Lord McKenzie of Luton
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Pensions Bill
Lord McKenzie of Luton Excerpts(10 years, 4 months ago)
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Baroness Dean of Thornton-le-Fylde (Lab)
My Lords, some years ago I was chair of the Armed Forces Pay Review Body and I saw the way that wives were discriminated against. I remember one case. We went to Belize, where the commanding officer had been offered promotion conditional on his wife accompanying him. She was a very successful lawyer in London and they had to make a decision. She decided to give up her career. While she was abroad—a two-year posting—she was unable to contribute to a private pension fund because she was not doing recognised work. She was working as his partner in Belize on behalf of the British people looking after Army wives. She gave up her career and she lost the opportunity of a good private pension here as she could not contribute because she was not working in this country. She was also losing out at the end of her life because she could not contribute to the state pension scheme either. The changes made in 2010 helped, but this Bill will almost send us backwards. The changes made by my Government in 2010 did not fully resolve this issue. That is one case.
Among the officer cadre in all three services you still find wives giving up their job to accompany their husband, and they get a very raw deal. Until recently, other ranks would have gone to Germany for a two-year posting, and they, too, would lose out. Under the Armed Forces covenant and the updated report issued only this week by the noble Lord, Lord Astor, it is taken into account that we should be looking after families. I have no idea what it would cost and I cannot imagine that it would cost an awful lot of money, but maybe the Minister can help us. As my noble friend says, this may not be the way of dealing with the problem, but somehow it has to be recognised that, in bringing in a Bill that has cross-party support and in general terms is certainly advantageous for most, if not all, women, here we have a group who will continue to lose out, despite the changes that are being made. So it is with a deal of pleasure that I support the amendment, and I hope that the Minister will agree to go back and look at the issue. Perhaps he will come up with something that may not use this wording but which recognises the contribution that these women have to make—and, indeed, by which they lose out when they help their husband’s career, because the post requires accompaniment. If that solicitor, going back those few years, had said, “No, I’m not giving up my career”, the husband would have had to refuse that promotion. There are parts of the Armed Forces where the divorce rate is higher than normal. I am not suggesting that this is the only reason, but I think that it is perhaps one of a whole number of reasons, stress and overreach being another couple.
Lord McKenzie of Luton (Lab)
My Lords, I speak briefly in support of my noble friends and the thrust of this amendment. I should like to ask one or two questions. As I understand it, there is currently a class 1 credit going to people in this service category, which helps to build up not only pensions but access to contributory benefits such as JSA and ESA. In respect of the latter, there is also an easement that was introduced in 2011 in respect of the first contribution condition, because for contributory ESA and JSA you need both to pay an amount in a certain period of time and to have sufficient credit. My first question is whether that credit arrangement is going to continue under the new regime and whether the easement will be continued, because that is important, too.
Of course, the credit has to be claimed; it is not automatic. I wonder whether we could do something to address that issue, because we have a group of people here who would qualify only under certain clear conditions, and one would have thought that arrangements for these individuals could somehow be organised centrally, or perhaps by the separate Armed Forces, so that the information goes in directly and there is an automatic credit, rather than people having to claim. I understand that the take-up is limited at the moment, with only 601 applications in 2012-13, or maybe in the previous year. That is not as many as one might have expected. Perhaps we could also have clarification as to who is treated as a member of the Armed Forces for these purposes. I am not sure that the TA or reserves will be included within this.
This issue draws a wider question about crediting national insurance contributions. My understanding, based on some helpful information from the Bill team this morning, is that if, at the moment, you are in a category of benefit or activity that gave rise to a class 1 credit, that would continue post-April 2016. If you are receiving a class 3 benefit for a particular activity or being in a particular position, that would become a class 3 contribution credit also, under the new regime. So nothing has changed in that respect. These things are important, because a class 3 contribution builds up entitlement only to the state pension and bereavement benefits, not to contributory benefits. This gives rise to the broader question of universal credit. At the moment, if you are on JSA or ESA, you would get a class 1 credit. In the world of universal credit, my understanding is that you would get a class 3 credit, which means that you do not build up entitlement thereby to contributory JSA and ESA, which sit outside universal credit.
