Welfare Reform Bill

Baroness Drake Excerpts

Monday 12th December 2011 Lords Chamber

Moved by

[Baroness Drake]

7: Clause 8, page 4, line 18, at end insert—
“( ) Regulations may specify that the pension contributions of single, or either of joint claimants, are to be disregarded when calculating either earned or unearned income.”

[Baroness Drake]

My Lords, I shall speak to Amendment 11 as well. Amendment 7 would allow pension contributions made by claimants to be disregarded in full when assessing their income for calculating entitlement to universal credit. Some 100 per cent of the value of pension contributions is deducted from income that is brought into account for calculating entitlement to tax credit. This amendment would allow that arrangement to continue under universal credit. Sadly, the Government have stated that in future only 50 per cent of pension contributions will be deducted from income when calculating entitlement. That is a mean measure. The Government state that they will save £200 million a year but this should be set against the near £30 billion saving from accelerating the increase in the state pension age to 66 and, to use the Chancellor’s words, the saving of a staggering £59 billion from accelerating the increase in the state pension age from 66 to 67. Those are very big numbers in comparison.

Pension reform was intended to strike a new deal between the state and the citizen, whereby: people work longer and the state pension rises; the state pension would be a flat rate to provide a firm foundation for pension saving; and private pension savings would increase through automatic enrolment into a workplace pension with an employer contribution. Those three elements are inseparable or the settlement becomes unfair to ordinary, hard-working people. The Government are accelerating the increase in the state pension age to reflect increasing longevity and to secure public expenditure savings of many billions, but they are backtracking—I stress, backtracking—on the pension saving and the incentive to save for ordinary, hard-working people. That is not fair. It is not a fair deal for the citizen and it breaks the consensus of the way forward.

The Government have suspended the introduction of auto-enrolment for workers in firms with fewer than 50 employees. They have delayed by at least a year—to 2017—the date by which workers will have access to the full 3 per cent employer contribution and tax relief. They have this mean measure of reducing to 50 per cent from 100 per cent the amount of any pension contributions disregarded from the assessment of income for universal credit. This will all hit responsible, hard-working people on modest incomes in receipt of universal credit who try to save for a pension.

It was very clear from official analyses that the way in which pension contributions were treated under the tax credit system was part of the incentive to save and the payback on every pound saved by low-to-moderate income earners. It provides an increase on their savings of up to a third because of the incentive-to-save effect. The Minister argued in Committee that it is necessary to take a balanced approach to the disregard of pension contributions as not all taxpayers who do not claim benefits have the advantage of a private or occupational pension scheme. However, with the introduction of auto-enrolment, it is the Government’s intention that they will all have access to a workplace pension; so that argument will not hold.

The Minister argues that the disregard for pension contributions is an area in which tax credits have been excessively generous. That is not a great message to send out to decent, hard-working people who play by the rules and are trying to save for a pension, and not one borne out by the facts. It also ignores the billions given in higher-rate tax relief—around £10 billion—to pension savings by higher-income earners. Universal credit is intended to encourage responsible behaviour. Policies to deliver an efficient benefits system and policies to enable pension saving by responsible people are not alternatives. This is a short-sighted measure, which withdraws valuable support to the incentive to save for a pension from responsible, hard-working people on lower incomes. This mean little measure should be set against the billions of savings from accelerating the state pension age. I really hope that I can persuade the Minister to reflect and reconsider this change in the treatment of pension contributions, and perhaps even to deploy his black arts again.

The purpose of Amendment 11 is to provide for regulation to allow for an additional amount in universal credit where a claimant is over the state pension age. Pension credit is targeted at low-income pensioners, to help them live above the poverty line. Currently couples can claim pension credit as long as one partner has reached the qualifying age. The effect of this Bill is to prevent pension credit claims in the future from couples where one partner is under that qualifying age. The couple will have to claim universal credit and be subject to conditionality. The impact of this change will be significant for many lower-income, older couples going forward. First, it may impact their income. I recognise that mixed-age couples, where one or both have earnings from work, can benefit from the system of universal credit due to the more generous income disregards and tapers, but there will be a range of possible outcomes depending on a couple’s circumstances, which will mean many being worse off.

Mixed-age couples claiming universal credit in the future could receive incomes that are £100 or more lower than under the current system. They may lose other sources of support—cold weather payments, help with health costs, warm home discount, and more. Standard payments under universal credit are just £105.95 for a couple. In contrast, the pension credit guarantee rate for a couple is £209.70 a week, and £137.35 for a single person. Without provision through regulation for additional support within universal credit where one partner is older, a pensioner could have a higher income living alone and claiming pension credit than receiving universal credit as a couple.

