? The Treasury is also, ironically, taking the benefit of some £850 million from the sale of class 3A national insurance contributions—effectively an annuity product—the cost of which will mean increased state pension payouts beyond the forecast period.

The Pensions Minister—perhaps we should call him Mr Lamborghini—has apparently declared himself relaxed about people blowing their pension pots and believes that the single-tier pension will preclude them falling back on the state for support. This analysis ignores the extent to which means-tested benefits for pensioners endure through the single-tier pension arrangements, and there will be many still invested in their DC scheme who have retired, or will do so, before the single-tier pension comes on stream.

We know that the annuities market is not currently serving consumers well, and the Financial Conduct Authority considers that people are getting a bad deal. Annuity rates have been in decline and the fundamental reasons for this are clear—people are living longer and we have been in an extended period of rock-bottom interest rates. However, matters are made worse by too few people shopping around for the best deal and suggestions that the insurance company providers are extracting super-profits from their annuity business. Recent figures show that someone with a modest pension pot of £24,000 could increase their annual income by 25% just by shopping around to get the best deal. The Government have not helped by their refusal to introduce a cap on charges.

However, the position is not all gloom and doom. Annuity rates for 2013 rose because of rising gilt yields and a more competitive pricing environment—the latter driven by the focus on transparency by the FCA and the ABI and the unwinding of some of the cautious pricing from gender-neutral changes. There is an inevitability about some of the factors which have driven rates down—longevity being one—but not all.

Some of the market failures can and must be fixed. However, in acknowledging the potential benefits of more choice, we must not lose sight of the important role that annuities play and can continue to play. They are the only financial product guaranteed to produce an income for life, with the investment risk and the longevity risk remaining with the provider. They also pool risk, which is reflected in the pricing. Having individual choice over individual pension pots runs counter to all this. Certainly one of the big questions that arises from these proposals is what the annuity market will look like in the future. Evidence from other countries suggests that many will not annuitise. What is the Government’s assessment of how this is likely to affect the market, particularly on pricing?

We need to better understand precisely what is to be provided to consumers under the guaranteed guidance. Perhaps the Minister can confirm that we are talking here not about advice, but guidance; there is a difference between the two—guidance is a weaker concept. There are substantial issues about ensuring the robustness and independence of what is to be offered, and there is a wider issue of whether a one-off, face-to-face session at the point of retirement—what happens to those who have retired already or those who retire in stages?— will be sufficient to fully inform consumers and equip them to make effective choices for the rest of their retirement. Frankly, I doubt it.

This all gives the impression of having been put together somewhat in a rush, without due analysis and with big questions remaining unanswered, and perhaps with a hint that under the guise of promoting choice the Government are looking to rake in another £3 billion in tax from pensioners. That is no way in which to develop a sound, long-term pensions policy.

Taxation: Personal Thresholds

Lord McKenzie of Luton Excerpts

Monday 20th January 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, the Minister will be aware that the Government have adopted the policy of raising the qualifying earnings threshold for auto-enrolment in line with the personal income tax threshold rather than changes in the value of earnings. This denies lower-paid workers, mainly women, the benefit of an employer pensions contribution and of course saves the Treasury the cost of tax relief. How many low-paid workers is it estimated will have lost out because of this approach during this Parliament?

[Lord Newby]

My Lords, I will have to write to the noble Lord with the answer to that question. However, I am sure he will agree that the raft of measures that the Government are taking on pension reform will have as one of their signal benefits that many women who have lost out on pensions in the past will gain from adequate pensions in the future.

Autumn Statement

Lord McKenzie of Luton Excerpts

Thursday 5th December 2013 Lords Chamber

[Lord Deighton]

I absolutely agree that one of the principal challenges for our infrastructure ambitions is accelerating the delivery of the projects which we know are important but which take time to define, to get through planning, to be organised and generally to deliver. In a nutshell, what the Government are trying to do within the national infrastructure plan is to work away at the constraints on delivering this plan more effectively. Financing is one of those, which is why we welcome the announcement from those six insurance companies. It is an interesting example of joined-up government working, because the Treasury negotiated successfully with the European Union on the solvency question. That enabled the insurance companies to be comfortable in committing to this kind of asset, because the capital treatment in Brussels is now much more sensible.

[Lord McKenzie of Luton (Lab)]

My Lords, page 1 of the Statement makes reference to the introduction of universal credit. Part of the news that we had today was confirmation that that programme is in disarray and will not be delivered on time. Can the Minister say how much public expenditure has been wasted on that to date and what the estimates are of future write-offs of abortive expenditure? If the Minister is not able to give us the figures today, will he promise to write to us and let us have that information? The Minister referred also to tax avoidance. The introduction of capital gains tax on disposals of residential property by non-residents is to be welcomed, but, from a Government who do not hesitate to legislate retrospectively for benefit claimants, why will that not be introduced until April 2015, when it is clear that the wise will forestall that tax by upping valuations in the interim?

[Lord Deighton]

On universal credit, I can tell your Lordships from a personal point of view that the individual whom we have brought in to manage that programme, Howard Shiplee, worked on the Olympic Games and delivering the Olympic park, so we have got the right people focused on getting the delivery of universal credit absolutely right. Our current planning assumption is that universal credit will be available in each part of Great Britain during 2016, with new claims to the benefits that it replaces having been closed down and the majority of the remaining caseload moving to universal credit in 2017. I do not have the particular numbers on how much it has cost, but I will work with DWP and provide the noble Lord with a response to that question. On capital gains tax for non-residents, we are introducing it in the normal way. The efficacy with which we have approached closing down these loopholes puts the previous Government to shame.

Age-Related Payments Regulations 2013

Lord McKenzie of Luton Excerpts

Tuesday 12th November 2013 Grand Committee

[Lord Newby (LD)]

My Lords, the draft regulations before the Committee today confirm the rules surrounding the proposed payments to holders of Equitable Life with-profits annuities which began before 1 September 1992.

This version of the regulations supersedes a previous draft which was debated in this House in July. As a result of that debate, a drafting error was identified in the regulations. The policy as announced by the Chancellor specified that a single payment would be made to each eligible policyholder regardless of the number of relevant policies they held. However, the previous draft allowed for multiple payments to be made to policyholders if they held multiple policies. The previous draft has now been withdrawn. I thank the noble Lord, Lord McKenzie, for identifying the error, and I apologise for our having made it in the first place. However, all policy decisions surrounding the regulations remain the same, and only technical changes have been made to the regulations.

I briefly remind the Committee of the background to the decision to make these payments. As noble Lords will be aware, this Government established the Equitable Life payment scheme in 2010 to make payments totalling up to £1.5 billion to about 1 million former Equitable Life policyholders who suffered financial losses as a result of government maladministration which occurred in the regulation of the Equitable Life Assurance Society.

Since the establishment of the scheme, the Government have received representations suggesting that a specific group of elderly policyholders who bought their with-profits annuity from Equitable Life before 1 September 1992 should be included within the scheme. The Government remain of the view that there is no basis for their inclusion. In short, this is because the scheme is based on the understanding that those investing with Equitable Life relied on regulatory returns that were subject to government maladministration. As such, they had lost the opportunity to make a fully informed decision. If they had had this opportunity, they might have invested elsewhere. The first returns that would have been different if maladministration had not occurred were those of 1991, which would not have influenced policyholders’ decisions until September 1992. Therefore, investment decisions made before this time are not included in the scheme.

