Employment: New Jobs
Baroness Sherlock Excerpts(10 years, 3 months ago)
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Lord Freud
I am pleased to say that the regional position is pretty balanced. During this quarter, employment rose in virtually every UK region, with one exception. The north of England and the Midlands are doing particularly well. If one looks at the balance between the north and the south, since the election there have been 360,000 extra private sector jobs in the north—to take those four regions together—and 420,000 in London and the south-east.
Baroness Sherlock (Lab)
If that information is right, can the Minister explain the report from the Centre for Cities, which shows that four out of five private sector jobs are now created in London? For example, private sector employment grew by 2.8% in London year on year, but it fell in Sunderland and in Bradford it fell by more than 5%. Do the Government have a strategy for jobs north of, say, Witney?
Lord Freud
I hope that I made it very clear to noble Lords that this is a very widely spread recovery, that the north is doing very well and that the noble Baroness is misrepresenting the actual figures.
Housing: Underoccupancy Charge
Baroness Sherlock Excerpts(10 years, 4 months ago)
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Baroness Sherlock (Lab)
My Lords, the Minister has failed to address the core point made by my noble friend Lady Hollis and the noble Lord, Lord Best: why are the Government penalising people already in social housing, who took out their contracts when the current system was in place and before the bedroom tax came in? Why could they not protect people, as this House asked them to do during the passage of the Welfare Reform Act? If all else fails, will he join us in our costed commitment to abolish the bedroom tax?
Lord Freud
My Lords, the costings of the Labour Party in this area are fairly extreme because it seems to have used the same money many times over. This is a savings measure introduced in the emergency Budget, which applies to the existing case load and gives 33 months’ notice. The comparison is with the LHA changes introduced at the same time, for which there was less notice: 21 to 33 months. We have put in as support the discretionary housing payment system, as opposed to transitional protection.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 4 months ago)
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Baroness Sherlock
“(5) Regulations under this section shall not be made to exempt entire classes of business or businesses, such as small and medium-sized businesses, from automatic enrolment.
(6) Regulations under this section shall be laid before and approved by resolution of both Houses of Parliament.”
Baroness Sherlock (Lab)
My Lords, Clause 37 is headed: “Automatic enrolment: powers to create general exceptions”. I am tempted to rest my case there but I will press on a little. I hope that this will be a relatively uncontroversial amendment that the Minister can accept.
If the Committee looks at Clause 37, it will see immediately that it is drafted very broadly—too broadly, I suggest. In effect, it gives the Government the power by regulation to create exceptions from the employer duties under auto-enrolment in a way or to an extent that could undermine the intention of Parliament in establishing auto-enrolment in the first place.
When this clause was discussed in another place, the Pensions Minister said that the Government needed the powers to make regulations in order to ensure that employers do not automatically have to enrol people whom it will be a waste of time to enrol because they will be immediately removed; for example, people who have resigned, are retiring or have used their lifetime tax allowance. Apparently the clause is broadly worded because, the Minister said in the other place, we cannot predict the future need for exceptions. I suspect that our Minister’s brief contains similar assurances.
Clause 37(2) inserts a provision into the Pensions Act 2008 which enables the Secretary of State by regulation to provide for exceptions to the employer duty that may,
“be framed by reference to a description of worker, particular circumstances or in some other way”.
We accept that there will be circumstances in which it will be inappropriate to auto-enrol someone who is likely to want to be removed immediately, but it is our view that the clause is unnecessarily widely drafted—a view that is shared by others, including the TUC and the CBI.
In Committee in another place, the shadow Pensions Minister, my honourable friend Gregg McClymont, quoted from a letter from the CBI in which it expressed support for the intention of the clause but said it was too broadly drafted because:
“The inclusion of ‘in some other way’ would provide too broad a power to government to change the scope of automatic enrolment at any time it saw fit. For instance, it would provide the Secretary of State with a secondary legislation power to exempt some businesses. This is a move the CBI could not support, as it undermines the consensus that was reached on pensions reform by giving exempted firms a cost advantage”.—[Official Report, Commons, Pensions Bill Committee, 9/7/13; col. 352.]
If the Government want to exempt a category of business, they should come back to the Floors of both Houses and amend their legislation. This is not fanciful. It is not long since the Beecroft report recommended that micro-employers be exempted entirely from auto-enrolment.
This amendment makes it clear that Clause 37 shall not be used to exempt entire classes of business, such as small or medium-sized employers. This will ensure that the Government’s apparent intention for auto-enrolment to apply to all categories of employer and business will be honoured. If the Minister is of the same view as the Pensions Minister on this point—in other words, if it is the Government’s intention that no such general exemption should be made—there can be no reason to resist this amendment. If he does, he has some explaining to do.
Lord McKenzie of Luton (Lab)
My Lords, I support my noble friend’s amendment. Auto-enrolment has, initially, clearly been a success and the Government deserve credit for implementing the policy. But we should recognise that we are just at the beginning: although it has been up and running for 18 months, we are just approaching the point in April this year when smaller and medium-sized employers, those whose largest PAYE scheme covers between 50 and 249 employees, have to commence their duty.
There have already been a range of changes to the process, implemented by regulations, resulting from a review of early live running. Those changes mostly came into force last November, although some are due this coming April. The consultation on the draft regulations also canvassed views on other changes, including the proposition of excluding a certain category of worker from auto-enrolment. It sought more information on three situations, identified that it had a substantive response to the use of an exception, and committed to publish the results, with government proposals and a further consultation. When will the results be published? Will it be before Report? At the very least, can the Minister provide us with a list of the circumstances being considered, if those extend beyond the three identified in the briefing note, which states:
“The initial evidence suggested that there is a case to re-examine the appropriateness of the employer duty in some, very carefully specified, circumstances”?
However, as my noble friend has clearly set out in the amendment, the power taken in Clause 37 is a very wide one.
The circumstances covering someone handing in their notice, where the notice spans the automatic enrolment date, and where an active scheme member gives notice of retirement and stops making contributions could, it is suggested, be the subject of specific amendment. As for those individuals with fixed or enhanced protection for their lifetime allowances, the Minister might tell us how an exclusion might be framed so that the employer could operate without input from the worker. That those circumstances need to be addressed to avoid detriment to workers is clear, but at present the encouragement from HMRC is to do so by opting out. If the system for exemption depends on the worker lodging the existence of enhanced or fixed protection, perhaps with some validation from HMRC, I am not sure that that is a more effective route than the worker simply opting out.
If the rationale for Clause 37 is based on just those three circumstances, I am bound to say that it is not overly convincing. If we are to understand that a range of other circumstances have been identified which justify the clause, we must be entitled to know what they are. The Government must be aware of them from representations that they have already seen. The briefing note sets down some core policy principles against which suggested exclusions are to be tested. One of these is:
“Are the individuals unlikely to benefit from pension saving?”.
This has echoes of some of the challenges to auto-enrolment when the policy was first originated and being developed, particularly around older women just approaching retirement.
It is entirely reasonable that there will be changes to the operation of auto-enrolment arising from practical experience, but we should be cautious of wide powers to remove the employer duty of enrolment. That is the cornerstone of the policy. Of course, we are mindful that the duty has already in practice been narrowed by aligning the starting point with the level of the income tax personal threshold, thereby removing thousands of the low-paid from its benefits. We are also mindful that there is a subtext to the overall Bill about generating savings for the Treasury, so my noble friend is right to be cautious about this clause.
Lord McKenzie of Luton
Nobody disagrees that there could be some limited and carefully targeted exclusions in particular circumstances, but I am trying to understand the circumstances that the Government have currently identified. They have laid out three of them in the briefing document, which suggests that they might have had representations on a whole range of other areas. I reiterate my question: can we know what circumstances, other than the three identified, the Government are focusing on that warrant an exclusion from the provisions?
In particular, one of those that has been identified deals with enhanced or fixed-protection provisions. I accept that there is a financial detriment for people who get auto-enrolment in those circumstances, but HMRC has advised them pretty clearly to opt out in that case. How, specifically, would the Government draft an exclusion to encompass that group of people? The enhanced or fixed-protection status of individuals would not be readily known to employers. Would an employee have to report it to an employer? How is that a better arrangement than the employee simply opting out?
Fundamentally, I am trying to understand how many circumstances the Government have identified where they think there might need to be an exceptional exclusion from auto-enrolment. I accept the Government’s good faith on that remaining the cornerstone of the policy, but how many other circumstances, given all that has gone on and all the representations and discussions to date, have been identified which warrant this power?
Baroness Sherlock
I have a question to add to that. I am grateful for the Minister’s explanation as to why the Government feel they need to have some flexibility to deal with circumstances as yet unknown, but I do not think that the Minister addressed what the problem is with the specific amendment I moved. After all, the amendment does not seek to prevent the Government from having those powers; it simply says that the Government may not make regulations in such a way as to exclude categories of business such as small and medium-sized businesses from auto-enrolment. What is the Government’s particular problem with this amendment?
Lord Bates
I will come to the noble Lord, Lord McKenzie, in the first instance. We have said that there are three categories, which he rightly referred to: tax protection, leavers and retirees. Those are the issues that we have identified. We are, of course, having a consultation. One of the challenges we invariably have is that we phrase a piece of legislation and make certain statements on the record in terms of the progress of that legislation through the House. We give certain assurances and then put something in to say, “This is to cover for unforeseen circumstances”, to which the legitimate question is: “What are those circumstances?”. The legitimate response to that has to be that they are unforeseen at present.
Responses to the consultation are currently being processed. They will be dealt with and published later this year and could reveal examples that we have not actually identified at present. This is a new policy and a new area and we therefore need to look at this. As I made my remarks about unforeseen circumstances, I gave examples of areas where it would be unacceptable to exclude people from the terms. We have rejected these exemptions and certainly would not want to introduce them. We have identified casual staff and teachers with second jobs, for instance, as being examples of people for whom we would not want this provision to apply. However, there will be further consultation on this issue and I ask noble Lords, if not quite to trust the Government, at least to accept that sufficient assurances have been put on the record. We recognise that there is broad consensus, but this needs to apply to everybody. However, this is a young policy in general terms and therefore flexibility is still required.
Lord Bates
The short answer is that it is not easy. As the noble Lord will well know, given his experience as a distinguished Minister in the previous Government, it is not easy precisely to craft provision in those areas. We will seek to produce further examples by Report, following the responses received to the consultation. However, I can certainly assure the noble Lord that none of the responses has suggested that small employers should be excluded from the scheme. I know that is at the heart of the concern and, I hope, is at the heart of the reassurances which I have sought to give.
Baroness Sherlock
My Lords, I thank the Minister for that response, but confess that I am still a little uncertain about what the Government’s position is. I understood him to say that it is the Government’s policy that all categories of employer should be included and that the Government are still consulting and categories of person may emerge who they do not yet know about who they may wish to exclude in the future, and therefore they need to keep this open. So the question I am left with is: are the Government open to the possibility that somebody may make a compelling case for excluding a category of employer by size? If they are not, there is no reason for them not to accept this amendment. If they are, then, frankly, their assurances are not worth the time that they have been given today. I am disappointed that the Minister has failed to address the specific amendment. However, as we are in the Moses Room, and I do not have the option to do anything other than withdraw the amendment, I beg leave to withdraw it.
Lord Bates
My Lords, these amendments allow for two simpler alternative tests for a scheme to demonstrate that it is of sufficient quality. These were developed following last year’s consultation on technical changes to automatic enrolment, asking for views on whether there is a simpler way to determine whether a defined benefit scheme is good enough for automatic enrolment.
As well as calling for a general simplification in these rules, responses to the consultation highlighted that once the contracting-out period ends in April 2016, all those schemes that are currently contracted out, and so considered good enough, must satisfy the test scheme standard. This is considered unnecessarily complex and burdensome, particularly as, until the end of the contracting-out period, the schemes will have satisfied the higher standard of the reference scheme test. The alternative tests provide for a scheme to be used for automatic enrolment if the cost to the scheme of the future accrual of benefits for active members would require contributions that are at least equivalent to one of two prescribed percentages of relevant earnings. The first will apply at the aggregate level, looking at the scheme as a whole, and the second will apply at the individual level and must be satisfied for at least 90% of relevant members. Moreover, in order to provide assurances about the quality of schemes satisfying this alternative test, the amendment ensures that the prescribed amounts will not be lower than 8% of relevant earnings, in line with the minimum level for total contributions into a qualifying money-purchase scheme.
We are mindful of the need to strike the right balance between increasing simplicity and flexibility and ensuring adequate member benefits across all qualifying schemes. This balance will be one of the key issues to explore as we consult stakeholders on the detail of the alternative tests, and will also be reviewed in 2017 to ensure that the legislation is working as intended. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for his explanation of these amendments. I have two questions. He may have answered them but, although I listened hard, it is hard to be sure. First, will he confirm whether the Bill, with these amendments, will qualify the existing accrued rights protections in any way? Secondly, will he assure us that, given the variations in definitions of pensionable pay, the new defined benefit scheme qualifying tests will be of no lesser standard than the certification alternative requirements used at the moment for employers using money-purchase schemes but using an alternative definition?
Lord Bates
I certainly give the noble Baroness the assurance that she rightly seeks with her second question: there will be that minimum standard. In answer to her question as to whether the amendments will qualify in any way the existing accrued rights protections, nothing that we are doing in this clause or in the regulations that we plan to make under it will have any impact on accrued rights.
Lord Whitty (Lab)
My Lords, in a Bill of extreme complexity, with a large number of amendments that are equally complex, this must be the simplest amendment on the Marshalled List before the Committee. Therefore, I assume it is one which the Government could easily accept or, alternatively, make a slightly different proposition in respect of. Most of my interventions in Committee have been on behalf of the interests of beneficiaries of pension schemes, which I think is right, but this amendment is on behalf of a subset of employers; namely charities, although it would extend more broadly to the non-commercial private sector.
Charities are providers of occupational pensions—in fact, the top 50 charities have pensions liabilities of more than £5 billion. Clause 45 provides some degree of protection for all employers engaged with the Pensions Regulator in restoring the affordability of pension schemes, long-term deficit reduction plans and related matters. It requires the Pensions Regulator to take into account the effect on the employer’s “sustainable growth”. That is obviously a very important issue for commercial private sector employers, but the aim of charities, and of certain other organisations that provide pensions, is not growth. The aim is to work on the object of the charity and, in some cases—for example, with the alleviation of poverty or the eradication of disease—the charity’s aim is to reduce that object and therefore to run down its actual activities in the long run.
“Sustainable growth” is not the appropriate term to give the equivalent protection to private sector employers and to charities and other bodies for which growth is not the objective. I am therefore suggesting that the broader term of “sustainability” should be substituted for “sustainable growth”. Alternatively, if the Government are not prepared to go along with that entirely, I suggest “sustained growth or sustainability”. Otherwise, charities which face equal and, in some ways, greater financial pressures than private sector commercial employers, because of the legal and trustee-type restrictions on how they can use their own money, will have difficulty running pension schemes in many respects. They need this protection, but appealing to this clause, which amends the Pensions Act, would not automatically give them that protection.
I hope that the Government can consider this amendment and accept it, or at least make it clear, in an amendment of their own, that the broader objectives of organisations are also covered by this otherwise very valuable clause. I beg to move.
Baroness Sherlock
My Lords, as my noble friend Lord Whitty has explained, the purpose of this amendment is to ensure that the objectives of the Pensions Regulator, as set out in the Pensions Act 2004 and as to be amended by Clause 45 of this Bill, can be applied appropriately to charities.
We on these Benches are sympathetic to the aims of Clause 45 and recognise that there is a balance to be struck between the requirement on the Pensions Regulator to ensure that there is enough money in pension funds to meet their liabilities and the need to ensure that burdens are not placed on employers, with requirements so tough that they are effectively forced out of business and thus rendered unable to make any future contributions to said pension funds. However, as my noble friend pointed out, there are real concerns among those responsible for managing the finances of charities and other non-profit organisations over whether the clause, as drafted, is fit for purpose.
Charities have charitable objects that effectively circumscribe their purpose and activities. I declare an interest as the chair of some charities now and having been formerly chief executive of three different charities. I also remind noble Lords of the interest I declared previously as a non-executive director of the Financial Ombudsman Service.
As my noble friend has pointed out, charities do not necessarily aspire to grow as companies do. They may happen to grow, if demand is there and money is available to fund their activities. They may aspire to grow, to increase the number of people that they work with in line with their charitable objectives. However, they may not. In my time, I have presided over charities that grew but I have also taken decisions that effectively reduced charities by refocusing them on core objectives and ensuring that they were sustainable. While charities generally do grow, they also need to be sustainable, and that is what my noble friend is addressing here.
This is not a negligible issue. Registered charities employ around 850,000 people. The voluntary sector, according to the Charity Finance Group, contributes £11.6 billion to UK gross value added, compared, for example, to the contribution made by agriculture, which is just £8.3 billion. As my noble friend pointed out, there is a significant issue with charity pension funds. The Charity Finance Group estimates that the top 50 charities are carrying almost £5 billion in liabilities. I am advised that those liabilities, and the actions that have been required to flow from them, are driving a significant number of charity mergers. This is having an effect on the architecture of the sector, not just on the individual charities and their employees. Those charities are understandably nervous about any shift in direction or emphasis that is not appropriate to their circumstances.
I have personal experience of the fact that charities have often suffered at the hands of legislation or public policy that was based on the assumption that most organisations were either public or private and did not take into account the often quite different structure and funding arrangements of charities. The noble Lord has had significant involvement with charities and will understand that point.
If the Government are not minded to accept this amendment, can the Minister tell the Committee how the Government envisage “sustainable growth” being applied by the regulator to charities? What reassurance can he give to worried finance directors of charities? Can the Minister remind the Committee of what relationship, if any, there is between his department and the regulator when it comes to deciding how best to interpret their objectives as set out in statute?
Lord Bates
My Lords, this amendment relates to the proposed new objective for the Pensions Regulator. The Pensions Regulator oversees the scheme funding regime for defined benefit pension schemes. This regime requires, among other things, the regular evaluation of a scheme’s funding position and a formal recovery plan to plug any deficit identified.
