Social Security Benefits Up-rating Order 2012

Lord Freud Excerpts

Monday 27th February 2012 Grand Committee

Moved by

[Lord Freud]

That the Grand Committee do report to the House that it has considered the Social Security Benefits Up-rating Order 2012.

Relevant document: 40th Report from the Joint Committee on Statutory Instruments.

[Lord Freud]

My Lords, the Social Security Benefits Up-rating Order 2012, the Guaranteed Minimum Pensions Increase Order 2012 and the Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2012 were laid before the House on 30 January 2012, and I am satisfied that they are compatible with the European Convention on Human Rights. I will speak first to the two smaller orders: the first order makes minor amendments to protected rights; the second order increases guaranteed minimum pensions—GMPs. We will then discuss the up rating of state pensions and benefits.

The Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2012 makes minor amendments to the Pensions Act 2008 (Abolition of Protected Rights) (Consequential Amendments) (No. 2) Order 2011 in relation to amendments to be made to the Insolvency Act 1986 and the Pensions Schemes Act 1993 in respect of protected rights payments. By way of context, the 2011 order, which was approved by the House early in June last year, makes consequential amendments to primary legislation as a result of abolishing contracting out on a defined contribution basis on 6 April 2012, which is provided for in the Pensions Act 2007 and the Pensions Act 2008.

Just before the debate in the House last June, an issue was noted that related to how the proposed amendments in Article 3 of the 2011 order would work. When introducing the debate, I therefore outlined the background to the Committee and said that we would address the issue, which we are doing now. Having previously made that statement, I do not propose to take up more time with further explanation, other than to say that the instrument before the Committee amends the 2011 order, before it comes into force, to remove the exclusion of protected rights payments from what counts as income for the purposes of income payments orders made under Section 310 of the Insolvency Act 1986, and from the scope of Section 159 of the Pension Schemes Act 1993, which provides that GMPs and protected rights payments cannot be assigned or charged. Both the amendments will ensure consistency with changes made to the Bankruptcy (Scotland) Act 1985 by Article 2 of the 2011 order. This is consistent with our original policy intention that the tracking of protected rights would cease after the abolition of DC contracting out.

The Guaranteed Minimum Pensions Increase Order 2012 provides for contracted out, defined benefit schemes to increase their members’ guaranteed minimum pensions that accrued between 1988 and 1997 by 3 per cent. Such increases are in line with the growth in prices or 3 per cent, whichever is the lower, and this year the 3 per cent cap will apply as inflation is higher.

On the uprating order, I am sure noble Lords will welcome our decisions on increases to benefits in 2012. In total, the Government will spend £6.6 billion on uprating benefits in 2012. Alongside other measures that we have taken, it will deliver fairness to those who have worked hard all their lives, and protection to the most vulnerable in society during these difficult economic times.

The consumer prices index, the CPI, remains our preferred measure for pensions and benefits indexation. We made this change at last year’s uprating; some noble Lords may remember our extensive discussion on the relative merits of the price indices. I will not repeat myself on these points—despite the enjoyment I would gain—save to reiterate that the CPI is the Bank of England’s target and the headline measure of inflation in the UK. It relates to a basket of goods, which is more appropriate for pensioners and benefit recipients because it excludes mortgage interest and is less volatile than the retail prices index, the RPI, which fell negative two years ago, with the result that many pensioners had their additional state pension frozen. The CPI methodology takes into account how consumers respond to price changes—an advantage that has won the support of many experts. Last year, the High Court upheld the Government’s decision that the CPI could be used for pensions and benefits uprating, and we have robustly defended our case in the Court of Appeal. In April the Government will implement the full September CPI increase of 5.2 per cent across pensions and social security benefits.

I will now discuss in more detail the individual benefit rates amended by the legislation. One of this Government’s first actions was to restore the earnings link with the basic state pension. We went a step further and promised a triple guarantee to increase the basic state pension by the highest of the growth in earnings, the growth in prices or 2.5 per cent. In line with the triple guarantee, the basic state pension will rise 5.2 per cent to £107.45 per week, in line with the growth in the consumer prices index. This is an increase of £5.30—the largest ever cash increase to the basic state pension. This means that this year the basic state pension is forecast to increase to 17.1 per cent of average earnings, which is a higher share of average earnings than in any year since 1997.

The basic state pension goes to more than 11 million pensioners in this country, and both this year and in the long term the triple guarantee will ensure that the basic state pension will provide a solid foundation on which recipients can build a retirement income. The triple guarantee will protect the value of the basic state pension in the long term. It is estimated that the average pensioner retiring this year on a full basic state pension will gain £13,000 over the course of their retirement as a result of the triple guarantee, compared with the old prices link.

