HL Deb 18 October 2004 vol 665 cc167-77GC

In section 13 of the Social Security Contributions and Benefits Act 1992 (c. 4) (class 3 contributions), after subsection (1) insert— (1A) The prescribed conditions referred to in subsection (1) above shall not include any limits on the period between the payment year and the contribution year."

The noble Lord said: We turn to the thorny subject of national insurance contributions, which are divided into four. Class 3 national insurance contributions are voluntary contributions that boost entitlement to the basic state pension and also affect bereavement benefits, but do nothing else for the social security fund or the social security benefits of this country.

5.15 p.m.

Generally, class 3 NICs must be paid within six years of the end of the tax year to which they relate. They are especially helpful for people who have not reached the minimum number of contributory years. For someone who is just beneath the threshold for receiving any state pension, it is likely to be worthwhile paying sufficient class 3 NICs to gain an entitlement.

The trouble is that one must have a pension forecast in order to make that calculation. Again, in the multi-question mode that I seem to be in today, I ask: how many people ask for state pension forecasts in advance of being likely to retire? The time limit for the payment of class 3 NICs for 1996–97 to 2001–02 is 5 April 2008. Moreover, any contributions for that period can be made at their original rates rather than, as is usually the case, the rate at the time of making the payment. Indeed, I suggest that should this extension be given, the rate of payment should be the rate pertaining at the date to which the NICs are paid rather than the rate of payment at the date when they should have been due: perhaps that explains matters clearly.

The extension to the period during which contributions for past years can be made is a result of the decision taken in 1998 by the Contributions Agency to stop issuing automatic NICs deficiency notices. These had previously been sent to people who had paid insufficient contributions, but were stopped because of the serious problems experienced by the National Insurance Recording System 2 (NIRS2) computer system. The decision was supposed to be temporary, but was not rescinded even after NIRS2 had stabilised, which I am pleased to say it now has. Therefore, I ask: will it be reinstated? If so, when? Clearly, that would save an awful lot of hassle for an awful lot of people. I cannot imagine that it is vastly expensive from the point of view of the pensions agency.

Effectively, the proposed new clause would extend those temporary arrangements by extending the six-year time limit for paying class 3 NICs and, as a result, would provide greater flexibility for people to fill in any gaps in their contributory records, which must, by definition, be desirable. I beg to move.

Baroness Hollis of Heigham

I think that this is a much bigger amendment than perhaps the noble Lord indicated. On the basis of what he said, given that class 3 NICs are voluntary payments paid by those not in work—such as students, people living abroad and so on or those who are employed but are unable to pay class 1 NICs—it is normally paid at a flat rate per week, currently £7.15, to the Inland Revenue.

If the amendment proposed by the noble Lord was to win favour, it would mean that most people would wait until the last moment before paying contributions. Class 3 NICs would be an infinitely better buy. They would then be able to make a judgment based on the actual status of their contribution record rather than assumptions about earnings and employment over their working life. Most people would pay the minimum amount needed to complete their record.

That has a number of implications. First, the contributory principle that people contribute through their life for out-of-work benefits would be seriously undermined. The employed and self-employed who are required to pay regular contributions while they are working might justifiably be aggrieved if others were able to wait until just before they retired before paying contributions and were then able to judge the minimum amount needed to receive the level of state pension that they wanted.

It matters because the subsidy to those paying class 3 NICs compared to those paying contributions to other classes would increase. The class 3 contribution rate is low. In 2004–05, it is £7.15. If class 3 contributions were to be actuarially mutual so that they actually paid for the benefits that they bought—in other words, not just for six years, which is, so to speak, a concession—but extended to those, such as married women, who had ultimately decided that it was worth the difference between 60 per cent and 100 per cent pension to pay in, the sum would have to be £20.50 as opposed to the current £7.15. Given that the person who might benefit from this, as cited by the noble Lord, would be a woman perhaps earning a minimum wage but working below the LEL—and therefore earning at best, say, £75 a week—would she be willing to come forward with a contribution of £20 a week in order to gain coverage through class 3? That is what the noble Lord's amendment suggests.

Lord Skelmersdale

No.

Baroness Hollis of Heigham

I shall be very brief.

