Pensions Bill

Baroness Drake Excerpts

Monday 16th December 2013 Grand Committee

[Baroness Hollis of Heigham]

My Lords, I hope that Committee will forgive me if just for a second I revisit Amendment 3 and pension credit costs. I pressed the Minister, but he did not give me an answer—I would be very happy for him to write me—about the annual savings from each cohort of men falling out of pension credit and where those savings go to. That was not part of his reply and it would be good to know.

This amendment proposes a 2% head space between the new state pension and what someone would get on pension credit. Obviously, it is a probing amendment, a peg to explore what the future level of the state pension vis-à-vis pension credit will be, and to give us information about some of the winners and losers on the income analysis, on which I am sure that my noble friends will be pressing the Minister.

In particular, I want to focus on the issue of means-testing. As far as we know, eventually only something like 3% of the means-testing in the system will drop out as a result of the proposed changes. One of the great virtues of the new proposed pension was that by bringing together the BSB, S2P and pension credit, it was to leapfrog some means-testing. As my noble friend Lady Sherlock said, we had to use means-tested pension credit when we came into government because pensioner poverty for the bottom third was so acute and the number was so large that we could not financially manage a sufficient flat-rate rise for all. So we targeted our resources, and the policy worked. However, as my noble friend Lady Turner will remember, although we pushed the policy through, it was not without insistent, noisy and continuous haranguing from the late, splendid Barbara Castle, who used to sit right behind me, muttering very loudly to Muriel as I would reach some fancy point in policy, “What’s she trying to say now? What’s she trying to say now?”, to the great amusement and glee of those on the opposition Benches.

That policy removed hundreds of thousands of people from poverty, so pensioners are now less likely than any other group to come within that category of poverty. However, it came at a price. As we know, means-testing is disliked, especially by older people and, no, it is not the same as giving your income details to HMRC for tax purposes. It is highly expensive to administer and open to error—I will not say fraud—for this group.

Above all, as the Minister rightly and sympathetically identified in his previous answer to my noble friend Lord McKenzie, those entitled to pension credit, such as the self-employed unsure of their income or elderly widows whose husbands’ pensions have died with them and who have never handled the financial pension arrangements between them, do not always claim. Unlike lone parents, who are savvy and feisty about their benefits—well, usually—and have very high claim rates, pensioners do not. For example, fewer than half of those entitled to savings credit claim it. In the past, fewer than two-thirds of those entitled to council tax benefit claimed.

Endless studies were undertaken into why, and I congratulate the DWP on its fascinating in-house research published last year by Maplethorpe et al on whether we could get a significant increase in the take-up of pension credit if pensions were made to the department’s random sample of 2,000 entitled non-recipients automatically and a further 2,000 ENRs who were followed through by DWP visitors. That was an imaginative and welcome piece of research.

It is a pity that the results were, for everyone I think, really rather disappointing. The money was welcomed at the point but after the trial period of three months DWP had added only about 10% to the number claiming pension credit, which was useful but not a breakthrough, when pensioners were required to submit their own forms—in other words, take the initiative in a means-testing pension credit. As the research identifies, it is about stigma and difficulty with the forms, but also we have long found that if a pensioner had applied in the past for another means-tested benefit—HB, for example—and been refused, they thought they were ineligible for any other means-tested benefit so did not apply. If a friend or member of their family had been refused after applying, they assumed that the case applied to them too.

Many of them felt that the money they got at the end of a lengthy process was too little to be worth it. They may be right because although the savings credit mean figure is something like a loss of about £34 a week, the median is infinitely lower because it is skewed by a few very high numbers at the end. However, pensioners worried—this is partly the result of some of the problems with tax credits—that if they were wrongly paid they might face having to repay money that they subsequently could not afford. Nor are they clear about income and savings rules; some pensioners with £5,000 tucked away for funeral costs think that that disqualifies them. A few thought that as they could manage without pension credit, although they were entitled, it was morally wrong to claim it.

This research, which builds on two previous pieces of research that the DWP has done over the past 15 years on pension credit that I am aware of, suggested to me that means-tested benefits are almost inherently troubled by the failure of a substantial number of pensioners to claim, and that the new state pension is absolutely the right way to go for the future. It has to be on an automated basis. Whatever may happen to other means-tested benefits, we hope that at least pensioners’ basic income in the new state pension will be safely delivered and in full. However, means-testing will continue for the 25% of future pensioners who are not owner-occupiers but who are on housing benefit in the rented sector, or for those with incomplete NI records. The reduction in means-testing is mainly because the new pension incorporates the means-tested guaranteed credit while abolishing the means-tested savings credit. That is actually why the numbers fall.

