State Pension Regulations 2015

Lord German Excerpts

Thursday 22nd January 2015 Grand Committee

The department is in effect the servant of the court and supplies information about the value of the individual’s state pension. It also implements orders from the court. The regulation and schedules introduce the concept of old and new pension-sharing arrangements to assist the courts and the department in administering pension sharing. I commend the regulations to the Grand Committee.

[Lord German (LD)]

My Lords, I will address my remarks, if I may, to Part 4 of the regulations—that is, Regulation 13. As I understand it, the regulations effectively replace what is called the home responsibility protection with a 10-year minimum qualifying period for a UK state pension. Prior to 2010, we had in the UK both the HRP and a 10-year minimum qualifying period. From 2010 until now, we had the HRP only. That is now being replaced by the 10-year minimum qualifying period, which was the position before 2010.

I refer to the Explanatory Memorandum and, in particular, paragraph 7.21, which, without the benefit of an impact assessment, is one of the major ways of discovering how many people will be affected by the shift that is announced in the regulations. This is what worries me more than anything else. In the Explanatory Memorandum, the Government look at the difference between a seven-year and a 10-year minimum qualifying period. The number of affected individuals in the United Kingdom who reach retirement age between 2016 and 2020 is approximately 3,000—the figure for the seven-year qualifying period is 6,000 to 10,000, while that for the 10-year period is 9,000 to 12,000, so the average difference between the two is 2,500 to 3,000 people. However, the following sentence says:

“In comparison, we estimate that 18 to 23 per cent (6,000 to 10,000 people) of the total number of individuals living overseas reaching state pension age in the same period will not qualify for a state pension because of the 10 year MQP”.

Then there is an estimate of that saving the Exchequer £650 million by 2040. This figure, I presume, relates mainly to those people living in other countries who have made a contribution to a UK state pension through their national insurance contributions, but who have not reached 10 years of qualifying and do not live either in the EEA or in a country that has a bilateral arrangement with the UK—for example, contributors to a UK pension who live in Australia, Canada, New Zealand, South Africa and other places. That is presumably why this figure is so high.

In that four-year period from 2016 to 2020, somewhere between 18% and 23% of all those pensioners who are expecting to receive a UK state pension are now not going to receive one. I would be grateful if my noble friend could provide—in writing if he does not, as I suspect, have the information to hand—a breakdown of who will be affected, where those people are affected and what the average rate of payment into a UK state pension has been in terms of minimum qualifying periods. If in fact there is a greater number between seven and 10 years, would that figure of 18% to 23% of people affected fall dramatically, if there were a seven-year qualifying period? It would be interesting to know what the rates of contribution had been for those people.

There is of course a second issue, relating to those who live within one of the countries that have a bilateral arrangement with the United Kingdom. I presume that those who live in an EEA country would in fact be entitled, because of contributions made through that European Economic Area member state, to a pension of some sort from the country where those contributions had been made. I want to ask my noble friend whether that is correct. Has an assessment been made of what that pension would be in each of the European Economic Area countries? More specifically, for those countries where there is a bilateral arrangement—my noble friend mentioned Israel and the United States of America—would the contributions which would enable people to get their pensions if they did not reach the 10-year minimum qualifying period, providing they had made sufficient contributions in those countries, for example, entitle them also to some form of pension ability in those countries, given that we have a mixed and bilateral system? I wonder whether my noble friend would agree with me that now is perhaps the time to reconsider the arrangements that we have with other member states in the European Economic Area and with other countries, particularly those of the Commonwealth, where we perhaps need to revisit whether we have a consistent, safe and sane system.

My noble friend also referred to the assistance that will be given to people to understand the new changes. It is not in the regulations, obviously, but paragraph 9 of the Explanatory Memorandum refers to guidance. Could my noble friend tell me whether any guidance is given to those people in the country who are now seeking, part-way through their working life, to emigrate to Canada or Australia, for example, that their state pension rights will be affected by these regulations, and perhaps much more dramatically than they would have been in previous years? I understand that this is a very narrow area to consider, so I would be happy, if necessary, to have a detailed reply in writing, but I would like to see the breakdown of how this affects people who have been contributing to a UK pension in countries such as Canada, New Zealand, Australia and South Africa.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for his very helpful explanation of the regulations and the noble Lord, Lord German, for his contribution, too. Generally speaking, the regulations seem to broadly reflect the intention of the legislation, so I shall concentrate on only two or three points on which I would like some clarification, which mostly have already been raised by the Minister—although I confess that I was not planning on talking about prisoners, or his idea of people being “at large”. I completely agree that people should not be rewarded for this, but the Government’s argument for not giving them a pension is that the state is taking care of their bed and board—which, presumably, the state is not doing if they have absconded. However, I shall let him off on that point for now.