From April this year the additional state pension will also rise by 5.2 per cent, which will mean that those with a state second pension or state earnings-related pension, SERPs, will see the 5.2 per cent increase in both their basic and additional state pension income. This means that the increase in total state pension income for someone with a full basic state pension and an average additional state pension will be about £6.70 a week: £348 a year.

The standard minimum guarantee in pension credit is the means-tested support that ensures all pensioners a minimum level of income in retirement. The legislation requires us to increase the minimum guarantee at least in line with earnings, so that over the long term the poorest pensioners see their incomes rise in line with that of the working population. However, this year the relevant earnings index stood below inflation at 2.8 per cent. We judged it unacceptable that the poorest pensioners on the guarantee credit would see the lowest increases. We wanted to ensure that those pensioners saw the full increase given to the basic state pension, and we will therefore increase the single rate of the standard minimum guarantee by £5.35, taking it to £142.70 per week in 2012.

To ensure that the overindexation of the guaranteed credit is affordable, we will make some changes to the savings credit element of pension credit. In April, we will increase the savings credit threshold to £111.80 for individuals. This will mean that those with higher levels of income may see less of an increase, but no one should have a lower weekly income as a result of the uprating. This policy also enables us to focus spending on the poorest pensioners on guaranteed credit.

On working age benefits, the Government have ensured that, even in these difficult economic times, benefits for disabled people and their carers and for those out of work and seeking employment will see the full CPI increase of 5.2 per cent. This increase will ensure that the most vulnerable people in society are protected and that those looking for work get the support they need to move into the labour market.

Through the uprating order, the Government are spending an additional £6.6 billion in 2012. This means £4.5 billion more on pensioners, more than £1 billion more on disabled people and their carers, and more than £1 billion more on people who are unable to work through sickness or unemployment. Even in these tough economic times, the uprating commitment that I have outlined today will give real support to the poorest and most vulnerable in society. I therefore commend the orders to the House. I beg to move.

[Lord McKenzie of Luton]

My Lords, at the start, we acknowledge that the Government have rejected the voices within their ranks that would have watered down even the full CPI increase for these upratings. The order before us deals with most out-of-work benefits, but it of course does not deal with changes to tax credits, which we shall debate shortly.

We have heard from the Minister that the upratings order amounts to increasing benefits by £6.6 billion, but that is dealing on one basis with the effects of inflation; it is not addressing the real cuts that are being made to employment support allowance, housing benefit, support for disabled children, DLA, council tax benefit, child benefit and tax credits. By 2015-16, just three years hence, the Government will be pocketing £10 billion-plus per year from the CPI switch to benefits, tax credits and public service pensions.

We have no points to raise on the Guaranteed Minimum Pensions Increase Order, and support it.

On the abolition of protected rights consequential amendments order, we have some brief questions. Post-abolition of contracting out on a DC basis, schemes will not be required to keep track of protected rights payments, so, as we have heard, the court will not be able to identify them when setting income payment orders for a debtor. Consequently, protection of accrued rights payments from income payment orders will now be retrospectively removed. Does that mean that creditors can ask for income payment orders to be revisited in the light of that loss of protection? If trustees amend their scheme rules to reflect the abolition of protected rights and a scheme member is subsequently subject to an income payment order, could the trustees be in breach of Section 67 of the Pensions Act 1995, a section that protects accrued rights and for which there is no statutory override? The order has the consequence of retrospectively removing protected rights accrued, albeit in the instance of an income payments order being issued. Is a precedent being set here, and would it not have been possible to set some sort of pension income threshold below which the courts cannot take account of income when issuing income payment orders as an alternative approach?

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[Lord Freud]

My Lords, it is a lot easier to spend £6.6 billion extra than to remove it. I accept that noble Lords are pleased that we are sticking to the CPI September figure—the 5.2 per cent—even though it is a high figure. It is important for the Government to do that because once you start moving the figure around to suit your convenience the suspicion arises that there is no principle behind that decision and that it is done to save money. Therefore, you save money in one year but there is a lack of confidence in the longer-term strategy. The point about the CPI is that these things even out, although the figure that is arrived at in a particular year might be painful for the Government’s finances. Clearly, this year it is painful to stick with that figure. However, if you stick with the same month, given that it is an annualised figure—it lasts a whole year—it should even out. Albeit that this is a very difficult year, there were some siren voices demanding that we take a particular course, as the noble Baroness, Lady Lister, said. However, it was decided that to do something other than what we have done would undermine the principle of the measure.

