Social Security

Thursday 17th February 2011 Commons Chamber

[Madam Deputy Speaker (Dawn Primarolo)]

I understand that it will be for the convenience of the House if we take motions 2 and 3 together.

13:39

[The Minister of State, Department for Work and Pensions (Steve Webb)]

I beg to move,

That the draft Social Security Benefits Up-rating Order 2011, which was laid before this House on 3 February, be approved.

[Madam Deputy Speaker]

With this we shall discuss the following motion on pensions:

That the draft Guaranteed Minimum Pensions Increase Order 2011, which was laid before this House on 3 February, be approved.

[Steve Webb]

I shall deal briefly with the Guaranteed Minimum Pensions Increase Order 2011. The order provides for contracted-out defined benefits schemes to increase by 3% their members’ guaranteed minimum pensions that accrued between 1988 and 1997. Increases are capped at this level when price inflation exceeds 3%. This is a technical matter that is attended to on an annual basis, and I suspect that it will not be the focus of our discussions.

The broader uprating of social security benefits this year is a landmark event for two reasons. First, it enshrines the restoration of the earnings link for the basic state pension. Secondly, it introduces a clear and consistent approach to price measurement through the move from the retail prices index to the consumer prices index. I suspect that a lot of our debate will focus on that issue, but I want to turn first to pensions and pensioners. It is more than 30 years since the link between the basic state pension and earnings was broken. Although Labour Members talked a good game towards the end of their time in office, they had 13 years in which to restore that link, and they failed every year to do so.

The coalition Government said that they would restore the earnings link for the basic pension, and that is precisely what we have done. Indeed, we have gone one better with the introduction of our triple guarantee, which means that the basic pension will be increased by whichever is highest of earnings, prices or 2.5%. We estimate that the average person retiring on a full basic pension this year will receive more than £15,000 extra in basic state pension income over their retirement than they would have done under the old prices link. This important change will be a benefit to existing and future pensioners. It will provide a more generous basic state pension, giving a solid financial foundation from the state. So from this April, the standard rate for the basic state pension will rise by £4.50 a week, taking it from £97.65 to £102.15 a week. The introduction of this triple guarantee will finally halt the decline in the value of the basic state pension for current and future pensions. It will also mean that even in times of slow earnings growth, we will never again see a repeat of derisory increases such as the 75p rise presided over by the previous Government in 2000.

In addition to restoring the earnings link, we have taken action to ensure that the poorest pensioners do not see the increase to their basic state pension clawed back in the pension credit. This has been done by linking the minimum increase for the pension credit to the cash increase for the basic state pension this year. Therefore, from April 2011, single people on pension credit will receive an above-earnings increase to their standard minimum guarantee of £4.75, which will take their weekly income to £137.35. Of course, as you will be well aware, Madam Deputy Speaker, this is in addition to the key support for pensioners that the coalition protected in the spending review: free NHS eye tests; free NHS prescription charges; free bus passes; free TV licences for over-75s; and winter fuel payments exactly as budgeted for by the previous Government. In addition, we have reversed a planned cut—one of Labour’s many ticking time bombs that I discovered in my in-box. The previous Administration had planned to reduce the cold weather payment from the pre-election—I use that phrase deliberately—rate of £25 a week to just £8.50 a week. We took the view that despite money being tight, helping elderly people on a low income to heat their homes in winter was vital and a priority for the coalition. I can update the House by saying that we have paid slightly more than we thought—an estimated 17.2 million payments worth an estimated £430 million, which we believe is money well spent.

[Kate Green (Stretford and Urmston) (Lab)]

Naturally, elderly people will be relieved by the news about the winter fuel and cold weather payments. However, is not the Minister concerned that in the longer run the cut in funding for Warm Front will mean that those pensioners have higher fuel bills?

[Steve Webb]

The hon. Lady is absolutely right that home insulation is an important part of this: it is not just about helping people to pay their fuel bills, but about improving the insulation standards of their homes. Our colleagues at the Department of Energy and Climate Change are working on the issue and will shortly introduce proposals that will build on the energy rebate scheme, which took place in 2010, whereby low-income pensioners and others—the most vulnerable households—received direct payments. I understand that a further scheme will shortly be brought forward that will benefit exactly the people she talks about.

Despite the pressure on public expenditure, the coalition, through these orders, will spend an extra £4.3 billion in 2011-12 to ensure that people are protected against cost of living increases, and, of that, fully £3.4 billion will be spent on pensioners.

Let me move on to the second landmark change—the move to the consumer prices index. At one stage, the House thought that it might have a jolly three hours on price indices after an all-night sitting, so we are probably all relieved that we got a bit more sleep before entering this territory. The purpose of the annual uprating exercise is to ensure that the purchasing power of social security benefits is protected against inflation. We view the CPI as the most appropriate measure of price inflation for this purpose, although we would acknowledge no single index is perfect. The CPI is

“more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old RPIX measure of spending patterns. It is more precise because, as in America and the euro area, it takes better account of consumers substituting cheaper for more expensive goods.”—[Official Report, 10 December 2003; Vol. 415, c. 1063.]

They are not my words, but those of the then Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown). I could not agree more. Increases in line with the growth in the CPI maintain benefit and pension value. The CPI is the country’s headline measure of inflation, forming the target for the Bank of England’s Monetary Policy Committee. I remind the House that the legislation under which this order is made requires that we reflect the “general level of prices”.

It would be remiss of me not to thank the Leader of the Opposition for his support for our position on this issue. When Laura Kuenssberg of the BBC challenged him at a press conference on 11 January, saying,

“You’ve said time and time again that you will not oppose every cut; but four months into the job, the list of cuts that you will support remains pretty short,”

the Leader of the Opposition said:

“Let me just say on the cuts, I listed four cuts that we had not opposed, but it’s not just four cuts...from Employment Support Allowance to some of the changes to Disability Living Allowance, to the changes to the Consumer Price Index and RPI, to a range of other measures, we’re not opposing all the cuts.”

I am very grateful to him for his support.

[Dame Anne Begg (Aberdeen South) (Lab)]

Would the hon. Gentleman like to quote the Leader of the Opposition further, where he said that if there were a case to be made for shifting to the CPI, it would be a temporary move, not a permanent one?

[Steve Webb]

I am grateful to the hon. Lady. I have heard it intimated that the Opposition support using a temporary measure of inflation before using a different one in the future. I can see the politics of that, but not its coherence. The duty on my right hon. Friend the Secretary of State is to measure the general increase in price levels in an appropriate way, and it would be very odd if he were to decide one year that the CPI, with its method of calculating on a basket of goods, was the right answer, and then four years later, because there was a bit more money, that there was a different answer. That is not the legal duty on my right hon. Friend.

[Dame Anne Begg]

Will the hon. Gentleman clarify whether the move from RPI to CPI has anything to do with deficit reduction, which would be a reasonable argument as to why it might be temporary?

[Steve Webb]

The hon. Lady asks an important question. I will deal specifically with the budget deficit. However, when we looked at this issue as a new Government, we were prompted particularly by the context of a year in which the RPI had been negative. We arrived in May 2010. In April 2010, uprating had been nil for the state earnings-related pension scheme, public sector pensions and all the connected pensions. That is not because inflation for pensioners had been nil—I have never met a pensioner who thought they had negative inflation in the year to September 2009—but because that is what the RPI said. The RPI was clearly not doing its job then, and that focused our mind on whether it was the right thing. It is true that, on average, the CPI tends to be lower—not always, but generally. I have looked at the past 20 years, and in five of those the RPI has been lower than the CPI. That improves the situation in a difficult financial position; I would not pretend that it does not. However, our job is to have an appropriate, stable measure of inflation, and that is what the CPI achieves. [Interruption.] Indeed, it is much less volatile.

I sometimes think—perhaps this makes me sound a bit sad—that if the CPI were a person, it would be taking people to court for slander and libel for some of the things that have been said about it over the past few weeks and months. It is almost as if it is a stray number that we found on the back of a fag packet and decided to use to up-rate benefits. In fact, it is a careful calculation by the Office for National Statistics, with excruciating amounts of thorough methodological detail about the general increase in consumer prices. It is not the only measure, but it is an entirely decent and proper one.

I want to respond to some of the myths that have grown up about CPI, and to stress that this is not a choice between a good index and a bad index, but about trying to find the most appropriate measure for the purpose. The first argument that is made is that CPI is always lower. As I have pointed out, that is not true, although it is lower on average over the long term. People criticise the methodology that is used. I will explain what the difference is and why we think it is appropriate. Somewhat more than half the difference between RPI and CPI is to do with the way in which CPI assumes that people change their behaviour when prices change. CPI uses a substitution method, which assumes that people substitute for cheaper goods. Interestingly, the Institute for Fiscal Studies, which has looked at this issue, has said that that difference is a

“sound rationale for the switch”

that we are making today. RPI does not do that. Even the Royal Statistical Society, which has been critical of aspects of our proposals, states that RPI arguably overstates inflation as a result. I stress that we are trying to find not a high number or a low number, but an appropriate number with an appropriate method. Particularly for those on benefits, the substitution approach is important.

It is worth adding in parenthesis that people who say that RPI is the only possible way in which we can uprate pensions, because it is appropriate for pensioners, seem to be oblivious to the fact that RPI excludes the poorest fifth of pensioners from its consumption patterns. Their spending patterns are deliberately excluded in the construction of RPI. It seems odd that people are so wedded to RPI on purity grounds when it excludes the most vulnerable pensioners, about whom we should be most concerned.

The second myth is that the UK Statistics Authority does not think that CPI is a proper measure of inflation. [Interruption.] The hon. Member for Leeds West (Rachel Reeves) says that she has not said that, but I assure her that I have seen it in plenty of letters. The UK Statistics Authority oversees the Office for National Statistics, so it would be very odd if it thought that the ONS was producing dodgy figures. CPI is the headline measure and it is the target for the Bank of England, so it is hard to see how it is not a proper measure of inflation.

Thirdly, some say that the Royal Statistical Society does not like CPI. It has certainly criticised some aspects of the change, but it takes a more balanced view and sees limitations in CPI and RPI. As I have said, no single measure is perfect. The Royal Statistical Society has highlighted the issue of housing costs, and I will come on to that because it is clearly important.

The fourth thing that people say is that this is a real cut to the value of benefits. [Interruption.] The hon. Member for Glasgow East (Margaret Curran) says that it is, but it is not. What we are doing is measuring inflation in an entirely proper manner and increasing benefits—revaluing and reflating them—every year in line with inflation, measured in an appropriate way. That is what indexation is meant to do. There is no argument for saying that it is a cut when we are increasing benefits and pensions by inflation. Only a couple of nights ago, the lead story on the BBC news was “Inflation hits 4%”. Indeed, CPI inflation had hit 4%. That was the headline, that is inflation, and that is what we are uprating benefits by.

[Stephen Timms (East Ham) (Lab)]

I think that I know the answer to my question on the basis of what the Minister is saying, but I want him to confirm it. Is it the Government’s intention that the change from RPI to CPI will not be temporary, but permanent?

[Steve Webb]

Yes. For all the reasons I have been giving, we regard CPI as a more stable and appropriate measure for uprating pensions and benefits. We see no reason to change it in the future. The arguments that I am advancing, it seems to me, will stand the test of time.

