Social Security

Debate between Stephen Timms and Mike Freer

Thursday 17th February 2011 Commons Chamber

[Stephen Timms (East Ham) (Lab)]

It is a happy coincidence that we are debating the order on the same day as the publication of the Welfare Reform Bill, and I am pleased to see the Secretary of State in the Chamber. I welcome the opportunity to make some observations on the Bill—of course, only in so far as they impinge on matters in the order.

However, I want first to respond to some of the Minister’s remarks. The truth is that the two orders signal the start of an ideological move from the use of RPI to CPI as the measure of inflation for uprating benefits, including pensions. The Minister told us that this is the first outing for the much-vaunted triple lock, but actually, in their first effort, the Government have had to override the triple lock. Had they not done so, they would have been rightly criticised for a very low increase to the basic state pension.

The Minister set out in some detail and at some length why it is right to use CPI rather than RPI, but the order uses RPI and not CPI. If he is so persuaded by his arguments on why CPI is the right measure to use, why has he used RPI in the order? The argument that he has put to the House is holed below the water line by the fact that he clearly does not believe it, because on this occasion, he has used RPI.

My hon. Friend the Member for Aberdeen South (Dame Anne Begg), the Chair of the Work and Pensions Committee, rightly asked whether the measure is to do with reducing the deficit. Of course, both the Government and the Opposition agree that we need to cut the budget deficit, even if we take very different views on the speed at which that ought to be done, but we should be clear from the outset that the orders, despite what the Government will tell us fundamentally about deficit reduction, are part of a wider quest. Changing permanently from RPI to CPI, other than in this year, and keeping things that way even after the deficit is long gone, is plainly not a deficit reduction measure—it is ideologically driven, and the Opposition do not support it.

As my hon. Friend the Member for Aberdeen South hinted in her intervention, there would be a case for a time-limited change ensuring that benefits do not fall behind earnings in the next few years. That might well be a fairer alternative to deep cuts in departmental expenditure. Were that on the table, it would be an argument that we would be willing to discuss, and we would work with the Government to consider it. However, that is not the proposal. As the Minister rightly made clear, the Government want a permanent change, with entitlement and pensions continuing to be reduced every year relative to RPI, saving money for the Government even long after the deficit has been eliminated. We will be making our position on that very clear as we go through these debates, and as we seek to amend the Pensions Bill, when the same matter is raised.

[Mike Freer (Finchley and Golders Green) (Con)]

If the right hon. Gentleman looks at the local authority pension schemes here in London, he will see that there is only 75% or 80% viability on future liabilities. A lot of the contribution rates and the inflation from RPI to CPI are about balancing the books for future pensioners, not deficit reduction.

[Stephen Timms]

I was familiar with the call often made when I was in the Minister’s office to release occupational funds from the constraints under which they had long operated, and RPI uprating was one of them. However, the question that has to be asked is whether it is right to change the rules at this stage, effectively to undermine the accrued rights that people have always believed they would benefit from in retirement, and to shift the goalposts. I will come to that very point in a moment. However, I suggest to the hon. Gentleman that this change raises a very serious question about fairness.

Of course, we need to get the economy back on track, but that will take some time. The coalition is doing it too fast. Why do they want pensioners, the armed forces and those on the lowest incomes and least able to bear the burden to continue to lose out even long after the deficit has gone? On average, RPI is between 0.5% and 0.75% higher than CPI, as the Minister pointed out, so in any given year, benefits linked to CPI will give people a lower income by that amount. The CPI for the year to September 2010 is 3.1%, and the RPI figure is 4.6%. At 1.5%, that is a very big percentage point difference. The Minister has decided, perhaps because of the scale of that difference, to use RPI and overrule his triple lock in its first year. However, if the Government intend, as they clearly do, to make CPI indexation permanent and apply that across the pension system, experts estimate that it could cost pensioners 15% of the income that they expect in retirement.

--- Later in debate ---

[Stephen Timms]

The hon. Lady makes an interesting argument. I have to say, however, that before the election I did not hear from her and her hon. Friends the argument that the structural deficit required a reduction in the incomes of the least well-off people in the land. That is the implication of what she is putting to the House. The real key to reducing the deficit is to secure new growth, new investment and new jobs in the economy. As we saw yesterday in the new unemployment figures, however, that is what the Government’s policies are signally failing to produce.

[Mike Freer]

The problem is that for public sector pensions, the fund can meet only 75% or 80% of future liabilities. If we do not reduce the indexation to reduce that drain on future liabilities, we will have to increase contribution rates. Which would the right hon. Gentleman do?

[Stephen Timms]

My point is that people who have been contributing to those schemes throughout their working lives have done so on the basis of a promise, but the Government are now saying that that promise should be torn up, perhaps just a few months before somebody retires. Is that fair? As I am sure that we will hear in this debate, a lot of people feel that it is deeply unfair—and we can all understand why they take that view.

Lord Hutton’s report on public sector occupational pensions pointed out:

“This change in the indexation measure”—

from RPI to CPI—

“may have reduced the value of benefits to scheme members by around 15 per cent on average. When this change is combined with other reforms to date across the major schemes the value to current members of reformed schemes with CPI indexation is, on average, around 25 per cent less than the pre-reform schemes with RPI indexation.”

Even the Minister’s own Department, in numbers slipped out at the end of last week, estimated a fall of £83 billion in the value of occupational pensions over the next 15 years as a result. For the 2 million members of defined benefit schemes, that is broadly the same as a pay cut, on average, of between £2,250 and £2,500 a year.

The figure of £83 billion has gone up by more than 8% since the Department last calculated it in December. We ought to know why the Department got their figures so wrong last time round. My worry is that the Department does not really know what the impact of this ill-thought-through measure will be in reality. I ask the Minister, therefore, whether he can assure us that this—in itself alarming—estimate of the scale of the loss to defined benefit pension scheme members will not be revised any further.