(10 years, 4 months ago)
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The Deputy Chairman of Committees (Lord Colwyn) (Con)
My Lords, I have the usual announcement. If there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division bells are rung and resume after 10 minutes or at such a time as we are all back in our seats.
Clause 5: Transitional rate of state pension
Amendment 22
Baroness Turner of Camden
Baroness Turner of Camden (Lab)
My Lords, this is a rather complicated matter. We are on to the area of people who are contracted in and those who are contracted out. Under the Government’s proposal, an employee who by April 2016 has already built up a state pension entitlement equal to or in excess of the single state pension cannot add further to it. This means that a large number of long-term contracted-in employees will face the prospect of a reduced state pension. These employees, by definition, have not had access to quality company DB pensions during their career, and SERPS and the second-tier pension were originally designed to assist them. By contrast, an employee who has been long-term contracted-out will have an established right to the basic state pension only. Under the transitional terms, they would have the ability to add to their single pension benefit and could increase it from the prospective £107 of the basic state pension level to £144 in approximately nine years.
The amendment is designed to be helpful. We realise, of course, that the transition may be difficult. Some people may feel that they are losing out as a result, and we want to ensure that as few as possible feel that way. The idea of the amendment is to limit the loss of future rights to accrue for the contracted-in employees and to put them on an equal footing with contracted-out employees. Under the new scheme, both groups will in future be paying the same amount of national insurance contribution. The idea of the amendment was therefore to ensure that the transition that is taking place will be as smooth as possible, and that people who think that they have been left out or that their conditions are undermined will feel that every effort is being made by the Government—if they accept our amendment or something rather similar—to make the transition as painless as possible. I beg to move.
Lord Browne of Ladyton (Lab)
My Lords, I apologise on behalf of my noble friend Lady Sherlock for her absence from today’s Committee. I should explain that she became quite ill over the Christmas holidays and spent part of them in hospital. She is now on the mend but, wisely but reluctantly, as I am sure those noble Lords who know her can imagine, she has accepted the advice of her medical adviser that it is not yet appropriate for her to come back to work. However, she is hopeful that she will be fit to recommence her duties in your Lordships’ House some time next week and hopes to be with us for the next scheduled Committee day. I know that noble Lords will want to extend their best wishes to her for a quick recovery.
I also pray the Committee’s indulgence to express my sadness at the news of the shocking and untimely death of my very good friend Paul Goggins. He was the best of the best. No words can express the sorrow that I feel. I shall miss him a lot, and I just want his family to know that my thoughts and prayers are with them at this very difficult time.
We are now on Clause 5, which, as my noble friend Lady Turner of Camden, explained, deals with the transitional rate of state pension. Once again, my noble friend has allowed the Committee an opportunity for some further clarification and explanation from the Minister. In the House of Commons, the Minister for Pensions, Steve Webb, dealt with this clause in two paragraphs. To be fair to him, it took slightly longer to explain Schedule 1 but most of that was probably, rightly, a paean of praise for the drafting and for parliamentary counsel. It appears that Schedule 1 is a unique piece of drafting and reads logically, simply and straightforwardly. If all legislation were as clear, it would be very helpful.
I hope the Minister will forgive us if we tarry a little in this important provision, given that we do not have a lot to go on from the debate this Bill has been subject to thus far. Clause 5 and Schedule 1 explain how the transitional rate is calculated. My understanding—and if it is not right I am sure the Minister will correct me—is that this rate applies to everyone who, under Clause 4(1)(c), has at least one pre-commencement qualifying year. A pre-commencement qualifying year is one year of national insurance contributions before 6 April 2016 and, for completeness, after 6 April 1978—although I suspect that is not of great relevance. Everyone who has such a pre-commencement qualifying year and who meets the minimum qualifying period will have the foundation amount, which is the higher of either the pre-commencement and post-commencement years added together or the amount already accrued under the old system, whichever is the larger. In short, such a person will get what they would get under the old rules or what they would get under the new rules, whichever is the greater. Thereafter we are working on a maximum of £144 and one thirty-fifth of £144 for each year until they reach the maximum. Over and above that, as my noble friend has pointed out, there comes a point, no matter what age you are, when you cannot accrue any more pension entitlement. It is capped. Indeed, there was some debate in the House of Commons as to whether the pursuit of the word “cap” was appropriate. Interestingly, “cap” is in the schedule itself. You cannot accrue any further pension under the current system. As with the present system, after 30 years you still have an obligation to pay national insurance but you will be contributing not to your pension but to the whole pot.
Beyond that, we knew—I think until the Prime Minister’s recent announcement on “The Andrew Marr Show” on 6 January—that none of this was guaranteed to be triple locked. I digress a little because I am not entirely sure exactly where we stand with the fact that the Prime Minister took the opportunity to make an announcement on “The Andrew Marr Show” on retaining the triple lock for the duration of the next Parliament. This will provide existing pensioners, I think, and those retiring soon after the implementation of this Bill, with some degree of comfort in the rather unstable financial world we are now living in and I venture to suggest that it was calculated to do so. It was calculated by the Prime Minister to generate that degree of relationship between him and those people.
The Opposition have supported the triple lock since it was proposed by the Government. Maybe the Minister can take this opportunity to tell us if this announcement constitutes a Conservative Party manifesto policy pledge or is it—as I think we could probably, in an inspired fashion, guess that the junior partner in this coalition is unlikely to take a different view—now government policy, issued on behalf of both coalition partners? I apologise if I have offended any noble Lords by my reference to “junior”. Perhaps I will just refer to them as “the other party in the coalition”.
Are pensions within the welfare cap now? People are asking whether the winter fuel allowance and other pensioner benefits will be protected. Is the Prime Minister planning to take from one part of a person’s pension pot and put it in another with no gain? Will the triple lock apply to existing pensions? Will it apply to pension savings credit? Is this within the welfare cap itself? Will the triple lock apply to S2P or are we retaining the uplift? There are lots of questions. I suspect the Minister, who carefully prepares for these things, anticipated a significant number of them.
I will resist the temptation to go back over all the ground of the debate on the triple lock which we could not have because there was apparently no guarantee for it. We now appear to have the best we can expect in terms of a guarantee, bearing in mind what the Prime Minister had to say. Maybe the Minister would be willing to engage with that. Perhaps he could also explain a little more than was in the two paragraphs of the Written Ministerial Statement yesterday about the money that has been captured from the reserve in order to build the IT for the accelerated implementation of these provisions. He may have something further to say that could be relevant to our discussions on this Bill, although this may not be the right time to do it.
To a limited degree, we know about the transitional rate of the state pension. This is an opportunity for the Minister to explain it with a degree of clarity that is always welcome in the official record of debates on Bills. I hope that the Minister will engage with the questions posed by my noble friend Lady Turner in relation to this, and I am sure we shall all be much the wiser if he does so.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)
My Lords, I start by thanking the noble Lord, Lord Browne, for stepping into the place of the noble Baroness, Lady Sherlock, with his customary skill. I join him in paying tribute to Paul Goggins. I knew him much less well than the noble Lord, Lord Browne, did, but I worked with him on the Mesothelioma Bill—which is now an Act—and I found him knowledgeable, supportive and an extraordinarily likeable man. He is a real loss to many of us.
Lord Freud
On the series of questions that the noble Lord, Lord Browne, raised about the triple lock, I would direct him to the next Conservative manifesto if he wants more information. I will not go into any more detail, but I will promise to deal with the amendment in more than two paragraphs and to treat it with the dignity that it deserves.
The amendment of the noble Baroness, Lady Turner, concerns the single-tier position of people entitled to a protected payment—so, in other words, those with foundation amounts higher than the full single-tier pension. People in this position are likely to have built substantial additional state pension entitlement in the existing system and would typically have been contracted into the additional state pension for most of their working life.
Let me first say that the decision to close the additional state pension in 2016 was by design, rather than by accident, as it allows us to provide a simpler, fairer state pension. Most of the complexity inherent in the current system is associated with the additional state pension and contracting out. This in turn makes it more difficult for a person to know how much pension they are likely to get from the state and how much more they would need to save to realise their desired income in retirement. However, we are recognising pre-commencement qualifying years in the transition design and will allow people to gain amounts above the full single-tier pension. We also uprate the whole single-tier amount by earnings, as opposed to just the basic state pension in the current system, and any excess is price-protected. I think we have had sufficient reference to the triple lock around that.
The noble Baroness’s amendment would allow those with protected payments to add up to nine extra qualifying years to their foundation amount. This would provide for a maximum of an extra £37 a week in single-tier pension—or, in other words, nine times the £4.11 a week illustrative figure. If we were to do this, we simply would not have a single-tier system. We would, in fact, enhance disparities in state pension outcomes counter to the aims of the reform which seeks to provide a flat-rate amount on which people can save. For example, a person whose pre-commencement qualifying years result in a pension that is £1 above the illustrative amount of £144 a week could add up to nine more qualifying years. However, this generosity would not be extended to a person whose pre-commencement qualifying years resulted in a pension just below, or at, the full single-tier amount: this person’s pension would be capped at £144 of the illustrative amount. This seems arbitrary and unfair.
We are also talking about potentially enhancing the entitlements of up to around 1.5 million single-tier pensioners who will be receiving a protected payment in the 2030s. This would come at a significant cost—each extra year added to each individual’s entitlement would add £200 a year to the costs of the single-tier pension. As I have already said, the costs of this amendment would be considerable and it would benefit a group which is already receiving £11 a week more than the full single tier on average.
To sum up, the single-tier pension is designed to give people a clear foundation for saving. The transition arrangements recognise the contributions people will have made up to 2016. Further enhancements for people with amounts higher than the full single-tier pension would undermine the principles of the reform and come at considerable cost. I therefore ask the noble Baroness to withdraw the amendment.
Baroness Turner of Camden
I thank the Minister for his detailed response to the amendment. It was of course designed to cover the situation where a number of people may feel that they are being badly done by in the transitional process. That is why it was suggested that an amendment be put down and the Government’s views on it sought. I am grateful for what he has said. I acknowledge, of course, that there will be some cost involved—I realise that we mostly put down amendments that involve some cost. None the less, we were anxious to try to ensure that people should not feel hard done by if they feel that they are losing out in any respect. However, I note what he has said. We shall have a good look at this issue before Report and I shall let the people who originally raised it with me know what the response was. In the mean time I beg leave to withdraw the amendment.
Baroness Turner of Camden
“( ) The amount to be revalued in accordance with the full rate of the state pension.”
Baroness Turner of Camden
This, again, concerns a somewhat difficult point. Currently, paragraph 6(2) of Schedule 1 provides that amounts of pre-commencement pension up to the level of the full single pension will increase in line with “the full rate” of the single state pension, while any amount in excess of that will rise only in line with CPI inflation. In other words, the rate of revaluation is on the basis of prices rather than, as in the past, in relation to earnings. This takes us into the whole area of revaluation. We have already heard that, apparently, government policy is in future going to support the triple lock, which I personally have always supported. If the triple lock were accepted, and if our amendment were accepted, that would certainly bring the whole thing into line with the triple lock, because it would increase this section of the pension in line with earnings.
I am rather surprised that the Government continue to imagine that it is possible, in this particular section of the Bill, to have revaluation in line not with earnings, or indeed with the triple lock at all, but in line with prices. That is completely out of kilter with what will, hopefully, be in the rest of the Bill and with support for the triple lock. I therefore suggest that the Minister look again at the amendment and perhaps agree with what we are suggesting: that the amount to be revalued should be in accordance with the full rate of the state pension, which would of course bring you directly into the earnings section rather than looking at prices again. I do not think that we want to look at prices again in relation to any section of the Bill. If we are going to have the triple lock, which I hope we shall, that would of course not arise because the best of three would be payable in respect of all the pension payments referred to in the Bill. I beg to move.
Lord Whitty (Lab)
My Lords, I fully support what my noble friend has just said and have some amendments in this group which point in the same direction. The issue is fairness in relation to expectations. Under this part of the schedule, if your entitlement under the prior system is greater than the reference point, it is index-linked on a different basis from that on which it would be if it falls below the reference point.
The Minister may regard that as part of the overall approach, but in terms of the expectations of the people concerned there is in essence the same point as was in my noble friend’s previous amendment: somebody who is retiring in 15 years’ time may be able to provide other means of savings to make up for the loss of expectation. However, if they are retiring fairly close to the due date of the single tier, then their expectations cannot be made up in that time. A significant degree of unfairness applies there. The same applies in relation to the subject matter of these amendments if you happen to be one side or another, under the old system, of the proposed reference figure of £144 or whatever it turns out to be. There is no particular reason why one group of workers—who have, by and large, not had the most favourable pension schemes but have saved into the state second pension—should be treated differentially in this way, compared with their expectation.
It is an issue of fairness. The triple lock seems to have all-round support except in these clauses. It seems that the Government, at a relatively small cost, could make the adjustment here and save quite a lot of aggro and, I suspect, a significant postbag for most Members of Parliament.
Lord Browne of Ladyton
My Lords, I have no idea how many persons Clause 6 is expected to relate to, but it seems to be a discrete and relatively small group of pensioners. As I understand it, it deals with those who, after the start date, leave a contracted-out pension scheme where, under the rules of the scheme, they are not entitled to a pension and their transitional rate will be calculated as if they have never been contracted out before, and thereafter by reference to Schedule 1 which will set out the rules whereby that transitional rate will be calculated.
Amendments 25 to 29, as my noble friends have explained, all have similar intentions behind them. They refer particularly to the revaluation of the foundation amount and the protected accrued state pension amount above the single-tier amount for people with pre-commencement qualifying years of practicable pensionable age. As my noble friends have explained, the amendments are designed to ensure that for the revaluation of the foundation amount and the amount in excess of the full single-tier state pension, the protected payment would be in line with average annual increases in earnings as opposed to annual increases in general price levels. I hope that I have understood the effect of these complicated amendments. Currently, the Bill specifies that the valuation of the foundation amount up to the full rate of the state pension is to be revalued by earnings and any excess over that rate is to be revalued in line with the annual increase in the general level of prices.
For all those reasons articulated by my noble friends, which it would be otiose to repeat, I look forward to the Minister’s assessment of my noble friend’s amendment. I ask him to address these additional questions when he responds to the amendment. How will the public be informed of these changes to their pension entitlement in order to ensure that they are able to make adequate preparation for a secure retirement? In the words of my noble friends Lady Turner and Lord Whitty, will they be able to calibrate their expectations? Do the Government plan to review these arrangements at some time in the future? My noble friend Lord Whitty asked a very pertinent question: what are the cost implications of these amendments? In my estimation, they appear to relate to a comparatively small number of people. If the Minister is not able to tell us, will he come back to my noble friend before Report so that that information can inform the debate, if it takes place then?
Lord Freud
My Lords, it might be helpful if I explain the principle behind having protected payments. We recognise that some people who will reach pensionable age under the single tier will already have amounts of additional pension which take them over the full single-tier rate. A key consideration in the design of the transition was that this extra would not be taken away. Revaluing the protected payment, at least by increases in prices, will maintain its purchasing power over time.