It is clear, however, that this group of policyholders is under significant financial pressure in their later years, as they have not received the income that they planned for from their Equitable Life annuity that they bought more than 20 years ago. In this year’s Budget, the Chancellor announced that the Government would make an ex gratia payment of £5,000 to those individuals who bought an Equitable Life with-profits annuity before 1 September 1992 and were aged over 60 on 20 March 2013, the date of the Budget. An additional £5,000 is available to those policyholders who are also in receipt of pension credit.

I can reassure noble Lords that the revision of the regulations has not caused any delay to the planned timing of these payments. We appreciate that many of the pre-1992 with-profit annuity policyholders are very elderly and in financial hardship, so the Treasury intends these payments to be made soon after the parliamentary process has been completed. We are very grateful to the Prudential, which makes ongoing annuity payments to this group of policyholders, for its support in making these one-off payments.

In September, the Treasury wrote to all those who are expected to be eligible under these regulations to give more detail on the payments and to encourage people to check their pension credit status by 1 November with the Department for Work and Pensions. As a result, the Department for Work and Pensions has recently begun work to identify which pre-September 1992 annuitants are in receipt of pension credit. This will allow the payments due to them to be increased from £5,000 to £10,000 without the need for them to make any application. Under the regulations, we also have a provision that should an annuitant be eligible for pension credit on 1 November but is not on the DWP’s records for some reason on that date, they can apply directly to the Treasury for the additional £5,000 due to them.

As I explained on a previous occasion, should an eligible annuitant have passed away after the Budget announcement on 20 March 2013 before receiving their payment, this payment will be made to their estate. As these payments have a more complex administrative process, the Treasury has already begun the process of writing to the personal representatives of those deceased policyholders with details of how to apply for this payment. I hope that the Committee will join me in supporting the regulations.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for introducing the regulations, which engender a sense of déjà-vu. We note that the error in the original regulations has been corrected to ensure that only one payment of £5,000 is due regardless of the number of relevant with-profits annuity policies held by a qualifying annuitant.

Other than the possible delay in payment—I think that the Minister said that this re-run of the regulations would not mean a delay—it would seem that no individual has been disadvantaged by the re-run of the regulations. Perhaps the Minister will confirm that because I think that the same parameters operate for pre-1 September 1992 with-profits annuity policies; that is, that the individual should have been aged over 60 on 20 March 2013 and should have checked their pension credit status by 1 November 2013. If the re-run meant that payments were later than they otherwise would be, there could be a very narrow category of individuals who might have survived to receive pension credit but did not survive to receive the additional payment, but I do not think that that arises if there is no delay in the payments.

We went over some of the convoluted background to the Equitable Life saga. I do not propose to revisit it today as the Minister gave us a summary. Perhaps the Minister will clarify the status of our earlier debate. I cannot remember whether it was reported to the House or whether it just withered on the vine. I do not know whether the Minister has anything further to add to our exchanges on the tax profile of recipients. If he does, perhaps he can do that this afternoon.

--- Later in debate ---

[Lord Newby]

My Lords, I am very grateful to the noble Lord for his constructive comments on the scheme. I shall do my best to answer them, but there may be one or two things that I need to follow up on in writing.

I understand that no individual will be disadvantaged as a result of this slight delay because we have moved to write to people and to get the process in motion. On timing, the noble Lord raised the fascinating question of how many payments might be made before the current financial year. That is an extremely interesting question to which there is probably an obvious answer.

There are two things on which I may need to write. On applications, 5 July and whether that is a deadline, I think that it is but, if I am wrong, I shall write to him. By 5 July, given that people will have been contacted already, we would have expected them to have responded. The noble Lord asked a number of questions about the Equitable Life scheme, particularly on publicity around the closure of that scheme. I am not in a position to give a detailed answer to those questions now, but I will write to the noble Lord, and I hope I will set his mind at rest.

[Lord McKenzie of Luton]

On the July 2014 date, if I understood what the Minister said, we could have a situation where the Treasury, based on the engagement of Prudential, has made an error in not making a payment to somebody yet the potential recipient has not applied within the deadline—between April and July is a fairly narrow period—and would cease to have any entitlement. Where the origin of the problem is an error by Prudential or the Treasury, that seems a little harsh.

[Lord Newby]

Can I write to the noble Lord on that point and set his mind at rest?

[Lord McKenzie of Luton]

I would be grateful for that.

Motion agreed.

Age-Related Payments Regulations 2013

Lord McKenzie of Luton Excerpts

Monday 22nd July 2013 Grand Committee

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his introduction to these regulations. They take us back to the saga of Equitable Life, which spawned a range of inquiries and reviews, including those by the FSA, the Treasury Select Committee, the actuarial profession, the Treasury, the ombudsman—twice—and the Public Administration Committee. I do not propose to pick over those in detail this afternoon. As we have heard, they culminated in the Equitable Life (Payments) Act, which came before your Lordships’ House in 2010 as a money Bill. The Act, which we supported, introduced a payment scheme to be operated by an independent commission. It would seem that the scheme is well under way and is open until April 2014, although annuitants will clearly continue to be paid thereafter.

One bone of contention with the proposed scheme was the overall amount of money allocated, although the Parliamentary Ombudsman recommended the need to reflect a public interest consideration and the impact on the public purse. Another bone of contention was the starting date of the scheme which, as we have heard, applied to policyholders who invested from September 1992. In justifying not including earlier investment, the then Minister—the noble Lord, Lord Sassoon—stated:

“The first issue here is that they took out policies before any maladministration could have affected their decisions”—

that reflects what the Minister said earlier today. He continued:

“That is the first and principal reason why they have not been included in the Government’s proposed payment scheme … Sir John Chadwick and Towers Watson”—

the actuaries—

“… concluded that the pre-1992 WPAs received more from Equitable Life than they would have if the society had been properly regulated”.—[Official Report, 24/11/10; cols. 1157-58.]

As it paid out more in the earlier years but less in later years than it would have had there been no maladministration, “no compensation is due”. We are told that the Government remain of this view. That is what the Minister reiterated earlier. Can he confirm that and tell us whether any updated assessment was undertaken to verify the balance of the over and underpayments in that analysis? Does it still fall in a way that validates the view then expressed?

--- Later in debate ---

[Lord Newby]

My Lords, I am extremely grateful to the noble Lord for the speed with which he joined this debate from the Chamber and for his typically forensic questions. He asked me whether the reality validates the view we originally took on under and overpayments on Equitable Life. I believe that it does. If I am wrong, I will write to him, but I think that it does. He asked when the payments would score. I believe that they will score when they were made, so earlier.

The noble Lord asked one or two detailed numerical questions. How many would be precluded by being under-60 at the relevant point? I understand that there are 19, so it is literally a handful. He asked about how many are resident overseas. There are 223 overseas policyholders, 125 of whom are within the EU. He asked about the incomes of the people involved—how many would be paying tax at the various rates. We simply do not have information about the incomes of those pre-1992 with-profits annuitants.

The noble Lord asked whether there would be multiple payments. No, there will not be multiple payments. There will be one payment per policyholder even if they have more than one policy. He then asked the wider question of why £5,000 and why this group. These are simply matters of judgment. Should it be five rather than four rather than six? The view taken by my colleagues in the Treasury was that £5,000 had a sense of justice about it, and that it was felt broadly right and was affordable.