I apologise for this rather convoluted series of questions, but this very important issue prompts them, and it would be useful to have clarification on them either today or later by correspondence.
Lord Browne of Ladyton (Lab)
My Lords, I am grateful to my noble friend Lady Hollis for tabling the amendment, for the very reason that it allows your Lordships’ Committee to engage in this important issue. As we have already heard, successive Governments have committed to end any disadvantage that armed service causes members of the Armed Forces and their families—a group of people who have come to be known in these circumstances as the service community.
In July 2008, the Government set out to put flesh on the bones of that commitment in a command paper entitled, A Nation's Commitment: Cross-Government Support to our Armed Forces, their Families and Veterans. In pursuit of the ambition of that document, the DWP announced and introduced on 6 April 2010 new rules that allow spouses and civil partners accompanying service personnel serving overseas outside the United Kingdom to be eligible to claim class 1 national insurance credits during such periods.
In certain circumstances, spouses and civil partners may get credits on their national insurance contribution record for state benefit purposes, and as my noble friend Lord McKenzie pointed out, that helps protect their eligibility to a state pension and contribution-based benefits. Application for the credit is made at the end of each accompanied assignment outside the United Kingdom, but there are complications about that. My noble friend is right to say that it has to be claimed. I understood that the services had in place default arrangements to ensure that everyone who could be entitled to make such an application was advised fully of that. Can the Minister elucidate the current situation?
I do not think that one need go into the complications that service abroad generates for service families, but one can imagine that service abroad may mean that the family is split up. For example, some of our troops are based in Germany, or the families may be there but the service member might be serving somewhere else overseas. All of these complications are accommodated. Indeed, circumstances may arise where there is a need to make an application part way through an assignment, and provision is made in the regulations to facilitate that. There is helpfully discretion—and the DWP is to be commended for this—as to the time that an application can be made. It is already provided for to accommodate the lifestyle of the armed services community. Importantly, however, this improved benefit was not made retrospective.
We have already heard from my noble friend Lady Dean’s experience of her engagement with the service community the sort of circumstances that can lead to the need for this provision. At the heart of it, there is a clear and good reason why we need this. Members of our Armed Forces are commanded to work in overseas environments. If they stay in the services, they have no choice where they work, and often they are there for extended tours. Often their spouses and civil partners are unable to accrue a full national insurance contribution record because of that. Fairness demands that they not be disadvantaged by that service in so far as is possible.
When my noble friend Lady Hollis introduced this amendment she described it as simple, but it has become slightly more complicated in the debate. I am not seeking to complicate it because it is a relatively simple policy issue, although it may have complex consequences. She implied that the trend would suffer regression as a consequence of implementation of the Bill. My noble friend Lady Dean specifically said that the Bill would have a consequence of regression in relation to the position of service wives in particular. It is important for the Minister to address that position. If it is indeed the case that the direction of travel is being regressed as a consequence of the Bill, that needs to be identified. I am sure that all parties, including the coalition parties in the Government, would wish to deal with that situation in the context of this Bill. I do not think that there will be any division, in terms of policy, in relation to ambition here.
Unfortunately, when the change was made in 2010, it was realised that this was a “start”. My noble friend Lord McKenzie has identified, with his characteristic care in these matters, that there has already been a minor change in relation to this provision to improve it. Indeed, the coalition Government are to be congratulated: they have built on the work of the previous Government in pursuing the commitment of “no disadvantage” which is at the heart of the military covenant. In May 2011 they published the Armed Forces covenant. In paragraph 5 on page 7, under the heading “Scope of Covenant”, it states:
“Members of the Armed Forces community should have the same access to benefits as any UK citizen”.
Page 33 of the guidance document that accompanies the covenant, The Armed Forces Covenant: Today and Tomorrow, states that,
“the Government has no plans to make further adjustments”,
to the benefits rules. Importantly, however, it goes on to say that they will,
“keep this issue under review”.
