Lord Freud
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, the amendment tabled by the noble Baroness, Lady Hollis, concerns the position of spouses or civil partners of service personnel who accompany them on overseas postings, a group in which I know the noble Baroness has a keen interest. The amendment would enable people in this position to be credited with national insurance contributions for the full 10 tax years between 2000-01 and 2009-10.
We have already taken steps to shore up the contribution records of this group. In 2010, arrangements were put in place to allow the spouses of Armed Forces personnel to gain a national insurance credit for time spent accompanying their spouse or civil partner on postings abroad. These credits are awarded for tax years from 2010-11 and provide entitlement to all contributory benefits, including the state pension. Their main purpose was to provide access to contributory working-age benefits to spouses and partners who might have difficulty in finding employment when they return home. I confirm to the noble Lord, Lord McKenzie, that no changes are planned to those crediting arrangements.
The amendment would enable a person to meet the minimum qualifying period for the new state pension and therefore qualify for a reduced single-tier pension. However, if we were to combine the qualifying years that could be gained under the 2010 credits with those available under this amendment, a person could be credited with up to 16 qualifying years.
We should caution that the existing arrangements incur administrative costs for HM Revenue and Customs and the Ministry of Defence. Applications for the existing national insurance credits need to be validated by service welfare officers and processed by HMRC. Similar arrangements would need to be put in place for these new credits, but that would involve more onerous administration because any validation would relate to periods some years past.
The noble Lord, Lord Browne, made a point about difficulties with take-up of the current credits. We are not aware of any difficulties but, on the back of his concern, we will check with the MoD on that.
Currently, around 500 to 600 people a year have been awarded the credits that have been in place since 2010, but it is unclear how many are likely to benefit for pension purposes from the noble Baroness’s proposed retrospection measure.
Baroness Hollis of Heigham
The Minister obviously agrees with my noble friend’s figure of 500 to 600 people, but how many eligible non-recipients does he think there may be? In other words, what would be the total population, of which 500 to 600 are claiming? Does he know the answer to that? I certainly do not.
Lord Freud
Unless I am rapidly informed otherwise, I do not think that we know either at this stage. It is likely that most of the people in this group will have been at work or be covered by other credits during the past periods covered by the amendment. Over the course of a 50-year working life, we would expect many to build the 35 qualifying years to qualify for the full single-tier pension in their own right. That is where this problem lies. That said, I understand the concerns of the noble Baroness and would not want to ignore the position of this group of people if they have genuine difficulties in building the qualifying years that they need.
The Committee will understand the Government’s general concerns about going back in time to treat particular groups in different ways, because there are always issues of fairness and parity when you do that—the noble Lord, Lord McKenzie, talked about some of the relationships with people moving into UC and so forth—and that is the case even though special consideration is reserved for the Armed Forces and their families. However, turning to the point raised particularly by the noble Baroness, Lady Dean, and the noble Lord, Lord Browne, we will consider this further.
I have to warn noble Lords that this is a difficult matter, so I am not promising that anything will come out of that consideration. Sometimes, in saying that, one suggests that there is a solution, but we are finding this quite difficult. We are doing that exercise and I am sure—
Baroness Hollis of Heigham
Why is it difficult? I understand that when most people in civvy life claim X years ago to have done Y it is very hard to check that, but the one thing that the MoD will have is records. So why is it so difficult?
Lord Freud
I will be in a much better position to explain the difficulties in a little while. So, rather than presuming on this, I would say that we are considering it. It is difficult, and I am sure that we will have the opportunity to return to it on Report.
Lord Browne of Ladyton
I am extremely grateful to the Minister for giving way at this stage, and I am not ungrateful to him for his undertaking to consider this and report back. That is the most that we could have expected. However, I ask him to consider two things. First, there is certainty that the Ministry of Defence will have records—there is no question about that. Secondly, I direct his attention back to the provision in the guidance note issued on the covenant, in which the Government promised to keep the issue of access to benefits under review. It might be helpful if the Minister explored why that promise was made and what was in mind at that time. Clearly some consideration was given to it, which instructed that promise. Surely it was not just a cosmetic promise, with nobody having any idea what could possibly be offered in the future.
Lord Freud
Let me take the two issues there. It is not necessarily the case that the MoD will have records on this, especially of an accompanying partner. That is clearly one of the issues. I think what was envisaged was exactly to look at this kind of thing and other benefits, which is exactly what we are doing. We are, as I say, treating it very seriously, but that is not the same as being able to say that there is a ready solution. We will come back to this issue.
Lord McKenzie of Luton
I am not sure whether the Minister confirmed that, whatever happens with the impact of this amendment, there is no suggestion that the existing arrangements both in respect of the crediting and the easement of the first contribution condition are not going to continue post-April 2016.
Lord Freud
I am pleased to confirm that the crediting and the easement will continue post-2016.
Lord Browne of Ladyton
Can the Minister also confirm whether the Bill, if it becomes law as drafted, will have a regressive effect on the position of service spouses or civil partners, as is believed to be the case by at least one of my noble friends and suspected by another, and whether that will in fact be the case when the review is conducted?
Lord Freud
I will not answer what could in practice be a huge review of everything to make a hard statement on that, but I will write on that point. Having finished, I hope, all the questions asked, I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
My Lords, I thought this was short, sweet and simple. It is now long and less simple but still very sweet, in the sense that I think there is consensus all round the Committee. I welcome that and I am very grateful to the Minister for his responsiveness to the concerns that we raised. Clearly this amendment was a peg for the discussion that we have had. My noble friend Lady Dean is highly knowledgeable about service families and speaks from very real experience. I am very glad that my noble friend Lord McKenzie was able to get on record from the Minister what the Government’s intentions were about easement, which was very useful. I am still slightly surprised that we did not have this information about the eligible population base for claiming credits since 2010-11 and how many have actually claimed. Is it 500 of 5,000 or 500 of 700? We do not know and I would have expected that information, but I am sure that the Minister will write to us with that because it gives us some sense of how problematic it is when you rely on people to claim, as we have experienced with means-tested benefits for pensioners, for example.
Lord Freud
It is a little early to get into the practicalities, but I am sure that we can arrange, one way or the other —either from a spontaneous governmental unleashing of information or in response to an amendment —to get the latest information on the record at Report.
Baroness Hollis of Heigham
I thank the noble Lord. What I would love to see—I know that this has been done in the past because I have done it—is an amendment jointly in the names of my noble friend Lord Browne and the Minister, which will amaze and command total support. In that context, I ask leave to withdraw the amendment.
Lord Freud
My Lords, the amendments relate to the single-tier pension. I have to confirm that the noble Lord, Lord Whitty, is in a better place, but I think we all knew that. I covered quite a lot of this in detail on Monday, so I will keep my comments relatively brief.
The amendments describe a minimum entitlement at a level broadly equivalent to the state pension entitlement that a person with 40 qualifying years could receive under the current scheme through their basic state pension and the additional state pension. For someone on low earnings, that equates to around £180 a week. That is the question that the noble Lord, Lord Browne, was seeking an answer to.
I fully appreciate the sentiment behind wanting to set the rate higher than the illustrative rate of £144, which is from last year's effective equivalent rate. Indeed, under the Bill, future Governments will be free to make above-earnings ad hoc increases in the light of economic conditions at the time, but setting a starting rate that cannot be afforded within the current spending projections would instead force the hand of future Governments, siphoning off greater and greater amounts of GDP into pensions spending. Setting a minimum starting level of £180 a week would add a further £12 billion in real terms to the single-tier costs by 2030—that is a per annum figure. Over the longer term, it would increase annual pension expenditure by another two percentage points of GDP in 2060 and squeeze out other spending pressures from an ageing society.
