Child Support, Pensions and Social Security Bill

HL Deb 15 May 2000 vol 613 cc49-88

5.26 p.m.

House again in Committee.

Clauses 27 to 29 agreed to.

Lord Goodhart

moved Amendment No. 109: Before Clause 30 insert the following new Clause— ("Age addition AGE ADDITION . For section 79 of the Social Security Contributions and Benefits Act 1992 there shall be substituted— "Age addition. 79.—(1) A person who is above the specified age and who is entitled lo a retirement pension of any category shall be entitled to an increase of the pension, to be known as "age addition". (2) Where a person is in receipt of a pension or allowance payable by the Secretary of State by virtue of any enactment or instrument (whether passed or made before or after this Act) and—

1. (a) he is above the specified age; and
2. (b) he fulfils such other conditions as may be prescribed,

he shall be entitled to an increase of that pension or allowance, also known as age addition. (3) In this section "specified age" means an age specified by the Secretary of State in regulations. (4) Age addition shall be payable for the life of the person entitled, at weekly rates to be determined by the Secretary of State in regulations. (5) Regulations under this section may—

1. (a) specify one or more specified ages at which age addition shall be payable;
2. (b) provide for different rates of age addition to be payable for persons of different specified ages.".").

The noble Lord said: I rise to make what is positively my first, but not my last, appearance in the debates in Committee on this Bill. The proposed new clause provides for age additions—that is, additional payments—that are to be paid to older pensioners as an addition to their basic state pension. It would be paid to everyone who is entitled to a basic state pension.

The amendment is the same as one introduced by my honourable friend Mr Steve Webb in the other place. Formally, it does not specify the age at which the additions will be paid or the amount of such additions. Of course, the amounts will need to be flexible and will have to be varied from year to year. I should say that the current proposals of my party are that there should be an extra payment of £5 to single pensioners aged 75 or more. That £5 should become £7 when they reach the age of 80.

We recognise the problems with financing earnings-linked increases in the basic pension, but we also recognise—and do so acutely—the serious problems of elderly pensioners. The present "age addition" of 25p per week payable at the age of 80 is obviously completely farcical and I believe has not been increased at all since 1971. Elderly pensioners are undoubtedly those who are most in need. If they have an occupational pension, they are likely to have the lowest. They are very unlikely to have a personal pension; certainly not one of any significant amount. Moreover, those in their 80s will not even have SERPS (or not SERPS of any significant amount) because in many cases they will have retired before that was introduced in 1978.

In some respects, elderly pensioners have greater expenses, especially when it comes to heating and perhaps to some extent clothing. Therefore an additional pension for pensioners who are aged 75 and over will target those most in need without having to require them to submit to means testing. It will also greatly reduce the need for older pensioners to have to claim the minimum income guarantee.

As pensioners get older, it becomes more difficult for them to get hold of forms, to understand them and to fill them in. I believe that much of the failure to claim MIG is due to difficulties with form filling which may deter people, particularly the more elderly pensioners, from claiming what are often relatively small sums which are payable.

I should, however, add that, strong as the case is for age additions in any case, that case is made vastly stronger by the proposed introduction of the state second pension. There are two reasons why that is so. First, the state second pension will be earnings-related up to pension age by the revaluation of the earnings factors but will be price-linked thereafter. Once the state second pension comes into payment, it will increase annually only in accordance with prices and not in accordance with earnings. The minimum income guarantee, however, is likely to be earnings-linked. The result of that will be that people who start with a pension above MIG level will find that their pensions fall below MIG after a few years. The estimate is that this could happen after some 10 to 15 years, even for people with full contribution records who rely on the basic pension and the state second pension.

I do not believe that that result is acceptable. The age addition should be fixed at levels which will prevent pensioners with full contribution records for the state second pension falling below MIG level. There is, I believe, also another reason why the state second pension makes the age addition particularly necessary; that is, that the state second pension, at stage 2, will cease to be an earnings-related pension, or a pension which has an earnings-related element in it, because the amount of pension at stage 2 will be linked solely to the notional lower earnings threshold—a figure which is currently £9,500.