I would like to pick up on the point about the triple lock. I think that the noble Lord, Lord McKenzie, has been a little grudging about what we are doing with that, which is trying to drive up, over the long term, the level of the basic pension compared with average earnings, because it has lost that relationship. The problem with that is that more and more people go on means-tested pension support, with all the complexity that noble Lords complain about. Clearly one thing that we are trying to do with the pension reform that we have consulted on is to get a liveable rate without all these special levels of support, and the triple lock is another mechanism to do that.

While I am on the topic, I confirm to my noble friend Lord German that the switch from the guaranteed credit to the savings credit and the closing of the thresholds was done precisely so there would not be a cut in the basic pension for those pensioners. While I am touching on CPI versus RPI—we will not have a major debate on that, although we all enjoy it—I want to make the point that there is work going on on the CPI. Only a relatively small proportion of the difference between RPI and CPI is because of the housing element; the rest is the substitution effect—the bulk, as noble Lords will all remember. When that work on a new CPI comes in, the Government will need to look at it and take a decision on what to do. I think that that is the best response I can give to the noble Lord, Lord McKenzie.

However, I need to defend myself slightly from the noble Baroness, Lady Lister, on what was a very interesting and excellent letter that I got on my description of the differences between CPI and RPI. I must point out that it was only one letter, which is unusual—I did not get every economist in the world writing to complain or differentiate—but I did enjoy it.

The noble Lord, Lord McKenzie, asked a large number of very good questions—as I would expect—some of which I can answer and others I will write to him about. In particular, I will write to him on the issue of guaranteed minimum protections on contracted-out pensions. That really is complex and I need to provide specific chapter and verse on those protected arrangements.

The noble Lord asked about the local housing allowance. It will be set in April 2012 to establish the baseline, and it will be uprated from a year on, based on September-to-September figures. On the migration from IB to ESA, these are technical provisions but there are some potential effects for individuals. Again, I think that that is a matter for a letter. On service charges, it is the elements of the individual items such as fuel that are raised in line with their particular price increases, and that is done—and has been done for some time—by convention rather than the aggregate.

On non-dependant deductions, as noble Lords will remember, there was an announcement that they would be moved up to match the level that they would have been at if they had not been frozen in 2001. The increases in 2012-13 have been calculated based on forecast rent growth. New income bands determine the amount of the deduction, based on earnings growth. Will passported benefits be taken into account? The answer is yes, when looking at the financial effects of uprating individual benefit elements that give rise to derived entitlements.

With regard to the effect of statutory payments on small businesses, again, I think that that is a matter for writing. We will discuss this with colleagues in BIS who are responsible for those payments and get the most up-to-date figure for the number of small businesses that have been reimbursed.

On the savings credit changes, the £200 million savings on savings credit are recycled into the guaranteed credit, so there is no net saving to the Government. This means that 30,000 fewer people will receive savings credit. Some will have their entitlement extinguished because their income is above the new maximum savings credit level. I say that in response to my noble friend Lord McKenzie—sorry, the noble Lord, Lord McKenzie. I was looking at my noble friend Lord Kirkwood, who is the other person who asks impossible questions.

The noble Lord, Lord McKenzie, asked about the impact assessment. In practice, last year’s assessment sets out the shape of the effects of applying CPI as the preferred index. That is why we have only conducted an additional equality impact assessment this year for the pension credit measures, as they are the novel measures.

I will talk to my noble friend Lord Kirkwood about his particular interest, the national insurance fund, where he looks at the way that the fund balance is moving. It is expected that it will be above the recommended level, which is a sixth of annual benefit expenditure, but I think that I will need to write to him about any change in the balance in recent years.

I think that I have dealt with all the questions. If I have missed anything, I will, of course, write. In the words of the Chancellor of the Exchequer, the uprating order of 2012 will provide support for those who have worked hard all their lives—

[Lord McKenzie of Luton]

Perhaps I may intervene. I am sorry, but I did not know whether the Minister was about to wind up, so perhaps I could revert to a couple of the questions which are left outstanding.

In relation to the savings credit and passported benefit, the issue is that if there are, as we now know, 30,000 fewer people claiming savings credit, presumably there are some savings in respect of passported benefits that would go with that. The question is whether those savings are factored into the savings needed to produce the guaranteed credit upratings.