Let me deal directly with the point made by the noble Lord, Lord Whitty, about fairness in relation to expectations. Under the current system, the additional state pension is revalued up to state pension age in line with average earnings, but is then indexed only by prices once in payment. A man retiring in the first 10 years of single tier could expect to spend, on average, 20 years in retirement. In single tier, we have shifted this balance between adjustments before and after pensionable age, and the majority of people receiving protected payments will be better off overall as a result of this shift.
In the current system, only basic state pension is uprated by a minimum of earnings. In the future, the full amount of the single-tier pension would be uprated in this way. So using the 2012-13 White Paper figures, this means that people will see the illustrative £144 of their state pension being uprated each year by earnings, or more—potentially the triple lock—not just £107. People with a protected payment will be relatively close to pension age, so the revaluation will typically be applied only for a few years. So, for example, even someone with an above average protected payment of £20 with 10 years left until they reach retirement would find that revaluation leaves them £4 per week worse off upon reaching pensionable age, but £4 better off 10 years later.
The amendments tabled by the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, would effectively incorporate earnings revaluation of the protected payment into single tier. As this is a cost-neutral package of reforms, we would need to make offsetting changes elsewhere. Given that we expect most people to be better off from the combined revaluation and uprating changes, this would be difficult to justify. To give noble Lords a response to their question about the costs we are talking about, I can tell them that using earnings to revalue the protected payment would have annual costs, which would peak at around £150 in about 2040.
Lord Freud
It would be £150 million per annum—I am not doing too well with my millions and billions. Let me be specific: £150 million per annum at the peak in about 2040.
As regards the question from the noble Lord, Lord Browne, on the review, we will look at how we do that as part of our overall communication strategy, part of which will be about providing people with individualised information. I hope that I have covered all the questions and therefore ask the noble—
Lord McKenzie of Luton (Lab)
Before the Minister sits down, I hope that he will help me. I think that he made reference to the proposals being cost neutral and that his previous formulation went something along the lines that the new arrangements would not be more costly than the current ones. Should we be worried about this nuance?
Lord Freud
My Lords, it was not my intention that the noble Lord should be worried about it. I ask the noble Baroness to withdraw her amendment.
Baroness Turner of Camden
I thank the Minister for that response but he will not be surprised to learn that I am not terribly happy with it because I cannot envisage a situation in which any element of pension provision could be linked to prices rather than anything else, and rather than the triple lock which we have all talked about. Therefore, although I thank the Minister for his detailed response, we will have to look at it very carefully because I am not happy about any element of pension provision where there is revaluation based on prices. It is out of kilter with the rest of the thinking in relation to pensions generally and we will certainly have to think about this and come back to it on Report. However, in the mean time, I beg leave to withdraw the amendment.
“( ) Regulations may provide that those entitled to or subject to a pension credit or a pension debit shall be advised annually of their entitlement.”
Baroness Hollis of Heigham (Lab)
My Lords, we move on to a different subject, which is pension sharing on divorce. This is a very simple, short amendment that raises the issues of divorce that were touched on in previous amendments. When we delivered pension sharing on divorce—many of my noble friends were absolutely vital in that activity in the 1990s—it primarily affected private pensions. We thought that the portion that could be set aside as part of the divorce settlement would be the basis of a useful pension for the divorced spouse—usually the woman. We were also anxious that he and she would build on—or, in his case, perhaps rebuild—their pension shares back up again so that both would face retirement with an adequate pension. However, most divorcing spouses do not seek pension sharing. In some cases, obviously, there may not be much pension to share, particularly if the divorce takes place at a relatively young age—often, sadly, younger women do not always properly value their husbands’ pension, and solicitors, I am afraid, are still pretty sleepy about what is quite a technical issue. Many of those who share pensions do not realise the need for or the possibility of rebuilding their separate pensions. However, out of 120,000 or 125,000 divorces a year, an average of 10,000 divorces involve pension sharing, which means that 8% or 9% of total divorces involve pension sharing of private occupational pensions.
This amendment asks what the implications are for the new state pension. Currently, under existing laws—we clarified this again in a previous discussion on divorcees—upon divorce the woman can substitute the man’s NI record for BSP in lieu of her own at the point of divorce, if his is the higher, and she may also be entitled to half of his additional pension—SERPS or S2P—if the court so decrees as part of the sharing of matrimonial assets.
Under the new regime, she will not be able to substitute his NI contributions for her own, a point that we argued a few amendments back. The only element that can be split or shared, if the court decrees it, is the protected pension; for example, the frozen, additional amount from SERPS and S2P, to which my noble friend referred on a previous amendment. What is more, if he has a shortfall in his NI contributions towards the new state pension—possibly because he has a track record in the public sector, I imagine, with contracting out—some of his additional pension will be brought over to make good his NI record and that transferred slice of protected pension will not then be available for sharing. I am assuming a genderised position here, I am afraid. So she takes the double whammy: not only does she not get an ability to substitute his NI contributions for her own for the basic state pension element, but, equally, if he has an inadequate NI contribution—that may well be the case if he has had a lifetime of contracting out, has never had head space and wishes to make good his shortfall in the new state pension—as I understand it, she will then not be able to access that chunk of his protected and S2P or SERPS pension, which will go across to make good the shortfall.
I would be grateful if the Minister would confirm that I have understood this correctly. If so, the woman has a pretty nasty deal and I think some explanation of the implications is required, particularly for women who have childcare responsibilities and so on and who may not be able to rebuild the additional income, particularly once their youngest child hits 12.
Advising people annually of their pension debit—for example, telling him, as it is usually, but not invariably the man, by how much the pension has reduced following divorce, or with regard to pension credit, the fraction that usually has gone to her of the protected additional pension, if the court has so decreed—would allow each of them to know where they stand to make better decisions about their pension futures and, in particular, that might encourage them into NEST to build or rebuild their total pension prospects.
With this amendment, I am seeking to ask the Minister to ensure that women who may not be aware of, but who could well take advantage of, a share of the additional protected pension have the knowledge that they can do so. They may wish to set that against other matrimonial assets that may otherwise go their way on divorce. I hope, therefore, that the Minister will agree with me that as this is techie and this has now been changed substantively in the Pensions Bill, those women who have been married to someone in the public sector—the reverse could equally well be true in terms of gender—will be a loser a second time because he may well dip into this to make good his NI shortfall. I hope that the Minister will agree with me that we need to encourage people to be aware of the situation and I think that the department needs to take some responsibility for ensuring annual information. I beg to move.
Lord McKenzie of Luton
My Lords, I put my name to this amendment because I spent a happy half hour with my noble friend trying to fathom out what the legislation was about, on this occasion, without a bottle of gin. The conclusion that my noble friend has just outlined, which I believe to be correct, is that any protected payment could be shared—I think that was confirmed at one of our briefing meetings and indeed in some of the documentation that we have and this parallels the current situation with the additional state pension—but the protected payment cannot, I think, for some of the reasons outlined by my noble friend, be greater than the second state pension accrued at 6 April 2016; it can, however, be smaller. For individuals who grow up entirely within the single-tier system, with just S2P, as we understand it, there would be no basis for sharing the state pension. The noble Lord’s confirmation would be helpful. The particular thrust of the amendment—to make sure that people are routinely informed—seems entirely reasonable.
Lord Browne of Ladyton
My Lords, I intend to make a very short contribution to this debate. As my noble friend Lady Hollis made clear in her introductory remarks, this is a simple amendment. If it can be simple and complex in its implications at the same time, then that is what it is. I have no intention of trying to replicate or supplement my noble friend’s understanding of the complexity of this issue, and the implications of the decisions that face people in these very difficult circumstances. My understanding of the element of the pension that can be split by the courts on divorce is as my noble friend Lord McKenzie explained it. We benefited from a briefing from the Minister’s supporting civil servants which, as always, we were grateful to receive; it was very clear and helpful.
We have heard from my noble friend Lady Hollis about some of the challenges and problems that face divorced women in particular, or women in the context of divorce, about the choices that they have to make. They may well spend some significant time thereafter before receiving pension payments, not knowing or losing track of the details of their pension-splitting arrangements. As a supplementary to the questions asked by my noble friend, and because I do not know the answer, can the Minister tell the Committee if there are arrangements in place by which the courts or the legal profession—the justice system—in some fashion notify the DWP of such arrangements? If they do, what are they? If people are not to be sent regular statements of pension credits or debits, how else would the Minister suggest that this information gap be addressed?
Before I sit down, I want to take the opportunity to provide the Minister with the chance to put on the official record information about a very discrete point relating to the devolution settlement, and the implications of these provisions about pension sharing on an area of devolved responsibility. In this Bill, necessarily, there are consequential amendments to the Family Law (Scotland) Act 1985. As most of us have come to know, the devolution settlement requires certain rules to be applied to circumstances where we in this Parliament legislate in areas which are otherwise devolved—and family law is devolved to the Scottish Parliament. I am satisfied—because I raised this matter with the Minister’s civil servants and received an e-mail explanation on 13 December—that this issue has been discussed with both the Scottish Parliament and the Scottish Government. I was told that the Scottish Government were content, within the scope of the devolution settlement; that the provisions in the Pensions Bill fall under a particular category in the devolved guidance that allows legislative provisions to be enacted here without the necessity for the normal processes. I think this is called a Sewel Motion in the Scottish Parliament. I am speaking long enough for the Minister to find some words that he can put into the official record. I am sure he will understand why it would help if there was some recognition of these discussions and the agreement of the Scottish Government to this Parliament legislating in these potentially contentious areas which would otherwise be devolved. I hope I have made myself clear that it would be helpful if that could be addressed in the response to this amendment.
Lord Freud
My Lords, by way of background, the additional state pension can be considered as an asset in a divorce settlement and the department is responsible for administering pension-sharing orders ordered by the courts. Basic state pension is not included as an asset to be shared, nor will the new single-tier pension be shareable. However, share orders in respect of additional state pension which are made before the single-tier pension is introduced will still stand and, from 2016, only the protected payment—the excess above the full single-tier pension—will be considered in any share order.
Baroness Hollis of Heigham
The Minister also gave those figures last time, when we debated the amendment on divorcees and the substitution issue. The 100,000 requests and the 150 orders are happening in terms of the protected or state second pension, or SERPS, now. Of course, it is only a tiny fraction of the occupational pensions which are usually the more valuable asset and make up the other 9,900 or so requests.
Perhaps I should have asked this before, and I do not mean to catch the Minister on the hop, but what is the financial distribution of the 150 within the 10,000? Are those 150 simply the largest, or are they associated with people who are tenants in rented accommodation, where there is therefore no unoccupied house to be set off in lieu, or what? What does the Minister know about them?
Lord Freud
Rather than going into the sub-detail of what is already a very detailed point, I ought to commit to getting whatever information we can find and supplying that by letter to the noble Baroness.
When pension sharing disappears, most men and women will be able to build up entitlement to a simple contributory pension above the basic level of means-tested support. This is the most effective way of ensuring that savers have a decent underpin which stays with them however their family circumstances change. More than 80% of those reaching state pension age by the mid-2030s will get the full single tier, a figure with which I know the Committee is familiar. The courts will still be able to take account of private pension provision in the divorce settlement. The expectation is that the vast majority of people will be able to build a single-tier pension in their own right.
If someone is the beneficiary of a pension share order they receive a pension credit. The person the order is made against is subject to a corresponding debit. State pension credits are normally awarded and debits applied from state pension age. If the order is made after state pension age, the payment is increased or decreased at that point. As under the current system, single-tier pensioners who have a state pension debit or credit will be informed of the weekly addition or deduction when the court order is implemented. Individuals will be able to ask for statements of their state pension, but the pension credits or debits would be consolidated within the individual’s single-tier payment or protected payment and so not identified as credits or debits. As now, these elements could be identified on request but I am informed by the department’s pension sharing administrators that no one can recall ever receiving such a request.
On communications, the question raised by the noble Lord, Lord Browne, our statements will give individuals an up-to-date picture of their single-tier state pension position, which includes their foundation amount, and explain how this may change with further national insurance qualifying years through work or credits. The foundation amount included in statements will take into account any pension share debits or credits, as I have said.
Let me make it clear that state pension sharing on divorce affects relatively few people. As I said, in 2012-13 the department implemented only around 150 sharing orders. The changes to the computer system necessary to generate such automatic annual statements would therefore be disproportionately costly to provide this group with information it can in any case request.
Finally, on the devolution issue raised by the noble Lord, Lord Browne, I can confirm that this does not require a legislative consent Motion from the Scottish Government.
I hope that I have been able to go some way in reassuring the noble Baroness that, while there is low demand for this information, it is available if requested. I hope that on that basis, she will feel able to withdraw the amendment.
Baroness Hollis of Heigham
My Lords, I am grateful to my noble friends Lord McKenzie and Lord Browne for their contributions and also to the Minister for a helpful reply. However, I am still not secure on a couple of points he raised, if he would be so kind as to elaborate on them. He said that the recipients—I presume they would be almost all women; the Minister has not challenged me on this so I assume that it is correct—get information when the court order is implemented. Does that mean at the point of divorce or at the point of payment? What does “implementation” mean here? It could be the legal point of when the court has finished with it or the practical effect of when it is actually paid. I am not quite clear.
Baroness Hollis of Heigham
So it is at the point of divorce. Thereafter, from what the Minister has said, if they wish to see what has happened to that payment they can make an inquiry but the Minister says they never have so far.
Lord Freud
That is exactly right. We have the information and people who want to double check it can ask, although they seem to be satisfied with the level of information they had at the outset.
Baroness Hollis of Heigham
If it is 150 people, how much does an inquiry cost to handle?
Baroness Hollis of Heigham
If we are talking about 150 people, how much does it cost to respond to each inquiry?
Lord Freud
My Lords, as I said, in practice we have not had an inquiry. We have to manage 150 sharing orders. Again, I am not sure of the cost of that and how easy it is to extract it. If I can do it, I will include it in a letter that I have committed to send.
Baroness Hollis of Heigham
I am grateful for the Minister’s promise of further information and, on that basis, I am happy to withdraw the amendment.
Lord Browne of Ladyton
Lord Browne of Ladyton
My Lords, I speak to the amendment and to Amendment 31B which are in my name and that of my noble friend Lady Sherlock. These are simple probing amendments which need not detain the Committee for long. Clause 16(4) says:
“A person may not opt to suspend his or her entitlement to a state pension under this Part on more than one occasion”.
Clause 16(5) says:
“Regulations may specify other circumstances in which a person may not opt to suspend his or her entitlement to a state pension under this Part”.
My question is simple. Can the Minister please explain the need for these subsections and what circumstances they are intended to cover? I beg to move.
Lord Freud
My Lords, the simple answer is one word: simplicity. However, I will embellish a little. Clauses 16, 17 and 18 allow people to defer their single-tier pension at state pension age in order to build up an increase to their pension. These provisions broadly mirror the deferral arrangements in the current scheme.