Why this potential group? As the noble Lord knows, this group has been part of the debate about Equitable Life all the way through—about where do you draw the line between payment and non-payment. After a very long period of discussion it was simply thought that these groups were Equitable Life policyholders who had not got the sort of benefit that many other Equitable Life policyholders had got, notwithstanding the fact that they were not subject to maladministration in the same way, and that it was a question of fairness to them. That was the telling argument which decided us on this course.

I hope that I have answered all the noble Lord’s questions. On that basis, I commend the regulations to the Committee.

[Lord McKenzie of Luton]

I am grateful for the very full answers that the noble Lord has given, but perhaps I may come back on this issue of only one payment. I hear very clearly what the Minister says. Either I am misreading the Explanatory Note, or it is something that we will have to settle outside our discussions today, but it would be good to be clear on that.

On the issue of who we are supporting here, it is quite possible that the people who are getting these ex-gratia payments are higher-rate taxpayers as well as people who do not pay tax at all. Obviously, having a tax-free ex-gratia payment is of particular value to such people. The overall cost, which is, I think, £45 million, is not in these days a small sum. This is why my last question is about all the demands and all the challenges that we have, particularly some of the benefit changes. Why spend £45 million on this group, including some who are higher-rate taxpayers who are going to do very well out of a tax-free ex-gratia amount? I think that I have made the point, and I am grateful for the noble Lord’s explanations.

[Lord Newby]

I do not think that there is any doubt that one individual will get a maximum of one payment. I am sorry if the note is not very clear but I think that that is correct. Should these payments be tax free? One of the considerations—bearing in mind that these are not insubstantial payments, but they are not vast payments—was that, given that we do not know the current incomes of the people, having a common payment to this group of elderly policyholders seemed to us to be the easiest, simplest, and fairest outcome.

Welfare Benefits Up-rating Bill

Lord McKenzie of Luton Excerpts

Monday 25th March 2013 Lords Chamber

[Lord McKenzie of Luton]

My Lords, like the noble Lord, Lord Kirkwood, we have deep concerns about the Bill, certainly that it may be a precedent. We have made clear our opposition to it throughout its various stages. We believe that it is unnecessary and that it hits the poor, both those in and out of work, and will certainly increase child poverty. Sadly, the amendment before us will do nothing to help that. We could have a repeat of the debate that we have had at earlier stages, but I simply say to the noble Lord, Lord King, that one of the problems is that some of the austerity measures the Government are introducing are making debt worse, not better. To pray in aid Cyprus when talking about our situation seems extremely far-fetched.

The noble Lord, Lord Kirkwood, said that introducing such an amendment at Third Reading is a clichéd device. However, an annual review gives the Government of the day, and indeed the Opposition, a chance to take stock of how measures are working. In this case, the problem is that a 1% cut has been locked in without knowing what the effect will be. The noble Lord is right: inflation is ticking up. Therefore, even if we knew the amount that the Government will spend as a result of this measure, the locking-in will mean that it makes no difference. That is why the proposed review differs from a review, annual or otherwise, that we would normally have. We have debated this matter extensively and I have made our position very clear. However, I recognise that the House has spoken on this matter.

Welfare Benefits Up-rating Bill

Lord McKenzie of Luton Excerpts

Tuesday 19th March 2013 Lords Chamber

Moved by

[Lord McKenzie of Luton]

1: Clause 1, page 1, line 4, leave out “by 1%”

[Lord McKenzie of Luton]

My Lords, I will also speak to Amendments 5, 7 and 10 in this group. These amendments stand in my name and in those of my noble friend Lady Sherlock, the noble Lord, Lord Low of Dalston, and the right reverend Prelate the Bishop of Leicester. I say at the start that we view the amendments as consequential on Amendment 1, and we are advised that should these amendments be carried, they do not pre-empt a discussion on the subsequent amendments on the Marshalled List.

Amendments 1 and 7 would remove the reference to 1% in Clauses 1 and 2, and hence would remove the 1% cap on the uprating of the relevant sums and amounts. Amendments 5 and 10 would delete the prohibition on uprating such sums and amounts under the annual uprating of benefits and tax credits. As we explained in Committee, we fully intend these amendments to negate the fundamental purpose of this Bill, which is to lock in real-terms cuts to a range of benefits for the two years to March 2016. This follows on from the equivalent cut for next year, which has been implemented by statutory instrument.

The uprating of benefits and tax credits should proceed in accordance with the existing statutory framework, whereby the Secretary of State is required each year to review the rates of various benefits and tax credit components to see whether they have retained their value in relation to the general level of prices. There is no general requirement to fully uprate, but there is an obligation to assess on the basis of up to date information on the cost of living.

On these grounds alone, the Bill is completely unnecessary. If the Government are intent on three years of cuts by 1% uprated, they can use existing mechanisms, just as they have for 2013-14. They would then at least retain some flexibility to revisit the policy, especially if inflation were to surge above currently expected levels. If the Bill stands, there is no certainty about the level of real cuts that have been imposed on some of the most vulnerable people in our country.

The government assertion that committing these cuts to primary legislation is crucial to giving confidence to the markets has no credibility. It is frankly untenable to suggest that by locking into legislation these estimated benefit savings, which amount to less than 0.1% of government spending, the markets will be assured and comforted. It does not seem to have cut any ice with the rating agencies.

Let me reiterate Labour’s position. We will make no commitment now on spending or tax for the next Parliament, and we will set out our spending plans at the time of the next election. However, right now, we would uprate in line with inflation. I will come in a moment to how the Government can plug the hole in their increasingly fragile finances.

This Bill is misdirected on several other counts. We are told by the Secretary of State that cutting benefits and tax credits is necessary in advance of universal credit, as a contribution to fiscal consolidation. However, it does nothing for the deficit or borrowing. Indeed, by withdrawing real resources from low-income families, which of necessity have the highest marginal consumption rates, it is damaging demand. It ignores the IMF warning that the fiscal stabilisers should be allowed to operate. Just last week, the FT joined an increasing chorus of those pointing out that fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output.

We also had the spectacle of the Prime Minister being rebuked by the OBR for asserting that the Government’s debt-reduction programme had not affected growth. Its justification is supposed to be that there needs to be some correction for the fact that benefits have been uprated at a faster rate than earnings over the past five years: essentially, that those out of work have done better than those in work. It is perverse, therefore, that some two-thirds of those hurt by the 1% restriction are those who are actually in work.

Looking at percentages rather than cash amounts is misleading. One per cent of a small number is a very small number. Indeed, specifically included among the cuts are in-work support such as working tax credits, SSP, SPL and maternity pay, as well as in and out of work benefits such as housing benefit: the very support that enables individuals to sustain employment and manage work and family responsibilities. We are told that the Government are committed to eradicating child poverty, and of course we would accept that child poverty is not only about income levels, but improving income and relative income is an essential component of tackling poverty, and matters are being made worse by this Bill, with another 200,000 children being drawn into poverty. Compared with CPI uprating, this Bill and the 2013-14 order mean that 30% of all families are affected, losing on average £156 a year.

