HL Deb 15 February 2000 vol 609 cc1150-61

7.58 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham) rose to move, That the draft order laid before the House on 31st January be approved [8th Report from the Joint Committee].

The noble Baroness said: My Lords, as noble Lords are aware, this annual order and the other standing in my name on the Order Paper are an important part of DSS business. The order increases most of the social security benefit rates from this April. Most national insurance and non-contributory benefits will increase by an RPI of 1.1 per cent. Most income-related benefits will increase in line with the Rossi index of 1.6 per cent.

As is usual, the increases are based on the change to the retail prices index from September to September, with the increase for the income-related benefits adjusted to remove the element of housing costs. As Your Lordships know, housing costs for those on the income-related benefits are met separately through housing benefit and income support mortgage interest. The Rossi index most closely reflects the spending of these individuals.

Last year our main focus was on helping people of working age move back into work by providing greater employment opportunities and introducing policies that ensured that work paid. This year we are building on our policies to provide real security for the most vulnerable in our society. We are particularly concerned about the levels of poverty and exclusion experienced by children and by pensioners. We recognise the importance of giving young children in the poorest families the best possible start in life so we have decided to equalise the rates of child personal allowances in the income related benefits. Families will now receive as much for a child under the age of 11 as they do for a child aged between 11 and 16.

This will take place in two stages and the first stage was implemented last October. Full equalisation will take place from this April when the rate for children from birth to age 16 will increase to £26.60. This follows on from a substantial rise in the rate for children under 11 in November 1998 and means that between April 1998 and April 2000 the amount paid in respect of children under 11 will have risen in two years by over 50 per cent.

Last year, in line with our commitment to fight child poverty, there was a significant increase in child benefit, and benefit for the eldest child was increased from £11.45 to £14.40. To allow the poorest families to gain fully from this substantial increase, the family premium in the income-related benefits was increased by the same amount.

A further increase over and above normal RPI uprating will be made for the second year running taking the rate of child benefit to £15 for the eldest child, and £10 for the second and subsequent children. The family premium in the income related benefits will again be raised to reflect this.

Our policies are proving effective. Measures in the previous two Budgets will lift some 800,000 children above half average income levels. However, to be truly effective in changing people's lives we need to ensure that we can help their parents move back into work. Poor opportunities and low expectations lead to poverty in later life. Therefore we also need to tackle those issues and I am sure that we shall debate them tomorrow.

I turn now to the position of today's pensioners. This group is least able to improve their income through employment. Between 1979 and 1996–7 the incomes of the richest 20 per cent of single pensioners rose by 76 per cent. In comparison the incomes of the poorest 20 per cent rose by only 28 per cent in real terms. This difference is mainly due to the increase in occupational pensions and SERPS, with the poorest having least access to pensions other than the basic state pension and income support. We are determined to tackle the current levels of inequality and poverty among pensioners. Our strategy is twofold: first, to provide help for today's least well off pensioners; and, secondly, to make sure that people have a decent pension in the future.

Despite the rise in national prosperity, the poorest 1 million single pensioners and the poorest 1 million couples have been left behind. Therefore we are targeting extra help on the 2 million pensioners who have lost out. All pensioners will benefit from other measures such as the fivefold increase in winter fuel payments, which have been extended to all households with someone over the age of 60.

Later this year we shall introduce free TV licences for the older pensioners who tend to be among the poorest. In addition we have restored free eye tests to everyone over 60 and removed the burden of paying income tax from 200,000 pensioners. Now two-thirds of all pensioners pay no income tax at all. And a 10p starting rate will help many more. Under this Administration the least well-off older pensioner will gain over £500 a year. By the end of this Parliament an additional £5 billion will be spent on pensioners.

This £5 billion also allows us to help the poorest pensioners who need most help. The minimum income guarantee will be increased in line with earnings for the rest of this Parliament. We are setting a decent base for pensioner incomes. By targeting our resources where they are most needed we shall boost the incomes of the least well-off to £78.45 for single pensioners (an increase of £8 since 1998–9) to £121.95 for couples (an increase of £12.60 since 1998–9) and, for the older pensioners, to £86.05 and £131.05 respectively for singles and couples (an increase of £8.50 and £13.15 respectively since 1998–9).

