Pensions Bill

Lord Browne of Ladyton Excerpts

Monday 16th December 2013 Grand Committee

[Baroness Hollis of Heigham]

My Lords, Amendment 7 is another probing amendment so that we understand the buyback rules. By virtue of the Bill raising the number of qualifying years from 30 to 35, there will be some people, mostly women, who will come to retirement age with an incomplete NI record. I should emphasise here that in terms of buyback I am not talking about class 3A—the new proposals for the additional pension. Some of those missing basic years may have occurred before 2016; some may occur afterwards. It is crucial that we help people to have a complete record, otherwise many will need topping up by pension credit.

Buyback, as members of the Committee will know, comes through making class 3 contributions—what we call voluntary NICs. They cost around £13 a week, which is about £700 for the purchase of one year, and add £3 to £4 to your pension, for life, so that you get a payback within three to four years. That is a return of more than 25% on your capital, so it is a very good deal if the arrangements stay the same. Obviously, the class 3A proposals are meant to be actuarially neutral, so I imagine that they will not be as attractive. You can buy those extra years in the year that you are missing a class 1 contribution—husbands have sometimes bought them for their stay-at-home wives and rich kids have sometimes had their parents buy them for them—or you can revisit the record of your NI contributions close to retirement and see how many more you need to get a full state pension. If you can afford to, you can then buy back contributions for the missing years.

In the past, you were allowed to buy back your missing years either as you went along, so that they were current, or to buy back the last six years, especially at retirement. If you had missed a year, say 15 years before, it meant that you could not retrospectively cover it by buyback. That was changed after 2006 so that you could buy back any six years. That was particularly useful to women who might have taken a year or three off, say 10 years before, when they accompanied their husband to his new job in a new city or because her working life had, for a couple of years, been interrupted by caring responsibilities for which she could not then have been credited.

The Government have said, as I understand it, that up until April 2023 you can buy back missing years to 2006, which is good news. I have some questions. First, will that happen if you have already retired? In other words, could someone retiring in 2021 decide to buy back additional missing years? Or must, as in the past, that purchase take place within a year of retirement? Secondly, are you limited in the number of years you can retrospectively purchase to, say, six years within those 16, or could you in theory purchase up to 16 years at or after retirement—for example, if you are lucky enough to have a legacy, or something?

Thirdly, are you still able to purchase up to six missing years in any years before 2006, or has that now been wiped out? That is key. Those were the years for which women particularly suffered before the credit system was made more generous. I think that I am right to say that women who gained NI credits for their children up to 16, which is now reduced to 12, should be okay, given buyback to 2006, but what of the situation of a woman carer not eligible for the carer’s allowance but who today would be eligible for carer’s credit, which did not exist before 2006? If she were caring for a couple of elderly relatives, between, say, 2000 and 2004, she might well have lost several years of NI credit. Can she buy those years back?

As I said, I am not referring to the new class 3A. I would be grateful if the Minister could clarify that and put the rules on record. I beg to move.

[Lord Browne of Ladyton (Lab)]

My Lords, I am grateful to my noble friend Lady Hollis for opening what appears, from the expressions of those in the Minister’s Box, to be an unexpected line of engagement in the complex issues with which we are dealing.

The issue of buying back national insurance contributions has been engaged with most recently, as the Minister will realise, in 2006, when the six-year buyback was relaxed in certain circumstances of some complexity. I am conscious that we are moving inexorably towards the clauses in the Bill which in the House of Commons were described as being the complex clauses, which deal with transition. Clauses 2 and 3 deal with entitlement to single-tier pension where the national insurance contributions are all close to 2016, because of the provision in Clause 4(1)(c), but this seems as good a place as any to deal with this issue, which may well have been properly engaged with under a later clause because it lies within the years that my noble friend is interested in—more in the transitional phase than the projected phase of post 2016.

It is none the less a valuable issue. It allows me to take advantage of a completely coincidental e-mail which I received at exactly 4 pm today. With the permission of the Committee, I will read this set of personal circumstances to the Committee. I think that it illustrates the real challenge that the limitations generate for real people. I cannot imagine that this woman who has written to me and, probably, to other Members of the Committee, is unique. I will protect her identity by anonymising her, but will read just a couple of paragraphs to the Committee, if I may.

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[Lord Freud]

I thought that I said the 2008 Act.

[Lord Browne of Ladyton]

I am grateful to the Minister. On this side, we heard 2000.

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[Lord Freud]

No, let me provide clarity. The system does not let people buy back years before the 2006-07 point. We have relaxed the time limits because of the uncertainty around the new system. However, it is an insurance system, with the basic principle that you cannot insure after the event.