There is an issue with the treatment of housing costs. One of the reasons why CPI is more appropriate than RPI for pensioners is that only 7% of pensioners have a mortgage. Mortgage interest fluctuations dominate the changes in RPI, sometimes swooping it up and sometimes swooping it down. The year in which RPI went negative, it happened because mortgage rates slumped. Not only was that of no benefit to the vast majority of pensioners; it was a penalty to the vast majority of pensioners because their savings rate fell. Just at the point when pensioners were suffering through low interest rates, RPI came along—to humanise it once again—and kicked them in the teeth and said, “Oh, inflation is falling so you don’t need a benefit rise.” I do not see how that can be right.

[Kate Green]

I am interested in the Minister’s argument for making CPI permanent. Will he comment on Lord Freud’s response to the Select Committee on Work and Pensions on the indexation of housing benefit, in which he suggested that it would be for this Parliament only?

[Steve Webb]

To be clear, my noble Friend was talking about the indexation of the housing benefit limit of the 30th percentile to CPI. We have said specifically that that will be looked at after two years, so that is a quite separate point. The fundamental point I am making is that the more one looks at the argument for using CPI for pensioners, the more powerful it gets.

There is an issue about the role of owner-occupier housing costs, as CPI includes rents and certain housing costs. The CPI advisory committee has said that the ONS should consider whether owner-occupier housing costs should be included. We are entirely open to that proposition and do not rule it out. It is interesting that the CPI advisory committee has already ruled out doing so by lumping in mortgage interest payments in the same way as in RPI. It accepts that putting that into CPI in the way it is put into RPI would not be a good way of doing it. We will obviously consider what the committee comes up with.

[Sheila Gilmore (Edinburgh East) (Lab)]

Will the Government give the House a time scale in which it will consider these matters to do with CPI? Obviously, council tax also has to be taken into account.

[Steve Webb]

I am grateful to the hon. Lady for raising that point. We are, of course, driven by the Office for National Statistics, so we are not cobbling together our own index. It is undertaking careful work over the next two years. We will then look at its findings and consider whether it is appropriate to use a CPIH-type measure. We are governed by the ONS’s time scales.

I will comment briefly on benefits for people of working age. Unfortunately, last year the Government got themselves into a bit of a mess over uprating. As I have said, RPI was showing negative inflation, mainly as a result of falling mortgage interest. As a result, benefits such as additional state pensions did not increase at all. They would have done under CPI. Other benefits, mainly the disability and carers’ benefits, were the subject of what my notes call a bewildering fudge—I think that roughly sums it up. In the end, disability and carers’ benefits last year were increased by 1.5%, but on the proviso that the pre-election—sorry, that word slipped out again—increase in 2010 would be clawed back in 2011. In other words, that would have happened this year in this order. [Interruption.] The Secretary of State says that we had to decide whether to pick up the ticking time bomb of that 1.5% clawback as well.

Members will be pleased to know that the 2011 uprating order before the House today contains no such sleight of hand. It is based on the straightforward proposition that, aside from increases in the basic pension and pension credit that have already been explained, the other mainstream social security benefits and statutory payments will increase by 3.1%, in line with the annual growth in RPI. There will be no attempt to recoup the value of the 1.5% fudge that we inherited from the previous Government.[Official Report, 7 March 2011, Vol. 524, c. 3MC.]

Finally, I will touch on occupational pensions. Such pensions are not directly the subject of the orders. The changes that relate to the revaluation and indexation of most occupational pensions were the subject of the revaluation order that was tabled before Christmas. However, because of the close link in all pensions matters—everything is connected to everything else—I ought to say a word about this matter. CPI is being used for all social security benefits and additional state pensions, and through statutory linkage, CPI applies to public sector pensions. We had to decide what to do for private sector pensions. I stress that the role of Government is to set the floor for increases to private sector pensions and we had to make a judgment on that. We took the view that the Secretary of State could not decide that inflation was CPI for things that we pay out, but RPI for things that other people pay out. As far as we are concerned, inflation is inflation and we have to be consistent. CPI is therefore the right floor for occupational pensions. However, I stress the word “floor”. Schemes are entirely at liberty to make more generous increases if they wish. This statutory requirement increases only in respect of service after 1997, whereas some schemes index service before that.

[Dame Anne Begg]

Will the Minister quantify the number of private occupational pensions that will not adopt the floor? When the initial announcement was made, the impression was that all private occupational pensions would move to CPI rather than use RPI. I understand a number of them have RPI in their schemes and therefore will not move to the new index. Can the Minister say anything about the volume of such occupational pensions?

[Steve Webb]

When we produced the initial impact assessment on the changes, we divided schemes into four groups according to whether they revalued by RPI or CPI and whether they indexed by RPI or CPI. We found that a good deal of revaluation was done in terms of the revaluation order and hence would go to CPI, but that a lot of the indexation was in terms of RPI. We have gone out into the field and talked to those administrating schemes, and we are revising our estimates of the proportion that will respond to this change.

The hon. Lady brings me on to the point that I wanted to make: some schemes have RPI hard-wired—for want of a better phrase—into them. We faced the difficult decision of whether to override that and put CPI in or whether to say, “Rules are rules, scheme promises are scheme promises,” and keep it how it was. We announced at the start of December that we felt that people’s confidence in pensions is important, and therefore that we would not override scheme rules. If someone has joined a private sector occupational scheme that has RPI in the scheme rules, we will not override it. Obviously, each scheme will make its own decision on how to respond if they have the flexibility to do so, but many schemes do not have that, and therefore will not make the change. We will publish updated estimates of the proportions.

[Mr Jim Cunningham (Coventry South) (Lab)]

I apologise to the Minister and to you, Madam Deputy Speaker, for coming in late to the Chamber.

Will that also apply to the public sector schemes, because I have had a number of letters about those? Will the Minister clarify that matter for me?

[Steve Webb]

I am grateful to the hon. Gentleman for that point, because there is a difference between public and private schemes. The latter very often have the words “retail prices index” or “in line with statutory provisions” in their rules. The rules of public sector pensions did not have the words “retail prices index” in them; statutorily, they simply link to whatever the Government of the day do with state earnings-related pension schemes. Whatever amount or percentage SERPS went up by has always been the legal entitlement for members of public sector schemes, and we have not changed that or the law on it. Obviously, we are defining inflation differently, but the legal entitlement of members of public sector schemes was always whatever happened to SERPS, and we have not changed that.

[Albert Owen (Ynys Môn) (Lab)]

The Minister is giving the House a very thorough outline of his plans, but does he acknowledge that the people he just mentioned—many thousands of them, and those on deferred pensions—will lose out considerably because of the change brought about by the order?

[Steve Webb]

It is important for the people who have contacted the hon. Member for Coventry South (Mr Cunningham) to remember that we are changing two things. We are changing, first, the indexation of the basic state pension that they will receive, and, secondly, the indexation of SERPS and therefore public sector pensions. Overall, most pensioners, and particularly those on lower incomes, will benefit net from the two changes taken together. In other words, although earnings are depressed at the moment, in the long term the earnings link is a substantial boost. The CPI change on average means about 0.8% or 0.9% less over the long run, and the earnings link means close to 2% extra, so people with very large private or public sector pensions will lose net, but people with smaller pensions—the people who are most worried about the changes—will probably gain net. I am grateful to the hon. Member for Ynys Môn (Albert Owen) for raising that point.

[Albert Owen]

Can the Minister say how many people he is talking about? No one has written to me to say that they will benefit from the change, but considerable numbers of people have said that they will lose. I realise that that is the nature of the beast, but has the Minister done any impact assessment?

[Steve Webb]

People often miss one important point. The numbers on pensions in payment are in a sense straightforward, because we know the level of the state pension and the average pension in payment. To give the hon. Gentleman a flavour, the average occupational pension in payment is £70 a week, and the basic state pension is of the order of £100 a week. If we give an extra 2% on the £100 and take 0.8% off the £70, it is clear that people in that typical situation will be better off. Those are long-term changes, so there will be a big cumulative effect for someone who is 25. Of course, they do not see the boost to the state pension—they do not see that, in 40 years’ time, 40 years’ worth of earnings link will be embodied in their state pension. It is very hard to project that, which is why those people do not see it. Overall, I am confident that large numbers of pensioners will be net beneficiaries of the change.

[Rehman Chishti (Gillingham and Rainham) (Con)]

I am grateful to the Minister for clarifying the situation on SERPS. Will he confirm that the previous Government did not uprate SERPS in 2010?

[Steve Webb]

My hon. Friend is quite right. One of my first tasks as a Minister was quite strange. I had to write ministerial letters to say why we the Government—meaning my predecessors—had frozen people’s SERPS pensions, which was precisely because the RPI was negative, yet inflation was not.

[Katy Clark (North Ayrshire and Arran) (Lab)]

When the Chancellor announced the change in his emergency Budget last June, he said that it would save more than £6 billion a year by the end of this Parliament. If that is true, it must surely mean that individuals will be worse off.

[Steve Webb]

Just to be clear, my right hon. Friend the Chancellor was talking about the CPI indexation of all social security benefits, not just pensions. Clearly, compared with previous plans, benefits for people of working age will generally increase by less over the Parliament, which will lead to significant savings. I should mention therefore in passing that any political party that went into the election promising to reverse that would also have to indicate where many billions of pounds would come from over the course of a Parliament. However, specifically for pensioners, the earnings link in the long-term is much more generous than the reduction from the CPI change.

[Stephen Timms]

The Minister says that the order enshrines the earnings link. Is there a reference in the text to earnings uprating? I could not find it, but if there is one, where is it?

[Steve Webb]

No. This is the first set of upratings to which we have applied the triple lock. Indeed, we have gone further, and said that because RPI was built into the spending plans, we did not want to go lower than that, so there is an RPI increase of 4.6% this April. When we reintroduced the earnings link last summer, we did not know what the earnings figures would be, but had earnings been higher than any of those figures, we would have used it.

I ought to move on, because many hon. Members want to contribute to the debate. To conclude on occupational pensions, we have not overridden scheme rules. As the Chair of the Work and Pensions Committee pointed out, many people will still get RPI, if that is what the scheme rules say, but those that are free to link to CPI may do so. We will report shortly on our research on the balance between different schemes.

The approach adopted in the uprating order seeks to strike a fair balance between the interests of benefit recipients and pensioners, and the burden placed on the taxpayers of the UK, who often end up footing the bill. Despite the fact that the nation’s finances remain under severe pressure, this Government will spend an extra £4.3 billion in 2011-12 to ensure that people are protected against cost-of-living increases.

We have restored the link between earnings and the basic pension and confirmed that most people on pension credit will benefit from the cash increase enjoyed by those on the state pension. The move to CPI for the uprating of the majority of other pensions and benefits will result in an uplift of 3.1% from April, and sets the future of uprating on a more appropriate, consistent and stable basis that is fair to individuals and fair to the taxpayer. Through this package of uprating, I have outlined our firm commitment to ensure that no one is left behind, and I commend the order to the House.

14:06

[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.

[Jane Ellison (Battersea) (Con)]

We are weeks away from the point when the Opposition, had they won the election, would have commenced their own deficit reduction plan. Given the enormous sum that the welfare bill represents within the public finances, it is inconceivable that the right hon. Gentleman could intend to go through this debate without addressing some serious long-term issues regarding his own policy on deficit reduction.