Many people, including some in your Lordships' House, have requested that the earnings link be restored for the basic state pension. However, this would do nothing for the poorest pensioners on means tested benefits because they would lose their income related benefits pound for pound, and would be most advantageous to those individuals whose incomes have already risen dramatically. Uprating the basic pension by earnings would cost £7.5 billion by 2010. However, under that policy pensioners on means tested benefits would still see no gain. But they are already seeing the benefits of the minimum income guarantee. We will have given poorest pensioners at least £5 a week more in real terms since 1998. An earnings uprating of the basic pension would have given the poorest, on income-related benefits, precisely nothing. The guarantee sets a minimum income for pensioners of over £78 a week. Pensioners should not be worse off than this. We want to ensure that all those who are entitled will get it.

Although the basic state pension is the foundation of the pensions system it has never been enough on its own. That is why the graduated pension scheme was introduced in 1961 followed by SERPS in 1978. But even those measures did not do enough because SERPS is earnings related. That is why we are changing it to the state second pension in a Bill which I hope will reach this House before Easter.

To ensure a better income in retirement, people have always needed to save. That is reasonable. We want to make it easier to save than ever before. Low inflation levels protect the value of savings. We shall provide stakeholder pension schemes that are good value, flexible and secure. Through the state second pension we shall increase the help that the state gives to low earners with incomes under £9,500 a year, to carers and to disabled people with broken work records. We shall help them get a better pension. Someone earning £6,000 a year now would get £14 a week under SERPS. Under our proposals for the state second pension that person would get £54, not £14. That is £40 more and has huge implications for someone's standard of living in old age.

Providing work opportunities remains the main way to tackle poverty. People cannot save if they do not have a wage. The action we are taking now on a whole array of initiatives will get more people into work, will reduce poverty now, and will help prevent them taking poverty from their working years into their old age. We have a strategy for tackling poverty and social exclusion. We are determined to eradicate that in every instance for children, for people of working age and for pensioners. The uprating order, by providing price protection, ensures security and for vulnerable groups such as children and pensioners ensures even greater security. I therefore commend the orders to the House.

Moved, That the draft order laid before the House on 31st January be approved [8th Report from the Joint Committed].—(Baroness Hollis of Heigham.)

Baroness Buscombe

My Lords, the House will be grateful for the Minister's announcement of, and explanation of, the orders. I propose to respond taking the Social Security Benefits Up-rating Order 2000 and the Guaranteed Minimum Pensions Increase Order 2000 together.

First, I make it clear that we shall not vote against the orders because we do not want to stop the uprating of benefits. However, we are concerned that the 1.1 per cent rise, which amounts to 75 pence in the basic rate pension, is significantly less than the Minister's department's spending plans published in March 1999 which assumed a 1.3 per cent increase in the basic state pension from April 2000. We calculate that this difference amounts to a £90 million saving from pensioners. We should like to know what has happened to that sum. Is this a clear sign that the Government have decided to ignore once and for all their manifesto commitment to retain the basic state pension as the "foundation of pension provision"?

The Government certainly appear to prefer to announce eye catching gimmicks such as the free television licence for a selected group of pensioners. Indeed, that was the only new benefit pensioners received in the previous so-called "pensioners' Budget" of November 1999. Then there is the universal winter fuel payment, another provision that has no statutory protection and could therefore be dropped at any time. In addition, actual delivery continues to be a problem. Over the 1997–98 winter it was almost summer before payments were received. This year we understand that the Government do not know precisely to whom it must be paid following the recent ruling in the European Court of Human Rights which decided that men and women are equally entitled to receive it. We are pleased that payments will be backdated to 1997 for those who are entitled. However, can the Minister say to whom and when this payment will be made?

It is not only the delivery of the winter fuel payment that is causing concern. The breakdown of the national insurance computer system (NIRS2) has caused misery to thousands of pensioners who have not received their proper entitlement. In September 1999, one year after the Secretary of State first stated that the computer problem would be resolved in—I quote from a "Dear Colleague" letter dated 11th September 1998—"the next couple of weeks", only two thirds of cases affected had been identified.