Clause 16 specifically provides for the individual to suspend their single-tier pension only once after they have started to receive it, as is the case in the current state pension scheme. This will be particularly important for those who are not certain of their likely retirement income until they have reached state pension age but who could benefit from the ability to suspend their pension and build up weekly increments. At the moment, pensioners can only do this once under the current scheme. This enables people who want to return to work or increase their hours to manage their tax position more effectively. For example if they have the opportunity to work and no longer require their state pension to support themselves, they will be able to suspend their pension and therefore lower their taxable income for that period. They will then build up an increase to their single-tier pension which will be payable when they reclaim it.
The amendments would remove any restriction on the number of times a person may opt to give up their entitlement to a single-tier pension. It introduces new complexity for individuals planning for their retirement and administrative complexity for the department. Allowing people to de-retire later in life increases the risk that they will not live long enough to break even. It would only really make sense for people who would see a significant tax benefit from not claiming their state pension for certain periods of time. Having the option to suspend their state pension once strikes a balance between giving people the flexibility to return to work and manage their tax position after claiming their state pension and ensuring the system remains as simple as possible. I ask the noble Lord to withdraw the amendment.
Lord Browne of Ladyton
My Lords, I am grateful to the Minister for his response, to the extent to which he responded. I had hoped, however, that he would have gone further and, in particular, engaged with Clause 16(5), giving noble Lords some indication as to under what circumstances the Government expect that they would want to further curtail the option to suspend. Maybe the Minister has something of an answer to that coming to him at the moment.
I had hoped that the Minister would say that there is a very narrow set of circumstances to which the regulations that could be promulgated under Clause 16(5) would relate, and give some assurance that it was not the Government’s intention to use these powers extensively but in a narrow way, with reference to at least one set of circumstances for which they were planned.
Lord Freud
My Lords, the power provides the flexibility to respond quickly should the need arise to amend the scheme—for example, if there is a group of people to whom it would be inappropriate to offer the opportunity to improve their pension once it was been claimed. Under the current scheme, if the individual is not ordinarily resident in Great Britain or another EEA member state and has claimed their pension, they will not normally be able to suspend it in order to build up an increase. The inclusion of this power means that we can use secondary legislation to mirror the current position for the suspension of a single-tier pension. The amendment would mean that any modification of the option to elect to suspend a single-tier pension would require a degree of parliamentary scrutiny via the primary procedure that would be disproportionate to that change.
Lord Browne of Ladyton
I am grateful to the Minister for engaging with the challenge that I encouraged him to engage with. I am not entirely sure that it satisfies my curiosity over the need for this power, but this is an issue to which we can return later, perhaps in correspondence. In the mean time—
Lord Freud
My Lords, so that we do not waste a lot of extra time on this matter, this replicates the power that we have in the current scheme and does no more than that. There is no substantial change going on or any intentionality towards using it in a different way.
Lord Browne of Ladyton
I reassure the Minister that I do not see any malevolent intention masked by this power. It occurs to me that if there is no purpose in this element of the existing structure, there is no purpose in replicating the existing structure, but I do not intend to expand this debate into such philosophical discussions. At the moment, I am content that the issue has been raised and will consider the Minister’s response to it. If I am satisfied when I see it in writing, we will not return to this. If I am not, we may return to this issue. In the mean time, though, I am content to beg leave to withdraw the amendment.
“( ) If a person’s entitlement under this Part to a state pension has been deferred for a period, that person may receive it as a lump sum, as specified in regulations.”
Baroness Hollis of Heigham
My Lords, I would just point out that the clock seems to have frozen on the display.
Baroness Hollis of Heigham
It does not matter. I am grateful for the additional statistics on this issue provided by the Bill team. That has been very helpful. In 2004, the previous Administration sought to encourage people to stay in work longer by offering attractive arrangements if they deferred taking the state pension for several years, or at least for more than one year. About 9% of pensioners did so—1.2 million people—three-quarters of them women, usually because they were younger than their husbands and worked longer hours, particularly given that their retirement age was earlier than the husbands’ and this way they could retire together. These arrangements had several advantages: they kept people in work for longer; they allowed husband and wife to synchronise their retirement if they wished; and they offered them a higher pension income once retired, with interest rates—until this Bill comes into effect—of 10.4% per annum, or to roll it up into a lump sum, where instead they received the basic rate plus 2%.
The vast majority of the 1.2 million pensioners who deferred their state pension for more than a year chose income. Some 60,000 preferred to take a lump sum. I do not know how many of those are women, but my hunch would be, again, a very high proportion. If by any chance the Minister had that figure, that would be helpful. Some 60,000 preferred to take the lump sum, which on average was £13,700 for GB residents—a considerable sum.
The Bill proposes to remove the option of a lump sum so that in future, if you defer taking your state pension, all that you can do is add to your income. Why? I have to say that the arguments offered by the Minister in the other place did not persuade me. He said that, first, it was a less financially attractive proposition to take the lump sum than to take the money as increased pension, even at the proposed new rate for income deferral of 5.2%. Secondly, drawing their pension rather than deferring it and then putting it into a building society account would give much the same return. And, thirdly, by removing choice, you are giving people something more valuable—that magic word “simplicity”, as though a lump sum payment is really hard to understand.
I think this approach is incomplete at best and, in policy terms, wrong in terms of what we know about pensions income and capital. Why would one want a lump sum when the alternative of income is, in terms of return, more financially attractive, which I accept that it is? The answer, it seems to me, is simple. It may be the only opportunity a couple or an individual—but more likely a couple—get of acquiring any capital before they go into full-time retirement. If they have an occupational pension, they are likely to get perhaps the capital of a 25% tax free lump sum. If they are reliant only on the state pension, they have no such access to capital at all. The problem for pensioners now, and future pensioners, as they face their retirement, is not so much lack of income, thanks not only to what the previous Administration did but what the current Administration are doing, on which I congratulate them—it is above all lack of capital. I do not think that the Government or the Minister in the other place gave the impression of understanding that that is the problem coming up in the lift.
Let us remind ourselves that in 1997 the percentage of pensioners below 60% of median income was 41%. As of now, it is about 14%. Pensioners, as we know, have rightly done relatively well in terms of income. As my noble friend teased earlier on, we now know that the current Administration propose to continue this until 2020, should they return to office. As a result, pensions have already risen three times faster than wages and pensioners will continue to do well. The big problem for pensioners is not income but the lack of savings or capital. That has, if anything, worsened over the past decade: 21% of all pensioners have no savings at all; 37% have less than £3,000—not enough to pay for one funeral, let alone two—and 50% of all pensioners have less than £8,000, which would just about cover two funerals with a bit left over for the high tea. For those able to defer, bringing in an extra £13,000 to £14,000 of capital is magic. It transforms their situation. I repeat that the struggle for pensioners is not so much lack of income, which was how it was treated down the other end, as lack of capital, and the Government are going to close down one of the easiest and simplest routes to acquiring it.
A couple, for example, could make the entirely sensible judgment that one of them—possibly him—adds their deferred pension to their pension income and, as a result, his state pension increases. The other—it may well be her—brings in the lump sum to build some savings for a rainy day or replace the car, build the conservatory, help their grandson with tuition fees at university, and, above all, in time, to help pay for social care and eventually, perhaps, to fund funerals. Yes, they could save that sum out of income instead, as Steve Webb suggested. However, as with auto-enrolment, where we are structuring choice, ring-fencing it into a deferred lump sum may be the most helpful way to build those savings. To assume that people will voluntarily put their income aside into a building society is the exact opposite of what we are doing with auto-enrolment, where we know that we need the nudge theory of inertia to get people to save, not to leave it to a voluntary choice. They can, of course, do as the Minister suggests, but if that is the case, and if we can rely on them to do that, frankly, we do not need auto-enrolment at all because people will look after themselves with private occupational provision. But, of course, we know that they do not and that is why we are introducing auto-enrolment. The same cast of mind applies to deferred state pensions, I suggest.
In my experience, pensioners seldom spend their full income. They cope. Whatever the level of pension—whether it is £60, £80 or £100—pensioners spend £1 or so underneath their ceiling. Indeed, as a result of past and current government policies, including the triple lock, the income from the new state pension for future pensioners will be increasingly adequate. However, what pensioners are badly short of is capital, and that capital, as a proportion of their future, is reducing. They have little or no reserve cushion and the Government are taking away the easiest way in which pensioners can choose to build that up.
Why are we taking this choice away? No one has to opt for a lump sum but, as long as it is an informed choice, it may be absolutely the right choice for them. Government should not second-guess them and deny them a choice. It is very silly. Contrary to what the Government believe, we do not know what is best for all pensioners in all situations and we should allow them to make the decisions they want and which work best for them. In moving this amendment, I hope very much that the Government reconsider their position on this as they are failing to see the issues that are going to affect pensioners in the future, particularly as we move into the field of social care and the need for individual pensioners to pay for it. I beg to move.
The Lord Bishop of Chester
My Lords, I support this amendment. The background seems to be one of a general lack of provision for pensions for older people in the future. There is a major shortage of pension savings, and my impression is that that is getting worse rather than better, for all sorts of reasons. My experience of young people—I use the word “young” to include people in their 30s—is that they do not think about pensions as much as they should. Anything we can do to encourage people to take a long-term view and think for the future must be a good thing. The principle, therefore, of deferring taking the state pension until you really need it seems a healthy principle to encourage in our circumstances. My anxiety is that, in the future, a lot of people are going to be very short of money when they are older. It seems fundamentally right to do anything we can to encourage that culture of not taking the pension until you need to.
If you are going to encourage people to do that, maintaining the flexibility so that they can either take additional income when they do take their pension, or a lump sum in lieu of the money they save, seems to be a sensible inducement. If you just look on it as an issue of encouraging savings, one of the lessons of the last decade or so is that we need to encourage the thought of saving in our culture. It may be just as easy to take the pension and put it into a building society account or whatever but why not offer the option of the Government allowing the lump sum to be taken? Another reason for supporting the amendment is the principle that if it ain’t broke, why do you need to change it? What is wrong with the current arrangements that means that we want to change them?
My third reason for supporting this is that, in principle, I think there should be parity with how we relate the state provision of pensions to private provision, which normally allows the option of taking part of the pension as a lump sum. That is an important principle of flexibility and, indeed, defined benefit schemes now typically make that option more available than they used to. There seems to be a simplicity—to use the Minister’s point—in treating state pension and private pension arrangements in broadly similar ways.
Lord Hutton of Furness (Lab)
My Lords, I do not want to detain the Committee for any length of time here but my noble friend has raised a very important issue of principle that the Committee should consider very carefully. I hope that at some later point the whole House might as well.
In relation to the Amendment 31A moved by my noble friend Lord Browne, the Minister, quite sensibly, prayed in aid the existing rules and said that the provisions simply reflected that. In essence, that was his argument for continuity. Here, he is proposing something quite different—he is proposing to take away a freedom and a choice that have existed for some considerable time from people who want to defer claiming their state pension. We should not do that unless there is a compelling reason for so doing. The principle of choice for people retiring should be preserved. They might want to, for whatever reason—and maybe the Minister would not agree with the reason—take their deferred pension as a lump sum. I cannot think of any good reason why we should not allow them to continue to do that. It cannot have any overall implications for public spending so there cannot be any cost to the Treasury.
Lord McKenzie of Luton
My Lords, I have added my name to this amendment and I wholeheartedly support the points my noble friends Lady Hollis and Lord Hutton and the right reverend Prelate have raised. The Government are reserving the right to defer but, of course, making it more expensive. I think the savings the Government ultimately get from this are in the order of £300 million, because it is going to be dealt with on an actuarial basis rather than the current way. I do not know if it is possible to split the saving between that resulting from the denial of the lump sum and that which is otherwise simply a result of the different actuarial calculation. It would be helpful to have that split, if it could be done. We await the final rates, which are going to be dealt with in regulations.
The issue about lump sums is very important. We need to think about people who might have a health impairment. There is no impaired annuity equivalent under state provision, so far as I am aware. Surviving spouses cannot inherit increments arising from deferral, as I understand it, but they can, of course, inherit a cash sum that has been saved.
The point has been made about the equivalence between the private sector and the state sector. Many people to date have not accessed private savings. Thank goodness auto-enrolment is in place now, courtesy of my noble friend Lord Hutton, who was Secretary of State when big advances were made on that. Over time, people will get better private sector provision and that will provide them with an opportunity many of them do not currently have to access a lump sum.
Can the Minister say what this all means for the public finances? I presume a lump sum paid on day one in a sense scores against public finances in that year while a deferred amount does not score until it is received, and is then received at a higher rate going forward. I do not know whether this is part of the Government’s considerations, but I hope not because I think it would be modest at best.
There are also differences in relation to pension credit. A modest capital sum is ignored for pension credit but, of course, a supplement and income increase arising from deferral would not be. That would be a further denial and scraping away of benefits from these provisions. I very much support the point that no great rationale has been advanced why the lump sum and other deferments should be denied and I hope we can agree across the Room that it should be reinstated in the Bill.
Baroness Dean of Thornton-le-Fylde (Lab)
My Lords, I, too, will not detain the Committee very long. When we go through a Bill, there is always something that comes up quite unexpectedly. My noble friend Lady Hollis has alighted on one here, which I do not think is going to go away. If we are not able to progress it at this level, perhaps we shall need to return to it later in the debate on the Bill.
I do not know where the Government have the mandate for this, but it is there now. They are understandably trying to look at pensions as a whole, and saving for retirement, hopefully through a personal pension scheme and through the state scheme. We would support that. However, it is taking a very different principle to the one that applies in private schemes. It will only apply, of course, where the individual says, “I am going to defer my pension”. It is not a case of saying, “I want to take some of my pension in a lump sum”. It is also taking choice away from people. You cannot say, on the one hand, that we want people to have choice, to save and to be in charge of their own income when they retire, and do everything you can to encourage them, but then, in this particular aspect, say, “No, we the state know better than you do”. Even if the Minister cannot do so today, I hope he will be able to reflect on this and give due consideration to making some movement in the Bill on it.
Lord Browne of Ladyton
My Lords, in speaking to these amendments, I seek to achieve a better and more precise understanding of the nature of the Government’s objections to the taking of lump sums. My noble friend Lady Hollis has done your Lordships’ Committee two favours. One is in raising this issue, which has captured the mood of the Committee quite clearly. The second is in rehearsing accurately the explanation by Steve Webb, the Pensions Minister, in the House of Commons, as to why there is opposition to the taking of lump sums. In my recollection, the arguments were as thin as my noble friend made clear.
My noble friends, and the right reverend Prelate the Bishop of Chester, have explained very clearly the case for allowing lump sums. Undoubtedly there is a savings crisis. Too many people do not have the safety net of a rainy day fund or, in some cases, of any fund at all. British households do not have enough money in savings, and the amount they do have has been falling in recent years. This is, perhaps, unsurprising given the cost of living crisis that we have been experiencing. The data on this are very persuasive. ONS data show that 6% of pensioners—over half a million people—live in households where the total financial wealth is less than £10,000. Half—more than 4.8 million—live in a household where it is less than £20,000. However, that is not the whole story. Given the distribution within those bands, there must be a significant number of retirees with little or no cash available in savings. Interestingly, the ninth annual Scottish Widows pensions report stated that, of those already retired, one-third are still paying off debts, including mortgages. The average amount owed is in excess of £5,500—£5,682 to be precise. It is not as if those people are in a position to add to their savings in retirement. In a survey in June 2013, the insurance giants LV reported that nearly 2 million pensioners have an average £8 per week of disposable income. By way of comparison, that is less than the average eight year-old has as pocket money, according to another survey.