Lord Freud
Let me take the two issues there. It is not necessarily the case that the MoD will have records on this, especially of an accompanying partner. That is clearly one of the issues. I think what was envisaged was exactly to look at this kind of thing and other benefits, which is exactly what we are doing. We are, as I say, treating it very seriously, but that is not the same as being able to say that there is a ready solution. We will come back to this issue.
Lord McKenzie of Luton
I am not sure whether the Minister confirmed that, whatever happens with the impact of this amendment, there is no suggestion that the existing arrangements both in respect of the crediting and the easement of the first contribution condition are not going to continue post-April 2016.
Lord Freud
I am pleased to confirm that the crediting and the easement will continue post-2016.
Baroness Donaghy (Lab)
I support my noble friends Lady Turner and Lord Whitty. The pension letter that I receive reads a bit like a history book. Having completed the 40 years, I have a bit of graduated pension, some SERPS and some S2P. Obviously it all adds up penny by penny but, as I said at Second Reading, one of my concerns is that simplicity is not of itself the best objective. If the amount is set too low, the middle earners will not buy in to the new system. Any system that does not have a buy-in from the middle earners will, in the future, give rise to enormous political pressure from those people for some form of opting out, which I do not believe anyone in this room wants.
When we looked at all the charts at the briefing, we found the crossover point—which I think was in about 2040—before people start losing out. The discussion that took place on Monday about net versus gross may well place that crossover point a lot earlier, and people will see that they are going to lose out much earlier. They will then make a judgment about whether this flat rate is any good and, again, either there will be pressure to opt out or there will be pressure—dare I say it?—for SERPS, graduated pensions or S2P in about 20 to 30 years’ time. Therefore, this gives rise to very important issues.
I know that we are going to have another discussion about net versus gross when we come to later amendments, but I want to make the point that this is not a straightforward issue. I realise that there is cross-party consent about the flat rate but I am slightly sceptical about its long-term holding, although the Minister has said very confidently that it will last for more than 10 years. I hope that he is right, because the last thing I want to see is Governments tinkering with this. As I said, I do not want my grandchildren to have a history lesson in 40 years’ time in which they are reading about the different names for the pension.
Lord McKenzie of Luton
My Lords, perhaps I may raise a point about the level of the single-tier pension, and couple it with a reference to passported benefits in the impact assessment. I looked at the assessment again this morning and there was a point that I had not identified, or did not understand before. This is to do with the interaction with the guarantee credit. This passage is about passported benefits, but it says:
“Receipt of Guarantee Credit passports pensioners to the full amount of Housing Benefit and Council Tax Benefit, if the pensioner is eligible for these benefits. There is little reduction in Guarantee Credit eligibility resulting from the single tier”—
about 1%. I thought that the whole thrust of this simplicity as a base for people to be able to make judgments about saving was that, in a sense, it floated people at a level which was above the guarantee credit. Here we are saying that only 1% of people who get STP will not be affected by guarantee credit in the future. Can the Minister explain that to me, please?
Lord Browne of Ladyton
My Lords, by tabling and moving these two amendments my noble friends have done the Committee in general and the Minister in particular a favour by creating an opportunity for him to expand on what his right honourable friend the Pensions Minister was able to tell the House of Commons about Clause 3. Despite the fact that my noble friend Lady Turner’s amendment is to Clause 2, I think that most of the issues raised can be dealt with within the context of Clause 3.
The provisions of Clause 3 set out a mechanism for calculating the full rate and the reduced rate of the single-tier pension for those whose contribution record commences post 6 April 2016. As we have already established, that does not actually set out in monetary terms the full rate; and as much of Monday’s debate made clear, that is at the root of some nervousness, not to say anxiety—or, on the other side, a possibly optimistic expectation—on the part of future pensioners, a state which, rightly, we anticipate will heighten as we approach these provisions’ implementation date.