In undertaking this evaluation, the Pensions Regulator is guided by a number of objectives set out in the Pensions Act. It is therefore important, in reference to the remarks of the noble Lord, Lord Whitty, and the noble Baroness, Lady Sherlock, that when we talk about this new requirement, it is placed in the context of the six or seven different measures that the Pensions Regulator will take into account in determining the funding rate that is necessary for the scheme to make up any deficit. While some consideration of sponsoring employers is implicit in these objectives, the new objective will make it explicit that the regulator must consider them, alongside members and the Pension Protection Fund, in deciding upon the suitability of deficit recovery plans and other decisions related to scheme funding.
The new objective responds to concerns expressed by sponsoring employers which felt that they needed to be recognised in the regulator’s statutory objectives, given their importance to defined benefit schemes. The current wording of the objective refers to sustainable growth, as the Government believe that the best protection for scheme members is a strong, healthy employer standing behind its scheme now and in the future. Whether that is a charitable organisation or a commercial organisation, its health must be the first objective in order to keep a sustainable body behind the scheme. Sustainable growth can benefit both the organisation and pension scheme members via a potentially stronger employer covenant underpinning the pension promises made.
Lord Bates
My Lords, the four amendments I will speak to fall into two groups of two. The first two, Amendments 64A and 72A, relate to the application of the PPF compensation cap to individuals who have entitlement to both an occupational pension and a pension credit arising from a divorce or civil partnership dissolution settlement. It has come to light during the drafting of the Bill that the way in which the PPF currently applies the compensation cap to this group, while in line with the policy intent, does not comply with legislation. When compensation is calculated, these two entitlements are kept separate. It was the intention that the compensation cap would also be applied separately and this is what the PPF is currently doing. However, the legislation, as currently worded, requires the two amounts to be added together and the total capped, leading to a significantly lower payment. These amendments simply bring the existing legislation into line with the policy intent and the actual practice of applying the cap separately. They also allow the change to be applied retrospectively to cover past calculations and for them to come into effect from Royal Assent to reduce the period in which the practice and the legislation are out of alignment.
The second set of amendments—Amendments 67A and 67B—relates to the provisions in the Bill that establish a long-service compensation cap in the PPF. Those provisions in Clause 47 already make provision for how the long-service cap will apply in the calculation of PPF compensation for individuals in the PPF when the long-service cap legislation is commenced. The amendments deal with how the long-service cap should be applied when a scheme is either undergoing assessment by the PPF or winding up when the long-service cap is introduced. When the legislation commences, a scheme could be in the PPF assessment period—that is, being considered for entry to the PPF, or the scheme could be in wind-up.
Members of schemes in the assessment period will see their payments increased to reflect the long-service cap. However, any valuation of the scheme’s liabilities as part of the assessment period will continue to be based on the current cap structure. Any scheme that winds up outside the PPF, after being in assessment or not, will allocate its assets against the current cap structure. I hope that is absolutely clear. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for that very helpful explanation of these amendments. He may have answered the question that I am about to ask in his final sentence but I did not quite catch it, and I apologise for asking him to repeat it. In relation to the cap, for schemes currently in assessment, do the current PPF rules and levels of benefits or the more generous rules apply?
Lord Bates
The answer is that the current provision applies if a scheme is wound up outside the PPF. Schemes will increase payments where appropriate to reflect a long-service cap. However, the scheme’s liabilities will continue to be measured against the old cap. This is to prevent the actuary having to recalculate the scheme valuation, leading to delays and extra costs. I hope that that is helpful to the noble Baroness and thank her for raising the point.
Baroness Sherlock
“National Employment Savings Trust transfers
(1) In relation to NEST, the Government must by 30 August 2014 notify the European Commission that it wishes to lift the ban on transfers and the contribution cap.
(2) The Secretary of State must make a statement to Parliament within 14 days of the Government notifying the European Commission in accordance with subsection (1).”
Baroness Sherlock
My Lords, the amendment in my name and that of my noble friend Lord Browne would require the Government to lift the restrictions on the National Employment Savings Trust, or NEST, on transfers made before 30 August 2014, and to notify the European Commission that they wish to lift the ban on the transfers and the contribution cap. Following this, and within 14 days of the notification, the Government would be required to make a Statement to Parliament.
The Government’s decision to legislate now but not to lift the restrictions on NEST until 2017, and to refuse to lift the ban on transfers in and out until pot follows member commences, is cause for real concern. Crucially, it cannot be in the public interest for the Government to proceed in such a way. Incidentally, I am sure that the Minister has noted the recommendation from the Work and Pensions Select Committee that the restrictions be lifted without delay.
I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had once been a concern among some. Indeed, the restrictions have meant that NEST has been able to get less of that low and medium-earning segment than it otherwise would have done, which will contribute to the increase in the number of small dormant pots.
While the contribution limit will be lifted from 2017 by legislation, the restriction on individual transfers in and out of NEST will be left to coincide with the beginning of pot follows member. Whether the income cap is such a problem up to 2017, the continuing ban on transfers in and out will be. The DWP’s own research found that more than 80% of employers want one provider. However, the ban means that any employer who is thinking about using NEST but currently has a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government are encouraging employers to use NEST but, by refusing to lift the ban on transfers in and out right away, they are discouraging those employers who currently have a scheme elsewhere. In this way, NEST is being disadvantaged against many of its market competitors.
Our amendment would enable employers who currently have an existing pension scheme to take their employees with their existing savings into NEST. While there remains a ban on transfers in and out, those employers cannot use NEST, or can use it only by leaving any existing pension pots in a stranded place, with a different scheme. Has the Minister considered that aspect of the Government’s decision?
It appears that what the Government are actually doing is ensuring that the restrictions on NEST remain until every employer has staged. By the time the NEST restrictions are lifted, auto-enrolment will be complete. There are a number of significant problems with the Government’s position. First, as the pensions industry acknowledges, NEST provides best-practice standards, which has obliged the insurance companies to improve their standards. Yet NEST is disadvantaged in competing for many of the low and medium-earning savers for whom it is designed. That may well result in customer detriment for many of those workers. Secondly, the Government’s proposals fail the public interest test. If large numbers of low and medium-earning employees cannot use NEST, it is thereby being prevented from delivering its public interest obligation. Thirdly, restricting NEST impacts on its financial position and makes it harder to pay back the state aid earlier and thereby allow it to reduce its charges even further. This again undermines NEST’s public interest obligation and its mission to deliver a low-charge, high-governance pension proposition. Finally, the rest of the industry is reported in the pensions press as increasingly not having the capacity or, possibly, desire to cope with all the employers who are still to stage in. Having had, it is said, the advantage of the NEST restrictions in place while larger employers move in, the rest of the industry is perhaps less interested in the smaller end of the market.
I trust that the Minister will be able to explain why the Government have so far refused to lift the restrictions. However, whatever has been said in the past, I urge the Minister to accept this amendment; but if he cannot do so today, I hope that he will take it away and reconsider before Report the strong case for these restrictions to be lifted—not in a few years’ time but now, before auto- enrolment is complete. I beg to move.
Lord Bates
My Lords, I thank the noble Baroness, Lady Sherlock, for giving me the opportunity to update the Committee on all things NEST.
As noble Lords know, the National Employment Savings Trust was established to support automatic enrolment, providing access to a quality, low-cost scheme for a target market of low-to-moderate earners and smaller employers. We are now just over one year into automatic enrolment and NEST has around 800,000 members and 2,500 participating employers. Opt-out rates are low, with only 8% of individuals enrolled into NEST choosing not to save for their retirement. NEST is already very successfully doing what it is there for—supporting automatic enrolment.
However, we are approaching a peak in the staging profile. Between April and July this year, 27,000 medium-sized employers will start to enrol their workers, and from April 2015 more than 1 million small employers will do the same. We anticipate around 65% of these small and medium employers will use NEST. By the end of staging we expect NEST to have admitted around 750,000 employers and to be providing a pension saving vehicle for between 2 million and 4 million members.
This implementation challenge is what we need NEST to focus on. We need to ensure that the millions of people currently not saving sufficiently for retirement are provided with an opportunity to do so, and that NEST plays its part in starting to make pension saving the norm rather than the exception. For this reason, during the implementation of automatic enrolment, it is critical that NEST focuses on the key task of getting employers and workers on board without distraction. That is why we announced that we will be lifting the annual contribution limit and transfer restrictions currently placed on NEST by April 2017, when implementation for all existing employers is complete.
I am pleased to advise the Committee that, following an invitation from the European Commission, the Government submitted a formal notification earlier this month of their plans to lift these two constraints. The Commission will provide its response in due course. Once this has been received, the Government intend to consult on draft regulations and bring forward secondary legislation later this year to lift the constraints in 2017.
These regulations will provide certainty that beyond 2017 NEST will be on a similar footing to other providers and its members in the wider pensions market. It will enable NEST to support the successful implementation of automatic enrolment but will send a clear message to employers that these constraints will not have any bearing on them in the longer term, helping them to make an informed decision about automatic enrolment scheme choice for their members.
The Government are committed to ensuring that the introduction of automatic enrolment is a success. Effective implementation is important for building and maintaining consumer confidence in the reforms. Removing the annual contribution limit and transfer restrictions by April 2017 is the right approach.
The noble Baroness asked if the ban on transfers stopped employers from choosing NEST. NEST already has 800,000 members and 2,500 participating employers. Given that the overwhelming majority of employers that have staged so far are large employers, the evidence suggests that the constraints have not unduly deterred employers from choosing NEST.
This is an operational capacity issue for NEST. The restrictions on transfers in and out of NEST were designed to enable NEST to focus on its primary objective of supporting the introduction of automatic enrolment. Between April and July this year, an anticipated 10,000 to 15,000 medium-sized employers will start to use NEST to meet their automatic enrolment duty. It will not stop there, with more than 1 million small employers starting to enrol their workers from 2015.
I hope that those comments and updates, and the responses to the questions that the noble Baroness rightly raised, will enable the noble Lord to withdraw his amendment.
Lord Bates
The noble Baroness makes a important point in relation to this and I would not dissent from it. NEST has a vital role to play and we want it to be a success. However, it is new, and a new system is coming online, so this ought to be done through learning from experience in a gradual and incremental way rather than as a big bang, of the sort which has had its problems in the past.
Baroness Sherlock
My Lords, I thank all my noble friends who have contributed to the debate and am grateful to the Minister for his graciousness in revising his position. It is quite possible that my noble friends are in a better position to decide what the Labour Government intended by these measures than he perhaps is, despite his knowledge and his current position, since they were involved in shaping it.
Lord McKenzie of Luton
I look forward to the letter and its contents in due course. We were relaying the origins of NEST in the first place. These issues—the restrictions—were not intended by the then Government that introduced it to avoid NEST being distracted.
Baroness Sherlock
I thank my noble friend for that. First, I am disappointed that the Government decided to go ahead and stick with their current position. I would have liked the House to have the opportunity to discuss this further, as I do not think the Minister took on seriously the arguments made from this side. There was no reference at all to the question of scale. If the reports one hears from the industry are correct, it is possible that some of the big players may, this year or next, shut their doors to new members. We should do everything possible to enable NEST to build an appropriate level of scale and to enable it—far from distracting itself—to do precisely what it was set up for: to fulfil its public service obligation by delivering a high-governance, low-charge offer to those who can benefit from it.
The Minister made reference to employer choice but of course, by definition, the constraints actually reduce employer choice. Employers who want to go into it are unable to because the restrictions remain in place. I am disappointed that, despite the pressure from this side of the House, the Government have not revised their position. However, given that we are in Grand Committee and I can do nothing else, I beg leave to withdraw the amendment.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 4 months ago)
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Baroness Sherlock (Lab)
My Lords, all noble Lords who have spoken have laid down a significant challenge to the Minister on this part of the Bill. I do not propose to add a great deal, but there are a few questions that I would like to clarify. First, in his opening remarks, I think the Minister said that one of the problems being addressed was that there were significant levels of incorrect awards of pension credit because various assets and income were not being taken into account if they happened after an AIP was set. Does he mean incorrect? Presumably, he does not mean incorrect if they were in line with the rules. If someone is not required to declare it then they do not affect the award, but maybe I misunderstood that point.
Secondly, there is a question about the additional changes of circumstances. I am struggling a little to understand what the department does and does not know about this. The impact assessment states:
“We have limited evidence for the additional number of changes of circumstance that are likely to be reported each year as a result of the change in policy”,
but the impact assessment provides an estimate of £17 million a year as the cost of processing additional changes of circumstances and reviews. What assumptions is that figure based on in terms of the number of changes of circumstances?
Picking up a point made by my noble friend Lord McKenzie, what estimate has the department made of the likely increase in fraud and error as a result of the abolition of AIPs? Will the Minister remind the Committee what sanctions will be imposed on pensioners who fail to report a change in retirement income or capital that is relevant to their award? I would also be interested to hear what kind of support will be given. Will he also take the opportunity to remind the Committee how pensioners will be informed of this, how they will be reminded and what discretion can be exercised in choosing whether to sanction them, and of course what appeal mechanisms are there. That would be very helpful.
There is then the crucial question of the likely effect on the level of pension credit awards to those who have, or would have had, an AIP. The impact assessment was encouraging at first because it states:
“Analysis suggests that many customers are not currently reporting changes which would lead to an increase in their entitlement so they may actually benefit from the simplification of the policy”.
Can the Minister explain the use of the word “simplification”? At the moment, if I have an AIP and an income only from pension and capital, I do not have to tell the DWP about any changes in income, but in future I will. How is that simpler?
On the question of level, the briefing said that despite the fact that many customers may be better off, most people will not be better off as the Minister and my noble friend Lord McKenzie have pointed out. It is obvious that they could not be if £80 million a year is to be saved. Also, my understanding is that not only will there be twice as many losers as gainers, if I have read this correctly the average gainer will gain £6.70 a week but the average loser will lose £13.10 a week, which is twice as much. Will the Minister clarify whether that is right and if so what average means in this context? Is it a mean or median figure?
On the impact by age band of abolishing AIPs, the briefing from the department says that it is not possible to break down savings by age band, but that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Will the Minister help me understand that distinction? Assuming that they are spared, these younger pensioners will go on to be over-75s, who would have been entitled to an indefinite AIP. Is the assumption that that cohort, when they reach 75, will still be less likely to have savings over £10,000 or other pension income and thus less likely to face a change in pension credit entitlement? In other words, is the distinction one of age or cohort?
Just out of interest, did the department make any assessment of the effect and cost of, for example, maintaining indefinite AIPs for pensioners above 80 or 85 or any other age level? There is then the question raised by my noble friend Lady Hollis on equity release. I have no intention of standing between my two noble friends on the question of how they should be treated, being a woman with an ambition to live to at least 75 myself. But this is a serious question, to which the Minister responded at Second Reading simply by saying that,
“equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital”.—[Official Report, 3/12/13; col. 193.]
Of course, that is obviously true; for some people it may, and for some it may not. The briefing on the subject that came from the department had a note attached to it that may have come from the Department of Health, entitled, Reforms to Care and Support: Financial Product Review. That said, on equity release:
“Some people do use this to fund the cost of domiciliary or home care. No data is collected on the number of people who take out equity release to pay for care but it is currently very limited”.
At the risk of being a pedant, if no data are collected, how do the Government know that the number is very limited? I wonder if they are perhaps relying on the Age Concern survey referenced in the DWP briefing note, Abolition of Assessed Income Periods—Equity Release? I think probably not, however, because it suggests that the sample size was too small to be used for extrapolation. So I am sure that is not the source of it. But they must be able to make an estimate to be able to declare that the number is very limited, so can the Minister tell the Committee how many people the department estimates take out equity release to pay for care?
The importance of this question is to understand its implications. Even if the Minister takes the view that he does not regard this as being anything other than administrative easement, as explained by my noble friend Lord McKenzie, the Committee needs to understand whether there will be consequences for the treatment of income that may be needed to pay for care and, if so, how those costs will otherwise be addressed. I look forward to the Minister’s reply.
Lord Freud
My Lords, I shall deal with the equity release issue first. Assessed income periods were never intended to enable people to shield their income and capital from interaction with the means-tested system. Pension credit is a safety net benefit providing support for daily living needs for the poorest and, as such, should be a last resort.
Lord Freud
My Lords, my experience of cat skinning is that it takes quite a long time, so I am not sure that I can promise the aforesaid cat in its dematerialised form in the right time.
Baroness Sherlock
I am sorry, but I am pressing the Minister on the comment about the assessment of how many people use AIPs for equity release. The phrase I think he used at the beginning of his remarks was that this may be a minority of claimants, which is about as vague as it is possible to get in terms of a formulation. Can he shed any light on this?
Lord Freud
No, my Lords. We do not have any precision on this, and that is one of the reasons that we want to look at it in the context of social care. Clearly, one will need to build a better evidence base rather than me extrapolating from a very thin one. The cat is small; it is possibly a kitten.
On the question from the noble Baroness, Lady Hollis, about potentially retaining AIPs until the age of 75, while the noble Lord, Lord McKenzie, talked about the age of 80, we do not have a breakdown of age from the sample of AIP reviews that we have taken, but we have no evidence to suggest that older pensioners have more stable incomes than younger ones. Retaining AIPs for older pensioners would prevent us driving many of the inaccuracies out of the system and would lead to a two-tier system, whereas we want to see a single, understandable regime for everyone. Older pensioners are more likely to have indefinite AIPs already in place in April 2016 because they are being retained, so they should not experience any significant changes to their reporting requirements.
On the more detailed question about numbers raised by the noble Lord, Lord McKenzie, on the breakdown between guarantee credit and savings credit, I do not have it to hand behind me right now, but I am happy to offer a letter providing that. I can confirm to him that someone who applies for pension credit can make a claim for housing benefit, but people will be encouraged to seek council tax support. As the noble Lord is fully aware, that scheme was localised in April of the current financial year.
Lord Freud
As the noble Baroness is fully aware, the dividing line is actually much more spread given the complicated transitional arrangements between one system and another. There is not the sharpness of a dividing line—I know the noble Baroness is fully aware of that because we have debated it in great detail. I am conscious that we are pressed for time.
Baroness Sherlock
There are three questions that the Minister did not answer. I am happy for him to write to me: I wanted to get them on the record so that they could be picked up before Report. I asked about the estimate of £17 million in the impact assessment for the cost of processing additional changes of circumstance. What assumptions was that figure based on in terms of the numbers of additional reviews or changes of circumstance?
I asked what estimate, if any, the department had made of the likely increase in fraud and error as a result of AIPs going. Also, the departmental briefing says that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Is it that cohort or because they are young and therefore when they become old that will no longer apply?