[Stephen Timms]

I am grateful to the hon. Lady, because that is exactly the point that I have been making. If this was about deficit reduction, there would be a worthwhile point to debate. However, the Government are saying that they want this change to be permanent and lower uprating to be a feature of the pensions and benefit system not just while we are reducing the deficit—I agree with her that there would be an argument for doing it during that period—but long after and into the indefinite future.

[Jane Ellison]

In part, Government Members are talking about addressing the much longer term problems that this country faces, of structural deficits building up and having to be addressed. The right hon. Gentleman has only to look around the world, at the problems in California and all sorts of places where enormous long-term structural problems have built up, particularly in relation to pensions. It is inconceivable that he cannot take a long-term view on this issue.

[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.

[Rehman Chishti]

Am I right in thinking that the shadow Minister was a Treasury Minister in the previous Government? If so, will he clarify the fact that when the coalition Government came into office last May, we inherited the worst financial deficit of the G20 and the worst structural deficit of the G7 countries, and that that is why we have to make some tough decisions?

[Stephen Timms]

I was indeed a Treasury Minister—on four separate occasions. We managed the global economic crisis with great skill, to the extent that the increase in unemployment, which was widely anticipated before the crisis hit, did not happen. Under the previous Government there was about half the unemployment and half the home repossessions that we experienced in the recession of the early 1990s. I was indeed a Minister at the Treasury when those successes were being achieved.

[Rehman Chishti]

The shadow Minister talks about unemployment and the previous Government’s actions. Is that why my constituency of Gillingham had 30% unemployment for 18 to 24-year-olds in 2006? The figure for youth unemployment remained at 30% in 2007 and 2009, and was the same in 2010 before we came into government. Will the right hon. Gentleman apologise to my constituents for that record?

[Stephen Timms]

I agree with the hon. Gentleman about the damaging impact of youth unemployment, and I hope that he shares my deep regret that it has increased again. It is now the highest that it has been since comparable figures began to be compiled nearly 20 years ago. The highest figure ever recorded was published in the statistics yesterday. I certainly take the view that the Government need to do more to reduce that figure.

The estimate of a hit of £83 billion on defined pension schemes makes it clear that long after the deficit is gone, the Government will be keeping pensioners out of pocket. I fear that the order is the start of a move that will mean that millions of pensioners and other benefit claimants experience a fall in the value of their benefits every year, relative to RPI. If the Government had simply applied the much-vaunted triple lock this year, the basic state pension would be uprated next year far below the RPI level that the previous system would have delivered. That is the problem with the Government’s proposition.

That is not the only Government measure to hit pensioners. The Minister proudly and fairly read out a list of excellent things that the previous Government did for pensioners, which the present Government will not abolish. I am glad that they will not. However, they have increased VAT, which means that pensioner couples will be £275 a year worse off, and single pensioners £125 a year worse off.

The Pensions Bill means that some women approaching retirement will have their state pension delayed by up to two years, with very little time to prepare. That will mean a loss of up to £10,000 in basic state pension, and up to £15,000 for those who would have qualified for pension credit.

My hon. Friend the Member for Leeds West (Rachel Reeves) asked the Minister previously about an individual’s accrued rights, and I referred to that in response to an earlier intervention. Let me press the Minister again on the same subject. Why has he made such an abrupt U-turn? Before the election, he said:

“We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pension rights that have already been built up. I have confirmed that I regard accrued index-linked rights as protected.”

I am sure that the Minister would agree that all those who contracted out—all those in the local government scheme that was mentioned a few minutes ago—did so on the basis that RPI would be used for uprating. On the basis of what the Minister said before the election, those rights should also be protected. They are not; they are being explicitly downgraded in the Government’s proposals.

[Mr Robert Syms (Poole) (Con)]

I am listening carefully to the right hon. Gentleman. Can we be clear about the Labour party’s position? Do you oppose the CPI? Do you oppose it just for this year—or are you in favour this year and next year, but want to go back to the RPI in a future year?

[Stephen Timms]

There is a persuasive case for making a change to CPI uprating for a period of time while we are tackling the deficit. However, I do not agree that that should be a permanent change. That aspect of the Government’s proposal is very damaging.

[Jane Ellison]

Does that mean that in the Labour manifesto for the next general election, the Labour party will commit itself to reverting to RPI?

[Stephen Timms]

The whole country eagerly awaits the next Labour party manifesto, but I must urge the hon. Lady to be patient on that front.

We welcome the 4.6% increase in the basic state pension this year, for which the order provides, in line with RPI for next year, not the triple lock or the lower CPI. But this is something of a smokescreen to cover up the true nature of the Government’s intentions, which we have been able to smoke out a little in this debate.

Why does the Minister think that CPI would be a better measure of inflation for pensioners than RPI? I am yet to be convinced of that. For pensioners and low-income families, a strong argument can be made that average inflation is more than either RPI or CPI, because of fuel and food. That point was certainly made in the representations that many of us will have received in recent weeks. In opening the debate, the Minister mentioned the views of the Royal Statistical Society. In its letter to my hon. Friend the Member for Leeds West, it said:

“while the consumer price index (CPI) is acceptable for macroeconomic purposes and for international comparisons within the EU we do not believe its coverage is generally appropriate for inflation compensation purposes”.

That looks like a strong criticism by the society.

[Guy Opperman (Hexham) (Con)]

When answering the question asked by my hon. Friend the Member for Poole (Mr Syms), you said you would—

[Madam Deputy Speaker (Dawn Primarolo)]

Order. All hon. Members are doing this, not just the hon. Gentleman. When addressing the shadow Minister, if they refer to him as “the right hon. Gentleman”, we will not have the problem of whether the Chair is planning the election manifestos of all the political parties for the next election.

[Guy Opperman]

The right hon. Gentleman mentioned “a period of time”. How long would that be?

[Stephen Timms]

If that were the proposition, we would be happy to debate it and consider it, and perhaps work with the Government on it. Sadly, that proposition has not been made. The proposition before the House is that the change should be made for ever, and that is what I object to. It is not just me: the Civil Service Pensioners Alliance—

[The Secretary of State for Work and Pensions (Mr Iain Duncan Smith)]

I had not planned to intervene, but I wanted to tease out the right hon. Gentleman’s meaning. He is being a little disingenuous, so I invite him to be a little clearer. He knows that commitments are made for a Parliament, at most, and that if there were to be a change of power, the next Government could do whatever they want. He talks about “for ever”, but decisions can be made at the next election. Can we tempt him to say on behalf of his party that during the lifetime of this Parliament—or perhaps for one year or two years—it supports the change to CPI? Or is he saying that his party utterly detests the change and will not support it?

[Stephen Timms]

The Secretary of State is putting a different gloss on this from the one that the Pensions Minister put on it. I asked the Minister directly whether this change was intended to be permanent, and he confirmed that. The Secretary of State suggests that it would be only for this Parliament—[Interruption.] Well, I am anxious to establish the Government’s position. We have had two contradictory positions set out now—

[Mr Duncan Smith]

The right hon. Gentleman may have failed to understand my point. The Opposition are not in government, by definition, and they have to decide what they will do in this Parliament. What is his position in this Parliament? We have said that the change is permanent. Do they support that for this Parliament or not? Do they support it for a year, two years, three years or four years? What is their position on CPI? All we need to know is whether they support it for this Parliament.

[Stephen Timms]

Well, the Secretary of State has shifted back a little way towards the Minister by suggesting that the Government view the change as permanent. As for the view of my party, I simply refer the Secretary of State to what the leader of my party has said, which is that the suggestion that the change should be made for a period—perhaps up to three years—would be something that we could consider. If that proposition were on the table, we would be happy to consider it. But sadly it is not. As we have heard from the Minister—and as I think the Secretary of State has now reluctantly confirmed—the Government’s intention is that this arrangement should be permanent. That is what I strongly object to.

I was just about to refer to what the Civil Service Pensioners Alliance said. It

“firmly”

rejects

“the assertion that the CPI is a ‘better’ measure of inflation for pensioners.”

It urges the Government

“to take account of the advice of their own statisticians before embarking upon a change which will adversely affect the incomes of pensioners for the rest of their lives and not just for the term of the current financial crisis.”

Age UK has made a similar point.

All the main public service schemes are contracted out of the additional state pension. Of course, in the current climate we need restraint over public sector pay and pensions, but one group that the proposed permanent change will hit particularly hard is those who serve in the armed forces and their dependants, who rely on their pensions at an earlier age than almost anyone else. A permanent switch would, as I understand it, mean that somebody who had perhaps lost both legs in a bomb blast in Afghanistan could miss out on half a million pounds in benefit and benefit-related payments over the rest of their life. War widows, too, will lose out severely. For instance, if this change were made permanent, the 34-year-old wife of a staff sergeant killed in Afghanistan would be almost three quarters of a million pounds worse off over her lifetime.

If Ministers are going to pursue this policy, they need to explain why those serving in Afghanistan—already in some cases, as we have heard in the last few days, facing redundancy of which they were informed by e-mail—should see their pensions reduced for the rest of their lives compared with the expectations that they have had until now, and why—

[Steve Webb]

The right hon. Gentleman has raised a serious point. I think both sides of the House would be united in our respect and admiration for our forces and our forces veterans, but surely the issue is that we pay decent forces pensions, not that we choose to measure inflation in a particular way. Those are two quite separate issues. There is the adequacy of forces pensions and there is the proper measurement of inflation, but to conflate the two seems confusing.

[Stephen Timms]

In opening the debate the Minister accepted that in 15 years out of 20, CPI uprating is less than RPI uprating. My point is that those serving in Afghanistan have been contributing to their pensions on the understanding that their pensions, when in payment, would be uprated in line with RPI. Now the Government are saying, “No, they won’t; they’ll be uprated by a smaller amount,” and that is a very worrying development. In view of the sympathy that the Minister has expressed for people in that position, the Government must give further thought to this matter—why war widows, who have had the person most special to them taken away, deserve to have the support that they would otherwise have been able to depend on cut as well.

[John McDonnell (Hayes and Harlington) (Lab)]

May I, through my right hon. Friend, give the Minister an opportunity to respond to a question? Is it not clear that as we identify anomalies like this—and they are bound to arise—it is important for the Government to introduce corrective measures fairly quickly?

[Stephen Timms]

Yes, there are some serious problems here, and I hope we will hear responses to them. I pay tribute to my hon. Friend for the work that he has done on this subject, and I hope that the Government will think again.

The Welfare Reform Bill, which was published this morning, touches on a number of the points that the Social Security Benefits Up-rating Order also touches on. One of the Government’s original proposals, which Opposition Members strongly opposed, was to cut housing benefit by 10% for people in receipt of jobseeker’s allowance for one year. We were all absolutely delighted this morning to hear the Secretary of State say that the Government have reconsidered their position and will not implement that draconian cut. We understand from newspaper reports that the change was brought about as a result of pressure from the leader of the Pensions Minister’s party. The Minister himself may well have had a hand in bringing about that change. If so, I—and many of us—would want to join in congratulating him on his success against the views of the members of the other coalition party, particularly, perhaps, the views of those serving in the Treasury.

