Pensions Bill
Baroness Drake Excerpts(11 years ago)
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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.
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.
Pensions Bill
Baroness Drake Excerpts(11 years ago)
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Baroness Drake (Lab)
My Lords, I refer to my interests in the register and mention that I am a trustee of both the Santander and Telefónica/O2 pension schemes. These state reforms accelerate the direction of travel set, with political consensus, under the Labour Government. The single tier is intended to be fairer, reduce reliance on means-tested benefits, provide a firm foundation for private savings and assist ordinary people to achieve a reasonable income in retirement. To achieve those intentions, it depends in part on the starting value of that single-tier pension and the uprating of its value over time.
The Government’s impact assessment assumes uprating will be by the triple lock but assumptions about pensions’ adequacy could be significantly different if it is not. I also note that the extent to which the single-tier pension is set above the guarantee credit is lower in the White Paper than in the Green Paper. I hope that we can explore these matters further in Committee because it is very important to understand where the consensus is settling on the value and uprating of the single tier.
The state pension age needs to rise in the face of increasing life expectancy. Five-yearly reviews by government will be informed by reports from the Government Actuary but it is less clear how much importance will be given to the report of the independent panel which will consider other relevant factors specified by the Secretary of State. Hopefully, these will include geographical, occupational and socioeconomic differences in morbidity and mortality. There is a need for greater clarity about the process and for clear public evidence to inform the debate.
The Bill also provides for the statutory override to allow private employers with contracted-out schemes to adjust members’ future pension accruals or contributions to recoup the employer’s loss of national insurance contribution rebates consequent on the abolition of contracting out. However, employers should not be able to make disproportionate adjustments. Will the actuarial advice of the trustee take precedence over that of the employer? What if adjustments disproportionately impact on one group of members compared to the other? What are the protections to be?
Many of the provisions on private pensions are to be welcomed: the abolition of incentives to induce a member to transfer their rights out of a salary-related scheme; the abolition of short-service refunds; the protection to workers’ pension contributions from the national insurance fund in the event of employer insolvency; and the granting of powers to the Secretary of State to impose requirements on work-based pension schemes on administration, governance and charges.
However, the question is whether the Government will be sufficiently bold in exercising these powers. Auto-enrolment utilises inertia, not active engagement, to get people saving. The employer chooses the pension product while employee choice is largely restricted to joining or not joining the employer’s scheme. The state harnessing inertia—together with the OFT finding that the demand side, the buyer, of the DC workplace pensions market is one of the weakest that it has analysed in years—raises the bar inexorably on governance requirements, especially as auto-enrolment drives a level of demand that the industry would not achieve under a voluntary system. Poor governance, a lack of transparency or scrutiny and conflicts of interest are to be found abundantly on the supply side. To quote the OFT,
“we have concluded that … competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Ordinary people are embracing auto-enrolment. Relatively few have opted out so far, and employers are fulfilling their duty. However, this places a reciprocal responsibility on the Government to protect ordinary people against poor standards and conflicts of interest. The challenge that the Minister is grappling with is apparent from the plethora of consultations and investigations: the FCA on annuity markets and asset management charges; the OFT on the workplace pensions market; the DWP on quality standards, governance and charges; the Law Commission on how the law of fiduciary duties applies to investment intermediaries, using pensions as an exemplar; and TPR on codes of practice. The imbalance between the buyer and the supplier sides of the pensions market, and the systemic inequalities of knowledge and understanding between saver and provider, mean that seeking an alignment of interests is not sufficient—the interests of the saver must come first. There must be a duty to act in the saver’s best interests and, where there is a conflict of interest, priority must go to the saver. No shareholder has a right to gain a dividend from selling or managing a pension product that fails to meet the interests of the saver. The product proposition cannot be designed with sub-optimal features simply to facilitate a profit.
I was therefore anxious to read that in investigating the workplace pensions market, the OFT had reached agreement with the industry to introduce independent governance committees to address the governance challenge, but before a wider community had had the chance to comment on that solution. As the Law Commission says:
“There are many difficult questions about how these committees will work”.
They,
“will not have the power to change investment strategies or investment managers … Furthermore, it is not clear whether … the committees will be under explicit legal duties to act in the interests of”,
the savers. Achieving low charges and good quality in pensions must be inseparable. Sound governance will ensure their delivery. Complexity and lack of transparency put employers and savers at a disadvantage. The OFT identified no fewer than 18 different charges. Full transparency is essential to those who are to be the guardians of the consumer’s interest.
The Secretary of State’s new powers must also be applied retrospectively to cover legacy pension savings. MoneyMarketing, in reporting that the Association of British Insurers has missed the deadline for the pension charge cap consultation, suggested that it was because providers cannot agree on whether existing pension arrangements should be included and quotes Adrian Boulding, Legal and General’s pension strategy director, saying:
“This is all about legacy and the L&G view that existing pension schemes should be able to enjoy the 0.5 per cent charge level that is widely available for new pension schemes. We are morally uncomfortable with the concept that an employer buying new in the market gets one price but an employer that has already bought and is a loyal customer is getting a worse deal for their staff … a charge cap … should apply to new schemes and existing schemes”.
Even if Legal and General has its own competitive considerations for saying those words, they still capture the issue well. We will have to see in the ABI’s crafted response where the common denominator comes to rest.
The Bill addresses the real problem of small, dormant pension pots by giving the Secretary of State power to provide for the automatic transfer of a worker’s pension savings to their new employer’s scheme up to a pot value of £10,000. “Pot follows member” cannot be implemented without raising quality standards or the Government risk transferring the savings of millions of ordinary people into myriad schemes over which they currently have little quality control. Generally, transfers take weeks, if not months. Lots of paperwork, bureaucracy, poor data and lack of standardisation combine to slow the process and increase costs.
All pension savers should easily be able to transfer and consolidate their pension savings, but some savers will never make an active decision, so an effective private pension system requires a series of efficient default arrangements over the life cycle of the saver. I have real concerns about pot follows member as the automatic default arrangement for small pots rather than the alternative of a scheme that can aggregate people’s savings.
I fear pot follows member does not accommodate people who leave the labour force or become self-employed as they have no employer to transfer to, but their ex-employer may nevertheless default them into a poorer personal pension because they do not want to provide for ex-employees in their existing scheme. PFM increases the regulatory burden to oversee the myriad workplace schemes into which automatic transfers would be made rather than focusing on leveraging extremely high quality in a few aggregator schemes. Pot follows member may prove complex for the industry to implement and increase risks to savers. Pot follows member increases risks of charges and transaction costs being incurred on the whole pension pot each time a worker changes their job and transfers rather than on the incremental amount of savings accrued with the previous employer. An efficient pot consolidation mechanism is needed, but I fear that PFM may not best meet this need.
Furthermore, many pots above £10,000 will be defaulted into a personal pension on which there is little quality control because employers increasingly will not let ex-employees stay in their workplaces scheme. The Government argue that significant sums accumulating in aggregator schemes will potentially disrupt the market, but in a dysfunctional market where competition cannot be relied upon to deliver value for money—the words of the OFT, not mine—the driver, as my noble friend said, should be the interests of the saver.
Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2013
Baroness Drake Excerpts(11 years, 5 months ago)
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Baroness Stowell of Beeston
My Lords, I had just finished explaining why we were bringing forward the regulations and had started to explain the review that the department undertook between November last year and May this year.
The review found that consultancy charges were likely to be used to pay for employer compliance with the automatic enrolment obligation. This has been likened to expecting workers to pay for the steps that their employer takes to ensure compliance with health and safety law.
Over the course of the review, a broad consensus emerged that there was a significant risk of consumer detriment with consultancy charges; that is, individuals paying for a service from which they receive no individual benefit. With this risk came a wider risk to the reputation of pensions more generally at a critical stage in the rollout of automatic enrolment.