Lord Freud
My Lords, I will arrange to write to the noble Baroness. I think I can deal with the second point straightaway. We simply do not know whether it is an age or a cohort effect, so I cannot be clearer about that.
Baroness Sherlock
Baroness Sherlock
My Lords, as we move on to Part 5 of the Bill on private pensions, I want to take the opportunity to remind the Committee of my interests in the register. I have a remunerated interest as the senior independent director of the Financial Ombudsman Service.
This group of amendments looks lengthy, but its aim is remarkably precise. Amendment 62ZC to Clause 32 is actually very simple; it retains the power of the Secretary of State to put in place the consolidation of small pension pots but removes the part of the sentence that limits this to the pot follows member form of consolidation. I will focus my contribution on Amendment 62ZC, as the other amendments in the group address the consequences arising from that specific change. The Government believe that action is needed to address the large number of dormant small pension pots which will arise under auto-enrolment when employees move to new jobs, as they do on average 11 times in their careers. We from these Benches agree that action is needed, but not the form of action proposed.
The impact assessment confirms that the Government considered two default transfer options. The first option would be pot follows member, where small pension pots follow the member to the new employer’s pension scheme. The second is an aggregated scheme in which the small pension pots are transferred to an aggregator such as NEST. The Government had two choices, and I believe strongly that they made the wrong one.
As it stands, the clause allows only for pot follows member. Our amendments would allow the possibility of using a default aggregator model without the need for new primary legislation. I propose to comment on the problem in order to demonstrate why I believe that the Government’s proposed solution is flawed, to put forward an alternative, and then pose some questions to the Minister. I promise to do it as quickly as is practical.
I turn first to the context. The core issues of trust and confidence which we have discussed previously are still centre stage in getting people to start and to continue saving for their retirement. We were reminded afresh by my noble friend Lord Hutton that we do not have a savings culture in this country in Committee last week. This Bill and auto-enrolment need to give people the confidence that they need to save for their old age. but how can we demand that people save if they do not trust the saving vehicles and they do not trust the pensions market as offering value for money?
The pensions market is not a typical retail market where the consumer chooses the product. Under auto-enrolment, the consumer does not choose the product at all—the employer does. The employee choice is either to stay in or opt out and lose the employer contribution completely. There are also many intermediaries in the pension supply chain. Pensions are a complex product; they lack transparency, and while large employers may have the resources to pay for good advice and assessment of fund performance, SMEs may not. The demand side is weak.
The pensions market also has some very big players who offer pension fund products, asset management, and annuities. The OFT says that the four largest players have between them 68% of the assets, 76% of the schemes and 61% of the members. The results are predictable; the combination of a concentrated supply side and a weak demand side is bad for savers and allows conflicts between the two to go unresolved, which is not in savers’ interests. Those characteristics of the pension market combine, as the OFT report puts it, to make the market “dysfunctional”. The OFT concluded that,
“competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Future clauses and amendments deal with the criticisms raised by the OFT in its report, but this clause and our associated amendments deal specifically with the challenges of small pension pots created by auto-enrolment. The Government estimate that 50 million pension pots will be created by auto-enrolment by 2050, 12 million of them under £2,000. Already, one in six people have lost track of their pension pots, and there are 1 million unclaimed pension pots out there. The evidence is clear that the Secretary of State needs power to make regulations automatically to transfer and consolidate small pension pots. We all agree that a default consolidation mechanism is needed for those people who do not make an active choice to transfer their pensions. The point of contention is how this should be done.
Lord Bates
Yes, and our hope and belief is that there will be higher standards. That cannot be issued by diktat and has not been covered. We are simply giving the powers and setting out the framework as to how we will go about that, but that discussion has to be had with the pensions industry. The conversation is ongoing and we will certainly be reporting on that progress.
I turn to some of the specific points that have been raised. The noble Baroness, Lady Sherlock, talked about the level of support and seemed to be fairly sceptical about whether there was any.
Lord Bates
The noble Baroness always asks an honest and genuine question, and I am trying to give an honest and genuine response, which is to say that we are not necessarily comparing like with like here. Although people understand how the pot-follows-member scheme might work—in other words, they will have just one pot, and everything will be transferred into it—they do not necessarily understand what the noble Baroness is proposing in terms of alternatives, whether they are single, multiple or virtual aggregators. Therefore, to give a clear-cut position on that is somewhat difficult.
It was drawn to my attention today that Adrian Boulding of Legal and General, one of the largest pension providers, in today’s Pensions Expert, formerly Pensions Week, says:
“the concept of your pension pot following automatically to a new employer is now not far off. The long-term benefits of people having ‘one big fat pension pot’, as the minister likes to call it”—
I think the Minister he is referring to is my right honourable friend Steven Webb—
“will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for”.
Baroness Sherlock
I thank the Minister for that response and am also very grateful to all noble Lords who have contributed to this discussion. The noble Lord joked at the beginning that the Turner commission had been quorate. I think when he reads Hansard he may find that slightly less funny than it seemed on the face of it. If I was sitting where he was sitting and two-thirds of the members of the pensions commission told me that I had got this wrong—auto-enrolment and all that flowed from it was based on their recommendations—I would be thinking very hard indeed at this point.
I am very grateful to the noble Lord, Lord Turner, for what seemed to me a pretty damning indictment of the fact that, although we may share an objective, the way the Government are going about trying to achieve this will not tackle the very grave consequences of market failure in the pensions market for savers who are depending on the results of those investments for their retirement income. As my noble friend Lady Turner pointed out, that is one of the most significant issues facing not just the Government but, frankly, this Committee.
I am sorry. I have a great deal of respect for the Minister but I am afraid that he was unable to answer the major questions that came up today. I do not blame him for that. He did not invent the policy: it was invented in another place and he is doing a good job of defending it. But the fundamental questions are out there unanswered. The noble Lord, Lord Turner, pushed home the consequences of that market failure on high costs and charges and what that does to savers’ incomes, and the fact that, despite the Government's best intentions, pot follows member simply does not contain within it the means for addressing that.
The noble Lord also pointed out the consequence of what happens to savers’ incomes in retirement of not getting that right now. Those effects will run for a long time. I was very grateful for the intervention of the noble Lord, Lord Stoneham. Given the origins of this Bill, I thought it was a brave and helpful intervention. But the questions that he posed about how pot follows member can deal with old pots and multiple moves are still sitting on the table. It will be interesting to hear whether there is some small movement on auto enrolment pots, but we will still have the issue of significant numbers of dormant small pots.
We still do not have an answer, as my noble friend Lady Drake pointed out, to the problem of people who are leaving the labour market altogether either to become self-employed or simply to leave the labour market. What happens to those pots?
We did not really get an answer as to why, when so much of the Bill is remarkably loose, the Government suddenly get very prescriptive in this area and solely specify PFM on the face of the Bill. As my noble friend Lady Drake pointed out very powerfully, there are some major difficulties of implementation. The Minister is calling for speed and action now. He must know that the barriers to implementation described by my noble friend Lady Drake are such that he is not in a position to press that button now. If he is, he might want to respond to the questions that she posed about the IT challenges, the standardisation challenges, the huge issues of implementation and the need to build consensus across the industry to prioritise savers’ interests. If he feels that the Government have all those cracked, I encourage him to stand up and intervene and tell me now. Otherwise, there is a lot more work to be done. All this amendment is trying to do is to make sure that that work does not abandon the alternative option—which may in the end be the saving of our shared objective—when there is no need to do so at this stage.
I am also concerned about some of the points that the Minister raised in response to there being no single model. I would be very happy to work with the Government to see if we can build consensus around a single model of an aggregator. If that is what the Minister offers, let us work together to try to do that.
The Minister said that there would be more consolidation in pot follows member. Leaving aside for one moment the serious concerns about the judgment made in the impact assessment raised by my noble friend Lady Drake and the noble Lord, Lord Turner, if pot follows member does not tackle the full range of risks that have been described, then that simply does not answer the question. The Minister again gave an argument that most annuity providers would require a minimum level of pot and the point of decumulation, but again he did not take on the point made by my noble friend Lady Drake, which is that being able to buy in bulk in the market, which an aggregator could do at the point of decumulation, actually opens up whole opportunities in that area.
He made the point about good and bad schemes and that there should not be any bad schemes. I completely agree with him, but there are 200,000 pension schemes in this country. The chances of getting all those up to an optimum level before this is introduced are frankly unrealistic. Given that, the point made by my noble friend Lady Drake stands even more strongly. Even if the Government could guarantee to get all those schemes up to what they would regard as an acceptable minimum standard in the context of the criticism of market failure made by the noble Lord, Lord Turner, and even if they could do that fast, there will still be a significant difference between the best and worst returns. For reasons I will explain in a moment, that seems to be very difficult in the context of auto enrolment.
I was pleased that the Minister managed to find some backing for his scheme from a survey. Did he say that the survey was conducted by the ABI?
Baroness Sherlock
That is marvellous. So the ABI backs a scheme and the survey conducted by the ABI backs the scheme. That is excellent. I think it still leaves out some possibility that there may be other people out there who do not back the scheme. Perhaps it was the other way round. Either way, I think it is the same point made differently. None the less, I take the point and thank him for sharing that with us.
The Minister also made the point that there will be real attractions—and he quoted someone from Legal & General saying that it was clear that the direction of travel from the Government was for pot follows member. There are—but, of course, this is a Bill, not an Act. It is open to Parliament to make a decision if it does not agree with what the Government are proposing, and so far this Committee clearly does not agree with what the Government are proposing. Not one person who has spoken backed the Government’s plan; all backed the alternative. So we still have an opportunity. He also went on to say that many advantages have been mentioned of people having one big, fat pension pot. Of course, there is no reason why that big, fat pension pot could not be sitting in a well performing, well regulated, successful aggregator.
That takes us to the fact that we have two significant public policy dilemmas or issues. The challenge that we have here is made all the more significant by the fact that it comes on the back of auto-enrolment. This is not an individual employee making a choice to go to a pension fund, place their money in it and take their risks in the market. This is somebody who is not choosing, but is simply choosing a job, and by doing so will be forced by default, if they make no other choice, automatically, without their express consent, their pension pot will be moved from their previous employers to their new employers. That is in the context whereby already the state has auto-enrolled them. So step one, without any active consent, we have auto-enrolled them in a pension scheme. Step two, when they move jobs, without any active consent we default moving it with them to the new employer. Doing that in a context where the level of return that they might have expected to gain with the old employer could, potentially, be significantly higher than that which might be enjoyed with the new employer, creates the possibility that the state is creating consumer detriment on a significant scale. That is a very serious challenge, and in that context I suggest that the Government’s proposal of pot follows member has a very high bar to pass.
Finally, the other public policy point is that, if one of the consequences of this is that significant numbers of savers end up with lower retirement incomes than they might otherwise do, that is bad for them, but it is also bad for us as a country. I think that my noble friend Lady Drake quoted from the impact assessment, which suggested that the gains and losses would balance out across the piece. Even if that is true, and I do not know the impact assessment well enough to be sure—I do not have enough confidence in it yet to be confident of that—that does not help us individually. On average, the life expectancy may be X, but if mine is significantly below and yours is significantly higher, the difference matters quite a lot to me, because although on average we may both die at 84, if I die at 60 and you die at 100, that does not make me happy. So the consequences for individuals are really quite significant.
Given all that, there is also the fact that the distribution will mean that, if savers do not go into retirement with the kind of incomes that the Government expect them to have, the whole strategy for retirement on which this is predicated begins to be called into question. So this whole Bill is predicated on an assumption that future generations of savers will have higher retirement incomes because of all these actions taken. It is, therefore, absolutely incumbent on all of us to make sure that the Government get this right. All this amendment does is to put the aggregator option into the Bill. I urge the Minister to accept it and to work with us in doing that. We will definitely return to this matter at a later stage but, since this is the Moses Room, I beg leave to withdraw the amendment.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 4 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Turner of Camden (Lab)
My Lords, Clause 25 increases the pensionable age to 67. It is a key clause, but I wish to oppose the question that it should stand part of the Bill, as I hope to get the Government to think again about it. I know that in legislation that has an impact on millions of people, as this Bill does, it is useful to have arrangements that are the same for everyone—the same benefits and the same retirement age—as that makes things much easier to administer. The problem with that is that we are not all the same. Even more important, jobs are not all the same.
As I said at Second Reading, some people are happy to work for longer. They like their jobs and the social aspect of working with others is important to them. Such people do not look forward to retirement; they like to go on working if they can. These people are often employed in administrative jobs, but for others things are very different. Some industries involve strenuous and often hazardous work—the construction industry is one such. Those who work in such industries do work that is necessary for the rest of us. Without them, we would not have the comfortable lives that we now have. Yet such industries often have a record of industrial accidents and disease, which we should all find unacceptable. It may be dangerous for older workers to work with others in such a working environment. Therefore, an earlier retirement may well be necessary. This simply cannot be left to the private sector. We cannot have legislation that says that all people must work longer before retiring.
It is not only industries that are hazardous where this is a problem. There are many low-paid workers in dreary jobs who are only too happy to retire, as long as they have enough money to do so. People who work in hospital cleaning and dreary jobs of that kind are only too happy to retire if it is possible for them to do so and to receive reasonable benefits when they are retired. Such people long to retire. It is not enough for us to say, “Oh well, you have to work for longer”.
We are often told of the evidence that we are all living longer, but it is not always sensible to use that as a reason for extending working life—not for everyone, anyway. We are not alone in thinking this. A number of my colleagues have tabled amendments to subsequent clauses to seek a review of retirement ages. I certainly think that that is necessary. Have the Government thought through what all this means? What is the impact on people working in particular jobs and their health? What happens when people live longer? What is the effect on their health? Therefore, it seems to me that this simple provision in legislation to ensure that people work for longer is not a good idea. I hope that the Government will be prepared to look at it again, in the light of some of the things that have been said both at Second Reading and in Committee today.
Baroness Sherlock (Lab)
My Lords, as this is the first discussion of Part 2 of the Bill, it may be worth setting out a couple of principles from these Benches at the outset. First, we agree with the principle of raising the state pension age to reflect longevity, as people are living longer than when the current arrangements were put in place, largely in post-war reforms. As I indicated at Second Reading, we also accept the need for periodic reviews of the state pension age, but we differ from the Government on how best to do that—we will return to that issue in the discussion of our later amendment.
Fixing the state pension age is never easy, and an issue of fairness is always at stake. There needs to be a balance between the interests of the generations on the funding of retirement incomes in a pay-as-you-go system, where today’s taxpayers fund today’s pensions. As we will discuss in later groups, our view is that having a careful, evidence-based review before taking any future decisions on changes to the state pension age is a crucial element of ensuring fairness between generations.
However the arguments made by my noble friend Lady Turner require careful attention from all of us. Sometimes fairness also requires at least a consideration of difference, and my noble friend has highlighted some crucial differences, particularly in relation to longevity and health. We all know that life expectancy is increasing, but that fact conceals as much as it reveals. Mortality rates vary widely, as do morbidity rates. There is a huge amount of socio-demographic data available to inform our debate—and I am sure we will hear a great deal of it in the groups to come—from the Wanless and Marmot reviews to government figures and other outside research. There are also some very interesting data from the TUC. I will say more on this later, but I do not want to pre-empt what I think could be a very substantial discussion coming up shortly.
There are no easy solutions to these problems. The biggest challenge to the Government is to address the question of differential mortality and morbidity rates through urgent attention to public health, but we also need time to reflect on how best to deal with these questions in relation to the state pension age. It is our view that the best way to do that is to ensure that the mechanism for reviewing the state pension age includes a review panel which has on it representatives of a wide range of interests in society, including employer and employee representatives and representatives of different parties and, indeed, our own Cross Benches. I shall move an amendment later today to that effect, but in the mean time, I hope very much that the Minister will take the concerns of my noble friend seriously. I look forward to his reply.
Lord Freud
My Lords, the purpose of Clause 25 is to bring forward by just over eight years the point at which the state pension age completes its rise to 67. The latest evidence shows that we are living longer and, on average, healthier lives than ever before. To illustrate this point: a man in the UK reaching the age of 65 30 years ago—in 1983—could expect to spend 14.5 years in retirement. Today, a man reaching that same age can expect to spend about 21.5 years in retirement.
The noble Baroness, Lady Turner, raised the key issue of differential life expectancy. I do not propose to go into that in great detail at this point because we will have the opportunity to address that full-on in the next amendment; so, if she will forgive me, I shall concentrate my remarks on raising the age to 67.
The Pensions Act 2007 was informed by the Office for National Statistics’ 2004-based life expectancy projections. Those projections suggested that a man aged 67 in 2028 would survive for a further 19.9 years. However, on our latest understanding, this same man is projected to survive for a further 21.5 years, fully 1.6 years longer than we thought when setting the original timetable in the 2007 Act.
We continue to believe that it is only fair that those enjoying the benefits of longer life expectancy pay a share of the associated costs. Bringing forward the increase in pensionable age to 66 through provisions in the Pensions Act 2011 ensured the short-term sustainability of the UK’s state pension system. Now, the measures contained in this clause to accelerate the increase to the age of 67, combined with the regular review mechanism as set out in Clause 26, will help ensure the fairness and affordability of the system into the medium and long term. The savings projected to result from this proposal are significant—some £73 billion in net savings between 2026 and 2036—but not only are there net spending reductions, but this measure is projected to increase employment rates and boost GDP by around £100 billion over the same period.
Bringing forward the rise to 67 by some eight years will affect around 8 million men and women born between 6 April 1960 and 5 April 1969: people who are now aged between about 44 and 53. As with previous increases in state pension age, the transition to the higher age will be phased in gradually: men and women born between 6 April 1960 and 5 March 1961 will have a state pension age of between 66 and 67, and those born between 6 March 1961 and 5 April 1969 will have a state pension age of 67. Those born after 5 April 1969 will not be affected by this change because they already have a state pension age of 67 or 68, or somewhere in between the two, as legislated for in the Pensions Act 2007. The proposals in this clause mean that the maximum increase that any individual will experience in their state pension age, in relation to the Pensions Act 2007, is one year. By starting the transition to age 67 in 2026, no one who was affected by the Pensions Act 2011 will have their state pension age changed again by the measures in this Bill. To help people prepare for the change, we announced these proposals back in November 2011, giving the first cohorts affected more than 14 years’ notice.