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[Baroness Stowell of Beeston]

My Lords, there have been some very powerful speeches in this debate. I am very grateful to all my noble friends for their contributions and for laying out so clearly and eloquently the economic case for this Bill and for what we seek to achieve. As they have been so clear, I will not repeat much of what they have said. However, I will start by making clear to your Lordships’ House that the amendments before us would, in simple terms, remove the commitment to a 1% uprating from the Bill. The noble Lord, Lord McKenzie, said in Committee:

“We fully intend these amendments to undermine and negate the purpose of the Bill”.—[Official Report, 25/2/13; col. 855.]

My noble friend Lord Newby said in reply that these are the sort of amendments that equate to,

“a vote against the Bill at Second Reading”.—[Official Report, 25/2/13; col. 866.].

It is important that we understand what these amendments seek to do.

As has been made clear by my noble friends, these are not decisions that we take lightly. I do not deny that they will have impacts on those who receive the benefits in question or that those impacts will not be easy. However, we have made a conscious decision to protect those benefits which reflect the additional costs that disabled people face, while also protecting pensioners through our commitment to the triple lock.

The right reverend Prelate the Bishop of Leicester is right to highlight those in need and I am glad that he does. It is important that we all remember and are conscious of the people affected by some of these changes. However, I ask him and all noble Lords not to forget that, as part of the Government’s wider reforms, we are prioritising resources towards measures and reforms that support families and help to change lives.

Let me name just a few of those measures. We are expanding early-years education to ensure that children have access to early education and to support parents in work. We are attaching additional funding to disadvantaged pupils through the pupil premium, which will rise to £2.5 billion a year by 2014-15. We have protected the schools and NHS budgets to ensure that these vital services continue to support families. More than £1 billion of investment will go into schools. We are introducing universal credit—a new, radically simpler benefit payment designed to ensure that work pays.

As my noble friend Lord Bates already has acknowledged, this last change is about transforming our welfare system. It will significantly increase the incentive that people have to work. Indeed, we estimate that it will lead to up to 300,000 more people moving into work. It is important that we focus on that point for a moment. As my noble friends have already indicated in their speeches, we must not look at the changes that we are discussing today in isolation; we must see them in the wider context of the changes that the Government are making. They reflect the fact that this Government’s focus is on how to help people off benefits and into work.

We need to be aware of the level of support that people can receive while they are on out-of-work benefits. For many, this is supposed to be a temporary state—an interruption between periods of work. By making the system simpler, by reducing the risks from people moving into work and by making work pay, we can reinforce that temporary nature and ensure that more and more people are moving into work. That is what we are seeking to achieve through universal credit and, as I have said, I ask noble Lords to bear these wider changes in mind when considering this Bill and all the amendments that we will debate today.

This Bill is a short-term change, made at a desperately difficult time, as we seek to rebalance the public finances. However, in our other reforms we have made a huge commitment to the long term, a commitment to changing lives through helping people back to work. Although we still have challenges in the labour market, the fact is that more people are moving into work already. Unemployment is falling. Private sector employment is up by more than 1 million since the election and the number of people employed is at its highest level ever.

We are continuing to provide for a 1% increase in these benefit rates. As my noble friends have said, this will mean that the value falls in real terms, which is not a decision that we take lightly, but it is an increase and we must compare this, as some of my noble friends already have, with what is happening elsewhere. Ireland has cut unemployment benefit by 4% a year for two years since 2010. Portugal has cut unemployment benefit by 6%. Spain has cut payments to people who are unemployed for more than six months by 10%. Let me remind noble Lords that the UK’s deficit in 2010 was larger—I repeat, larger—than the latter two countries. I am not saying that that justifies the measures we are discussing today; they are justified by the need to rebalance the public finances. However, it is, I hope, a reminder that these are very difficult times. The actions this Government have taken and continue to take to reduce the deficit are helping to secure economic recovery, but there are still tough decisions to make.

While this group of amendments seeks in simple terms to remove the 1% figure from the Bill, as many of my noble friends have already pointed out, it does not suggest an alternative. It should be noted that if the amendments before us were to pass, they would make it possible for the Government to increase benefits by any amount that they wanted in the years in question, without reference to prices or any specified factors, including uprating by less than 1%. Let us assume that the intention would be to upgrade in line with CPI. That would mean that the £3 billion in savings from the Bill would not be delivered. I appreciate that the decisions we have made in the Bill are not easy. We never claimed that they were. However, they are absolutely necessary. This was made clear by my noble friends, who made contributions that were much more powerful than I could have made.

Let us not forget that the central purpose of the Bill is to set out clear plans on uprating that deliver significant and vital savings that will help us on the road to economic recovery, along which we simply must travel if we are to preserve for the future the kinds of things that we value and from which we will all benefit: a stable economy, a growing labour market and opportunities for the next generation.

When the noble Lord, Lord McKenzie, moved the amendment, he said that all the amendments in the group were linked and were consequential one on another. Perhaps it is premature for me to make this point, but I will make it clear that in the Government’s view the amendments are not consequential one on another. If Amendment 1 is agreed, the Government will not oppose Amendment 5. However, we will oppose Amendment 7. It is important to make that clear.

I have made the case for seeing these changes in a wider context, and my noble friends have made powerful contributions about the wider economic context. It is clear that the changes, while painful, are necessary. Therefore I urge the noble Lord to withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Low, for his support for the amendments in this group. He made the very important point that we are potentially moving into a period of greater inflation. This point was made last week by the FT, which talked about the risks of stagflation in this country. I also thank the right reverend Prelate the Bishop of Leicester for his support. He posed the key question: how will making these people poorer help the national interest? What we heard from noble Lords who oppose the amendment did not help us on that point.

I say to the Minister and to the noble Lord, Lord Bates, who prayed in aid universal credit, that it would be good to know that universal credit is on track because from everything we hear it is not. Even with universal credit as proposed, we know that something like 1.8 million people will have their benefits from work reduced in comparison to their current position.

I stress that the amendment challenges the locking-in over a three-year period of the restrictions on uprating. Uprating by less than the rate of inflation is a real-terms cut. We should recognise that it is a cut in people’s benefits. The fundamental proposition in the amendment is that these things should be looked at in the normal way on an annual basis by reference to what is happening to prices.

The noble Lord, Lord King, and the Minister said that other countries are cutting benefits. Benefits have been cut in this country, too. Council tax benefit, housing benefit, DLA, ESA and tax credits have been cut by something like £18 billion to date.

[Lord Newby]

Will the noble Lord confirm that no benefits in this country have been cut in cash terms, as they have widely been in the rest of Europe?

[Lord McKenzie of Luton]

Housing benefit is one such benefit. Council tax benefit has been dumped on local authorities with a 10% restriction on funding, which means that people’s support will be cut in cash terms. That is absolutely happening.

I say to the noble Lords, Lord King and Lord Forsyth, that it seemed that the mention of Cyprus was meant to lead us to a conclusion that bears no relation to reality. We are not dealing with a situation here that would take us anywhere close to the situation in Cyprus. We are talking about restrictions on uprating which, on the Government’s own figures, would amount to something like £1.9 billion.

[Lord King of Bridgwater]

The Government’s ability even to pay this level of benefit will partly depend on our ability to borrow enough money at low enough rates to continue the policy. Is the noble Lord not aware that there is a big shiver going through the eurozone about the financial situation? It has suddenly come back into the headlines. If it was thought at this moment that the Government were going to deviate from their previously planned approach—if it was voted down by your Lordships’ House—it would have a serious effect. Then the problems faced by some young people and people in poverty at the present time, as spoken to by the right reverend Prelate, could be seriously aggravated. Our job is to try to make the best we can of a very difficult situation.