As the Minister is on a bit of roll, may I suggest that he go further in changing the Government’s proposals? Under the existing system, most out-of-work benefits are subject to savings limits—currently £16,000, but the Government intend to extend that threshold to in-work benefits as part of the universal credit, and I notice that that threshold is not uprated in the order before us. Under the proposed limit, in future anyone in work who would be entitled to tax credits but has savings of more than £6,000 will have their payment reduced. Those who have savings of more than £16,000 will lose their entitlement to tax credits altogether.

According to calculations by the Social Market Foundation, 400,000 families with children, who are now in receipt of tax credits, would be punished for having £16,000 in the bank by losing all their tax credits. For example, anyone saving up for a deposit to buy a home would suddenly find that they had lost all their tax credits as a punishment for having £16,000 in the bank. Such families would have been doing the right thing, working and saving their money, perhaps to put down a deposit on a house. For many such families, putting down a deposit will be made not only difficult but impossible. The Opposition cannot possibly support the proposed change, and I cannot imagine that many Government Members would want to see such an extraordinary assault on family savings either. I hope that we shall see another initiative by Liberal Democrat Ministers—we saw the benefits of such an initiative this morning—to persuade the Government to abandon that policy as well.

I hope the Government will also scrap the proposal to remove eligibility for the mobility component of disability living allowance for those in residential care. The order does uprate disability living allowance, and my hon. Friend the Member for Glasgow East (Margaret Curran), who is on the Front Bench today, has been making powerful arguments to the Government about the iniquity of removing that benefit from people simply because they are in residential care. I hope the Government will think again about that, and I am delighted that the Under-Secretary of State for Work and Pensions, the hon. Member for Basingstoke (Maria Miller), who is responsible for that part of the policy, is on the Government Front Bench today.

The Government are signalling today that they intend a permanent shift from RPI to CPI as the inflation measure for uprating benefits and pensions. The Opposition do not support that. It is not right to continue to reduce the incomes of pensioners, widows and those on low incomes long after the deficit has gone. [Interruption.] From a sedentary position, the Minister says that we will not vote against the order, but that is because it uprates the basic state pension next year by RPI. Therefore, it does not do what the Government have told us they want to do in perpetuity. The order overrides the policy that he set out today, and no Labour Member would object to uprating the basic state pension by RPI, as that was always the practice under the previous Government—and quite right, too. As the Minister rightly pointed out, pension credit, which has done an enormous amount to reduce pensioner poverty in the UK since its introduction, will also be uprated accordingly, and we support that as well.

[Jane Ellison]

As the right hon. Gentleman has opened up the debate about other welfare payments, I shall have one more go at my question before he concludes his remarks. Given the scale of the welfare bill and the fact that we are weeks away from when the Opposition’s deficit reduction plan would have commenced, will he please comment on how he would reduce that bill if he were running affairs?

[Stephen Timms]

On a number of occasions during the debate I have made the point that there is a case for temporary lower uprating to contribute to reducing the deficit. My objection is to the permanent character of what is being proposed, and I hope the House will not support it.

The order does not uprate the basic state pension by CPI or by the triple lock; it overrides that, and increases the payment by RPI. I do not expect Labour Members to object to that, but the move to commit to CPI uprating and to make the change permanent, not just while the deficit is being reduced but in perpetuity, is what we object to, and we will be working hard in the months ahead to try to persuade the Government that their policy on that is wrong.

14:39

[Jenny Willott (Cardiff Central) (LD)]

Like the right hon. Member for East Ham (Stephen Timms), I refer to the Welfare Reform Bill, although we are debating the uprating orders. With the introduction of the universal credit when the Bill becomes law, the complicated changes that we are processing in these orders will become a thing of the past, which I think we welcome on both sides of the House. It will be much simpler for people to understand their entitlement to benefits, and there will be a much better deal for many people who are in receipt of working-age benefits.

[Rachel Reeves (Leeds West) (Lab)]

The hon. Lady says that we will not debate uprating in the future, but because the Government have reneged on the universal pension, we shall be debating uprating for pensions every year.

[Jenny Willott]

I shall clarify my remarks in case anyone misunderstood me. I said that we will not be debating complicated uprating changes every year. Clearly, there will still be a debate every year, I assume, on the uprating of benefits; I should hate to think they will be frozen in future. I shall talk about pensions later in my remarks.

According to the Institute for Fiscal Studies, the universal credit will mean that 2.5 million families will be better off. They will get more money, which will in time help to reduce the total benefit bill by making it more worthwhile for people to get work and remain in work and off benefits. That should generate support on both sides of the House, as it is something we all want families to do.

As well as an improvement in prospects for those on working-age benefits, as the Minister said, this morning the Government introduced changes that will make a significant difference to pensioner incomes. The level of pensioner poverty in the UK is a complete disgrace in a civilised country. During the shadow Minister’s remarks, it slightly got me that he seemed to criticise the Government for not sticking to the CPI increase for pensions and going for a larger increase in pensions this year. In 2000, the previous Government were happy to see an increase of only 75p in the state pension, which most of us found stingy, measly and completely unforgiveable. At least, this Government are tackling pensioner poverty and are willing to do something serious about it.

Labour’s efforts to lift older members of society out of poverty resulted in a massively complicated, overly bureaucratic system based on means-tested benefits that has left 2 million pensioners still living below the poverty line. Clearly there is something wrong with the current system, so I am delighted that real progress is being made to safeguard the value of the basic state pension. Current pensioners will now be protected by the triple lock, which is welcome. I am delighted that a Liberal Democrat manifesto commitment is being implemented by the Liberal Democrats in government. What we promised we have delivered, and the state pension will increase by earnings, 2.5% or CPI, whichever is greatest. People over the age of retirement will have the protection they deserve. As the Minister said, the amount can be quite significant. We are talking about £15,000 over a person’s lifetime, which will make a significant difference for a large number of pensioners and will, I hope, have an impact on pensioner poverty.

I am glad to see that change. However, I believe that we are still building up problems for future generations of pensioners. Current pensioners’ circumstances will improve significantly, but the ticking pension’s time bomb was not tackled by the Labour Government or by previous Governments. I would like the current Government to take the bull by the horns and ensure that we do not end up with a problem in decades to come. Far too many people are not saving for retirement. Auto-enrolment will help in that regard, but people need to know that it will pay to save. We must reduce the amount of means-testing to ensure that people know that, if they save while they are working, it will benefit them in retirement.

We have an uncertain jobs market. There are no more jobs for life. Occupational pension schemes are closing at a terrifying rate. Many occupational schemes are defined-contribution, rather than defined-benefit, and far less generous. Even with the triple lock, problems will increase. I would be grateful if the Minister told us what the Government plan to do in the long term to tackle the time bomb. The triple lock will make a significant difference, but we need to look at the whole pension system to ensure that we reform it in decades to come so that it is more appropriate to the needs of society.

Clearly, a big issue is the move from RPI to CPI. I understand why people are concerned about that, but I say to pensioners who are worried about the impact on their basic state pensions that they will be protected by the triple lock. As the Minister made clear, the majority of people on public sector pensions will be protected from a potential reduction in their long-term benefits by the triple lock on the state pension, so they will end up better off in the long term. The impact on people will not be as great as many Opposition Members have said it will be.

I can see that benefits come with the change to CPI. It is more stable. It means that we will not face issues such as the one that arose last year when benefits were frozen, which caused significant hardship for many millions of people. CPI is also a more appropriate system as 70% of pensioners own their homes outright. As the Minister said, there is a negative impact for those pensioners as the rate of mortgage interest is taken into account under RPI. They do not benefit in any way from the massive fluctuations that that can generate in their pension increase.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

One of the big concerns is that the Royal Statistical Society has said that the CPI is not a good measure for pension inflation. The differential impact of that measure is causing many Opposition Members concern.

[Jenny Willott]

I thank the hon. Lady for her comment. The issue is likely to be taken up by the Minister in his summing-up because, from his comments from a sedentary position, he seemed to disagree with similar comments by the shadow Minister. I do not have a copy of the whole quote in front of me, but I am sure that he will be able to fill the House in on that and respond to her question later.

[Kate Green]

Does the hon. Lady accept that CPI is not a good measure for most working-age households precisely because of its exclusion of housing costs?

[Jenny Willott]

As I understand the way in which that relates to working-age households, people who are on benefits are much more likely to be living in social housing and so will not face large fluctuations in mortgage costs. For those of working age who are on benefits and do have mortgage costs, there is a lot of assistance from the state. They are not bearing the full brunt of mortgage interest fluctuations because a lot of that is borne by the state. Therefore, I believe that CPI relates appropriately to that group, too.

The financial implications, over this Parliament and beyond, for the Government of the difference between CPI and RPI have been discussed a lot today. We are in very difficult financial circumstances and the Government have had to make some extremely difficult financial decisions. The Minister has laid out why the Government believe that CPI is the right measure to use, but the financial benefits of that for the Government coffers are significant. By introducing the triple lock, the Government are protecting the most vulnerable pensioners. The people potentially most penalised are being protected, while the amount of money saved is quite significant and will help the economy to grow in future.

The shadow Minister, the right hon. Member for East Ham (Stephen Timms), eventually made it clear that the Opposition will not vote against the orders and will support the changes and the uprating, which seems to suggest that they understand the logic and agree with the overall decision. Whether it be for the moment, for three years or until the next Parliament, I am not entirely sure, but it is good to see it when occasionally agreement breaks out across the House. It is also good and quite a novelty to see Labour Members finally supporting measures that will save the Treasury some money. If they plan to return to RPI in the future, I look forward to seeing how they plan to find the billions of pounds that will be necessary to implement it.

I congratulate the Government on introducing the triple lock for pensioners, which is a significant step forward. It is also pleasing for me as a Liberal Democrat to see a manifesto commitment implemented.

[Hywel Williams (Arfon) (PC)]

The hon. Lady is generous. She has mentioned the triple lock many times. Is she at all concerned about the ratcheting effect of implementing it, which has been a consideration in the past?

[Jenny Willott]

I would have thought that being too generous to pensioners was a good thing.

[Hywel Williams]

I am unconcerned about it being too generous. When the ratcheting effect was considered in the ’80s, when Barbara Castle presented her proposals for pensioners, I was supportive of her, but concern was expressed in the House at the time.

[Jenny Willott]

Like the hon. Gentleman, I was not a Member of Parliament at the time, but I would have expressed my disagreement with those views. Pensioners are among those in society with the lowest incomes, so they are most in need of protection. Anything that prevents them from falling even further behind, as they have over the past few decades, is a good thing. Since the link to earnings was taken away under the previous Conservative Government, pensioners’ incomes have fallen significantly behind. Pensioner poverty is still at a disgraceful rate. I am glad to see measures being put in place today that will start to tackle that problem and stop pensioners falling further behind the rest of society.

[Sheila Gilmore]

Does the hon. Lady not accept that pensioner poverty was substantially tackled by the Labour Government, as pensioners were among 1 million people lifted out of poverty by their policies?

[Jenny Willott]

I absolutely accept that the previous Labour Government tried to tackle pensioner poverty by introducing pension credit, guarantee credit and so forth. However, the system they introduced has had a number of unintended consequences. It was so complicated that millions, or at least hundreds of thousands, of pensioners did not apply for the benefits to which they are entitled. The system is so degrading and complicated that they do not receive the benefits due to them. These are people living below the poverty line who are among the most vulnerable in our society.