Finally, noble Lords will be aware that an ageing society is not a phenomenon unique to the UK. That is why other countries in Europe and beyond are moving to adjust the age at which retirement benefits become available. Indeed, even by moving to a state pension age of 67 in 2028, we will still be behind many other countries—Ireland will get there in 2021, the Netherlands and Australia in 2023, and Denmark and the US in 2027. In bringing forward the rise to a state pension age of 67 we are ensuring that the system as a whole remains fair between the generations and sustainable and that we are doing so in a way that is on a par with elsewhere in the developed world. I beg to move that Clause 25 stands part of the Bill.
Baroness Sherlock
My Lords, there are times when one feels rather redundant in these proceedings—and, after a range of extraordinary speeches from my noble friends, this is one of them. I thank very much all those who contributed to this debate.
Perhaps I might start by briefly responding to the noble Lord, Lord Stoneham. I think I may have misheard him, and I hope that he will correct me if I did. He said that inequalities had not got worse, but perhaps I might refer him to the brief sent out by the DWP on equality in life expectancy and in healthy life expectancy. It said that while life expectancy has risen substantially for all social classes, this has resulted in a widening of inequalities, and that the smallest growth in life expectancy at age 65 was experienced by those in the lower socio-economic groups. What has been happening is that life expectancy has been rising for all classes, but because of the differential rate at which it has been rising, the gap has been widening. In fact the inequality problem is significant. That is a question for public policy to address.
We have heard today about trying to find a way to do two things: First, the analysis was made very clear by my noble friends Lady Hollis and Lord Whitty that people are living longer, but the proportion of years spent in full health is not keeping track at the same rate. We have significant inequalities in health within the UK, and significant variations in mortality and morbidity rates as a result. Also, we have people who are not able to work safely through to retirement age. Those are the issues that somehow public policy has to grapple with.
The fact is that mortality rates start rising slowly when people hit their mid-50s, and rise significantly from 65 onwards. That has significant implications for workers and employers. First, we have the implication—to which a number of noble Lords alluded—of having an older workforce. There will of course be employees who find, as my noble friend pointed out, that they cannot work until the state pension age. I wonder what consideration the Government have given to the risk that we will see a growing number of people who are recognised as sick or chronically disabled, but are having to wait so long for their pensions that they end up eating through the savings that they have set aside for retirement and so move into retirement without the very nest eggs that we want them to build up. Has any assessment been made of whether that will be one of the consequences of the changes to state pension age?
Secondly, what happens to those who know that they are unable to work safely at 67 but cannot retire? We have heard various examples mentioned of people in different professions. This is not simply a case for those in unskilled jobs. I would not want to be operated on by a surgeon who felt that his or her eyesight was no longer up to it, either. The reality is that a number of people in different roles may find that they have to face up to the fact that they cannot continue in the same role until a higher retirement age. The real question is whether their differential experience and resources may give them differential strategies for dealing with that. One of the questions for public policy is how we address the problems of those who do not have the resources or choices available to them in that circumstance.
Then there is the question of employers. We know that many employers welcome the wisdom and experience of older workers, but they have often expressed concern that older workers may get seriously ill and be off work for longer periods. I know that the Government have often reassured them that that is not the case and that older workers do not take more time off sick than younger ones. Have the Government given any consideration to whether that is likely to change as the state retirement age increases? Of course, at the moment, people can choose to work beyond the state retirement age and therefore there must be an element of self-selection among older workers who carry on working. As the retirement age increases, people may have no choice but to continue working, and I am interested to know whether any work has been done on whether that could make a difference to the composition of the older workforce.
We then heard about the issue of inequalities in health in relation to the fairness test. I read very carefully through the DWP document on equality in life expectancy and in healthy life expectancy, but in the end, I almost wrote at the bottom, “Baroness Hollis was right”. I found it hard to summarise it other than with something I have heard my noble friend say repeatedly almost ever since I have known her—one can expect 10 years of healthy retirement, 10 years of declining health and the rest of one’s life with significant levels of infirmity and disability. Yet despite that fact, she has pointed out the tendency of Governments to put so much store by actuarial information on average life expectancy. That of course is precisely what the Bill says in bald terms, whatever assurances we may want to receive about how it will be done in practice. The point has been made that average life expectancy tells us something, including quite a bit about how medical advances can keep us alive, but it does not tell us very much about our health in retirement, or about differential mortality rates.
We have heard a huge amount of information about clear socio-economic differences and the health inequalities that result from them. There is also clearly still a gender divide. Women still live longer than men, although the gap is closing. I also note that we are only now seeing a generation of female pensioners who have worked for most of their lives as well as raised families. We do not yet know the impact of that on female longevity—it will be interesting to see that.
Baroness Sherlock
My Lords, in addition to a gender divide, we have heard that there is a class divide and a geographical divide. To add to the examples from Glasgow, Liverpool and Norfolk, I offer Dorset, which I am reliably informed is the place to live—statistically, you are expected to live longest in the UK. Women in east Dorset can expect to live nine years longer than women in Corby—the area with the shortest life expectancy for women. Men living in east Dorset can expect to live 7.1 years longer than men in Manchester—the area with the shortest life expectancy for men. Then there is the effect of this differential life expectancy on state retirement incomes. Those living shortest post retirement, primarily the poorest and least skilled workers, will obviously receive less in state pension than their better-off counterparts in Dorset. Women in Corby will get £67,000 less and men in Manchester will get £53,000 less. And, of course, those manual workers may well have contributed for longer than those who spent longer in education.
Where does all this take us? It does not take us to any straightforward policy solutions. As I am sure is the case with other noble Lords, many representations have been made to me on ways in which the Government should tackle this—that perhaps they should not raise the state pension age until we have tackled inequalities in health; or that a variable retirement age should be brought in, taking account of life expectancy, work pattern or contribution history; or that there should be flexible retirement proposals or the idea of paying actuarially adjusted pensions early for those retiring in their 60s but before the state pension age. It is quite likely that none of these will commend themselves to the Minister. Given the look on his face, I expect that I am right in that. However, I am sure the Minister will accept that what we have heard today is an analysis that suggests that a significant set of public policy issues needs to be addressed. They are not all pension issues—a point that my noble friend Lady Drake made powerfully—but are effectively spillovers from decisions around the state pension age, which will then impact on public policy-making in a range of other areas.
If the Minister does not feel able to respond positively to any of those concrete suggestions on how to deal with this issue, I encourage him at the very least to go along with the idea of spelling out in the Bill the need to take account of all these factors, because that would then at least put the review process for setting the state pension age in the position of having to tackle all these complicated issues and making some recommendations to government on which we could all, I hope, place some store.
Lord Freud
My Lords, the purpose of Clause 26 is to ensure that every Government consider state pension age in light of the latest life expectancy projections and other relevant data. The legislation sets out that a review must be informed by a report from the Government Actuary on the proportion of adult life spent in retirement and corresponding implications for state pension age.
On the point about pensions as a percentage of GDP raised by the noble Baroness, Lady Hollis, the single-tier impact assessment shows that even with an SPA of 67 in 2028 and an SPA of 68 in 2046, the proportion of pensioner benefit expenditure could rise from under 7% of GDP in 2016 to 9% of GDP by the 2060s. I am addressing her point about the baby boom.
It is true that life expectancy is different between socio-economic groups, and even in the latest figures it slightly widened. However, it is increasing for all groups. Such inequalities have always existed and, as the Minister noted in Committee in the other place, adjusting the pension age is not the right way to address these inequalities. We need to address these issues elsewhere through tackling the factors that lead to these differences in life expectancy. To illustrate the rate of increase, the period of life expectancy at age 65 for males in the lowest occupational class between 2002 and 2006 was 15.3 years. You have to go back only to 1999 for the average period of life expectancy of males from all occupations to be the same figure.
I will not go into detail on one of the amendments regarding adult age because we have not discussed it very much, but I will pick up the point raised by the noble Baroness, Lady Hollis, and the noble Lord, Lord Whitty, on the timing of when people enter the labour market.
The single-tier pension’s key features are simplicity—giving people the clarity and confidence to save—and a value set above the minimum income guarantee standard. Allowing early access would mean that we would have actuarially to reduce the pension, and this would severely undermine both these key features of the new system, complicating outcomes and meaning that, if people’s actuarially reduced state pension was below the minimum guarantee, we would retain an extensive and complex system of means-testing. International organisations have repeatedly advised countries to withdraw incentives to early retirement. Indeed, in recent years, a number of countries have put in place measures to discourage it, including Denmark, Finland and Germany.
The changes to state pension age are primarily about fiscal sustainability and fairness between the generations, such as taxpayers and pensioners, at any given time. It is therefore right that the Government Actuary’s Department focuses on total life expectancy from state pension age and not on healthy life expectancy. Indeed, the Pensions Commission advocated that pension age should rise proportionately in line with life expectancy, thereby maintaining the proportion of adult life spent in retirement. Just last week, the noble Lord, Lord Turner, reasserted this principle. This is what the GAD element of the review is for.
We also think it is crucial that future Governments have access to wider evidence before laying any proposals to change state pension age before Parliament. We have been clear in the White Paper and in the other place that we believe the reviews of state pension age should consider healthy life expectancy but also differences between socioeconomic groups and the wider economic effects of increasing state pension age.
On my original point about flexibility, we do not want to be too prescriptive in setting out factors that must be looked at by each review. We want to foster a more long-term view which would allow each Government to specify factors relevant to the circumstances at the time of commissioning the review. There is the danger that, by setting out a list of things for each review to consider, future Governments will simply have a tick-box approach to the reviews. As my noble friend Lord Stonham said—
Baroness Drake
My Lords, I shall speak also to Amendment 54. Amendments 53 and 54 are tabled in my name and that of my noble friend Lady Hollis. They provide for a report on the periodic review of the rules about pensionable age, having regard to life expectancy and other factors, to be prepared by an independent commission.
There is an important role for an independent commission, while recognising that the Government of the day would determine the policy that is brought to Parliament. The demographic challenge poses unavoidable choices, which are partly for society to make and partly for individuals. However, for those choices to be rational and sustainable, they have to be informed, barriers have to be removed and a broad consensus has to be achieved. One of the useful roles of an independent commission is to present society with those difficult but unavoidable choices. It can spell out the facts and choices clearly and starkly. It can identify the complexities. That process will also assist the parties in reaching a political consensus.
Public debate on policy changes will be better focused and more likely to arrive at consensus if there is a permanent independent body charged with presenting to society the evidence and the issues. A commission can provide the public with a clear and comprehensive narrative about what is happening and what it means. Delivering a sustainable state and private pension system and responding to the demographic challenge are long-term projects that cannot be delivered in the lifetime of any one Government.
A consensus needs to be held over a long policy framework, because optimal outcomes take decades to come through. However, securing and maintaining a consensus will not be easy, because deciding the way forward involves important political judgments, and successive Governments have focused very often on immediate challenges. Trade-offs are the essence of political debate, but achieving some degree of consensus on core principles will be easier to achieve if there is an independent commission supporting that consensus. We know that the long-term management of public finances requires intensive debate now about the state pension age—but, notwithstanding the desirability of continuity in policy being achieved, the detail of pension and associated policies will and should be subject to continuing debate over time, in the light of new information becoming available.
Life expectancy and healthy life expectancy may change significantly from current forecasts, trends in voluntary private pension savings could turn out to be more or less favourable, and the participation rate of older workers in the labour force may prove problematic. As the information available changes, so the precise public policy direction can be refined, even if the overall framework of the system maintains as much continuity as possible. It is important that an independent commission should consider the sort of issues and complexities that we all referred to in the previous debate.
As to the type of commission, it should be small, so that the quality of engagement between commissioners is dynamic and qualitative, but sufficient in number to allow for wider input and for the stimulation of considerations that an individual by definition could not achieve. The commission could become a source of authoritative and independent presentation of the facts, and of the estimates of public expenditure consequences and of what future rises in the state pension age might be implied by the principle of pension ages rising in proportion to life expectancy increases. A commission could maintain a clear and steady focus.
The report could capture the key trends in life expectancy and the differences in morbidity, employment and retirement patterns among older people, by gender, region, occupation and socio-economic classes. This analysis would also allow early and regular identification of whether increases in state pension age are accompanied by increases in productive employment and/or a greater reliance on means-tested benefits and whether major inequalities in healthy life expectancy can make across-the-board increases in retirement ages feasible or unfeasible.
For example, if state pension ages rise and average retirement ages rise, state pension expenditure as a percentage of GDP will be reduced, not only by a pension expenditure reduction but by a rise in GDP. However, if pension ages rise and average retirement ages do not, the reduction in pension expenditure will be offset by other non-pension benefit expenditure and lower GDP. These issues are matters of some moment when we are looking to achieve sustainability in the light of what is a major demographic challenge.
Engaging the public is important. Individuals consistently underestimate their own life expectancy. Research confirms that. Individuals on average are unaware of, or do not believe, the projected increases in life expectancy—in some instances, even when the evidence is presented to them. Such attitudes make it difficult for people, particularly young people, to think rationally about the savings rate/retirement age/pension level trade-off that they personally and society face. An independent commission would assist in changing those attitudes and getting those key messages across in a way that very often government and political parties cannot do successfully.
The commission’s analysis could also identify the latest trends in private pension provision on average and across different gender, socio-economic and ethnic groups, and thus of the overall coverage and adequacy of pension provision. This analysis coming from an independent commission could assist in future debates about appropriate adjustments in employee or employer default contribution rates. This is a not insignificant matter and a key debate—one that people are probably feeling tentative about in view of other, wider considerations, but one which certainly an independent commission would help address, as well as helping the formation of a political consensus.
In the debates on previous amendments we heard much reference to data—the quality of the data, what they show, their integrity, whether they are sufficient and so forth. The quality of choices made and policy decisions taken is directly influenced by the quality, quantity and type of data that are available. An independent commission would be well placed to interrogate the quality of the data available and to make recommendations on the gaps or omissions in the data collected, and on the data needed to inform debate.
As the Minister conceded in an earlier discussion, there is a need to take a long-term view on these issues. In considering those long-term issues, long-term projections also need to focus on the uncertainty inherent in such analysis and on important sensitivity analysis. These are issues that a standing commission could focus on. It could assist in helping the debate and in helping the quality of government and individual decisions.
To repeat what I said at the beginning, one of the useful roles of an independent commission is to present society with difficult but unavoidable choices. It can spell out the facts and choices clearly, and it can identify the complexities and assist government and political parties in making the type and quality of decisions that are necessary in the light of the challenges that we face. I beg to move.
Baroness Sherlock
My Lords, I rise to speak to Amendments 55 and 57A in my name and that of my noble friend Lord Browne of Ladyton. I shall speak also to Amendments 53 and 54 in the names of my noble friends Lady Hollis and Lady Drake.
As we heard in the very clear speech from my noble friend Lady Drake, Amendments 55 and 57A provide that the periodic review of rules on pension age should be prepared by an independent commission. I can think of no one better to suggest how a pensions commission might work than my noble friend Lady Drake, who was such a distinguished member of the Turner commission.
As I indicated previously, we agreed that there should be periodic reviews of the state pension age to reflect changes in longevity and the need for people to fund their retirement and also to achieve a fair balance between generations. The question is how to achieve that, and we have grave concerns about the way in which the Government are approaching this matter.
As it stands, the Bill simply says that the Secretary of State shall review the rules about pensionable age. That leaves us with some significant gaps. There is insufficient information about the kind of review mechanism that there might be. There is also insufficient detail about who will conduct a review or how it is to be done, and there seems, on the face of it, to be insufficient scrutiny by Parliament of any recommendations that emerge. Perhaps the Minister will clarify that for us when he replies.
At the heart of this lies a very important question: how do we enable people to have confidence in the system? If we want to encourage people to save for their retirement and we need them to save more, they need to trust the Government, to trust Parliament and to believe that their pensions are safe in our hands. The public need to know that they will not be at the mercy of political expediency and will be protected from any adjustments that might otherwise be made too quickly. After all, they may be nervous about this. There has been a succession of changes to pensions legislation, pensions levels and the state pension age. To suggest just one example, under the previous Labour Government the number of years of contributions required to get a basic state pension—
The Deputy Chairman of Committees (Baroness Fookes)
My Lords, we have to adjourn the Committee for 10 minutes.
Baroness Sherlock
My Lords, as I said, there has been a succession of changes to pension policy and legislation. One key example is that under the previous Labour Government the number of years of contributions required to get a full basic state pension fell significantly, only for there to be a change of Government and for the number now being proposed to shoot back up again. The Chancellor did not help by giving the appearance of using the Autumn Statement to make an ad hoc announcement about the raising of state pension age. Once the dust settled, that turned out to be nothing more than what was already in the Pensions Bill and was therefore not necessary. However, that ran the risk of reinforcing the impression that pensions policy is made on the hoof, and we need to tackle that.
If we are serious about getting Britain saving for retirement, we need a proper, cross-party consensus on the way forward for settling the state pension age. Rather than simply being a matter for the Secretary of State, as the Bill proposes, we need a proper external panel which has the kind of cross-party and independent representation which will reassure the public and give confidence to parliamentarians from across the spectrum. We need a review mechanism that is clearly understood, a review body that is clear in purpose and function and ways of working, and clear parliamentary scrutiny of its finding—the kinds of things that will come from the report.
I know that the Minister will want to be reassuring about the Government’s intentions. In another place, the Pensions Minister said, in the face of pressure from the Opposition, that he had always envisaged a model such as the Hutton review, where the review is chaired by someone who people respect and who has credibility across the spectrum. That point was underlined by the Minister at Second Reading. I am happy to accept that the current Pensions Minister means that. However, even if that proposal were satisfactory, he will not always be Pensions Minister. I mean no disrespect when I say that I hope very much that in 18 months he will not be Pensions Minister any more. I can recommend my right honourable friend Mr Gregg McClymont, should anyone be looking for an alternative. However, Mr Webb, even when he is Pensions Minister, cannot bind the hands of his successors, even in this Parliament, never mind a future one. That is why this matter needs fixing in legislation.
Our amendment proposes simply that the review body should include representatives of the opposition parties and of the Cross-Bench Members of this House to ensure that Parliament as a whole is at the heart of this process. It would also include representatives of trade unions as those who represent those who are spending their ever-longer working lives saving for retirement. This broader representation on the review panel will give people confidence that a wide range of views will be heard. This amendment does not seek to shape the remit beyond that of having a range of competent and representative people sitting on the review panel. I urge the Minister to accept it.
