Pensions and Social Security

Debate between Stephen Timms and George Hollingbery

Thursday 23rd February 2012 Commons Chamber

[Stephen Timms (East Ham) (Lab)]

The Minister has helpfully explained that we are dealing with three separate orders, aspects of which are welcome but others of which are decidedly unwelcome. I shall make it clear where we do not support the Government.

The Pensions Act 2008 (Amendment) Order—to give it a rather briefer title than the one the Minister used—makes minor amendments to protected rights over payments of defined contributions contracted-out pension schemes. As he said, the underpinning legislation is the Pensions Act 2008. I accept that the order is necessary to clarify a following order, and I have no objection to it.

The most substantial of the orders—the one that I am sure this debate will focus on—is the Social Security Benefits Up-rating Order 2012, which, as the Minister said, uprates most out-of-work benefits and the basic state pension in line with the consumer prices index. For most out-of-work benefits, this will be the second year that CPI has been used rather than RPI, but for the basic state pension it is the first year. Members might recall that, like this year, last year the Government trumpeted their triple lock on the basic state pension.

I recall that in the debate last year the right hon. Member for Bermondsey and Old Southwark (Simon Hughes), who unfortunately is not with us today, congratulated his hon. Friend the Minister on his success in introducing the triple lock—only, the Government did not, in fact, apply it last year. Under the triple lock, the basic state pension would have been uprated by CPI, which was a long way below RPI last year, so the Minister—prudently, I think—decided to overrule his triple lock on its first outing and instead operate the old mechanism, uprating the basic state pension by the higher rate, RPI. In doing so, he exposed to public view the weakness of his triple lock. He had to override it in the first year it was due to be applied. Advertised as a safeguard for pensioners, the triple lock in fact undermines pensions uprating.

The Government have told us that the switch from RPI to CPI is not simply a deficit reduction measure. Instead, the justification for the switch is that, as the Minister said again today, CPI is a more accurate measure of changes in the cost of living for pensioners. Last year the Minister told us that he viewed CPI as

“the most appropriate measure of price inflation for this purpose,”

and that he saw

“no reason to change it in the future.”—[Official Report, 17 February 2011; Vol. 523, c. 1174-77.]

However, the view that RPI, let alone CPI, is an adequate measure of pensioner inflation is one on which many pensioners would take issue with him, as the hon. Member for Banff and Buchan (Dr Whiteford) suggested a few minutes ago. I was interested in the Minister’s view that the National Pensioners Convention is happy with CPI uprating. However, as the Civil Service Pensioners Alliance, among others, has pointed out in its briefing:

“The Royal Statistical Society…has said that CPI fails to reflect the spending patterns of pensioners and the rising costs they face. The Institute for Fiscal Studies”—

to which the Minister referred—

“has shown that most pensioner households are not shielded from many of the costs excluded from CPI. The UK Statistics Authority…has said that they do not believe the CPI should become the primary measure of data inflation until housing costs are included,”

which is a point that he touched on in response to my intervention.

The Minister has tried to paint the change as simply a sensible bureaucratic change, not one that is ideologically motivated or that represents a cut in the income of pensioners, but in reality that is not the case. As the UK Statistics Authority put it last year:

“Questions about compensation, who to compensate and what for, are straightforwardly political questions, not for statisticians.”

In other words, this is a matter for political decision. Let us be frank with people: the Government have chosen to uprate benefits and pensions permanently in a way that, in the case of benefits, will usually be meaner than the method used before and, in the case of pensions, was meaner this year and last year, which is why the Government overrode it last year and used the old method instead.

[George Hollingbery (Meon Valley) (Con)]

I seem to recall some embarrassment in the Labour party back in 2000 when the low rate of 1.1% was used to uprate pensions, the result of which was a 75p increase. Does the right hon. Gentleman agree that, under this Government, the triple lock will ensure that 2.5% is the minimum that can be paid?

[Stephen Timms]

Of course, that is indeed the effect of the mechanism that the Government have chosen. I would simply point out to the hon. Gentleman that if the previous method was still in place, there would be a higher increase in the basic state pension than the Minister has announced today.

--- Later in debate ---

[Stephen Timms]

It is probably the case that the Government’s poor performance on inflation—to go back to a point the Minister made earlier—and the resulting high level of inflation have been a surprise. I do not think anyone expected inflation to rise so rapidly. However, I want to underline the point, which the Minister has not acknowledged yet, that if RPI was still in place for the coming year, the increase for pensioners would be higher than the order in question sets out.

The judgment to adopt this approach of using a permanently meaner version of uprating than was in place before is one that we oppose. Of course there is a pressing need to reduce the deficit. We know, as does the International Monetary Fund—and, it would seem, the credit rating agencies and, this week, the former Defence Secretary—that reducing the deficit requires economic growth, which is strikingly absent at the moment. With the economy not creating enough new jobs and so many people out of work, not paying taxes but instead claiming benefits, targets for reducing the deficit will just keep being pushed back further and further. We heard in the autumn statement that we will be borrowing £158 billion more over the lifetime of this Parliament than on the last estimate, because the Government’s economic policy has failed to deliver growth and the economy has flatlined. If, instead of the permanent switch to CPI uprating, a temporary switch had been proposed—with the aim of contributing to deficit reduction over a short period—that might, in our view, have been justified, but we do not support the Government’s policy of a permanent switch to meaner uprating.

In the debate last year, the Minister attempted to make something of the fact that, for five of the past 20 years, RPI had been lower than CPI. Well, it was not lower last year, and it is not lower this year. RPI has generally been higher. Since 1989, the gap between RPI and RPI minus X and the CPI measure has been 0.7% on average. The Office for Budget Responsibility’s November economic and fiscal outlook suggests that the long-run difference between RPI and CPI is likely to be a good deal more, at about 1.4 percentage points. That is twice as much as that historic average, so the OBR thinks that the gap between RPI uprating and the CPI uprating that the Government want to apply in perpetuity is going to get bigger, not narrower.

[George Hollingbery]

I think I understood the right hon. Gentleman to say that he has made a commitment that, had a Labour Government been in power now, they would have uprated pensions using RPI. Has he calculated how much that might cost, and is that a spending commitment that he is prepared to make here today? Secondly, if he is arguing for RPI uprating in future, does he have any idea of the long-term commitment that that might involve for the Government?

[Stephen Timms]

I shall deal with the last point immediately. I have said that if this Government had proposed a temporary switch to CPI uprating in order to contribute to deficit reduction, we would have looked seriously at that argument. It is the permanent downgrading of the uprating method for pensions and all other benefits that we think is wrong.

The DWP impact assessment from July last year told us that the impact on occupational pensions over the next 15 years would be more than £70 billion, and I think the Minister has said that it would be more than £80 billion. It will certainly involve a very large figure indeed. In this coming year, the gap between CPI and RPI—the figure that has been used refers back to last September—is relatively small, at 0.4%. I think the Minister is hoping that pensioners will not notice that his triple lock, which sounds so generous, is in fact delivering a lower increase than the long-established formula used by all Governments until this one. High inflation makes this a substantial cash increase, but, given what the Minister has said about the importance of keeping inflation low, it is not greatly to this Government’s credit that the cash increase is so large.