Another unintended consequence of the system is that when people are working, they do not know whether they will end up better off when they retire. The system acts as a disincentive for people on low incomes to save. With auto-enrolment into pension schemes, I would like to see the means-testing taken out of the system so that people know that every penny they save when they are working and earning low incomes will benefit them in retirement. That is preferable to ending up being trapped, as a number of people are, in the pocket between those able to get means-tested benefits and those who are not. Although a lot was done under the Labour Government, the unintended consequences have, I feel, been quite damaging as well. The Office for National Statistics says that more than 2 million pensioners live in poverty; for me, that is far too many and I would like to see the problem tackled further.

[Sheila Gilmore]

Do I take it from the hon. Lady that she would support the raising of the basic state pension to the level of pension credit for everyone? Does she accept the consequential decisions that we would have to take as a society about the level of taxation appropriate to support such a change?

[Jenny Willott]

As the hon. Lady might well be aware, as a Liberal Democrat I stood on a manifesto that said we would like to introduce a citizen’s pension, which would result in the basic state pension being lifted to the level of pension credit so that everyone who was retired would be living on a decent pension above, or at, the poverty line, rather than people having to go through the demeaning process of applying to the Government to lift their income above the poverty line. That would also remove the disincentive to save. Perhaps the Minister will say in his summation whether he agrees with me that we should introduce such a citizen’s pension.

Given that the Welfare Reform Bill was launched yesterday with proposals to update significantly the system of working-age benefits, will the Minister tell us what the Government will do to update the old-fashioned and outdated system of benefits that go to those of pension age? We seem at present to be able to think imaginatively about changes to benefits and state support, so I hope the Minister will tell us a bit more about what vision the Government might have for older members of our society.

14:56

[Dame Anne Begg (Aberdeen South) (Lab)]

It is nice to see such a large crowd of Members in the Chamber for this debate. I have attended benefits uprating debates for a number of years, and there are usually three people, possibly including one who really likes statistics, sitting somewhere on the Back Benches. As the Minister has suggested, the greater attendance this afternoon is probably a result of the fact that the entire basic indexation of the benefit system is about to change from RPI to CPI.

Benefits uprating orders are all or nothing orders; we cannot pick and choose what we want to be in them. There are bits that Labour Members are not particularly happy about, but we are happy with other bits, and if these orders do not get passed today no uprating will take place, which is the dilemma facing those of us who have concerns, particularly about the move from RPI to CPI for public sector pensions. I think I can speak on behalf of my party colleagues in saying that we will not vote against the motion, but neither will we necessarily vote for it. If the order does not pass, nobody gets anything, and we would not want that to happen.

The Minister is a very clever man, and I found his analysis fascinating. He gave a very clear and logical explanation of why CPI should be used as the inflation measure for indexation; everything fell into place, as we would expect from him. He said it is such a good measure that we are going to use it for public sector pensions, and, if we can get away with it, possibly for private sector pensions and occupational pensions. Apparently, it is so good that we are going to use it for everything except the basic state pension. I have no problem with the fact that the Government are increasing the basic state pension by more than the triple lock would have given, but this undermines the Minister’s logical argument as to why CPI is so good. My right hon. Friend the Member for East Ham (Stephen Timms) picked up on this and I would like the Minister to explain his position. Why is the basic state pension going up by RPI, or 4.6%? CPI stood at 3.1% during the period; we are talking about last year’s inflation figures here.

I am also delighted that the Government have recognised the importance of pension credit, which was introduced by a Labour Government, and of keeping that increase in line with inflation. Under the Labour Government, it was the pension credit element, rather than the basic state pension, that went up by the higher rate of indexation, because the Government wanted to narrow the gap between rich and poor pensioners and that was the easiest way to make sure the poorest pensioners got the most. Under this new uprating, however, pension credit is not going up by the 4.6% under RPI that the basic state pension is going up by. It is going up by only 3.6%, which is in line with neither CPI nor the triple lock. I am not quite sure where that figure has come from. I am not complaining that the uprating is not more than it should be, but perhaps it is less than the Minister was led to believe.

We can see from last year’s figures and the indexation that we are looking at a CPI of 3.1% and an RPI of 4.6%. That is one third less. Many people are concerned about the compounding effect of CPI over the years on their take-home pension.

[Stephen Lloyd (Eastbourne) (LD)]

Does the hon. Lady agree that even under CPI, because the coalition Government are linking it with earnings, that would be the equivalent over a full term of an additional £15,000 to someone’s pension pot?

[Dame Anne Begg]

But that is assuming that the only income that pensioners have is the basic state pension, which is not the case. Most pensioners supplement the basic state pension with an occupational pension or, if they worked in the public sector, with a public sector pension. That is where the Government have sometimes missed a trick. In obsessing about the triple lock and the basic state pension, they have taken their eye off the ball with regard to all other pension income.

Because other pension income will be reduced as a result of the link with CPI, many pensioners will find themselves worse off, or certainly not as well off as they expected or as the rhetoric from the Government would suggest. To listen to the Government, one would think they are doing everything that pensioners ever wanted, whereas they have taken action only on the narrow area of the basic state pension.

We already know that inflation is going up. VAT went up, thanks to the Chancellor. The Opposition expect inflation to go up much further because we do not think the Chancellor has the right policies. We know from the most recent inflation figures for January this year that CPI is now up to 4%—good news, one would think, for pensioners—but RPI is up to 5%. It is that differential that will cause problems.

We are considering not just pensions, but uprating for the whole benefits system. Even the Minister must recognise that there is an enormous irony in using CPI to uprate housing benefit—CPI being the one inflation measure that does not include housing costs, notwithstanding the point that the hon. Member for Cardiff Central (Jenny Willott) made about the poorest people being in social housing. That is not the case in cities such as London, and it is not the case because of the shortage of housing.

We know that large numbers of people are dependent on housing benefit—or, more accurately, local housing allowance—and they will be hit. When the Select Committee on Work and Pensions looked into the matter, we thought there were some figures to show that within a very short time nobody on housing benefit would be able to afford houses in the private rented sector that fit into the 30th percentile.

[Steve Webb]

For the avoidance of doubt—this has been said incorrectly twice in the debate—the CPI includes rent, so it is owner-occupiers’ housing costs that are not included. As rent is included in CPI, it is entirely appropriate to index housing benefit by it.

[Dame Anne Begg]

CPI is still much less. Perhaps the average is taken from rent overall, not only in the private rented sector. That is where some of the differential might come from.

[Jeremy Corbyn (Islington North) (Lab)]

My hon. Friend has made an important argument about the level of rent increases, particularly in the private sector in London, where rent increases and demand go up by far more than any rate of inflation or any other measurement. The Government’s cap on housing benefit has the perverse effect of driving many of the poorest people out of central London because they will not be able to meet the rent demands and normal costs of living within the global cap on benefits.

[Dame Anne Begg]

My hon. Friend is right. There is a triple whammy on people who live in London in high rent areas: the local housing allowance is to be capped, possibly below the level of the rents; they will have access only to houses within the 30th percentile; and they will not see the inflationary increases in the indexation of their housing benefit to meet those conditions. They will be hit more than once with regard to the affordability of their rents. That certainly came over loud and clear when the Select Committee looked at what was happening to local housing allowance.

The effects of the Welfare Reform Bill have been mentioned. The universal credit will make it difficult to project benefit uprating into the future to work out what percentage of their incomes people are likely to loose. There will be no straight line from the current benefits to the universal benefit, because they will be mixed up. It is difficult to see what will happen. The compounding effect will probably be seen in pensions, particularly for those in receipt of the state pension, and the level of pension will be less.

In reply to my hon. Friend the Member for Eastbourne (Stephen Lloyd)—I am sorry, Madam Deputy Speaker; I always refer to fellow Committee members as hon. Friends—I said that the assumption is that the largest part of a pensioner’s income is the basic state pension, but we know that for many people that is not the case. Even if the state pension makes up a large part of their pension, it is often not all of it. Many people on the lower pension are dependent on SERPS, which of course will now be moving up in line with CPI, rather than RPI.

On the basic state pension, I accept the Minister’s figures indicating that it will rise from £97.65 to £102.15, an increase of around £4.50 a week. No one would say that that is wrong, because we all agree that £234 a year is great. However, the average public sector pension of £7,800 will be reduced by around £117 because of the difference between RPI and CPI. I am not very good at the arithmetic, but that means that instead of getting a rise in income of 4.6%, the people affected will get a rise of less than 2%. It is a rise, but it is not as much as they were expecting, and we must remember that we are living in a time when inflation is increasing.

A woman who receives the average local government pension of £2,600 will be £40 worse off than if her pension had been linked to RPI. If she has paid the small stamp, she might get no extra money through the basic state pension anyway, not even the compensatory increase in it. She might not have made full contributions and so will get some of it, but not all. The Government’s proposal is unfair to pensioners, and it is particularly unfair to women.

My right hon. Friend the Member for East Ham has already mentioned the particular unfairness of raising the state pension age to 66 by 2020. To be clear on the Opposition’s position, we have no qualms about raising the state pension age to 66 in principle, but we are concerned about the speed with which the Government are doing so. That overrides what was already in place for women who were born in the 1950s, who were going to see their pension age rise to 65 by 2020 anyway.

Women who began their working lives expecting to get a state pension at 60—that happens to include me—will now have to wait another six years for it. On a quick calculation, that will save the Government £32,000 on today’s basic state pension. It will come out of the pockets of women who are roughly my age and will stay with the Government. We will have to increase the indexation an awful lot more to make up for the £32,000 that those women will lose as a result of the increase in the state pension age by six years.

I appreciate that the measure whereby women born in 1955 would have to wait until 2020, when they were 65, to receive their income was already in train, but what about the women born between 6 October 1953 and 5 April 1955, who had already made all their financial plans but will now have to work for more than one further year before they can receive their basic state pension? The Minister has said on numerous occasions that that measure alone will save the Government £10 billion. All that is a win-win for the Government: the Government win, because they do not have to pay the money out, and because they have changed the indexation. The people who lose are those who expected to receive their pensions at a certain point, and in this case those people are women.

I would understand the Government’s rationale if the measure was part of their deficit reduction plan, but they have already said that they intend to get the deficit off the books in four years’ time, and none of this stuff comes in until after the deficit is meant to have been reduced, so it cannot be part of a deficit reduction plan. The Government should be more honest. We have heard that the change to CPI is going to be permanent, so they should say, “We’re doing this as a long-term measure, because we want to save money.” That is part and parcel of what the Government are about: saving money.

[Steve Webb]

The hon. Lady is a thoughtful person who will know that there is an issue of short-term deficit reduction and an issue of the long-term sustainability of the public finances. Leaving aside the £1.3 trillion of public debt, which will still exist and need to be dealt with even when the deficit is no longer adding to it, does she not accept that the Office for Budget Responsibility has challenged the Government to do something the previous Government did not do and get a grip on the long-term sustainability of spending, particularly on older people?

[Dame Anne Begg]

My right hon. Friend the Member for East Ham claimed that there might be a case for deficit reduction in the short term. We are considering women and the accelerated increase in the state retirement age to 66, however, and, in terms of the 50-year pension policy and the long term, why could not the Government have waited another year or even two before equalising the state pension age at 66? The Minister keeps bandying about the £10 billion figure, but in terms of equity and fairness it would have been much more sensible if the Government had taken a long-term view. Theirs is a very short-term view, meaning that a large number of women—half a million—will lose out.