Lord Freud
My Lords, I start by acknowledging the expertise and experience of the noble Baroness, Lady Drake, as a member of the Pensions Commission, on which she was able to rest when she moved this debate.
The purpose of the review is to inform the Secretary of State. Its job would be to collect and analyse the latest data, compiling a report to give the Government of the day the information they need to make a decision. Of course, we are all keen that the Secretary of State receives a report that is both impartial and credible. We appreciate the attraction of a panel to ensure that a wide range of views are reflected in the compilation of the report. However, we have been clear that we do not think that prescribing a committee is the right way to go. We do not want to restrict future Governments by prescribing exactly what the review looks at and who is doing the looking. There is greater merit in allowing Governments to choose whether to appoint a single reviewer—as with the review of public service pensions by the noble Lord, Lord Hutton—or a larger commission, such as the Pensions Commission. Indeed, the latter, set up by the previous Government, was made up of three individuals, two from the worlds of academia and business, neither of which, incidentally, was mentioned in the amendment.
Both of those cases show that a legislative underpin is not required to set up a review that can win cross-party and wider public support and that there is no consensus on where is the best place to find the right people. We do not think that the proposal by the noble Baroness, Lady Drake, to set up a permanent commission—an NDPB or a standing commission, as she put it—is appropriate. That kind of structure is simply not necessary for a review that will come together and publish a report on a single issue, wide-ranging though it may be.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 5 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Freud
Despite the guarantee credit not changing a lot, there is roughly a halving of the overall reliance on means-tested benefits, so there is a move, but I acknowledge that it is not by any means a complete elimination of the use of means-tested benefits.
Baroness Sherlock
I think the Minister may be offering a rather dramatic understatement. It is not an elimination; it is a change of 1%. As we established in the Committee on Monday, most of the reduction in means-testing is related to the abolition of the savings credit, which is removing access to something for people. If my noble friend is right, he has hit on something quite extraordinary, which is that despite the Government saying that the STP will be pitched at a level above the means-tested level for the pension credit, it is in fact, according to his modelling, pitched at a level that will not lift anyone but the 1% who get it out of means-testing. Surely the whole argument collapses at that point.
Lord Freud
My Lords, the guarantee credit does go down in absolute terms. It is already a small percentage of the total. When one gets into arguments about data it gets very confusing, so I will set this issue out very clearly. As I understand it, the issue is about the number of people on means-testing as we look forward into the single tier over the decades. The subsidiary question behind that is what it does to the incentive to save. I will address those two questions with some proper data in a letter rather than trying to do so off the top of my head when I am not absolutely confident about providing exactly the right information.
The start rate of the full single-tier pension should not be viewed in isolation but in combination with the private pension income that some 6 million to 9 million people will gain from having been automatically enrolled in a workplace pension. An inflated start would be unaffordable and unsustainable, and I ask the noble Baroness to withdraw her amendment.
Baroness Sherlock
I am very grateful to the Minister for his offer to write to all Members of the Committee. Will he prioritise that letter and write it before the Committee next sits, rather than waiting until we come back at a later stage of the Bill?
Lord Freud
Yes; I am trying to get letters out at great speed. I am expecting to sign letters relating to the questions from Monday later today in order to get them to Members of the Committee as quickly as possible, so that is a three-day turnaround. I will aim to do something rapidly for today as well.
Lord Freud
My Lords, as I said even before the noble Baroness intervened, even though the numbers today are relatively small, I am not decrying that particular issue. I was referring to the 50,000 figure—the current estimate of those affected. Let me get on with my argument and not worry about that at the moment.
The drive to universal credit is to allow greater flexibility in the labour market, so zero-hour contracts work with universal credit. There may be elements of zero-hour contracts that are of concern, particularly if the balance of power between the employee and the employer is unfair, but universal credit works with that flexibility of the labour market.
Baroness Sherlock
I understand the argument the Minister is making, but let us suppose that the woman described by my noble friend is in a relationship with a civil partner or a husband. What is the most the husband could earn before she would effectively be excluded from universal credit? As they do not have children, if her earnings are low but his are at a reasonable level, she would no longer be able to benefit from his pension. So you cannot assume that she would be caught up in universal credit because her earnings are low.
Lord Freud
I accept that. This is for low-paid households. That is what universal credit is. There will be some people in higher paid households who will have to take a view on how to make their arrangements through voluntary NICs or whatever. I accept that point.
Baroness Hollis of Heigham
My Lords, I apologise to the Committee that I want to raise another substantial issue. After this, I promise that the issues that I raise will get smaller, but other noble Lords’ amendments may be appropriately substantial.
This is about the married women’s dependency pension. This is the first of three amendments. The second amendment is intended to address the issue that widows may face and the third amendment addresses those that divorcées may face. They try to avoid the cliff edge for some vulnerable women—please forgive the political incorrectness. This also applies to men and civil partners, and later amendments apply to male divorcés and widowers.
The peak cost of some £200 million which was suggested by the Minister in the other place would fall in the 2030s for all three groups, including overseas spouses, I gather, which suggests a lower figure, perhaps £100 million a year, during the next 10 years or so. I am grateful to the Box for giving me some additional information on numbers, although I am still not clear about costs. If the Minister can clarify that, that would be helpful.
The Government have rightly helped 10,000 women—it is a diminishing number—who paid a reduced stamp and have put them effectively on to the equivalent of the former 60% dependant pension. At the same time, they are taking that same pension from about 5,000 married women who would otherwise qualify for it each year. This amendment calls for a transitional period of 15 years, as urged by the Select Committee on Work and Pensions on this part of the Bill, having taken a considerable amount of evidence, including some very effective evidence from Age Concern.
This amendment seeks to help women, not many of them, who have, for one reason or another, lived their lives among an older, shall we call it—although I do not mean this to be patronising at all—Daily Mail model, without any expectation that the Government were going to change the rules around them.
On the one hand, the Government are about to reward about 4 million non-working wives with a marriage tax allowance for their husband worth £3.85 a week, costing £700 million a year, and on the other hand they are taking away a £66 per week pension, also derived from marriage—bingo for marriage—at a fraction of the cost of the marriage tax allowance, from older women who have no time to rebuild. The Government are giving to married women with working husbands and taking away from married women who now face retirement with no pension of their own. Husbands—younger men—immediately benefit from a tax allowance transfer which has come as a windfall, while older women lose support that they have been promised all their lives. It is bizarre. Why not spend the first on the second? It will pay for itself several times over and will be far more useful and far more fair for, given their age and such short notice, older women can do little or nothing to build a pension of their own greater than the 60% that they would get as a derived right. That would take 16 years.
Women approaching retirement age had expected the 60% pension and planned their retirement around it. They had, and have, a legitimate expectation. The younger woman and her husband—they are not just cohabiting—receiving the £3.85 household income have not built their lifetime around it and planned for it, unlike the 60% pension. That is simply a windfall. It is unexpected and unplanned and, in my view, much less deserved than the pension that older women were entitled to expect. That younger woman is likely to have many years ahead both to work and gain income and to secure her own retirement with a full pension. I cannot think what mentality, frankly, has produced that juxtaposition and this disjuncture between those two groups, both of whom derive their rights through marriage.
In the other place, the Minister made much of the fact that a significant proportion—more than two-thirds—were male spouses or partners who were born or lived overseas. I now calculate, with the revised statistics that we have had, that huge number to be all of 2,000. However, I have tried to cover that with my,
“ordinarily resident in the United Kingdom”,
which has a good case behind it and which will not trouble the Government.
Indeed, the Minister may also argue, as Steve Webb did in the other place, that he finds it hard to conceive of women who might fall into this group given the wide array of credits—the up to 50 years of working life, which would mean that you start collecting credits at the age of 15 to bring you up to 65, and the 35 years’ NI record requirement. Let me help him, if I may, with two possible categories of women, both of which I am familiar with; I am sure my noble friends have other examples.
I am aware of at least two groups of women who continue to need transitional protection. To get the equivalent of 60% of the future pension equivalent, they would need cover on their own record of at least 16 years—less than that, and they are worse off. Younger women, I readily agree, have time to reshape their plans. They also have appropriate childcare credits, not HRP, which required you to earn actual NI years for it to come into play. Many may have undertaken part-time work above the LEL and may have signed on for JSA, all of this bringing entitlement to a pension of their own. That is as it should be. But women in their 50s do not have that, hence the 15-year transitional period.
Who are likely to lose? The first group is older women with patchy NI years. They got HRP and perhaps did not understand what happened when we replaced it with childcare credits. They did small jobs below the LEL for many years knowing that they would get the 60%. That is what women have told me. They did miscellaneous caring for elderly relatives, credit for which was introduced only in the past five years, which is too late to benefit most of them.
Perhaps their husband’s job took them around the country and they were unable to keep finding new jobs above the LEL for themselves while they moved house and supported his career. As we have discussed, service wives are an extreme case of this. They juggled untidy lives; lives which did not conform to NI requirements. But they knew—or they thought they knew—that they could count on their husband's pension to give them a dependent’s fund. Virtually overnight, as there are no transitional arrangements, that has been taken away.
The Pensions Advisory Service, which I quoted on Monday, completed its survey of nearly 1,000 women and women often commented with additional views. I quote from one of them.
“Had to give up my part-time job when my grand-daughter was born to look after her full-time while her mother and father worked. I’m now desperately looking for work”,
because the NI years have risen to 35. She thought that with 30 years she was all right. She is now 58 and has tried hard to find work but without success. She continues:
“I am getting very worried about the future. I go to bed thinking about it and wake up to face it all again”.
She has a patchwork. She has missing years and we are told that she cannot buy them back before 2006 once universal credit comes into play. Even if she had voluntary NICs, she could not deploy them in circumstances such as hers.
The second group is women who have had poor health for most of their lives—depression, arthritis, angina or diabetes—and they either did not think about or know about incapacity benefits or perhaps believed that the condition was not so incapacitating that they would qualify, especially given the somewhat deliberate stigmatising in the past few years of benefit claimants. Frankly, there has been humiliating treatment of certain claimants by ATOS. I know that the Minister will not want me to recite some of the cases that I have experienced, but they are relevant to this. Their husbands earned enough and, given their poor health, keeping house and perhaps helping out neighbours or local charities was as much as they could manage. If this sounds improbable to the Minister, we are talking about women approaching pension age where the DWP’s own research on benefit take-up among entitled but not claiming pensioners shows how deeply ingrained is the reluctance to claim means-tested benefits.
Such women may have had a few years of NI work behind them but not enough to bring them over the 10-year threshold. If they had nine NI credits or years, they could at least have received £36 a week that they do not in the conventional way, which would normally not have needed to come into play because the 60% was more generous. That de minimis has been removed, although I hope and expect that some women affected will buy an extra year to get over the 10-year hurdle and enjoy £40 a week. However, they probably do not have the time, good health or employability, or in some cases the income, to bring it up to 16 years, or the 60% level that they reasonably expected.
Let me again quote from the TPAS survey. Asked about how they would cope, one woman wrote that she was,
“sick and disabled so unable to save or plan, though very worried as had break in NI due to illness but never claimed benefit”.
Some, but few, I suspect, of the 30,000 affected will be able to afford to buy back missing years. I am not sure whether they can buy them back previous to 2006—we had confirmation on Monday that they could not—where the missing years may have occurred. That relaxation appears to expire in 2015 and the Minister is not continuing it from 2016 onwards.
The Minister at the other end several times argued that if the DWP introduced any transitional period, this would be found by the courts to be arbitrary and would presumably be overturned. He seemed very nervous about the courts; he introduced this argument at least twice when reading his speeches. I am surprised by this. In my experience, if Parliament’s policy intent is clear—see Roe v Wade—it would not fall to judicial review unless it could be shown that it was a decision that no reasonable person could have made. That is quite a high hurdle and clearly not the case here, so if the Minister is going to argue that, may we have proper information about the legal advice that the DWP has received on which the Minister at the other end so heavily relied?
We phased in the rise in people’s pension age over a decade. We are scrapping the pension that they might have drawn at pension age, effectively overnight. I do not think that is fair. If we feel the need to give adequate warning when raising the state pension age, as we did, we should provide adequate warning and therefore transitional arrangements for the most obvious group of real, not notional, losers. It is not difficult. We have the precedent of the reduced married women’s stamp, which we should follow. I beg to move.
Baroness Sherlock
My Lords, I shall speak to Amendment 23, which is in my name and that of my noble friend Lord Browne, and to Amendment 12 in the name of my noble friend Lady Hollis, who has outlined the basic issue at stake here. I need not repeat that. As we know, the single-tier pension will be based solely on an individual’s contribution or credit record. Everyone will get out depending on what they put in; as they sow, so shall they reap. But we are concerned in this group with people who chose to sow as a couple, expecting to reap in like fashion, when from now on it will be every reaper for himself or herself.
Changes in labour market participation rates and social structures mean that we recognise that, in future, a system built on individual contributions is the right way forward. This year, 75% of those retiring will have complete contribution records of 30 years. It will be interesting to know what happens when that moves up. However, it is obviously important that the appropriate protections remain in place for those who have caring responsibilities or childcare responsibilities and that adequate information is put out. Subject to those caveats, we accept the direction of travel.
However, we are concerned to understand fully the impact of this provision in the short term on those who will lose entitlements derived from a partner’s NI contribution record on which they may have done their retirement planning. It is crucial, for the reasons that my noble friend outlined, that the transitional arrangements are fair and seen to be fair. We have had representations from groups working with older people, particularly older women, highlighting a range of circumstances in which women did not build up any entitlement. There are women who were entitled to credits but did not bother to claim them as they were planning to piggyback off their husbands’ records and there was no advantage in doing so. Then there were women who worked part-time around caring commitments, as my noble friend described here and in the last amendment. There were women who chose to do voluntary work, knowing that their husband’s pension would support them and who were often the pillars of their local community. I see a lot of them in Durham, who helped to support their neighbours and really were the backbone of the local community.
Baroness Hollis of Heigham
Why does the Minister think that the courts would not support us in having transitional arrangements for those who are ordinarily resident? I am not a lawyer, but, in my somewhat limited experience of judicial reviews, there have been a number of challenges. The two criteria I lay down are: was Parliament’s intention was clear—Roe v Wade—and would it be a position that a reasonable person would think was not unreasonable. The addition of ordinarily resident would seem to fit the criteria for transitional arrangements. If the Minister could help us on why that is not the case, I would be interested.
Baroness Sherlock
My question is slightly different, but perhaps the Minister could answer them both at once. Are the costings net of any additional expenditure on pension credit?
Lord Freud
Yes, it is a net figure. On the legal position, clearly the noble Baroness will remember that we are in the European Union and there are definitions of which kind of payments are transportable, so to speak, and which ones can be restricted. That is where our legal issue comes from. Therefore, rather than go into huge detail on that—
Baroness Sherlock
My Lords, I shall speak briefly on this amendment. I was exceedingly brief last time, but since the Minister did not feel any compulsion to do likewise, I shall take my time this time round. The amendment again raises a particular question about transitional protection. I will not revisit the substantive debate that we have just had, but I want to highlight a couple of points. To do that, I want to use a case study given to us by DWP officials.
In this case, we have a couple who have been named Jack and Jill—a slight lack of imagination, but better than the DEL and AMI beloved of Treasury case studies. Jill reaches state pension age in 2020 and her husband Jack reaches state pension age in 2018. Conveniently, they have average life expectancy, so Jack survives until 2040 and Jill until 2044. In this case, Jill had 15 qualifying years of contributions.
Under the current system, Jill would get a married woman’s pension of £64. Under the new system she would get £62. But the real crunch comes when Jack sadly dies. At that point, Jill would receive £113 a week under the current system. Under the new system she would receive only £62 in single-tier pension. That is a huge difference and a real worry to the real Jills of this world, and even more so to those who outlive their husbands by more than two years. The Minister may say that Jill can claim pension credit, but the DWP did not tell me how much Jill has in the bank, so it may be that her savings would preclude that. Even if they do not, I have reason to believe that Jack always thought that his contributions would be enough to ensure that Jill got a pension without having to turn to means-tested benefits. I would be grateful if the Minister could comment on Jack and Jill.
There is some transitional protection in place and I want to be sure that I have understood it properly. If I understand the rules correctly, if the dependant—in other words the person seeking to benefit from the derived entitlement—reaches state pension age before 6 April 2016, he or she would be entitled to derived and inherited state pension as under the current system, but only based on the other person’s national insurance contributions as paid up to 4 April 2016. If he reaches state pension age before April 2016 but she does not then she gets no derived or inherited entitlement. In either case, it is possible for the surviving partner to receive 50% of the additional state pension accrued after 2002 and before April 2016, and between 50% and 100% of the additional state pension accrued under SERPS before 2002, depending on when the contributor reached or would have reached state pension age. I would be grateful if the Minister could confirm whether that is correct.
If it is, perhaps the Minister could answer a different question. He spent a lot of time in his response to the last amendment stressing the simplicity of this case in order to respond to a concern that I had made at Second Reading. I am flattered that he read it so carefully. However, does the Minister think that Jack and Jill’s case or the description that I have just outlined passes that simplicity test? If I am right, will the Government then tell the Committee two other things? First, what consultation have the Government done with the real Jacks and Jills of this world and, secondly and more crucially, what steps are the Government taking to identify and warn those couples who are in this situation and may still be married, widowhood not yet having broken in, what the impact of these changes will be so that they can start to make provision as soon as possible?
Lord Freud
My Lords, I have already set out the Government’s position on the issue of the ability of one individual to derive a pension based on another’s national insurance record. As the noble Baroness, Lady Sherlock, pointed out somewhat bitterly, I did that at some length, so I will try to be as brief as she was in dealing with this. I appreciate that the noble Baroness, Lady Hollis, wishes to discuss the three interrelated issues separately, so I want to address her specific concerns here.
It is the ability for individuals to receive a survivor’s state pension, often called a widow’s pension, to which we have now turned. Let me outline the different groups that this amendment concerns. These are, first, those who would otherwise have gained a married woman’s pension and, secondly, those who would not have been entitled to the married woman’s pension because they have more than the equivalent of a 60% basic state pension in their own right but less than 100%, so would otherwise have received a widow’s pension. There will also be some who, regardless of whether they derive any basic state pension, may have expected to inherit some additional state pension.
