Social Security Benefits Up-rating Order 2011

Lord Kirkwood of Kirkhope Excerpts

Monday 14th March 2011 Lords Chamber

[Lord German]

I was very grateful that the Government did not put the override in place, because of course it should be up to occupational pension schemes to make up their own minds according to their rules. Clearly, if RPI were written into the contract that already existed, that would apply and the schemes would be able to stay with that. Most pension schemes will be able to make that choice, and I hope that there will be a debate among pension fund members about the way in which that might be put into place. It is also very important that pensioners with accrued benefits under RPI should have those benefits maintained and that, if the choice is made to change, CPI should occur only after the CPI regulation hits the deck.

Going slightly beyond this issue, I want look at the packages in the round and I also want to ask the Minister some questions. I am pleased that there was no override, and I wonder whether the Minister can confirm what I have just said regarding accruals for occupational pension schemes. Will the switch to CPI see the pressure on occupational pension funds reduced? I know that some figures have been produced regarding the reduction in pressure on some occupational pension funds. I should be grateful if the Minister could update us on the current thinking on that matter and on the current analysis of who is going to move and in which direction.

My final question relates to the much bigger world of the reforms proposed by the noble Lord, Lord Hutton. What are the Government’s thoughts about the direction of travel of the matters that we are discussing today, and how will that impact on the public sector pension funds? Will the Government be responding to the noble Lord, Lord Hutton, and in what timescale? People will want to understand the Government’s direction of travel, both on the basic pension and on public service pensions, which I imagine are a cause of concern to many people at present.

[Lord Kirkwood of Kirkhope]

My Lords, I should like to make a few comments at the end of what is always a very important annual occasion. There have been occasions in the past when colleagues in the House have not considered it appropriate to look at social security benefit uprating orders, but these orders are extremely important for the people whom they affect and it is right that we should spend time looking carefully at the provisions. I am not surprised that more colleagues do not participate in these debates, as they are extremely complicated, particularly this year when we are contemplating wholesale changes in the benefit system. It is particularly difficult to foresee the impact that some of these announced changes will bring in future.

It would be helpful to receive some reassurance from my noble friend on the Front Bench on a couple of points. I agree with the comments that have been made about the pension provision. That is one area where substantial progress has been made, for which I am very grateful.

I want to pick up an important point made by the noble Baroness, Lady Lister, who is probably the only person in this Chamber who has been doing uprating orders for longer than I have—she advised me about them when I was elected to the other place in 1983, which was not yesterday. She has a huge amount of experience and knowledge and she will be a great asset to this House in considering these issues in the future. She raised the point about freezing child benefit until 2014. Of course, that is against the background of deficit reduction. I defer to no one on the necessity to attack the important financial circumstances that we all face, but how will that affect the child poverty strategy? In the legislation that we passed in the dying days of the previous Parliament, the Child Poverty Act 2010, we set out the requirement for a child poverty strategy. I anticipate that that will be unleashed on us quite soon. These changes will have a dramatic impact on the staging posts of 2015 and 2020 in the child poverty strategy.

Deficit reduction notwithstanding, I hope that the Government do not make these changes in a way that makes it impossible to get to a more comfortable place on child poverty by 2020. If that were the case, I would be very concerned. I think that redistribution is still necessary. The noble Baroness was absolutely right to say that this benefit was a tax allowance in the days before it was converted. It is extremely important that we keep the pressure up. People like me are uncomfortable about freezing child benefit. If the Government continue to freeze it, I shall be more than uncomfortable; I shall be very upset. A word of comfort about the fact that there is a child poverty strategy in gestation and about to be unleashed on us would send me home a happier bunny this evening.

We shall return to the CPI/RPI debate, and at great length. For me, there is some conflicting evidence. My noble friend dealt with the substitution effect. I think that he is right about substitution and I concede that he is right about geometry and not arithmetic. However, I do not necessarily concede that, therefore, CPI is an appropriate measure. I think that the IFS is on his side when it comes to substitution but, on whether this is an inflation experience that is adequate and appropriate for the client group, it is on a different side of the argument. The press release that I have in front of me, dated August 2010, suggests that it believes that,

“only 23 per cent of benefit claimants are unaffected by increases in mortgage interest payments and council tax”.

Therefore, the rest will be caught by the reduction. We cannot ignore that. I want to think about that more carefully and I shall study, with care, what my noble friend says about it, if not tonight then at another stage. I think that the jury is out. I think that he has won the argument about substitution but I do not think that that necessarily means that it is a safe measure in perpetuity. You only have to ask the Library not just about the short-term effects but also about the long-term effects to see that reductions in domestic household incomes are stark. Over a 20-year and a 30-year period, they are unconscionable. I hope that we in the coalition Government are not lashed to the mast on some of these things. If the CPI in the middle-to-longer term—five to 10 years—starts to pinch in a way that I think it may, I hope that we will be big enough to look again at whether it is an appropriate measure.