However, if the new pension is to reduce means-testing, as we hope it will do—though at the moment the statistics do not suggest by as much as some of us had hoped—it must, to use the phrase, put clear blue water between it and the new pension. At the moment, the difference between what a pensioner would get under the three tiers of state pension, possibly some additional pension and pension credit under the new state pension, could be less than £1 a week, although the triple lock for the pension, unlike the earnings link for pension credit, should widen that gap over time if the triple lock remains. Age UK has provided figures showing that means-testing will have fallen by just 3% by 2014 from what it would have been as a result of this. However, as my amendment suggests, 2% would provide a rounder figure—a £3 gap, I guess.

I am hoping that the Minister will give us some guidance on the difference in income for each path that a person registering for the new pension will take, and the winners and losers as a result, so that we can work further on those stats before Report. The Select Committee recommended such a clear space, although it did not suggest a specific sum. The Government’s response was rather interesting. They agreed it was necessary to establish,

“a firm foundation for saving”,

but believed that it was not necessary to put that in the legislation. I do not think that is good enough. Put very crudely, there is not much point in having a massive and welcome reform of pensions structure if at the end of the day many future pensioners, mainly women, lose derived rights, and many other pensioners, mainly women, are no better off than they would have been on pension credit because the new state pension is financially not sufficiently distinctive. I beg to move.

[Baroness Drake (Lab)]

My Lords, I shall take advantage of the helpful peg of this amendment moved by my noble friend Lady Hollis. I completely accept that moving more rapidly to a flat-rate pension will bring losers and gainers. However, we need to have some confidence about the initial value of the single-tier pension and how its value will be maintained over time, in order to have confidence about the assessments of gainers and losers.

The figures and statistics that we have are based on the assumption of triple-lock uprating, which is far from assured over time. We know that the single-tier pension has to produce a series of outcomes: it has to be above the guarantee credit to address the disincentive to save; it has to be set at a level which reduces reliance on means-tested benefits; and it has to provide a firm foundation for private saving. However, whether it achieves those intentions depends in part on the starting value of the single tier and how its value moves over time. The White Paper therefore suggested that a single-tier pension should be worth £144 in 2012-13 earnings terms, but the extent to which the single-tier pension figure is to be set above the pension guarantee credit is very unclear.

At the time of the White Paper’s publication in January 2013, the illustrative £144 was only £1.30 higher than the guarantee credit—less than 1%—which was lower than the figure in the Green Paper, when the £140 illustrative figure was £7.40 above the guarantee credit, which is nearly 6% higher. In 2013-14 earnings terms, £144 would be worth £146.30—just 90p above the guaranteed credit of £145.40. We therefore have a lack of confidence about what the level of the single-tier pension will be at its introduction, what its uprating is likely to be over time and what its relationship with the guarantee credit is likely to be.

The rate of the new state pension will be set in regulations, and it is important to have some confidence about government thinking. The Delegated Powers and Regulatory Reform Committee commented that,

“we draw to the attention of the House that, for the first time, the rate of the state pension will be specified only in subordinate regulation”.

The Government’s impact assessment assumes uprating by the triple lock, but the assumptions about gainers and losers and pension adequacy could be significantly different if the triple lock were not applied. I also note that, when it comes to assessing gainers and losers, the notional figures include the previously contracted-out individuals. In one of the very helpful briefing sessions that we have been afforded, I asked whether we could see the notional figures for gainers and losers, excluding those contracted out at April 2016, in the hope that we could get a clearer picture of winners and losers. I was particularly interested in understanding more clearly who the winners and losers were from the base of the actual amounts that contracted-in individuals receive. I was interested to read a report this weekend, albeit in the Corporate Adviser. I quote from the article:

“The figures for mean gross state pensions, which give the clearest official picture of the level of combined basic and secondary pension of contracted in workers, have been omitted from the ONS’s 2013 Pension Trends paper”.

I understand that the reason for that is information provided by the DWP. For the sake of debate and for clarity, net state pension figures are only those payments paid directly by the state, whereas gross state pension figures are estimates of the total entitlement to additional state pension, which include those elements paid by private pension schemes that are contracted out.