We are putting in place transitional arrangements for that last group for inherited additional state pension. This will mean that where a survivor is in a marriage or civil partnership with someone in the current system they will inherit additional state pension, as now. For those where both parties are in the single tier, the survivor will be able to inherit 50% of the protected payment, where one exists. This is what Clause 7 and Schedule 3 achieve.
Limiting inherited additional state pension and the ability to derive a widow’s pension will, however, mean that some people receive less. In terms of how much those losses are, we estimate that the figure will be about £8 per week in 2025. That is the median figure and is made up mostly of people receiving less by way of inherited additional state pension. This loss is also due to the fact that people cannot carry on building up additional state pension after 2016, limiting the potentially inheritable amount.
However, around three-quarters of people reaching state pension age in the first 10 years of single tier who would have inherited some additional state pension under the current system will receive more single-tier state pension over their lifetime than they would have in the current scheme. This is because the gain from current system inheritance at the point of bereavement—and, potentially, very late in retirement—will be more than offset by the gains in state pension as a result of the single-tier valuation and uprating arrangements.
I think that this particular point feeds through into the issue of fairness. We are giving less to some people but we are using those savings to fund higher entitlements at state pension age for many people. Many people will benefit when they are younger—and by that I mean at the point of state pension age as opposed to widowhood—and are more likely to spend the money than would be the case towards the end of their lives.
On the simplicity test, I have to acknowledge the point from the noble Baroness, Lady Sherlock, that there are elements of complexity in the transition. However, that is because of the current system, not because of the single-tier system.
On the related issue of communications, the core objective of our strategy on communications is to raise awareness of the changes, particularly among those significantly affected by the reforms or those reaching state pension age shortly after the reforms are introduced. As I said on Monday, I will be producing our communications package in the new year.
The noble Baroness, Lady Sherlock, mentioned two examples. I think that it would be best to take up the Jack and Jill example with officials later, but her second example seemed to be correct, and I have confirmation of that. I think that she interpreted correctly the different groups—that is, who is in single tier and who is out.
Baroness Sherlock
My Lords, when I used the example of Jack and Jill, I was not asking whether it was correct. Unless the officials have made a mistake—in which case I am sure they will let me know—I presume it to be so. I was simply using it to demonstrate how much somebody would lose under the system.
Lord Freud
I am sorry, I was not referring to the Jack and Jill question; I was referring to the second example, where the noble Baroness asked me whether she had interpreted it correctly. I have the pleasure of telling her that, as always, she is absolutely correct, except of course where she disagrees with me.
I will not go into the arguments on simplicity and clarity or fairness, because the same arguments apply. In the light of my response, I hope that the noble Baroness will withdraw her amendment.
Lord McKenzie of Luton
This amendment moves us into somewhat gentler waters. The amendment calls for a strategy to improve take-up of national insurance credits. It is by way of a probing amendment, seeking clarity on what is planned to encourage greater take-up. In a sense, it is a subset of the debate that we had on Monday about communications in general, which we have touched on today. We had a very thorough note from the Bill team, which confirms that the NI crediting system is comprehensive but also highly complicated. There is a low level of awareness of some credits, carer’s credits in particular, the very aim of which is to protect state pension provision for individuals who take time out of paid work due to caring responsibilities. Of course, the issue especially affects women.
The importance of ensuring take-up of maximum credits is increased under S2P because of the increase from 30 to 35 years in the number of years required for a full state pension and the 10 years’ minimum threshold. This is a reversal of the position whereby the reduction in qualifying years from 44 and 39 to 30 meant that the gaps were not so important. The increase in the number of years to 35 has in part rebalanced that, although the value of credit in the new system would be higher.
We are promised a review of the national insurance recording and operating systems and an HMRC review of deficiency notices. Perhaps the Minister will say a little more about that. There was reference to deficiency notices being suspended for those due to retire on or after 6 April 2016, and the Minister might like to take the opportunity to clarify that. Some awards of credits, of course, are automatic; some have to be claimed, including class 3 credits for foster carers or kinship carers and those caring but not receiving carer’s allowance, and class 1 credits for maternity, paternity or adoption pay, for non-governmental sponsored training, jury service, for those wrongly imprisoned and, as we discussed earlier, for Armed Forces spouses or civil partners. There is also a new issue for those with high income who would be excluded from claiming child benefit.
Our briefing note identifies the carer’s credit as achieving take-up significantly lower than the 2007 legislation anticipated. We acknowledge that those in receipt of universal credit will automatically get a class 3 credit and that this would cover some of these circumstances. However, universal credit will not be fully in place for a number of years and, in any event, there will be some credits which will be claimable. Crediting entitlements has come a long way in recent years, and universal credit looks to improve the position further, but some are still missing out and this needs to be addressed.
I will revert to one point that I touched upon earlier. As I understand it, the credit for universal credit is a class 3 credit and therefore is focused on pension and bereavement entitlements only. Given that employment and support allowance, jobseeker’s allowance and working tax credit are at the moment a class 1 credit—obviously those benefits will be subsumed within universal credit—it seems that we are worsening the position of some groups. I will be interested in the Minister’s response. The purpose is to give the Minister a chance to focus on those who have to claim where take-up is not as it should be and to see what can be done. I beg to move.
Baroness Sherlock
My Lords, I thank my noble friend Lord McKenzie for giving us the opportunity to touch on this issue and for setting out the challenges in his characteristically clear and well informed style. I shall be very interested to hear what the Minister has to say in response.
I would be grateful if the Minister would answer the following questions. First, will he clarify whether all the routes to gaining national insurance credits which are currently available will continue to be available in the new system on the same terms? Secondly, if not, or if there is any doubt about that, have the Government consulted on changes or will they commit to a public consultation before making any changes? I include within that any changes that are implied or necessitated by the switch to the new pension system or the universal credit system.
My noble friend raised an issue concerning the Government’s strategy. In particular, I am concerned about the categories of people who have actively to make claims for credits and will not get them automatically, even under universal credit. I think he cited all the ones that I have been able to identify, plus child benefit, which I had not noted. Will the Minister tell us whether the Government’s strategy will include elements targeted at those categories of person? Within that, will they consider how they engage with direct routes, rather than just generalised campaigns? My noble friend Lord Browne mentioned that the Armed Forces look for ways to make sure that members of the forces community can take up those credits. Will the Government consider other routes to that—for example, through adoption services or the ways in which the Government already communicate with those in receipt of maternity, paternity, adoption or sick pay? Is the department in discussions with other government departments about the way to take this forward?
My noble friend Lord McKenzie also mentioned take-up. It would be helpful if the Government could report on take-up now and under the new system and tell us how they will monitor that and report to Parliament on it. Finally, will the Minister tell the Committee whether the Government have considered ways in which people might actively be supported in claiming credits for past years, which might now become important, where they would not have been previously?
Lord Freud
I thank the noble Lord, Lord McKenzie, for this amendment. I hope that I shall be able to offer some reassurances about the current arrangements and those within the context of the work that we are planning. The existing arrangements provide for national insurance credits to cover a wide variety of contingencies and activities, as he acknowledged. They are generally available to people who are unable to work and pay contributions. This could be because they are unemployed, incapacitated or caring for others, but credits are also available to cover a range of other circumstances—for example, jury service or if an individual is employed but is in receipt of working tax credit.
Credits protect a person’s national insurance record and their future entitlement to benefits. Under the current system, all classes of credits protect the basic state pension, and in certain circumstances an earnings factor credit can be awarded to protect state second pension entitlement, mainly for caring responsibilities and long-term incapacity. I can confirm that the crediting arrangements will be brought forward to the new system and that people will still be able to get credits to protect their single-tier pension position.
Lord McKenzie of Luton
My Lords, I thank the Minister for his reply and my noble friend Lady Sherlock for her questions. On the latter point, I am not sure that the Minister specifically dealt with whether there would be individual strategies focused on those types of people whom we particularly need to reach, such as carers. On the issue that was just raised about not accessing the benefits through other benefits, the point about contributory ESA and contributory JSA, as I understand it, is that you cannot achieve them only by credits; there has to be a payment arrangement as well to qualify. If the credit is changed, that makes it potentially more difficult than it is at the moment. The Minister mentioned the earnings factor credits but, as I understand it, those disappear because S2P obviously disappears as well in the new regime.
I am comforted by the fact that deficiency notices, perhaps in their new form, are to be reactivated once we get to the stage where the April 2016 data are available, which is helpful. I suppose that, broadly, one accepts that there is going to be a big communications strategy. I see that my noble friend Lady Sherlock is poised to ask a question, so I will give her that opportunity.
Baroness Sherlock
Before my noble friend withdraws his amendment, the reason I asked the Minister generally at the beginning about whether all the currently available routes to gaining NI credits would continue on the same terms was precisely to try to draw out the kind of things that my noble friend has been highlighting. If the Minister finds anything else which could possibly fall under that category when he goes back and consults more with his officials, perhaps he might write to us.
Baroness Sherlock
My Lords, I can understand why the Minister might be reluctant to commit his Government—or indeed a future Government, should one appear before too long—to a particular level of uprating of any benefit. However, the device of my noble friend Lord McKenzie is very interesting. I realise that the Government are finding themselves under increasing pressure to agree to the triple lock, but I suppose that to a degree they are caught in a trap of their own devising, in that the more they trumpet the importance of a triple lock, the more people will expect them to carry on being committed to it. As we discussed on Monday, all the assumptions in the impact assessment and the various illustrations with which we have been furnished are based on the single-tier pension being uprated by the triple lock.
Obviously, the Opposition are in no position to commit to what they might do in any future Government. They would have to make a judgment based on the state of the public finances when they arrived. In the mean time, my noble friend Lord McKenzie makes a very interesting suggestion—that the Government should, if they choose a route other than the triple lock, have to tell Parliament and the public what they have and have not done.
Earnings have been lagging behind prices in all but one of the months since David Cameron became Prime Minister, but we live in hope that that will not always be the case. At that point, the difference could be quite significant and that would have to be taken into account by any future Government. I look forward to hearing the Minister’s reply.
Lord Whitty
Before the Minister replies, the noble Baroness, Lady Greengross, who has an amendment in this group, has had to leave. She apologises.
Benefits: Sanctions
Baroness Sherlock Excerpts(10 years, 5 months ago)
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Lord Freud
As I just said, we are having one review, undertaken by Matthew Oakley. My colleague the Minister for Employment is also looking at this area very closely, and I am expecting the details of the review that she is overseeing to be published reasonably soon.
Baroness Sherlock (Lab)
My Lords, the Minister said that sanctions had not increased significantly. Perhaps he would look at a Written Answer given in another place to Mr Timms on 4 July, which suggested that the amount of money withheld from JSA in sanctions in 2009-10 was £11 million. Only halfway through 2012-13, it was £60 million. If it carried on at that rate, that would constitute a tenfold increase. Anyone who has ever been to a food bank will have heard horror stories about people being sanctioned for trivial or disgraceful reasons. Can the Minister please get a grip on this?
Lord Freud
My Lords, the relative figures are that since 2010 the volume of sanctions has run at between 3% and 5.5% whereas between 2005 and 2010 the rate was running between 2% and 4%. One of the most encouraging elements of the new regime is that the proportion of people on high-level sanctions has fallen quite steeply and is now down by 40% from 10,000 per calendar month to 6,000 per calendar month.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 5 months ago)
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Lord Kirkwood of Kirkhope (LD)
My Lords, I would like to add a more operational note to the questions raised by the important amendment from the noble Baroness, Lady Turner of Camden. She makes a powerful case, but the financial circumstances suggest to me that there is more likelihood of eventually getting into the position that was explained by the noble Baroness, Lady Hollis, than she was suggesting.
The implication of the amendment is that it would extend the single-tier pension to all pensioners. I have some questions about the operational capacity of the system to deliver sensibly some of these significant changes. In the first place, the Green Paper suggested that we should be looking at this by 2017. That has been brought forward; there are obvious advantages to that but it has caused some people to raise questions with me. Some of that is informed by the current controversy about the efficacy of the systems for universal credit, which are of course of a different order in terms of the IT systems. It also has to be acknowledged that the Pension Service has a very good record of implementing some of this stuff; when pension credit came in, it was done in a way that got very high marks from the National Audit Office, as I recall. So it may be that everything is going to be fine, but if the national insurance records are not all clean data then we could be facing some serious difficulties in delivering the payment of pensions on time. There are other operational matters that I am sure are concerning people at Longbenton in Newcastle, as they should be.
Speaking for myself, I would be very pleased to get some kind of assurance at some stage in Committee that with regard to this huge and significant change, affecting a number of very vulnerable households, the department, having regard to the recent reductions in staff and all the other matters, is in place to be able to deliver this efficiently and on time in the way that is proposed.
Baroness Sherlock (Lab)
My Lords, in speaking to Amendments 1 and 2, I look forward to a productive time in Grand Committee. I assure the Minister that there will be cross-party consensus over the direction of travel; this very much carries on the direction that Labour took in government, and I look forward to being able to debate the detail. This first group has already highlighted a number of the issues that we are going to want to explore over the next few weeks. The point about cost made by the noble Lord, Lord Flight, and my noble friend Lady Hollis is an important one, and I hope that the Minister will be able to give us an indication of both the cost of bringing all these people into the system but also the cost drivers that might help us to understand better my noble friend’s point. If he could cost her ingenious scheme before we got to the end of this stage of the Bill, that would also be very helpful.
The point made by the noble Lord, Lord Kirkwood, about operational issues is going to become very important. There are amendments later on in which we will begin to explore how the department will communicate with people, and that will surface many of those issues. The Minister may want to be prepared before we get to that stage.
I, too, have heard concerns from all kinds of people. I know that Age Concern has been very worried; it has been getting letters, e-mails and phone calls from people who are anxious about the fact that they will not get this new pension that they have read so much about. One of the requirements on the Government from a very early point is going to be to try to manage their communication better, as I will say later on when we come to discuss information. The Select Committee found a huge amount of confusion among the public about who would get what and when. It is not surprising, therefore, that people are as anxious as they are.
Will the Minister reassure the Committee that the Government are alive to the concerns of those who have already reached state pension age or will do so before implementation, and will carry on listening? Will they consider the impact on those pensioners as the system is brought in? Will the Government, maybe at the next Committee day, take the opportunity to explain to us the impact of the new amendments tabled in the wake of the autumn Statement? That could be helpful, and we could look at it later this week.
Will the Minister help the Committee to reflect on the position of those who retire before implementation on modest incomes? Will he clarify that those who have saved with the second state pension or its predecessors will find that any amount they get in future which is above the single-tier pension is in fact uprated only by CPI? There is a perception that everybody before the transition gets one thing and everybody after it gets another, when in fact, as we will unfold, it is going to be a lot more complicated than that.
Is the Minister concerned at all about the distributional impact for those in that area of modest earnings? He will know that S2P is distributive because it treats anyone earning between the lower earnings limit of £5,668 and the lower earnings threshold of £15,000 as though they earn £15,000. That distributive element is quite important in protecting those on modest incomes and making sure that they can save for the future.
Baroness Sherlock
My Lords, I wonder if I could just follow up on a couple of points. I thank the Minister for that response and I understand that, certainly at a £10 billion a year price tag, this would be a challenging reform to adopt. Could I ask him—I may have missed it and I apologise if I did—to respond to my questions about pension credit and passported benefits? If the Government are not going to able to bring existing pensioners into the new system can he give us a categorical assurance that pension credit will last throughout, and if so that the passported benefits on the back of that will come?
Lord Freud
My Lords, we are not changing the existing system for people who are on that system. Therefore that system, with the way that pension credit is set up, will not change for those people.
Baroness Sherlock
Forgive me, but may I therefore invite the Minister to put it this way: the Government have no plans to end savings credit, change its current value or change access to benefits currently passported on it?
Lord Freud
My Lords, I am happy so to confirm. As I say, for existing pensioners we have no plans to make any changes to the way that pension credit works. I have got a little bit more information. The cost of £10 billion is to get everyone on to single tier, and that is the cost to get all current pensioners to the illustrative £144 per week. I can confirm that cost is £10 billion per annum. This is a figure taken at 2016 and clearly that would reduce over time. The other issue that we discussed as we went through this was the 75% of people who see a change of less than £5 a week: this is not an average and most people will see only a small change compared to the current system.
Baroness Hollis of Heigham
I will first follow up on my noble friend’s point on savings credit. The Minister says that it will remain unchanged, but given that it is going to be CPI uprated, where the guaranteed pension credit is earnings related, at what point does the Minister expect savings credit to no longer exist because the guarantee has caught up with it? Therefore, although it is technically true that there will be no changes none the less it is surely also true that, X period of time on, given assumptions about inflation and so on, savings credit will in practice no longer exist.
Baroness Sherlock
I thank my noble friend. I think that when the Minister comes to read Hansard, he may notice that I asked him to confirm that its value would not change and I am sure that he meant to clarify the level rather than the value. One of the reasons is that, since they came to power, the Government have frozen the maximum level at which savings credit can be obtained. I wonder whether they intend to carry that on, in which case would we find that its value did, in fact, diminish.
Lord Flight
I am sorry to bother the Minister but is the £10 billion figure what I call gross or net? The key issue is that many older pensioners who would not otherwise qualify will qualify for various forms of income support in whatever is left of pension tax credits, and there really is a need to net all those projected costs off if they are not covered in the £10 billion to see what the actual net extra cost is. If, in that exercise, the Government discovered that the cost was much less than that, then I think this is something that could be thought about.
Baroness Sherlock
My Lords, I shall speak to Amendments 4A and 6, which are in my name and that of my noble friend Lord Browne of Ladyton. Amendment 6 is a probing amendment that would require the Government to conduct a review to determine whether all the women born on or after 6 April 1951 should be included in the scope of the new state pension arrangements. Amendment 4A—I apologise for its late tabling—would require a detailed assessment of the impact on those women who benefit as a result of derived entitlements.
We on these Benches will use the device of asking for reviews more than once in this Committee. I have said already that we are very supportive of the aims of the Bill and regard its direction of travel as continuing the work that we began in government. Labour understands the challenges of reform on this scale and the potential fiscal implications of some of the changes that many people will want to see to the system. However, we need to understand precisely what the implications will be and what the impact of these changes will be on different categories of people who will be affected by them. I have been very grateful to officials for doing their best to provide us with information, and I thank the Minister for giving us access to them and to it. However, it has still not always proved possible or straightforward to understand the impact of these changes on particular categories of people, and this cohort of women is a prime example.