--- Later in debate ---

[Lord Lea of Crondall]

Perhaps I may say how interesting I find the noble Lord’s analysis of the difference between the RPI and the CPI. Some 30 years ago, I was a member of the RPI advisory committee when it had a great row with the Treasury about mortgage interest payments. The philosophical argument was that you cannot have the cost of money as a factor in the national income. I respect that that was always the Treasury position. It might be slightly provocative to say this, but perhaps an organisation such as the Office for National Statistics or the new Office for Budget Responsibility could objectively set out the pros and cons for the different purposes. Whether one is dealing with national accounts or the cost of bus fares, one has to disaggregate the RPI. This issue arises all the time. Therefore, it would be useful if the Cabinet Office or somewhere else could produce a paper on the strengths and weaknesses for different purposes of the RPI and the CPI, including European standardised statistics and all the rest of it.

[Lord Kirkwood of Kirkhope]

I certainly think that that is a good idea and I would support it.

[Lord Freud]

My Lords, this has been an interesting debate, as one would hope and expect. I thank noble Lords for their valued contributions. I should probably declare an interest in that I am due a winter fuel payment this year, although I did not get it. The DWP says that it paid everyone and I find that I am the only person who did not get their winter fuel payment.

The uprating order and the GMP increase order both legislate for increases to benefits and pensions to be paid from April, thus protecting their value at a difficult time. My overview of what the noble Lord, Lord McKenzie, said is that the party opposite was perfectly happy with the CPI in the short term and would agree with the UK Office for National Statistics on the issue if the CPI was to include housing costs in the slightly longer term. On that basis, I suspect that there is rather less between us than might appear at first instance. We are very interested in the changes that will potentially be made to the CPI if housing costs are incorporated, which is being looked at. However, as the noble Lord, Lord Lea, hinted, it is likely that that would be done not by including the changes in mortgage interest rates but by the actual changes in house values.

A lot of points were raised in the debate and I will do my best to answer as many as I can. An important point about substitution was raised by the noble Lord, Lord McKenzie, the noble Baroness, Lady Lister, and my noble friend Lord German, who pointed out that people will buy everything at the bottom, which is what one expects them to do—that was the sentiment. However, that is not what happens with this index, which it is important to emphasise. If in a given range of the cheapest items—or best value goods, whatever they are called—and one of them goes up but the rest stay the same, people will substitute the one that has increased in price with the ones that remained stable. The relative movement in those goods, rather than their absolute value at any one time, is what counts. It is really important to understand that when looking at how the substitution effect actually works.

We could probably all bore each other by quoting lots of different experts—and I think we have, so I will not bother doing so—but the noble Lord, Lord McKenzie, made the point that we abandoned the policy of the CPI when it came to it. I repeat what I said in my opening remarks: we announced the RPI for the basic state pension for the year at the same time as we announced the move to the CPI, so there has been no reversal or change. That was what the policy was.

On the point raised by the noble Lord, Lord McKenzie, on the triple guarantee, in the current environment the earnings factor does not make much immediate difference, but over time it will make a substantial difference and pensioners will benefit from it. As I said in my opening remarks, the 1.5 per cent increase from the previous year was not reversed. Picking up on some of the noble Lord’s other points, I think that he knows almost better than I do that, when it comes to mortgage interest for people of working age, benefit recipients and working people on low incomes can also get support for mortgage interest payments.

The noble Lord asked what assessment had been made of the changes that we have introduced to non-dependent deductions. The equality impact assessment on those changes has been published on the DWP website. A question was also asked about indexation rights for public service pensions. Those have been index-linked on the same RPI basis up to this point, and in future the indexation will be made on the new basis, which is CPI.

The noble Lord, Lord McKenzie, and the noble Baroness, Lady Lister, also homed in on the effect on poorer households, which is the big question here. We now have 5.8 million adults of working age living in relative poverty. As I have argued, the idea is that using the CPI will ensure that typical changes remain in line with real experience. Where we need to go in this area—a much more important point—is in the structure of the benefits system so that we strike the right balance between the welfare system as a safety net and one that sends out a clear message that work is valuable and that, if you can work, you should work.

We are modelling the big impact that will be made by introducing the universal credit. We estimate that 350,000 fewer children and 600,000 fewer adults will be expected to live in poverty—on the normal definition of 60 per cent of median household income. Some two-thirds of that effect will be because of better take-up. My noble friend Lord Kirkwood asked whether we would chase underpayments as hard as overpayments, but that is exactly how that effect will happen in practice. A lot of the effect will come from take-up by people who simply do not take up what they are entitled to.