The amendment would also have significant costs. There would be an initial impact on the NI fund as class 3 payments would disappear as people wait to pay until they are near retirement age. Over time, payments of state pensions would increase as people are able to top up their contributions to ensure that they receive a full—or at least a bigger—pension which would be heavily subsidised unless one lifted up the actuarial rates. If one did not, it is estimated that the cost would in time reach £5 billion a year.

In summary, as I said, the noble Lord's amendment is much bigger in its consequences than perhaps he envisaged. In the light of that, I hope he will withdraw the amendment.

Lord Skelmersdale

It need not be. I accept that the current rate is £7.15 a week. I also accept the noble Baroness's figures—I am not an actuary—that it would need to rise to £20.75 a week, on the basis on which she has had the calculations done. But of course it is not necessary to do it like that. It depends at what point the gap is and at what point it is paid. It is not beyond the wit of man to adjust these things to make it workable. For example, if you discover at age 24 that you are likely to have three years missing, that would not cost £20.75 by any stretch of the imagination. It might not even cost £7.15; I do not know. On the other hand, if you discovered at age 60 that you had three or five years missing, then it almost certainly would cost you £20.75, as the actuarial rate suggests.

Perhaps the serious question behind this is whether the pensions agency will ever again send out forecasts to people who have a deficiency in their payments, as it used to some time ago.

Baroness Hollis of Heigham

The answer is yes. It has sent them to both of my sons. They rang up to ask about their forecasts. They were students who had done further degrees, higher degrees, postgraduate degrees and all the rest of it, and they wanted to see their shortfalls. They received an impeccable document that showed them exactly where they stood. They will have to make a decision before 2009 about whether to reinstate their missing years, as they are entitled to do.

Lord Skelmersdale

But it was not automatic. The forecasts were sent because the noble Baroness's sons requested them. That is very different. In the old days, forecasts were sent automatically. If one did not receive such a notice, one could assume that there were no deficiencies in one's account.

Baroness Hollis of Heigham

We have started the cycle again. One of the reasons for the extension to 2009 was the failure to do these annually. They have now restarted. Therefore, people should automatically be told.

Lord Skelmersdale

I am delighted to hear it. I must confess that that comes as news to me, but then, for the past 15 years or so, I have not been following work and pensions issues perhaps as closely as I did in the past. That said, when I get Hansard tomorrow, I will look very carefully at what the noble Baroness has said. I am as yet unconvinced, for the reasons that I have partially given. Meanwhile, I have no alternative but to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 284 shall stand part of the Bill?

Lord Higgins

The noble Baroness and I spent many hours on the Child Support, Pensions and Social Security Act 2000, which this clause seeks to amend. Evidently, we either overlooked a matter or something has changed since then. Perhaps the noble Baroness can tell us which it is.

Baroness Hollis of Heigham

The clause makes a number of technical amendments to Section 42 of the Child Support, Pensions and Social Security Act. It amends it to make clear that third-party administrators can use the so-called opt-out procedure to obtain individuals' consent for the exchange of information necessary for producing a combined pension forecast. Third-party administered schemes cover almost half of those who have a private or occupational pension, so the matter needs addressing. The clause also makes a few other technical amendments, including allowing information about the proposed lump-sum option for the deferral of one's state pension to be included on state pension forecasts. I hope that the noble Lord will be content with that explanation.

Lord Higgins

It was a point that we did not notice, so I am glad that we have put it right.

Clause 284 agreed to.

On Question, Whether Clause 285 shall stand part of the Bill?

Lord Higgins

This important clause deals with a matter that has long been a cause for concern. The noble Baroness, Lady Fookes, in particular has pursued the issue over a very long time. It arises from the question whether people living overseas who are entitled to a national insurance pension should also get the pensions up-rating that those in the UK have. The trouble has been that the distinction between who gets the up-rating and who does not is extremely arbitrary. Members of the European Union get the up-rating, so the expansion of the EU means that pensioners—there cannot be very many but there may be more in the future—who are entitled to a British state pension but live in Poland, for example, will get the up-rating whereas others, particularly in Commonwealth countries, do not.

The issue came to a head in relation to Australia because a longstanding, rather odd reciprocal arrangement whereby we paid their up-rating and the authorities there paid ours, was discontinued by Australia because they regarded it as wrong. As a result, British citizens entitled to a UK pension in Australia got the basic state pension but not the up-rating. That caused considerable concern. When I spoke on the matter previously in the House I was perhaps misinformed on some aspects. The individuals concerned receive a contributory pension. They feel that, although they retired and went abroad, their contribution record is exactly the same as that of someone living in the UK, yet they do not get the up-rating.