--- Later in debate ---

[Lord Freud]

I shall start with the question from the noble Baroness, Lady Hollis, referring to the previous amendment regarding men coming off guarantee credit. I commit to write to her with the data on the numbers coming off.

The central principle that these reforms represent is that the full amount of the single-tier pension will be above the basic level of the means-tested support for a single person. This provides a clear foundation for both private saving and automatic enrolment, and it builds on the broad cross-party consensus that has characterised the debate that there has been on pension reform: people need to save more, and to do that they need to know what they are going to get. The reforms are therefore not so much about spending more or less money on future pensioners but about restructuring the system to provide clarity and confidence to help people today to plan for their retirement.

In the White Paper, published in January 2013, we used an illustrative start rate of £144, which was above the minimum guarantee and forecast to stay within the projected spending on the current system. Every extra pound added to the start rate increases annual costs by £500 million in the 2030s. A start rate of 2% above the standard minimum guarantee would incur significant additional costs.

On the question from the noble Baroness, Lady Drake, on the narrowing of the gap between the standard minimum guarantee and the start rate of the single tier, the Green Paper said explicitly that the precise value of that start rate would need to be set at a level that met the affordability principle. The start rate that we will fix will need to be set closer to implementation, when the Government will be able to factor in both the 2016-17 level of the standard minimum guarantee and the latest economic and forecasting data.

The Committee will note that the regulations to set the start rate will be subject to affirmative resolution and will therefore be debated in this House. The noble Baronesses, Lady Drake and Lady Sherlock, asked why this is being done by affirmative resolution as opposed to in the Bill, as is the existing position. The different approach was flagged up by the DPRRC, although, interestingly, it did not recommend that we changed our legislative approach. That approach is consistent with recent legislation, such as establishing both the ESA and universal credit, and it is driven by not currently knowing what rate to use, given the enormous costs involved of getting that rate out even by a small amount from what it should be, relative to the means-tested level.

On contracting out, there is not a clear distinction between the people who are contracted in and contracted out. We estimate that even by the 2030s about 80% of people will have been contracted out at some point. The analysis we have done in the IA, as the noble Baroness, Lady Drake, pointed out, is based on the net state pension outcome, not the gross.

The stated intention of the Government is that the start rate should be above the standard minimum guarantee, and it is the Government’s intention that it should remain above the standard minimum guarantee into the future. That is why the Bill sets out that the single-tier pension will be uprated by at least earnings growth. There is flexibility in the legislation for discretionary above-earnings uprating, depending on the fiscal circumstances at the time.

I point out to noble Lords that where a couple both receive the full amount of single-tier pension, as a household they will receive almost a third more under the new system than the couples’ rate of the standard minimum guarantee. To promise a single-tier start rate at 2% above the basic level of means-tested support would mean that we could not guarantee that the reforms would be cost-neutral. With these reforms, we aim not to increase the amount spent on pensions but to provide clarity to support private saving.

On the question from the noble Baroness, Lady Sherlock, on the decrease in the numbers of those who are means-tested being driven by the end of savings credit, clearly the answer is yes, in part. However, that money is being used to provide the flatter state pension that is central to these reforms and it allows us to provide the single tier in a cost-neutral package, while simplifying the system. Although there is no Baroness Castle to barrack us from in front or behind, or wherever she did it, it clearly makes sense to go to a system that is less—or as little—reliant on means-testing as possible. This is the way to do that and I urge the noble Baroness to withdraw her amendment.

[Baroness Drake]

Was I correct in understanding that the noble Lord confirmed that the figures that we have show that notional gainers and losers are based on the net state pension figures, not the gross, and that a certain category of payment was therefore excluded in that analysis? Those net figures will not include total additional payment entitlements.

[Lord Freud]

The noble Baroness is correct that the analysis is done on a net basis. I am dubious about whether a gross basis is even possible, so I will not promise to have an additional analysis done on a gross basis.

[Baroness Drake]

That prompts the obvious question: why not? However, will the Minister write to us on why the net rather than the gross figures are used, and why the gross figures cannot be used, so that we can fully understand the implications of the gainers and losers analysis with which we have been provided? Certainly I had not realised that there was that distinction. I was scrabbling at or delving into trying to understand this issue when I asked some of my questions at the briefing. However, I think the distinction between net and gross is quite significant, and it would be helpful to have an understanding of those two issues.

[Lord Freud]

I will certainly be pleased to write on the thinking behind why it is net. As I say, I am not in a position to commit to anything on the gross figures at this stage, but I will set out the latest position in that area in that letter.