Pensions Bill

Lord McKenzie of Luton Excerpts

Wednesday 8th January 2014 Grand Committee

[Lord McKenzie of Luton (Lab)]

Before the Minister sits down, I hope that he will help me. I think that he made reference to the proposals being cost neutral and that his previous formulation went something along the lines that the new arrangements would not be more costly than the current ones. Should we be worried about this nuance?

[Lord Freud]

My Lords, it was not my intention that the noble Lord should be worried about it. I ask the noble Baroness to withdraw her amendment.

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[Baroness Hollis of Heigham (Lab)]

My Lords, we move on to a different subject, which is pension sharing on divorce. This is a very simple, short amendment that raises the issues of divorce that were touched on in previous amendments. When we delivered pension sharing on divorce—many of my noble friends were absolutely vital in that activity in the 1990s—it primarily affected private pensions. We thought that the portion that could be set aside as part of the divorce settlement would be the basis of a useful pension for the divorced spouse—usually the woman. We were also anxious that he and she would build on—or, in his case, perhaps rebuild—their pension shares back up again so that both would face retirement with an adequate pension. However, most divorcing spouses do not seek pension sharing. In some cases, obviously, there may not be much pension to share, particularly if the divorce takes place at a relatively young age—often, sadly, younger women do not always properly value their husbands’ pension, and solicitors, I am afraid, are still pretty sleepy about what is quite a technical issue. Many of those who share pensions do not realise the need for or the possibility of rebuilding their separate pensions. However, out of 120,000 or 125,000 divorces a year, an average of 10,000 divorces involve pension sharing, which means that 8% or 9% of total divorces involve pension sharing of private occupational pensions.

This amendment asks what the implications are for the new state pension. Currently, under existing laws—we clarified this again in a previous discussion on divorcees—upon divorce the woman can substitute the man’s NI record for BSP in lieu of her own at the point of divorce, if his is the higher, and she may also be entitled to half of his additional pension—SERPS or S2P—if the court so decrees as part of the sharing of matrimonial assets.

Under the new regime, she will not be able to substitute his NI contributions for her own, a point that we argued a few amendments back. The only element that can be split or shared, if the court decrees it, is the protected pension; for example, the frozen, additional amount from SERPS and S2P, to which my noble friend referred on a previous amendment. What is more, if he has a shortfall in his NI contributions towards the new state pension—possibly because he has a track record in the public sector, I imagine, with contracting out—some of his additional pension will be brought over to make good his NI record and that transferred slice of protected pension will not then be available for sharing. I am assuming a genderised position here, I am afraid. So she takes the double whammy: not only does she not get an ability to substitute his NI contributions for her own for the basic state pension element, but, equally, if he has an inadequate NI contribution—that may well be the case if he has had a lifetime of contracting out, has never had head space and wishes to make good his shortfall in the new state pension—as I understand it, she will then not be able to access that chunk of his protected and S2P or SERPS pension, which will go across to make good the shortfall.

I would be grateful if the Minister would confirm that I have understood this correctly. If so, the woman has a pretty nasty deal and I think some explanation of the implications is required, particularly for women who have childcare responsibilities and so on and who may not be able to rebuild the additional income, particularly once their youngest child hits 12.

Advising people annually of their pension debit—for example, telling him, as it is usually, but not invariably the man, by how much the pension has reduced following divorce, or with regard to pension credit, the fraction that usually has gone to her of the protected additional pension, if the court has so decreed—would allow each of them to know where they stand to make better decisions about their pension futures and, in particular, that might encourage them into NEST to build or rebuild their total pension prospects.

With this amendment, I am seeking to ask the Minister to ensure that women who may not be aware of, but who could well take advantage of, a share of the additional protected pension have the knowledge that they can do so. They may wish to set that against other matrimonial assets that may otherwise go their way on divorce. I hope, therefore, that the Minister will agree with me that as this is techie and this has now been changed substantively in the Pensions Bill, those women who have been married to someone in the public sector—the reverse could equally well be true in terms of gender—will be a loser a second time because he may well dip into this to make good his NI shortfall. I hope that the Minister will agree with me that we need to encourage people to be aware of the situation and I think that the department needs to take some responsibility for ensuring annual information. I beg to move.