Having said that, I am not clear exactly what the clause does. We are clear what some of the provisions do. It does not affect the Social Security (Australia) Order 2000. The system is strange; it ought almost to be an international treaty rather than a clause in the Social Security Bill. Given the background that I have outlined and the feeling by pensioners in some countries that they have been treated unfairly, does this clause do anything to put the matter right? The Social Security Committee in another place looked at the matter some time ago and decided that whether one put it right was all a question of priorities. But that does not take into account the fact that it is a contributory pension rather than a pay-as-you-go pension. Perhaps the noble Baroness will enlighten us.

5.30 p.m.

Baroness Barker

Perhaps I may remind the noble Baroness, Lady Hollis, that on my first day in this House I was in the company of Lord Russell and we bumped into her in the Prince's Chamber. Curiously enough, we talked about this very subject. She gave me a brief answer on her thoughts. After that, I went away to read up about it and it is something that I have followed closely over the years, in particular relating to the recent court case involving pensioners in South Africa.

From my casual observation—which is rather different, given that I work with an organisation that looks after the interests of older people—it is clear that patterns of domicile among older people are changing quite radically. Some of those changes relate to historical patterns of migration to this country. The noble Lord, Lord Higgins, mentioned Poland. We know that there are large populations of Polish people who came to this country a long time ago, and who are now returning to their home country as pensioners. Therefore, we seem to have come to a point where it is accepted that there should be a thoroughgoing review of pensions.

That review ought to look not only at changes in the domicile of pensioners, which are far greater than was the case when the basic state pension was introduced, but also at the services people need in older age, wherever they are, and what their pensions may have to support in different places.

While I make no statement about that, like the noble Lord, Lord Higgins, I am intrigued about the technicalities of the Bill in this context. However, at a time when we are considering changing patterns of retirement, the Government would perhaps be missing a trick if they left those out of their review.

Baroness Hollis of Heigham

Before I turn to the substantive argument, I acknowledge that the noble Baroness has made an interesting point about the changing patterns of domicile in retirement. I shall make only one blue-sky remark, because this clause does not deal with frozen pensions. We are dealing with the consequences of Australia's declaration that, because we will not unfreeze pensions, they have ended the reciprocal agreement. The noble Lord pressed me about contributory pensions. Of course the national insurance pension is contributory, but it is one in which the indexation is designed to meet increases in the British cost of living. Indeed, for many years during the 1950s and 1960s, there was no such indexation. That is my one aside on the point and I shall not go into the bigger debate about priorities, the £400 million and so forth. No doubt those arguments will be rehearsed on Report.

Clause 285 is needed for a much smaller purpose and does not relate to the bigger issue of frozen pensions. It is needed to regularise the extra-statutory payments we are making to people now living permanently in the UK, but who have had previous periods of residence in Australia. When Australia ended the reciprocal Social Security Agreement in March 2001, we had to take steps to protect the national insurance contribution records of those people who were affected so as to ensure that they did not lose their benefits. We currently do this by making extra-statutory payments which take account of the period of residence in Australia, thereby protecting those who are entitled to payments of state pension, widow's benefits and bereavement benefits. This is not about increments paid after people have retired, it is about their working period contributions contributing towards pensions.

Lord Higgins

When you are living where?

Baroness Hollis of Heigham

When you are living and working in another country. The position is that contributions towards the Australian basic state pension, which I think I am right in saying is income related while the UK pension is not, results in a disparity in the interest of Australians living in the UK, which would otherwise have been ended.

As I have said, we currently make extra-statutory payments to take account of the period of residence in Australia, thereby protecting those entitled to payments of state pension, widow's benefits and bereavement benefits. This clause will put these payments on a proper legislative footing, and thus is another instance where we are seeking to regularise extra-statutory payments. If Parliament declined to legislate, we would need to consider continuing with extra-statutory payments, which are less certain and could affect around 4,000 people.

This clause will also enable the provisions of the Australia agreement that are treated as remaining in force to take account of future changes in UK legislation in relation to claims for state pensions, widow's benefits and bereavement benefits through secondary legislation. This means that if changes to Great Britain or Northern Ireland legislation are made that affect the provisions of the agreement that are treated as remaining in force, we can quickly take action to protect any people affected.