The Government could have introduced a measure that people considered fair, rational and part of a long-term decision to ensure that pensions are affordable, and it is ironic that, while they have made the decision on equalisation, they have forgotten about the long-term sustainability of the basic state pension. They have done so because the Liberal Democrats had an election promise—the one they seem to have kept to, when they have managed to ditch all the others—that was all to do with the triple lock. The Minister will not accept this point in the Chamber, although he might do privately, but the triple lock debate has skewed the Government’s entire pension policy. We are not looking at the issue in the round or over the long term, when perhaps we should be.

We do not know what inflation will be in years to come, so in the private and public occupational pensions sectors in particular it is difficult to work out exactly how much people will lose compared with what they expected to receive. Lord Hutton, in his interim report, thought that on average they would lose up to 15% of their pension’s worth, but I have seen lots of other figures for, and various calculations of, what a pensioner would have expected if their pension had been linked to RPI as opposed to CPI.

This measure cannot just be about paying off the deficit, because we know that the big-time savings kick in well after the Government propose to have paid off the deficit. The Government will win, but the people who will lose are, unfortunately, the pensioners of this country.

15:14

[Rehman Chishti (Gillingham and Rainham) (Con)]

I very much welcome these initiatives by the Government, as they will help to improve the quality of life of the elderly, who have given so much to our society, and that of the most vulnerable in society. It is absolutely right and proper that we help those who are most vulnerable.

I believe that the Government are right to use one index for uprating additional state pensions, public and private pensions and social security benefits, and that the consumer prices index is a more appropriate measure of changes in the cost of living than the retail prices index. The CPI is the headline measure of inflation in Great Britain, forming the target for the Bank of England’s Monetary Policy Committee. The CPI excludes mortgage interest payments, which are not relevant to the majority of pensioners and benefit recipients. In fact, only 7% of pensioners have a mortgage, and working-age benefit recipients can get help with their housing costs. The methodology used to calculate the CPI takes into account the fact that many people tend to trade down to cheaper goods when prices rise; the RPI does not do that. That comprises a significant portion of the gap between the CPI and the RPI. In terms of population coverage, the RPI excludes the significant group of pensioner households who receive 75% or more of their income from the state; the CPI includes them.

The intention of indexing benefits and pensions is to protect their purchasing power, not to give the highest increase possible. Increases in line with growth in the CPI maintain benefit and pension value and put the system on a more sustainable footing, allowing the Government to focus help where it is needed most.

[Sheila Gilmore]

If the change to the CPI is such a good move, why are the Government running scared of using it as part of the triple lock for the basic state pension this year and picking another figure out of the air in order, presumably, to make pensioners feel better about what is happening?

[Rehman Chishti]

The hon. Lady raises an interesting point, which I think was dealt with by the Minister. She refers to pensioners getting the right deal from the triple lock. It is important that we listen to what people in the third sector, not only politicians, say about how this will affect people. I have here a quote from Age UK’s charity director, Michelle Mitchell:

“We are delighted the Government is introducing a ‘triple guarantee’ to raise the basic state pension from April, and also a matching increase for Pension Credit which will help the poorest in later life.”

[Stephen Lloyd]

I take my hon. Friend’s point entirely. Does he agree that one of the profound advantages of the triple lock is that we will not have the deplorable situation of a few years ago under the previous Government, when pensions were uprated by 50p? There are real advantages to the triple lock: it means that people can be sure that they will have a decent minimum rise.

[Rehman Chishti]

The hon. Gentleman raises a good and pertinent point. He said 50p, but to be fair to the Opposition, I think that it was 75p. Even so, it was totally unacceptable. If we link that to other things that happened to pensioners and the elderly—for example, the closure of so many post offices that were a lifeline for them—it is clear that the overall package under the previous Government was completely unacceptable. This measure goes a long way towards improving their quality of life.

It is estimated that the average person retiring on a full basic state pension in 2011 will receive £15,000 more in basic state pension income, and that can only be a good thing. In the light of what I have described, it is absolutely right and proper. I fully support the move to the CPI and the wider package that the Government are putting forward.

Looking at the time and applying the principle that brevity is a virtue, not a vice, I will end my remarks.

15:18

[Hywel Williams (Arfon) (PC)]

I begin by welcoming the Government’s change of mind on housing benefits. If that had not happened, there would have been a disastrous effect on constituencies such as mine which have high unemployment rates and slim prospects of people finding a job within a year. There will be a general welcome for that. I wanted to say that because I have campaigned about it in the past, as have many of my constituents.

I should like briefly to refer to correspondence from pensioner constituents who are concerned about the change from RPI to CPI. At the very least, there is a problem of perception. People see that RPI for the third quarter of 2010 was 4.6%, whereas CPI was 3.1%. They see that the current rate of inflation under RPI is 5.1% and that it is 4% under CPI. Clearly, people are worried. People have made long-term financial decisions on expectations that might not be realised. I raised the triple lock in an intervention and I do not want to discuss it in detail, but I worry about its longevity because of concerns that have been expressed many times in the past.

I have received correspondence about CPI and RPI from the Public and Commercial Services Union, the Civil Service Pensioners Alliance, Age UK and my constituents. My attention has been drawn to some statistics and I would like to read them into the record. The PCS states that using the base of 1988, had CPI been used to uprate a £10,000 pension, its value now would be £18,035, compared with £20,935 under RPI—a difference of 16%. A pensioner on the median public sector pension of £5,500 who has been retired for 20 years would now be on £4,845—a loss of 12% or £655. It is those sorts of figures that worry people.

Obviously, CPI has been higher than RPI in some years—1991, 1993, 1996, 1999 and 2008—but the Treasury itself reckons that over the next five years, RPI will consistently be higher than CPI. Perhaps that is because of the predicted steeper rises in housing costs. I refer the House to table C2 in the Budget Red Book, which puts the overall change to 2016 of CPI at 13.7% and of RPI at 22.1%. That is a substantial difference. Of course, a gloss has been put on, but I will not go into that at the moment.

[Naomi Long (Belfast East) (Alliance)]

One argument for the change to CPI is that many of those in receipt of a pension are insulated from fluctuations in housing costs because they are not paying a mortgage. However, does the hon. Gentleman agree that they often have other private housing costs that are not reflected in CPI, such as insurance costs and the depreciation of their properties?

[Hywel Williams]

That is a valid point. Of course, the variation across the country is quite substantial. I refer again to my own constituency, where there has traditionally always been a very high level of owner-occupation. There are older people who own their houses, but in other areas people are still paying off their mortgages. The figure of 7% has been mentioned—that is a lot of people who will be hit.

[Sheila Gilmore]

Does the hon. Gentleman agree that that figure might well grow in future? Given the level of borrowing that many people have made to buy properties, and that a lot of people are buying at a much later age, many more people are likely to move into retirement with a mortgage still to repay.

[Hywel Williams]

That is a very good point. Indeed, I think I might be one of those people. I understand that the average age of the first-time buyer is now 38. These are valid worries that people have.

The arguments on RPI and CPI have been well rehearsed this afternoon so I will not go further into them. I have a great deal of respect for the Minister and I think he would agree with me and many other people that what we need is a bit of calm and consensus on pensions policy—something that has been lacking for 25 or 30 years. I worry that this change will not lead to consensus and that he might have fallen in with a bad lot.

15:24

[Gordon Henderson (Sittingbourne and Sheppey) (Con)]

A lot has been said about CPI and RPI, but I will avoid the technical aspects of that and restrict my comments to two others.

First, my hon. Friend the Member for Cardiff Central (Jenny Willott) mentioned that it was a Conservative Government who many years ago broke the link between the basic state pension and earnings. I was one of few Conservatives to oppose that at the time. About 11 years ago, when I was the parliamentary candidate in Luton South, I went to see the late Jack Jones, who was president of the National Pensioners Convention, to offer my support to the campaign to restore the link. Jack, sitting at the other side of a desk, was astounded that a Tory had come to offer his support, and he said, “Gordon, I really appreciate that you’re backing me, but I have to tell you, son, you’re never going to get your party to agree to restore the link.” Jack died a couple of years ago, and I wish he was alive today to see that a Conservative-led coalition is restoring the link.

That is long overdue. I shall not make any partisan points about the previous Government not delivering, because looking after our pensioners is beyond party politics. When I supported the pensioners way back in 2001, I was one of few parliamentary candidates who went into the election wanting to restore the link—I was certainly the only such Conservative candidate—but it was not Labour party, Conservative party or Lib Dem policy at that time. I am delighted that we have moved on and that we will restore the link.

I am even more pleased with the Government, because many of the pensioners in my constituency did not want us just to restore the link to earnings, because RPI is sometimes higher than earnings. Jack Jones mentioned that too. We then started campaigning not for the restoration of the link with earnings, but to ensure that we used whichever of earnings inflation or prices inflation was the higher. As I said, I will not go into the technical differences between CPI and RPI, because the pensioners in my constituency just want a decent increase in their pensions based on the higher measure of inflation. The triple lock now includes the 2.5% stipulation, so if either inflation measure is less than that, the increase will be 2.5%. They welcome that, so I thank Ministers and my coalition Government for delivering on a long-standing promise.

The second aspect of the orders that I want to talk about relates to a problem that is experienced by many women pensioners who have worked in the civil service. I will give one example. One woman who retired early on a civil service pension came to see me in my surgery recently—I have written to the Minister, and hope to get a response some time soon. She had reached the age of 60, and told me that some arcane measure in the civil service pension scheme means that there is a reduction in the amount that is paid once someone starts to receive the basic state pension. I am not sure of the technicalities, but she explained how she was written to way back in November to say that now she was 60, her civil service pension would be reduced, because she was receiving the basic state pension. Of course, however, because she is a woman and the age at which women start to receive their pension is to be higher, she will not start to get her basic state pension until May this year. Although the period is only a few short months, there will be women for whom the gap is a lot longer. I would be extremely grateful if the Minister addressed that point when he winds up. I listened carefully to his opening remarks, and I thought that he put a very good case for CPI which will help me when I talk to my pensioners. I thank him.

15:30

[John McDonnell (Hayes and Harlington) (Lab)]

I will not apologise for breaking the consensus—although I was about to apologise to the hon. Member for Cardiff Central (Jenny Willott), who welcomed the consensus across the House. I oppose the order, and will seek to vote against it. I do not accept that the installation of CPI will be of benefit in either the long term or the short term. I am grateful that the Government have not introduced it for the basic state pension at least for this year, but its installation across all the other benefits will result in detriment. To take £6 billion out of the payments to the poorest in our society is unacceptable. My hon. Friend the Member for Aberdeen South (Dame Anne Begg) said that the order is indivisible, so by not voting for it we would prevent other overall increases from going ahead. However, it is not beyond the wit of any Government to introduce another order within hours—or at least days—that could amend what is in this order to enable us to get some justice for pensioners.