Many are concerned as to what the single rate will be, whether they will be worse off as a consequence of change versus their expectations of the continuation of the status quo, and whether the actual rate will keep the new single-tier pension rate above the level of the pension credit sufficiently for it to prove an incentive to save, which is the relevance of my noble friend Lord McKenzie’s point, based on his characteristically forensic examination of the paperwork that is before us, and picking up this key point which instructed much of the debate in the House of Commons on these matters: the degree to which a prime objective of this policy—that is, to reduce in the longer term dependence on means-testing—will in fact be achieved by the full implementation. In addition, people need some predictability of future pension arrangements to enable them to make appropriate decisions to prepare for their retirement, confident that they will live up to society’s expectations of them now and avoid financial difficulties in life and a life of poverty. My noble friend Lord Whitty described the central issue as whether there could be certainty that this figure would not disappoint people’s expectation to such a point that they would fail to support the policy. By the device of these amendments, my noble friends have created an opportunity for the Minister to engage with these challenges.
Lord Freud
My Lords, the amendments relate to the single-tier pension. I have to confirm that the noble Lord, Lord Whitty, is in a better place, but I think we all knew that. I covered quite a lot of this in detail on Monday, so I will keep my comments relatively brief.
The amendments describe a minimum entitlement at a level broadly equivalent to the state pension entitlement that a person with 40 qualifying years could receive under the current scheme through their basic state pension and the additional state pension. For someone on low earnings, that equates to around £180 a week. That is the question that the noble Lord, Lord Browne, was seeking an answer to.
I fully appreciate the sentiment behind wanting to set the rate higher than the illustrative rate of £144, which is from last year's effective equivalent rate. Indeed, under the Bill, future Governments will be free to make above-earnings ad hoc increases in the light of economic conditions at the time, but setting a starting rate that cannot be afforded within the current spending projections would instead force the hand of future Governments, siphoning off greater and greater amounts of GDP into pensions spending. Setting a minimum starting level of £180 a week would add a further £12 billion in real terms to the single-tier costs by 2030—that is a per annum figure. Over the longer term, it would increase annual pension expenditure by another two percentage points of GDP in 2060 and squeeze out other spending pressures from an ageing society.
Sustainability is a core principle of the reforms. Our proposals work within projected expenditure on the current system, and our current modelling, including the illustrative start rate of £144, stays within 1% of current expenditure until the late 2030s.
During Second Reading, much was made of the consensus following the Pensions Commission report, which recommended that the state move away from providing earnings-related pensions. I was pleased to see that the noble Baroness, Lady Donaghy, had moved her scepticism out from 10 years to 30 years in the space of a few weeks, so there is hope that we may move her to the 100-year objective. To this end, under previous reforms, the earnings-relation provided by the additional state pension was effectively being squeezed out of the system, moving over time to a flat-rate state pension but, as many respondents to the Green Paper pointed out, that was not doing enough to support private saving and underpin automatic enrolment.
I have said this before, so I will go on record twice on this. These reforms are not about increasing pensions expenditure. They are not about reducing it. They are about spending the money differently, so that we can move to a flat-rate pension quickly to tackle an urgent problem of undersaving.
To respond to the pointed question of the noble Lord, Lord McKenzie, about why the single tier does not lift many clear of the guarantee credit, that is largely because many people on the guarantee credit have a higher standard minimum guarantee. About 37% are entitled to one or more additional amounts—for instance, for disability—and we do not want to remove those additional amounts.
Lord McKenzie of Luton
I understand that point, but what does that do to the argument that this is all about having a very clear platform so that people know that it will pay to save and that they will be above means-tested benefit levels? On the basis of this information and what the Minister just said, 99% of people who will get STP will still be eligible for the guarantee credit. Indeed, annexe C to the impact assessment states that total spending on the guarantee credit and the savings credit will actually go up by the end of the period in the tabulation. That does not make sense to me. I understand that it is the additions that mean that guarantee credit is above the level of STP, but that seems totally to undermine the whole thrust of the rationale of the Bill.
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.
Lord McKenzie of Luton
I hesitate to follow those two powerful speeches, but I wanted to ask the Minister a question around RTI. It is understood that, so long as an employer has a PAYE system, RTI requires reporting of all earnings whether or not the individuals are earning each week at a rate in excess of the LEL. That would not apply to an employer where all employees were below the threshold and nobody was issued with a tax code. We are now in a position whereby, at least in theory, HMRC has within its system details of earnings per paid period of each employee with each employer. Even if that is not the basis of a calculation, it would at least provide a basis on which individual claims might be verified. That seems a potential change that ought to help with this important issue.