[Lord McKenzie of Luton]

My Lords, of course we are aware of what is going on in Europe, and I shall come on to issues of borrowing in a moment. We are talking here about an amount that is less than 0.1% of total government expenditure. The noble Lord cannot seriously be arguing that taking our position rather than that of the Government would bring the whole edifice crashing down. That simply does not reflect reality.

The problem that the Government have is that because they have failed to deliver growth in the economy there is a real risk—this is what is happening—that their austerity programme is making debt worse. This was again a point made in a very powerful article last week in the FT.

We have heard a great deal about the Labour Government’s record. When the Labour Government left office the economy was growing again and it was the austerity measures which choked off that growth. As to the Labour Government’s record on debt, before the international crisis hit, our debt levels were the second lowest in the G7, lower than when we came into office in 1997, I believe.

[Lord Forsyth of Drumlean]

I am following the noble Lord’s argument very carefully. If he is saying that we can get growth again by spending money uprating benefits in line with inflation, why will he not therefore make the commitment that a Labour Government would do that?

[Lord McKenzie of Luton]

My Lords, I make the commitment that we should review on the usual basis at each uprating period. No Government or Opposition immediately prior to a general election are going to pre-empt the programme they would have. The noble Lord knows that full well. He is making a silly political point.

There is a real risk that by cutting back you make the debt situation worse. It depends upon the multiplier. There have been some recent studies which suggest that it is made worse because the multiplier effect would mean that if you did not cut back you could create growth greater than the saving you are seeking to make. We shall hear from the Chancellor tomorrow about his view on borrowing for capital spend, for example. The relative merits of that depend upon the multiplier effect.

Ultimately, the argument in favour of the Government’s Bill as it stands is that it is locking in an unknown. You cannot know in year two or indeed the next year what the rate of inflation will be and you cannot know, therefore, the extent of the cut you are visiting on the poorest people in our country. That is what we object to in this Bill.

We could go on for ever in an economic debate, but I think it is time to test the opinion of the House.

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[Lord Forsyth of Drumlean]

I am happy to give way to him if he wants to explain where the money would come from, but I suspect not. A large part of his flock of the clergy will be recipients of benefits because of the wages that they are paid by the Church of England. Everyone is in the same boat here. The noble Baroness, Lady Sherlock, argues that somehow it is possible to find money which we have not got and that she is proud to support the amendment because of the reduction in the top rate of tax paid by those who she describes as millionaires. I remind her that those people are paying 5% more in tax than they did under her Government. I also remind her that the effect of cutting those high rates of tax has been to increase revenue and therefore to make it possible to do more in that respect.

Surely, by now, we have learnt that lesson. It is a cheap political argument to say that it is possible to create money out of thin air and that this Government want to protect the rich at the expense of the poor. If we want to help the poor, we have to get the economy growing again. The noble Baroness says that the economy is not growing because of this Government. The economy is not growing because of the burden of debt which she and her fellow members of the Labour Party ran up.

[Lord McKenzie of Luton]

The noble Lord keeps going on about debt. Is it not right that, because of the failures of the noble Lord’s Government, the lack of growth has meant that borrowing is now about £200 billion more than they planned when they came into being?

[Lord Forsyth of Drumlean]

I am utterly amazed by the noble Lord. He is now criticising us for spending £200 billion more than we planned, when part of that money is being used to provide the 1% uplift in benefits. Talk about wanting to have it both ways. On the one hand, he is criticising the Government for not borrowing enough, but now he is criticising the Government for borrowing more than we planned. The reason why we are having to borrow more than we planned is because of all the commitments made by the previous Government without a clue as to how they would fund them. That includes commitments on welfare. Welfare spending accounts for £1 in every £4 that the Government spend.

On the basis of the noble Lord’s criticism that we are spending £200 billion more, that would mean that £50 billion is going on welfare. In all the time that I have been involved in both Houses of Parliament, I have never seen a more irresponsible Opposition. It is not good enough for the right reverend Prelate to come to tell us that we need to do more to help working families with young children without explaining from where the money is to come or addressing the main problem.

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[Lord Brooke of Sutton Mandeville]

My Lords, my noble friend Lord Deben is not in the Chamber, although I had a word with him outside. I am not sure that he was fair in asking the right reverend Prelate the Bishop of Ripon where he would find the money on the previous amendment. However, when we get into the guts of this amendment, it would be reasonable to expect the Official Opposition at that stage to explain where they would find it.

My memory goes back to Grand Committee on a couple of Bills in the final two years of the previous Government. They were held in the Moses Room; one was on housing and the other was on planning. I recall that the second one occurred in the very first week of the then Governor of the Bank of England—who is still the governor—who expressed anxiety that a recession was now becoming a real possibility. I asked why the Government, in their explanation of the text of the respective Bills on housing and planning, thought that future conditions would be like conditions in the past. I was told by both the Minister and knowledgeable government Back-Benchers in Grand Committee that I was not to worry my head about these things. There was no acceptance that the economic ice was beginning to thin and, specifically, I was told that the recession had not yet happened.

It was only later that I recalled a new year message in the 1950s or 1960s in the Observer by its essayist Paul Jennings in his weekly article. He explained that the new year had come in over a weekend and he had therefore had the opportunity to use the weekend to explore in his diary what the publishers thought he needed to know in the coming year, which they had not supplied in the previous one. It transpired that the answer was the thickness of ice. He explained that he was now in a position to tell the Observer’s readers that you required half an inch of ice to sustain a duck and an inch of ice to sustain an infant, going up in a series of categories until you reached 16 inches for a County-class locomotive and 24 inches for a regiment of foot. It was on reaching the statistic for a regiment of foot that Mr Jennings began to wonder how they knew. He imagined a scene in the Crimea when not much else was happening. The same young Mr Hemmings who took part in the film “The Charge of the Light Brigade” was riding up to Lord Raglan with the news that they had just lost another battalion of the Grenadiers.

If I move from that analogy to the departure of the previous Government, I recall that Mr Byrne, the Chief Secretary to the Treasury, left a note for his successor saying that there was no more money. As a message, that seems to me as daunting for a new Chief Secretary as the news to Lord Raglan that he had lost a battalion of the Grenadiers during what must have been the Crimean War. It is therefore reasonable to ask the Official Opposition where they would find the money for their support for this amendment. Indeed, perhaps the Official Opposition might express some regret for their mistakes in government and explain to the Bench of Bishops what went wrong in their economic policies.

In the same context as the intervention by the noble Lord, Lord Griffiths, I shall personally look forward in the hope that we will be able to come back to that subject on a future amendment, in which I would much enjoy joining with him.

[Lord McKenzie of Luton]

My Lords, we have added our names to this amendment moved so comprehensively by the noble Lord, Lord Low. It requires that all the components of ESA—the personal allowance and the additional component for those in the work-related activity group, as well as those in the support group—are taken outside the 1% cap on uprating. As we have heard, the amendment rightly includes provision for children to be made under universal credit, although it remains to be seen how much progress the faltering universal credit will have made by the time the Bill is spent.