The review also found that consultancy charges can have a disproportionately negative impact on people who move jobs regularly, because they might repeatedly have to pay higher “initial” scheme set-up charges. In April, the Work and Pensions Select Committee raised concerns about consultancy charges and the ultimate impact on individuals’ income in retirement. The committee recommended that the Government ban consultancy charges in automatic enrolment schemes without delay.
A number of options were considered during the review, including restricting the use of consultancy charges through setting a cap, imposing decency limits and providing statutory guidelines. Our conclusion was that none of these options would protect consumers sufficiently or quickly enough. Even a low consultancy charge will have a detrimental effect on a member if they do not receive any tangible benefit from the advice that they are paying for. Our approach is the simplest rule to understand and enforce, and sends a clear message that we are protecting consumers.
While employers are free to get advice if they want it, the Government do not believe that the cost of seeking such advice should be passed on to the members of the pension scheme. Let us not forget that the Government have established NEST, a low-cost and simple scheme designed for automatic enrolment compliance, and joining that scheme requires no consultancy advice.
Banning consultancy charges in automatic enrolment schemes, which is essentially the effect of the draft regulations, will increase competition in the advice market. Advisers will compete on a more transparent fee basis and deliver value for money for employers. I therefore commend the regulations to the Committee and beg to move.
Baroness Drake
My Lords, the decision to prohibit consultancy charging for any scheme used for auto-enrolment and charges which arise from an amount paid to a third party under an agreement between a third party and an employer is very welcome, and I am pleased that the Government have taken this decision. The decision recognises the vulnerability of pension savers where they have not chosen the pension product but are automatically enrolled in the employer’s choice of scheme and where who has responsibility for protecting the best interests of the saver in contract-based pension provision is at best uncertain.
It is also welcome that the Government have called for evidence on standards of governance and quality in defined-contribution pension schemes. I hope that this decision on consultancy charging is the first of many by the Government which put the interests of the pension saver centre stage.
It is also important to reflect that consultancy charging was initially allowed by the FCA—previously the FSA—and its subsequent abolition, because it is quite clearly not in the saver’s interest, is compelling confirmation of the need for the two pensions regulators, the Pensions Regulator and the FCA, to co-ordinate very clearly on what is the appropriate framework of protection for pension savers in an auto-enrolment world where one has a mix of both trustee and contract-based pension provision and where, increasingly, the future looks as though it is contract based.
It is important to reiterate a point to which the Minister referred: Parliament having secured broad popular support for automatic enrolment—which is certainly manifest in the preliminary evidence of people not opting out from being auto-enrolled into a pension scheme—cannot afford to fail those millions of people who are allowing themselves to be auto-enrolled by not having a framework of protection that ensures that the interests of the saver are centre stage in any regulatory framework. Public confidence on this issue, once lost, will not be easily regained. This is a framework for auto-enrolment. I suspect that we have one chance at securing a rebuild of private pension saving in this country and we cannot afford to get too much of it wrong. I therefore welcome regulations but encourage the Government to be even bolder in forthcoming challenges.
Queen’s Speech
Baroness Drake Excerpts(11 years, 7 months ago)
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Baroness Drake
My Lords, I am pleased to follow the noble Lord, Lord Stoneham, and to comment on the Government’s commitment to people who save for retirement and to create a single-tier pension. People save for their retirement through the compulsory national insurance system, through auto-enrolment into workplace pensions and through an active decision voluntarily to save more than is delivered by auto-enrolment. Achieving a sustainable and fair pension system that delivers desirable outcomes for people requires a holistic approach across both the state and the private pension system.
The Government’s single-tier pension reforms are evolutionary, in that they continue at a faster rate than reforms commenced by the previous Labour Government in 2010. They will certainly deliver a higher state pension sooner for many women and carers and those on lower incomes. That is surely to be welcomed.
The state pension will always form a greater part of the retirement income of carers, who, as a consequence of their caring responsibilities, will spend longer periods out of the labour market or participate for fewer hours. It is regrettable, therefore, that the Government continue to exclude an ever-growing number of part-time working women from the benefits of auto-enrolment into a private pension.
Pensions are very long-term, and it is important that there is a consensus across the political spectrum about the long-term intention for pension policy. Otherwise, we will simply revert to the mistakes of the past, when successive Governments over decades took incremental decisions which contributed to an increasing dependency on means-tested benefits and to the huge decline in private pension savings, which can be seen from the early 1980s.
The single-tier pension will mean winners and losers, as changes normally do. It will be important when we consider the Bill fully to understand those trade-offs and whether, for the losers, the loss is fair and proportionate. The introduction of the single-tier pension is intended to strengthen the firm foundation for private pension savings and reduce reliance on means-tested benefits. Both are desirable, but a single-tier pension does not of itself achieve those intentions, as was acknowledged by the Government in their report, The Single Tier Pension: A Simple Foundation for Savings, which states that the starting level and uprating for the single-tier pension will have significant implications for what can be asserted about gainers and losers. The state pension must hold its value against earnings over the long term if ordinary people are to have a realistic prospect of achieving a reasonable replacement income in retirement.
Increasing the state pension age in the face of increasing life expectancy is part of a sustainable pension system. Reports from the Government Actuary on trends in life expectancy will inform the Government’s view of that age, but it is less clear how much importance will be given to the report of the independent panel reviewing additional factors such as socioeconomic differences in morbidity and mortality. Those are matters of considerable significance when setting public policy. As my noble friend Lady Hollis powerfully articulated, it would be most unfair to ignore them.
As to private pensions, there are some most welcome actions proposed by the Government, such as banning consultancy charges for auto-enrolment schemes, tackling charges generally and the abolition of short service refunds. With auto-enrolment, pension policy cannot rely on caveat emptor. Auto-enrolment is predicated on the behavioural insight that, for many people, improved information will not overcome the inertia that prevents their actively choosing to save for a pension. Furthermore, the pension chosen for auto-enrolment is a decision made by the employer, not the worker. A consequence of using inertia to raise pension saving levels—that is to say, not relying on people actively to choose to save—is that ordinary savers will have even less power and influence over the operation of that market. Therefore, it is welcome to see the Government indicating a greater willingness to set minimum standards.
There are many regulators in the private pension space—the FCA, the OFT, the TPR and the DWP—and the Government may not want to change the organisational architecture, but the need for enhanced co-operation between them is essential. The FSA’s proposals to allow employers to negotiate consultancy charges with their advisers and for those to be deducted from their employees’ pension costs were clearly not in savers’ interests and did not sit well with the messages coming from the pensions regulator. In workplace pensions offered by insurance companies, there remain significant governance challenges. No single regulator or government department has responsibility for ensuring that contract-based schemes provide value for money and a high standard of governance. Too much reliance on disclosure of information will not produce those. The majority of savers will struggle to process and act on the information provided, and the overwhelming majority will not make active decisions but end up in the default fund.
I hope that the Government will be brave and use their powers under the Pensions Acts 2008 and 2011 to set up more highly specified minimum quality requirements. I accept that it is reassuring that the Government have already announced their intention to consult on the OFT findings on the working of the pensions market, to be published later this year.
Finally, defined benefit pension provision in the private sector is, for the most part, in managed decline. The new duty on the pensions regulator to minimise any adverse impact on the sustainable growth of an employer raises concerns. The setting of prudent discount rates, for example, remains a key battleground—I make no apology for using that phrase—between trustees and employers. Trustees have to give proper consideration when setting deficit recovery plans. There is real tension between the very long-term funding requirements of a defined benefit pension scheme, the importance of the employer covenant being good for the funding of that scheme for decades to come, and the five-year horizon that many companies work to when making corporate decisions. The cases of Nortel and Lehman Brothers, going through the Supreme Court at the moment, are good case studies of such tension.
Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012
Baroness Drake Excerpts(12 years, 7 months ago)
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Baroness Drake
My Lords, starting positively, it is most welcome that auto-enrolment will really commence in October 2012, and this order is obviously an essential part of getting to that position. The pay reference periods in the draft order and the corresponding earnings values in respect of the relevant sections of the Pensions Act 2008 are sensible. We can understand why, for example, a daily pay reference period could deliver results that were not the policy intent.
It is also pleasing that the Government have held to the definition of qualifying earnings that reflects the common pay components that make up the pay packet. Aligning auto-enrolment triggers and thresholds with tax and national insurance thresholds in the interests of simplicity for employers wherever possible would seem a sensible approach—but only to the point where the pursuit of simplicity does not undermine desirable outcomes, particularly for women.
Aligning the upper limit of the qualifying band of earnings with the NI upper earnings limit provides simplicity, complements the policy intention and, by extending the range of earnings, increases savings a little. Similarly, setting the lower limit for the qualifying earnings band to the NI lower earnings limit provides simplicity and maintains contribution levels when auto-enrolment is triggered. That is the positive.
However, our concern is that the level of earnings that triggers the automatic enrolment of a worker is set for 2012-13 at £8,105, the PAYE threshold. This further rise in the trigger excludes yet more women, and places simplicity above enabling millions of women to increase their savings pot. We remain concerned for the reasons we have rehearsed previously: raising the earnings trigger has a disproportionate impact on women and the Government are repeating the errors of the past in designing a second-tier pension system that does not work for the life pattern of many women. In 10 years’ time, the error will be obvious, particularly to women themselves. I have no doubt that action will be taken to amend it, but by then thousands of women will have lost out unnecessarily.
The Government’s response to the automatic enrolment earnings threshold consultation reports that the main focus of consumer organisations was on equality issues, particularly the impact of higher thresholds on low-paid workers, the majority of whom are women, but clearly their views are not a dominant influence in setting the trigger. Millions of women have a life pattern in which periods of full-time work are interspersed with significant periods of part-time work when their caring responsibilities are at their greatest.
On the Government’s figures, of the workers eligible for auto-enrolment, two in five—39%—are women. Raising the trigger from £5,035 to £7,475—the 2011-12 PAYE threshold—excluded 600,000 individuals, 78% of them women, most of them part-time, but that decision was made. However, raising it to £8,105 excludes another 75,000 women, on the grounds of simplicity. If, over time, that earnings trigger rises even further in real terms, tracking proposed increases in the tax threshold, the number of women excluded from the benefits of auto-enrolment will grow even more.
The effect of excluding these women is, first, that they may not start to save when the reforms are introduced. Secondly, when they transition from full to part-time jobs they may face increased charges on their pension pot accumulated as a result of becoming an inactive member. Thirdly, ceasing to be auto-enrolled when they become part-time workers could break the persistency of the savings habit they built up when working full-time.
The Government sympathise with the view that only those who benefit from tax relief should be auto-enrolled. This ignores the working of the tax credit system. For example, household income brought to account when calculating universal credit disregards 50% of that income paid in pension contributions. Of course, before the reforms it was 100%. To quote from the Johnson report commissioned by the Government:
“Many or most very low earners are women, who live in households with others with higher earnings and/or receiving working tax credits. These may well be exactly the people who should be automatically enrolled”.
Those excluded women also suffer a loss in lifetime pay, albeit deferred pay, because they do not have access to the employer’s 3%—and for some employers the figure is higher. However, they will still lose out from any lower wage growth that flows from the cost of automatic enrolment.
If policy is predicated on the belief that most people will not begin to save unless the power of inertia is harnessed through auto-enrolment then it cannot be the case that the right of those below the earnings trigger to “opt in” will seriously mitigate the risk that many women will face lower incomes in retirement as a result of the level at which the trigger is put. As to persistent low earners, the argument that they should not save because they get state pension and benefit means yet again that there will be no “asset accumulation strategy” for low earners. If 100% of pension contributions were disregarded for universal credit calculation, this would reduce the risk of a fall in people’s welfare prior to retirement.
Furthermore, if the Government accelerate the move to a single flat-rate pension, depending how that is done, together with the more generous crediting arrangements for carers introduced by the Labour Government, then the incentive to save can increase for significant numbers. As the Johnson review again observes:
“earnings are highly dynamic and there are relatively few people who have low earnings throughout their lives”.
A make-weight argument for the higher earnings trigger is that it reduces the number of small pots of pension saving, which are disproportionately expensive for the insurance industry to administer. But of course that argument is totally contrary to the policy intention. The answer to that problem is the public service obligation of NEST not to increase the numbers of workers excluded from auto-enrolment.
Much is made by large employers—though having read the review, one sees that not many of them directly make submissions—of certainty and business planning from linking the earnings trigger to the PAYE threshold, so setting the direction of travel. In 2012-13 the Government are rolling out to the large employers and are raising the earnings trigger in order to simplify the process. However, these are large firms well versed in dealing with complexity. Surely we should not be trading fairness for women, which they need, for an alleged simplicity which these companies do not require.
Many large employers have already been given the simplifying benefit of an alternative certification test. Many use salary substitution, managing the complexity of employees opting both in and out of salary substitution. They are experienced in deploying often complex measures to manage their pay and tax liabilities and frequently changing tax rules. Do 75,000 more women need to lose the benefit of auto-enrolment to give them the alleged simplicity they seek?
To return to the positive: while we welcome the commencement of the new employer duty, and recognising some of the positives in this order, we remain concerned about the position of many women that is created by raising the earnings trigger.
Lord German
My Lords, I recognise in the consultation document and in the response from the Government that three-quarters of the respondents supported the trigger that is now being set by the Government in this legislation. Of course, this is not an exact science; one cannot say that a specific figure is the level at which people will benefit from coming in to automatic enrolment. However, we should recognise that for many low earners, investment in pensions is potentially unsuitable, and that it is not suitable for persistent low earners. I will come back to that point in a moment.
When the Pensions Commission did its initial work, it stated that low earners might aim for a gross replacement rate of 80% or more of their income when they retired. The Johnson review—which I, like the noble Baroness, will quote from—stated:
“This disproportionate impact on women is something we would wish to avoid if we believed that these people would benefit from saving”.
Individuals who are low earners throughout their lifetime will receive a relatively high income—I stress “relatively”—in retirement, without private pension saving. Paul Johnson quotes the example of an individual earning £10,000 a year from the age of 22, who would see a replacement rate of around 97% from the state alone. Therefore, the question is where the target trigger should be set. Surely the objective must be to maximise pensions saving where that saving is valuable and minimise it for people for whom it will not be worth while.
There is no doubt that this will have a disproportionate effect on women, but the question is whether potentially it would not be worth their while to invest in this manner. Would they benefit from the savings? The question that is being asked here is about what the threshold should be and whether it should be somewhere in the region of the figures that Paul Johnson quoted in his review for the Government. Individuals who are low earners throughout their lifetime will receive a relatively similar income without private pension saving. The question is: does the trigger enable people to come back in when their earnings level rises above the tax threshold? The question that the Minister might like to answer is: what will be the procedure for people who have been low earners, who are underneath the trigger, who have not chosen to opt in but who reach that figure to be automatically enrolled? If they are in the category of persons who will occasionally fall back below and then rise above the trigger level, how will their re-enrolment occur? Will there be encouragement, and will they be tracked so that the re-enrolment will occur seamlessly, without them losing out?
The other way in which people’s choices could be made is through opting in. I note that the consultation response from the Government states that people will be encouraged and that employers will be required to pass on information to their workforce. However, there is a difference between passing on information and encouraging people. The difficulty that many employers will have with low earners is in determining whether this is potentially good for them. It is a very difficult judgment to make, given that it may not be the right choice for a person who is a low earner throughout their life but might be for someone who is a low earner now but who has the potential to move back and forth across the trigger line.