As I understand it, the lower earnings threshold will increase in line with earnings. The result of that will be, for example, that people who retire in the year 2020 will receive a higher state second pension than those who retire in the year 2010 and are still living in the year 2020. Of course, to some extent this problem already arises with SERPS but it is much less obvious because SERPS is earnings-related—as its name suggests—and therefore the spread of pension amounts among those retiring in any one year is wide. However, this problem does not arise with the basic pension because it is the same for all pensioners with full contribution records whenever they retire. Therefore someone who retires this year will receive the same basic pension as someone who retired 10 years ago.

At stage 2, the state second pension will become, in effect, an additional basic pension. If those who retire this year were to get a higher basic pension than those who retired in 1985, I believe, frankly, that there would be hell to pay. If the Government are to stop short of a full earnings link for the state second pension while it is in payment, I believe that they must find some other way of providing larger pensions for older pensioners. I believe that this can, and should, be done by a substantial age addition.

As we know, the Government face outrage over their 75p per week increase in the basic pension.

Baroness Hollis of Heigham

Did the noble Lord refer to the earnings-related state second pension, or did he mean the state pension? Will he clarify what he said in his previous one or two sentences? I believe that he referred to the state second pension; I think that he may have meant to refer to the state pension.

Lord Goodhart

I am not quite sure to which passage the noble Baroness refers. I said that in effect at stage 2 the state second pension will become an additional basic pension and will cease to have any earnings-related element.

I believe that, particularly after the state second pension has ceased to be an earnings-related pension or have an earnings-related element, there will be serious problems because someone who retires in 2020 will receive a higher state second pension than someone who retires in 2010, even though in neither case is the pension earnings-related.

Even if the present system was maintained, I believe that age additions are essential if the Government are unwilling to return to the earnings link for the basic pension. I also believe that the introduction of the state second pension makes age additions doubly important. Without them the unfairness to older pensioners will be built into the system and the state second pension simply will not work. I beg to move.

Lord Astor of Hever

The noble Lord, Lord Goodhart, put his case eloquently. We on these Benches share his concern for older pensioners. However, reluctantly, we are unable to support the insertion of the new clause. As he explained, it proposes that pensioners of a certain age should be entitled to a pensions increase. However, as the noble Lord said, the age and amount are unspecified.

Furthermore, it is open-ended and would commit future governments to expenditure that might not be sustainable in the long run. The oldest pensioners are an important priority for these Benches. In the years 1997–98 the previous Conservative government targeted the oldest pensioners by increasing premiums for income support, housing benefit and council tax benefit. We feel that there are more effective ways to help older pensioners than this new clause.

Lord Brett

I find the amendment in the names of the noble Lord, Lord Goodhart, and the noble Earl, Lord Russell, superficially attractive, particularly as regards the desire to help poorer older pensioners. However, I question whether the age addition—whatever amount is suggested—would achieve that as well as the Government's current policy. Over the past two years the Government have tried to eradicate pensioner poverty by aiming policies at less well off pensioners, whether that be through reductions in VAT on fuel, the increase in winter fuel payments or the lop rate of tax.

The amendment, which contains elements which concern the Conservative Front Bench, does not target the poorest pensioners. Those on income-related benefits would not benefit at all from the provision that is proposed. Perhaps the simplest and the wisest policy is to try to do everything possible to overcome elderly pensioners' fear of filling in forms. Perhaps the Government should make an extra special effort to ensure that pensioners who qualify for the minimum income guarantee are given every assistance to enable them to claim it. I believe that the minimum income guarantee will be in the gift of governments in years to come. It can be made more effective provided we ensure that people understand the role it plays and their rights to it. I hope that the Minister will explain what plans the Government have to ensure absolute take-up of that benefit rather than go down the route of added payments at the age of 75 or 80.

Baroness Castle of Blackburn

As an 89 year-old it is obvious that this amendment has superficial attractions for me, if I understood what it committed the Government to do. As has been pointed out, it is totally vague and gives the Government a blank cheque to do nothing. However, I am sure they would seize on that avidly.