The case made by my noble friends and the right reverend Prelate about why people might need access to a lump sum deserves an answer. The lump-sum payment option was introduced in April 2005. I think my noble friend Lady Hollis was the Minister who oversaw its introduction. The reasoning then was the same as the case she has made today. Even if pensioners go into retirement with a just adequate income, they may well not have enough savings to deal with the rainy day problems we all face. Never mind the challenge of the eventual cost of their own burial, what happens if the boiler fails in a bitterly cold winter? Or the car that they require in a rural environment breaks down and they are otherwise trapped in their home? We can all think of circumstances in which a bit of capital would be of help.
We know who chooses to defer their pensions. Drawing on the DWP’s own statistics, in March 2013, 1.2 million pensioners, or 9%, were receiving an income arising from a deferred pension, of whom 75% were women and 77% were living in the UK. We know that few of those who choose to defer take the lump-sum option; 63,000 payments were made in 2011-12, and the DWP forecasts that that will fall to 35,000 by 2017-18. In 2011-12, the average lump sum was £11,500, with the UK average being £13,700 and the overseas average £4,100. These are not significant sums, and the calculation could be done as to what this is likely to cost based on these statistics.
However, there are things that we do not know. First, we do not know why people choose to defer. Of those deferring, 75% are women, but the question is whether they are waiting until their partner retires to draw their pensions or there is some other motivation we do not know about. Are those who defer still working, deferring their retirement perhaps because they have saved too little and it is too early for them to retire? What do we know about the wealth of those who defer? Very little. The statistics already deployed show that 25% are overseas residents. Do we know why they make the choices that they do? We do not.
These Benches would like to understand the costs better. The DWP tells us that spending on lump sums currently costs about £800 million per annum and is due to fall to £700 million in real terms, although I am not sure by when. Obviously, these people have not been drawing their pensions for the period during which they deferred, so I presume that that is not a net cost—but maybe my presumption is wrong and it is. If it is not, what is the cost of the lump sum minus the pension forgone? What is the net cost of these deferrals in real terms? If there is a net cost, what rate would have to be offered to make the lump sum a cost-neutral choice?
Finally, I would like to understand why the Government want to end this. Is it the cost? Is it the administration? Is it the desire for simplicity? Are the Government sure that they know enough about the impact of this policy and the relatively small numbers who choose to defer? If not, has the Minister or his department considered further research on who is deferring? If it turns out primarily to be people with no or too little savings, what other option would he suggest for those who are retired and have no nest egg now, on what are likely to be low incomes with no means or opportunity to build up such a nest egg or capital?
Lord Freud
My Lords, as several noble Lords have said, the Bill does not provide an option for those deferring a single-tier pension to receive a lump-sum payment. Instead, the deferral arrangements will be simplified. Those who defer will receive a weekly increase in their state pension, enabling them to improve their pension income for retirement. Looking at some of the relevant figures, I can confirm the figure given by the noble Lord, Lord Browne, of 1.2 million people receiving an increment in March 2013, which was around 9% of the state pension case load. We had 63,000 lump sums taken in the latest year for which we have figures, 2011-12. In response to the query of the noble Baroness, Lady Hollis, two-thirds of those are women and one-third are men. However, under the new system, we expect that that is likely to change, and I will go into that in a little while. A primary objective for the reforms is to simplify the state pension and to provide a simpler foundation for private saving.
At this point, I was going to give the cost figures, which the noble Lord, Lord McKenzie, asked about. The savings from removing the lump sum in isolation from the change in the increment rate are around 85% of the overall deferral savings for 2030, which are outlined in the impact assessment. That figure will be between £250 million and £300 million in 2030.
Baroness Hollis of Heigham
Why did the Minister in another place, Steve Webb, argue that one of the reasons for doing this was because the deferred pension, even at the proposed rate of 5.4%, was financially much more attractive to people and a much better buy, and therefore he was helping to protect would-be savers from themselves? If it is a better buy for the individuals receiving it, why does it therefore cost the Government money to keep the less expensive option going?
Lord Freud
It is a timing issue, of course, because you take the money in earlier. That is where the costs to the Government come from.
Baroness Hollis of Heigham
If the Government were making that monetary saving, they would have to show us that that would be a one-off saving and not a continuous saving. If those people then took instead the increased income, the cost of that would soar by comparison because the £62,000 or £63,000 would presumably move across. In order to save some upfront costs of the lump sum, the Minister is committing himself to an increased continued income on the deferred income option.
Lord Freud
I do not have the crossover point figure. I could look into that. Clearly, it would be different depending on the system. I can offer to discuss this with some graphics, which I suspect are essential, in a briefing session before Report.
Lord McKenzie of Luton
Will the Minister help me on another point about simplicity? We will come on to discuss 3A voluntary contributions in a moment. As I understand it, additional pension achieved via that route could be deferred and a lump sum could be taken. Is that right?
Lord Freud
Yes. The reason is that that is the equivalent of the private pension provision, which is a purchase. We are drawing a distinction here between public provision and private provision. With the pulling into a single tier, that is where the line is drawn between the two. As private pensions offer lump sums, that is where we would expect people to be taking them.
Baroness Hollis of Heigham
That cannot be reasonable, can it? After all, the new state pension combines the element, including the state second pension, which was bought up by people in lieu of and as an alternative to or an equivalent of an occupational pension and contracting out into it.
Lord Freud
Deferrals of lumps sums are both complex to understand and cumbersome to administer.
Lord Freud
That complexity is illustrated in the DWP information booklet which provides guidance on deferrals. It runs to 60 pages and then recommends after all that that people get independent advice before making their decision. Even so, given the factors and variables, there is no guarantee that such advice would be forthcoming.
Reverting back to the class 3A distinction, that is clearly being directed at existing pensioners who currently get existing increments as a lump sum, so they are within the old system. It is being directed at people who are in the existing system rather than those in the single-tier system.
Baroness Hollis of Heigham
But that means, does it not, that the Minister is giving the option of a deferred lump sum within the state system, even though, a couple of minutes ago, he said that was exactly what he was not going to do because he wished to maintain the boundaries between state and private provision?
Lord Freud
Yes, that is the distinction between the existing system, where there is a lump sum, and the post-2016 single-tier system, where it is proposed that there should not be a lump sum. That is where the consistency lies.
The simplified arrangements under Clause 17 will mean that people will be able to work out both the level of increase they will build up as a result of deferring their state pension and the potential effect this will have on their future taxable income. People will be able to make their own arrangements to save their single-tier pension if they wish and build up savings in that way. This will give them a choice over what and when to save, in a form that meets their needs. We do not think that the state should continue to provide the lump-sum option as an alternative to savings in the long term.
However, there is a way of building up some capital, if people take 12 months of arrears of pension straightaway if they claim after state pension age. That is worth around £7,500 for someone with a full single-tier pension in 2013-14 terms. Our intention is to bring forward regulations for the single tier that will replicate the existing arrangements.
Baroness Hollis of Heigham
Could the Minister help us further? Is he saying that at the end of the first year post the conventional state retirement age you can choose to take your deferred pension as a lump sum for one year only but not for a second year? Is that what the Minister is now telling us?
Baroness Hollis of Heigham
Well, why? Why is it okay to do it for one year and not for two?
Lord Freud
That is the standard position whereby, if you are in arrears for a year, you can take the provision at the end of that year and that is treated as arrears of pension rather than a lump sum. Some noble Lords are very concerned about the issue of the nest egg. If we drop the distinction between arrears and lump sum, there is a nest egg opportunity in that £7,500, which may go a long way to satisfy the concerns that have been expressed with some vigour this afternoon.
The Lord Bishop of Chester
My Lords, I invite the Minister to comment on the more general point as we are getting into specifics, which I recognise are complicated. Do the Government agree that it would basically be a good thing if deferral was encouraged? Is it the Government’s position that in the great scheme of things and income in old age it would be a good thing if the principle of people being encouraged to defer was affirmed?
Lord Freud
I am not sure that parliamentary privilege covers me for giving financial advice. Perhaps the noble Baroness, Lady Drake, could advise me on what I should say on that matter.
Baroness Drake (Lab)
I think that the Minister is right not to give advice as to whether or not it suits an individual to defer. It depends on their personal circumstances.
Lord Freud
I must thank the noble Baroness for keeping me out of jail. Many a seminar that I have been to would have told me that. It is a matter for people to judge.
The Lord Bishop of Chester
If I may have another little bite of the cherry, I do not wish the Minister or the Government to give any specific advice to any specific person. I am inviting a general comment upon the desirability of people looking to the longer term, given the parameters around old age and pensions in our society. If in some general terms that is a desirable object, without making any comment about specific cases, surely the more flexibility we build in, the better.
Lord Freud
I actually have very strong views on this matter but I think they are personal. I am going to utterly resist putting them on the record in this Committee but I would enjoy having tea with the right reverend Prelate and giving vent to my personal views at full force.
The Lord Bishop of Chester
My Lords, very few people on the Committee will know that the last time that I had tea with the Minister was in his rooms in Merton College when we were both first years in 1969, so it would be good to have another cup. Given the nature of this discussion, I wonder whether the Minister could at least agree to take the issue away and think about it. There are issues here that may need a bit of teasing out other than in the circumstances of this Committee.
Lord Freud
I have to accept that the right reverend Prelate is on a very important and interesting point, on which one could write many a financial essay. I will go back and think about whether there is any generalised approach that we as a Government should take on this. I will resist any indulgence in doing so off the top of my head, though, because this is a huge and difficult issue.
Lord Browne of Ladyton (Lab)
My Lords, I am pleased and not surprised that a cup of tea with the Minister can last one a very long time. May I tempt him to look at the challenge that he has been posed from a slightly different perspective? It strikes me that a number of things may be possible. First, I tempt him to express a view on whether he thinks that it would be a good thing to encourage people in their retirement to have some capital, rather than encouraging individual people to defer a pension or whatever. As a point of principle, would it not be better for us if our retired population had access to some capital that would cover these rainy-day situations?
Secondly, is it possible to take advantage of the Bill, in the way in which the Minister has suggested pensioners can do, by deferring taking pensions for a year and then taking that as a lump sum or by some other simple method to create an opportunity for people to take a deferred pension lump sum to provide that capital? I am struck that it should not necessarily be the case that the only way of doing this is to import a very complicated existing procedure as a method of taking a lump sum, and then finding that that confounded the argument for simplicity. Is it not worth spending some time to see whether there is a simpler method of doing this, such as perhaps an extension of what the Minister has tempted us with today as a possibility?
Lord Freud
My Lords, if it is a nest egg that noble Lords are worrying about, then the arrears approach is not a huge distance away from what they might find quite attractive. The best thing that I can do is try to spell that out in a bit more detail in a rather considered letter to Members of the Committee, to see if it addresses their concerns. The counterpoint is that a lot of people take their nest egg and blow it on a car. Concern about the no-savings culture is the other side of the lump sum coin and those people will face later old age, if they live a long time, poorer than they otherwise would have been because it is a complicated decision. I will think a little bit harder about the arrears issue we have discussed because it might give noble Lords what they are after, possibly without needing to change very much, but I need to spell out how that might work. My team is looking ecstatic at that offer and will fully support any tea-time activities I might indulge in later.
Baroness Hollis of Heigham
My Lords, I am extremely grateful to all Members of the Committee. I am sorry we did not hear from the Lib Dem Benches as we would then have had a full hand. I am grateful particularly to my noble friend Lady Dean, to my noble friend Lord Hutton for raising the debate in the way he did and to the right reverend Prelate for his persistent questioning. Both my noble friends continue to interrogate the Minister, which is really valuable. The right reverend Prelate said, “If it is not broken, why fix it?”. I have seen no evidence at all, apart from the Minister saying this is not such a good buy for individuals as taking it as income, that the system is broken. The Government are relying on having the upfront savings rather than the longer-term costs. That is not, in my view, a prudent way of handling finance.
My noble friend Lord Hutton, along with the right reverend Prelate, stressed that it is no use saying that we have to go for simplicity and thereby remove choice, if choice would be part of the attraction for people to save and defer taking their state pension. We do not have hard evidence on this, but we know from everything that is coming through from auto-enrolment and the pilots—including under my noble friend—that the nudge theory of encouraging people to stay opted-in and having them opt out rather than choosing to opt in was transformative. I remember when we got the figures from the Newcastle brewery, where something like 43% of its staff opted in to a pension. When it went to opting out, that went up to over 90%, and the only people opting out were students working in the summer vac. It transformed the pension regime in that brewery. It relied on nudge and inertia and ensuring that people could save in the way that was least problematic for them. Unless the Minister can show noble Lords—certainly me—that denying people the right to turn a deferred state pension into a lump sum will not only not have a negative effect on their savings but actually increase their savings, he is storing up problems for himself in the future.
Research last month by the LSE found that 483,000 people—nearly half a million, almost all of them pensioners—had either lost their home care support or were no longer eligible to claim it, as compared with 2008. Now, that home care will need to be funded by savings; it will not come out of income. People are losing the capacity to pay for home care week in, week out, as the cuts bite. My noble friend Lord McKenzie—
Lord Freud
To go back to the point of how people use their lump sum, it is towards the latter end of the pension drawdown period that you are going to need to pay for care. It is exactly at that time that any lump sum taken earlier will have been used up on other expenditure. That is why this is such a difficult area. A lump sum taken at 70 is probably not going to be around when social care is needed in the late 70s, for instance.
Baroness Hollis of Heigham
How does the Minister know? I represented one of the poorest wards in the city of Norwich and the pensioners I know were desperate to have a lump sum. Very often, they cast it in terms of paying for funerals, because that was a working-class, respectable-culture consideration. They desperately wanted savings and they did not have them. They managed weekly. Sometimes their daughters might help out with the odd bit of groceries when they did their shopping but the notion is that you can read across from people in the private sector having a car or holiday.
The same arguments apply to equity release. We know the research on equity release. We know that if people take it very early they may spend it on white-good replacement or on trying to keep up a standard of living but we also know that, as they grow older, they tend to take it for personal care. If, as the Minister suggests, he believes that it is going to be blown, why, for example, are his Government continuing to keep a tax-free lump sum? By his own argument, we should scrap that, on the grounds that the Government know better than the taxpayer how to spend the taxpayer’s money. We should instead roll it into the basic pension that people have from their occupational fund because we know that only between 11% and 13% of pensioners use their tax-free lump sum to increase their pension; instead they use it to give themselves savings. We know that from the private sector. We have no reason to think that it would not apply here. I am amazed that the Minister seems to think that there are different cultures between those who have private, occupational pensions and those who do not. As a result, we are making it harder and harder for the poorest to have what each and every one of us wants—a modest cushion against, as my noble friend Lord Browne said, the rainy day. The Minister, the Government or the department seem to be pulling that possibility away from people for no good reason.