On 17th January 2000 the Minister of State in another place, the right honourable Member for Birmingham, Perry Barr, stated that there are, 83,000 cases outstanding and we expect all to be settled this year".—[Official Report, Commons. 17/1/00; col. 569.] Can the Minister give a clear indication today of when this mess will be cleared up since upratings are of little significance or encouragement to all those still affected by this administrative incompetence.

Returning to the new Labour pre-election manifesto, in addition to championing the basic state pension it also stated, we believe that all pensioners should share fairly in the increasing prosperity of the nation". How can the Minister reconcile this commitment with a £5 billion a year tax on pension funds and the abolition of the most popular savings vehicles of all time—namely, TESSAs and PEPs—such that now the amount of money that people can put away tax-free each year for their future prosperity, for their retirement, if they so wish, has been halved?

In addition, with the abolition of dividend tax credits, 300,000 pensioners whose income is so low that they do not pay income tax will have to pay, on average, an extra £75 a year in tax.

Further, in the 1999 Budget, having given the impression that pensioners would retain the married couples allowance, the small print revealed that those turning 65 after next April will not be able to claim the allowance and that this will cost them an extra £500 year in tax that they had neither expected nor planned for.

It is also important to note that the Government have now abolished the allowance granted to widows aged 60 to 65 following their husband's death and simply replaced it by a payment which will only be available to widows under pensionable age.

Even the disabled are having a raw deal now that the Government are means testing incapacity benefit for the first time. Individuals who have a modest pension will lose their entitlement to incapacity benefit. This will discourage people on low incomes from saving while penalising those who have been able and prudent enough to save for their future. This change also attacks the contributory principle.

It is true that, thanks to our policies when in government for encouraging investment and occupational pensions, more pensioners currently enjoy higher incomes and so are less dependent upon the basic rate pension. However, given the Government's erosion of pensioners' investments and occupational pension schemes, we are deeply concerned that the pendulum is beginning to swing in the other direction since it no longer pays to save and we will see a growing dependency upon the basic state provision—that is the basic rate pension—for the long term. To make matters worse, we on these Benches believe that the Government's stakeholder pension scheme will drive people out of existing occupational schemes and into stakeholding instead.

In contrast, a crucial incentive to pensioners would be to raise the capital limits in order to match them more closely to current interest rates. The limits have not been increased since 1990. I now urge the Minister to respond to promises made in another place during previous uprating debates going back to 1998, and referred to by my honourable friend, the Member for Havant, in another place when these orders for 2000 were debated on 7th February. For example, he said: In February 1993, the then Under-Secretary of State for Social Security, the hon. Member for Manchester, Withington … said: 'I do not dissent from the view that there are problems with capital and disregards. In our review of benefits and the general review of the welfare state, capital and disregards will have to be considered'.—[Official Report, Commons, 7/2/00; col. 35.] Moving to the substance of the Guaranteed Minimum Pensions Increase Order 2000, our response to this extension of means tested benefits is that its practical effect is to act as a severe disincentive for saving into retirement for people on low incomes, thereby resulting in increased state dependency among pensioners. Given the minimum pension guarantee and the Government's pledge to raise it in line with earnings, some people who save, for example, in a stakeholder pension, could be better advised not to bother saving at all. Why does the Government seek at every turn to undermine those who are prudent and want to prepare to support themselves with private provision in retirement?

We on these Benches believe in protecting pensioners' savings and increasing their incomes from funded pensions. Our fundamental objection to the Government's strategy is their undermining of pensioners' incomes by their stealth attacks on pension funds, coupled with a patent reluctance to do more than tinker with the system. Where is the genuine commitment to welfare reform that we heard so much about before the last election? These uprating orders to not provide pensioners and those genuinely in need with anything more than disappointment.

Earl Russell

My Lords, the debate puts me in a little difficulty. By long tradition, this occasion has been used for a general discussion of the state of the social security system. However, I shall be doing that tomorrow.

Baroness Hollis of Heigham

My Lords, I am sorry. It is not my fault.