[Lord McKenzie of Luton]

My Lords, I put my name to this amendment because I spent a happy half hour with my noble friend trying to fathom out what the legislation was about, on this occasion, without a bottle of gin. The conclusion that my noble friend has just outlined, which I believe to be correct, is that any protected payment could be shared—I think that was confirmed at one of our briefing meetings and indeed in some of the documentation that we have and this parallels the current situation with the additional state pension—but the protected payment cannot, I think, for some of the reasons outlined by my noble friend, be greater than the second state pension accrued at 6 April 2016; it can, however, be smaller. For individuals who grow up entirely within the single-tier system, with just S2P, as we understand it, there would be no basis for sharing the state pension. The noble Lord’s confirmation would be helpful. The particular thrust of the amendment—to make sure that people are routinely informed—seems entirely reasonable.

[Lord Browne of Ladyton]

My Lords, I intend to make a very short contribution to this debate. As my noble friend Lady Hollis made clear in her introductory remarks, this is a simple amendment. If it can be simple and complex in its implications at the same time, then that is what it is. I have no intention of trying to replicate or supplement my noble friend’s understanding of the complexity of this issue, and the implications of the decisions that face people in these very difficult circumstances. My understanding of the element of the pension that can be split by the courts on divorce is as my noble friend Lord McKenzie explained it. We benefited from a briefing from the Minister’s supporting civil servants which, as always, we were grateful to receive; it was very clear and helpful.

We have heard from my noble friend Lady Hollis about some of the challenges and problems that face divorced women in particular, or women in the context of divorce, about the choices that they have to make. They may well spend some significant time thereafter before receiving pension payments, not knowing or losing track of the details of their pension-splitting arrangements. As a supplementary to the questions asked by my noble friend, and because I do not know the answer, can the Minister tell the Committee if there are arrangements in place by which the courts or the legal profession—the justice system—in some fashion notify the DWP of such arrangements? If they do, what are they? If people are not to be sent regular statements of pension credits or debits, how else would the Minister suggest that this information gap be addressed?

Before I sit down, I want to take the opportunity to provide the Minister with the chance to put on the official record information about a very discrete point relating to the devolution settlement, and the implications of these provisions about pension sharing on an area of devolved responsibility. In this Bill, necessarily, there are consequential amendments to the Family Law (Scotland) Act 1985. As most of us have come to know, the devolution settlement requires certain rules to be applied to circumstances where we in this Parliament legislate in areas which are otherwise devolved—and family law is devolved to the Scottish Parliament. I am satisfied—because I raised this matter with the Minister’s civil servants and received an e-mail explanation on 13 December—that this issue has been discussed with both the Scottish Parliament and the Scottish Government. I was told that the Scottish Government were content, within the scope of the devolution settlement; that the provisions in the Pensions Bill fall under a particular category in the devolved guidance that allows legislative provisions to be enacted here without the necessity for the normal processes. I think this is called a Sewel Motion in the Scottish Parliament. I am speaking long enough for the Minister to find some words that he can put into the official record. I am sure he will understand why it would help if there was some recognition of these discussions and the agreement of the Scottish Government to this Parliament legislating in these potentially contentious areas which would otherwise be devolved. I hope I have made myself clear that it would be helpful if that could be addressed in the response to this amendment.

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I do not know the figures but maybe the Minister does. How many pensioners who exercise the choice to defer their state pension claim a lump sum? That would be good to know. My sense is that it would be quite a significant number but I would like to hear the number from the Minister. This is an issue of principle and I do not think this House, or Parliament, should take away from pensioners the option of taking their deferred state pension as a lump sum if they choose to do so. That should be their choice and we should enshrine it in legislation.

