Welfare Reform Bill

Lord McKenzie of Luton Excerpts

Monday 12th December 2011 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I propose to speak briefly in support of Amendments 7 and 11 as my noble friend is a renowned expert on pensions and it is never possible to add much, if anything, of substance to what she has said. My noble friend has made an important point about the breaking of the consensus on encouraging saving. On the one hand she instanced the huge sums that will be garnered by the changes to the state pension age and, at the other end of the spectrum, the deferral of automatic enrolment and this measure, which changes the basis on which pension contributions are treated in universal credit compared with working tax credits.

I wish to probe again a point in respect of the 50 per cent only deduction, which I do not think that the Minister dealt with significantly in Committee. Universal credit will obviously be based on real-time information—the information which will flow from employer returns to HMRC, and the data flowing back. That data will be based on 100 per cent deductions of occupational pension schemes, so if universal credit is going to rely on a 50 per cent deduction only, there is going to have to be some other process or loop which is not naturally there in the data flows at the moment. I think the Minister instanced that this was something that was being commissioned. I can imagine the work involved in seeing how that might be derived. I hope that he will take the opportunity tonight to be a little clearer on that. Quite apart from the principle of the measure which my noble friend has raised, I raise the actual practicalities of implementing it. When we looked at recasting the child maintenance system, which we shall come on to on a subsequent Report day, what was determined and debated in your Lordships' Chamber was that it would be based on gross income data provided by HMRC but net of 100 per cent of employee occupational pension contributions, as that was the natural flow of data. I would be grateful if the Minister could deal with the practicalities of that point.

Amendment 11 seeks to ensure that measures can be put in place to address one of the significant couple penalties introduced by the Welfare Reform Bill—a penalty that means that a couple, where one person is over and one under pension age, could lose as much as £100 a week compared to the current system. This sits alongside the couple penalty introduced by the limiting of contributory employment and support allowance and that introduced by the benefit cap in a series of changes that, perhaps unintentionally, mean that couples may see themselves as better off financially, as my noble friend has said, living apart.

The policy change being introduced means that whereas at present couples where one member has reached pension age are eligible for pension credit, following the coming into effect of the Bill, if one member of the couple is below pension age, they will be forced to claim universal credit until both of them qualify for a pension. We have been given no specific figures on the impact of this policy although we know that there are currently 93,000 couples where one person is over and one under pension age. Not all of these will be affected as those who are already receiving pension credit will be able to remain on that benefit. However, as the revised impact assessment points out, those who are affected are likely to be hit hard, stating that the heaviest notional losers for couples without children,

“are in cases where one member is of working-age and one is currently eligible for Pension Credit”.

Perhaps the Minister can tell us how many people he estimates that this change will affect and how much they stand to lose. Bringing pensioners within the orbit of universal credit will also mean, as my noble friend has said, subjecting them to many of the new and harsher rules that accompany the new benefit. The Minister has not yet told us how he expects pensioners to be affected by the new capital limits that will be introduced for universal credit, and also for pension credit when housing benefit is abolished. As Age UK points out, nearly 150,000 people claiming pension credit have more than £16,000 in savings. In the future those with a low income but over £16,000 of savings who have a younger partner will not only be excluded from pension credit, they will not be entitled to universal credit due to their savings.

The Government have argued that the purpose of the policy change is to ensure that working-age claimants are subject to working-age conditionality and asked to look for work. However, many of the working-age claimants who fall into this group and have an older partner may in fact be subject to no work-related requirements—a matter we discussed in Committee—whether because they are caring for someone or have a disability themselves. These couples too will see a £100 a week hit on their income as well as potentially losing other support linked to pension credits, such as the winter fuel payments.

The Government have said that this is not a savings measure so there should be some flexibility within the system to ensure that couples in this situation have their income protected. This policy has not been consulted on and we have not received sufficient information fully to assess who it will affect and how. Therefore, the amendment proposed by my noble friend would give the Government the flexibility to look again at the options in this area and to ensure that couples in this situation do not lose out.

[Lord Freud]

My Lords, Amendment 7 would take a power to disregard the full amount of any pension contributions from the assessment of both single and joint claimants’ income. As I made clear at Committee, this is a matter for regulations and we do not need any additional regulation-making powers. Our stated policy since the Universal Credit White Paper has been a 50 per cent disregard of pension contributions, in line with the current approach in the benefit system, as opposed to the tax credit system. We are taking the middle path between supporting pension saving for people on low incomes and fairness to the taxpayer. It is important to remember that many taxpayers who do not claim benefits do not have occupational or private pensions. A full disregard of all pension contributions would cost an additional £200 million a year.