Sustainability is a core principle of the reforms. Our proposals work within projected expenditure on the current system, and our current modelling, including the illustrative start rate of £144, stays within 1% of current expenditure until the late 2030s.
During Second Reading, much was made of the consensus following the Pensions Commission report, which recommended that the state move away from providing earnings-related pensions. I was pleased to see that the noble Baroness, Lady Donaghy, had moved her scepticism out from 10 years to 30 years in the space of a few weeks, so there is hope that we may move her to the 100-year objective. To this end, under previous reforms, the earnings-relation provided by the additional state pension was effectively being squeezed out of the system, moving over time to a flat-rate state pension but, as many respondents to the Green Paper pointed out, that was not doing enough to support private saving and underpin automatic enrolment.
I have said this before, so I will go on record twice on this. These reforms are not about increasing pensions expenditure. They are not about reducing it. They are about spending the money differently, so that we can move to a flat-rate pension quickly to tackle an urgent problem of undersaving.
To respond to the pointed question of the noble Lord, Lord McKenzie, about why the single tier does not lift many clear of the guarantee credit, that is largely because many people on the guarantee credit have a higher standard minimum guarantee. About 37% are entitled to one or more additional amounts—for instance, for disability—and we do not want to remove those additional amounts.
Lord McKenzie of Luton
I understand that point, but what does that do to the argument that this is all about having a very clear platform so that people know that it will pay to save and that they will be above means-tested benefit levels? On the basis of this information and what the Minister just said, 99% of people who will get STP will still be eligible for the guarantee credit. Indeed, annexe C to the impact assessment states that total spending on the guarantee credit and the savings credit will actually go up by the end of the period in the tabulation. That does not make sense to me. I understand that it is the additions that mean that guarantee credit is above the level of STP, but that seems totally to undermine the whole thrust of the rationale of the Bill.
Lord Freud
Despite the guarantee credit not changing a lot, there is roughly a halving of the overall reliance on means-tested benefits, so there is a move, but I acknowledge that it is not by any means a complete elimination of the use of means-tested benefits.
Baroness Sherlock
I think the Minister may be offering a rather dramatic understatement. It is not an elimination; it is a change of 1%. As we established in the Committee on Monday, most of the reduction in means-testing is related to the abolition of the savings credit, which is removing access to something for people. If my noble friend is right, he has hit on something quite extraordinary, which is that despite the Government saying that the STP will be pitched at a level above the means-tested level for the pension credit, it is in fact, according to his modelling, pitched at a level that will not lift anyone but the 1% who get it out of means-testing. Surely the whole argument collapses at that point.
Lord Freud
My Lords, the guarantee credit does go down in absolute terms. It is already a small percentage of the total. When one gets into arguments about data it gets very confusing, so I will set this issue out very clearly. As I understand it, the issue is about the number of people on means-testing as we look forward into the single tier over the decades. The subsidiary question behind that is what it does to the incentive to save. I will address those two questions with some proper data in a letter rather than trying to do so off the top of my head when I am not absolutely confident about providing exactly the right information.
The start rate of the full single-tier pension should not be viewed in isolation but in combination with the private pension income that some 6 million to 9 million people will gain from having been automatically enrolled in a workplace pension. An inflated start would be unaffordable and unsustainable, and I ask the noble Baroness to withdraw her amendment.
Baroness Sherlock
I am very grateful to the Minister for his offer to write to all Members of the Committee. Will he prioritise that letter and write it before the Committee next sits, rather than waiting until we come back at a later stage of the Bill?
Lord Freud
Yes; I am trying to get letters out at great speed. I am expecting to sign letters relating to the questions from Monday later today in order to get them to Members of the Committee as quickly as possible, so that is a three-day turnaround. I will aim to do something rapidly for today as well.
Lord Freud
I thank the noble Baroness, Lady Hollis, for tabling this amendment on an issue which I know is of great concern to her: access to contributory state benefits, including pensions, for those who have more than one job but do not earn above the national insurance low earnings limit in any one of them.
We have debated this issue over the years. She will be aware that I have equal concern about this issue. Before we get into the specifics, we have a policy to seize this issue head-on, and that is through universal credit. When you look at the debate this afternoon when we talked about the present system—JSA, tax credits, the problems of going through—universal credit basically combines in-work JSA where you are credited for your pension, and in-work benefits. Therefore, the low paid will be credited in the same way as people on JSA are currently credited. Our estimate is that 800,000 more people will be credited as a result of the adoption of universal credit. Noble Lords may well say that universal credit is taking its time coming in: one or two noble Lords have made that point to me. I can only say that we are going as fast as possible. We are rolling it out.
That is the fundamental solution. Any of the adjustments suggested today would be time-consuming changes to make. One has to take a strategic decision. Does one have a system that sweeps away these problems, or does one make itsy-bitsy changes with HMRC here or there? They all take time. I think it was the noble Baroness, Lady Dean, who said that HMRC is slow to make adjustments, but they are genuinely difficult to do. I have been involved in quite a few government change programmes now and even relatively modest changes are time-consuming and soak up the energy of the people doing them.
The question asked by the noble Lord, Lord McKenzie, about cutting into the RTI system ahead of universal credit is an interesting one. Clearly, we are looking very closely at how we use RTI in different ways. One of the issues in terms of a comprehensive solution for this relatively small group is that we have to be sure they are on the PAYE system in order to use it as a comprehensive cut through. My instinct—again, data are short here—is that this is not a comprehensive solution in the same way as catching them at the UC level. If you are not on PAYE, you can self-declare and get the system to work. I do not think that RTI is the solution.
As noble Lords have pointed out, the numbers are relatively small—some 50,000—but just because the numbers are small does not mean that we should not worry about the issue. That is what universal credit is trying to catch.
Baroness Hollis of Heigham
The Minister said that the numbers were small, which is to restate the 50,000 figure. I thought that my noble friend exploded that pretty effectively. Not only is that itself pretty doubtful, but we now have the issues associated with zero-hours contracts. We specifically asked whether they had been taken into account and what would now be a reasonable basis on which to go forward with shared information.
Lord Freud
My Lords, as I said even before the noble Baroness intervened, even though the numbers today are relatively small, I am not decrying that particular issue. I was referring to the 50,000 figure—the current estimate of those affected. Let me get on with my argument and not worry about that at the moment.
The drive to universal credit is to allow greater flexibility in the labour market, so zero-hour contracts work with universal credit. There may be elements of zero-hour contracts that are of concern, particularly if the balance of power between the employee and the employer is unfair, but universal credit works with that flexibility of the labour market.
Baroness Sherlock
I understand the argument the Minister is making, but let us suppose that the woman described by my noble friend is in a relationship with a civil partner or a husband. What is the most the husband could earn before she would effectively be excluded from universal credit? As they do not have children, if her earnings are low but his are at a reasonable level, she would no longer be able to benefit from his pension. So you cannot assume that she would be caught up in universal credit because her earnings are low.
Lord Freud
I accept that. This is for low-paid households. That is what universal credit is. There will be some people in higher paid households who will have to take a view on how to make their arrangements through voluntary NICs or whatever. I accept that point.
Lord McKenzie of Luton
The Minister proffers universal credit as a solution, but as I understand it, universal credit will generate only a class 3 credit, not a class 1 credit. Therefore, it would help towards pension entitlement but not to contributory JSA or ESA.