[Lord McKenzie of Luton]

My Lords, I have added my name to this amendment and I wholeheartedly support the points my noble friends Lady Hollis and Lord Hutton and the right reverend Prelate have raised. The Government are reserving the right to defer but, of course, making it more expensive. I think the savings the Government ultimately get from this are in the order of £300 million, because it is going to be dealt with on an actuarial basis rather than the current way. I do not know if it is possible to split the saving between that resulting from the denial of the lump sum and that which is otherwise simply a result of the different actuarial calculation. It would be helpful to have that split, if it could be done. We await the final rates, which are going to be dealt with in regulations.

The issue about lump sums is very important. We need to think about people who might have a health impairment. There is no impaired annuity equivalent under state provision, so far as I am aware. Surviving spouses cannot inherit increments arising from deferral, as I understand it, but they can, of course, inherit a cash sum that has been saved.

The point has been made about the equivalence between the private sector and the state sector. Many people to date have not accessed private savings. Thank goodness auto-enrolment is in place now, courtesy of my noble friend Lord Hutton, who was Secretary of State when big advances were made on that. Over time, people will get better private sector provision and that will provide them with an opportunity many of them do not currently have to access a lump sum.

Can the Minister say what this all means for the public finances? I presume a lump sum paid on day one in a sense scores against public finances in that year while a deferred amount does not score until it is received, and is then received at a higher rate going forward. I do not know whether this is part of the Government’s considerations, but I hope not because I think it would be modest at best.

There are also differences in relation to pension credit. A modest capital sum is ignored for pension credit but, of course, a supplement and income increase arising from deferral would not be. That would be a further denial and scraping away of benefits from these provisions. I very much support the point that no great rationale has been advanced why the lump sum and other deferments should be denied and I hope we can agree across the Room that it should be reinstated in the Bill.

[Baroness Dean of Thornton-le-Fylde (Lab)]

My Lords, I, too, will not detain the Committee very long. When we go through a Bill, there is always something that comes up quite unexpectedly. My noble friend Lady Hollis has alighted on one here, which I do not think is going to go away. If we are not able to progress it at this level, perhaps we shall need to return to it later in the debate on the Bill.

I do not know where the Government have the mandate for this, but it is there now. They are understandably trying to look at pensions as a whole, and saving for retirement, hopefully through a personal pension scheme and through the state scheme. We would support that. However, it is taking a very different principle to the one that applies in private schemes. It will only apply, of course, where the individual says, “I am going to defer my pension”. It is not a case of saying, “I want to take some of my pension in a lump sum”. It is also taking choice away from people. You cannot say, on the one hand, that we want people to have choice, to save and to be in charge of their own income when they retire, and do everything you can to encourage them, but then, in this particular aspect, say, “No, we the state know better than you do”. Even if the Minister cannot do so today, I hope he will be able to reflect on this and give due consideration to making some movement in the Bill on it.

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[Lord Freud]

I do not have the crossover point figure. I could look into that. Clearly, it would be different depending on the system. I can offer to discuss this with some graphics, which I suspect are essential, in a briefing session before Report.

[Lord McKenzie of Luton]

Will the Minister help me on another point about simplicity? We will come on to discuss 3A voluntary contributions in a moment. As I understand it, additional pension achieved via that route could be deferred and a lump sum could be taken. Is that right?

[Lord Freud]

Yes. The reason is that that is the equivalent of the private pension provision, which is a purchase. We are drawing a distinction here between public provision and private provision. With the pulling into a single tier, that is where the line is drawn between the two. As private pensions offer lump sums, that is where we would expect people to be taking them.

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Moved by

[Lord McKenzie of Luton]

34: Clause 23, page 11, line 30, at end insert—
“( ) Before the provisions contained in paragraphs 83 to 86 of Schedule 12 come into effect, the Secretary of State shall set out comprehensive arrangements for the passporting to benefits for those no longer eligible for the savings credit.”