As we have argued on previous amendments, it is the vulnerable who are most affected by the Bill. This is particularly so for those on ESA for two specific reasons. They are much less able to increase their income through work and their living costs are generally higher. This is particularly so for those in the support group, who are furthest from the labour market, but also for those in the WRAG. It is worth remembering that there is a rigorous testing process for people who are unable to work due to ill health or disability. We know that the gateway to this benefit is tough. Although the process involving Atos has been improved, there are still many who end up on ESA only after a successful appeal.

Although individuals in the WRAG are closer to the labour market through their conditionality or otherwise, the route to paid work is not easy, as the noble Lord, Lord Low, said. We know that the Work Programme has not covered itself in glory in this regard. As things currently stand, individuals in the WRAG will lose something like £191 a year by 2015 as a result of this Bill. Those in the support group will fare little better in terms of income, being some £138 a year worse off by that date.

Macmillan has specifically drawn our attention to how these measures will affect people with cancer. Its estimate is that in excess of 40,000 cancer patients will be claiming ESA by 2015 with the presumption that they will be placed in the support group. Macmillan particularly stresses the impact of rising energy bills on this group. Like the noble Lord, Lord Low, I remind the Secretary of State that he should fulfil his commitment to make sure that people on ESA are being fully protected.

The noble Lord, Lord Brooke, challenged me to say where we think the money should come from. I thought I made it clear in the first debate that we think the Government should not proceed with the tax cut that is proposed for those earning £150,000 a year. The proposed tax cut from 50% to 45% would be a source of revenue. The Government say that this will not produce very much, but that assumes that people can get away with planning their income to defeat the thrust of that change. If the Government are alert to that, they could garner that revenue and we believe they should.

There is a wider argument about the extent of debt that can be sustained. The point I come back to is that the greater the failure of the Government in their economic policy—the greater the paucity or lack of growth in the economy—the more it will be necessary for the Government to borrow. If the Government can get growth back into the economy, that begins to ease the debt burden. There is another source there.

I also remind the noble Lord that these amendments take ESA out of the fixed uprating—the collar that this Bill puts around them—so a judgment would have to be made for each uprating period. Traditionally and rightly that has been an increase by the rate of inflation of one sort of another. That is what these amendments are doing. They are not technically, of themselves, proposing a different rate, although I made it clear that we support uprating by inflation for the year that we are about to enter.

It is clear from that combination of reasons that this proposal can and should be supported. It is not constrained by the economic position of the Government. It is the Government that have got themselves into a bind because they have failed to generate growth in the economy.

[Lord King of Bridgwater]

As the noble Lord understands some of the complexities of this matter which many others may find more difficult, what does he assess the cost of this amendment would be over the next few years?

[Lord McKenzie of Luton]

The total cost is certainly less than that proposed for the totality of the arrangements in the Bill. It would be a portion of that. The number of people in the support group is something like 200,000 and there are around 300,000 in the WRAG. If you assumed you were looking at a difference between uprating by inflation and uprating by 1%, that would be the calculation. I stress that this amendment is saying that you simply take ESA out of the 1% collar, and it leaves open the question of whether uprating next year and the year after should be by whatever inflation is then. However, this amendment does not put a figure on it.

[Lord King of Bridgwater]

The noble Lord is a signatory to this amendment. He is speaking for the Official Opposition and it obviously represents a cost. I wonder what that cost is. I do not see how the House can vote if it is not clear what extra costs are envisaged. If he is suggesting that there is no extra cost at all, I do not imagine the Government will find great difficulty with the amendment. Presumably there is a cost; I wonder if he knows the figure.

[Lord McKenzie of Luton]

It depends on what the alternative proposition would be. I have tried to stress that this amendment takes ESA outside this 1% fixed uprating—outside that collar—so we would have to judge the impact at each uprating period thereafter. A judgment would have to be made in the light of inflation and general economic circumstances at that point in time. That seems a very clear proposition, is it not? It is certainly a basis on which we are very happy to support this amendment.

[Baroness Stowell of Beeston]

My Lords, all of us want to protect those who are furthest from the labour market or who have additional costs because of disability, and I think that all of us who have contributed to this debate so far and all of us in the Chamber today share that view. There is no disagreement among us on that.

That is what the Government are doing. We have not included key disability benefits, including disability living allowance and attendance allowance in the 1% annual uprating decision in the Bill. Nor have we included the disability premiums in working age benefits or the disability elements of tax credits in the Bill. We have also excluded the support group component of employment and support allowance and the higher of the universal credit disabled child additions. All these benefits will continue to be uprated by CPI. We have protected them because they help support those who are furthest from the labour market or who have additional costs because of disability.

In one of the exchanges that has just taken place, the noble Lord, Lord McKenzie, referred to cancer sufferers and made the point that we want to make sure that we provide them with the support that they need. It is worth reminding noble Lords that earlier this year, in January in fact, we introduced changes that will mean that more people with cancer will now qualify for the support group, which is protected, whereas before they might have been placed in the work-related activity group. We have taken on board the concerns in that area. They were valid concerns, and we were glad to be able to act on them.

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[Lord McKenzie of Luton]

My Lords, let me make it clear that we support each of these amendments. The request in the amendment in the name of the noble Baronesses, Lady Morgan of Drefelin and Lady Masham of Ilton, that there should be a review seems modest and straightforward. If the Government should seek to resist that, or a reasonable and clear alternative, I would be amazed.

The case is the same with the amendment of the noble Lord, Lord Kirkwood. As I understand the proposition, he is saying that should in any year the current expectations of inflation be in excess of 3%, which we currently expect to be the case, the 1% automatic uprating would not apply and there has to be an annual assessment, as happens at the moment. That assessment might lead to a 1% uprating, or to some other form of uprating, but there would not be the automatic application of 1%. Who knows what will happen to inflation? I do not predict that there will be a surge in inflation but, if there were to be, is any level of real cut in the standard of living of poor people acceptable to the Government? Is that what they are saying? They would be if they rejected this amendment.

[Lord Forsyth of Drumlean]

Would the noble Lord apply the same principle to pay in the public sector?

[Lord McKenzie of Luton]

We are talking about specific provisions in the Bill about the uprating of benefits. The noble Lord has worked quite hard to differentiate himself from the noble Lord, Lord Kirkwood, and his amendments. The suggestion that somehow having this provision in the Bill will fuel wage inflation across the land, fuel expectations up and down the country and bring the economy to a halt is, frankly, frivolous and a nonsense. The noble Lord knows that full well. He is an experienced parliamentarian and an able debater, but I do not believe that he did himself justice in the way he sought to pick away at the noble Lord’s amendment.

[Lord Forsyth of Drumlean]

I was asking the noble Lord a straightforward question. He is enunciating the principle that if inflation were at 3% or more, it would be necessary to abandon a position that held the increase in benefits to 1%. I am simply saying that if that is the Opposition’s view, is it also their view in respect of public sector pay? If inflation turned out to be much higher, would the same apply to people working in the public sector? If not, why not?

[Lord McKenzie of Luton]

My Lords, we are debating a different Bill. If the noble Lord wants to debate a proposition about public sector pay, let us have some propositions and we can consider that. The noble Lord knows full well that he is trying to lead the Opposition in a particular direction.

I come back to the point that the amendment of the noble Lord, Lord Kirkwood, is very straightforward. It just says that an automatic 1% uprating would not apply automatically if inflation reached a certain level. That seems entirely unobjectionable and I cannot see why the Government cannot accept it. If the Government do not accept it, they have to say what level of inflation, what level of real decrease in people’s circumstances, they would find acceptable, because that would be the consequence of rejecting the amendment. This is a very modest proposition. I really am surprised at the trouble that the Government are having with accepting it. I would hope at least that the noble Lord’s colleagues would stick with him on this issue as the arguments that we have heard against it are quite spurious.