Lord Freud
The noble Lord is exactly right. It goes to the point of what we are discussing. It would get you the pension entitlement and the bereavement benefit entitlement but not the contributory entitlements. The current arrangements for crediting a person with national insurance contributions are comprehensive. They cover all the main reasons why someone may not be working, or working only a small number of hours, such as ill health and unemployment, or where people are caring for a child aged nought to 12 or for someone with a disability. They also cover those currently entitled to working tax credit, and we have recently introduced credits to protect the contribution record of working-age grandparents looking after their grandchildren.
Those who fall outside the scope of the crediting arrangements and who can afford to do so—higher paid households are clearly in that category—can make payments on a voluntary basis. The current rate of voluntary class 3 national insurance contribution is a very fair price at £13.55 a week, or £705 a year. The person could recoup the cost within four years of receiving basic state pension benefits.
Using this approach to establish whether a person’s combined earnings exceed the lower earnings limit would require the collation of tax and contribution returns for employees with multiple jobs. That clearly would place a burden on business and require HMRC to develop complicated IT which would take time and money and benefit a small number of people. We would also need to consider collecting the employer’s national insurance contributions in proportion to the earnings in each job, which would add considerable administrative complexity.
The question that one needs to consider is whether those who have aggregate earnings above the primary threshold should be credited or should pay a discount rate of national insurance. That is a question I address to the noble Baroness. It could be seen as quite unfair on someone who is earning just over the threshold in one job and has to pay full national insurance, whereas someone else just below might be credited.
Baroness Hollis of Heigham
That applies if someone is in one job and £1 below the PTT for these purposes; they will still be credited and not pay a penny. I do not see the difference at all.
Lord Freud
That is the issue about whether one wants to introduce this kind of system across for mini-jobs.
Baroness Hollis of Heigham
We already have. All my lifetime, I think, we have had exactly the same cliff edge between those who are below or above the PTT when that diverged from the LEL. That exists now, so there is no difference at all.
Lord Freud
Clearly, under universal credit, there would be a crediting arrangement for everyone within that system anyway, so I accept the point to that extent. I agree with the point on zero hours made by the noble Lord, Lord Browne, in that robust data are currently simply lacking and we are waiting to see the ONS data when they arrive. As I say, the universal credit system that is coming in adapts very elegantly to that kind of flexible labour market.
Lord Browne of Ladyton
Before the Minister moves off the question of the data, the fundamental point about the zero-hours contract estimate that I was attempting to make was that that was despite it being part of the Labour Force Survey. There was an apparently robust basis for a figure that turned out to be, potentially, 300% wrong. We are being asked to debate this against an estimate of a figure that every single part of our experience of life suggests to us is grossly wrong—that is, the figure of 50,000.
Lord Freud
The previous estimate for zero-hour contracts—which is what we are talking about—was that there were 250,000. Let us see the figures today for those on part-time work. I cannot remember the figure offhand—is it 1.5 million? There is a boundary, therefore, about what proportion of flexible working is formally on the zero-hour contracts. Rather than speculate on what the real figure is, I think that we should wait until the ONS comes out with a figure, if it is going to revise that.
On the pointed questions about self-employment rates raised by the noble Baroness, Lady Drake, rates of national insurance are clearly a matter for HM Treasury. However, we have not assumed that self-employed contributions will increase single-tier cost estimates.
I know that the noble Baroness has been a champion of this group and has genuine concerns about it losing out. As the new systems come into sharp focus—universal credit, RTI, single tier—there will be a chance to look at this issue properly when we know exactly what is happening, where the remaining issues are and then to find a precise way of dealing with it. It is simply too early, right now, to get a clean and elegant solution, but we do intend to look more broadly at crediting arrangements to examine the possibilities of modernising and simplifying the arrangements in that light. So there is a process. Her point is taken: it is just about what is the most efficient and effective way of solving a particular problem. What I do not know and cannot offer now is a timetable. It is something to be looked at some years—not a lot of years—in the future, in terms of exactly what should happen. I think that there will be a solution in the medium term. For those reasons, I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
I am extremely grateful to everybody who contributed, including the Minister. The debate was very interesting and revealing and a lot of new issues were raised that had not been raised on previous occasions when we have debated jobs below LEL. That suggests that it is worth going back to some of these issues, as the information that we get and the changes in the labour market make those new concerns increasingly relevant.
My noble friend Lady Drake spoke with all the appropriate authority of one of the pensions commissioners. She rightly emphasised—and sometimes I feel that we are simply retreading the same territory—that every pension issue has to be judged through the perspective of how it affects women, because if we get it right for women we get it right for everybody. Actually, that is not usually what we do; we tend to go on bulk numbers, which are made up by men because they are more reliably, through their working life, attached to a pay grade in the labour market that takes them over the LEL level. As a result, we ignore pockets of women here, there and everywhere, around the system, because, for very good reasons indeed, they do not conform to patterns of male working life.
I honour the Minister in his appreciation of the need to have the recognition of mini-jobs through universal credit. He has never tried to underestimate the significance of these issues, and I put it on record that I appreciate that. However, where we have got to today is not quite good enough.
My noble friend Lady Drake emphasised the need to put up the gender filter and, absolutely rightly, emphasised that women are locked out twice over—in their own ability to get into the NI system and by their ability to go through their husband or partner. They are suffering a double whammy. This Bill makes their default position disappear, which is why the problem has increased urgency from when we discussed it around the universal credit and welfare reform proposals some 18 months ago.
My noble friend Lord McKenzie emphasised the practical feasibility of doing this through HMRC arrangements. Given his lifetime of experience in working with businesses on issues like that, I think that his expertise should be taken very seriously by the department, which may not have had similar experience.
My noble friend Lady Dean, like my noble friend Lady Turner, has fought for women’s pensions since the 1990s, as far as I am aware. She got it absolutely right when she said that this amendment, or an alternative way in which to meet that need, would conform to the spirit of the Bill, and that it should not be left in the hope that, in four or five years down the line, the world may be different.
My noble friend Lord Browne made a devastating critique in talking about the inadequacy of the statistics, how every month the number seems to double—geometrically, not arithmetically—and that very soon we will find that the whole basis on which the Government have estimated their costings and needs, on the basis that it is a tiny minority, will be undermined. He certainly makes me even more uneasy about the neglect of this group than I was before we discussed the issue today.
The Minister is relying essentially on universal credit. I see why he would want to do that, but I am trying to do some back-of-the-envelope calculations. Let us take a group of women and say that the system comes into effect and is rolled out nationally in 2020. It may happen a year earlier than that, but it is unlikely to be more than a year earlier. Following the example of my noble friend Lord Browne, let us say that people leaving school at 18, or college or university, are going to a patchwork or portfolio life for much of the rest of their lives, given the increasing dominance of labour market flexibility. I calculate that when they come into the labour market, if at 2020 they subsequently need 35 years, which they will get through some universal credit arrangements—and thanks to my noble friend there is a big question mark over that—that means that they will qualify for a basic state pension in 2055. They therefore have to have been born in 1990 and are currently aged 23. Under the Minister’s own figures, as far as I can tell, any young woman or man who is older than that probably will not qualify under UC for a full pension by the time they retire.
Lord Freud
My Lords, I cannot leave that unchallenged. People will have inherited rights, including credits, before 2016. Clearly, many of the examples quoted by the noble Baroness related to people who had had children, so 12-plus years would be credited under the existing system to be pulled forward into the system with the foundation amount, building up beyond that. I also need to remind the noble Baroness that the intention with the universal credit schedule that we have announced is to bring in all people, certainly in the working population, by 2016 and 2017, with a group of ESA recipients left beyond that point for very good reason, because we need to deal with them very carefully. Therefore, under the timings that we have announced, the people about whom she is concerned would be brought in very shortly after the introduction of the single-tier pension.