Earl Russell

My Lords, it is not the Minister's fault, nor mine either. It is just one of those things. But since I am not the young lady named Bright, I do not intend to arrive on the previous night. I must therefore find a few other things to say.

I thought that I might pay some attention to the general principles upon which uprating should be based. The Minister may remember that we on these Benches abandoned the principle of uprating in line with earnings a good while before her party did. I can remember an occasion in the days "BT"—"Before Tony"—when the noble Lord, Lord Carter, asked me to put my name to an amendment of his to change uprating so that it was in line with earnings. I told him very quietly that I would rather sit that one out. The noble Lord, Lord Carter, looked like a hurt spaniel. So we can see that there are difficulties in affording uprating in line with earnings.

It also seems to us clear that if uprating is in line with prices and not with earnings, then there will be a steadily widening gap opening up between people on benefit and the rest of us. That must mean that, as resources allow, from time to time there must be upratings which go above prices, and occasionally well above prices.

I wonder whether this might be regarded as such an occasion. I have read the report of the Government Actuary with some care. It is a highly encouraging report. There is a generally beneficent economic climate—or, at least, there has been—which is international as well as national. It owes a great deal to the success in overcoming the Far East crisis of 1998. There was a single year surplus of £1.5 billion and a balance in hand of £16 billion.

The Minister may perfectly well say—she probably will—that benign economic conditions do not always last, but what encouraged me most in the Government Actuary's report was its concluding sentence: However, even quite substantial alterations in economic conditions should not cause the balance in the fund to fall below the levels seen in some recent years". That is the kind of statement that actuaries do not make very often.

It has presented the Minister with an opportunity not only for some uprating a bit above prices but also to review the pattern of the relationship between one benefit and another. Gaps open up in different places at different times, and it would have been worth taking the chance to review the way things have developed since 1988.

I agree entirely with everything that the noble Baroness, Lady Buscombe, said about the need to uprate pensions by more than the proverbial 75 pence. On Marie Antoinette principles, pensioners would find it difficult to use that to buy a piece of cake unless it was a rather poor quality cake.

I take the Minister's points about winter fuel and free TV licenses. But will she tell me whether a provision exists anywhere in legislation or regulation whereby the benefits may be uprated in some future year? If it does, I am not aware of it.

The Minister talked about the minimum income guarantee—MIG—which she regards with great enthusiasm. I shall be grateful if she will tell me whether she has discovered any secure means of delivery for the minimum income guarantee. How does she get the money to those who need it? Unless she can answer that point, the value of the minimum income guarantee is perhaps greater in the course of conducting a debate than in the course of feeding a pensioner. If the Minister has an answer to that, I should be pleased to hear it.

The Minister talked about children. I welcome the increases, but I wonder whether the form of her statement that she had lifted 800,000 children above half the average earnings illustrates the danger of taking one single target for poverty, which is a great invitation to benefit those just below the target level—to float them off—while leaving those in much deeper poverty entirely alone. It is a danger of taking one single yardstick to measure a problem. One needs to consider also those in much deeper poverty.

I wonder also whether the Minister might have done well to consider the relationship between single people and couples and that between the young and the old. She may remember signing an interesting Written Answer to me on 19th January, which dealt with the rates of income support as a percentage of average earnings. I concede at once that average earnings are not the same thing as average income and that income support pays out housing benefit. Nevertheless, some of those rates are quite striking. The income support level for single young people aged under 25 is 10.15 per cent of average earnings—not particularly generous. For single people over 25 it is a little better: 12.82 per cent of average earnings. Those rates are hardly princely.

Furthermore, the tendency to hardship is exacerbated by the longstanding principle—at least, since 1988—that special hardship payments are not normally made available to single people. I have never understood at all why being single means that one is incapable of experiencing severe hardship. Hunger is just as painful and the ground is just as cold to sleep on. If the Minister has an answer to the question of why single people cannot obtain hardship payments, I should be glad to know what it is. That is a matter that she might have addressed.

The differential between young people's and old people's rates of income support is a further matter that might have been addressed. It is an effect of percentage increases that if an equal percentage increase is given to two unequal sums, the differential widens. In terms of pounds as distinct from percentages, the difference between income support for people under and over the age of 25 has been widening slowly since 1988. In some year or other, something should have been done to prevent that gap from widening much more quickly. This year, with a surplus in hand, might have been a good year to do it.