The mover made it clear that he considers the amendment to be an alternative to restoring the earnings link, but it seems to me that it is a device for distracting attention from the division in the Liberal ranks. As I said on Second Reading, a large contingent of Liberal Democrat Members in the other place joined Labour rebels in supporting an amendment to restore the earnings link. I do not think this amendment would satisfy them as an alternative and it certainly does not satisfy me, so I would not dream of voting for it.

Baroness Carnegy of Lour

The noble Baroness has taken most of the words out of my mouth and said them very much better than I would have done. I hope that the problems of older pensions will not be discussed in terms of gimmicks. The amendment, with its free television licences and a heating allowance of £150, would help me every bit as much as pensioners who are much poorer. The benefits are not targeted. Perhaps the noble Earl could tell the Committee how it would be funded and how older pensioners could plan their retirement, when they would have no idea of the amount decided by the Secretary of State and at what age; otherwise, one cannot take the amendment seriously.

The problems of older, poorer pensioners are great, as I know from a number who live near me. They are extremely grateful for a free TV licence and a heating allowance but wish to plan—and they will always want to watch television and it will always be cold in Angus. I do not believe that the amendment is the right way to assist pensioners. The public may regard its provisions as somewhat cynical. Pensioners want certain, targeted help so that they know what is ahead. I am sure that any serious government will have to think about that—including the present Government. If the Liberal Democrats really aspire to govern us, I do not think that they should table such an amendment. I am really quite shocked by it.

Baroness Greengross

There is a strong argument for any increases in state pensions to be for all older people, rather than targeting particular age groups. However, the benefits system already recognises the greater needs of the oldest, which is why income support is more for older pensioners and why rates of attendance allowance are higher according to need, which is often age-related. The Government have recognised that greater need in their provision of free TV licences for the over-75s, and that is what was behind the original 25p age addition on the state pension at age 80. That has been allowed to wither to such an extent that it has become an insult. Older people point out regularly to me and others that one cannot even buy a first-class stamp for 25p. It would be better either to resurrect the addition meaningfully or to get rid of it altogether.

Today's oldest pensioners, especially women, are the poorest and would benefit particularly from the amendment. My concern is where to draw the line and at what level to pitch any extra help. More research is required into what is needed by older people at different ages. I shall return to that aspect when we debate Amendments Nos. 132 and 133.

Earl Russell

I shall respond briefly to the noble Baroness, Lady Castle. The amendment as drafted allows for regular uprating. I am sure that the noble Baroness would be the last person to query the importance of that opportunity. In Committee on the Welfare Reform and Pensions Bill last year, it was said that while we were not going to adopt the earnings link, it would be necessary in good years for earnings to be above the level of prices. Nobody knows how much above that level we might be able to uprate in future years. We would like to leave available the option of generosity where that is financially permissible.

As to what was done by my right honourable and honourable friends on Report, I do not think that the noble Baroness understands the difficulties of being a third party in the other place, where there is no guarantee, as there is here, of being able to table amendments and vote on them. Our amendment in another place was not selected, so voting for the earnings link was the only way we could vote in favour of an increase in pensions. We thought that principle so important that it justified departing from our normal practice and policy. That may have been an unusual way of deciding the issue but in view of the concerns that we share, I hope that the noble Baroness will forgive us.

I am sorry that the noble Baroness, Lady Carnegy of Lour, is so easily shocked. I shall not advert to incidents in past Parliaments. The noble Baroness knows that I could, but I shall not bother.

5.45 p.m.

Lord Haskel

My noble friend Lady Castle is being a little hard on the Government in accusing them of doing nothing. They have uprated pensions, introduced a minimum income guarantee, and given better heating allowances and free TV licences.

I share the concern of my noble friend Lord Brett. Although I welcome the Government's improvements to reduce pensioner poverty, my concern is that pensioners should claim the benefits to which they are entitled and that they should not be made to feel that they are receiving charity. Recent figures show that there is much variation in poverty within each group of pensioners. Offering the same benefits to all will not eliminate poverty. The only way to do that is to target the poorest pensioners and to make sure that they claim the benefits to which they are entitled.

Baroness Hollis of Heigham

The amendment relates to the increase in the basic retirement pension, known as the age addition, paid to people over the age of 80. The practical effect would be to remove the specified age from primary legislation and allow it to be specified by the Secretary of State in regulations. The amendment would also permit regulations to specify different rates of age addition.