My noble friend Lord McKenzie asked about health impairment. The Minister did not answer that question at all. Under the new scheme, a spouse would not be able to inherit a deferred income that was accumulated by their deceased spouse but they could inherit the lump sum. That, too, is unfair. The couple have made a decision together that that is what they will do. They can take it in one form, but not in the other. Why? That is just the point at which the spouse may wish to have the cushion of a lump sum and is not able to inherit it. It is unfair.
The Minister may also choose to look at my other consideration, which has not been discussed today. Perhaps I should have raised it in my opening speech. Once you hit retirement age, if you carry on working, you are not entitled to continue to build up national insurance contributions. I think you should be able to do so, with employer input, although maybe that is a debate for another day.
Drawing on the report from Scottish Widows, my noble friend Lord Browne emphasised how many people retire with debt, including mortgages. He is absolutely right. Taking a lump sum that actually pays off that debt, which it would take years to accumulate through a modestly increased pension, may be the most prudent thing that those people can do, because that debt may require a much higher rate of payments to keep it covered than any other income that they could get. It could be through a loan company, for example, where they were paying APRs of 300%, 500% or 1,000%. A lump sum would pay that off and therefore increase the robustness of the rest of their income. That is what you can do with capital—you cannot do it with income. Again, I hope that the Minister will reflect on this. I know that he is concerned about people’s indebtedness as they go into retirement, and by freeing them from a burden of debt he would actually improve their financial ability to cope once in retirement.
The Minister argued about the cost of the lump sum. He seemed to suggest that taking away the lump sum would produce 85% of the £800 million savings. I am completely baffled by that figure. What he is doing is removing the up-front cost of paying a lump sum while paying out over a period of time at a higher cost to the Government. There is therefore a break-even point, five or maybe seven years down the line, at which the Government incur additional cost—not reduced cost—by getting rid of the lump sum. Obviously it is less financially attractive; a return of 2.5% or 3% is less attractive than the return of 5.4% that he is proposing. In that case, how can the Government say simultaneously that they are going to save money by getting rid of the lump sum and that if a person takes it as deferred income instead they will be better off? He is going to have to do some nimble footwork—I am sure he will be able to do so—to explain to the noble Lords how he gets to those savings.
The Minister helpfully said that people could already take a deferred pension at the end of one year as arrears of £7,500. If he were able to say that two years could be taken as arrears, I would be satisfied because that would give people the cushion that they would need, or some such flexibility. I take heart from the fact that he has responded, as I was confident that he would, to the range of feeling around the Room that this is simply the wrong way to go. All parties have genuinely attended to pensioners’ incomes, and the present Government—I include both members of the coalition—as well as the previous one are entitled to claim high credit for that. It is a very good achievement for us to have taken pensioners out of income poverty. However, we are sending them into retirement with increased capital poverty. If we wish, we have the option of allowing them to do something about that. To say that we are removing the choice to address capital poverty in the name of simplicity is, frankly, Orwellian, and normally I would expect better from the Minister than that.
Under the circumstances, I will withdraw the amendment and hope that the Minister will be able to find a way through, perhaps around the hook of an assumption that this is actually paid as arrears. I thank again all noble Lords who have taken part in the debate and beg leave to withdraw the amendment.
Lord German
Lord German (LD)
My Lords, the amendment is an attempt to find an alternative approach to the solution of the anomaly of what is known in common parlance as the frozen pensions issue. At Second Reading I asked my noble friend if I could see the correspondence between other Governments where there were UK pensioners receiving only the frozen pension, in order to try to identify whether the idea of moving forward on the basis of reciprocal arrangements was actually going to be productive and would produce some way forward. It is clearly an anomaly; there are currently approximately 600,000 UK pensioners living outside the UK who get their pensions uprated in the same way as if they were living in the UK. At the same time, we do not uprate the pensions of about 550,000 UK pensioners, most of whom live in Commonwealth countries. All, of course, have made the appropriate financial contribution for their pension and many of them have relocated to be near family members. Many of them are former members of the British Armed Forces.
Baroness Hollis of Heigham
My Lords, I had not expected to come in on this, but I am intrigued by the concept of mutual advantage to both countries. I have never been in a position to support—I use those words appropriately, I hope—the proposition that we have reciprocal relationships. That is primarily because the main beneficiaries are the UK citizens who have gone to the major Anglo-Saxon countries: Canada, above all Australia, to a lesser extent New Zealand, and South Africa. Obviously, there is free movement within the European Union. I am sure that the Minister will correct me if my stats are wrong, but when I last looked at this the reason why it was so costly—the figure used to be £400 million but I understand that it has gone up to over £600 million—was that four times or more British citizens go to those countries than come back to the UK. Therefore, I cannot see how it can be mutually advantageous if the UK is committed to spending four times as much pro rata as, say, the Australian Government—if those are the appropriate figures—in reverse. If it is the case, as I believe it to be, that so many more people are emigrating to those countries than come back to the UK to retire, essentially it is a one-way bid. That is why so many of us are concerned about this proposition. In Australia, particularly—I have less knowledge of New Zealand—there is income-related support which amplifies any state pension that someone may have brought with them from the UK. It is obviously means-tested but it ensures that those UK citizens have at least a minimally adequate income, so we are not talking about dire poverty, particularly as many of these people have retired and gone to join their families.
It is also the case—this was argued all the way up to the European courts, which found in favour of the British Government—that increments to the British pension in the UK were granted in the light of wider considerations of social policy, and to deal specifically with increased costs of living reflected in increased earnings within the UK. If you were to track the relevant figures—for example, in South Africa—you may well find that because of changes in currency rates, employment rates or wages, the British pension may well be worth more in the home country than in the country to which the retired person has moved as it was designed to deal with the UK situation. For many years when the state pension was first introduced there were no automatic increases at all. They were introduced as a regular item under the Wilson Government. Then, fairly quickly, Mrs Thatcher, after four years, separated the provision from earnings and attached it to prices, but only since then have we assumed regular increments, which is why the problem possibly did not arise in those early reciprocal arrangements. The pension was designed to deal with the British cost of living and not with costs abroad.
As long as people emigrating or retiring to those countries where there is no reciprocal arrangement have full information about the financial implications of their choice—that is key—then they make that decision with their eyes open to what it means. Given that the Government are seeking to impose cuts on British pensions here for widows, and cuts in universal credit, income for disabled people and so on, I could not support seeing £600 million go to people who have made an informed decision to leave this country. If we were to have reciprocal arrangements, it would result in cuts to other very beleaguered services.
Lord Browne of Ladyton
My Lords, I wish to speak to Amendment 33A in the name of the noble Lord, Lord German, and to support Amendment 33B, which stands in my name and that of my noble friend Lady Sherlock. I am grateful to the noble Lord, Lord German, for his explanation of the motivation behind his amendment. We had the benefit of his contribution to the Second Reading debate, to which I listened carefully, in which he explained the provisions of this amendment and posed questions to the Minister on them.
However, when I looked at the mechanism he had chosen, I was slightly concerned that he was seeking to empower the Government to act in breach of the EU and international law in the form of bilateral treaties, and that he felt so strongly on the issue that anything which budged the status quo was worth arguing for. However, I understand his motivation and am intrigued by the questions that he asked, and those which my noble friend Lady Hollis asked, about how one can—specifically in regard to Canada—come to some mutually beneficial agreement in these circumstances. He is right to be intrigued by that. These are the words of the Canadian Minister and, if that is the offer that they are making, it would be interesting to know the extent to which the Government know the detail of that offer and whether an argument can be made for it.
However, I move on from that, as I wait in anticipation of the Minister’s response to these interesting questions, to Amendment 33B. Before I come to the argument for it I should say, as was explained by my honourable friend Gregg McClymont in the debate on this issue in the Commons, that we are not hostile to the government position of continuing not to uprate pensions in countries where they are not currently uprated. It would be extremely difficult to explain why we had not done this in years of government if we were now to take this position. We have the benefit of the Government’s estimate of the cost of doing so.
Lord Browne of Ladyton
My Lords, we have the benefit of the Government’s estimate of the cost of uprating those pensions that are not presently uprated, which is in the region of £700 million, plus of course the possibility of significant backdating. Once payment began then the arguments for backdating would subsequently follow; I do not think that that would be unexpected. We on these Benches agree that at present this is not a priority for our country, and that the cost is important.
That leads me directly to the justification and the reason for Amendment 33B. We promote this review for many of the same reasons that the noble Lord, Lord German, promotes his questions on engagement—to help us to reach a definitive and informed judgment on the costs and benefits of uprating. We are not calling on the Government to uprate. If the analysis that we call for, which we understand is capable of being done on a cross-governmental basis, has been done in whole or in part, then we would welcome the information that is available because it would help our understanding of the necessary information and the calculation of the costs and benefits. By this method we seek to inform the debate, and that is the consistent approach of our amendments calling for a review in different parts of the Bill.
Importantly, this issue is not going to go away; I think that we all appreciate that. In fact, as my honourable friend Sheila Gilmore made clear in the House of Commons, it is impossible to be a Member of that House without being assailed by the impressive campaign consistently being run by those who feel aggrieved because they have not benefited from uprating over a lengthy period. Indeed, many noble Lords have also been assailed by these arguments in correspondence. I remember, at the time when I was in the House of Commons, receiving correspondence regularly and indeed, on occasions, people at my constituency advice surgeries who were home-visiting relatives coming to argue and make the points for uprating in a very forceful fashion.
Those who have campaigned for uprating for these frozen pensions have been encouraged in that campaign at various times by senior politicians. Mischievously, I cannot resist the temptation to remind noble Lords that in 2004, when the Pensions Bill was passing through Parliament, the now Pensions Minister Stephen Webb told campaigners:
“I agree that pensioners who earned their pensions by paying national insurance contributions have a strong case for the value of that pension being maintained in line with inflation, and I am actively seeking such a change. As you may be aware, there is currently a Pension Bill passing through Parliament. I will take this opportunity to table an amendment, seeking to uprate the ‘frozen pensions’ of expatriates”.
My researches have not gone to the extent of trying to find out whether or not he did in fact promote such an amendment, but he certainly indicated his intention to do so. He has clearly changed his mind, and I suspect that he may not be the last Back-Bencher to find his words in the surgery haunting him once he is in ministerial office. It was once famously said by someone that when the facts changed, he changed his mind. Here the facts have not changed—they have been consistently the same—but the mind has changed.
Lord Freud
My Lords, as the noble Baroness, Lady Hollis, pointed out, the policy on the uprating of state pensions for pensioners abroad is a long-standing one. It has been regularly debated over the years. Clause 20 provides an enabling power for regulations to restrict the availability of annual uprates, as now, in the new state pension where the recipient is living overseas. The Government’s intention is that there will be no difference in treatment between the new and old state pensions as to overseas uprating, either generally or with regard to the UK’s various bilateral agreements. I can reassure noble Lords that all our existing legal obligations with regard to uprating of pensions under bilateral agreements—along with the European co-ordination regulations—will continue to be honoured. To treat the new single-tier pension differently from the current pension would clearly go against the spirit of these agreements. However, I should make it clear that there are no current plans to enter into any new social security bilateral agreements.
There are a number of factors to be considered behind that decision. These are the number of people moving between countries, the benefits available under the other country’s scheme, the compatibility of systems and how far and to what extent reciprocity can be achieved. Future costs are also considered in both the implementation and future operation of any agreement. A bilateral agreement with Australia existed in 2001 when Australia ended it because of a dispute around the current UK policy on uprating UK state pensions paid overseas. There are no plans to enter into a new bilateral agreement with Australia, as any agreement would not achieve reciprocity between it and the United Kingdom.
I shall pick up the Canadian point. Bilateral agreements cover social security matters only, rather than matters beyond this scope which might be described as mutually beneficial. DWP officials are not aware of a discussion or correspondence on this wider scope of mutually beneficial arrangements. I cannot confirm the figures provided by the noble Baroness, Lady Hollis, on whether four times more go to Australia than come back, but she is normally well informed.
I need to make information available on the numbers. We are in the process of updating and quality assuring our estimate of the cost of unfreezing pensions for 2014-15. The department has moved from modelling change to the case load at a population level to a more complex methodology, which takes account of individual characteristics and provides a more accurate estimate when applied to historic data. As a consequence, we now estimate that the cost of extending the uprating of pensions currently paid overseas is slightly reduced but it will still represent a substantial cost to UK taxpayers of more than £0.5 billion per annum. My noble friend is right in saying that this is somewhat below the previous estimate, based on general populations, of £700 million. The department has recently released a statistical publication that clarifies this matter, to which I can refer noble Lords if they need more information.
On the point of the noble Baroness, Lady Hollis, on whether people have full information, the department issues the following leaflets which include information on the impact of living outside the UK and the annual uprating increase for UK state pensions: leaflet BR 23, leaflet DWP040 and leaflet DWP026. The 040 leaflet is sent out with the state pension statement, for instance. Information is available on the government website and Social Security Abroad, leaflet NI138, issued by HMRC, also includes similar advice.
The amendment in the name of the noble Lord, Lord Browne, on reviewing overseas residents’ provision assumes that we would be able to identify and assess the behavioural link between uprating policy and migration patterns. The question about a review is whether it would raise expectations. The noble Lord posed the question about whether we would uprate if we had the money. The noble Baroness, Lady Hollis, was spot on when she raised the issue about making very difficult decisions on payments. Finding £500 million is not an easy business. Clearly, there will always be different priorities for £500 million per annum, as indeed the previous Government decided at a time when there appeared to be more money floating around than there appears to be today. I will not step on anyone’s grave in the collegiate atmosphere of this Committee.
The final question raised by the noble Lord, Lord Browne, was on the numbers of pension-age people moving abroad. That comes from the document from the ONS called Emigration from the UK, November 2012, which states:
“Only two per cent (or 6,000) of those emigrating were over the state pension age of 60 for women and 65 years for men”.
The report also interestingly indicates that 10% were aged between 45 and 59/64 years.
We are aware of research that suggests that a theoretical and economic case can be made to support the uprating of state pensions for all recipients abroad. However, it is notable that this analysis has not been able to provide evidence of a proven behavioural link between uprating and pensioner migration. In fact, we think it unlikely that any review would demonstrate that. In any case, the decision to emigrate abroad remains a personal choice for individuals. In the absence of that kind of evidence, we know that the cost of extending the uprating of pensions currently paid overseas remains significant at more than £0.5 billion per annum. The Government, like their predecessors over the past 60 years, believe that they must put the interests of pensioners living in the UK over the interests of those living overseas by restricting the availability of uprates to those living here or in a country where we have a legal or treaty obligation to provide them. I therefore ask the noble Lord to withdraw his amendment.
Lord German
My Lords, I thank noble Lords who have taken part in this debate. It is an interesting one because in the words, I think, of the noble Lord, Lord Browne, it is one that will not go away and will continue to raise its head. I am grateful to the noble Lord, Lord Browne, for reminding noble Lords that at Second Reading I did preface my remarks quite clearly by saying that I was not seeking to pay huge amounts of money to deal with this matter in the manner that many people have demanded or asked. It is a question of trying to find an alternative approach, which is what I was seeking to do with this amendment and in my earlier statements at Second Reading.