There were a couple of other items. In relation to non-dependant deductions, it was asked whether we could be told what the reduction in housing benefit and council tax benefit is estimated to be as a result of those changes. In relation to the small business issue, and the £45,000 threshold, I was trying to determine whether, because of increases in national insurance and fiscal or national insurance drift, the same thing would happen as with tax drift, where effectively more people are being excluded from the benefit of 100 per cent reimbursement, because in real terms it is declining.

There is one other issue—perhaps the Minister could deal with it in writing—which is the relationship between the uprating of guaranteed credit and the basic state pension. I am indebted to my noble friend Lady Drake for bringing to my attention some interesting material produced by the PPI showing the impact of pension credit over several years. The component that would produce the biggest reduction in the percentage of pensioners living below 60 per cent of median income would be if the current policy plus guaranteed credit were indexed to the triple lock. That would have a more beneficial outcome than the current policy, where guaranteed credit is indexed to earnings, although I accept that this year it is earnings-plus, but that is still not the same as earnings plus the 5.2 per cent.

[Baroness Lister of Burtersett]

To save the Minister getting up and down, I would appreciate a comment on the point that I made about child benefit. Perhaps it is more appropriate for the noble Lord, Lord Sassoon. What is the logic of putting so much emphasis on increasing personal tax allowance in real terms and then freezing child benefit, which is the equivalent of a personal tax allowance?

[Lord Freud]

Perhaps I may deal first with the point made by the noble Baroness, Lady Lister, although I am sure that my noble friend Lord Sassoon will provide a much more sparkling answer. My answer is that, as we look forward into a world where the poorest are supported by universal credit, which is very targeted—

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[Lord Freud]

My Lords, I was talking about child benefit, which was an issue raised by the noble Baroness, Lady Lister. She referred to the relationship between child benefit and tax thresholds. As you move towards the universal credit system, that is the way you keep the incomes of the poorest in line. That can be done elegantly and in a more focused way than by using universal benefits, which of course is what child benefit is—using a lot of money and giving it to all in order to target the poorest. That is certainly the direction of travel that I am taking. We could possibly debate this at great length at some stage, and no doubt we will.

I will write to the noble Lord, Lord McKenzie, on the question of those excluded on the non-dependant deductions. That is a matter for a letter. I will also write on the point about small businesses because I do not have all the information to hand. On the point about passported benefits and savings credit, the 30,000 who will not receive savings credit would actually not have been passported to the full housing benefit or council tax benefit, so they could establish a claim on the ground of low income. However, the £200 million being recycled to the poorest pensioners includes an assessment of the additional cost of passporting more of those pensioners by disproportionately uprating the standard minimum guarantee.

As regards the triple lock on guaranteed credit, we are planning to retain the link with earnings. Clearly, our aims are to reduce reliance on means-testing, which is why we are protecting the position of those receiving the contributory state pension. But we do not have the funding to uprate the guarantee credit on the same basis as the underlying state pension. Depending on how we change the system, the basic pension would be larger and protected in that way.

This order will provide support for those who have worked hard all their lives, poorer pensioners, people who are not able to work through their disabilities and those who through no fault of their own have lost their jobs and are trying to find work.

[Lord McKenzie of Luton]

I tried to avoid getting to my feet but there is an outstanding issue related to the Work Programme and the reports on that.

[Lord Freud]

My concentration has been completely broken as to that point.

[Lord McKenzie of Luton]

Because there was no impact assessment with the orders and the issues around the Work Programme, can we have an update on its performance?

[Lord Freud]

I thank the noble Lord for reminding me. Because the Work Programme is a payment-by-results system, you see the results later than with those programmes paid for on a pro forma basis. I am not sure of the exact date but I think that we are looking to publish the entrants to the programme in the next couple of months. We expect to start publishing the performance figures of the Work Programme providers in the autumn. These figures are being done to the sophisticated standards required in order to become national statistics.

Perhaps I may correct myself as regards referrals. They are expected rather sooner than in two months’ time. The first set of figures is expected this month.

[Lord McKenzie of Luton]

Are they expected in February?

[Lord Freud]

Yes, so we are expecting them reasonably soon. I can say to the noble Lord—I cannot give anything away and I have only anecdotal feedback—that I am looking forward very much to these figures. I know that he will want, as he has in the past, to say that the Work Programme was a stepping stone from some of the programmes introduced by the previous Government. I am happy with that and I think that he will want to be associated with it. I feel that I will enjoy myself when I make some of these announcements later in the year. I just want to let him know that, because it is based on my own feelings.

Despite these difficult economic times, this year’s uprating will put an additional £6.6 billion into the pockets of the poorest in our society. We have discussed the GMP increase and the amendment order to the Pensions Act 2008. I commend the order to the House.

Motion agreed.