[Lord McKenzie of Luton]

My Lords, this is a probing amendment to give us a chance to have a canter round the passporting issues. The impact assessment has a section on passported benefits. We had a brief excursion into these matters when we last met and have since had a helpful letter from the Minister. The impact assessment sets it out clearly:

“If pensioners are no longer eligible for Pension Credit as a result of the single-tier reforms then they could lose eligibility to some of these ‘passported benefits’”.

That is straightforward. It goes on to state:

“Receipt of Guarantee Credit passports pensioners to the full amount of Housing Benefit and Council Tax Benefit … There is little reduction in Guarantee Credit eligibility resulting from the single tier”.

Therefore, this has a limited impact on the proportion of pensioners who are eligible to be passported. Yet in his letter—and we understand the arithmetic—the Minister tells us that in 2020 there will be a fall of around 15% to 20% of the total eligible for guarantee credit in these cohorts.

Going back to the impact assessment, we are reminded that there are other benefits that are linked to receipt of guarantee credit such as health benefits and Social Fund payments, so that pensioners no longer entitled to guarantee credit as a result of the single-tier measures may also lose eligibility to these other benefits. But again we are told that,

“there is only a small impact of single tier on entitlement to Guarantee Credit”.

The cynic might conclude that, when dealing with passported benefits, the Government are seeking to play down the reduction in guarantee credit recipients but are otherwise seeking to reassure us that single tier will reduce means-testing. I accept the figures in the Minister’s letter that in the 2040s there will be some 50,000 fewer households on guarantee credit than would have been the case under the existing state pension arrangements. It is further accepted that fewer will be on guarantee credit because their income has risen. However, the working assumption is that STP will be set just marginally above the guarantee credit level, so for notionally swapping pension income for guarantee credit some 50,000 are notionally missing out on passporting. Is this correct? What are the estimated savings to government from this? There seems clearly to be no intent to compensate in any way. As our documentation makes clear, the main driver of reductions in pension credit is the demise of the savings credit. Chart 4.1 of the impact assessment shows—as a percentage of the population reaching state pension age after the introduction of single tier—the change in the composition of those eligible for pension credit, but I cannot readily locate the absolute numbers of households which lose savings credits and the notional average amounts. The chart is done in percentage terms. Can the Minister help us on this?

So far as the passporting of benefits is concerned, under current arrangements most depend on guarantee credit. However, receipt of the savings credit can unlock access to such benefits as cold weather payments, affordable warmth obligations of energy companies and, until abolition, working tax credit and child tax credit. How many pensioners will have no access to cold weather payments under STP who would have under the current arrangements? How much money are the Government saving by this, and are there plans to put in place any alternative arrangements? I beg to move.

[Lord Browne of Ladyton]

My Lords, in speaking to this amendment I shall speak also to Amendment 36A in the name of my noble friend Lady Sherlock and myself. Amendment 36A is a small probing amendment designed simply to draw out the Minister on the impact of the abolition of savings credit on mixed-age couples—that is, a couple where one member reaches the state pension age before 6 April 2016 and the other after. The relevant provision in the Bill is to be found in paragraph 85 of Schedule 12, and the mechanism is the insertion of Section 3ZA into the State Pension Credit Act 2002. Subsection (1) of this new section of that Act reads as follows:

“Regulations may provide that, in prescribed cases, a person who is a member of a mixed-age couple is not entitled to a savings credit”.

Subsection (2) reads:

“For example, the regulations could provide that a member of a mixed-age couple is not entitled to a savings credit unless … the person has been awarded a savings credit with effect from a day before 6 April 2016 and was entitled to a savings credit immediately before that date, and … the person remained entitled to state pension credit at all times since the beginning of 6 April 2016”.