Noble Lords have characterised our approach as worsening the position when compared with tax credits, where there is a full disregard of pension contributions. However, this oversimplifies the comparison between universal credit, based on net income after tax, and tax credits, based on gross taxable income. Frankly, we are not comparing like with like. We also need to take account of the new employer contribution duties to be introduced from next year. We previously said that when taking account of employer contributions, the cost to an individual for each pound of pension would be 34 pence. Since Committee, we have looked again at these figures and I should like to take this opportunity to correct that one, which we have now calculated out at 38 pence. I apologise for that mistake, which I hope is not too substantial directionally.

If one considers putting £1 today into a pension, the cost in the tax credit system is 39 pence. One can see that that represents 61 pence pure universal credit. However, if one combines that universal credit calculation with the employer pension duties, the figure reduces to the 38 pence that I talked of. The middle way, when considered in combination with what else is happening, is actually not quite as mean or extreme as the noble Baroness, whose expertise I acknowledge and have suffered from in the past, might imply. If you are outside the system entirely, it costs you 80 pence for every £1 of savings. That provides a balance on why we have come to that figure.

Picking up the question from the noble Lord, Lord McKenzie, on the RTI feed, I can inform him that payroll data do identify pension contributions from salary. They have to do that because the pension contributions will be subject to national insurance. That is the feed element we will use to make this calculation, and we are currently working out the detail. Taking all these factors into account, we believe that a 50 per cent disregard is an appropriate balance between encouraging saving and a fair deal for the taxpayer.

Amendment 11 would amend the regulation-making power in Clause 9 relating to the standard allowance. This would allow us to provide an exception for couples with one member above state pension age by excluding the standard allowance from the calculation of their universal credit award. As I explained in Grand Committee, the Government have taken the view that couples with one member above and one under the qualifying age for state pension credit should claim universal credit. Following that debate, I sent the noble Baroness, Lady Hollis, and other noble Lords some worked examples showing the entitlement of different couples on the two benefits. They showed that there will be a range of outcomes depending on individual circumstances. We calculated that more than 90,000 couples with one partner under pension credit age are on pension credit—that was in answer to the noble Lord, Lord McKenzie. However, transitional protection will apply, and all those couples currently on pension credit will stay on it while circumstances remain the same.

We are not convinced that it is necessary to have special rules or different amounts of standard allowance where one partner is above pension age. Universal credit also includes additional amounts for those people who have limited capability for work or regular and substantial caring responsibilities for a severely disabled person. It remains the Government’s view that people of working age who are able to work should prepare for or look for work in return for receiving support from the state. The earnings rules and disregards in universal credit provide a clear incentive to do so. I therefore urge the noble Baroness, Lady Drake, to withdraw her amendment.

--- Later in debate ---

Moved by

[Lord McKenzie of Luton]

8: Clause 8, page 4, line 21, at end insert—
“(5) Regulations are to specify the amount of tariff income from capital that is to be included as unearned income, including specifying different amounts for in work and out of work claimants.”

[Lord McKenzie of Luton]

This amendment raises the question of the amount of capital that will be taken into account when calculating universal credit. The Government's proposals at present are that those with savings of above £16,000 will not be able to claim universal credit and that capital above £6,000 will attract a tariff income of £1 for every £250 above the £6,000 floor.

Our amendment seeks to enable differential treatment of capital for those in and out of work, reflecting the current arrangements, under which the universal credit rules replicate current benefit arrangements. Tax credits claimed by those who are in work have no limits on capital nor assume any tariff income, but obviously take account of the actual or taxable investment income. The Minister has talked about universal credit encouraging a culture change in how people manage their money. We fear that the current proposals will discourage low-income people in work from accumulating savings and building assets.

This is not just our view about the capital rules, but that of one of the main architects of universal credit, the Centre for Social Justice. As Deven Ghelani, a senior researcher at the centre said when giving evidence to the House of Commons Bill Committee:

“It is fundamentally a disincentive to save. I think that the savings limit for people who are not working and are on benefits has been £16,000 for I am not sure how many years, but certainly rather a lot”.

It is nice to know that the centre has such precision.