Baroness Dean of Thornton-le-Fylde
My Lords, I shall not detain the Committee long except to give my support to this. It is quite interesting that the changes that HMRC has carried out actually help this particular argument. The situation as it stands is completely counterintuitive to what the Government are trying to achieve, which is that we all save while we are working so that when we retire we have built up a state pension. If people do not have a state pension, they will be reliant on welfare benefits, or whatever the Government of the day decide. So it is a matter of independence.
My noble friend Lady Drake is so right: women find it offensive that they are excluded from contributing when they are able to towards their own pension. I said “women” deliberately, because the nature of work today will change that argument. Since the recession, we have seen more and more men also working part time. So what has been traditionally an argument on equality for women is being diluted by the nature of work in the country today. The argument that we are putting forward is not just for women—it is for citizens who may, by force of circumstance or choice, have more than one job.
The Inland Revenue has no problem in finding solutions to quite complex issues when it comes to collecting tax, and this goes hand in hand with that. Citing the excuse or reason that it is very complex and impossible to do is wearing very thin. Given the remit to do it, I am sure that the Revenue would have to find a way through. The issue is not going to go away; it will be raised at every opportunity, and it is one that runs four-square with what the Bill is trying to achieve, which is for us all to contribute to a state pension while we are working.
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.
Lord McKenzie of Luton
The Minister proffers universal credit as a solution, but as I understand it, universal credit will generate only a class 3 credit, not a class 1 credit. Therefore, it would help towards pension entitlement but not to contributory JSA or ESA.
Lord Freud
The noble Lord is exactly right. It goes to the point of what we are discussing. It would get you the pension entitlement and the bereavement benefit entitlement but not the contributory entitlements. The current arrangements for crediting a person with national insurance contributions are comprehensive. They cover all the main reasons why someone may not be working, or working only a small number of hours, such as ill health and unemployment, or where people are caring for a child aged nought to 12 or for someone with a disability. They also cover those currently entitled to working tax credit, and we have recently introduced credits to protect the contribution record of working-age grandparents looking after their grandchildren.
Those who fall outside the scope of the crediting arrangements and who can afford to do so—higher paid households are clearly in that category—can make payments on a voluntary basis. The current rate of voluntary class 3 national insurance contribution is a very fair price at £13.55 a week, or £705 a year. The person could recoup the cost within four years of receiving basic state pension benefits.
Using this approach to establish whether a person’s combined earnings exceed the lower earnings limit would require the collation of tax and contribution returns for employees with multiple jobs. That clearly would place a burden on business and require HMRC to develop complicated IT which would take time and money and benefit a small number of people. We would also need to consider collecting the employer’s national insurance contributions in proportion to the earnings in each job, which would add considerable administrative complexity.
The question that one needs to consider is whether those who have aggregate earnings above the primary threshold should be credited or should pay a discount rate of national insurance. That is a question I address to the noble Baroness. It could be seen as quite unfair on someone who is earning just over the threshold in one job and has to pay full national insurance, whereas someone else just below might be credited.
“( ) Within 12 months of the passing of this Act the Secretary of State shall report to Parliament on a strategy to improve the take-up of National Insurance Credits.”
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 McKenzie of Luton
Before I do, will the Minister comment on the issue of universal credit being just a class 3 credit, whereas some of the benefits that will be subsumed into universal credit—ESA, JSA and the working tax credit—are class 1 credits? Is that not a diminution in the crediting opportunity?
Lord Freud
JSA is, I think, already a class 3, is it not? I have a comprehensive list of national insurance credits. Rather than running through them all, perhaps I should just forward it to the noble Lord and the Committee to make the point.
Lord McKenzie of Luton
I am grateful to the Minister. I think that I have the list, which probably came from the same source as his did. I was interested in the rationale for the universal credit just being a class 3 credit, because that is a change for somebody who would previously have been on JSA or ESA in particular. Has any assessment been made of the extent to which people are likely to lose out on their contributory JSA or ESA as a consequence of that?