Baroness Drake
I appreciate that the Government are looking at the whole issue of the transfer of small pots. The point that I sought to concentrate on was that it is very likely that the market will apply a differential charging structure to inactive members and to active contributing members. Even though the Government have taken powers to control that, those powers will not stop differential charging. If a woman is full-time, then takes on a part-time job with another employer and is not auto-enrolled—and so becomes an inactive member—one of the consequences is that the charges on her remaining pot start to rise, because inertia is not turned into a positive. It is that narrow point. I appreciate that the wider review of pension pot transfers is coming up.
Lord Freud
I will stand my ground a little bit on this, because these are some of the issues that really come into consideration when we look at the broader issue of pension pots. My colleague Steve Webb has said a few things about this in public, and I know that he is looking in private at this differential charging issue, so it is something that he is considering.
My noble friend Lord German asked a related question about the opt-in/opt-out rates. Those will be monitored on an ongoing basis. He also asked about people coming in and going out as their earnings change, perhaps going from full-time to part-time. These people will continue to make and receive contributions according to the rules of the scheme that they end up going into when they go in, but if earnings dip to the extent that no contributions are due in a particular period, they will restart immediately when their earnings are high enough, so there is no waiting period.
I will now return to two issues to deal with them precisely. I only touched on the differential charging that the noble Baroness was concerned about. We have powers under the 2008 Act to set a cap should charges become inappropriately high. We recently extended those powers to cover deferred members. Therefore, we have all the necessary powers, and my colleague is aware of the issue. We are monitoring the charges with rolling research and will continue to do that as enrolment is brought in.
I will close my answers by doing justice to the point about tax relief made by the noble Lord, Lord McKenzie. We will continue to take that into account. The matter is not entirely straightforward, as we established. At this stage we do not know how many people will get relief at source as opposed to making net pay arrangements. We will keep that matter, too, under review.
This is our first review. It took a major consultation effort to decide on the trigger and the earnings band. We would have preferred to come out with this earlier, and I will try to do better on timing next year because early certainty is important, for employers in particular. It was right to consult this time, and to gather the views of people who will need to make automatic enrolment work in practice: those who will have to administer pension schemes, employers who will have to deal with all the questions from their workers, and people who represent those workers. The one message that we got from all of them was that we should keep this simple. I shall take that to heart for the future. Of course, it chimes with the Government’s Red Tape Challenge.
As I said, we will come back to this in a little less than a year. I know that I look forward to it as much as other noble Lords in the Room. I commend the order to the Committee.
Welfare Reform Bill
Baroness Drake Excerpts(12 years, 10 months ago)
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Baroness Drake
My Lords, I support Motion G1. I am conscious that I have entered the debate several times on the matter of the grace period before the weight of penalties comes into play and the benefit cap bites for those who lose their job through redundancy or some enforced reason. I apologise today if I sound a little repetitive, but it is something about which I feel most strongly. A modern welfare system, while addressing benefit dependency, must also support those hard-working families with a clear work ethic in managing today’s flexible labour market. It must not fail to support responsible hard-working people and their families managing today’s economic realities. There is a danger that this dimension has lost some focus in the current debate on the Bill.
The Bill writes the welfare rules for those in work and for those who have no record of benefit dependency. There are millions of people in this country on modest and low incomes who are hard-working, take the hard knocks that life hands out to them and fight to stay on course, so I welcomed the comments from the Minister, Chris Grayling, in the House of Commons on the 1st of this month that the Government would put in place a period of grace of nine months for those who have been in work for the previous 12 months and have lost their job through no fault of their own. The Government’s recognition of the case for a period of grace is most welcome, but I remain anxious.
We know that the Government want to see increased flexibility in the labour market, including, if I may speculate, revisions to employment laws on redundancy consultation and no-fault dismissal for SMEs for up to two years—we await their proposals on these matters. This desire, taken together with the realities of today’s labour market and the intensity of competition, makes a powerful case for inserting into the Bill the provision that regulations will provide for a period of grace in the circumstances where someone faces forced job loss. The provision of a period of grace for a fair period should be hardwired into the welfare system—an integral part of the definition of fairness—and not too easily reserved to the Secretary of State’s discretion, which is why I feel that the amendment is correct.
Ever one who is keen to build on progress to see if there is any more progress to be made, I would like to clarify a matter with the Minister. Experience since 2007 has revealed that some employers have been more creative in responding to downturns than by using the traditional laying off of workers and redundancies. We have seen reductions in working hours and we have seen unpaid sabbaticals—that is, extended periods of non-payment and no work, where, through agreement and to avoid compulsory redundancy and to assist the company, the employment contract has stayed in place but the flow of wages has been suspended or reduced. I hope that the Minister will agree that positive and innovative employment practices to ride out a recession are to be encouraged; they can be good for productivity, employment and the speed of competitive response. However, that raises a question: in such situations where hours fall to a very low level so that they are below the threshold and work conditionality kicks in, or where any payment of wages is suspended for a significant period, will the period of grace apply? In such a situation, the people affected may not strictly have lost their job, because the employment contract remains in place, but they have lost their wages through no fault of their own.
I repeat that hard-working families have paid their dues but will need support in managing their way through a difficult labour market. A period of grace is of itself fundamentally fair. After all, for hard-working people who have lost their job and are desperately seeking another one, which most of them do, what change of behaviour can the immediate application of the cap be designed to achieve? Rather, it would have the perverse effect of undermining their efforts to get back early into the labour market because they were rushing around trying to find affordable accommodation, move their children into new schools or whatever. While I welcome, in the statements from the Minister today and from Chris Grayling, that they have accepted the argument for a grace period, in my view that argument is so compelling that it should not be a matter of discretion but should be enshrined in the Bill. Could that period of grace be applied in a way that fits in with trends in the modern labour market?
I would like to make a final comment. I had not intended to do so but have been prompted to by the comments of the right reverend Prelate the Archbishop—sorry, the Bishop of Ripon and Leeds; I accidentally promoted him there—on kinship carers, a matter on which I myself have tabled several amendments. The Minister has given us his promise that he recognises the contribution of kinship carers, who keep 200,000-plus children out of care, and that he is on the case. I trust him on that; I trust him to honour his promise. I hope that he can reassure the right reverend Prelate that he will hold to his promise, even if today we cannot get the details of how he will do so.
Lord Empey
My Lords, I have some remarks on Motion G2. I recall vividly that in the Autumn Statement there were indications that regional pay was to be examined and the Chancellor had asked regional bodies throughout the United Kingdom to report to him by next July on the issues of regional pay. From a regional perspective, I have to say to the noble Lord, Lord McKenzie, that I have great reservations about his proposals. While a cap is by definition a blunt instrument, and there always has been a specific London issue in pay for as long as I can remember anyway, if we go down the route of establishing a body to run around the regions—as the noble Lord, Lord Newton, has pointed out with his usual typical incisiveness, the variation is not only between regions but within regions and within cities, streets and districts—then I fear that we open the Pandora’s box not only of regional pay but of regional benefit, and sooner or later some people are going to say regional taxes. I fear that the amendment could inadvertently have a perverse effect on all of us, particularly in the regions. I understand that there is very much a London issue, but within regions there are vast variations.
If you want to encourage people to move to where they are more likely to get work, that tends to be in densely populated areas—that is just the reality of life. This measure, however, portends a reality where you could discourage people from going somewhere that they are more likely to find work. I fear that if we go down the road of the amendment, we could open up a range of issues in the regions relating to pay, benefits, taxes and the whole relationship that exists there.