As the noble Baroness, Lady Greengross, said, it is difficult to defend the current level of age addition. The sum of 25p a week is nonsensical by anyone's reckoning. However, although I appreciate the desire to help the oldest in society, the amendment presents real difficulties. Our mixed strategy is more effective. The noble Earl's amendment overlooks the cohort effect, and the method of paying for it would undermine longer-term policies.

My noble friends Lord Brett and Lord Haskel referred to the minimum income guarantee. We already have age-related premiums in the MIG and believe that that is the quickest and most effective way to help those in need. Through MIG, we increased income support for pensioners last year by three times the rate of inflation. This April it was increased in line with earnings. So, for example, a couple over 75 are getting through MIG nearly £18 more than they would under the retirement pension; and a single person over 80 is getting through MIG nearly £20 more than the retirement pension—and, incidentally, £9 more than a 65 year-old would get on MIG. We again expect to increase this by earnings next year. We shall further enhance the amount of the premium that older pensioners receive through MIG over other pensioners.

We have invested much in the minimum income guarantee, but, as my noble friend Lord Brett rightly said, it is not worth a jot unless people claim it. So through the late spring and all summer we shall be writing to more than 2 million pensioners to tell them about MIG. The campaign will be supported by TV advertising and, for the first time, pensioners will be able to claim MIG over the phone by ringing the new MIG Telecentre in Newcastle. They do not need to go into a benefits office; they can claim it from the comfort of their home.

We believe that providing help through MIG is the most effective way to help those most in need immediately. In the longer term, our radical pension reforms—in particular the introduction of stakeholder pension schemes and the state second pension—will ensure that everyone with a lifetime of work behind them will build up rights to a pension on retirement which will take them above MIG and ensure that they have an income above that level for longer.

Over and beyond that, we have introduced other benefits—for example, the winter fuel payments, which are tax free and worth £150 to eligible householders from next winter; the introduction of concessionary bus fares; the free eye tests for the over 60s; the reduction of VAT on fuel; the tax changes which have cut the starting rate of tax to lop; and the free television licence. As a result, we are spending an extra £6.5 billion on pensioner income this Parliament. Put broadly, half of that money is going on the poorest 3 million pensioners.

Against this, I should like now to engage, as seriously as I can, with the propositions in the amendment of the noble Lord, Lord Goodhart. I take them very seriously. The noble Lord should consider that extending the payment of the age addition in this way would have a net annual cost of around £660 million. That is not my problem. My problem is, as was hinted at by my noble friend Lord Haskel, that the noble Lord—by repeating some of the proposals spelt out in much greater detail by his honourable friend, Mr Steven Webb, from another place, which were based on statistics produced by the last two pensioner surveys of the DSS—is assuming that age cohorts are an appropriate proxy for picking up the poverty of pensioners.

It is true that older pensioners are poorer than younger pensioners—for example, they become poorer over time because they are less likely to be earning, as 65 to 70 year-olds often do; they are likely to have spent more of their capital; and it is likely that their occupational pension will have not kept pace with the general wealth of the country. But the offset against that is that we have seen across the country a huge increase in the number of occupational pensions over the past 20 years, as well as the higher state pension benefits and better housing. But it is true that older pensioners are poorer than younger pensioners.

However, it is also true that women pensioners are poorer than men pensioners; and it is also true that single pensioners are poorer than couples. By using only the age proxy—which is what the noble Lord seeks to do—we will have exactly the same problems as we had with City Challenge and urban regeneration projects.

Lord Goodhart

I am most grateful to the noble Baroness. As to the use of age as a cohort, is it not the case that, because of women's greater life expectancy, a much higher proportion of the oldest pensioners are women and, therefore, an age addition helps not only the older pensioners but helps women disproportionately to men?

Baroness Hollis of Heigham

That is perfectly true. But the opposite is also true: we would probably do more to help poverty by giving all women pensioners, of whatever age, an increase of, say, £10, than to concentrate on the age cohort targets. It is arguable.