As many noble Lords have mentioned, people are putting pressure on noble Lords and Members of the other House to come up with some solutions. The challenge is to think of a way in which an approach might be developed, and I put one before noble Lords in this amendment. I hope it was quite clear that the amendment was not seeking any approach beyond a quid pro quo with another Government so that the message would be clear to any other Government seeking to approach the United Kingdom on this issue. Quite a number have approached the United Kingdom over the years, including some quite surprising places such as Mongolia. If we are going to go down this route, we need to ensure that there is a clear message that there will be no additional costs to United Kingdom plc.
I note what my noble friend said about reciprocity only being looked at from a social security angle. However, that raises another point, on which I echo some thoughts back to the noble Baroness, Lady Hollis. If income comes to UK plc, providing the UK Government can redistribute it accordingly, there may well be opportunities in any agreement beyond just simple social security. I think that has been consistently looked at as the approach for all these reciprocal arrangements, right back to the very beginning.
Baroness Hollis of Heigham
I am intrigued by the notion of it being mutually advantageous. The noble Lord raised this—rightly and in an interesting way—at Second Reading and again today and has been understandably careful about not seeking to load a substantial increase on the pensions bill for people who no longer live in this country. When he talks about mutual advantage, he must have thought about what that might look like. What suggestions has he got? What propositions have been made? I cannot understand why it is about anything other than money, to the advantage of people who have left the country. Can he give us some indication of how his thinking might go in that way because I am sure it would be of considerable interest to the Committee?
Lord German
Perhaps I could put inverted commas around the comments of the noble Baroness, Lady Hollis, and refer them, and the precise nature of this debate, to the Minister in Canada. I do not know what was in their mind. My noble friend the Minister here cannot know either, because of course they closed the door to any discussion with the officials from the Canadian Government. However, we need a discussion about this issue. It may well be that it is not with DWP Ministers; it may need to be at some other level.
I do not know the answer to the noble Baroness’s question. All I know is that the Canadian Government believe that they have a mutually beneficial offer to make. That seems to me to be worthy of further discussion; no more than that. I make it clear that I am very much in favour of managing expectations here. The amendment does not call for expenditure at the levels which we have seen before us, and I do not wish to see a reduction in social security expenditure for people currently living in this country as a result. However, when an offer of that sort is made, it is worthy of examination. If there were to be the sorts of things that would make it mutually beneficial, and the Canadian Government believe it to be mutually beneficial to adopt a procedure for Canadian UK pensioners, then it is worth at least finding out what is on the table. If it were to be a successful offer, that of course quite clearly sends the message to other Governments that they can come up with a deal that actually meets the expectations of this Government and the British people.
Baroness Hollis of Heigham
I am sorry to interrupt the noble Lord again; he is being very tolerant, for which I am grateful. Again, I am relying on my memory, which is probably faulty, but something in the order of 85% of overseas pensioners outside the EU are in the four major Anglo-Saxon countries. However, the countries in which most of us would recognise that there are anomalies are not so much the big four Anglo-Saxon countries, which have decent social security systems for poverty relief as a safety net and so on. This is about the mixed history of some Caribbean islands, which came in under the net, before 1979, for protection of overseas pensioners, while others did not. Once we started inflating pensions by the cost of living—I am not sure that this was accidental—bilateral relations disappeared at that point because they started to reflect the British cost of living. Those countries are so poor that they are looking for a form of aid in the form of pensions. How would the noble Lord justify coming to a mutually advantageous deal with a relatively wealthy country like Canada while, because an appropriately mutually advantageous offer could not be made with Caribbean islands, that opportunity would be refused to some of the poorer countries?
Lord German
We have gone a very long way from what might be the first step in this direction. We have not yet been able to answer that first question: what do any Government have ready to offer?
Incidentally, the Government’s figures are quite clear. They say that 85% of all those with frozen pensions live in Canada, New Zealand and Australia. Those are huge numbers. One of the interesting things when you look at these issues, as noble Lords will know, is that other countries produce information, which comes to you in emails. The noble Baroness, Lady Hollis, asked earlier about Australian pensions. I understand that they are means-tested, but only by 50% of total income over the threshold, so if the UK pension was increased by £20 then the Australian pension would be reduced by the equivalent of £10. As we know, it is not always as clear as we suggest.
My intention in tabling the amendment was simply to be able to examine the issue in a different way, and only then to consider it further. However, it seems to me that we need an answer. I have not yet heard the answer, although of course I could not expect to hear an answer from my noble friend since the discussion with officials was not allowed to take place. However, I encourage that discussion to take place, even if it is over a cup of tea with another group of officials at some stage. In a spirit of hope that this will happen, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“( ) Before the provisions contained in paragraphs 83 to 86 of Schedule 12 come into effect, the Secretary of State shall set out comprehensive arrangements for the passporting to benefits for those no longer eligible for the savings credit.”
Lord McKenzie of Luton
My Lords, this is a probing amendment to give us a chance to have a canter round the passporting issues. The impact assessment has a section on passported benefits. We had a brief excursion into these matters when we last met and have since had a helpful letter from the Minister. The impact assessment sets it out clearly:
“If pensioners are no longer eligible for Pension Credit as a result of the single-tier reforms then they could lose eligibility to some of these ‘passported benefits’”.
That is straightforward. It goes on to state:
“Receipt of Guarantee Credit passports pensioners to the full amount of Housing Benefit and Council Tax Benefit … There is little reduction in Guarantee Credit eligibility resulting from the single tier”.
Therefore, this has a limited impact on the proportion of pensioners who are eligible to be passported. Yet in his letter—and we understand the arithmetic—the Minister tells us that in 2020 there will be a fall of around 15% to 20% of the total eligible for guarantee credit in these cohorts.
Going back to the impact assessment, we are reminded that there are other benefits that are linked to receipt of guarantee credit such as health benefits and Social Fund payments, so that pensioners no longer entitled to guarantee credit as a result of the single-tier measures may also lose eligibility to these other benefits. But again we are told that,
“there is only a small impact of single tier on entitlement to Guarantee Credit”.
The cynic might conclude that, when dealing with passported benefits, the Government are seeking to play down the reduction in guarantee credit recipients but are otherwise seeking to reassure us that single tier will reduce means-testing. I accept the figures in the Minister’s letter that in the 2040s there will be some 50,000 fewer households on guarantee credit than would have been the case under the existing state pension arrangements. It is further accepted that fewer will be on guarantee credit because their income has risen. However, the working assumption is that STP will be set just marginally above the guarantee credit level, so for notionally swapping pension income for guarantee credit some 50,000 are notionally missing out on passporting. Is this correct? What are the estimated savings to government from this? There seems clearly to be no intent to compensate in any way. As our documentation makes clear, the main driver of reductions in pension credit is the demise of the savings credit. Chart 4.1 of the impact assessment shows—as a percentage of the population reaching state pension age after the introduction of single tier—the change in the composition of those eligible for pension credit, but I cannot readily locate the absolute numbers of households which lose savings credits and the notional average amounts. The chart is done in percentage terms. Can the Minister help us on this?
So far as the passporting of benefits is concerned, under current arrangements most depend on guarantee credit. However, receipt of the savings credit can unlock access to such benefits as cold weather payments, affordable warmth obligations of energy companies and, until abolition, working tax credit and child tax credit. How many pensioners will have no access to cold weather payments under STP who would have under the current arrangements? How much money are the Government saving by this, and are there plans to put in place any alternative arrangements? I beg to move.
Lord Browne of Ladyton
My Lords, in speaking to this amendment I shall speak also to Amendment 36A in the name of my noble friend Lady Sherlock and myself. Amendment 36A is a small probing amendment designed simply to draw out the Minister on the impact of the abolition of savings credit on mixed-age couples—that is, a couple where one member reaches the state pension age before 6 April 2016 and the other after. The relevant provision in the Bill is to be found in paragraph 85 of Schedule 12, and the mechanism is the insertion of Section 3ZA into the State Pension Credit Act 2002. Subsection (1) of this new section of that Act reads as follows:
“Regulations may provide that, in prescribed cases, a person who is a member of a mixed-age couple is not entitled to a savings credit”.
Subsection (2) reads:
“For example, the regulations could provide that a member of a mixed-age couple is not entitled to a savings credit unless … the person has been awarded a savings credit with effect from a day before 6 April 2016 and was entitled to a savings credit immediately before that date, and … the person remained entitled to state pension credit at all times since the beginning of 6 April 2016”.
For good reasons to do with the interpretation of statutory powers, it is unusual to legislate by example, and with this amendment I am seeking to draw out the Minister on why the Government have chosen to do so. The answer may be that there is some existing provision that has to be re-enacted. If that is the case, I would quite like the Minister to go further and explain why there is this particular example of circumstances where a mixed-age couple would not be entitled to savings credit. For the record, I think it would instruct and inform the public and the Committee if the Government explained whether it is their intention that these example circumstances will be the only circumstances in which a mixed-age couple are entitled to savings credit. How many couples do the Government expect will be affected by this very specific change?
On the broader issue of the loss of savings credit, will the Minister clarify precisely how many people are currently entitled to savings credit only? I cannot reconcile the figures from the different case load statistics that I have access to. Will he clarify how much the mean and median loss—the notional loss, if he prefers—will be? Will he engage with the question of whether or not this will create a cliff edge for those who just miss out on guarantee credit?
Turning to my noble friend’s amendment, what will happen to entitlement to those benefits that are passported off savings credit? According to the paper from his officials, these are assisted prison visits, affordable warmth, access to the Social Fund—presuming, of course, that there is anything left of it—working tax credit, child tax credit and the Sure Start maternity grant. Will these people still be entitled to those, based on the maximum income on which they could have been eligible for savings credit?
Lord Freud
My Lords, as you know, these amendments seek detailed arrangements of passporting to other benefits for single-tier recipients who would, under the current system, have been receiving a basic state pension with a modest private pension income above that level. They would also ensure that mixed-age couples, where one member has reached state pension age before 6 April 2016 and the other after, would retain access to the savings credit. As noble Lords will be aware, the savings credit, which is currently available to those aged 65 and over, will continue to be available to those who reach state pension age before 6 April 2016, and mixed-age couples who are already in receipt on that date will continue to receive it.
The guarantee credit will continue to be available for the poorest, regardless of when they reach state pension age, and receipt of the guarantee credit will, for example, continue to give access to the warm home discount scheme and to cold weather payments. Moreover, poorer pensioners, in the bottom income quintile, are among the principal beneficiaries of these reforms: more than half will be better off in the first 25 years, with a median gain of £8 a week in 2040 and £5 in 2020.
The full rate of the new single-tier pension will be set above the basic means test. Where both members of a couple receive the full single-tier pension, they will receive nearly a third more than the couple rate of the pension credit standard minimum guarantee, based on 2013 rates. This means state pension income alone will raise them above the standard income level at which pension credit runs out. Savings credit already rewards some couples for their state pension, which muddies the original intention. Mixed-age couples, where one is on a full basic state pension and the other a full single-tier pension, would also have income above the couple’s standard minimum guarantee.
A key principle of the reforms is to remove access to savings credit for single-tier households, which includes couples where one reaches state pension age before 6 April 2016. We need to balance the fairness between recipients and taxpayers in dealing with the conflict between the individual basis of the single-tier pension and the household basis of the savings credit. However, we will allow those mixed-age couples already in receipt of savings credit on 6 April to retain it, if they continue to meet the eligibility conditions.
Amendment 36A would retain means-testing for the mixed-age couple group and continue to reward some with savings credit for their state pension, but without any increase in savings incentives, which is why we oppose it. The cost of the amendment would be up to £20 million per year into the 2030s.
I shall pick up the issue of why we include the example. The power in the Bill will allow us to specify when the restrictions should and should not apply. The example in new Section 3ZA(2) captures one situation where we may wish to allow existing recipients to retain the entitlement, but we may identify more situations as we work through the detail of single tier. The numbers affected are likely to be small, with a maximum of 20,000 couples at any one time, and a total of 40,000 couples affected at some time over their retirement, which is only 5% of an estimated 800,000 mixed-age couples. Of those potentially affected, only around two-thirds would have claimed, because of the low take-up issue. Changes in circumstances during retirement mean that, on average, a mixed-aged couple would miss out for only seven years of their retirement.
The noble Lords, Lord McKenzie and Lord Browne, asked about numbers in receipt of savings credit. There are currently 540,000 receiving only savings credit. The average median loss of savings credit peaks at around £10 per week in 2020, but the net impact on household income is only expected to be £8 per week at that point.
Lord Browne of Ladyton
Before the Minister moves too far away from my specific question, which was exploring legislation by example, I should perhaps correct what I said. In explaining this, I remember suggesting that new Section 3ZA(2) was about the circumstances in which somebody would be “entitled” to savings credit. However, the wording is “not entitled to”. I wish to clarify that for the purposes of the record. I am really not clear why the Government choose to legislate by putting into primary legislation an example of the only set of circumstances that they have currently come across in which, specifically, a mixed-age couple would not be entitled to savings credit and then say they expect that there are other sets of circumstances out there but that they have not formulated them yet. Why put in any example at all? What is the purpose of it?
Lord Freud
The purpose is that we want to retain the ability to avoid cash losers. That is the purpose of this particular power. In relation to the potential impact of the removal of savings credit on passporting, I remind noble Lords that, while pension credit acts as a passport to a number of other benefits, most are linked to receipt of the guarantee credit rather than the savings credit. Housing benefit and council tax reductions are not limited to pension credit recipients; they can already be claimed on low-income grounds regardless of receipt of pension credit, and this will continue. Furthermore, there is a higher applicable amount for pensioners over 65 in housing benefit, essentially to ensure that the savings credit is not itself means-tested away for those paying rent. This higher applicable amount applies to all pensioners over 65, not just those receiving savings credit. This provision will continue for at least as long as housing benefit remains. As noble Lords may be aware, we recently announced that there are no plans to change housing benefit for pensioners until at least 2017-18.
Unlike housing support, entitlement to social fund payments, including cold weather payments, requires receipt of pension credit, and this can include people getting savings credit only. I assure the noble Lord, Lord McKenzie, that we have made no assumption of savings from cold weather payments as a result of the changes in this Bill.
On the question of figures—
Baroness Hollis of Heigham
Is the noble Lord saying that cold weather payments will continue as is?
Lord Freud
No, it means that we do not expect that we will be paying out less in cold weather payments because of these changes.
Baroness Hollis of Heigham
Then I am even more confused. If we are denying a category of people the right to cold weather payments, how is it that the bill is remaining the same?
Lord Freud
Clearly, it is because we are expecting that broadly the same numbers of people will be getting cold weather payments. Because of the complexity around this, as I was trying to indicate, we have put no assumption of savings into these figures.
Lord McKenzie of Luton
I accept that the Government have not put in any assumptions of savings but if, in fact, there are going to be 540,000 fewer individuals on savings credit and presumably at least some of those would have been able to access cold weather payments under current arrangements—quite apart from couples; I am not talking here about mixed-age couples—there must be savings. There must be circumstances where cold weather payments are not going to be due to somebody in the future who would have got them under the current arrangements. We are just trying to understand the numbers and the savings.