When I heard the noble Lord’s colleague announce this policy in the other place some time ago, I was greatly surprised. Many of his colleagues spoke to me after I had made the point about regional pay and said, “Yes, we can see this is coming”. However, this would actually accelerate the process, so I hope that the noble Lord might not move his amendment and might instead reconsider the policy as it might apply to the regions.
Pensions: Occupational Pensions
Baroness Drake Excerpts(12 years, 10 months ago)
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Baroness Drake
My Lords, my first involvement with NEST is a matter of record. I thank my noble friend Lord McFall for securing this debate and I give recognition to his work on pensions.
Active membership of workplace pension schemes is now at its lowest level since the 1950s. Although I am relieved that the revised timetable for auto-enrolment has been published, I desperately hope that there will be no further delay. In fact, I plead with the Government that there should be no further delay.
For workers to persist in saving for their pension, they have to have trust and confidence. Auto-enrolment will mean that millions of workers begin saving through the capital markets, and the fiduciary duties and behaviour of those managing their assets are going to be of great importance. Trustees have a duty to act in the best and sole interests of the beneficiaries, but the auto-enrolled world coincides with an increasing move to contract-based provision, where fiduciary duty, managing conflicts of interest and governance standards are more ambiguous. To quote the Secretary of State, Vince Cable, in the foreword to A Long-Term Focus for Corporate Britain, returns can be,
“captured by a small number of intermediaries at the expense of the many who provide the capital”.'
A powerful, much needed benefit of establishing NEST as a not-for-profit trust is that it has already started to drive up standards in the industry. Otto Thoresen, the director-general of the ABI, recently acknowledged at the Work and Pensions Select Committee the role of NEST in driving a higher standard of behaviour in the market. Downward pressure on charges and upward pressure on standards of governance—these are the early impacts that NEST is having.
No one who has seen NEST’s approach to governance or investment strategy can doubt the absolute focus on delivering a product for ordinary people. It has transformed thinking around the design of default funds. However, NEST’s influence on the market has to be strong and sustained over a long time. The product restrictions on NEST, the transfer ban and the contributions cap must not be allowed to undermine that influence as the 2012 pensions market, with extensive contract provision, starts to take shape.
The potential cost-efficiency of NEST should not be inhibited. As these restrictions play out in practice, we are now finding that they add complexity to the NEST product rather than simplicity to the employer experience. They may force employers to make multiple-tier provision or sign up for a scheme that does not offer some workers best value.
The transfer restriction also prevents NEST acting as an aggregator of pension pots. With automatic enrolment and job churn, there will be millions of small pots in the system which will be vulnerable to high charges and neglect if they are not steered into a safer harbour.
The Government have acknowledged that the case for reform is clear. That reform must include a role for NEST, which must be fit for purpose in protecting the pension pots of ordinary people.
The importance of NEST in driving up standards in the pension industry should be neither underestimated nor undermined. On the eve of auto-enrolment, we see emerging issues, such as providers selling short-service refunds as a propositional benefit to employers, with the consequential loss of up to two years’ pension saving for the worker. There is also the establishment of multi-employer “master trust” schemes by providers with senior executives in trustee roles. How do they manage conflicts of interest? Will such trustees be able to sack underperforming fund managers if they sit within the same corporate entity?
The Secretary of State has reserved powers to set charge caps and I hope that he will monitor closely the emerging evidence. Low charges are essential to the public credibility of automatic enrolment. I also hope that the Government take the opportunity of the Financial Services Bill to strengthen the requirement on regulated bodies to have a duty of care and to act responsibly in the interests of the consumer.
There is increasing recognition of the importance of the alignment of interests between pension scheme governance and the member. NEST has this alignment at the core of its governance. Indeed, it was heartening to see Otto Thoresen at the Work and Pensions Select Committee arguing forcefully that the industry has really got it in terms of the need to make pensions work for the saver. It was equally heartening to hear him accept that some would be cynical of this claim, based on the industry's past behaviour in this area.
I urge the Government unequivocally to confirm that they accept that a successful and thriving NEST has an essential role to play in driving up standards in the industry, in pension provision and in the interests of all those workers who will be auto-enrolled in saving for their pensions. I urge them to take such steps as are necessary to ensure that the role that NEST will perform in raising the standards in the market place is maintained, including removing restrictions to allow it to continue to do that.
Welfare Reform Bill
Baroness Drake Excerpts(12 years, 11 months ago)
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Baroness Drake
My Lords, I support Amendment 60, to which my name is attached. It would support hard-working people and their families with a clear work ethic to manage the challenges of today’s flexible labour market and the consequences of losing their job through no fault of their own by allowing a transition period of 26 weeks before the benefit cap is applied. In integrating in and out-of-work benefits, universal credit has to be applied to two different constituencies: those who are out of work for long or sustained periods and those who are regularly in work. A single system has to provide an experience fit for both. I accept that a modern welfare system has to incentivise people to work and to address benefit dependency, but it also has to support hard-working people with a clear work ethic and their families in managing difficult economic circumstances. A benefit cap immediately applied can have a very negative effect on hard-working people and their children when the wage earner loses their job or work involuntarily, even more so where the loss of work happens quickly.
The Government have made clear that a driving principle of the Bill is that work should always pay more than out-of-work benefits and that a benefit cap is, first, a clear message that there is a maximum level of financial support that claimants can expect and, secondly, necessary to provide incentives to work and to reduce benefit dependency. When my noble friend Lord McKenzie questioned the Minister in Committee about whether, if it were established that the cost of the cap outweighed the benefit savings, he would still support the cap, the Minister replied:
“Clearly the message that we are trying to get over is a behavioural one much more than a cost-based one”.—[Official Report, 23/11/11; col. GC 421.]
What is the change in behaviour that the immediate application of the cap is designed to achieve in hard-working people who have lost their job and are desperately seeking another one? Where someone has a clear work ethic and a clear pattern of working and is desperately seeking another job, a grace period of 26 weeks will give them a fighting chance of re-entering the labour force before the weight of penalties comes into play and the cap bites. When faced with job loss, normal working people do not clap their hands and say, “Oh goody goody, I'm off to a life on benefits”. They are more likely to be stressed, anxious and worried about their home, paying bills, their children and their future while they rush around trying to find another job, probably fighting feelings of depression while they do so.
It is higher housing costs that are most likely to push families over the cap. As the noble Lord, Lord Best, said, without a period of grace, many families in private rented accommodation, particularly those with children and living in the south, will see the benefits for their housing costs cut, potentially forcing them to look for alternative housing elsewhere.
The Government’s impact assessment of the cap said that those affected will need to choose between taking up work, reducing non-rent expenditure or cheaper accommodation, but where someone who loses their job is clearly choosing to take work, they need time to do that. Finding a new job rarely takes days. It is most likely to take quite some weeks and even longer in difficult economic circumstances. The welfare system should provide this safety net, otherwise at the very time when a person needs to put all their efforts into finding another job, their efforts may be redirected to relocating to cheaper accommodation and relocating their children to different schools. In moving, they may lose, as has been said, their contacts, their local knowledge and their networks—all the routes that would most frequently take them back into work. The ultimate irony is that lone parents could face having to relinquish their childcare arrangements—their nursery place or their childminder—just as they need to keep them in place so that they are available to make an early transition back to work.
Currently, approximately 50 per cent of people on JSA get back to work within six months, 75 per cent in nine months and 90 per cent within a year. They clearly want to work. I accept that these figures might have been overtaken because of the rise of unemployment that we are now experiencing whereby 10 people are chasing every job in London, but the underlying argument holds good. They are chasing them because they want to get back into work.
The immediate application of the benefit cap would penalise those who have just lost their jobs—decisions about their rental costs or family size were made while they were employed—before they had even been given time to find another job. Rather than penalise people who are trying to make a rapid return to employment, universal credit should be supporting them. A grace period of 26 weeks does not contradict the simple message, as expressed by the noble Lord, Lord Freud, who said that,
“in the end, there is a limit to how much the state is prepared to support someone”.—[Official Report, 23/11/11; col. GC 422.]