[Lord Browne of Ladyton]

I may need to go and do some research, but my understanding of the 2008 Act was that there were circumstances in which you could buy back beyond the six years for a further six years, under very limited circumstances. It was open to married women in particular, I think, though I am not entirely sure and I will need to go back and check all this. However, maybe the Minister may just conclude this debate on the point at which the six-year limit is fine.

[Lord Freud]

My Lords, I thought that I had just said that we had made that concession a general one in practice.

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[Baroness Hollis of Heigham]

My Lords, I shall withdraw the amendment, but I would have thought that the Minister would do everything possible to reduce the number of people having to fall back on pension credit as a safety net as opposed to getting them into the new system provided they pay their way. They have taken on these family responsibilities and are willing to pay for it, and the Minister is saying no.

[Lord Browne of Ladyton]

My noble friend may wish to take this opportunity to have recorded the apparent inconsistency between the new policy, which allows class 3A national insurance contributions to be paid in an unlimited fashion—or if not entirely unlimited then in an extensive fashion—and the restriction of six years on class 3 national insurance contributions. She may wish to consider whether there is some indication of a relaxation of the clear policy until now of restriction in relation to national insurance contributions.

[Baroness Hollis of Heigham]

My noble friend is absolutely right, but we have probably pushed this matter as far as we can tonight. However, I am simply very unhappy about this. It is an unnecessary abatement of the possibility of allowing women who have done the right thing and put their family first at difficult points in their lives to make good their deficit in the NI record, whereas if she were wealthy, well informed, stayed at home and bought a year every year, she would be okay. That is not only a failure to recognise her family responsibility but a failure to recognise the position in which low-income women have always been placed in relation to pensions. We can do better than that. I hope that the Minister might want to see whether he can meet us on this in any way. I beg leave to withdraw the amendment.

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[Baroness Turner of Camden]

My Lords, this amendment is about the 35-year qualification period to get the full-rate single-tier pension—of course, that also applies to the reduced rate pension. I have tabled the amendment because a lot of concern has been expressed to me. Presently, there are 30 qualifying years for the basic state pension. That period of 30 years has been achieved after a fair amount of agitation in the past, and people are anxious to retain it. The Government, however, apparently argue that the 35 years is associated with a higher benefit, but this argument ignores the fact that most people will also have established some rights to the second-tier pension at that stage.

Under the present framework, a low-paid employee can establish an entitlement to a level of state pension equal to £144 if they have 30 qualifying years’ contributions or credit for the basic state pension, and of course they have to have 22 years for the second state pension. Putting in 35 years instead of 30 seems to a number of people simply to be going backwards. It is obvious that other people feel like that as well because my noble friend Lady Sherlock has tabled Amendment 16, with which my amendment is grouped and which again raises doubts about the 35-year provision. That amendment suggests that there should be a review to determine costs and benefits and so on.

I would be in full support of that if my amendment was not accepted. I would prefer of course to have 30 years rather than the 35, but my noble friend’s amendment at least suggests a review and would ensure that the matter was thoroughly discussed and a report issued to both Houses of Parliament. I would be in support of that as well. I beg to move.

[Lord Browne of Ladyton]

My Lords, I am grateful to my noble friend Lady Turner for her amendment, which, as your Lordships will have noticed, is grouped with an amendment in my name and that of my noble friend Lady Sherlock, which calls for a review of the phasing.

For the sake of some chronology in our thinking, a similar amendment to this was considered in the House of Commons after Clause 4. That was to the benefit of the debate in relation to it. The call for a review really belongs with Clauses 3 and 4 because it relates to transition whereas, as I have indicated earlier, Clauses 2 and 3 relate only to people whose qualification in terms of contributions has been achieved post-2016. In the words of the Pensions Minister, that makes it much easier and simpler to understand Clauses 2 and 3 than it does Clauses 3 and 4, which are significantly complex. However, my noble friends will be pleased to hear that I do not intend to go into the detail of all the elements of the transition. There are complexities there, some of which it would be helpful if the Minister explained to the Committee so that we had an understanding of the complexity and the consequences of it for individuals.

I will first address the amendment in the name of my noble friend Lady Turner, which challenges the imposition, as it were, of a qualifying period of 35 years so soon after we changed the law to reduce the qualifying period for the state pension to 30 years. It would be to the benefit of the Committee’s understanding of the Bill and the policies that instruct it if the Minister addressed himself, as I am sure he will, to the way and the processes by which that figure of 30 years was arrived at. It was probably best explained by the Pensions Minister at col. 141 of the House of Commons Committee stage on 2 July. He set out broadly that the existing state pensions structure had two elements to it: the basic state pension, for which there was a 30-year qualifying period, and then the additional pension—as we have come to know it in terms of the Bill, but which has different elements depending on which years one looks at—which could be built up from rights that have been built up over as much as 49 or 50 years of a working life.