It is our role in this House during Committee to try to get to the bottom of the detail of the impact of these Bills, and I hope very much that this review would enable the Government to do that. However, maybe the Minister can give us the information that would make that unnecessary. Despite the goal of a simpler system, there is still a lot of complexity in the system, as we have already heard—often, inevitably, in the transitional provisions. However, we will need to understand what the impact will be.
I have received a great deal of correspondence on this issue, as I am sure other noble Lords have, from individual campaigners and organisations concerned about the position of women born between April 1951 and April 1953, and my noble friend Lady Hollis has set out a range of concerns about their position. The headline concern that has been raised most often with me posits the position of a pair of male and female twins, born on the same date in that window, who are treated differently. The man will get the new single-tier pension and the woman will not, even if both have worked for 35 years or more or even if both of them are still working, with the woman having deferred her pension. My noble friend made the important point that unemployed men are treated effectively as if they are retired and get the equivalent to the amount that the woman would receive in pension. Those women are caught in the equalisation of the pension age. They say that they do not object to the equalisation but they feel that they have lost out in comparison with other women because, unlike women born before April 1951, they could not retire at 60 on a full pension. Those born after April 1953 get the full STP at the age of 63—that is, up to one year and 10 months earlier than men born after April 1953.
At Second Reading my noble friend Lady Donaghy gave a moving account of the life courses of many women of that age and the extent to which the way they are treated by society and the state has changed so markedly over their lifetimes; they really are a transitional generation. Whatever the Government finally decide, it is important that Parliament and the Government listen to their concerns before making a decision that they cannot be included.
We acknowledge that a line must be drawn somewhere but there are some questions to which I have not yet had satisfactory answers. First, as my noble friend Lady Hollis noted, there is the position of men born between 1951 and 1953 who are unemployed and get treated as if they were pensioners. Currently, a man in that situation who cannot claim the state pension, where a woman of the same age would, can get pension credit. Will the Minister confirm that that is the case? If so, the question has been raised with me as to whether these women have a claim in law on equality grounds and, if so, what that would mean. It might be helpful if the Minister could tell us whether the Government have sought legal advice on this matter and, if so, have they been assured that their position is safe? I assume that they were or the Minister would not have felt able to sign the habitual statement at the start of the process, but it would be helpful to clarify that.
The second big issue was the impact on this particular cohort of women. From having read the proceedings in another place, I think that the Government’s case is this: there are always cliff edges; there are always winners and losers and these are just the unlucky ones; these women will already be pensioners and some will have been able to draw their pension before 2016; they can always exercise the right to defer drawing down their pension and get a 10% uplift each year, which would effectively bring them up to the STP level by 2016; and only 70,000 of those 700,000 women born between 1951 and 1953 will be worse off, and the median loss will be only £6 a week.
The response of the campaigners to that case is this: some people will lose more than £6 a week, but even £6 a week is a lot of money, especially for 25 years. They are getting their pension earlier, but over their lifetime they will be disadvantaged. I would be grateful if the Minister could confirm that that was the case and, if so, when the break-even point comes, since they could be expected to live for a further 10 to 15 years and in some cases many more, we hope.
Thirdly, the campaigners say that most women spend most of their working lives expecting to retire at 60, so this is a shock to them. Finally, they point out that not many people can afford to defer taking their pensions. The figures that were supplied to us by the department suggest that only 0.9 million people in Great Britain get an increment as a result of deferral, as against 10.8 million who do not. I think that the figure in total was 1.2 million. If that is the case, inevitably it is a minority activity. Effectively, therefore, the right to defer your retirement date is a bit like the right to shop in Harrods: we can all do it but we cannot all afford to do it, so I am not sure that that totally answers the question.
That leaves us with some unanswered questions which I invite the Minister to address. First, there seems to be agreement that 70,000 women from this cohort will lose out. I do not yet understand the Government’s case for saying that they are so confident that the other 630,000 will be better off remaining in the current arrangements. The Government claimed in the other place that most women would be better off under STP. In the Committee there, the Pensions Minister said that, in the first few years, 700,000 women would be better off on STP by an average £9 a week. The impact assessment says that, as a result of the STP valuation, around 650,000 women who reach state pension age in the first 10 years after implementation will get an average £8 more in state pension in 2013-14 earnings terms.
The question then is this: how is the cohort of women born from 1953 to 1960, to whom those figures refer, so different from those born from 1951 to 1953? In other words, if the people who just get in will be better off in the new system, why would the people who just miss out be worse off? I hope that the Minister can explain to me the reason for that.
I want to drill down into this. The only reasons that I can think of come in the form of questions. First, the Government say that 30,000 people will lose from the derived entitlements post 2016. Can the Minister tell us how many of this cohort—that is those 1951 to 1953 women—would have derived entitlements? If not, perhaps he would smile upon our Amendment 4A. Secondly, some divorced couples with pension-splitting arrangements might be worse off under STP. Does the Minister know how many of those are within that 630,000? Thirdly, do most of those women have 30 years’ national insurance credits? Is that a factor? How many of them would have enough to get access to a full single-tier pension? Fourthly, how many of those women are better off as a result of their getting pension savings credit? What might happen in the future given the direction of travel on that?
My final question is about the costings. In Committee in another place, the Minister suggested that the costs for bringing this group into the system would be an initial £150 million a year, peaking at £300 million, and cumulatively costing about £4 billion. I am not an economist so I am not disputing the figures, but I do not understand them. If only 70,000 women are worse off and by a mean £6 a week, I make that—admittedly, using my calculator—£21 million a year. Even if they live for 25 years after retirement, I cannot get that above half a billion pounds. I am not suggesting that that is a small sum, nor offering to spend it; I am just trying to understand why I am so far out from the costings given by the Minister in the other place. I apologise for asking so many questions, but this is a complicated matter. Before we make any decisions and before the Government are to proceed on this, we need to understand the implications.
Lord Paddick (LD)
My Lords, as the noble Baroness, Lady Sherlock, said previously, there is great confusion among the public about the consequences of the Bill. I have to confess that that includes me. I, too, am feeling my way here rather than making authoritative statements.
The noble Baroness, Lady Hollis of Heigham, spoke about the men between 60 and 65 who are treated as pensioners because they are unemployed. I presume that that is a small proportion of men in that cohort and that the overwhelming majority have to wait until 65 to receive their pension, as opposed to those men who are unemployed during that period. Therefore, the statement that all men are treated the same as women applies only if they become unemployed, if I understand the situation correctly.
Baroness Sherlock
On that point, have the Government therefore costed what might happen if they simply included this group in the system and not allowed them to choose?
Lord Freud
I will have to write with that estimate. There is every way of doing these estimates that one can imagine. That brings me to the amendment tabled by the noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, which is to review how many women in this cohort are projected to derive a pension based on their spouse’s record. We have published a paper on derived entitlement, which covers the projected outcomes for people as a result of removing these provisions. As one may expect, individuals reaching pension age in the few years before April 2016 will have similar national insurance records to those reaching pension age in the few years after April 2016. As such, we can assume that the proportion of women in the cohort under question retiring under the current system who benefit from derived entitlement is broadly similar to the proportion of women reaching pension age just after 2016 who may be disadvantaged.
Lord Freud
My Lords, it is now in Hansard. We will spend some time on derived entitlement in later clauses, rather than going through that issue now. We will, I know, spend an awful lot of time on derived entitlement thanks to a certain set of amendments from the noble Baroness, so I have no fear at all that I will not be utterly explicit on this matter before the end of this Committee.
At Second Reading, the noble Baroness, Lady Sherlock, recognised that a line had to be drawn somewhere, but she asked the House to think carefully about whether it is right that twins of different genders should find themselves in different positions. Equally, one could ask whether it would be fair for people who reach state pension age on the same day—for example, the 65 year-old man and the 61 year-old woman—to be in different positions. The noble Baroness, Lady Sherlock, is absolutely right that a line has to be drawn. We have been clear and consistent that only people reaching pension age after the new system is implemented may receive a single-tier pension.
The noble Baroness asked whether these women would lose out. It is not a question of this particular cohort losing out; they simply will not receive a single-tier pension, just like everyone else reaching pension age before 2016. The Government have not changed these women’s state pension age and so there has not been a change in the pension that these women were expecting. Regarding the leading question on discrimination raised by the noble Baroness, I can confirm that any difference in treatment is as a result of the legislation providing for the change in pension age, which is not in this Bill, and we are satisfied that there is no breach of Article 14 of the ECHR on grounds of sex. This is justifiable in helping to pursue legitimate aims and achieving them in a timely way to achieve an equality of state pension outcomes between men and women generally.
Baroness Sherlock
I am trying to address these questions as I go, otherwise I will forget them. Does that legal advice also cover domestic law?
Lord Freud
That legal advice covers the full gamut of the legal position. On pension sharing, the average number of share orders is currently running to around 100 a year, so there is in practice a negligible impact on the gains and losses. We have written to all the cohorts affected by equalisation—
Lord Freud
I can confirm what the noble Baroness says: I am talking about the additional pension, not the state pension.
To summarise: the women in this group are getting the pension that they expected when they expected it. We have produced analysis on this group of women as well as on the impact of changes to derived entitlement. We need a clear start for the changes and, in line with the 2010 reforms, believe that that should be based on reaching state pension age. I urge the noble Baroness to withdraw her amendment.
Baroness Sherlock
Before my noble friend responds, I think that the Minister has ticked off all my questions and said that in fact these were incidental in terms of differences between the 1951-53 group and the 1953-60 group. Given that, I wonder if he could come back to the question that I posed: how is it, then, that those who retire in the first 10 years after implementation are apparently mostly going to be better off, whereas those in this group immediately before that will actually be worse off if they move on to the new system?
Lord Freud
It will be easier if I push that analysis of the figures into the letter-writing process rather than trying to summarise it off the top of my head, because it is quite complicated.
Baroness Greengross
My amendment is about a public education programme, which is necessary as so many people are in the same position, as has been outlined in noble Lords’ statements. Amendment 30 seeks to ensure that individuals are made aware of both their responsibilities and expected outcomes here; for example, in terms of state pension contribution years and amounts, and what outcomes they can expect and when. Given longer life expectancy and extended working patterns, it is not unreasonable to increase the number of national insurance contributory years from 30 to 35. People who have contributed for less than 35 years but for at least the minimum qualifying period of seven to 10 years are going to receive a proportion of the pension. However, it is absolutely critical that this change is clearly communicated to all individuals so that they can ensure that any years outside of work—for example, because of ill health or caring responsibilities—are counted as years of contribution and so that they can make appropriate private pension arrangements, should they wish to do so.
Baroness Sherlock
My Lords, these amendments relate to the crucial question of information. The Government have stressed at different stages of the Bill the move to reduce the complexity of the state pension to make sure that people understand their likely entitlement and are therefore incentivised to save enough to complement the support that they can expect from the state. This came up a lot when the Work and Pensions Select Committee looked into the matter. Citizens Advice, in its written evidence to the Select Committee, noted that a considerable complexity would remain in the system, mainly as a result of transitional provision. It accepted that as being unavoidable but said that:
“A commitment to a sustained communications programme could improve outcomes, manage expectations, minimise misinformation, promote action on NI contributions, and support personal saving for retirement”.
I think that was nicely put. The ABI said this to the Select Committee:
“Adequate communication of the change will be essential, or the clarity and simplicity of the new system could be undermined … No-one should feel unclear about the amount they will receive—and therefore need to save personally themselves”—
—a common view between the ABI and Citizens Advice.
The Select Committee noted that various witnesses focused on that issue. Sally West of Age UK said that,
“we are finding a lot of people are understandably confused”.
I think that that is an understatement. The Select Committee reported considerable confusion about the reforms. Many people wrongly believed that the introduction of the STP would mean that everyone would get £144 a week in state pension, because they did not understand the eligibility criteria. Others thought that there would be no means-testing at all; others thought that if they were due more under the current system, they would lose all that and get only what was due under the new system. The implications of having been contracted out or of not knowing whether you were contracted out or in was another area of confusion. It was noted that it was therefore important to,
“ensure that people have full information about their own future entitlement as well as a reasonable understanding of the reforms”.
Baroness Sherlock
My Lords, I shall say very little. I am so keen to hear the answer to that last question that I shall race through my contribution even more so than normal.
My noble friend Lady Hollis has done the Committee a service by opening up the question of the level at which the single-tier pension will be set at introduction. Both she and my noble friend Lady Drake have drawn attention to the rather dusty view taken by different bodies of the Government’s refusal to do this.
The Work and Pensions Select Committee was very clear about the fundamental importance of the principle that the STP should be set above the level of pension credit. That is primarily about means-testing, and I was grateful to my noble friend Lady Hollis for making the point that, contrary to what one would think from some of the headline messages, the percentage-point reduction in means-testing is really very small, being somewhere between 2% and 3%. That is not very surprising. One of the notes that we were given explaining means-testing and single tier confirmed what I think a number of us had expected, which is that, while there is a small reduction in the number of pensioner households claiming guarantee credit—pension credit—a considerable part of the reduction in means-testing on pension credit relates to those who would have received savings credit. It has always been very easy to reduce the number of people involved in means-testing: just make benefits less generous or take them away faster. You simply reduce the level at which you can get them. Taking a benefit away from people may reduce means-testing; it is not in itself an achievement. More interesting is what the combined effect is.
The Government’s response to the Select Committee was to confirm that it was indeed a principle of the STP that it should be set above the standard minimum guarantee and would be thus set, and that Parliament would be able to debate it as the regulations would be affirmative. However, as my noble friend Lady Drake said, the Delegated Powers Committee pointed out that this is the first time that this is being set not in primary legislation but simply in regulations which cannot be amended. I confess that this is not an area of expertise—along with many things that I talk about—but I presume that the reason for this is that, when Parliament is debating the introduction of a new system, it is impossible to understand the implications for anybody involved unless one knows the level at which it will be introduced.
I spent the entire weekend, apart from a brief outing to the marvellous Durham Johnston Christmas concert, going through all the details trying to understand the impact on different people of all these changes. They are all predicated on the assumption that this will be set at £144. If that assumption proves to be untrue, or indeed if the triple lock proves not to be the case, then I have no idea what the impact will be or who the winners and losers will be, and all our debates today and in the many joyous weeks that we have to look forward to will be rather academic. Can the Minister be tempted to give us some level of clarity, at least about what the minimum level might be, in order that we can understand better the assumptions that the Government are making? I raised this question at Second Reading and, I have to say, got a rather dusty reply. The Minister said simply:
“We will need to decide that closer to implementation when the level of the pension credit standard minimum guarantee for 2016-17 is known. I am afraid that I cannot reveal all tonight”.—[Official Report, 3/12/13; col. 192.]
So I confess that it is not with a hopeful heart that I await the Minister’s response, but I await with fascination his response to my noble friend Lady Drake.
Lord Freud
I shall start with the question from the noble Baroness, Lady Hollis, referring to the previous amendment regarding men coming off guarantee credit. I commit to write to her with the data on the numbers coming off.
The central principle that these reforms represent is that the full amount of the single-tier pension will be above the basic level of the means-tested support for a single person. This provides a clear foundation for both private saving and automatic enrolment, and it builds on the broad cross-party consensus that has characterised the debate that there has been on pension reform: people need to save more, and to do that they need to know what they are going to get. The reforms are therefore not so much about spending more or less money on future pensioners but about restructuring the system to provide clarity and confidence to help people today to plan for their retirement.
In the White Paper, published in January 2013, we used an illustrative start rate of £144, which was above the minimum guarantee and forecast to stay within the projected spending on the current system. Every extra pound added to the start rate increases annual costs by £500 million in the 2030s. A start rate of 2% above the standard minimum guarantee would incur significant additional costs.
On the question from the noble Baroness, Lady Drake, on the narrowing of the gap between the standard minimum guarantee and the start rate of the single tier, the Green Paper said explicitly that the precise value of that start rate would need to be set at a level that met the affordability principle. The start rate that we will fix will need to be set closer to implementation, when the Government will be able to factor in both the 2016-17 level of the standard minimum guarantee and the latest economic and forecasting data.
The Committee will note that the regulations to set the start rate will be subject to affirmative resolution and will therefore be debated in this House. The noble Baronesses, Lady Drake and Lady Sherlock, asked why this is being done by affirmative resolution as opposed to in the Bill, as is the existing position. The different approach was flagged up by the DPRRC, although, interestingly, it did not recommend that we changed our legislative approach. That approach is consistent with recent legislation, such as establishing both the ESA and universal credit, and it is driven by not currently knowing what rate to use, given the enormous costs involved of getting that rate out even by a small amount from what it should be, relative to the means-tested level.
On contracting out, there is not a clear distinction between the people who are contracted in and contracted out. We estimate that even by the 2030s about 80% of people will have been contracted out at some point. The analysis we have done in the IA, as the noble Baroness, Lady Drake, pointed out, is based on the net state pension outcome, not the gross.
The stated intention of the Government is that the start rate should be above the standard minimum guarantee, and it is the Government’s intention that it should remain above the standard minimum guarantee into the future. That is why the Bill sets out that the single-tier pension will be uprated by at least earnings growth. There is flexibility in the legislation for discretionary above-earnings uprating, depending on the fiscal circumstances at the time.
I point out to noble Lords that where a couple both receive the full amount of single-tier pension, as a household they will receive almost a third more under the new system than the couples’ rate of the standard minimum guarantee. To promise a single-tier start rate at 2% above the basic level of means-tested support would mean that we could not guarantee that the reforms would be cost-neutral. With these reforms, we aim not to increase the amount spent on pensions but to provide clarity to support private saving.
On the question from the noble Baroness, Lady Sherlock, on the decrease in the numbers of those who are means-tested being driven by the end of savings credit, clearly the answer is yes, in part. However, that money is being used to provide the flatter state pension that is central to these reforms and it allows us to provide the single tier in a cost-neutral package, while simplifying the system. Although there is no Baroness Castle to barrack us from in front or behind, or wherever she did it, it clearly makes sense to go to a system that is less—or as little—reliant on means-testing as possible. This is the way to do that and I urge the noble Baroness to withdraw her amendment.
Lord Freud
I will certainly be pleased to write on the thinking behind why it is net. As I say, I am not in a position to commit to anything on the gross figures at this stage, but I will set out the latest position in that area in that letter.