Baroness Hollis of Heigham
I hope that the Minister is right but I do not believe that he is. It is very unlikely that the UC system will be sufficiently stable to be rolled out to the entire working-age population—the Government are not catching these people in their labour statistics—before about 2019 or 2020. I would like to be proved wrong but I very much doubt that I will be. Even somebody who has had two children, which means that they will have had 14 years-worth of credit under the new rules, would still be stuck at about 43 or 44 with no ability to add to those years if they came within this category of having no single job that took them above the LEL. Therefore, we wipe out people who are something like 20 years off their pension life, and they will go into retirement with a fairly trivial amount barely over the minimum qualifying amount. I do not think that the Minister can rely on that.
He is right that some women will manage. Particularly if they have children, they will be fine, but if they have no children, they may have a husband. They may both be on perfectly modest incomes but when, taken as a household, they are tested for their eligibility for working tax credits, where the threshold is relatively low, she will not qualify through that either under the joint claim.
Therefore, I am not at all confident but I would be delighted to receive the statistics from the Minister about the coverage, under the circumstances identified in today’s discussion, for those whom UC is intended to help.
The Minister wants a clean and elegant solution. The clean and elegant solution would be to get as many people as possible into the new system and not to rely on pension credit, a legacy system which will otherwise continue for 30 or 40 years. Unless we can get this group into the system as early as possible, he will not find clean and elegant solutions to sustain the Bill. I am glad that he is going to work on it. I hope that, certainly before Report, he can come back and give us an idea of how he is going to address this issue, even if it is about extending conditionality as a credit into JSA conditionality. That would work for me. I want some way of bringing these people in. I promise the Minister that, if he does not address it, this problem will not disappear; it will grow. It is his responsibility to bridge the deficit between where people are and where some of them may be when he has introduced UC three, four, five or six years down the road. Under the circumstances, I beg leave to withdraw the amendment.
Lord Freud
My Lords, there are three amendments that are closely related, of which this is the first. I welcome the fact that there seems to be general agreement in principle that what I will loosely call “derived entitlement”, established in the 1940s, is past its sell-by date and has no place in a modern state pension system.
I apologise for the fact that I am going to speak at some length, but it is important that I lay out the Government’s argument for removing derived entitlement by reference to the criteria for judging single tier as laid out by the noble Baroness, Lady Sherlock, at Second Reading: that is to say fairness, simplicity, sustainability, the provision of a decent standard of living for all and, at the same time, the encouragement of private saving through clarity of outcome.
First, we believe that fairness means ensuring an adequate state pension for people who have contributed to the system. That is why we are recycling the savings from aspects of the current system being abolished, including derived entitlement, to give a boost to individuals who have historically been excluded from additional state pension, such as carers, the self-employed and the low-paid. Indeed, around 650,000 women who reach state pension age in the first 10 years of single tier will receive an average of £8 per week more in state pension due to the single-tier valuation.
Sustainability and affordability are also key qualities that the Opposition have made it clear that they are looking for. Let me be absolutely clear that we are ending derived entitlement from principle and not to save costs. However, as we have been asked a number of times about this, and as affordability is one of the criteria of interest to the Opposition in judging single tier, I shall respond to the question raised by the noble Baroness, Lady Sherlock, and deal with the cost issue.
Our analysis shows that to continue running the basic pension derived entitlement provisions for people reaching state pension age up to 2030-31, the cohorts targeted in these amendments, would cost around £200 million per annum in the early 2030s, and those are just the costs for Great Britain. We do not think that it would be possible to restrict transitional protection to those ordinarily resident in the UK, as the noble Baroness, Lady Hollis, hoped. While it is difficult to quantify the cost for those overseas, we think it likely that it would cost about the same amount again as in the UK, meaning transitional protection for the first 15 cohorts could have further costs peaking at another £200 million a year.
Baroness Hollis of Heigham
Why does the Minister think that the courts would not support us in having transitional arrangements for those who are ordinarily resident? I am not a lawyer, but, in my somewhat limited experience of judicial reviews, there have been a number of challenges. The two criteria I lay down are: was Parliament’s intention was clear—Roe v Wade—and would it be a position that a reasonable person would think was not unreasonable. The addition of ordinarily resident would seem to fit the criteria for transitional arrangements. If the Minister could help us on why that is not the case, I would be interested.
Baroness Sherlock
My question is slightly different, but perhaps the Minister could answer them both at once. Are the costings net of any additional expenditure on pension credit?
Lord Freud
Yes, it is a net figure. On the legal position, clearly the noble Baroness will remember that we are in the European Union and there are definitions of which kind of payments are transportable, so to speak, and which ones can be restricted. That is where our legal issue comes from. Therefore, rather than go into huge detail on that—
Lord Freud
Perhaps I can make sure that the noble Baroness is briefed on that outside the Committee. The question of which types of benefit are transportable around the EU and which you can justifiably keep is immensely complicated. I think that the definition is that a social support you can keep within an area but a pension tends to be transportable. However, I can arrange a detailed legal session for the noble Baroness if she would like that.
Perhaps I may turn to the figures that the noble Baroness, Lady Sherlock, was talking about. Some 290,000 people would be affected at some point up to 2030, which represents less than 4% of those reaching state pension age up to that point. The 30,000 figure is a snapshot in 2020 of the number of people projected to be receiving less at that point in time. That is the explanation of those two sets of figures.
One point concerning payments abroad is that it does not seem fair on our taxpayers and pensioners who have made contributions to the UK, or indeed even affordable, to spend money on those claiming overseas who have never set foot in the UK.
Simplicity is another virtue that the noble Baroness, Lady Sherlock, concentrated on. If people are to save for their retirement or make sound decisions on purchasing voluntary contributions, they need clarity of outcome. Extending the derived entitlement provisions would run counter to the goal of achieving simplicity of outcome for tens of millions of today’s working-age people. At the moment, we are in the position where we can tell people shortly after April 2016 what they have, in the words of my colleague Steve Webb, banked to date.
The key to being able to do that is to have a full rate of single tier that people work towards and a base entitlement on an individual’s own record. At the moment, we will crystallise people’s national insurance record as at 2016, recognising past contributions, and we will move on from there into the single-tier system. We can say, “You’ve got this to date. If you get this many more qualifying years, then you will get the full rate of single tier”.
However, let us imagine what would happen if we were to put in place provisions that allowed people to continue to draw a pension based on someone else’s record. We would have to tell people, “This is what you’ve got on your record but if you’re married or divorced, or if you get married or divorced between now and state pension age, or you get divorced or are widowed after state pension age, then your entitlement might be different. We can’t tell you what it might be because you would have to look to your partner’s, or even ex-partner’s, record”.
Baroness Hollis of Heigham
My Lords, I support the Government's position on this, as I think we all do, but what will be the position for the reduced married women’s election, where you are effectively introducing—I was going to say inventing—a 60% dependency pension for a whole new group of women which is rather larger in number than the group we are talking about?
Lord Freud
Because we can at that point tell those married women exactly what they will be getting. The difference here is that it is very hard to trace those people to tell them definitively what they will be getting. That takes us back to today’s problem, which is, when you phone up to ask what your pension is going to be in three years’ time, we can give a guesstimate at best. That will remain the case if it is open for lots of people.
Turning to the aim of providing a decent standard of living, we already have an underpin that guarantees pensioners living in Great Britain a minimum amount of weekly income. I confirm the point made by the noble Baroness, Lady Sherlock, that the very purpose of pension credit is to provide support to people in Great Britain who, for whatever reason, have not built up sufficient savings or pension entitlement through their life.