I have some serious information for the noble Lord. I respect the fact that the diagnosis is connected with age and with gender, and I accept the fact that because women live longer than men they are more likely to be single. I do not disagree at all with that diagnosis; the noble Lord, Lord Goodhart, and his honourable friend, Mr Webb, are correct. However, whenever one goes for a broad-brush approach such as a cohort—as we have found, for example, in urban renewal projects and the like—if one seeks to concentrate money on poor areas to overcome the problem of individuals claiming it, the difficulty arises that more than half of all people live outside poor areas. Exactly the same is true of the noble Lord's amendment and age additions.

Perhaps I may give him some figures on which he might care to reflect. The gap between age cohorts is far smaller than the income disparities within each age cohort. Let me give the facts. Let us take, for example, a single pensioner. The quintile—the bottom fifth of income—for single pensioners under the age of 75 is £70; for those over 80, it is £65. That is the gap for single pensioners. For couples the figures are similar: £133 for under 75s; £113 for those over 80. That is medium, quintile income; the net income before housing costs of pensioner units. So, by age, a gap between £133 and £113 in the bottom quintile for couples; and a gap between £70 and £65 for the under 75s and over 80s for single pensioners. That is the only difference one would pick up through age cohorts.

But when one looks within each age cohort, one sees that for couples under 75—the ones that are getting £133 —the top fifth would be getting £457. Extend that to the over 80s: for the bottom quintile couples it is £113, the figure I have given, but, for the top fifth, £348 is the median income. It is the same for singles. As I said, the bottom fifth of under 75s would have a median income of £70; but the top fifth would have £224. As to the over 80s, the bottom fifth would get £65; the top fifth £195. In other words, the inequalities within each age cohort approximate to a ratio of three to one, but the gap in median incomes between each age cohort is 20 per cent, 40 per cent or 60 per cent, according to how one calculates the figures.

The policy of the noble Lord will not work. All it does is to pay some money to older pensioners who need it; it gives a lot of money to older pensioners who, given the figures, do not need it; and it ignores the poverty in younger pensioners, who need it but who will get nothing at all. There is more poverty within each age group than there is between age groups; therefore, as a result, any measure designed to tackle the poverty of pensioners by attaching more money to age will not be enough to help lift the poorest out of poverty; it will give a lot of money to those who do not need it; and it will neglect the poverty among poor pensioners, who will still need to claim MIG. The statistics do not sustain the noble Lord's argument.

I shall be very happy to send him a copy of the statistics—I am sure that the noble Lord and his honourable friends will want to look at them—hut, given my explanation, I am afraid that his amendment will not work.

Perhaps I may give another example. Only 40 per cent of those over 80 are entitled to claim MIG; 60 per cent are not. Under the noble Lord's proposal, he would give them all a hefty lift. In other words, the greater inequality is within each age group rather than between age groups. I would suggest that the noble Lord's basic assumption is, therefore, invalid.

It would still be the case that the majority of those over 75 and over 80 would be above the poverty line as measured by access to MIG. Equally, even given these proposals, four-fifths of over 75s and over 80s who were previously on MIG, would still need to remain on it because the noble Lord's allowance would not be sufficient to float them off. I suggest that that is not the right way to help.

As I said, it could equally be argued that the money should be added for women. One would then have exactly the same problem; there would be greater discrepancies within genders than between genders age for age, quintile for quintile.

I accept that this is a generational problem; I accept that 75 and 80 year-olds will always be relatively poorer than 65 year-olds. But this will not be so much because of disparities in income but because they are more likely to be widows and, as the noble Lord rightly described, given their greater frailty, they are more likely to have higher expenditure. That gap is closing and will continue to close given our proposals for the state second pension.

Thus, my first criticism of the noble Lord's proposals is that they will not address poverty in the way he thinks that they will. The bulk of poor people will remain unhelped by his proposals—for example, those poor people who are aged under 75—and equally, in his method, he will be giving still more money to those who do not need it as opposed to those who do and, as a result, the poorest will still need a top-up.

My second criticism of his proposals is that he has identified what I believe to be a temporary problem which will be overcome by the state second pension and our proposals for that and for stakeholder pensions. However, to my dismay, he is proposing to fund those schemes—at least in the Steve Webb paper—by abolishing the state second pension and SERPS. That means of solving a temporary problem—and inadequately—removes the possibility of a permanent and proper solution. I have the paper here and I shall happily quote it to the noble Lord.