I am reticent about criticising the Minister. I think that I have moved a Budget amendment on restoring the link with earnings every year for the past 13 years, and I think that we walked through the Lobby together on an annual basis in that endeavour. I am grateful, therefore, for the restoration of the link with earnings. I know that it was in the Labour party’s most recent manifesto to restore the link in due course. I just wish that we had done it earlier, because that would have demonstrated our overall commitment to tackling pensioner poverty. However, I know how much the previous Government did to tackle pensioner poverty. Many people, particularly pensioners and many on benefits, are now living lives so much better than they would have been had it not been for the previous Government’s policies.

I was a critic of the extension of the means-testing system. I thought that it was a disincentive to saving and costly to administer. Nevertheless, I welcome what the previous Government did. I still think, however, that in a civilised society it is a mark of shame that reflects on all of us that there are still 2 million pensioners living in poverty, given that we are the fifth richest country in the world. It behoves all parties to tackle this issue. The question has been asked time and time again: how should we do it? For me the answer is straightforward, and expresses an argument that we have been putting forward since the foundation of the Labour party—fairer taxation and redistribution of wealth.

I have listened to the debate on moving from RPI to CPI. We can all marshal different battalions on the field of this debate—quotes from the Institute for Fiscal Studies, the Office for National Statistics, and so on. Most Members will have received through the post this week an assessment of the Government’s welfare reform policies by the Social Policy Association. I concur with the chapter in the report by Alan Walker of the University of Sheffield, who states:

“The Government claims that the CPI represents low income groups’ expenditure better than RPI but there is no convincing evidence to support this claim and according to IFS (2010) it is the RPI that provides a ‘superior’ coverage of goods and services.”

To some extent, we can dance angels on the head of a pin on this subject. As someone who has studied some statistics in the past, I have gone into the debates on the difference between the geometric mean and the arithmetic mean. From that, I conclude that CPI is 0.5% minimum off the calculation compared with RPI. However, there are concerns that the use of CPI will result in a reduction. As my right hon. Friend the Member for East Ham (Stephen Timms) asked, if that was not the case, why would the Government need to try to protect pensions this year? As my hon. Friend the Member for Aberdeen South said, the reduction from 4.6% to 3.1% is nearly one third of people’s overall increase. That is significant, so I am pleased that the Government are protecting the increase for this year, but the pensioners in my constituency will be worried about the introduction of CPI for future years.

I remain unconvinced about housing costs, partly because of some of the arguments that have been presented about the 7% of people—that still represents a sizeable number not to be taken into account—who will be affected, who do have housing costs. As my right hon. Friend said, there is an ageing profile of people who are taking on mortgages later in life, so housing costs will become a more significant factor.

In addition, one of the burdens that many pensioners feel in particular is increased council tax. I do not believe that that element is covered by the CPI calculation as it was with RPI.

The hon. Member for Sittingbourne—

[Gordon Henderson]

And Sheppey.

[John McDonnell]

I would not want to miss out Sheppey. Let us take the common-sense approach of the hon. Member for Sittingbourne and Sheppey (Gordon Henderson) and ask, “What do pensioners feel like at the moment?” I think that they feel that they are under significant pressure as a result of inflation. The researchers’ evidence shows that inflationary pressures hit pensioners harder than the average household.

I am concerned about the shift, which I oppose. It is a momentous shift: it represents one third off an increase. I say to the Minister that this should have been properly debated before the election if it was to be a long-term shift. I can understand, though I do not believe, the argument that when the Government came to power they opened the books and found that they had to introduce emergency measures. However, that is not being argued. It is being argued that this proposal, per se, is the beneficial or right thing to do. If that were the case, it should have been outlined before the election with examples of the implications for pensions and benefits overall. To make this change at this time casts doubt on the motivation for the change from RPI to CPI. We should have been more honest in the debate before the election.

As for the knock-on effects on occupational pensions, I chair the PCS trade union parliamentary group, and we have circulated fairly detailed evidence of the implications for public sector workers. It looks as though, on average, there will be a loss of between £500 and £700 a year. The cumulative effect of that in the long term is significant, and I am grateful that other Members have read its implications into the record.

My right hon. Friend quoted the Hutton report. I take those concerns seriously—a 15% cut, and possibly a consequential cut of up to 25% in the long term. I firmly believe that those are accrued rights—we have had that debate on the civil service compensation scheme—and that people have planned their lives on the basis of what they thought they could expect as a pension in the long term. To undermine those accrued rights is not only wrong and immoral but legally dubious, and there may be challenges to that effect.

The effects spread far beyond that. The right hon. Member for Uxbridge and South Ruislip (Mr Randall) and I have constituents who work at Heathrow airport for British Airways and are members of the British Airways pension scheme. They work for a former nationalised industry, so their pensions shadow what happens in the public sector. We have had letters demonstrating the potential consequences in terms of cuts in their pensions in the long term. Again, the problem came upon them relatively suddenly, and should have been properly explained and discussed before the general election.

My concern now is that the change will have an immediate detrimental effect over the next few years. Like most London Members, and many others, I deal in my constituency surgery with people living in poverty and on the margins of dignity. Any cut, in the short or long term, in their pensions or benefits will push some of them over the edge into virtual destitution. That is why I am anxious about anything that will decrease their incomes. On that basis, I cannot support this order. I understand why some of my hon. Friends do not wish to participate in a vote, but I want to put my opposition on record, because the change will have an impact on my constituents. It will also add to poverty and deprivation in our society—something that any Government should tackle.

We should, collectively, be ashamed of the way in which we have treated pensioners over decades. Our pension is now 16% of average earnings, whereas in France it is 60% and in the Netherlands 82%. Over time and incrementally, we have allowed our pensioners to lose their right to a decent pension, and therefore to a decent quality of life. This order will add to that incremental undermining of the quality of life of my constituents, and on that basis I will seek a Division on it.

15:41

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

I wish to correct the hon. Member for Edinburgh East (Sheila Gilmore), who talked about mortgages in retirement. I come from a financial services background—indeed, I have the scars on my back from being regulated by the Financial Services Authority—and I can tell her that it is virtually impossible to sell a mortgage to someone beyond retirement age. The regulator simply will not allow it.

I compliment the Minister, because it is a pleasure to see a Minister with such a grip on his portfolio. Indeed, it is almost scary to see a Minister in such charge of the detail. I welcome his clarity about the net effect of the triple lock on the lower pension indexation, which means that our pensioners will be better off both today and in the long term.

A key issue is the long-term viability of public sector pension schemes. I tried to press the right hon. Member for East Ham (Stephen Timms) on that point, but I was unable to get a firm response. I hope that the Minister will address the point when he winds up. I admit that my knowledge of pension fund management is a little rusty, as I stepped down as a pension fund trustee some 18 months ago, but one of the key issues facing the public sector is not necessarily the pensioners but the fact that most public sector pensions are structurally non-viable. The contributions simply do not meet the future liabilities. For example, the local government pension scheme for London—and for many of the bodies that are attached to it—is running at 75% to 80% of contributions to future liabilities. That is not sustainable.

I may be wrong, but one of the long-term benefits of the move from RPI to CPI is surely that it would address that structural imbalance between contributions and future liabilities. You cannot run a pension scheme with a 20% gap between liabilities and contributions. You can plug that gap only by reducing the pensions drawn down or increasing the contributions from the employer—in London that means the council tax payer or the taxpayer in some other form—or from the employee. There is no money tree on which the Government can draw to plug the gap in public sector pension schemes. The money can come only from the taxpayer or from the employee. We must address that structural deficit.

Will the Minister confirm that one underlying reason for the change is to address that structural gap between contributions and viability? May I gently ask him to stray beyond his brief and say whether the Government will consider closing the existing defined benefit schemes for the public sector and moving to defined contribution schemes, not only to increase portability but to increase the transparency of what people are getting for their money and, most importantly, increase the affordability of those pension schemes for the public purse?

15:45

[Katy Clark (North Ayrshire and Arran) (Lab)]

My contribution will be brief, but I want to speak because we are taking a momentous decision today. It is very sad, on the day when we are passing legislation that will reinstate the link between earnings and pensions—for which I and many Labour Members have campaigned over many years, and which Government Members have been able to get their Ministers to deliver on—that we are also probably going to pass legislation that will make a very significant, and probably a very long-term, change to the way in which we uprate pensions and benefits.

Today’s debate has made it very clear that these proposals are being made not just because of the current economic situation or because of the Government’s policy of deficit reduction, but because of the belief on the Government Benches that this is a more appropriate means of uprating. I have always taken the view—the trade union view—that pensions are deferred pay. It is very important that people have certainty in arrangements for their retirement. The decision we are making today will have implications for many of the lowest-income people, who are dependent on benefits, and some of the poorest pensioners.

I have been lobbied by a considerable number of constituents on this issue, but that number is a very small fraction of the number of people who will be affected by these changes and, I suspect, will be very angry when they realise the impact that the changes will have on them. I have also been lobbied by several of the trade unions that represent the affected individuals.

My hon. Friend the Member for Aberdeen South (Dame Anne Begg) mentioned women in the local government pension scheme, who have an average pension of approximately £2,600 per annum and will be worse off by £40 this year if the changes go ahead. They would have been £40 better off if the RPI link had been maintained. According to the trade union Unison, the average person who receives a pension from the local government pension scheme receives £4,100 per annum, and they will be £62 worse off in the coming year if the change goes ahead. A woman who works in the national health service receives, on average, a pension of £3,500; these are not people on high incomes, by any stretch of the imagination, and they will be £53 worse off this year if the change goes ahead.

If we pass the order today, it is likely that next year a similar order will be proposed, and the same approach will be taken for decades. The cumulative effect on the pensions of individuals will be very substantial indeed. Reference was made to figures released by the PCS trade union showing the impact that it thinks the change will have on its members.

These are very considerable public policy issues, about the extent to which we feel it is important as a society—

[Jane Ellison]

I must press the hon. Lady. She refers to the impact on pensioners, but does she give regard to the impact for the taxpayer of an aspect mentioned by my hon. Friend the Member for Finchley and Golders Green (Mike Freer)—the long-term lack of viability of major pension funds in the public sector?

[Katy Clark]

The matter under discussion has long-term and considerable public policy implications. Indeed, the Fire Brigades Union informs me that part of Lord Hutton’s interim report states that pay freezes and work force reductions will reduce future pension costs. Further, the gross cost of paying unfunded public service pensions is expected to fall from 1.9% of GDP in 2011 to 1.4% of GDP by 2060. If the long-term effect is that we pay less as a society towards pension funds, that will have significant implications for the individuals concerned, who will have less income, but also for the public purse. If people do not have adequate pension provision for their retirement, the state will have to pick up the cost, perhaps in greater benefit bills.

If public policy does not develop in such a way that people employed in the private and public sectors have pensions constructed and funded to be their main source of income in retirement, that will have substantial implications. If the changes go ahead, constituents of Members on both sides of the House will be worse off. No Member should take that lightly, given that inflation is rising and people are facing difficulties. I say to the hon. Lady and to other Members who support the decision that we as a society need to find the funds collectively. We need a public policy that encourages individuals to save for their retirement, but that also puts provision in place to ensure that they have adequate pensions in retirement.

In the emergency Budget in June last year, the Chancellor announced that the change would result in a saving of more than £6 billion a year by the end of this Parliament. There is no doubt, therefore, that the proposal is cost driven. My submission is that, as an ageing society, we need to find ways, collectively and individually, to put more aside for our retirement. We need pensions that are at a reasonable level for people to live on in retirement. If the change goes ahead, fewer people will have pensions that allow them an adequate standard of living in retirement.