Baroness Sherlock
It would be very helpful if the Minister could write and confirm that it was net. It would also be helpful if he confirmed that the gross figures were not available to him and explain why not. It would be helpful if he could simply clarify why they are not available or why he does not have them.
Universal Credit
Baroness Sherlock Excerpts(10 years, 5 months ago)
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Baroness Sherlock (Lab)
My Lords, I thank the Minister for that very reassuring Statement, which certainly goes with the reassurances that we often heard here that universal credit is on time and on budget. Perhaps I may clarify two small points. First, is it true that, far from all new claims for today’s benefits disappearing next year, that will not happen until 2016 and that, in 2017, more than 700,000 people will still not be on universal credit?
Secondly, if it is true that £40 million has already been written off on an IT system, does the Minister stand by the statement in the 2010 UC policy paper which said that UC,
“would involve an IT development of moderate scale, which the Department for Work and Pensions and its suppliers are confident of handling within budget and timescale”.
Is it still on time and on budget?
Pensions Bill
Baroness Sherlock Excerpts(10 years, 5 months ago)
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Baroness Sherlock (Lab)
My Lords, I thank the Minister for that introduction. This Bill builds on the foundations laid by the Labour Government and, for that reason, we support many of its provisions. I hope that with the Minister we can find some consensus around the major direction of travel. I also hope that he will work with me in seeing what we can do during the passage of the Bill to make pensions interesting. I do not promise that my contribution today will advance that cause greatly, but it falls to all of us, if we want to raise the level of saving in this country, to try to raise the level of interest in it as well. So far, when anyone asks me what I am working on and I tell them that it is the Pensions Bill, I find that they have looked at their watch before I finish the sentence. I look forward to all the speeches, including the maiden speech, and to seeing what we can do to advance “Project Interesting”.
Moving firmly away from that agenda, I may say that one reason why we agree with the idea of a single-tier pension is that it is very much the direction of travel that the previous Labour Government took. However, we have some significant questions about the way in which this Government are doing it and about the decision to go with what is known in the trade as a hard/fast transition. We agree, too, with the need to address the way the state pension age is raised, but we have different views on the best way to achieve consensus around that.
The project of overhauling both state and private pension provision is of crucial importance to the future of our country. We on these Benches will do all that we can to improve this Bill to ensure that it is fit for the job ahead. But that job is a tough one, made harder by the climate of mistrust which obtains at present—mistrust of the industry, which we must all address, and, I regret to say, mistrust of government. People can become cynical, and sometimes have, in the welfare area, when something presented as a reform turns out all too often to be really just a cut. It is popularly assumed that with financial services products the bad news and exclusions are buried in the small print. The same may be true here, of course. Parliament does not yet have the small print, or the regulations, as we call them, but I hope that the Minister can tell us how soon we can get them. But we must maintain an appropriate degree of scepticism until we see what the detail is. That is particularly important in the light of the 13th report of the Delegated Powers and Regulatory Reform Committee, to which the Minister referred, which has a great deal to say about how this Bill uses regulations. So I look forward very much to the amendments that will come forward from the Government shortly.
Before moving on to the detail, I, too, would like to say a few words about the context of this Bill and background. When Labour came to office in 1997, we inherited two challenges in relation to pensions from the previous Conservative Government. First, there were disgracefully high levels of pensioner poverty, much of it among generations who worked hard to rebuild Britain after the last war. The second problem was the degree of mistrust in the pensions industry, some of it caused by the mis-selling scandals of the 1980s and 1990s. Labour addressed both challenges head on. We introduced a minimum income guarantee for pensioners, lifting incomes from £68.80 per week in 1997 to more than £132 by 2010. Under Labour, pensioner poverty fell to the lowest level for 30 years. We pegged pensions to increase in line with earnings and brought in pension savings credit to tackle the 100% marginal deduction rate facing many savers. We brought low earners and carers into the state second pension and introduced legislation for auto-enrolment. I pay tribute to the Government for taking that forward and implementing it. Crucially, we reduced the years of national insurance contributions required for a full state pension from 44 years to 30 years for men and from 39 years to 30 years for women. We also set up the Turner commission, to which the Minister referred. I, too, add my congratulations to the noble Lord, Lord Turner, and my noble friend Lady Drake on the excellent work that they did.
Labour supports the creation of a simple state pension system, and we are committed to the goal of encouraging people to save into private pensions in which they can have confidence. But we believe there are three tests that this Bill must pass if it is to achieve those objectives. First, is it fair to all those who have contributed? Secondly, is it sustainable in the long term? Thirdly, does it create a decent standard of living for all and, within that, will it encourage the private pensions saving that the Government are banking on to ensure decent retirement income? We will apply those three tests to the Bill as we scrutinise it over the weeks ahead.
I turn briefly to each part of the Bill. The biggest challenge to understanding the reforms to state pension provision in Part 1 is figuring out who are the winners and losers. The Minister has graciously allowed us access to his officials so we hope to dig down into that before Committee. However, I wish to lay out some big questions, on which I hope he can come back. First, as the Bill goes through the House, the Minister will need to confirm the precise level at which the single-tier pension will be introduced. The reason for that is twofold. First, the Work and Pensions Select Committee recommended that, given the importance of the principle that the STP is above the level of the pension credit guarantee, the level should be on the face of the Bill. Furthermore, paragraph 3 of the DPRRC report said that the Bill is drawn in a way which means that,
“for the first time, the rate of the state pension will be specified only in subordinate legislation”.
Given that, the Minister needs to tell the House what the level of the STP will be.
Secondly, there is the issue of those 700,000 women born between 1951 and 1953 who will have to wait longer to retire but will not get the new single-tier pension, unlike men of the same age. While a line has to be drawn somewhere, I think the House will want to reflect carefully before concluding that, after a reform of this scale, a twin brother and sister should find themselves in such markedly different positions.
Thirdly, some people who are married or widowed will receive a lower pension because the derived entitlements to which the Minister referred have been taken away. In other words, they would have expected to get a higher pension based on their husband’s or wife’s contributions, and they will now not be able to do so. Although state pension rules of course change over time, this is a long-standing provision around which some couples have planned their retirement income. The Work and Pensions Select Committee recommended that women within 15 years of state pension age should retain that right, so I would be very interested to know why the Government decided not to accept that advice.
Fourthly, the move from 30 to 35 qualifying years could mean that a number of people, especially women and the low paid, are less likely to get a full state pension, and someone with 9.5 years of national insurance contributions will get not a penny in state pension. The House will want to understand more about the rationale for that and the consequences of that shift which reverses a significant Labour reform which reduced the number of years to 30. I would also be grateful if the Minister could confirm for the record what the safety net will be for those who do not have 10 years of contributions.
Then we have the issue of the abolition of the savings credit element of pension credit. We are concerned that that will penalise those who have savings and could discourage saving in future. We will want to understand who will lose out and by how much and whether there is an issue about passported benefits which are currently attached to that. I hope that the Minister can tell us more about that either today or as we go through Committee.
Finally in Part 1, we will want to examine the impact on both public and private sector pension schemes of the changes relating to the ending of contracting out. In addition, when these reforms are implemented, national insurance contributions for contracted out workers will rise, as will those for their employers. The Bill allows private pension schemes to amend their terms to take account of the increase in employers’ contributions but public sector schemes cannot do that, presumably to avoid destabilising the public sector pension settlements. That leaves an unfunded cost on the shoulders of public sector employers. Can the Minister tell the House whether the Government have committed to meeting that cost for those public sector employers, perhaps from the £5.5 billion windfall the Treasury will get as a result of increased national insurance contributions?
In Part 2 of the Bill on pensionable age, the major issue relates to the proposal to have regular reviews of pensionable age, at least every six years. We agree with the need for periodic review, but the Minister is right to say that everything around this needs to be consensual. We agree with the principle but we think that, done badly, this could be very bad and could remove certainty for future pensioners and damage trust in the system, undermining incentives to save for the future. It is vital that the way the state pension age is reviewed is not just fair, but seen to be fair, ideally delivering cross-party consensual support for reforms in which the public can then have confidence. We believe that the best way to do that is for the reviews to be overseen by an independent cross-party panel, including a Cross-Bench Member of this House, and for it to have a broad remit. It should be tasked to consider not just the latest trends in life expectancy and the long-range public expenditure issues but also, for example, differences in life expectancy for different socioeconomic groups and the degree to which health and ageing go hand in hand.
I will return to Part 3 on assessed income periods when we get to Committee.
Part 4 is very interesting, proposing, as it does, a complete overhaul of bereavement support. As I understand it, bereaved people under 45 without children will benefit, receiving a flat-rate grant for one year for the first time, but I think that bereaved parents with children will be the losers. At the moment, they can claim widowed parent’s allowance for as long as they claim child benefit, although in fact the average length of claim is just five years. However, in future their support will last for only a year, and that is a major shift. We have received strong representations from charities which work with families with children, particularly bereaved families, and which are worried about the impact of this reform on bereaved parents. It would be helpful if the Minister could explain the Government’s rationale behind this. Although there may be more investment in the short term, I understand that over the long term the measure will save money, or at least be neutral, and effectively it will therefore redistribute money from parents with children who lose a partner to people who do not have children. Understanding why that choice was made would be helpful.
We are also very concerned about the conditionality requirements. The Minister mentioned that society has changed and that people are expected to work. They are, but early widowhood is not just an ordinary time for someone to go out to work. When families lose one parent, the effect on the other parent can be very severe. I hope that the Minister will think again about the conditionality requirements so that a person will not be expected to go out to work just six months after losing a partner. That would be very difficult.
Finally, I turn to Part 5 on private pensions. The Government have explained to us the numbers coming into auto-enrolment. If we think about this, it is clear that the state owes a very serious duty of care to those who have auto-enrolled into the pension system. If we are going to ask people, at a time of wage stagnation and a cost-of-living crisis, to forgo spending on themselves and their family today in order to invest for the future, they absolutely must be able to trust their pension providers.
This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing.
We propose a number of ways in which the Bill could address the challenge of building a private pension sector that people can trust. The first is to improve pension schemes. We will argue for the full disclosure of all costs and charges, including the costs extracted by fund managers, and stronger trustee-based governance of savers’ pension money, including the extension of fiduciary duties to all intermediaries who handle pension savings and policies, with the aim of encouraging bigger, better, stronger, well resourced and expert pension schemes which are more able to provide value for money for savers.
The second proposal is better management of pension pots when people move jobs. We absolutely agree about the need to make sure that people do not lose track of pension pots when they move to a new job, but we absolutely disagree with the way that the Government have decided to do this. The Government have chosen “pot follows member”, as it is known in the trade, but that raises some really serious questions. The most important are probably, first, the potential for customer detriment if, for example, the new employer’s pension scheme is worse than the one that the person is leaving, and, secondly, the real concerns about administrative complexity and the cost of this way of doing things. We will need to drill down to that in Committee.
Our preferred solution would be for the pot, by default, to move to an aggregator such as NEST, or one of its competitors, rather than to the new employer’s scheme. That is not just a Labour position; it is backed by many key experts, as we will come back to in Committee. In fact, the DWP went out to consultation on this and, even though a majority of respondents preferred the aggregator model, the Government chose to plough on with “pot follows member” instead. I would be very interested to understand why the Government are so set on this mistaken path. I genuinely cannot see why they are so set on it. None the less, we shall seek to improve the Bill in Committee by bringing the aggregator model firmly into play.
Thirdly, pension charges have to be reasonable if people are to have confidence to invest their hard-earned money. I am sorry to say that it has taken the Government a long time to wake up to this issue. More than one year ago, my right honourable friend Ed Miliband raised the issue of pension charges and Ministers accused him of scaremongering. They said that no action was needed because the market was “vibrant”. In another place, the Pensions Minister ignored the evidence presented by experts. He stonewalled the determined efforts of my honourable friend Gregg McClymont as the Bill went through elsewhere to try to do something about pension charges. I am delighted to say that Ministers have now acknowledged that there is an issue and we are promised a consultation and a cap on charges. I absolutely welcome this change of heart. As I am sure the right reverend Prelate the Bishop of Derby will confirm, there is more rejoicing in heaven for the one sinner who has repented than there is for the 99 who have always been there. I welcome the Minister and the Government to the happy place which Labour has happily occupied for some time. However, we will need to drill down on this in Committee. We will need to understand exactly where the Government are going on this, the right level for the cap, whether the cap will include the full range of charges and deductions, and how soon action will be taken.
Finally, there is the means by which people turn their pension pot into an income for retirement—decumulation, in the jargon. Most people use their pension pot to buy an annuity. We are the annuity capital of the world. More than half of all annuities are sold in the UK but the annuity market has some serious issues and is badly in need of reform. Performance is hugely variable, charges are often unreasonably high and the margins are such as to raise serious questions about whether they are value for money for savers. We will seek to amend the Bill in Committee and on Report to ensure that people approaching retirement receive good quality, independent advice, something that is already best practice and available in many of the larger schemes.
In conclusion, there is much to do to improve the Bill but we very much welcome the direction of travel. At heart, pensions are about trust; trust that the system is fair and sustainable, trust for savers that their contributions are safe, and trust that the market is working fairly and in the interest of savers. People in Britain must trust us to ensure that, having contributed to pensions for their whole life, they will have the income to afford a decent standard of living and to enjoy their later years. We hope that the Minister will work with us in Committee and on Report to provide the House with all the information that it needs and help us all to make the Bill the best that it can be. That is what the pensioners of tomorrow expect and it is what they deserve.
Baroness Dean of Thornton-le-Fylde (Lab)
My Lords, as a number of fellow Peers have said, this is a substantial and important Bill. It deals with the state pension fund, but it also covers elements of private pension funds. After buying their home, most people’s biggest investment in their life is their pension scheme. The Bill will be important for the quality of life of the whole nation at the end of their working life, so it is important that we get it right. We have a chance to get it right because it is very much cross-party; the single-tier pension has general consensus. Compliments have been passed. The Minister was generous enough to recognise the work done by my noble friends Lady Drake and Lord Hutton.
So the Bill has a very good start with a lot of cross-party support. I would like to be the first to sign up for the campaign of my noble friend Lady Sherlock to make pensions interesting. They are very important but, unfortunately, when you mention pensions, people’s eyes go to the ceiling—until they find out just what is wrong with their pension. Then, their interest is alerted but it is too late.
What we are considering today is important, but the Bill is inferior in some respects to the Green Paper which the Government issued. The Green Paper said that the changes would be cost-neutral, but the Institute for Fiscal Studies stated that,
“these proposals imply a cut in pension entitlement for most people in the long run”.
I would welcome the Minister’s comments on that when he responds.
The Bill covers a whole range of issues, all of them in their individual ways important, but I shall concentrate my remarks on its impact on women. There is no doubt that the change to a single-tier pension is one of the biggest and best changes to state pensions for women in this country. In my view, the women who will benefit from it do not want to get those improvements on the back of the women whom the Bill does not treat fairly in the transitional stage. That is where my real concerns arise. I hope that we will propose to amend the Bill to deal with those anomalies.
It is established and generally accepted that women make up by far the largest number of those on pensions living in poverty. The number is substantially different; far more women than men are in poverty on pensions. The Bill does not change that for a whole group of women. It is also true that women pensioners have a lower income than men. The Bill does not change that in the transitional period. We must deal with those issues.
For instance, currently, a woman who has been married or in a civil partnership may be able to use their partner’s record to receive a state pension or increase the amount they receive of their own accord. There are some transitional protections in the Bill, but they do not cover everyone. For instance, in the years ahead, some would reasonably expect to receive either a married woman’s pension or a full basic pension, if they were widowed, or would not have had the time before retirement age to make up the contributions. Are the Government going to change the Bill to protect those people?
The Government said that in 2020, there will be between 20,000 and 40,000 married and widowed individuals affected by a pensions loss. I find that unacceptable. Given the magnitude of what we are dealing with, we could amend the Bill to deal with that. I am joined in that view by the Work and Pensions Select Committee in another place. The committee has asked the Government to conclude a solution by allowing individuals within 15 years of state pension age to be allowed to retain that right. That would be a transitional measure and, in the nature of things, would not be hugely expensive. Will the Government accept the Select Committee’s recommendations?
Another group of women has been mentioned in this debate several times: those born between April 1951 and April 1953. Those women feel that they are being subjected to a double disadvantage. First, their state pension retirement age will increase. That is an issue that would have faced any Government. Any Government would have had the unpalatable task of changing the retirement age; I fully accept that. However, this group of women will face a later retirement age but will not go on to the single-tier pension, as I understand it. Will amendments be brought forward to rectify that situation?
Another issue has come up several times. Because an element in the Bill deals with private pensions, I feel able to raise it. That is the issue of part-time workers. We had a long debate on the previous Pensions Bill about the fact that although part-time workers who do not earn up to the national insurance level cannot join a pension scheme, they may have two jobs which, put together, would take them through that barrier and they would qualify for a pension. Those in that category are predominantly women. It is grossly unfair that we are having a major pensions change in this country which, I think, will put it on the right path for the future—although I think that we will have to make further changes later—without dealing with that issue.
Indeed, the Department for Work and Pensions showed in its own analysis that in 2012-13, some 50,000 employees fell into that category of having more than one part-time job but not being able to have a pension cover because both jobs, or three or whatever it was, fell below that level. Of that 50,000 people, again, 40,000 were women. In a Bill which marks a substantial and improved change on pensions for women in this country, there are those anomalies which I believe we should deal with. It will be our responsibility to try and do that. They are all transitional issues, not issues which will last for ever and a day, and we should be about to deal with them in the nature of things.
There are other aspects of the Bill which obviously cause concern. On the bereavement provision, it is a bit cack-handed to withdraw the pension on the first anniversary of the death of the spouse. After the bereavement of your spouse, the first year is always the most difficult. We need to consider what it would be like to be reminded of it. There are also the pension charges. I congratulate the Government on their announcement this week that they are looking at those. It may be that we will have something to discuss on pension charges during consideration of this Bill. I look forward to taking part in debates on this Bill which, if we get it right, will be a landmark for British citizens.
Baroness Sherlock
Before my noble friend rises, my Lords, I should say that I realised after I sat down from speaking earlier, with something of a sinking heart, that I had forgotten to draw the attention of the House to my interests in the register. I am the senior independent director of the Financial Ombudsman Service—a remunerated position. In an unremunerated position, I also chair a charity which has employees in pension schemes that could be affected by the Bill. I apologise to the House both for that omission and for interrupting the debate now to have to rectify it.