For good reasons to do with the interpretation of statutory powers, it is unusual to legislate by example, and with this amendment I am seeking to draw out the Minister on why the Government have chosen to do so. The answer may be that there is some existing provision that has to be re-enacted. If that is the case, I would quite like the Minister to go further and explain why there is this particular example of circumstances where a mixed-age couple would not be entitled to savings credit. For the record, I think it would instruct and inform the public and the Committee if the Government explained whether it is their intention that these example circumstances will be the only circumstances in which a mixed-age couple are entitled to savings credit. How many couples do the Government expect will be affected by this very specific change?

On the broader issue of the loss of savings credit, will the Minister clarify precisely how many people are currently entitled to savings credit only? I cannot reconcile the figures from the different case load statistics that I have access to. Will he clarify how much the mean and median loss—the notional loss, if he prefers—will be? Will he engage with the question of whether or not this will create a cliff edge for those who just miss out on guarantee credit?

Turning to my noble friend’s amendment, what will happen to entitlement to those benefits that are passported off savings credit? According to the paper from his officials, these are assisted prison visits, affordable warmth, access to the Social Fund—presuming, of course, that there is anything left of it—working tax credit, child tax credit and the Sure Start maternity grant. Will these people still be entitled to those, based on the maximum income on which they could have been eligible for savings credit?

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[Lord Freud]

Clearly, it is because we are expecting that broadly the same numbers of people will be getting cold weather payments. Because of the complexity around this, as I was trying to indicate, we have put no assumption of savings into these figures.

[Lord McKenzie of Luton]

I accept that the Government have not put in any assumptions of savings but if, in fact, there are going to be 540,000 fewer individuals on savings credit and presumably at least some of those would have been able to access cold weather payments under current arrangements—quite apart from couples; I am not talking here about mixed-age couples—there must be savings. There must be circumstances where cold weather payments are not going to be due to somebody in the future who would have got them under the current arrangements. We are just trying to understand the numbers and the savings.

[Lord Freud]

We estimate that only 80,000 who would otherwise have been claiming pension credit in 2020 will be taken out of the scope of cold weather payments. Cold weather payments will clearly continue to be linked to savings credit, but it is difficult to say whether the 100,000 who may lose savings credit would get cold weather payments for other reasons. It depends on where they are living and what is triggered. That is the reason that we have not made any assumptions. On the basis of these observations and, in particular, the reassurance in respect of support with housing costs, I ask the noble Lord to withdraw the amendment.

[Lord McKenzie of Luton]

My Lords, I am going to withdraw the amendment—we are in the Moses Room—but I am bound to say that I think that the noble Lord would himself recognise that that answer in no significant way addressed the issues we were trying to explore. I will just restate them, and maybe we could have follow-up correspondence. Maybe we should have one of our sessions around this; it is important that we get to the bottom of it. We are seeking to understand how many individuals who would get the savings credit under current arrangements will not do so under the new arrangements in the future, whether they are individuals or couples; I am not dealing here with mixed-age couples. What is the average loss of income because of the denial of savings credit? What is the benefit to government of having restricted passporting of these individuals to a range of benefits, except that some of them may have other routes to those benefits? Of course, the cold weather payments depend on where they live; I am not asking the noble Lord to assume that they go and live in the Antarctic, Scotland or somewhere cold. Sorry, Des; I am in hot—no, cold—water.

The Minister will see the point that I am probing here. There must be savings to government from these changes and we are just trying to understand the measure of them. I take it from the Minister’s reply that there is absolutely no intent to bring forward any special arrangements to reinstate this sort of entitlement for people who will fall out of it because the savings credit is no longer applicable or because they are just at the threshold of being out of the guarantee credit. That is where S2P is going to be pitched, on the basis of all the information that we have. I am not sure that we can make much further progress on this issue this afternoon, unless the Minister is going to—

[Lord Freud]

I think the noble Lord made a valuable suggestion. This is one of the issues we can look at in a pre-Report session, at which we can go through some of the figures and tables. I am happy to commit to arranging that.

[Lord McKenzie of Luton]

I am grateful for that. On that basis, I beg leave to withdraw the amendment.

Amendment 34 withdrawn.