Lord Freud
The principle is not to allow access to contributory benefits through claiming another benefit. That is fairly logical, if you think about it. If you were purely claiming unemployment benefits and you were on them for a year, you would automatically go into contributory unemployment. That is the logic that we are pursuing when we move to class 3 in universal credit.
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.
Lord McKenzie of Luton
I am grateful to my noble friend and to the Minister. I am happy to read the record on this but, in the mean time, I beg leave to withdraw the amendment.
“( ) Where the state pension is uprated other than by reference to the triple lock for any period to 6 April 2020, the regulations shall require a calculation of the difference between the actual uprating and what uprating by the triple lock on a cumulative basis would have provided.
Lord McKenzie of Luton
My Lords, as the Minister will have spotted, this is a device to continue the debate on the level of the STP and the associated costs and savings in the Bill. The Bill assumes that STP, but not any projected payments, will be uprated by not less than earnings but the impact assessment is predicated on the triple lock applying, with uprating by the higher of earnings, CPI or 2.5%. Looking long term, these two bases of uprating produce materially different results, as illustrated in annexe B to the impact assessment.
Overall, we know that these reforms will reduce the overall percentage of GDP going to pensioner benefits. As we discussed briefly on Monday, by 2060 the share of GDP, compared to the current position, would fall by 0.6% if uprated by the triple lock but by 1.3% if uprating was just by earnings. Over the long term, the cumulative effect of uprating by earnings rather than the triple lock would lead to STP being 10% lower than if uprated by earnings. This is not a small difference and although the long term— 2060—may seem a long way away, it is the scenario which those in the labour market today will face. Annexe C shows projected expenditure in total support for pensioners at various points over the period to 2060. It shows, in 2013-14 prices, that state pensions in total will be £30 billion less than they would have been under current arrangements. This is why we need to keep an eye on how things are uprated.
One message we take from all this is that the Treasury has undoubtedly taken advantage of a progressive proposal—the STP—to claw back support from pensioners where it can. The figures just discussed do not, I think, include amounts being withdrawn from the systems because of the introduction of the minimum qualifying period, now confirmed at 10 years and saving some £650 million a year, nor the changes to the rules on deferrals, with savings rising to something like £300 million a year. We will obviously come on to debate those in due course. We do not have clarity on the savings that may be made from restrictions on passporting although, as we discussed earlier, these may be limited. None of these figures take account of the increases in national insurance which the Treasury will garner: some £5 billion in 2016, £4.6 billion in 2020 and £3.7 billion by 2030, which are very significant sums.
We heard much praise on Monday for the triple lock and we should acknowledge its significance. However, my noble friend Lady Sherlock explained previously why our priorities had to be elsewhere—to tackle the legacy of pensioner poverty. Given the manner in which the Treasury has clawed back money where it can, it is reasonable for us to at least ask about the Government’s aspirations for the triple lock without, of course, conceding the likelihood of them being in a position to implement those aspirations. I beg to move.
Lord Freud
My Lords, the engagement of the guaranteed minimum 2.5% uplift in April this year saw the basic state pension reach a higher share of average earnings than at any time since 1992. Next year, in 2014-15, the basic state pension will be more than £8 a week higher than if it had been uprated by earnings alone in this Parliament.
This Government believe that, like the basic state pension, the single-tier pension should be uprated by at least earnings to ensure that it retains its value compared to wages, but there is flexibility in legislation for above-earnings increases. I therefore reassure the noble Lord, Lord McKenzie, that the triple lock could be used for the uprating of the single-tier pension, as it has been in this Parliament for the uprating of the basic state pension.
Clearly, the noble Lord would not—and the noble Baroness, Lady Sherlock, was generous enough not to—expect me to commit future Governments for the next 47 years. Looking back 47 years would take us back to 1966. That was a long time ago. Was it the summer of love? Perhaps that was 1967, but in any case it takes us back a long way. Therefore, I do not think that one could commit any Government to anything, and I am sure that there will be lots of different Governments over the next 47 years. However, when you look at the proportion of GDP taken up on the assumption of a triple lock, it is possible that Governments will want to stick to it. The Office for Budget Responsibility adjusts for the triple lock by applying a 0.3 of a percentage point premium to the annual uprating of the basic state pension over and above the earnings rate.