6 p.m.

Lord Goodhart

I never said anything about the abolition of the state second pension; it is not part of our proposal.

Baroness Hollis of Heigham

On the contrary, I have Mr Webb's proposals here and that is how he proposes to fund it. I am very happy to give the noble Lord a copy of his honourable friend's document on which his amendment was based, but let him be in no doubt that that is how it is proposed to be funded. Therefore, to solve a temporary problem, the noble Lord is proposing to remove the possibility of a permanent solution. Indeed, to solve the problem of pensioner poverty at ages 75 and 80, he will add to it at 65. Under these proposals, far more pensioners (both younger and older) will come on to the MIG and then, of course, will have to be lifted off it again. That is not to mention that the natural consequence will be that if you abolish SERPS and the state second pension, you will have to remove contracted-out rebates, which is the equivalent of SERPS for private pensions, which will have a devastating effect on private pension provision. Stakeholder pensions will flop, additional private pensions would stop and many occupational pensions would be scaled back. I just wonder whether the noble Lord and his honourable friend Mr Webb have considered the read-across and what it would mean to occupational pensions, many of which are funded, as he will know, by the contracted-out rebates which bear the read-across from SERPS, which would be abolished under his proposals to fund schemes which would not address poverty as he believes they would.

Although I accept the noble Lord's diagnosis of who the poor are, I would suggest that the MIG approach, which identifies poverty wherever it occurs—at 65, at 75, at 80, among women, among men, in London, in Lancaster—is a more decent way of responding to it than are any of the proxy poverty solutions, such as age-related rebates which, as I say, will not help the poorest but will give a lot of money to those who do not need it because income discrepancies are wider within each age band than between age bands. As a result, I hope that, on reflection, he will not wish to pursue this. What my noble friends have made clear tonight—and they are right—is that MIG is the right and decent way to identify poverty wherever it occurs, but we have an obligation to ensure it is claimed easily, transparently and simply so that every pensioner who is entitled to it receives it. In addition, we have a responsibility to those just above the MIG lines, whether through savings or modest earnings or income. That situation will be taken on board in our future proposals for pensioner credit. In that way, we will target poverty where it is, without stigma, without difficulty and without damage while not subverting the possibility of lifting future generations out of poverty, which is what our state second pension and our stakeholder pensions will do.

In the light of that additional information, I hope that the noble Lord will feel able not to pursue his amendments.

Lord Goodhart

The Minister has always been extremely eloquent on this matter. I welcome the support which the noble Baroness, Lady Greengross, gave to this amendment. I am disappointed, but not altogether surprised, at the lack of support from other Benches. I entirely understand the position that the noble Baroness, Lady Castle, has taken. That is entirely consistent with the viewpoint which she has expressed throughout. So far as the position of my party is concerned, if the Government are unwilling to give any assistance on this particular point, it is very likely that we would—

Baroness Hollis of Heigham

I want to respect the courtesies of the House, but does the noble Lord accept anything that I have said tonight about the problems inherent in his amendment which show that his amendment will not do what he thinks it might do, which is tackle pensioner poverty? Does he accept that?

Lord Goodhart

I shall take this in order. The position that has been taken by the Minister is of course entirely consistent with the line that the Government have been running.

Baroness Greengross

I did not say that I supported the amendment. I said that it had a number of attractive elements and that some of those are already part of the Government's policy, but I do have concerns about it.

Lord Goodhart

What I meant to say in reference to the noble Baroness, Lady Greengross, was that support meant support in principle rather than for the ideas behind these amendments, in particular for an age-related addition rather than for the specific details of this amendment. I understand, as I said, the position of the noble Baroness, Lady Castle, and have, as we may find when we reach later stages, some sympathy for it.