If the current system were to carry on, we project that by 2020, fewer than 10% of people reaching pension age after 2016 would be on the standard minimum guarantee. We have also looked at the group of people who would, under the current system, have been claiming a basic state pension on their spouse’s record—either at the point of reaching state pension age or later, on bereavement. Even if the current system carried on for ever, 40% of the people in that group would be on guarantee credit. That group of people—this 40% of all of our people losing out from the removal of derived entitlement—will get their loss in state pension replaced pound for pound with more guarantee credit. But there will be people not on guarantee credit who experience a loss. If we look at the average changes to household income as a result of removing derived entitlement, we see that the median loss for households affected is about £6 a week. The mean average is about £10 a week. There will undoubtedly be examples where people do lose larger amounts, but again, pension credit is there for them.
I hope that by now it is clear why we have not put in place transitional arrangements and why we have no intention to undertake a review to this effect. We have, however, put in place some protection, specifically to ensure that women who had paid the reduced rate election within 35 years of pension age will get roughly what they thought they would receive. Putting in place protection for these individuals is right: they have clearly participated in the labour market and have contributed. The difference between them and the wider group of people who would have relied on derived entitlement is that those people made an explicit deal with the state.
Furthermore, to address the point raised by the noble Baroness, Lady Hollis, those who have paid a reduced rate election are, crucially, easily identifiable. The message of simplicity for the wider single-tier population will not be affected, and the size of the group enables a bespoke calculation. Were we to apply such blanket protection to everyone, we would simply be awarding everyone with any history of work or credits a 60% basic state pension and, later, a full basic state pension; clearly the costs would become an issue and would not be tenable. We would ultimately be awarding people with just one qualifying year a full basic state pension.
On the point about the married women’s pension, if their entitlement under normal transitional rules would be higher, we will give them that instead, but we are not looking at their husband’s record for that; we will be assuming that they have a full record and award them a pension accordingly. Indeed, we project that, with the vast majority of couples involved, the husband will already have 35 qualifying years. It may be possible for people who are long-term sick but not claiming benefits to apply for credits for a past period. It is not essential for a person to be receiving a benefit to qualify for credits for periods of incapacity, but they would need to meet the entitlement criteria for incapacity for work or limited capability for work each day within the meaning of the legislation that applied at the relevant time. Provided that medical evidence for the whole period can be obtained, it may be possible to apply to a local Jobcentre Plus for credits for past periods. Clearly, I cannot comment on people’s success in that regard or otherwise, but I am glad to be able occasionally to provide some new information to the noble Baroness.
For the individual with 30 years who is looking for work, perhaps after looking after grandchildren, and is now worried, in the example that the noble Baroness, Lady Hollis, gave, we have credits for national insurance for exactly that type of situation.
Baroness Hollis of Heigham
I was talking about someone who had cared for her grandchild before the credits were introduced.
Lord Freud
Okay. On the specific case of someone who has 30 years and wants to get 35, that is part of the issue that we discussed at length at the last sitting. That individual should be able to benefit from the transitional arrangements. I draw your Lordships’ attention to the analysis in our recent ad hoc publication, which shows that the equivalent of the married person’s pension would be achievable even for the majority of those reaching state pension age in the initial period to 2020 through the purchase of voluntary contributions to cover years back to 2006, or by working or engaging in an activity that earned credits between 2016 and pension age.
I turn to the suggestion that we review the possibility of putting in place transitional arrangements. Such a review would be unnecessary and unhelpful. Noble Lords will agree that, in the interval between Royal Assent and implementation of the new scheme, communications will be crucial. A review at a time when we are preparing the implementation of the new state pension system would create great uncertainty just when we are being urged to ensure that we provide clarity. We had a discussion on that matter on Monday.
I make the general point that one problem here is that we are moving from the current system because it is too complicated for anyone to understand. The risk of some of these arrangements is that we just re-import all the complexity that we are trying to get rid of. That is a real and substantial risk, which we believe we must try to avoid.
In summary, we have had to make decisions about how we move over to the new system. In a system where changes to society and to the existing pensions system mean that a majority of women and men already receive a full state pension, these provisions, designed for the post-war era, are now an anachronism. I hope that I have set out the case that our approach in this respect has been as fair, simple and sustainable as possible. I ask the noble Baroness to withdraw her amendment.
Baroness Hollis of Heigham
Thank you. I would like to push the Minister on the comments made by my noble friend Lady Sherlock, who rightly warned against hindsight and applying modern attitudes to labour market decisions made some time back. That discussion will be repeated when we come on to widows in a moment. The Minister’s references to women being eligible in certain situations to claim pension credit precisely missed the point raised by my noble friend. If someone is in a couple with a husband who has acquired full contributory years, possibly with some minor additional savings, they will be floated off pension credit, so they will not be entitled to claim it, nor will she be entitled to claim it in lieu unless she is indeed solo.
I am grateful for the Minister’s help on “ordinarily resident”. I should like to see the legal advice, because I think it is arguable which side of the bridge it falls on. We have had plenty of debate on that in the past.
The Minister cited the four tests raised by my noble friend on Second Reading. I remind him of the tests in the impact analysis in October 2013: what are the policy objectives and intended effects? Four were offered. It stated that the intended effect of state pension reform was that,
“individuals have a better understanding of the state pension system,”
and how much they can expect to receive,
“and therefore engage more actively with planning for retirement”.
The people we are talking about understood the rules perfectly well. It is the Government who have changed the rules around them, not that they have failed to do anything that the Government think that they should have done at the time. We fail the first test in the impact assessment.
The second test is that the,
“inequalities of state pension outcomes within the current system are reduced”.
Some are reduced, but the Minister is substituting new ones, including those involving the green stamp and the women I am talking about. The third test is that,
“individuals have reduced interaction with means-tested benefits in retirement”.
That is highly doubtful, given discussion on previous amendments. The amount so far established is pretty trivial. The final test is that,
“the state pension system is more affordable and sustainable in the long-term”,
whereas the Minister has been arguing that it is cost-neutral. He failed to address the fact that there appears to be adequate money—£700 million—to introduce a marriage allowance while taking away support for marriage when it comes to pension arrangements. It is a modern world when it comes to pensions; it is what I do not doubt that the Minister would call a Beveridge world when it comes to married women’s tax allowances. I noticed that he did not venture a comment on or pray the modern world in aid against the Beveridge assumptions behind the married women’s tax allowances, as he would no doubt have described them if we had proposed them and he was criticising them.
The Minister says that the present arrangements are an anachronism. I am sure that it will be a great comfort to those women who are going to lose their 60% entitlement virtually overnight to be told that they are an anachronism and that it is their fault that they cannot shape up in the limited time available to change their situation.
Women have always had a lousy pension deal; it has never worked for them. By refusing to permit a transitional arrangement, we are colluding in that lousy deal by picking off an easy, voiceless, vulnerable group. I have to say that I am disappointed by the Minister’s response, but I beg leave to withdraw the amendment.
Baroness Sherlock
My Lords, I shall speak briefly on this amendment. I was exceedingly brief last time, but since the Minister did not feel any compulsion to do likewise, I shall take my time this time round. The amendment again raises a particular question about transitional protection. I will not revisit the substantive debate that we have just had, but I want to highlight a couple of points. To do that, I want to use a case study given to us by DWP officials.
In this case, we have a couple who have been named Jack and Jill—a slight lack of imagination, but better than the DEL and AMI beloved of Treasury case studies. Jill reaches state pension age in 2020 and her husband Jack reaches state pension age in 2018. Conveniently, they have average life expectancy, so Jack survives until 2040 and Jill until 2044. In this case, Jill had 15 qualifying years of contributions.