Clearly, the triple lock has insulated pensioners from periods when the inflation rate has been relatively high, and has been particularly important in the unusually uncertain economic climate that we have seen in recent years. The Government do not want to constrain future Administrations by placing a requirement to uprate by the triple lock in primary legislation. It must be up to future Governments to decide, based on their annual reviews, whether uprating above the minimum of earnings is applied.
In response to the noble Lord’s question, the expenditure figures include the impact of the minimum qualifying period and deferrals, but the chart in chapter 3 of the impact assessment—there is a loser’s chart there —does not. No savings are assumed from passporting.
On the provisional outcomes on the basis of earnings upratings, the White Paper set out the assumption that the triple lock would be extended until 2060, but we have nevertheless demonstrated the impact on earnings upratings on expenditure in our impact assessment. That is in chart B2 in the impact assessment, which shows that the triple lock uprating has a progressively greater impact on expenditure, and therefore pensioners’ incomes, over time.
The annual uprating process for the state pension is transparent, based on a review made by the Secretary of State with reference to the general level of earnings and the overall economic situation. The indices for earnings and prices are published by the Office for National Statistics before the uprating decision is announced and are readily available. As a result, we see no advantage in committing in legislation to providing a relatively straightforward calculation. I therefore ask the noble Lord to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for that reply. I did not expect him to announce that it was going to be triple lock for the next 47 years; my noble friend Lady Sherlock made our position clear.
There is nothing wrong in looking back 47 years to 1966. England won the World Cup. Harold Wilson was Prime Minister and in his ascendancy. Those were halcyon days and well worth reflecting on.
As I said, the amendment was just a peg to get a debate to highlight that the Treasury is withdrawing quite a lot from the S2P. To an extent, we accept that that is a progressive measure. The Treasury has been chipping away at various bits and I have by no means listed them all. We will probably have another go at listing them in the interim, but in the mean time, I beg leave to withdraw the amendment.
Lord Flight (Con)
My Lords, these amendments raise some issues that relate back to the previous Pensions Bill and, at least as far as I was concerned, some not very clearly answered questions about the potential size that the cash-flow deficit would grow to with regard to pay-as-you-go pensions.
First, my understanding is that, whether it is a pay-as-you-go public sector scheme or a funded public sector scheme, with the ending of contracted-out contributions, the money that the schemes will no longer receive will go towards financing part of the new state pension. Therefore, it has gone off to one box for that purpose. So we are left with pay-as-you-go public sector schemes and the impact that there is on them, and financed public sector schemes, such as local government schemes. My understanding is that, with pay-as-you-go public sector schemes, the money is no longer going to come in from contracting out and therefore the impact will be on the extent of cash-flow deficit going forward relating to public sector schemes. I should be interested to know the aggregate amount that pay-as-you-go public sector schemes will lose per annum as a result of no longer receiving the contracted-out contributions.
I think that there was some discussion during the passage of the Public Service Pensions Bill about the extent of the potential cash-flow deficit. Mr Michael Johnson and I calculated that it could be as large as £25 billion on the basis of including an estimate of the loss of contracted-out contributions. I think that the Government argued that it was not going to be as large as that but I could never quite get my head round the figures.
With regard to contributory public sector schemes, such as local government schemes—which is what these amendments are particularly concerned with—it will automatically become the financial liability of local government to make up the loss of the contracted-out contributions. How is that going to be financed? Not just in terms of what it might mean for a particular local authority, what is the extent of the aggregate cost to public sector schemes which are financed, and what is the average proportion that local government schemes, in particular, will have to make good as a result of the loss of contracting out?
I do not expect the Minister to be able to answer those questions with figures off the cuff, but it is desirable that they should be known and understood. Indeed, the impact on funded local government schemes may be very substantial, implying either significant increases in local council tax or the need for yet further substantial reductions in local government expenditure to finance the loss of contracting out.