Lord Freud
We estimate that only 80,000 who would otherwise have been claiming pension credit in 2020 will be taken out of the scope of cold weather payments. Cold weather payments will clearly continue to be linked to savings credit, but it is difficult to say whether the 100,000 who may lose savings credit would get cold weather payments for other reasons. It depends on where they are living and what is triggered. That is the reason that we have not made any assumptions. On the basis of these observations and, in particular, the reassurance in respect of support with housing costs, I ask the noble Lord to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I am going to withdraw the amendment—we are in the Moses Room—but I am bound to say that I think that the noble Lord would himself recognise that that answer in no significant way addressed the issues we were trying to explore. I will just restate them, and maybe we could have follow-up correspondence. Maybe we should have one of our sessions around this; it is important that we get to the bottom of it. We are seeking to understand how many individuals who would get the savings credit under current arrangements will not do so under the new arrangements in the future, whether they are individuals or couples; I am not dealing here with mixed-age couples. What is the average loss of income because of the denial of savings credit? What is the benefit to government of having restricted passporting of these individuals to a range of benefits, except that some of them may have other routes to those benefits? Of course, the cold weather payments depend on where they live; I am not asking the noble Lord to assume that they go and live in the Antarctic, Scotland or somewhere cold. Sorry, Des; I am in hot—no, cold—water.
The Minister will see the point that I am probing here. There must be savings to government from these changes and we are just trying to understand the measure of them. I take it from the Minister’s reply that there is absolutely no intent to bring forward any special arrangements to reinstate this sort of entitlement for people who will fall out of it because the savings credit is no longer applicable or because they are just at the threshold of being out of the guarantee credit. That is where S2P is going to be pitched, on the basis of all the information that we have. I am not sure that we can make much further progress on this issue this afternoon, unless the Minister is going to—
Lord Freud
I think the noble Lord made a valuable suggestion. This is one of the issues we can look at in a pre-Report session, at which we can go through some of the figures and tables. I am happy to commit to arranging that.
Lord McKenzie of Luton
I am grateful for that. On that basis, I beg leave to withdraw the amendment.
Lord Freud
“In Schedule 4 to the Marriage (Same Sex Couples) Act 2013, omit paragraphs 11, 12, 13 and 16.”
Lord Freud
My Lords, this is a minor technical amendment. It is being made as a consequence of Part 2 of Schedule 12 which, among other things, amends and consolidates the provisions dealing with category B pensions, which will continue to be available to people reaching state pension age before the magic date of 6 April 2016. These provisions have recently been amended by the Marriage (Same Sex Couples) Act 2013 in order to extend category B pensions to same-sex spouses. This Bill already takes account of these recent amendments. They are consolidated in paragraphs 55-61 and 63 of Schedule 12. The amendments in the Marriage (Same Sex Couples) Act will therefore be redundant when Schedule 12 comes into force so this amendment simply removes them from that point. I beg to move.
Lord Browne of Ladyton
My Lords, I am grateful to the Minister for confirmation for the record that this is a genuine and consequential amendment and I accept that. I am encouraged to ask a question, which he may not be in a position to answer, and I would be happy if he could write to confirm what I suspect is a simple answer to this. As a consequence of drawing my attention to this area of the law, I am moved to ask whether the Minister can confirm if there is any difference in the transitional arrangements that will apply to members of a civil partnership or same-sex marriage who divorce if one of them has reached state pension age before 6 April 2016? I do not want to detain the Committee in the detail of that. If the answer is no that is the answer I am looking for.
Lord Freud
I am very pleased to give the answer the noble Lord is looking for. No.
Lord Browne of Ladyton
I am grateful to the Minister and am pleased to have that on record. I have nothing further to add.
Baroness Turner of Camden
Baroness Turner of Camden
My Lords, Subsections (2) to (5) of Clause 24 and Schedule 14 give employers powers to amend employee contributions and benefits in their occupational schemes to an extent supposed to be limited to the cost of the extra national insurance the employer will have to pay as a result of the end of contracting out. I am totally opposed to this clause and also to Schedule 14. The proposal potentially impacts on 1.6 million active members of private sector DB schemes. It would enable any existing protection for members’ benefits in legislation or scheme rules to be overridden. This includes specific statutory protection given to members in former nationalised industries when they were privatised and also measures of protection that employers in times past have agreed to write into their schemes.
The ending of contracting out and the associated increase in employer national insurance is, in principle, no different from any other risk employers with DB schemes might face and there is no sound justification for the Government to disturb the existing balance of power in relation to these schemes. The extra cost on employers is no greater than as might arise in the event of a small change in market interest rates. There was no suggestion of intervention to protect scheme members who lost out when the Government, not so long ago, amended the statutory basis of the pension increase from RPI to CPI. A number of us objected at the time. Governments should allow the problems arising for employers on this count to be dealt with through the established process whereby changes can be effected by negotiation and agreement. An overriding power based on being able to recover a set amount of cost could result in great unfairness as there may be no correspondence between the variable amounts members may gain from a single state pension and those they may lose if employers are allowed to determine unilaterally the form of contribution and benefit changes in occupational schemes.
I also recall, during my career as a trade union official a number of years ago, how keen we were to negotiate what we then called final salary schemes— DB schemes. As a result of the schemes that we negotiated then, there have been beneficial changes for many pensioners. As we know, though, after a certain number of years there was a bit of a campaign against DB schemes, as a result of which a number of employers decided that they would scale down their DB schemes. I have sensed that there remains not a hostility but a lack of concern and support on the part of the Government for DB schemes. These schemes excellently provided for generations of pensioners, who are very grateful for the fact that they are in existence.
What is proposed here is not in any way acceptable. I very much hope that the Government will take it away and rethink it. I am not the only person to feel this; the Minister will notice that there are a number of other amendments in this group, including my own Amendment 40, which are designed to protect employees who were covered by existing protections when they belonged to former nationalised industries that were denationalised. As a result of that, there was legislation that provided for protection. In fact, the protected persons were first introduced by an Act of Parliament in 1948 and reaffirmed by the Thatcher Government on the denationalisation of the electricity supply industry in 1990.
The Government now propose, in my view, to override the statutory provisions providing these pensions, in order to allow employers to claw back the additional NI contributions. This really is the thin end of the wedge and I do not think we should accept it. The Government should take it away and rethink it, because I regard it as quite unacceptable and so do many people, including individuals who are themselves beneficiaries of DB schemes and the unions that support them. I beg to move.
Lord Whitty
My Lords, I have amendments in this group that broadly support the line that my noble friend has been taking. She was right to try to prise open what the Government’s strategy actually is.
Everyone recognises that there are consequences of contracting out, but under this clause and schedule the Government are effectively giving carte blanche to employers to change established means of paying occupational pensions among private sector employees. Government Amendments 48 and 49 actually make that worse by making it pretty explicit that the full cost of that will, or at least can, fall on the employees so that not only are the employers given the right not only to avoid the consequences of that cost and place it on to the employees, which is likely to have the knock-on effect of people opting out of the schemes, but they are overriding the long-established system whereby such schemes are governed by trustees representing the employers, the contributing members and often the pensioners in those schemes. To override the whole system of pension trustees that we have had in place for the past 40 or so years with regard to private occupational pensions is a very serious step. There are particular consequences in the area where statutory protections are built in. Past Governments have given guarantees that can be overridden by this clause.
All this can lead us only to the conclusion that the Government have a strategy and are using the excuse of the other provisions of the Bill on state pensions to go further in destroying private occupational schemes. We discussed the knock-on effect in public sector schemes at our previous sitting but here we have, as my noble friend says, more than 1.5 million people still in defined benefit schemes who have benefited from them and have every expectation of continuing to benefit from them. On top of everything else, the Government are attempting to ensure that those schemes now fail.
There are other reasons why some schemes have been curtailed and there are other reasons why the future of such schemes, in some cases, looks fragile. However, this is a deliberate attempt by the Government to make matters significantly worse. The Government must think very seriously about that. This is why my amendments and those of my noble friend would delete the bulk of Clause 24 and Schedule 14. We recognise that we have to face up to the consequence of that, but it would force the Government to rethink this and do it in the context of an overall strategy towards occupational pensions, their governance and their future, which is not there at the moment.
This clause provides the possibility of the Government reassuring us that they have a strategy but, frankly, we need to see the outlines of that strategy before we finish the proceedings on this Bill. Otherwise, I think that the message to those outside will be that, if you are in an occupational pension scheme in the private sector, we will make it cost you more and the benefits will be less and, if you are in the public sector, the Government will not compensate for the costs that they are imposing on well funded public sector schemes, as we discussed last time.
There is an occupational pension dimension to the whole pension issue. In principle we support many of the changes that the Government intend to make to the state pension, but the other part of the equation also needs to be faced up to. Frankly, I have seen no sign of a government strategy to do that. These clauses and much of this schedule will only make matters very significantly worse.
Baroness Drake
My Lords, I shall speak to Amendments 38ZA, 39, 45, 46, 47 and 50. The amendments in this group pose three propositions: the first is not to give the power to employers; the second is to give it only to employers with trustee consent; and then there is the amendment that I propose, which would give the power to employers only if it was subject to an explicit requirement to consult with the trustees.
Quite clearly, abolishing contracting out means abolishing DB schemes. The national insurance rebates to both employees and employers currently run at 1.4% and 3.4% on a band of earnings, so they are not insignificant amounts of money. The Bill will give this statutory override to the employers effectively to recoup that loss of their NI rebate by a choice of one of two options: increasing the employees’ contributions or reducing the value of the future benefits to be accrued. Not all employers need this statutory override to make that adjustment. It is quite clear that the closures and benefit changes of the past 10 years are evidence enough of that. However, there will be some schemes where employers cannot do that without trustee consent. The Government are clearly seeking to provide an override where that trustee consent is required so that employers can proceed without it.
If one looks at the impact assessment, it is quite clear that there is now a green light as a consequence of this clause for employers to recoup the loss of their NI rebates through an increase in employees’ contributions. The assumption made in the impact assessment is that all employees active in DB schemes, who are impacted by this, will bear the cost of increased employer’s national insurance contributions.
Lord Browne of Ladyton
My Lords, I shall speak to all the amendments in this group, particularly Amendments 38ZB, 40A and 68A, which are in the name of my noble friend Lady Sherlock and myself. In total, this is a comprehensive grouping of amendments that deals with what my honourable friend Gregg McClymont described in the Commons as,
“the more granular aspects of the ending of contracting out”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; col. 236.]
However, it is important to recognise that, although these amendments are almost comprehensive, there is one aspect of the ending of contracting out with which they do not directly engage: the abolition of contracting out itself. I feel motivated to say that with the honourable exceptions of my noble friends Lord Whitty and Lady Turner of Camden, there is broad agreement that the change to a single-tier pension and the aim of introducing simplicity into the state pension system require an end to contracting out, so we are dealing here with the consequences of contracting out, not the fact of its abolition. I will leave my noble friends to speak eloquently for themselves, and I have had private conversations with them to articulate their position on these issues.
When the Committee last met on this Bill, we debated in part the consequences of the ending of contracting out but only for public sector schemes. There were a lot of good questions for the Minister but, with respect to him, his response was essentially—this is not a direct quote—“How to deal with these consequences is a matter for future Chancellors”. The provisions that we are debating here and these amendments make it clear that that is not a luxury that employers with private sector defined benefit pension schemes have available to them.
As my noble friend, Lord Whitty, made clear in his contribution, and this has been his abiding concern regarding aspects of this Bill since his engagement with it, the ending of contracting out could have fatal consequences for occupational pension schemes. The Government’s response to that challenge is to give employers, through the vehicle of a statutory override, the powers to increase employee contributions and/or reduce accrual rates of defined benefit schemes in order to reflect the cost of the extra national insurance that the employer will now have to pay as a result of the end of contracting out. However, these powers are limited by the mechanism set out in Schedule 14, which precludes the use of them beyond the cost of the extra national insurance that the employer will have to pay.
Amendments 37 and 38, in the names of my noble friends Lord Whitty and Lady Turner, seek to delete that override power completely. While we on this Bench do not directly support these amendments, they raise a number of interesting questions. The Pensions Minister in the other place has said repeatedly, in public and in debate, that he is keen to help employers to maintain their defined benefit schemes.
I have some questions for the Minister today. Have the Government consulted employers to assess whether the changes may have the consequence that my noble friend Lord Whitty fears and lead them to close their defined benefit schemes or move employees on to career-average schemes, which are still good but not as good as defined benefit schemes? Should the costs of the additional amount of national insurance fall on to employees, my noble friends are fearful that employees will be unable to pay this from their salary and be forced to leave their schemes. Even a 1.4% additional contribution may be more than can be afforded by some workers living with static salaries and the rising cost of living. This is clearly not in their long-term interest, but if a large percentage of workers withdraw it will also threaten the viability of some pension schemes. As my noble friend Lady Drake has pointed out, 5% is a huge amount to find between employer and employee at a time when so many small businesses are seeking to get back on their feet. My noble friend reflects the views of trade unions, but have the Government discussed the changes with employees and employers, especially small businesses that will be affected by this?
However the changes are achieved—by consultation, as we advocate, or by imposition, as this Bill permits—employees will not be happy. They will struggle to understand the changes to single-tier pensions that are justified. I shall share an anecdote of my consistent experience as a Member of Parliament: I was regularly assailed on the main streets of Kilmarnock by pensioners who asked me why they had to pay tax on their pension. I became quite adept at replying. I will not bore the Committee with the explanation, which is simply that you make up the pot from untaxed income and the deal is that you pay the tax as you draw down. Try as I might, though, I do not think that I ever, even with charts, persuaded one pensioner that that was the case with regard to their pension. I spent from 1997 to 2010 as the MP for those people, and I would be surprised if I persuaded one person of the mechanism for their pension scheme and the operation in this fashion and how it was taxed, despite my very best endeavours to develop skills and take advice in order to do this.
Will employers end up saying, “We’re going to have pain over these changes whatever we do”—I am imagining the kinds of conversations that I have had with people—“so we might as well bite the bullet and close the final salary scheme.”? We know that the Government, particular the Pensions Minister, are keen to help employers retain the remaining defined benefit schemes. That is a justification for the override, as he said at col. 245 of the eighth sitting of the Committee in July 2013, but have the Government discussed with employers how many of them will use this as an opportunity to consider the closure of schemes? These are important questions that need to be tested. My noble friend Lord Whitty asks us all the time what the consequences will be.
This is a complex and expensive matter. Actuaries are costly, and scheme changes are extremely costly to achieve. The amendments tabled by my noble friends Lord Whitty and Lady Turner are helpful in raising questions that we should know the answers to, if they exist. If these measures will lead to employees being forced or inclined to leave schemes and schemes being forced to close, then we should debate that matter as I accept that it is not an intended consequence of the Government’s position.
The second issue engaged by these amendments reflects the fact that, apart from being subject to an actuarial check, this Bill gives the employer largely unfettered power. In particular, as we have heard, the employer does not need to reach agreement with, or even to consult, pension fund trustees or scheme members. As I understand it, existing employers’ rights under the Pensions Act 2005 are already quite significant. As my noble friend, Lady Drake, made very clear from her extensive experience of this, further extensions of that power should be done with great care, if at all. As she explained in convincing fashion, statutory overrides are very strong measures and should be used with care in all cases.