Given that explanation, I hope the noble Lord will accept that this clause should stand part of the Bill.

Lord Higgins

I am all for putting extra-statutory concessions into legislative form, because we then have the opportunity to discuss them in a way which is not otherwise the case with such arrangements. Having said that, however, I do not understand a word of what the noble Baroness has just said.

We agree that the Australian Government decided to terminate the reciprocal agreement whereby they would pay the pensions of our people in Australia, and the other way about. But if I understand the noble Baroness correctly, this appears to be related to the contributions made. Is she saying that the Government of the UK, by extra-statutory concession, have been paying the contributions of UK people resident in Australia who did or did not—or do or do not—pay Australian contributions? Is it the case that someone living in Australia who otherwise would be contributing here has their contribution record maintained?

Baroness Hollis of Heigham

No. I sought to make the distinction between the issue of frozen pensions, which is a debate about what happens to the raising of the basic state pension after retirement once it is in payment. What this provision does is ensure that, for anyone who has worked in Australia and has returned to the UK, their period of contributions made in Australia—the Australian equivalent of NICS—will count towards their British contributions record. I sought to make the distinction between what happens while you are in work and what happens afterwards. We have been making those payments on an extra-statutory basis, and I am sure that our move to regularise it will be welcome.

Lord Higgins

When the noble Baroness says, "making those payments", it means that those people were credited with national insurance contributions in the UK while they were working in Australia.

Baroness Hollis of Heigham

When they returned to the UK, their period of work in Australia was credited towards their UK record, but we did not have a statutory basis on which to do that. We are now seeking to put in place that statutory basis.

Lord Higgins

To get that concession, do they have to have made contributions to the Australian system?

Baroness Hollis of Heigham

Yes, they are credited with what they would have built up in Australia.

Lord Higgins

The Australian Government come into the contributions and the person returning to the UK gets nothing for them. However, we make up the contribution record in the UK. Is that right?

Baroness Hollis of Heigham

Let us take someone who works in Britain for 20 years, then works in Australia for 10 years and returns to Britain for their last 10 years in work. We would take into account the 10 years spent working in Australia, where they were contributing. We would count that in the contributions record, even though the Australians have broken the reciprocal arrangement.

Lord Higgins

And even though they have come into the proceeds derived from people making their contributions in Australia. Again, is that right?

Baroness Hollis of Heigham

That was part of the original knock-for-knock arrangement, which has now been ended by the Australians. However, we are continuing to protect the position of people in the UK. It is not precisely reciprocal because the Australian pension is income-related while ours is not; it is based on the contribution record. We are making good the period when someone works in Australia.

Lord Higgins

Regardless of that point, is it the case that for someone who works here for 20 years, works in Australia for 10 years and comes back to retire here, the British taxpayer must make up the contribution while that person was away, while the Australian Government benefits from the contributions paid by that person during the period they were working in Australia? Does the person get nothing while the Australian Government keep the money? Does the noble Baroness think that that is right?

Baroness Hollis of Heigham

I am very sorry indeed that the Australians felt it necessary to end the reciprocal arrangement, which was to our mutual advantage. However, given that they have ended it—very unwisely, in my view—as a response to the frozen pensions issue, we have nonetheless decided to do the decent thing, which is to safeguard benefits on an extra-statutory basis, now to be regularised by way of this clause.

Lord Higgins

Why should the Government make up contributions of this kind when they resolutely refuse to make them up for people with insufficient contributions who have always lived in the UK?

Baroness Hollis of Heigham

That is not the point. Anyone seeking to retire in Australia will take with them their basic state pension at the point at which they leave. It is a different argument, both from a moral and an emotional point of view. A person, post-retirement, may take with them to Australia or Canada their basic statement pension at the point at which they leave, having been fully informed about what will happen. Should they then go on to enjoy increments which have been awarded to pensioners resident in Britain to address the British standard of living? Whether someone still of working age should have their contributions record in Australia counted towards their UK contributions record is a different issue.