Rather, a transition period would ensure that hard-working people faced with an involuntary loss of work are assisted in making an early move back into the labour force and getting their family’s lives back on track before the cap bites. That seems to be a fair, reasonable and decent thing to do.
The Government want to see an increase in private sector employment relative to the public sector to increase flexibility in the labour market through a reduction in employment rights and regulation, but they appear reluctant to transition the benefit cap to help hard-working people manage today’s labour markets and economic realities—realities that will become harsher as global competition intensifies. As currently drafted, the benefit cap would undermine the expectation that if you work hard, pay into the system and play by the rules, there will be a safety net available to you if you hit hard times so that you have a chance to recover.
This Bill also sets the welfare rules for people who have no record of benefit dependency and are paying their national insurance contributions. When I made that point in Committee, the Minister commented:
“I shall bear that point very much in mind as we go through the next stages”.—[Official Report, 23/11/11; col. GC 427.]
We are at the “next stages” and I encourage him to put flesh on that consideration. This amendment does not pose a principled challenge to the cap; it poses a 26-week transition for people who are rushing around urgently trying to find another job before the cap is imposed. I accept that the Minister has made a major contribution to welfare reform but I ask him to accept the case for a safety net. As I have said, that seems to me to be a fair, reasonable and decent thing to do.
Lord Skelmersdale
My Lords, would the noble Baroness, Lady Drake, accept that she is talking about those who have been earning more than cap and fallen on hard times rather than those with whom much of the legislation is involved: that is, those who in employment have been earning under the cap?
Baroness Drake
The Bill sets the welfare rules for people who do not have a record of benefit dependency. In the national insurance contribution system, one is trying to design something that gives people a cushion. Sometimes it will be because they will be earning higher than the cap; on other occasions it is because of the nature of their accommodation. Either way, instead of having a cushion so that they can concentrate on getting back into work as quickly as possible, which it is clear most of them want to do, there is a danger that the immediate way in which the cap will operate means that they will have to take defensive measures to bring down their level of expenditure rather than putting all their efforts into finding a job.
Lord Stoneham of Droxford
My Lords, I have a lot of sympathy for the amendment of the noble Lord, Lord Best. It is largely about the transitional arrangements, on which we are still working towards having more information. It would be helpful if the Government could spell out exactly how they are going to deal with the problem of the flow after April 2013—because everyone will have a year’s transition. If they become unemployed after April 2013, they will in certain circumstances be hit by the cap. I think that there is some sympathy in the House for people who have not had a history of benefit dependency. We are not trying to achieve behavioural change with them. How are we going to help them back into work when they are suddenly faced with high housing costs and a cap being imposed on them?
In our debate on children, insufficient attention was given to the fact that one of the biggest problems is the differential in housing costs between certain areas. Fortunately, those who have the highest housing costs will normally be in areas where they are likely to get a job quickly, rather than in areas where housing costs are lower. Even so, it takes much longer to get a job these days, particularly in this market, than it has in the past. People need some help with that transition.
We need more information from the Government on the transitional arrangements, which we on our Benches are concerned remain imprecise. This particular issue highlights that.
Baroness Drake
“( ) Regulations under this section must provide for an exemption from the application of the benefit cap for family and friends carers where—
(a) the child comes to live with the carer as a result of plans made within a section 47 of the Children Act 1989 child protection enquiry or following enquiries under section 53 of the Children (Scotland) Act 1995 and the local authority states that the child cannot remain with the parents in the current circumstances;(b) a child comes to live with the carer following a section 37 of the Children Act 1989 investigation and the local authority states that the child cannot remain with the parents in the current circumstances;(c) a carer has secured a residence order, including a residence order under section 11 of the Children (Scotland) Act 1995, or special guardianship order to avoid a child being looked after, and there is professional evidence of the impairment of the parents’ ability to care for the child;(d) the carer has a residence order, including a residence order under section 11 of the Children (Scotland) Act 1995, or special guardianship order arising out of care proceedings;(e) the carer has a residence order, including a residence order under section 11 of the Children (Scotland) Act 1995, or special guardianship order following the accommodation of a child; (f) the carer has a residence order, including a residence order under section 11 of the Children (Scotland) Act 1995 or special guardianship order following the death or serious illness of a parent;(g) the carer is an approved kinship carer under Part V of the Looked After Children (Scotland) Regulations 2009.”
Baroness Drake
My Lords, I rise to move Amendment 60B, the purpose of which is to exempt from the benefit cap family and friends carers who are bringing up children whose parents cannot do so. These are children who would otherwise be in care and this community of carers is looking after a population well in excess of 200,000 children.
Family and friends carers may be disproportionately affected by the benefit cap as they are likely to be living in larger households because of taking in a sibling group, particularly if they have children of their own living at home. It is not uncommon for a kinship carer to be looking after four, five or six children. As a result these families could immediately be up against the cap. Grandparents Plus research finds that 10 per cent of kinship carer households consist of five or more people. While in most of the country carers receive benefits that are less than £500 a week, in parts of London people with larger families are already paying upwards of £400 a week in rent. The cap would leave these future kinship carers with less than £100 a week to cover all their family’s, including their new family’s, needs.
Around one in three kinship carers gives up work to care for children when they move in. Almost half of these children have emotional and behavioural problems or other special needs or disabilities. In about half of cases their parents are misusing drugs or alcohol. Bringing up someone else's children is enormously emotional and a big financial commitment, yet only a minority of carers—around a third—receive an allowance from the local authority. In the present financial climate, local authorities are even more reluctant to pay kinship carers allowances.
No one sets out in life to become a kinship carer. People do it because they do not want to see their grandchildren, their younger siblings or their nieces or nephews, or children who they know well, taken into care. Often, giving up work is not a choice for them. They are told by social workers or by other authorities that the children will be put in care or placed for adoption if they do not do this. Children who are cared for can be of any age, not just in their early years. Kinship carers are not entitled to an employment break when a child or children first move in and can face significant financial disadvantage as a result of having to give up work. If they are older, they may find it difficult subsequently to re-enter the labour market.
An unintended consequence of the benefit cap is that fewer family and friend carers may volunteer in difficult circumstances, increasing the number of children taken into care as a result. This would be more expensive from the point of view of the state and certainly not in the child's best interest. It costs £40,000 for one child to be in an independent foster care placement for one year and I understand that there is already a shortage of 10,000 foster carers.
The argument that imposing a benefit cap on larger families will discourage people from having more children has no resonance or behavioural leverage for family and friend carers, who are taking on other people's children. A benefit cap can have no positive incentive at all. Rather, it is a disincentive to kinship carers, who save the state significant amounts of money and provide a better solution for the child. Which of the three choices identified in the impact assessment do kinship carers take to mitigate the impact of the cap? Do they go to work, reduce their expenditure or move to cheaper accommodation?
Kinship carers may have to give up work as a condition of assuming responsibility for the child. Grandparents Plus has many examples of grandparents being told by social workers that unless they give up work, their grandchildren will be taken into care. They cannot mitigate the cap by going to work because they then hurt the child. Often, kinship carers want to stay in work, but this may not be an option if they want to take over the responsibility for the child. They may have their own children to support and moving to cheaper accommodation would seem to punish those who voluntarily embrace the responsibility for somebody else's children, often in difficult circumstances.
Children moving into kinship care because of serious family difficulties need stability, and if the carer has to move house to reduce housing costs that will be highly disruptive and mean that children have to change schools. It may mean that the local support networks, on which the kinship carers rely, will also be disrupted. This places further strain on carers, who are already under enormous stress because of the family difficulties that the children they are taking on have endured. Even more than for other parents, community links with families, neighbourhoods, friends, churches and community groups provide vital support to carers who are often bringing up children who may be traumatised.