The opposition Benches do not believe that the override power, in this form, is needed or desirable. Amendment 38ZB, tabled in the name of my noble friend Lady Sherlock and myself, would require that changes to pension schemes could be made only with the consent of pension trustees. I accept that it is unlikely that the Government will accept that amendment, but my noble friend Lady Drake offers more of a compromise position that the Minister may find acceptable. In her Amendment 39, she proposes that an employer has the power to amend a pension scheme after consulting pension trustees, and her Amendment 50 states that regulations may require employers to reach agreement with trustees.
It is interesting that in the debate in the Commons, the Pensions Minister, Steve Webb, said—I am keeping this short but I promise the Committee that I have not changed the meaning of it; I have merely taken out extraneous words:
“To encourage … firms to be willing to carry on offering defined benefit pensions, which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching … agreement. That would be the norm. It would be quite proper … The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; cols. 244-45.]
If I understand this legislation correctly—and I have to admit that I cannot always guarantee that I do, given its complexity—without the statutory provisions for override in the Bill, that is what all employers would have to do. As is clear, many Members of the Committee, and all of us on these Benches, are at a loss to understand why that best practice, endorsed by the Minister himself, is not what the Government are legislating for.
Our amendments, including Front-Bench Amendment 38ZB, ask these questions: why are the powers set out in the Pensions Act 2004 not sufficient? Why is it necessary to legislate for an override in this fashion at all? Why is it necessary, as the Government are doing in Amendments 48 and 49, to give employers even more powers than in the original drafting of this Bill? What possible reason can the Government have for not reflecting their own Pensions Minister’s endorsement of best practice in their Bill? Where is the opposition coming from to consultation at least, if not to consultation and agreement, if not—as it clearly is not—from the Pensions Minister himself? I hasten to add that I reinforce that I am not reading the Pensions Minister’s words from the debate in a way that misrepresents his argument; I have taken out some extraneous words but that is all.
It is just good management practice, never mind in pensions, to consult staff. Consultation assists implementation and, consequently, staff buy-in to the need for changes. To seek the agreement of pension trustees to changes to schemes, as we propose under Amendment 38ZB, can only prove helpful to employers. As we have heard, trustees have fiduciary duties and responsibilities to act in the best interests of scheme members, so why should the Government not think it sensible, as well as best practice, to consult trustees and seek their approval?
I turn to the limitation on the power to override and the effect of the amendments in relation to this. There is a limitation on the exercise of this override power. As has been said, the employer’s override powers are limited to recouping the cost of the extra national insurance that the employer would have to pay as a result of the end of contracting out. Under the terms of Schedule 14, the exercise of this power must be certified by an actuary as doing no more than that.
My noble friend Lady Drake’s amendments, which I do not intend to engage with in any detail, given her eloquent and convincing arguments for them, are designed to put more definition in the extent of this power. In particular, her Amendments 37ZA, 45, 46 and 47 are designed to define more clearly the values that limit the exercise of the power and would clarify the power of override in a way that I am sure the Government would find helpful. They are within the spirit of the Government’s proposal and the Minister’s intentions, as explained by him repeatedly.
I have some experience of engagement with actuaries when I practised law in Scotland. Given that it is improbable that actuaries, who are notoriously independent of each other and seldom ever agree on discount rates, are likely to come separately to different conclusions, is it not better that the statutory limitations on the use of this power are expressed in such a way as set out in my noble friend’s amendments, rather than in the way that the Government have chosen to do it?
I turn to the issue of protected persons. We have not had an extensive debate on this issue or protected pension schemes, but I have been subject to some very powerful arguments, made not only by noble friends and other parliamentarians but by those with whom I have engaged in preparing for the debates on the Bill, about such persons. I have studied carefully the words of the Pensions Minister, which I encourage people to do—they are very instructive about the thinking behind some of this legislation. To me, his words clearly imply his preference for exempting protected persons. Having done that, one cannot but feel that there is a special set of circumstances arising from the privatisation of nationalised industries in respect of these pension schemes.
Curiously, the Bill is drafted in a way that allows the Secretary of State the power to keep the promises that were made to the members of the schemes. I am really interested in why this has been done. What was the motivation behind it if there was no inclination to do it?
Lord Freud
My Lords, I particularly enjoyed the stories of the noble Lord, Lord Browne, about his dealings with pensioners. I am disappointed that he and his silver tongue were unable to persuade against the pocket. After single tier is introduced, there will not be an additional state pension to contract out of. Employers with such schemes will no longer receive the national insurance rebate; they will pay the same rate as other employers and will have to continue to provide a pension scheme that is generous but which will therefore be more costly. To continue funding these defined benefit schemes and to keep them open without the rebate, employers will be forced to find other ways to reduce running costs. They may wish to reduce the future rate of accruals, or to increase employee contributions.
Employers have told us that, without the override, they will have to consider closing their schemes, particularly if they have no other way of offsetting the costs of contracting out. Clearly, members are not served by their pension schemes closing. It is vital that we support those employers who are seeking ways of offsetting the increased cost of national insurance, including where their scheme rules would not allow the change or where the consent of trustees cannot be obtained. We also recognise that trustees may be put in a difficult position if employers come to them with a request to reduce benefits or increase contributions.
Baroness Drake
On the point that trustees find themselves in difficult positions if they are asked to consider increasing contributions or reducing benefits, I am not sure whether the Minister appreciates what trustees have been doing in the past 10 years in addressing precisely those kinds of requests from employers.
Lord Freud
I understand what trustees in pension funds do and I understand that some of them find themselves in very difficult positions when having to address those issues.
Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes. Such a move must be considered in this context.
In contrast to the figure that the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, were looking at—1.6 million in private sector schemes—regrettably, by 2016, we expect only 950,000 individuals to be affected. That figure is in the impact assessment at paragraph 128.
Amendments 37 and 38 would remove the statutory override power and prevent Schedule 14 from coming into force. The practical effect would be that an employer would be required to get trustee consent for the changes they wanted to make to their scheme should their pension scheme rules require this. For the reasons I have just set out, we feel the override is necessary.
Amendments 38ZA, 45, 46 and 47 of the noble Baroness, Lady Drake, relate to the calculation of the value of the employer’s lost national insurance rebate. For the statutory override to operate as intended we must balance two competing factors: first, safeguarding members from changes to scheme rules that go beyond offsetting the loss of the rebate; and, secondly, providing an override that remains workable for employers—otherwise in practice they will still be left with little real alternative to scheme closure. Schedule 14 sets out important safeguards in the Bill and includes powers to put further safeguards in regulations. Paragraph 2(2) of the schedule prevents the employer making changes beyond those necessary to recoup their increase in national insurance contributions. We intend for this amount to be calculated in accordance with regulations—allowing us to define annual national insurance contributions—and an actuary must certify that any changes do not recoup more than that amount before they are made.
Importantly, any proposed scheme changes cannot take effect before April 2016 and individuals’ accrued pension rights are protected by the Bill. The amount will be calculated in accordance with actuarial methods and I accept that that can be a changeable feast, as the noble Baroness, Lady Drake, pointed out. However, we intend to specify the methods and assumptions in regulations following consultation with the actuarial profession. We are working on the detail of the override regulations and are developing the legislation with stakeholders. We have shared an early draft of the key technical provisions of the regulations with the industry and will undertake a full public consultation on the full regulations as soon as possible. The override will not remove an employer’s obligations under existing legislation to consult their workforce in the usual way before making changes.
Amendments 38A, 39 and 50 refer to the role of trustees in the use of the statutory override. Legislating for trustee consultation risks unnecessarily complicating existing communication channels. It would be counterproductive to require employers to seek trustees’ agreement that the proposed changes recoup no more than the increase in national insurance costs. Trustees would be put in a position of either accepting or challenging the professional view of the certifying actuary. The proposal that the trustees could block the use of the override would negate its purpose. It is worth remembering at this point that, as with any significant alteration to pension schemes, existing legislative provision means that members must be consulted before any changes take place, which is a point I have made.
Where employers wish to make changes to their scheme, whether using the override or through existing scheme rules, it is in their interest, as my colleague Steve Webb said, to engage with their employees and scheme trustees. They will not want to make changes that are impractical or have unforeseen consequences for the scheme or themselves. We can see no reason why employers would not engage in the usual way without the trustees in this case.
We have placed a limit of five years during which employers may use the statutory override. This ends in 2021 but, as the noble Lord, Lord Browne, observed, that time limit may be extended by an order made by the Secretary of State. Based on all the information we have at the moment we believe employers who choose to use the override should be able to do so within this time limit. However, contracting out is complex and there may be unforeseen problems for some employers. An employer who is unable to use the override within the time limit, without the possibility of an extension, may have no option but to close their defined benefit scheme. This would be a compelling reason to use the power and we feel that an affirmative resolution procedure on this matter would not be a prudent use of parliamentary time.
Baroness Drake
I wish to clarify one or two points, if I may. The Minister said that these changes would still be subject to consultation with employers, by which I assume he is saying that they would be considered as listed changes and therefore trigger the listed changes regulations. What triggers that? Those provisions can be operated in a way that excludes the trustees, if the employer takes a certain route. I do not want to go into the detail; perhaps I can do so outside. I would like to understand how consultation with employers is triggered because I would almost certainly want to go on to say that what I think will be triggered will not be fit for purpose in a statutory override situation. I have a couple more points.
Lord Freud
Those are not straightforward points to answer and, given the time pressure we are under, I will write on those two matters.
Baroness Drake
I completely understand these technical matters. We are up against the clock but I think they need answering and I would want to respond to the answers. There could be an element of the positive in the second—on specifying the assumptions in the regulations—because it starts setting out the rules more explicitly. However, it appears that the Government are still proceeding on the basis that these are negative regulations. The trouble is that other interested parties cannot make an effective contribution unless this House has the opportunity to question those assumptions and those regulations. I have no idea what the delay implication would be of allowing this House to consider the proposed regulations and assumptions more actively when they are brought forward.
Secondly, I would still like an answer to what it is that can be recouped. Is it the definition of the NI rebate in 2016, or is it the NI rebate as it would evolve anyway over time under the current arrangement, meaning that, because of the reduction in the earnings element, it would contract?
Again, I do not want to get too much into protected persons but, on the fourth point, if one takes as an example the railway pension scheme, the Minister is absolutely right. Lots of people in that scheme do not have protected pensions, but they do have the shared cost. There are particular complexities that arise from shared costs and some other things as well, but I feel that there is no opportunity to flesh these out. I have spent some time looking at the railway pensions bill. Even if one did not want to challenge the Government on the principle, there are some complexities here. It is not easy just to adjust the contribution rate or to adjust the benefits in a shared cost situation and where there are variable accrual rates. How are we going to get a chance to look at these?
Lord Freud
My Lords, given our time constraints, I will pick up those issues—the shared cost and the rebate over time. With the negative and affirmative, there is a time saving and a certainty. The difference is that you get them in and, within a matter of a month, they are effectively law and they can then be prayed against, but they are in shape unless they are undone. Affirmative has to be approved. So there is quite a process and a time loss in going one way or the other, which I hope I have spelt out. Let me rush to—
Lord Browne of Ladyton
I am grateful to the Minister. I am conscious of the time, but I am also conscious that we should not move on from this particular part of the Bill with all its complexity because we are pushed for time, due to the accident of when we held this debate. I say this for a good reason. The Minister read a speaking note about affirmative resolution procedure in relation to regulations which was not written to respond to the amendment that I proposed but was a much more general speaking note. The amendment tabled by me and my noble friend Lady Sherlock related only to Section 24(8)—a very specific part that would not involve the complex regulations which the Minister narrated. The regulations in Section 24(8) will probably be two short paragraphs.
The Minister has given us a lot of other food for thought about how the regulations will be promulgated more broadly. He tantalisingly gave us some of the detail about what may be in there, which may answer many of our questions. It is inappropriate that we just move on from Committee in relation to all these issues that he has raised in his response, and which none of us has had the opportunity to tease out. There are three or four other issues that he raised in response to my contribution with which I would like to engage, because I am not certain that these arguments would stand the test of debate.
Lord Freud
Well, my Lords, I was responding to the comments of the noble Baroness, Lady Drake, on the negative procedure generally. It is fairly odd to have two separate procedures going on within one process. That is the point.
I will try to deal with government Amendments 48 and 49. Schedule 14 currently provides that regulations can create exceptions to the limits set out in paragraph 2(2). This was originally provided to deal with unusually funded schemes, such as fixed cost-share schemes, which I hope goes to the issue raised by the noble Baroness, Lady Drake. The Delegated Powers and Regulatory Reform Committee raised concerns about the power. In light of this and our ongoing discussions with the pensions industry, we no longer believe that we need this power—we believe that something different is required—so Amendment 49 removes it. Amendment 48 then makes specific provision for employers with atypical scheme-funding arrangements, such as cost-share schemes. It allows those employers to recover their increased costs without affecting the safeguards provided by Schedule 14.
In the statutory override we have designed a process whereby employers can continue to sponsor defined-benefit schemes without losing the rebate. We have included provision to allow for a pivotal role for actuaries in signing off any changes but we have not restricted the ability of trustees, and indeed members, to express their views to the employer. We have ensured that trustees are not forced to decide whether to accept scheme changes or risk closure of the scheme. I hope that this reassures noble Lords and I urge the noble Baroness to withdraw her amendment.
Baroness Turner of Camden
I thank everyone who has contributed to the debate. I agree, of course, that it is a complicated matter but, on the other hand, the complications take place within the context of what is in the Bill. The Bill makes it clear that in future employers will have the right to change the provisions of pension contributions and benefits. That is what most of us are concerned about. I do not think that the Minister’s response has dealt with the fear that people have that they are now facing a possibility that DB schemes could be under attack. They have been under attack in the past. Although I agree with everything that has been said about the necessity of involving trustees—of course I believe in that—when in the past employers have changed from a DB scheme to something less good, which has happened, the trustees have been consulted but have made no attempt to disrupt what the employer had intended to do. I therefore still do not think it is sufficient to say that the trustees have to be consulted. There has to be general consultation. The problem is, of course, that it is in the general context of the Bill, and the general context of this clause, which gives the employer power to change the benefits system through the DB scheme that may exist.
People are concerned about the continuation of their DB schemes. As I have said in the past, DB schemes which have been negotiated in the past have been responsible for improving benefits for a whole generation of pensioners. They want to continue with those schemes and to ensure that the unions to which most of them belong will have the right to ensure that negotiation will properly take place before anything can be done to remove those benefits that they all value so highly from them.
In those circumstances, while I have listened very carefully to what has been said, particularly to what the Minister has been saying this afternoon, I will look again at what he said. However, concerns still exist about Schedule 14 and the wording of this clause, and we shall certainly return to it on Report. Personally, I have not been satisfied with what I have heard and am quite certain that a number of other people will not be either. There has to be much more of a debate. Unfortunately, a number of our Members have left because we are running rather late tonight. A number of people who have tabled amendments have not had the opportunity to speak to them and so on. I beg leave to withdraw the amendment.