15:53

[The Minister of State, Department for Work and Pensions (Steve Webb)]

We have had a worthwhile debate, with some thoughtful and well-informed contributions. I compliment all Members who have taken part, as the issue is important to our constituents. All Members will have received representations on the matter, and Members who are here on the final Thursday afternoon before a recess show their sense of priorities.

I enjoyed the accusation from the right hon. Member for East Ham (Stephen Timms), whom I think of as my right hon. Friend, that the policy is ideologically driven. I have never heard the use of the geometric mean described as ideologically driven. Intriguingly, his position seemed to be that it would be bad to make such a proposal on a point of principle, but that he could support it if it was a temporary expedient because of a financial mess. That is not the position of the Government, whose judgment is that CPI is a better measure of inflation, not a temporary fix. I am grateful that he appeared to be saying that he would support us for three years on grounds of expediency.

[Stephen Timms]

If CPI uprating is right in principle, why are the Government not doing it this year?

[Steve Webb]

We are doing it this year for pretty much every benefit in the entire uprating order, which runs to many pages. The ones we are not doing it for are the basic pension and the pension credit. We are not doing it for the basic pension because the budget we inherited provided for a larger increase and we did not want to pay a smaller increase than was planned. If the right hon. Gentleman thinks we should have done so, I will take that advice, but he probably welcomes the fact that we did not follow it.

The Chair of the Select Committee, the hon. Member for Aberdeen South (Dame Anne Begg), indicated that unfortunately she could not be in the Chamber for the wind-ups. She asked why we had chosen a different figure for the pension credit. As I think I explained in my opening remarks, as we were putting the basic state pension up by about £4.50 a week, we did not want the increase in pension credit to be less than that, because the poorest pensioners would not have the full benefit of the pension rise. That was the basis for the increase in pension credit.

The right hon. Member for East Ham asked about the impact assessment on occupational pensions, and I am happy to say a few words about that. In December, we published an impact assessment suggesting a £76 billion impact from the reduction in revaluation and indexation. To respond to a point made by my hon. Friend the Member for Finchley and Golders Green (Mike Freer), one way of looking at that is to see £76 billion less in pensions, but another way is to see a £76 billion boost for British business. We are trying to reduce the regulatory burden on British business, so an advantage of the change—albeit not the purpose—is that major British firms will make a saving, and they and their pension funds will be in a stronger position as a result. Many pension schemes and companies have welcomed the change for that reason.

We discovered an error. We made a mistake, for which I apologise. As soon as we found it, we decided to give the House a revised estimate. In addition, we were asked by the Regulatory Policy Committee to revise the way we calculate net present values; I know that the right hon. Gentleman takes a close interest in such matters, and if he is not careful I shall tell him what it was. To draw the threads together, we reissued the figures last week, ahead of this debate, with an £83 billion estimate. That is a further interim estimate. We then undertook field research, as I mentioned, to ask companies how they will respond to CPI/RPI. We have early results; it would be premature to say what the impact will be, but early indications are that fewer pension funds will take advantage of CPI than we had thought. Such things are complex and there could be factors that move them in the other direction, but my sense is that the final version of the figures is more likely to be lower than the one we have already published, but we thought we should give the latest estimate as soon as we had it.

The right hon. Gentleman raised the important issue of accrued rights. It is a fundamental point and it relates to my pre-election remarks about a pension promise made being a pension promise kept. What is the accrued right of someone in a public sector pension scheme, or any pension scheme? The first point is that everything accrued to date—all the revaluations to date, based on RPI—stand; we are not going back and saying that all the revaluations to date have to be reworked according to CPI. The provision is prospective, not retrospective.

The question then is what future expectation people legitimately have. If they are in a company scheme that has RPI in the rules, we actively chose not to override that. If that was their expectation, because it was in the rules, that is what they will get. However, people in the public sector are members of a scheme whose rules are tied by statute to what we do to SERPS. That is the accrued right they have always had, and we are not changing it. We shall go on indexing their pensions in line with what we do to SERPS each year. That was the pension promise they were made; that is the pension promise we are keeping. We are indexing SERPS by CPI. I accept that, and I also accept that on average that will be lower than RPI, typically by about 0.8% a year. I do not dispute that. The accrued right is the one we are honouring.

The right hon. Gentleman said in parenthesis that pensioner inflation is typically higher than general inflation. I do not know whether he actually believes that; it was never something his Government took into account when setting pensions. They never uprated pensions differently because of pensioner inflation. There are certainly periods when pensioner inflation is higher when, as the right hon. Gentleman said, the costs of fuel and food are rising faster than the norm, but there are other periods when it is lower. I have asked officials to look at the matter and there is no evidence over a 20-year run that pensioners buy goods that have that inflation time bomb ticking away inside them. There are times when inflation is higher, which may include recently, and times when it is lower, but over the long run there is no evidence for that proposition.

My hon. Friend the Member for Cardiff Central (Jenny Willott) welcomed the restoration of the earnings link, and the triple lock. I am grateful for her support. She quite properly put me on the spot about the future of the pension system. I accept her analysis; we need a pension system fit for the future. If we are to auto-enrol 10 million of our fellow citizens, we need to be confident that it pays to save, and that they will be better off. I assure her that that is absolutely central to our thinking about long-term pension reform. We are making good progress on that project.

The Chair of the Select Committee asked a number of questions. I will respond to one or two on the record, although she has explained why she is not here to hear the response. She kept making the point that the basic state pension is not the only part of a pensioner’s income. Of course it is not.

I thought that the hon. Member for North Ayrshire and Arran (Katy Clark) made some sincere comments. She raised the issue of people with relatively modest occupational pensions who will get less under CPI. The state pension is bigger than all of those figures. Every one of the figures she quoted is less than the basic state pension. The package of Government policy on pension indexation is for an earnings link on the basic and a CPI link on the additional. The basic pension of every person she is concerned about is bigger than their additional pension, the earnings link in the long run is worth 2% more than prices and CPI is 0.8% less than RPI. The people she is most concerned about will overwhelmingly benefit from our package of policies. Therefore, I can assure her on that point. Taking the package as a whole, they will be better off, not worse off.

My hon. Friend the Member for Gillingham and Rainham (Rehman Chishti) made an important contribution and pointed out that Age UK, which is very much an independent organisation, was delighted by the triple lock, because it is a historic move to give pensioners the best of earnings, prices, plus 2.5%. I wish only that we were able to do this in a normal year—in 16 of the past 20 years, earnings were greater than prices. People would then start to see the benefit of the earnings link and the triple lock, and in time they will.

The hon. Member for Arfon (Hywel Williams) quoted some civil service pension figures. I make the same point to him. All the figures he quoted, based on average civil service pensions, prove my point. If we take them in isolation, CPI is lower than RPI, but people do not just get their civil service pension—they also get their state pension. We are putting more in through the state pension than we are taking away typically through the additional pension because of the relative sizes and the difference between the various indices. Our constituents write to us and raise the bit they see, but overall the state pension will more than make up for that for the vast majority of people, although not for people with very large pensions.

On the ratchet, I simply accept the hon. Gentleman’s rebuke for fiscal irresponsibility. I will take it on the chin and pass it on to the Chancellor for him.

I enjoyed the contribution of my hon. Friend the Member for Sittingbourne and Sheppey (Gordon Henderson) and his account of his conversation with Jack Jones. I am delighted to say that both coalition partners supported that. We needed the Chancellor on board for that one. I regard it as being to the credit of both coalition partners that we have been able finally to restore the earnings link. I am grateful to my hon. Friend for raising the case of his constituent. As he was describing it, I was thinking that I was sure I signed a letter on that the other day, and I gather he has now received it. I apologise to his constituent for the mistake that was made and I hope that that has now been resolved.

The hon. Member for Hayes and Harlington (John McDonnell) perfectly properly says that he will not support the order and that he is against mass means-testing and so am I. A pension system that allows too many people to retire poor and means that they have to be swept up by a leaky safety net is not a good, sustainable long-term pension system. I have set it as my goal to do something about that. We may not agree about these orders but we have common cause on that principle.

[John McDonnell]

Did the Minister ever consider a quadruple lock so that, earnings or inflation, CPI or RPI, whichever was the higher, would be used?

[Steve Webb]

We did look at that. Either one could say that what one is trying to do with pensions and benefits is protect pensioners’ spending power—that would be a price measure—or one could protect people’s position relative to the rest of society, which is an earnings measure. One wants to avoid silly small figures such as 75p, which is where the 2.5% comes from. To say, “But we will measure inflation according to different measures and we will pick the biggest” conceptually does not work for me. We could have done that, but in our judgment the point of revaluation is to maintain spending power fairly for the group in question. Our judgment is that CPI is the answer to that question.

There is a separate question about whether pensions should be higher or lower. In a way, the hon. Gentleman and the hon. Member for North Ayrshire and Arran are saying that we should be paying bigger pensions. It seems to me that that is an entirely separate debate from how we should correct for inflation. That is where CPI comes in.

[John McDonnell]

There is a point of principle that the Minister and I have argued over the past 13 years at least, which is that, whatever measure is introduced, there should not be a loss. Having that quadruple lock would convince people that this is at least a way forward, because people would be protected against years such as those five out of the past 20 where CPI was higher than RPI.

[Steve Webb]

I come back to my point that as the basic state pension is a big part of pensioners’ income, particularly for the most vulnerable, we are protecting their living standards overall—they will get bigger increases under this package of indexation than they would have on the basis of a straightforward RPI level alone. I believe we are doing the right thing.

I am grateful to my hon. Friend the Member for Finchley and Golders Green (Mike Freer) for his kind comments and I appreciate the expertise he brings to the debate. He was absolutely right that the idea that large numbers of pensioners will have large mortgages is quite implausible. It is true that 7% have some mortgage interest at the moment, but even those who face mortgage interest will typically have lower average amounts because they will be towards the end of their mortgage terms. Basing an inflation measure on an index that includes mortgage interest seems to me to be quite inappropriate for pensioners. As my hon. Friend pointed out, one consequence of CPI schemes such as the local government pension scheme is that it will help to put pensioners on a more even keel. As he also rightly said, this money has to come from somewhere—somebody has to find it—and this order will have the consequence of getting the systems on to a more sustainable basis. My hon. Friend tempts me on public sector pension reform, but I obviously must not pre-empt what Lord Hutton will say. He will be saying what he is going to say within the next few weeks, so we do not have much longer to wait.

Drawing the threads together, this debate has provided a worthwhile exploration of the issues. Our fundamental point is that the principal order will cost the Government £4.3 billion to protect and enhance the benefits for the people who need them the most. I am proud to commend these provisions to the House.

Question put,

16:06

Division 212

Ayes: 247

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Conservative: 209
Liberal Democrat: 38

Noes: 19

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Labour: 11
Scottish National Party: 5
Democratic Unionist Party: 1
Alliance: 1
Plaid Cymru: 1

Resolved,

That the draft Social Security Benefits Up-rating Order 2011, which was laid before this House on 3 February, be approved.

pensions

Resolved,

That the draft Guaranteed Minimum Pensions Increase Order 2011, which was laid before this House on 3 February, be approved.—(Steve Webb.)