Regulation 10 sets the accrual rate for increments when someone defers claiming their state pension. The rate has now been set at 5.8% per year, which is slightly above what we were told in Committee. Have the Government had time to reflect further since the Bill became an Act about the reasons behind the decision to stop people being able to take a lump sum when they defer, instead of an enhanced ongoing pension? During the passage of the Bill through this House, my noble friend Lady Hollis of Heigham challenged the Government and said that doing this was removing the only opportunity for some future pensioners, particularly those of lesser means, to acquire a lump sum to use in retirement, which might be the last opportunity to fix some particular problem with the house or buy a car. She pushed the Government on that.

I understand—the Minister can correct me if I am wrong—that of the 1.2 million who defer their pensions, only 63,000 take the lump sum, which on average is worth about £14,000. Could the Minister remind us of the reasoning for this? I seem to recall at the time the Minister for Pensions Steve Webb said it was to “simplify the system”, but I do not think it is very hard to understand that you can have a lump sum or a higher weekly amount. So I do not find that reason hugely compelling. Furthermore, government policy on pensions has evolved a bit in recent times, and the idea that people who have been saving for their retirement should be allowed to take a lump sum rather than a weekly pension has become rather flavour of the month. For example, it is there in the Taxation of Pensions Act, whereby people who would have had to spend their retirement savings on an annuity in future may take it out and spend it on a Lamborghini—I believe that is the phrase—should they be so moved. Has the Minister had any second thoughts on that, in the light of changing government pension policy?

Secondly, Regulation 13 was raised by the noble Lord, Lord German. I shall not repeat all the questions that he asked, some of which I would have asked myself, but I will be very interested to hear the Minister’s answer. I am interested in the rationale—that the reason for doing this now is because of the profile of the people who would be affected not being the people one would have expected when the legislation was going through. The Explanatory Memorandum suggests that only 2% to 3% of the people affected would be living in Great Britain, versus 18% to 23% overseas, but the absolute numbers are broadly comparable. We are talking 9,000 to 12,000 in Great Britain and 6,000 to 10,000 overseas. The memorandum says:

“Current projections by the Department indicate that in the medium and long term, abolition of the de minimis condition would have disproportionately benefitted people living outside the UK”.

What is expected to be the short-term impact?

As the noble Lord, Lord German, said, the changes made by the last Labour Government in the Pensions Act 2007 are the context for this. It meant that people who reached state pension age on or after 6 April 2010 needed only 30 qualifying years to qualify for a full basic state pension—and, of course, the HRP, as the noble Lord, Lord German, said. With fewer than 30 years, they qualify for a BSP of one-30th of the full rate for each complete qualifying year that they have built up. That means that somebody reaching state pension age from 6 April 2010 who would not be entitled to any BSP would only be somebody who had built up not even one qualifying year. So it is quite a significant difference. The Labour Government estimated that to mean that, by 2025, over 90% of people reaching state pension age would be entitled to a full BSP. It is quite a big difference from that to someone with, say, nine qualifying years, who as I understand it would not receive anything at all. Labour tried in various ways during the passage of the Bill to soften the transitioning, which would have dealt with some of the issues, but the Government rejected it. Have the Government had any further thoughts on that?

On another point, that is only one of many reasons why someone might not find themselves entitled to a full new state pension, which has become a bit of an issue of late. I understand the desire for simplicity, but in trying to advocate for the single-tier pension, there is a danger that the Government have led many people to believe that they will all qualify for the new state pension, when, in fact, we now know—from freedom of information papers released after Christmas—that 55% of people will not be on the new flat-rate state pension. Obviously, this is partly down to the way the Government have presented this. In an unusual bout of politicians declaring their responsibility, I gather that the Pensions Minister Steve Webb told the Daily Telegraph:

“I think I may have been guilty of oversimplifying the new flat rate state pension”.

Could the Minister tell the Committee, given that that misapprehension is out there, for whatever reason, what steps the Government are taking to correct it? What kind of information campaign is going on to make sure that people who are approaching retirement within the next 10 years will have a better understanding of what they can reasonably expect to get?