“The limit has not been uprated for at least a decade I would say, and possibly a lot longer. By extending that to people who are working, people who get close to that threshold might suddenly realise that it does not pay to save and that there are perhaps other things that they should be doing with the money, whereas saving is in itself a protection against dependency”.—[Official Report, Commons, Welfare Reform Bill Committee; 22/3/11, col. 19.]

The proposals will act as a barrier for those on modest incomes who are trying to save, whether for a house, for their children's tuition fees for university or against the possibility that they may lose their job and need a cushion of income to fall back on. The Government propose to encourage more tenants to buy their council accommodation. Under these proposals, tenants who wish to save to take up the offer will first be penalised for those savings and then, if they are able to build up their savings sufficiently, barred from accessing universal credit at all. That does not seem to be in line with the Government’s message that, under universal credit, work will always pay.

The department’s briefing assessment of the changes suggests that there will be between 100,000 and 200,000 people who will lose eligibility to universal credit altogether because of the new capital cut-off rules, and that between 200,000 and 300,000 people will have reduced eligibility due to the rules on tariff income. The briefing note states:

“People with substantial savings or other capital clearly have sufficient income to meet their needs”.

It is right that they should draw on these resources before looking to the taxpayer for support, particularly as many taxpayers themselves have savings well below these limits, but the vast majority of low-income workers who are claiming universal credit will also be taxpayers, and their taxes will be used to support other incentives to save in the tax system, including, as we discussed in Committee, the considerable tax relief on pension contributions.

The current proposals punish those on low incomes who are working and trying to build assets for the future. The amendment proposes a modest change to enable differential treatment of capital for those in and out of work. When we debated the issues in Committee, the Minister told us that these are not necessarily issues of principle; they are issues of affordability and the envelope that we have to introduce universal credit. By accepting the amendments, he could signal that he recognises the importance of enabling those who move into paid work to begin to build up their assets and avoid sending the wrong message that those on low incomes should not expect to be able to save. I beg to move.

[Lord Freud]

My Lords, Amendment 8 would require different tariff incomes to be set against the capital of people in and out of work. I understand the noble Lord’s desire to continue to treat the capital of people in work differently in order to encourage low-income workers to save. I remind the noble Lord and the House that I was able to provide somewhat more precision than the IFS on the last time the figure of £6,000 or £16,000 was raised. To be absolutely honest, I forget the date that I provided in Committee, but it is now on the record in Hansard. The date was 2006. I am pleased to keep just marginally ahead of the IFS every now and then.

This amendment is at odds with our shared ambition for a simpler system. It is also, as it stands, unaffordable. We estimate that it would cost around an additional £70 million a year to remove tariff income for everyone in work with capital up to £16,000. We estimate that it would cost an additional £30 million a year to set tariff income at £1 for every £500, instead of the current £1 for every £250, for everyone in work with capital up to £16,000. That gives you a context of cost. This is a cost matter, as I made clear in Committee. There are quite a lot of nice-to-dos in the universal credit; I would like to do many of them myself, I assure you, but we have got to focus on where we can put the scarce resource and where it is absolutely needed. The debate around that is based on the fact that we estimate that around 80 per cent of those claimants who will have a higher benefit entitlement under universal credit will be in the bottom two income quintiles. Now is not the time to do anything other than to retain the existing threshold of £6,000.

The shocking reality is that if you go to the median household with a working-age adult in it the figure of savings in that household is £300. That is across all working ages in the FRS. That is a shocking figure, but it just shows you where the debate is against the reality of what is happening in this community group. I am using median not average here, because I think it is a better figure.

That is the issue. We have limited resources; we need to focus them on those least able to support themselves. I hope that explains why we are where we are with these particular figures for tariff income and capital and why we cannot support this amendment, and I ask the noble Lord to withdraw it.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister for his response. I should just say that it was not the IFS which gave that evidence; it was the Centre for Social Justice, which I thought was an organisation quite close to the noble Lord’s heart.

[Lord Freud]

I should have known I would never be ahead of the IFS; I apologise to it.

[Lord McKenzie of Luton]

I understand the Minister’s response. It really reiterated what he said in Committee: this is an issue of affordability, not necessarily one of principle. On that basis I do not see why he could not accept the amendment—it would signal the Government’s intent on this—but given the hour I beg leave to withdraw the amendment.

Amendment 8 withdrawn.