[Lord Newby]

My Lords, the first amendment in this group in the name of my noble friend Lord Kirkwood would mean that the Bill would apply only if inflation was below 3% for the purposes of uprating in that year.

I shall provide a reminder of what the official inflation forecasts currently show. While inflation is forecast to be above target—that is, 2% in the near term—it will fall back towards the target in the medium term. In the final year of the Bill, the current forecasts show that inflation for the purposes of uprating in that year will be 2.2%. That was the view of the Office for Budget Responsibility at the time of the Autumn Statement. The OBR produces independent and authoritative forecasts for the economy and public finances and we take decisions based on them.

However, the OBR is not alone in forecasting that inflation will fall back to target in the medium term. That is also the view of other major economic forecasters. I refer to the IMF, the OECD and the Bank of England. Indeed, the latest assessment of independent forecasters in February was that UK inflation would be 2.2% in the 12 months to quarter 1 of 2014 and in the 12 months to quarter 1 of 2015. That is an average assessment of people who make their living by doing this job.

The noble Lord, Lord Kirkwood, said that he thought there was a 50% chance of inflation being over 3% in the period covered by the Bill. I remind the House that that means a 50% chance that inflation will be over 3% by September 2014, because that is the last point at which the Bill has an effect in terms of benefit uprating. All I can say to my noble friend, for whom I have the greatest regard, is that his view is just not shared by any reputable international or national body that is making forecasts about inflation.

[Lord Newby]

I am coming on to that. In fact, I will deal with it now. It is relevant to the point that was made by my noble friend Lord Forsyth. The purpose of the Bill, as we have debated about 20 times since Second Reading, is to give some certainty to the Government’s fiscal plans. The reason we are doing that is that a number of international bodies and rating agencies have said that this has a specific and significant impact on the way that they view the UK’s prospects. Entrenching something in a Bill has the effect of giving a degree of certainty, which is immensely useful with regard to the markets.

As my noble friend Lord Forsyth has said, there seems to be a sense that the markets think that we in the UK are in a very good position and that a little tweak here and there in terms of borrowing will make no difference. That is not the way the markets work. It starts off with a little tweak and then the markets feel that something is going wrong. Once that feeling takes hold, the markets can move very quickly.

As we have debated many times in your Lordships’ House, it does not need much of an increase in inflation to make a huge difference to the Government’s finances and the lives of ordinary people.

[Lord McKenzie of Luton]

Can the noble Lord tell me how the markets have moved in response to the Government borrowing £200 billion more than originally planned?

[Lord Newby]

The reason why they have not moved is that the Government have not changed our underlying policy.

The effect of a 1% increase in inflation on someone with a £100,000 mortgage is £1,000. These are big differences and a 1% increase in the interest rate is by no means out of line with the interest rates being paid by a raft of European countries whose borrowing as a percentage of GDP is significantly less than ours. The risk in terms of interest rates is real and present. It is not some airy-fairy possibility that would come into play only if the Government were suddenly to go mad and spend huge amounts of money. It can happen with a relatively small change.

The Government remain committed to low and stable inflation. As we have said umpteen times, it is good for individuals and for business and is a prerequisite for economic prosperity. That is why the Government set the remit for the independent Monetary Policy Committee to target inflation. The Chancellor will set the remit at Budget tomorrow, as usual. I do not know what the remit will be but I know it will not be, to quote my noble friend Lord Kirkwood, to loosen the constraints so that inflation rips. I am confident that the Government’s commitment to low inflation will remain.

My noble friend Lord Kirkwood and the noble Lord, Lord McKenzie, said, “What happens if, contrary to what the Government have said, inflation does rip? Suppose we have a circumstance that we don’t believe is going to happen”. If Governments legislated for every circumstance that they did not believe was going to happen, we would have Bills thousands of pages long. The Government can legislate and act only on the basis of a central assumption of what the future, in respect of the particular area of public policy they are dealing with, is going to be like, and that is what we have done here.

I turn to the issue that many people have faced and in many cases continue to face—real-terms reductions in pay. Inflation risk is something that everyone has to face in everyday life. We have been taking about public servants but let us just talk about them a bit more. Public servants have seen their pay frozen and then increased by 1%. When inflation rose to 5.2% in September 2011, many public servants were in the middle of a pay freeze. The Opposition supported that policy and there was no inflation guarantee within it. This includes, for example, many hard-pressed personal advisers in jobcentres who are on modest incomes and are having to see restraint in their pay in these very tough times. That is the right policy. However, the consequences have been that many out-of-work benefit recipients have seen higher cash—yes, cash—increases in their benefits payments over the past three years than many Jobcentre Plus personal advisers have seen in their salaries.

These are difficult but necessary decisions. We must remember the tough circumstances that many people in work have faced and continue to face across the country as we deal with the effects of the economic crisis. As I have said, we believe that this Bill is necessary to set out a clear and credible plan to make savings from welfare, help reduce the deficit and restore economic recovery. We are taking the tough decisions because it is necessary to give confidence to the markets. Adding to the Bill conditions such as those proposed by my noble friend Lord Kirkwood would diminish the confidence that we require.

I now turn to Amendment 12, in the name of the noble Baroness, Lady Morgan of Drefelin. This amendment would place a duty on the Secretary of State to instruct the Social Security Advisory Committee to commence a review of the level of uprating if inflation reaches 3.2% in any of the relevant periods as defined in the amendment. I hope that during this and previous debates both I and my noble friend Lady Stowell have been able to convey to the House that we understand and share noble Lords’ concerns about measuring the impacts of the Bill and all our reforms on individuals. However, as the noble Baroness slightly suggested in her speech, we believe that the amendment is unnecessary.

Noble Lords will be aware that we already have comprehensive arrangements in place to report on the impacts of government policy. First, we have already published a full account of the impacts of this Bill based on the forecast set out by the OBR. Again, these forecasts are broadly shared by the other main economic forecasters. Noble Lords will be aware that we have also published the child poverty impacts of the Bill. The Government already have a suite of ongoing reporting mechanisms in place and report on the levels of poverty every year in the households below average income series. It is only by looking at poverty issues in the round that we can have a meaningful debate about poverty. Noble Lords will be aware that the Government are currently analysing responses to their consultation on new measures of child poverty, measures that will attempt to capture the wider reality of poverty in the UK today.

Later this year we shall see the first of what will become an annual report from the Social Mobility and Child Poverty Commission, which will report on the Government’s progress towards reducing child poverty, in particular meeting the targets in the Act and implementing the most recent UK strategy. This commission, chaired by Alan Milburn, will report to Parliament and will enable detailed scrutiny of the Government’s work to eradicate child poverty.

Finally, the Government regularly produce an analysis of the cumulative impact of changes on households across the income distribution. This information is published by the Treasury at every Budget and other major fiscal events. This analysis will use updated inflation projections. We believe that it is a better approach than that in the amendment as it looks at the cumulative impacts of all changes rather than artificially isolating just one policy. The publication of cumulative impacts is a coalition initiative and was not produced by the previous Administration.