Finally— I am sure that I should have surprised the Minister a great deal more by not saying this than by saying it— I must, probably for the 20th or 30th time, express my deep regret that she has taken no advantage of the opportunity to uprate the capital limits on savings. Those have not been uprated in most cases since 1988, which means that the principle of a protected level of savings is itself in danger of coming so near to disappearing that it becomes nugatory. Someone with a good enough grasp of political history to remember the first Wilson administration will understand what I mean when I pronounce the words, "dog licences".

Baroness Hollis of Heigham

My Lords, we have had a short, but, as usual, to-the-point debate, with some detailed questions. I shall do my best to answer the points raised. I have been scribbling away during the debate. If I have overlooked any points, I shall follow them up with correspondence.

The noble Baroness, Lady Buscombe, did a splendid attacking job, although I hope that she will accept that perhaps not all the attacks landed. But let us not worry about guerrilla warfare on these occasions. She asked about the 75p increase in the basic rate pension and the implications of a lower departmental spending plan. She asked also where the missing money—in the region of £90 million—had gone.

The matter needs to be set in context. Because inflation and therefore RPI levels and unemployment are under control, the expected level of growth is less than half of that we inherited from the previous government's spending plans. As a result, the 75p increase properly reflects the RPI. Overall expenditure on the social security budget is down because of reduced unemployment and reduced economic inactivity among lone parents.

The noble Baroness asked to whom and when winter fuel payments would be made. They will be paid to an extra 1.5 million people or 1 million couples at a cost of some £85 million. It is complicated because a number of the relevant men over the age of 60 are in work. That was not the intention behind the original fuel payments. We shall be making announcements later about those payments because we do not have the automatic figures that we would have had for pensioners, for whom the payments were originally intended. We shall be contacting people with the details and the method of payment. They do not need to contact us.

The noble Baroness made some points about pension funds and the abolition of TESSAs and PEPs. She referred also to the attack on annuities and stealth, going back, I believe, to ACT. I understand why people complain that their pension fund has lower interest rates and now returns a lower annuity rate than they might have expected, but that must be understood in terms of three factors. First, one only receives a return of 5 per cent rather than 10 per cent compared to what one would have received in the 1980s. Secondly, inflation must be taken into account. Thirdly, we almost never hear about the resultant growth in the size of the fund, but it must be taken into account.

Perhaps I may give an example. In 1990, someone on half the average earnings might have retired with a pension pot of £31,000, which would have brought him an income of £92 per week, equivalent to £119 per week at today's prices. By 1998, although annuity rates had fallen from around 15 per cent in 1990 to 9.5 per cent, someone with the same earnings and contribution patterns would have accumulated a fund of £97,000 because of the growth in the equity value of his pension pot, enough to provide an income of around £175 per week. That is a good 50 per cent—indeed, nearly 75 per cent—more than he would have received in 1990.

Such a person can now expect the real value of his pension to be maintained because inflation has fallen below 2 per cent. The reason for that is the high returns achievable on equities during the 1990s, for which, indeed, the previous government must take the credit, which I should wish to pay. The point is that one needs to look not only at annuity rates falling, even though inflation has fallen even more, but also at what has happened to the growth of the equity value of the pension pot. As a result, pensioners are receiving a lower return, but on a much higher pension pot to meet a much lower level of inflation than they would have done in 1990. Therefore, they are much better off. Their expectations may be somewhat different, but those are the facts.

The noble Baroness then moved on to incapacity benefit and referred to some of the issues that were raised when we debated the Bill last summer. There may just be a fundamental difference between us. Incapacity benefit, with which the noble Baroness's government replaced invalidity benefit, was not designed to be a top-up to an early retirement pension. It was meant to be an earnings replacement benefit for those who were struck down in theft working life and needed an earnings replacement benefit which was more generous than the ordinary unemployment benefit. That was the purpose of it. It became instead, on the one hand, a replacement for unemployment benefit for those who had no recent, connection with the labour market and, on the other, a top-up for pensions. Our reforms were designed to bring it back to its original intent.