The amendment covers only carers who are looking after children who would otherwise be in care and under a relevant order. There is no possibility that exempting these kinship carers would result in any sort of perverse incentive for people to go round sweeping up children in the hope of claiming that they are caring for them and accruing additional benefits.
At the risk of repeating myself, I will go back to what I said in Committee and quote the Secretary of State, Iain Duncan Smith. If his words are compelling, as I said in Committee, why should I use alternatives? He said:
“The state has become ambivalent about the importance of family structure … the role of the extended family … in a context of growing family breakdown, it is all the more important that we continue to support … and hold together these wider relationships”.
Unless family and friends carers are exempt from the effect of the cap, the state will move from ambivalence to antipathy. In referring to exempting people from the cap, the Minister said in Committee on 23 November:
“We have … been very careful in providing exemptions and deliberately kept the list short”.—[Official Report, 23/11/11; col. GC 415.]
I simply ask that the short list includes family and friends carers. That protects the children and certainly makes fiscal sense.
I acknowledge that the Minister has recognised the valuable role that kinship carers fulfil and that he has committed to looking at a range of issues affecting this group—an important commitment that I accept and I know that he will keep to it. But it remains uncertain as to what the noble Lord intends and this may be my last chance to argue the case for this community before the Bill leaves this House. It is important that a decision on whether individual carers are exempt from the cap should not be left to local discretion. People who are thinking of taking on something as significant as the care of vulnerable children need a degree of certainty about the support that they can expect.
In response to the noble and learned Baroness, Lady Butler-Sloss, the Minister used words to the effect that, “Kinship carers are a special case and we need to get it right in regulations. Families need a period to adjust to looking after troubled children”. I would like to push him on that sentiment. As I said, this may be my final chance to argue the case for the valuable job that this community of carers delivers. Will he accept the amendment or agree to include an exemption from the cap for family and friends carers under regulation? Not only is the case for the carers and the children compelling, but it also makes fiscal sense to exempt them.
Baroness Tyler of Enfield
My Lords, I support the amendment that has just been moved so powerfully and comprehensively by the noble Baroness, Lady Drake. Having myself moved a similar amendment in Committee, I do not wish to go over the same ground that she has, save to say that there is a powerful case for providing an exemption from the cap for grandparents, older siblings, aunts, uncles and other family members who are raising vulnerable children because of very difficult family circumstances such as parental death, alcohol or substance misuse, imprisonment, severe illness, disability, abuse or neglect—the list goes on and on. Children living in the care of family and friends are often exceptionally vulnerable and have already suffered huge disadvantages and traumas in life.
As the noble Baroness clearly put across, one consequence of the benefit cap that I am sure is unintended is that fewer family and friends may step forward as carers in these difficult circumstances, and the cost to the state, particularly if more children go into care as a result, would be considerable. To amplify that point, I shall mention a few statistics that the Family Rights Group was good enough to share with me from an internet survey that it has just conducted—the largest survey of family and friends carers in the UK—with 500 respondents. The survey’s findings show that: more than 16 per cent of respondents were raising three or more children, both kinship children and their own; 11 per cent of respondents were in private rented accommodation and 28 per cent in housing association or council rented accommodation; 29 per cent received housing benefit; 31 per cent had given up work permanently when taking on kinship children while 14 per cent had given up work temporarily; and 20 per cent of the children that they were raising had previously been in an unrelated foster care placement. I think this puts some flesh on the bones of this particular issue.
I know that my noble friend the Minister was very sympathetic in Committee to this issue and has written in very sympathetic terms to the charities which are most involved. I very much hope that he has some reassuring words to give us tonight.
Lord Freud
My Lords, as always, I am incredibly grateful to the noble Baroness for her suggestion. I am thinking of offering her a job. However, let us not redesign the benefits system on the Floor of the House, although we have gone into it on many occasions. Let me ask the noble Baroness, Lady Drake, to withdraw her amendment.
Baroness Drake
My Lords, I thank noble Lords for their support and the noble Baroness, Lady Tyler, who also argued the case for family and friends carers in Committee. I accept that the noble Lord has shown a commitment to looking at the needs of this group and I think the charities would accept that.
My anxiety and that of the charities that articulate the interests of family and friends carers is that the Bill is going through the House without one having achieved clarity over the kind of protection that this community will get under the legislation. The Minister said that this community would be supported in the most appropriate way, and that it was necessary to get it right in regulation. It would be helpful if he confirmed that there will be regulatory provision to protect this group, notwithstanding what the precise solution may be, rather than leave the protection to discretion. It would be helpful if the regulatory route was being taken. I thank my noble friend Lady Hollis, as ever, for coming up with an excellent suggestion.
Lord Freud
Perhaps I may answer that straight on. I hope I made myself clear that when we get the regulations on handling the transitions and the options around it that we discussed earlier, we do it in a way that looks after this group. I am not committing here to specific exemptions for this group, but I am saying that we are looking at how to do it so that we meet its requirements, of which I am very conscious.
Baroness Drake
I thank the noble Lord for that response. In the earlier stages of the debate on this community, my particular concern was that the protection necessary for it is not dealt with solely as a matter of discretion and that there is clear guidance—whether or not as a consequence of dealing with the matter as part of a wider resolution—that it is not left solely to the individual discretion of advisers. I take the response of the Minister as meaning that it will not be left in that way. He is nodding.
Lord Freud
Hansard needs more than a nod. Without elaborating on a lot of transitional arrangements, I am not quite sure how this will work. I am not sure that I can give absolute assurance either way, although I would lean towards setting these things out formally without discretion; but I am not in a position to give any kind of assurance either way. There might be elements of discretion in any set of protections that we develop.
Baroness Drake
Obviously it would have been preferable if the Minister had said unequivocally that this matter will not be left to local discretion, but it is clear that I am not going to get that reassurance. However, the noble Lord has said quite a lot on record that he is committed to trying to resolve the needs of this particular group. Perhaps I may borrow a phrase from the noble Lord, Lord Newton, in a previous debate: I will hold the Minister’s feet to the fire on this issue. On that basis, I agree to withdraw the amendment.
Welfare Reform Bill
Baroness Drake Excerpts(13 years ago)
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Baroness Drake
I speak as someone who is rather preoccupied with financial inclusion. The Minister is describing a process, but if there is a product—a bank account—that works for low-income or unemployed people and the account is in debt, how does one know that the bank will pay the direct debit? Can he be confident that it will pay if there is a deficit in that account?
Lord Freud
That is exactly what we need to ensure and that is exactly what we are discussing with the banking groups. Specific banking support is exactly the issue that we need to get right.
Welfare Reform Bill
Baroness Drake Excerpts(13 years ago)
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Baroness Turner of Camden
My Lords, this is a very short amendment which I came to as I leafed through the Bill before writing any amendments down. It is an attempt to amend and make clear what is meant by work-focused interview requirement. The Bill states:
“The Secretary of State may specify how, when and where a work-focused interview is to take place”.
We must bear in mind that we may be dealing with a number of people who are not terribly well or who are not very well clued up about what arrangements are necessary. There would, presumably, be some sort of sanction if the claimant did not turn up. I have therefore drafted an amendment which enables a claimant who cannot comply with the requirement to attend a work-focused interview to provide medical evidence to say that, on that occasion, they are not able to turn up. In that way, they would avoid any sort of sanction which might exist. I hope that this, or something like it, will be acceptable to the Minister. As we are dealing with people who are often not very well, I am trying to make it clear that there is no sanction if they simply cannot make it.