Secondly, it will impact their savings. The way the capital rules work under universal credit means that a pensioner with a low income and modest savings who has a younger partner could be excluded from pension credit and forced out of universal credit, or face a steep withdrawal of benefit. That is hardly the action to be taken for some who is about to commence living through their old age. Furthermore, it can impact their housing benefit. There are to be no exemptions to the size criteria for the receipt of housing benefit from April 2013, other than when the claimant or partner is over state pension credit age. However, the Government now want to reflect their decision, where one member of a couple is a pensioner and the other is of working age, on the housing benefit rules. That means that, unless mixed-age couples are protected from the restrictions, a pensioner with a younger partner could find their benefit cut if they have one or more spare rooms; if they live alone, the restrictions will not apply. It is a really peculiar form of couple’s penalty, which disproportionately hits older and poorer couples and their relationships. Should couples stay together or separate in future? That will be a real debate under the application of universal credit.

Pensioners in poorer households will have significantly different experiences because of differences in the age of their partners. It may not be unreasonable to expect some young partners who are able to work to be subject to work-related conditions and sanctions when they do not fulfil requirements, but why is it necessary to provide further incentives by restricting benefit to the pensioner partner in that couple? As to the thousands of grandparents who may not be receiving a carer’s allowance but who are looking after their grandchildren, do they lack incentive or responsibility? Should they be the ones who have their allowances cut significantly below that which they would receive under pension credit? Again, the Government show no affection for our grandmothers. So where neither partner is able to work or is unsuccessful in finding work, their basic level of benefit under universal credit should reflect the fact that one of them is a pensioner. As to the treatment of carers and disabled persons in mixed-age couples, it is not clear how the system will work in all circumstances and many will be worse off under state pension credit.

Pension credit is a very effective policy—it is probably the only effective policy—for targeting pensioner poverty. The effect of the change will impact a group of low-income older people, which is why, as proposed in this amendment, the regulations should allow for an additional payment under universal credit where a claimant is above state pension age. I beg to move.

--- Later in debate ---

[Baroness Drake]

My Lords, I thank the Minister for that reply. I do not think that I am supposed to say that any more—I think the new rules say that I can dispense with that—but I will remain courteous and thank the Minister. Or is that only in Questions? I am trying to keep up.

I will deal with each of his points. First, I did not know that there was a middle path. That is a whole new concept to me. I thought the issue was that in-work benefits would support the incentive to pay for, say, low-to-moderate-income people by disregarding pension contributions. As to the concept of a middle path, I do not know what the merit of that middle path is other than the opportunity to save some public expenditure. I have never seen it publicly debated that it makes a big or meaningful contribution to the pension settlement.

I accept that we may not strictly be comparing like with like, because I am trying to lift from a set of rules under one benefits system to the one that will apply under universal credit, but I do not think that I heard the Minister say that the £200 million saving from this change had varied. As I understand it, the Government are still expecting to save £200 million. However the cloth is cut. That means that, for a particular group of low-to-moderate-income people, £200 million will be taken out of their incentive to save. At the same time, there will be a staggering increase in public expenditure reduction of £59 billion from accelerating the state pension age. I do not want to debate the acceleration of the state pension age—I am sure that there will be opportunities to do that.

[Lord Freud]

If I could just clarify this for the noble Baroness, £200 million is the extra cost of doing this, not the money taken out.

[Baroness Drake]

I am sorry. I thought that the Minister said that they would save £200 million from this change.

[Lord Freud]

No, no, my Lords, I said that the cost of this amendment would be an extra £200 million.

[Baroness Drake]

I will have to go back and check on the figures. None the less, there will be a saving from this which has the effect of reducing the incentive to save for this group of people. As they will not be able to access the benefit of auto-enrolment until later, the contribution from their employer will come online more slowly, and therefore their ability and incentive to save will be reduced.

The Minister said that he sent a series of worked examples to my noble friend Lady Hollis that produced a range of outcomes. That is my whole point—some people can lose quite significantly under these new rules. It is not clear as to what the rules would be in all circumstances. Although there are transitional protections, that simply means that there will be a cliff-edge impact on another group of older couples when these rules come in. This will continue to add to the couple penalty and to the differing treatment of older couples depending on when precisely their qualifying age falls or on the age of their partner. That is why the amendment sought to give the Government flexibility as to how to address the problem of people suffering a significant drop in income. It did not of itself say that in all circumstances a partner should not be subject to work conditionality. However, I beg leave to withdraw my amendment.

Amendment 7 withdrawn.