Under the current system, Jill would get a married woman’s pension of £64. Under the new system she would get £62. But the real crunch comes when Jack sadly dies. At that point, Jill would receive £113 a week under the current system. Under the new system she would receive only £62 in single-tier pension. That is a huge difference and a real worry to the real Jills of this world, and even more so to those who outlive their husbands by more than two years. The Minister may say that Jill can claim pension credit, but the DWP did not tell me how much Jill has in the bank, so it may be that her savings would preclude that. Even if they do not, I have reason to believe that Jack always thought that his contributions would be enough to ensure that Jill got a pension without having to turn to means-tested benefits. I would be grateful if the Minister could comment on Jack and Jill.
There is some transitional protection in place and I want to be sure that I have understood it properly. If I understand the rules correctly, if the dependant—in other words the person seeking to benefit from the derived entitlement—reaches state pension age before 6 April 2016, he or she would be entitled to derived and inherited state pension as under the current system, but only based on the other person’s national insurance contributions as paid up to 4 April 2016. If he reaches state pension age before April 2016 but she does not then she gets no derived or inherited entitlement. In either case, it is possible for the surviving partner to receive 50% of the additional state pension accrued after 2002 and before April 2016, and between 50% and 100% of the additional state pension accrued under SERPS before 2002, depending on when the contributor reached or would have reached state pension age. I would be grateful if the Minister could confirm whether that is correct.
If it is, perhaps the Minister could answer a different question. He spent a lot of time in his response to the last amendment stressing the simplicity of this case in order to respond to a concern that I had made at Second Reading. I am flattered that he read it so carefully. However, does the Minister think that Jack and Jill’s case or the description that I have just outlined passes that simplicity test? If I am right, will the Government then tell the Committee two other things? First, what consultation have the Government done with the real Jacks and Jills of this world and, secondly and more crucially, what steps are the Government taking to identify and warn those couples who are in this situation and may still be married, widowhood not yet having broken in, what the impact of these changes will be so that they can start to make provision as soon as possible?
Lord Freud
My Lords, I have already set out the Government’s position on the issue of the ability of one individual to derive a pension based on another’s national insurance record. As the noble Baroness, Lady Sherlock, pointed out somewhat bitterly, I did that at some length, so I will try to be as brief as she was in dealing with this. I appreciate that the noble Baroness, Lady Hollis, wishes to discuss the three interrelated issues separately, so I want to address her specific concerns here.
It is the ability for individuals to receive a survivor’s state pension, often called a widow’s pension, to which we have now turned. Let me outline the different groups that this amendment concerns. These are, first, those who would otherwise have gained a married woman’s pension and, secondly, those who would not have been entitled to the married woman’s pension because they have more than the equivalent of a 60% basic state pension in their own right but less than 100%, so would otherwise have received a widow’s pension. There will also be some who, regardless of whether they derive any basic state pension, may have expected to inherit some additional state pension.
We are putting in place transitional arrangements for that last group for inherited additional state pension. This will mean that where a survivor is in a marriage or civil partnership with someone in the current system they will inherit additional state pension, as now. For those where both parties are in the single tier, the survivor will be able to inherit 50% of the protected payment, where one exists. This is what Clause 7 and Schedule 3 achieve.
Limiting inherited additional state pension and the ability to derive a widow’s pension will, however, mean that some people receive less. In terms of how much those losses are, we estimate that the figure will be about £8 per week in 2025. That is the median figure and is made up mostly of people receiving less by way of inherited additional state pension. This loss is also due to the fact that people cannot carry on building up additional state pension after 2016, limiting the potentially inheritable amount.
However, around three-quarters of people reaching state pension age in the first 10 years of single tier who would have inherited some additional state pension under the current system will receive more single-tier state pension over their lifetime than they would have in the current scheme. This is because the gain from current system inheritance at the point of bereavement—and, potentially, very late in retirement—will be more than offset by the gains in state pension as a result of the single-tier valuation and uprating arrangements.
I think that this particular point feeds through into the issue of fairness. We are giving less to some people but we are using those savings to fund higher entitlements at state pension age for many people. Many people will benefit when they are younger—and by that I mean at the point of state pension age as opposed to widowhood—and are more likely to spend the money than would be the case towards the end of their lives.
On the simplicity test, I have to acknowledge the point from the noble Baroness, Lady Sherlock, that there are elements of complexity in the transition. However, that is because of the current system, not because of the single-tier system.
On the related issue of communications, the core objective of our strategy on communications is to raise awareness of the changes, particularly among those significantly affected by the reforms or those reaching state pension age shortly after the reforms are introduced. As I said on Monday, I will be producing our communications package in the new year.
The noble Baroness, Lady Sherlock, mentioned two examples. I think that it would be best to take up the Jack and Jill example with officials later, but her second example seemed to be correct, and I have confirmation of that. I think that she interpreted correctly the different groups—that is, who is in single tier and who is out.
Baroness Sherlock
My Lords, when I used the example of Jack and Jill, I was not asking whether it was correct. Unless the officials have made a mistake—in which case I am sure they will let me know—I presume it to be so. I was simply using it to demonstrate how much somebody would lose under the system.
Lord Freud
I am sorry, I was not referring to the Jack and Jill question; I was referring to the second example, where the noble Baroness asked me whether she had interpreted it correctly. I have the pleasure of telling her that, as always, she is absolutely correct, except of course where she disagrees with me.
I will not go into the arguments on simplicity and clarity or fairness, because the same arguments apply. In the light of my response, I hope that the noble Baroness will withdraw her amendment.
Baroness Hollis of Heigham
My Lords, my noble friend was referring to Jack and Jill. I assumed when I read this that HMRC, with perhaps unsuspected irony—perhaps the people who drafted this have young children—remembered that Jack fell down the hill and no doubt departed from this life, and Jill came tumbling after, thereby losing her 100% derived rights. I suspect that that is what HMRC may have intended, in which case it was all too accurate.
I simply think that what the Minister is doing is harsh, unnecessary and not costly to remedy. People made decisions and plans for their lives many years ago and he is now—this is the same point that my noble friend made about hindsight—projecting current takes on the labour market and women’s role in it back on to a previous generation who shared no such perceptions and perspectives. I think that in all decency we should give them a chance to remedy their situation through transitional arrangements.
We may revisit some of these issues when we come to bereavement payments, and I am sure that the noble Lord is looking forward to that. On that basis, I beg leave to withdraw the amendment.
Baroness Turner of Camden
I support what my noble friend has just been saying; nobody likes being dumped. I do not know whether noble Lords have seen from the newspapers lately that there has been a rise in the number of older women divorcing. It is quite remarkable; people who are quite elderly and approaching pension age are getting divorced, whereas formerly they simply put up with it. It can be quite a problem.
Lord Freud
My Lords, I will avoid the issue of divorce rates because I am aware of the quagmire in which I will incredibly rapidly end up if I say anything at all.
The final amendment tabled by the noble Baroness on the issue of derived entitlement focuses on the impact upon divorcees and people whose civil partnerships have been dissolved. Under the current system, divorcees can—through a somewhat complex mechanism colloquially known as “substitution”—use their former spouse’s or civil partner’s contribution record to qualify for a full, or enhanced, basic state pension. With the ability to derive a pension ending for post-2016 pensioners, we accept that some divorcees may be affected, and they are likely to be those divorced relatively late in their working life. We estimate that these individuals could number about 70,000 up to 2031.