Lord Higgins

I understand that this is not concerned with the basic uprating issue, rather it is a procedure by which the contributions of someone in the circumstances described are made up. However, what I am asking is this: why should their contributions be made up? Whether or not they make payments to the Australian Government is irrelevant. Why are we making up their contributions when the Government are taking such a tough line on the contributions records of other people who were suddenly told, "Unless you contribute for 10 years, you will not get anything."?

This arrangement is jolly nice for the group we are talking about, but it is inconsistent with the policy adopted by the Government with regard to the deficient contributions records of people who have remained in the UK throughout their lives.

Baroness Hollis of Heigham

No, the point is that someone with a deficient contributions record here—someone who has never gone to Australia—is that that person has not been in the labour market and therefore will not have earned above the lower earnings limit, and thus in the normal course of events will not have acquired a full national insurance record. They then seek, on a best-buy basis, to buy back additional years. I am sorry, the noble Lord was talking about the 10–year amendment.

I accept the point, but the policy was designed during a period when those who would be most affected by it—around 150,000 women—were protected by the 60 per cent married woman's pension dependency payment. That relates to our discussion earlier today, and triggers further arguments about whether inheritance should he recognised and so forth. However, the argument I seek to address is that, for the most part, those women would receive a 60 per cent married woman's pension.

We inherited a situation in which, as a result, there was a de minimis before they were entitled to enjoy any category A pension that they had accumulated in their own right. We could argue about whether the harrier of 25 per cent—10 years for women and 11 years for men—was set too high, but I would also argue that as one year was something of the order of £2, to go back to any year that could be taken into account meant that the Government would have become involved in paying out small sums, in some cases virtually nil payments, to a large number of people. That would have been a complicated and expensive piece of administration. If we were to go down the path of looking again at the 25 per cent rule, I suggest that we should not consider it in isolation from all the other changes being pressed on us by the EOC, the Fawcett Society and the like. This needs to be looked at as part of the wider context of considering pension entitlement, particularly for women, who certainly are disadvantaged in the labour market.

Lord Higgins

First, the Government are looking at this particular issue in isolation. Secondly, the noble Baroness has said that this relates to those working in Australia and no one else.

Baroness Hollis of Heigham

I sought to explain the example cited by the noble Lord of the 10 years for women.

Lord Higgins

The Government are taking action on this matter in isolation, although they are thinking about the other issues. They do not intend to deal with both groups together.

The noble Baroness has said that the people with deficient contributions who require 10 years to be made up were not in the labour market. However, the people working in Australia were not in the UK labour market. I find this a slightly strange solution. I understand that it is not to do with the broad issue of uprating. As regards the rest of it, we will need to read carefully what the noble Baroness says, because I must confess that I am confused.

5.45 p.m.

Baroness Hollis of Heigham

I should clarify that I made a mistake. I thought that the noble Lord was referring to a different amendment. I was referring to people not in the labour market in the class 3 debate that we had, rather than the 10–years rule and the 25 per cent to which the noble Lord referred. I thought that he was referring to frozen pensions, so to some degree we are at cross-purposes.

Basically, we are making extra statutory credits, which we seek to regularise, so that people who have come back and have paid their way in Australia, get the benefit of that in their national insurance record. If we did not do that, not only would it be injurious to them, but, given the implications for pension credit and so on. I am not even sure how much we would save.

Baroness Barker

I am reluctant to intrude upon this exchange, but I have been following the issue extremely closely. I have a question that I do not want the noble Baroness to answer just now; perhaps she will write to me and the noble Lord, Lord Higgins, as that might well help us to understand the matter further. With which, if any, other countries are there similar arrangements? The point that I take from the comments of the noble Lord, Lord Higgins, is not that he takes exception to the payments per se, but that he is puzzled about why they seem to relate only to Australia. I ask the noble Baroness not to reply to me other than in writing, but that may help us on this side of the Committee to understand the logic behind this.

Lord Higgins

I promise not to say one more word, except that, when I was at the Treasury, I always said that, if you put a non-statutory concession into legislation, the danger is that people will find out what you have been doing. That is exactly what has happened in this case.

Baroness Hollis of Heigham

The arrangement was devised between the governments of the UK and Australia. This particular aspect, in which you count the years of residency, does not apply to any other country, but that is very different from the wider debate about frozen pensions.

Clause 285 agreed to.

Baroness Dean of Thornton-le-Fylde moved Amendment No. 336A:

After Clause 285, insert the following new clause—