The position of the Government is that everything must be concentrated as much as possible on the minimum income guarantee as an attack on poverty among pensioners. I quite accept that—I think it is a matter of common sense—but the differences within the age cohorts is indeed wider than the differences between them, that is perfectly true. If the argument put forward by the Minister is taken to its logical extreme, you begin saying that you must rule out free television licences for all pensioners at the age of 75 and restrict them to those in receipt of the minimum income guarantee; you also have to say that you rule out the winter fuel allowance for all pensioners and restrict it to those in receipt of the minimum income guarantee; and indeed you go beyond that because ultimately that particular argument leads you to say that there will be no state pension at all and that all pensioner benefits will be provided through income support (under the minimum income guarantee) and will be limited to those pensioners who satisfy its income requirements. I believe that that would not be acceptable in this House.

Baroness Hollis of Heigham

Perhaps I may make it clear that the Government have no such intention. The Prime Minister has repeatedly made it clear that the basic state pension is a building block within the overall prosperity of pensioners and will remain so.

Lord Goodhart

Of course I accept that. I was merely pointing out that this is the logical conclusion to which that particular argument leads. The question surely is: what is the right balance between means-tested benefit for pensioners through the minimum income guarantee and non-means-tested benefits? The Government have put forward what I certainly regard as being an interesting and in many ways excellent proposal for the state second pension, but surely the aim must be, among others, to provide people who have full contribution records with a pension that will enable them to get to the end of their lives without having to rely at some point on means-tested benefits. Means-tested benefits may be necessary and will be necessary no doubt for those without full contribution records, but the state second pension is designed—and, I think, designed quite effectively, at the beginning—to take people outside the need for MIGs. The problem is that as people get towards the end of their lives and find it more difficult to claim means-tested benefits, they will have to fall back on them. When the Minister says that only 40 per cent of those over 80 are in receipt of the minimum income guarantee, my reaction is that 40 per cent is an enormous figure. It is far larger than the proportion of people in the population as a whole who are reliant on income-related benefits. It seems to me that the case—

Baroness Hollis of Heigham

I also gave the noble Lord the figure that, for a single person over 80, the difference between MIG and the retirement pension was nearly £20. Under the noble Lord's proposals, that single person would get only £7, so he would still need to be topped up between £7 and £20. Anyone who would currently qualify for most of MIG would still need to qualify even under the noble Lord's proposals.

Lord Goodhart

The triggers I have in mind take into account the fact that people will be better off under the state second pension. That will mean that the difference should diminish. We need to ensure that pensions are set at a level which will make it unnecessary for people who have paid full contributions, including the contributions to the second pension, to rely on the minimum income guarantee. That is important. The Minister's argument, taken to its logical conclusion, means that all benefits for pensioners should be provided by the minimum income guarantee.

I shall take the amendment away and look at it again.

Baroness Carnegy of Lour

How will the plan be funded?

Lord Goodhart

It will require only a relatively small addition. It is much less expensive than providing an earnings link for the whole of the pension.

Lord Higgins

That would make it cheap.

Lord Goodhart

Of course it makes it cheap. We regard this as being targeted on those who are in particular need. It will help a much higher proportion of those who are in particular need.

As I said, I shall take the amendment away and look at it again. However, it is very likely that, either in this form or in another, we will come back to it at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 [Earnings from which pension derived]:

[Amendment No. 110 had been withdrawn from the Marshalled List.]

Baroness Turner of Camden

moved Amendment No. 111: Page 27, leave out lines 9 and 10. The noble Baroness said: The intention of this amendment is to extend the categories of people who will be credited with benefits in the state second tier pension despite having insufficient earnings. The proposed amendment removes the reference to earnings over the lower earnings limit. It therefore gives deemed earnings to anyone with earnings under the lower earnings threshold. As I understand it, this would benefit principally the unemployed.

The real purpose of the second tier state pension is as much to fill the gap left by the erosion of the basic state pension as to provide a replacement for SERPS. In judging the adequacy of the Bills provision in respect of granting credits for non-earners, the yardstick therefore should be the groups who would now be credited for the basis state pension. People signing on as unemployed are credited with full NT contributions each week.

The Government may feel that to give credits to the unemployed would be a disincentive to work. However, we are not talking about immediate benefits but deferred benefits in retirement. For most people who are unemployed the idea of making pensions contributions is quite out of the question. I therefore hope that the Government will see that there is justification for this small amendment and respond positively to it. I beg to move.