Turning to the specific situation of divorced women, it is likely that single individuals who themselves have not achieved a record sufficient to build up a full basic state pension will be eligible to claim guarantee credit, which is considerably higher than the maximum a divorcee could derive from a former spouse through the current, complex substitution arrangements.
These provisions are extremely complex and, as with the married woman’s and widow’s pensions, there is no longer any substantial need for these arrangements because the vast majority of women will receive a pension in their own right.
I repeat that in designing the transition to single tier, we have had to make decisions about the way that we spend the money we have available and about how to achieve the simplicity needed for people to make decisions about their retirement plans. A safety net will remain in place and absolute losses will, on average, be relatively small. I therefore urge the noble Baroness to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, the Minister is absolutely right to say that it is a problem for late divorcees, as it is for widows or for women who married in their 50s and expect but then have removed from them the married woman’s dependency pension. Those people do not have time to rebuild their lives. My calculation is that that involves perhaps fewer than 5,000 people a year.
What interests me is that, given that the impact analysis claims that the Bill is determined to reduce means-testing, I have checked back in my notes and in something like five out of the last six amendments to which he has spoken the Minister has referred to pension credit and top-up, thus re-importing back into the system pension credit means-testing for cohorts of people that he could perfectly well take out if he was willing to contemplate transitional arrangements. He is getting rid of complexity for him and giving it over to them, because they will be required to go through all the stumbling blocks of pension credit and a reluctance to claim a means-tested benefit, which we discussed at some length on Monday. His position is harsh and unfair on all three amendments, particularly when we take into account that the Government are willing to find money for the married women’s tax allowance—which he still has not addressed, after three amendments—but not on these amendments, when older women are losing rights around which they have built their lives. I beg leave to withdraw the amendment.
Baroness Sherlock
My Lords, I thank my noble friend Lord McKenzie for giving us the opportunity to touch on this issue and for setting out the challenges in his characteristically clear and well informed style. I shall be very interested to hear what the Minister has to say in response.
I would be grateful if the Minister would answer the following questions. First, will he clarify whether all the routes to gaining national insurance credits which are currently available will continue to be available in the new system on the same terms? Secondly, if not, or if there is any doubt about that, have the Government consulted on changes or will they commit to a public consultation before making any changes? I include within that any changes that are implied or necessitated by the switch to the new pension system or the universal credit system.
My noble friend raised an issue concerning the Government’s strategy. In particular, I am concerned about the categories of people who have actively to make claims for credits and will not get them automatically, even under universal credit. I think he cited all the ones that I have been able to identify, plus child benefit, which I had not noted. Will the Minister tell us whether the Government’s strategy will include elements targeted at those categories of person? Within that, will they consider how they engage with direct routes, rather than just generalised campaigns? My noble friend Lord Browne mentioned that the Armed Forces look for ways to make sure that members of the forces community can take up those credits. Will the Government consider other routes to that—for example, through adoption services or the ways in which the Government already communicate with those in receipt of maternity, paternity, adoption or sick pay? Is the department in discussions with other government departments about the way to take this forward?
My noble friend Lord McKenzie also mentioned take-up. It would be helpful if the Government could report on take-up now and under the new system and tell us how they will monitor that and report to Parliament on it. Finally, will the Minister tell the Committee whether the Government have considered ways in which people might actively be supported in claiming credits for past years, which might now become important, where they would not have been previously?
Lord Freud
I thank the noble Lord, Lord McKenzie, for this amendment. I hope that I shall be able to offer some reassurances about the current arrangements and those within the context of the work that we are planning. The existing arrangements provide for national insurance credits to cover a wide variety of contingencies and activities, as he acknowledged. They are generally available to people who are unable to work and pay contributions. This could be because they are unemployed, incapacitated or caring for others, but credits are also available to cover a range of other circumstances—for example, jury service or if an individual is employed but is in receipt of working tax credit.
Credits protect a person’s national insurance record and their future entitlement to benefits. Under the current system, all classes of credits protect the basic state pension, and in certain circumstances an earnings factor credit can be awarded to protect state second pension entitlement, mainly for caring responsibilities and long-term incapacity. I can confirm that the crediting arrangements will be brought forward to the new system and that people will still be able to get credits to protect their single-tier pension position.
Lord McKenzie of Luton
Before I do, will the Minister comment on the issue of universal credit being just a class 3 credit, whereas some of the benefits that will be subsumed into universal credit—ESA, JSA and the working tax credit—are class 1 credits? Is that not a diminution in the crediting opportunity?
Lord Freud
JSA is, I think, already a class 3, is it not? I have a comprehensive list of national insurance credits. Rather than running through them all, perhaps I should just forward it to the noble Lord and the Committee to make the point.
Lord McKenzie of Luton
I am grateful to the Minister. I think that I have the list, which probably came from the same source as his did. I was interested in the rationale for the universal credit just being a class 3 credit, because that is a change for somebody who would previously have been on JSA or ESA in particular. Has any assessment been made of the extent to which people are likely to lose out on their contributory JSA or ESA as a consequence of that?
Lord Freud
The principle is not to allow access to contributory benefits through claiming another benefit. That is fairly logical, if you think about it. If you were purely claiming unemployment benefits and you were on them for a year, you would automatically go into contributory unemployment. That is the logic that we are pursuing when we move to class 3 in universal credit.
Lord McKenzie of Luton
My Lords, I thank the Minister for his reply and my noble friend Lady Sherlock for her questions. On the latter point, I am not sure that the Minister specifically dealt with whether there would be individual strategies focused on those types of people whom we particularly need to reach, such as carers. On the issue that was just raised about not accessing the benefits through other benefits, the point about contributory ESA and contributory JSA, as I understand it, is that you cannot achieve them only by credits; there has to be a payment arrangement as well to qualify. If the credit is changed, that makes it potentially more difficult than it is at the moment. The Minister mentioned the earnings factor credits but, as I understand it, those disappear because S2P obviously disappears as well in the new regime.
I am comforted by the fact that deficiency notices, perhaps in their new form, are to be reactivated once we get to the stage where the April 2016 data are available, which is helpful. I suppose that, broadly, one accepts that there is going to be a big communications strategy. I see that my noble friend Lady Sherlock is poised to ask a question, so I will give her that opportunity.
Baroness Sherlock
Before my noble friend withdraws his amendment, the reason I asked the Minister generally at the beginning about whether all the currently available routes to gaining NI credits would continue on the same terms was precisely to try to draw out the kind of things that my noble friend has been highlighting. If the Minister finds anything else which could possibly fall under that category when he goes back and consults more with his officials, perhaps he might write to us.
Lord McKenzie of Luton
I am grateful to my noble friend and to the Minister. I am happy to read the record on this but, in the mean time, I beg leave to withdraw the amendment.
Lord Whitty
Before the Minister replies, the noble Baroness, Lady Greengross, who has an amendment in this group, has had to leave. She apologises.
Lord Freud
My Lords, the engagement of the guaranteed minimum 2.5% uplift in April this year saw the basic state pension reach a higher share of average earnings than at any time since 1992. Next year, in 2014-15, the basic state pension will be more than £8 a week higher than if it had been uprated by earnings alone in this Parliament.
This Government believe that, like the basic state pension, the single-tier pension should be uprated by at least earnings to ensure that it retains its value compared to wages, but there is flexibility in legislation for above-earnings increases. I therefore reassure the noble Lord, Lord McKenzie, that the triple lock could be used for the uprating of the single-tier pension, as it has been in this Parliament for the uprating of the basic state pension.