Earl Russell

My Lords, I hope the Minister will not encourage us to resume arguments on which we have spent a good deal of time already.

Baroness Hollis of Heigham

My Lords, I am doing my honourable best to answer the points raised by the noble Baroness. Had she not raised invalidity benefit and what she regards as the inappropriate response of government, I would not now be seeking to respond to her points. If I am guilty of anything, it is of attempting to answer the noble Baroness's question.

Finally, the noble Baroness raised, as did the noble Earl, Lord Russell, a point about capital limits. I take the point entirely that they have not been raised since 1990. I wish that that point had occurred to the Benches opposite—the government at the time—in 1991, 1992, 1993, 1994, 1995, 1996 and even in the Budget of 1997, when they could have tackled the problem which they now draw to our attention as lying so long in neglect. We are committed to raising those capital limits as resources allow. We have reviewed them, and so on. But as and when will be determined not by the Department of Social Security but by the Chancellor of the Exchequer at the time that he judges appropriate.

I turn now to the points raised by the noble Earl, Lord Russell. He conceded that the Liberal Democrat position has always been that old age pensions should rise not in line with earnings but with prices, and he accepts, as I do, that that presents us with a problem. What happens is that, as average earnings increase, although pensioners do not fall behind in real terms, nonetheless there is widening inequality. As earnings rise higher, there is, by definition, a wider stretch of incomes. That is true and it is certainly true of pensioners. We have seen pensioner incomes overall increase by around 68 per cent—incomes in the country as a whole by around 30 per cent—so that pensioners on average have done much better than the rest of the country.

However, the noble Earl is absolutely right to say that there is a particular problem for poorer pensioners. The bottom two deciles, who for the most part are single widows over the age of 75 with no access to occupational pension schemes and not much access to SERPS because they were not themselves in the labour market, have fallen behind. That is why— the noble Earl is right to press us on this point—we are putting so much effort into the minimum income guarantee. We hope and believe that that is a short-term problem in the sense that now there are as many women in the labour market as men so they will be coming forward in the future as a cohort with their own pensions, to float them off those bottom deciles. We have a temporary problem while existing pensioners—mainly older single women and widowed women—have no access to other than state benefits. That is why the minimum income guarantee is important.

The noble Earl asked about the secure delivery of MIG. We are working on that. We are working on automatic delivery and we are working on the national campaign. We hope to make statements fairly quickly.

The noble Earl's final point was about the average earnings of young people and income support as a percentage of income of those in work. I was muttering to my colleagues on these Benches "10.1 per cent". I knew where that point was going to come from. The noble Earl was right to say that those figures exclude housing benefit, which in many cases effectively more than doubles the income. But, if taken after housing costs—it is perfectly proper to take it after housing costs— I would draw to the noble Earl's attention this point. I know that we are probably rehearsing tomorrow's debate. There are wide differences between the replacement ratio of income support or JSA to earnings for young single people compared with families with children.

The noble Earl will accept that the figures for families with children are different from those of single people. What matters is not just the level of benefit income but the length of time someone spends on that benefit income. It is the persistence of poverty that scars rather than any one snapshot point in time. I would remind the noble Earl— I am sure that he does not need reminding from me—that two-thirds of men on JSA are off JSA within six months. In other words, being on JSA or income support at those levels is fortunately a temporary phenomenon for most people. The people who remain—that is where poverty lingers—are those of working age who are lone parents, their children and of course the poorest pensioners whom we have already mentioned.

There is of course the severe hardship scheme. I would again seek the noble Earl's help in publicising it because, to my knowledge, well over 80 per cent of all claims going in for severe hardship payment are successful. Therefore, it is a decent scheme. It is perhaps not as fully used as it ought to be. Whether it is the exceptional scheme, the severe hardship scheme or the hardship scheme—there are three different schemes for different benefits—all have a very high ratio of success to application. If the noble Earl can help us to encourage people to apply for those, he will be doing them a service.

I hope that I have answered the points raised by the noble Baroness and the noble Earl. On that basis, I ask the House to accept the order.

On Question, Motion agreed to.