The Government have taken unprecedented steps to increase transparency and enable effective scrutiny of policy-making by publishing detailed distributional analysis of the impacts of their reforms on households. Our published distributional analysis goes further than that of any previous Government. Having these mechanisms in place means that we are confident that the Government will be able to scrutinise the effects of this Bill and of our whole suite of welfare reforms. I therefore ask the noble Baroness to withdraw her amendment.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2013

Lord McKenzie of Luton Excerpts

Thursday 7th March 2013 Grand Committee

[Lord McKenzie of Luton]

My Lords, I start by thanking the noble Lord, Lord Newby, for introducing this order. I find myself on pretty much precisely the same page as the noble Lord, Lord German, concerning the points and questions that he raised. When we considered this matter in May last year, we looked forward to the introduction of auto-enrolment and acknowledged the contribution of the many people along the way who had made it happen. Indeed, we also acknowledged the role of this Government in taking it forward. Perhaps this would be an opportune moment to seek an early update on how it is all going.

As we set out last year, we see the merit of simplicity in the earnings band limits being aligned with the national insurance lower and upper earnings limits. This is notwithstanding that the raising of the former and the reduction of the latter means that the band is squeezed by some £1,100 for the upcoming year, with the Government estimating a reduction in pension savings of some £30 million. However, we welcome the fact that the broader definition of earnings, or its equivalent in other schemes, is being retained.

Our main concern, which I am sure will come as no surprise to the Minister, is the one touched upon by the noble Lord, Lord German, of raising the earnings trigger to the new personal allowance level. On the Government’s own figures, this will exclude around 420,000 individuals, 76% of whom are women. Of course, this is on top of those who have been excluded by aligning the trigger to the personal allowance threshold in the current year. We have heard some of the justification for that. It concerns simplicity and whether people are in a position to afford to save.

However, it seems that there is a breakdown in the Government’s logic. Let us say that the Government got the balance right in the current year. Looking at the current year, why should the increase in the personal allowance for other policy measures, which we may or may not agree with, by more than the rate of inflation and more than earnings cause the balance in adjustment as to what people can afford still to equate with the personal allowance threshold? I do not think there is a logical connection between the two. However, we are where we are on that.

The Government’s explanation was that persistent low earners tend to find that, through pensions and benefits, the state provides a level of income in retirement similar to that in working life. Of course, that assumes that today’s low earners will be tomorrow’s low earners. We would hope that as a matter of government policy that would not be the case. The noble Lord, Lord German, touched on the much heralded single-tier pension, which is supposed to negate the need for earnings-related support in the future. It takes us back to the big debates that we had around “pays to save”, when the whole concept of auto-enrolment was being considered and the structure was being put in place. If the single-tier pension is to be introduced and is successful, negating a whole raft of earnings-related means-tested support, that should make it easier to make the judgment about when it will pay to save.

I turn to the issue of tax relief and relief at source. If people are excluded from auto-enrolment due to the personal tax threshold, they are potentially missing out on this chunk of government support. The noble Lord, Lord German, raised absolutely the right point by asking what employers are required to do to make sure that people are aware of this potential benefit. I hope that the Minister can confirm that there is absolutely no intention of changing the structure of tax relief. I think it was confirmed last year that NEST will operate the relief-at-source system, so anyone who was going to be enrolled or who wished to opt into NEST would receive the benefit of that tax support.

I end on the same point as the noble Lord, Lord German, which is: if this is the way things are going to go and if there is to be this increasing raising of the threshold, which will really change the landscape over time if it continues, what publicity will be given to the right to opt in? That becomes ever more important if the threshold is to continue to be raised. What are the Government planning to do generally? What are the requirements on employers, so that those who miss out on auto-enrolment at least have the chance to consider the opt-in route? The key point of auto-enrolment was to deal with inertia, to get people into pension saving because they had to make a decision to opt out. Once you remove that requirement from them, inertia reverts and the onus is on individuals. I think that they have to be above the lower earnings limit to opt in. What support and encouragement will they be given? They should at least know that they have the choice. Given what is happening to the personal tax threshold, that is a key issue for us.

[Lord Newby]

My Lords, I thank both noble Lords who have contributed to the debate. The questions have been about not the people who will be automatically enrolled but those who might or might not.

Part of the context for this is that even with the uprating of the tax-free limit, in terms of income level we are talking about 29 hours at the minimum wage, so the vast bulk of people in the category we are discussing—people who could join if they wish but who are not automatically enrolled—are likely to be part-time workers. That comes to the final point of the noble Lord, Lord McKenzie, about what their career paths will be. I would expect quite a number of people in that category now would not necessarily be part-time workers for the rest of their lives. A lot of them will be women with children, who may go on to have a full-time job when their children are older, and we would hope that they would do so if that is appropriate. Of course if they do, they would then be automatically enrolled.

On how we make sure that people know of their rights, which is obviously important, employers must write to employees with information about rights setting out the full picture. The department has developed a language guide and template letters to help employers to communicate clearly with people new to pension saving. I must say that I have not seen that letter. I will now make it my business to read it. If it is a letter that communicates clearly on pensions, it will probably be the first one that I have seen. I am sure that the finest minds in the department have been worrying about that. It is a major problem. By and large, people are ignorant about their pension savings and pension options. It is a challenge in any scheme, but particularly here, where a lot of the people who may be in this category will never have had a pension before. I will enjoy reading that letter.

The noble Lord, Lord German, asked for a definition of “inappropriate”. It is easy to see why for a single-parent family with children, where the mother is working part-time, it is not so much inappropriate as impossible. There just is not the amount of money in the household to enable much saving to take place. Another example of where it might be inappropriate would be if a household had built up debts and had large outstanding payments due, as many people on low incomes do. It would probably be in their financial interest to try to get those debts down before undertaking any savings. I am not sure that is the complete answer but I can see circumstances where, if you were a debt adviser or financial adviser to people who had got into debt and were on low incomes, you would be advising them to pay off those debts first.

There was a question about relief-at-source schemes and how these will be made clear. I hope that the letter explaining to people what their requirements are also explains the relief-at-source mechanism, and I will be looking at that. If it is able to do that in very clear terms, that will be an even greater achievement. I have great confidence in officials at the Department for Work and Pensions being able to clarify what most people find opaque. We are still looking at how relief-at-source schemes are operating as the new system rolls forward. The evidence so far is that schemes aimed at this population are actually using relief-at-source, so at least in that respect the system is working well.

The noble Lord, Lord McKenzie, asked how many people have been auto-enrolled and how this process is going. We expect that by this April at least 1 million individuals will have been automatically enrolled. The early signs are very positive: some big employers who have gone in first are reporting very low opt-out rates. However, the department has a full evaluation programme and we will be able to produce our first reports on this in the summer.

The noble Lord, Lord McKenzie, also asked whether it was the intention to change the relief-at-source rules. This is a Treasury matter, and we are near the Budget, but I think it is fair to say—and if I am sacked for this I shall blame the noble Lord, Lord McKenzie—that I am not aware of any intention to change the relief-at-source rules. I hope I have answered the questions that noble Lords have asked me.

[Lord McKenzie of Luton]

If the noble Lord gets sacked for that statement, I shall campaign on his behalf. When he has got over the excitement of reading the letter that he is going to peruse, would he share it with us? That would be helpful.

[Lord Newby]

I will, because it deserves to have the widest possible readership. With those comments, I commend the order.