Clearly, the noble Lord would not—and the noble Baroness, Lady Sherlock, was generous enough not to—expect me to commit future Governments for the next 47 years. Looking back 47 years would take us back to 1966. That was a long time ago. Was it the summer of love? Perhaps that was 1967, but in any case it takes us back a long way. Therefore, I do not think that one could commit any Government to anything, and I am sure that there will be lots of different Governments over the next 47 years. However, when you look at the proportion of GDP taken up on the assumption of a triple lock, it is possible that Governments will want to stick to it. The Office for Budget Responsibility adjusts for the triple lock by applying a 0.3 of a percentage point premium to the annual uprating of the basic state pension over and above the earnings rate.
Clearly, the triple lock has insulated pensioners from periods when the inflation rate has been relatively high, and has been particularly important in the unusually uncertain economic climate that we have seen in recent years. The Government do not want to constrain future Administrations by placing a requirement to uprate by the triple lock in primary legislation. It must be up to future Governments to decide, based on their annual reviews, whether uprating above the minimum of earnings is applied.
In response to the noble Lord’s question, the expenditure figures include the impact of the minimum qualifying period and deferrals, but the chart in chapter 3 of the impact assessment—there is a loser’s chart there —does not. No savings are assumed from passporting.
On the provisional outcomes on the basis of earnings upratings, the White Paper set out the assumption that the triple lock would be extended until 2060, but we have nevertheless demonstrated the impact on earnings upratings on expenditure in our impact assessment. That is in chart B2 in the impact assessment, which shows that the triple lock uprating has a progressively greater impact on expenditure, and therefore pensioners’ incomes, over time.
The annual uprating process for the state pension is transparent, based on a review made by the Secretary of State with reference to the general level of earnings and the overall economic situation. The indices for earnings and prices are published by the Office for National Statistics before the uprating decision is announced and are readily available. As a result, we see no advantage in committing in legislation to providing a relatively straightforward calculation. I therefore ask the noble Lord to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for that reply. I did not expect him to announce that it was going to be triple lock for the next 47 years; my noble friend Lady Sherlock made our position clear.
There is nothing wrong in looking back 47 years to 1966. England won the World Cup. Harold Wilson was Prime Minister and in his ascendancy. Those were halcyon days and well worth reflecting on.
As I said, the amendment was just a peg to get a debate to highlight that the Treasury is withdrawing quite a lot from the S2P. To an extent, we accept that that is a progressive measure. The Treasury has been chipping away at various bits and I have by no means listed them all. We will probably have another go at listing them in the interim, but in the mean time, I beg leave to withdraw the amendment.
Lord Browne of Ladyton
My Lords, I am content to join in commending my noble friend Lord Whitty and other noble Lords for bringing and developing this argument. They will forgive me if I do not join in the nostalgia for 1966. The removal of contracting out from April 2016 has significant implications for all occupational pension schemes. I shall make my speech short, given the time. It is bad enough to be between somebody and their dinner; it is impossible to be between somebody and Christmas.
It is clear just how significant are the figures quoted by the noble Lord, Lord German. I did not immediately recognise them, but they are in the same ball park as the figure, which I understand to be the Government’s figure, which suggest in excess of £5 billion a year going to the Treasury in extra NI contributions from 2016 when the new state pension scheme begins. Because of the scale of public service pension schemes, the lion’s share of that increase will come from them. It is far from clear, in the complexity of the Bill, how the increased NI contributions in the public sector can be met. Not surprisingly, those who have responsibility for these schemes—bearing in mind that they have just, in many cases, entered into agreements to reform them—are seriously concerned about the impact these changes will have on local authorities, health services, fire and rescue services and policing.
I note that in Committee in the Commons, Oliver Colvile correctly also put the Armed Forces Pension Scheme in the frame in the context of public service pension schemes. If that is correct, if the Minister is minded to accept Amendment 42, the definition of public service pension scheme will include the Armed Forces, which will answer more clearly the question asked by the noble Lord, Lord German, about what is a public service pension scheme. Rightly, Oliver Colvile was concerned that the defence budget should be spent on defending our country and should not be directed back to the Treasury. If it encourages the Minister to engage with this issue in a positive way, I promise not to tell noble and gallant Members of your Lordships’ House that this issue may impinge on that aspect of public policy. If he considers that, I will keep it quiet in the mean time until we see whether we can make some progress on this issue.
The Local Government Association has been in touch with all of us and has advised us that it supports my noble friend Lord Whitty’s amendments, which defer the end of contracting out for public service pension schemes until the tax year beginning 2018, and require the Government to credit public service pension schemes with amounts equivalent to the money lost through the end of contracting out.
It is understandable why it supports them, because, in the absence of an alternative from the Government, the choices they face are extremely unpalatable. They include loss of services or increased council tax, for example, or, as we are advised, the certainty that low-paid workers will leave the schemes or that settlements, including the settlement of the public service pension scheme, would have to be renegotiated. I am also told by those who know that it will mean the renegotiation of a lot of contracts in relation to privatised services, because assumptions were made about commitments in relation to pensions in the TUPE environment that no longer stand true.
It is not unreasonable in those circumstances to ask the Government how they will resolve the additional expenses and how they expect those who run public service schemes to deal with the increased cost and, for that matter, how they expect the individuals affected to deal with the increased costs. Will the Minister address the advice that we have been given and the concerns of those who run these schemes? Does he accept that there will be a perverse incentive unless this is resolved and that low-paid workers may decide to opt out of their public sector pension schemes? Does he accept that there is genuine worry that this will undermine agreements to reform that have already been reached? Does he accept that there is genuine concern that this will impact on existing contracts for provision of services by the private sector?
Lord Freud
As a consequence of ending the additional pension for those reaching pension age after 2016, we are ending contracting-out. This means that individuals in defined benefit schemes—public sector and private sector—and their employers will no longer be entitled to pay a lower rate of national insurance contributions by contracting out of the state second pension. At the moment, they receive a rebate of 1.4% for employees and 3.4% for employers on earnings up to £40,000.
The abolition of contracting out will result in additional national insurance revenue for the Exchequer. Of this, about £4 billion is national insurance contributions from public sector employers and employees. That is the money that the noble Lord, Lord Whitty, is most concerned about.
The extra information that I can provide to my noble friend Lord Flight is that the cost of the public sector schemes of paying extra employer national insurance is about £3 billion per annum. We do not have any breakdown of which schemes are at local authority level. I will speak to Her Majesty’s Treasury to find out whether any further information is available.
Noble Lords will know that the Government have not set a fixed spending envelope, nor one for individual departmental budgets, beyond 2015-16, and contracting out is abolished in 2016-17, so is outside the current settlement. Public sector employers will have to absorb the burden, as is always the case with tax changes. Any spending review in the next Parliament will, of course, consider the £4 billion cost in the round. This does not affect our commitments on protecting spending on health and education in this Parliament. Treasury officials have already met with Local Government Association officials concerning the impact on the local government pension scheme. This follows conversations between the Chief Secretary and the Local Government Association, and I would expect similar discussions to take place concerning other schemes when settlements are set.
Turning to the noble Lord’s amendments, I note that he moved back from 1966 to 1963, but then he would, would he not? The amendments would effectively defer the loss of the rebate to public service pension schemes for two years—until April 2018—but in doing so would defer the introduction of the single tier to more than 4 million people.
Amendments 19, 20 and 21 would change Clause 4 by redefining pre and post-commencement qualifying years, so that public service pension scheme members have them counted up to and from 2018 rather than 2016. Amendment 24 would change Schedule 1—the detail of the transition—to bring into account the old scheme and introduce the new scheme two years later for public sector workers, with a tidying-up clause in Amendment 43.