Lord McKenzie of Luton
My Lords, briefly, I commend my noble friend Lord Whitty and the noble Lord, Lord German, on trying to focus on solutions to deal with what seems to be a major problem, particularly in relation to local authorities. My noble friend Lord Whitty said that the annual cost of losing the 3.4% rebate is in the order of £700 million a year. Today, we had the local government finance settlement, which reinforced what was announced in the spending round: a further real terms cut of 2.3% in overall local government expenditure. Sir Merrick Cockell, who is a Conservative and the chairman of the Local Government Association, said that local authorities will have lost one-third of their budget by 2015. He said,
“This is the calm before the storm. We do not know how big the storm will be or how long it will last”.
The Audit Commission last year found that 29% of councils showed some form of financial stress. Council tax increases to cover this, even if they were contemplated at the level that the noble Lord suggested, simply are not on because of the need to have a referendum to go beyond a very small increase. Do the Government see this as a new burden which central government is placing on local authorities and therefore a burden which it should it meet?
Lord Browne of Ladyton
My Lords, I am content to join in commending my noble friend Lord Whitty and other noble Lords for bringing and developing this argument. They will forgive me if I do not join in the nostalgia for 1966. The removal of contracting out from April 2016 has significant implications for all occupational pension schemes. I shall make my speech short, given the time. It is bad enough to be between somebody and their dinner; it is impossible to be between somebody and Christmas.
It is clear just how significant are the figures quoted by the noble Lord, Lord German. I did not immediately recognise them, but they are in the same ball park as the figure, which I understand to be the Government’s figure, which suggest in excess of £5 billion a year going to the Treasury in extra NI contributions from 2016 when the new state pension scheme begins. Because of the scale of public service pension schemes, the lion’s share of that increase will come from them. It is far from clear, in the complexity of the Bill, how the increased NI contributions in the public sector can be met. Not surprisingly, those who have responsibility for these schemes—bearing in mind that they have just, in many cases, entered into agreements to reform them—are seriously concerned about the impact these changes will have on local authorities, health services, fire and rescue services and policing.
I note that in Committee in the Commons, Oliver Colvile correctly also put the Armed Forces Pension Scheme in the frame in the context of public service pension schemes. If that is correct, if the Minister is minded to accept Amendment 42, the definition of public service pension scheme will include the Armed Forces, which will answer more clearly the question asked by the noble Lord, Lord German, about what is a public service pension scheme. Rightly, Oliver Colvile was concerned that the defence budget should be spent on defending our country and should not be directed back to the Treasury. If it encourages the Minister to engage with this issue in a positive way, I promise not to tell noble and gallant Members of your Lordships’ House that this issue may impinge on that aspect of public policy. If he considers that, I will keep it quiet in the mean time until we see whether we can make some progress on this issue.
The Local Government Association has been in touch with all of us and has advised us that it supports my noble friend Lord Whitty’s amendments, which defer the end of contracting out for public service pension schemes until the tax year beginning 2018, and require the Government to credit public service pension schemes with amounts equivalent to the money lost through the end of contracting out.
It is understandable why it supports them, because, in the absence of an alternative from the Government, the choices they face are extremely unpalatable. They include loss of services or increased council tax, for example, or, as we are advised, the certainty that low-paid workers will leave the schemes or that settlements, including the settlement of the public service pension scheme, would have to be renegotiated. I am also told by those who know that it will mean the renegotiation of a lot of contracts in relation to privatised services, because assumptions were made about commitments in relation to pensions in the TUPE environment that no longer stand true.
It is not unreasonable in those circumstances to ask the Government how they will resolve the additional expenses and how they expect those who run public service schemes to deal with the increased cost and, for that matter, how they expect the individuals affected to deal with the increased costs. Will the Minister address the advice that we have been given and the concerns of those who run these schemes? Does he accept that there will be a perverse incentive unless this is resolved and that low-paid workers may decide to opt out of their public sector pension schemes? Does he accept that there is genuine worry that this will undermine agreements to reform that have already been reached? Does he accept that there is genuine concern that this will impact on existing contracts for provision of services by the private sector?