Baroness Drake
My Lords, I have Amendments 23A and 24A in this group. Amendment 23A requires the Government to have regard to the interests of the child when operating work conditionality and work availability requirements under universal credit. Work availability applies not only to those seeking work but can set requirements on those in work to increase their hours of work or to seek higher paid work. This conditionality has acquired greater significance because the Government will expect people with children aged five and upwards to be subject to full work requirements and are extending full work requirements to couples with children.
I do not seek to make a speech about what the needs of the child are and I do not seek to debate the detail of how work availability requirements will operate, though I have my opinions. What I do seek is to place a requirement on the Government to implement and operate work availability requirements with reference to the interests of the child of any carer subject to work conditionality. Universal credit imports a novel and extensive level of discretion over a sizeable section of the working-age population and powers to follow through with sanctions. However, a policy that is premised on the belief that parents and their attitude to benefit or responsibility are better if they work has to be balanced by the need to protect the interests of the child of the carer, subject to such conditionality.
It is not a question of whether we do or do not accept the Minister’s assurances; I am sure he gives them in good faith. But those assurances are not of themselves sufficient. If the Government want to take, for the Secretary of State, a powerful range of discretions necessary to apply work conditionality, which even the Minister admits is not fully defined or refined operationally, then Parliament should require the Secretary of State to exercise those discretions with reference to the needs of the child whose care will be impacted by the application of that discretion.
In response to concerns on this matter expressed in Committee, the Minister said:
“Jobcentre Plus does not dictate to parents the type of childcare or which provider they should use”.
He added:
“Advisers will continue to have an important role in both challenging and supporting parents who may have preconceived ideas about childcare”.
Furthermore, he said:
“Where the adviser considers that the parent has not taken reasonable steps to identify or access appropriate childcare they will refer the question to a decision-maker. The sanction will only be imposed if the claimant does not have a good reason”.—[Official Report, 26/10/11; col. GC 326-327.]
He had earlier said that,
“in due course we will provide more detailed guidance on how the system will operate in practice”.—[Official Report, 26/10/11; col. GC 296.]
That is a lot of guidance, a lot of discretion and a lot of work still to do, even though some reassurances are given. Currently, there is also a lack of clarity as to what would or would not be a good reason for a carer not to have access to childcare.
The amendment does not seek to answer those questions but seeks to insert in the Bill a requirement that the work availability requirements have to operate by reference to the interests of the child or any carer subject to them. Amendment 24A seeks to exempt family and friends, and kinship carers, from the conditionality requirements to seek work for a period of 12 months when they take on a child or children who cannot live with their parents because of parental death, drug or alcohol abuse, serious illness or imprisonment—most of whom would otherwise end up in local authority care. These carers are doing an enormous service, both to the vulnerable children and the state. Such carers often step in in extremely difficult circumstances, often at short notice, and voluntarily embrace responsibility to protect the child. Such children are covered by an order under one of the various provisions laid out in this amendment.
It is important to remind ourselves that we are talking of a population of some 200,000-plus highly vulnerable children who are being raised by grandparents, older siblings, other family members or friends. If just 5 per cent of the children currently in family or friends’ care were in independent foster care, this could add £500 million a year to the cost of providing for children in care. A number of provisions in the Bill could unintentionally disadvantage family and friends carers, and one certainly wants to avoid the risk of children needlessly being taken into care. These include not only the conditionality requirements I am referring to but other matters such as the benefit cap, to which I hope to return.
However, it is important to recognise that three in 10 family and friend carers give up work when a child moves in, and a similar number reduce their hours, often because they are told to do so by a social worker because of a trauma that the child has experienced that has led to them being taken into the family and kinship care. Many of the social workers feel that the carers have to do this in order to meet the child’s needs. Someone who adopts a child is entitled to adoption leave, but family and friends carers have no such entitlement to help them to settle a child—during what is often a very difficult period when they first arrive—and cope with the upheavals in their lives. They often have to take on these children without notice and often to avoid the children being taken into care.
In Committee, an amendment was tabled to give working-age family and friend carers exemption from conditionality requirements for one year after a child moves in. I recognise that I may not have the influencing powers of my noble friend Lady Hollis of Heigham, but it is very much welcome that in Committee the Minister made a very intelligent observation when he recognised the enormous contribution that family and friends carers make to society and children, and that it makes good sense to support them. I quote the noble Lord, who said:
“I am absolutely convinced that this is a key area and am currently looking closely at ensuring that this group is treated appropriately under the universal credit … However, we recognise that clarity of treatment and a clear legislative exemption could be of value”.—[Official Report, 26/10/11; col. 338.]
The Minister concluded:
“I am on the case”.—[Official Report, 26/10/11; col. 341.]
I am delighted by that. I hope that he is still on the case. I urge him to translate his warm words into action by supporting the amendment.
If the Minister is unwilling to accept the amendment, will he instead be willing to commit to introducing protection for kinship carers through regulations? I specifically ask him commit to include in regulations that there should be an exemption for conditionality requirements for family and friends carers for one year after taking on the care of a child who is not their own; and that family and friends carers who are required by the local authority to give up work or reduce their hours to look after such a child or children will be entitled to have their jobseeking requirements switched off or constrained for the duration of that requirement.
Lord Freud
I am going to have to write with a precise definition of domestic violence and the threat of domestic violence.
Turning to Amendment 26, we are all too well aware that in-work conditionality is a difficult and contentious area. In this debate and in Committee noble Lords raised a number of concerns and questions. I think that I have been open enough to admit that I do not have all of the answers to those questions right now, but I hope that I can provide some real reassurance by describing our planned approach. We are going to take some time to get this right, because it is a new area. I said in Committee that there may be a role for piloting and I can now be much clearer on that.
We have decided that when universal credit is launched we will not be imposing conditionality on claimants with income or earnings which would, broadly speaking, have taken them over the cut-off point for the current out-of-work benefits. So we are effectively continuing with the current system. Rather than a review, our approach will be to pilot the application of conditionality on claimants whose income is above this level. We will want to gather views on the sort of approaches that could be tested and I commit to publishing the details of these pilots. We will then reflect on the results of that process before adopting any national approach.
Finally, turning to Amendment 24A, I have listened very carefully to the feelings of noble Lords on this and again let me say that we are of one mind on this matter. Work is already under way, as I said in Committee, around how kinship carers should be treated for conditionality purposes. I agree that kinship carers who need a period of adjustment should be given time to return to a stable footing before being expected to meet work-related requirements and juggle conditionality with new caring responsibilities. Advisers will have discretion to lift temporarily the requirements on individual claimants where a child’s needs are such that the claimant must be able to provide full-time care. I repeat what I said in Committee. I recognise the potential for value and clarity in a legislative exemption from conditionality and we are carefully considering options for further provisions. The Bill provides scope for flexibility in this area and we have powers to make regulations as necessary. These things take time, but I can assure noble Lords that work is progressing. I am on this case. We are currently talking to the Department for Education—
Baroness Drake
I shall not miss any opportunity on this because I know that this important community will hang on the Minister’s every word—and I say that in the warmest sense. The Minister said that advisers would have the discretion to lift the conditionality and, at the same time, he repeated the reference to the value and clarity of legislation. If I may push him, is he saying that guidance and discretion around guidance are not of themselves sufficient to address this community?
Lord Freud
I think what I am saying is that you can take away the discretionary elements of support for this community, and that is already in the bag. I would like to add more to that, and that is what I mean when I say that there is value in legislative exemption. Then I move on to say that I am working on it. I am seeing some noble Lords who are familiar with government having a good giggle because they know exactly what is happening and they giggle with reality.
The way I have to express this—again, some noble Lords will recognise this better than others—is that doing more for this group may come at a cost, and we are operating in difficult financial times. I repeat that I have a real interest in this area, and when I am able to give firm answers, I will do so. This is a matter with which we will deal in regulations rather than in primary legislation. On that basis I urge the noble Baroness not to press her amendment.