The Minister then explained that in arriving at a period of contributions that should entitle one to an amalgamation of these two rights, he looked for a “weighted average”. He was challenged, probably correctly, as to why in earlier consideration of where it should lie he had favoured or indicated—at least in his evidence to the Select Committee—the figure of 30 years as opposed to any later figure. He was asked pointedly by my colleague Gregg McClymont whether there was a financial consideration as opposed to just some broadaxe approach at trying to work out somewhere that was appropriate, and which could do justice to those two elements as they were brought together.

The advantage that my noble friend Lady Turner gives the Committee is that she gives the Minister an opportunity to explain in more detail how the 30-year figure was arrived at and how it can be justified, as opposed to some broadaxe, weighted average-type judgment. If it is just a judgment that had to be made for speed and efficiency, the Committee ought to know that it is about the right figure and there is nothing more to it than that. That is the strong implication of the way in which the Pensions Minister approached his explanation in the debate in the House of Commons.

We on these Benches support the single-tier pension and recognise that at some stage, judgments have to be made, but it is much easier to support judgments if there is an explanation of the reasoning behind them to convince us why it should be 30 years rather than 32, 33 or whatever. Those figures are very important.

I do not think I will detain the Committee for nearly as long as my honourable friend Gregg McClymont engaged the Committee in the other place on the amendment that now stands in my name and that of my noble friend Lady Sherlock. However, in introduction, I want to tease out one or two observations about the amendment that I think should properly lie in our discussion after the debate about Clause 4, to explain why a review is necessary. Once one gets a sense of the complexity of the transition and the interaction of different calculations, one begins to realise just how important it is to have a review informed by reality. Of course, a part of that reality is the level at which the single-tier pension is fixed so that one knows who are the losers and who is being affected

What really instructs the review is a defeat of expectations. The Pensions Minister engaged with the perception rather than the reality. I am not keen on trying to argue policy changes on the basis of perception. That is principally because for two years I was a Minister in Northern Ireland, where I was repeatedly told, “In this country, Minister, you have to understand that perceptions are much more important than facts”. No matter how good my arguments were, I was told, “But that is not how it will be perceived” in one community or another, and that perceptions were much more important than facts—so much so that I thought for a period of having one of those famous signs on the desk that Ministers and executives often have made, reading, “In this office, facts are more important than perceptions”, but I thought that that might have been provocative and decided that it would not be a good idea.

Greg McClymont argued, and I support him, that there is a significant group of people who have a similar experience to that expressed in the e-mail that coincidentally I received this afternoon—people who have a set of expectations that are defeated. Unless there is engagement with those issues and some sense of fairness, the fairness, simplicity and other measures that the Government have set for these changes will not be met.

In this case, there is a group of people who have an expectation that they will get the full rate of whatever the state pension is after 30 years of work or 30 years of national insurance contributions. They will be met with the reality that it now requires 35 years. I will come to this in some detail—I am not going to take that long about it—but I know that one can say to them that 30-35ths of this figure is more than 30-30ths, or more than 100%, of the figure that they were expecting. However, they are retiring into an environment in which other people are getting not 30-30ths of the figure that they were expecting but 100% of what the new figure will be. That is an important point to make.

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[Lord Stoneham of Droxford]

With respect to the noble Lord, it is slightly unfair to criticise this document for being so long and then not get the point that the pension for 30 years is £110, and the pension for 30 to 35 years will be £123. That means that somebody is better off. That is the point, is it not? It was unfair to attack civil servants for writing that long brief to make that point, when I am not sure that the noble Lord got it. They will be better off under this system.

I should like to make two other points. If we set it at 30 years now, there is no going back. We might like it to be 30 years, but the fact is that if we set it at 30 now there will be no going back if it does not work out. If we cannot afford it, it will not go up to 35 and we will have to stay with it; whereas, if it is at 35, there is the possibility of review and it could come down.

[Lord Browne of Ladyton]

Clearly, my carefully constructed argument was utterly wasted. I just want to make two points to the Minister, who may well not have been intending to look at me. I am not arguing for 30 years; I am arguing for a review. I was commenting on an earlier amendment, which is not in my name and which I do not support, for a reduction to 30 years, suggesting that it opened up an interesting debate about why it is 30, not 32 or 35. That is not for me to explain. The noble Lord can be reassured that I understand the mathematics, or the arithmetic, on this. I am just arguing for a review for reasons to do with the expectations of people whom I think are entitled to have those expectations.

[Lord Stoneham of Droxford]

I am sorry if I lost the noble Lord’s argument in not realising that he was arguing for a review; I thought he was arguing to reduce it to 30. I think that makes my point, actually: it is easier to have the higher figure to start with and then review it down than to start with something lower that you then cannot afford.

My other point is that the additional contributions are very beneficial in their rate of return. Under the scheme, we are trying to encourage people to save. That is one of its main merits and motives.