6.15 p.m.

Lord Higgins

I have pointed out on previous occasions that the Bill is very much a package, with virtually no connection between the child support part and the pensions part. I hope therefore that the Committee will allow me just a moment or two to elaborate on the point made by the noble Baroness in explaining her amendment.

As she rightly said, it relates to the state second pension and she wishes to extend the provision for deemed contributions to a wider group than those covered by the Bill as it stands. My understanding throughout has been that the Government's strategy is effectively to have three levels of pension: a second state pension for those earning less than, in broad terms, £9,500 a year; a stakeholder pension for those earning between £9,500 and £21,600; and either personal pensions or company pensions for those above; in other words, what one might reasonably describe as the middle and upper earnings levels. I was therefore surprised by the speech of the Secretary of State, Mr Darling, to the National Association of Pension Funds. It may be helpful to quote a small passage in full and then, on the basis of what I have just said, ask the noble Baroness to clarify the position.

Mr Darling said: And from 2002, 18 million people will gain from the new State Second Pension … That's why we've introduced Stakeholder Pensions—to give more choice to 5 million people. We'll continue to work with you to make pension provision better". Two points puzzle me. The first is the statement that from 2002, 18 million people will gain from the new State Second Pension". My understanding is that, even with the amendment we are now considering, no one will gain in the sense of receiving benefit from the state second pension in 2002, not least because we do not know when the state second pension will come in. The Government have said that it will come in when the stakeholder pension is established.

Baroness Hollis of Heigham

In stage 2.

Lord Higgins

In stage 2, yes. When will we know that the stakeholder pension has been established as far as concerns stage 2 of the second state pension and how are we to tell that that is so?

Another point puzzles me in Mr Darling's speech. He said: But we want moderate and higher earners to get into funded pensions. That's why we've introduced Stakeholder Pensions—to give more choice to 5 million people". Apparently, Mr Darling is now saying that the stakeholder pension is for moderate and higher earners to get funded pensions. That is not what he intends.

Baroness Hollis of Heigham

I do not know whether the speech was accurately reported. The noble Lord's original description was correct: the state second pension is for those earning—not those not earning—up to £9,500 and stakeholder pensions from £9,500 to £21,000. The issue of the debate between us may be merely at what point is moderate to high. But there has been no change in any of that.

Lord Higgins

But as I understand it, this was the information in the press release issued by the department. Perhaps the Minister will tell the Secretary of State that her understanding, if not his, is that stakeholder pensions are not for middle and higher earners.

Baroness Hollis of Heigham

But they are for moderate earners. The conjunction may be where someone is regarded as a higher earner or simply above the average or median earnings line. Let me give the reassurance that nothing has changed. The noble Lord's original description was exactly right. All we may be discussing is at what point we classify someone as being a higher earner as opposed to being a moderate earner.

Lord Higgins

That reply is helpful because the matter will arise in subsequent debates.

There is another problem directly related to a point made by the noble Baroness in moving the amendment. One of the main arguments put forward by the Minister in response to the noble Baroness, Lady Castle, is that there is a huge advantage in the state second pension because people are deemed to have made contributions who were not able to do so under SERPS. The amendment seeks to extend that even further. But it still raises the question of whether, when the second state pension finally comes to fruition, we shall find that it is above the minimum income guarantee.

The state second pension will be a flat-rate pension. As I understand it, it will not be uprated in line with earnings. So the Government's apparent munificence in saying that they will give more for carers, the unemployed or whomsoever may turn out not to produce any real benefit at all at the end of the day. It could be purely a paper operation because of the interrelationship between the non-earnings related benefit and the earnings related minimum income guarantee. Some important issues arise in the context of the noble Baroness's amendment which we need to get clear in our minds. It may be that in reality her amendment costs the Government nothing, but in reality it is also the case that the people she wishes to help get nothing at the end of the day.

Perhaps I may make one other broad point. We do not know what the liability will be either of the noble Baroness's amendment or of what is proposed. I was going to say that I have been "lumbered"—I think that would be the right expression—with the Government Resources and Accounts Bill as well. The departments really ought to start working on estimates of the liabilities for the government as regards the state second pension. If we are to have a government balance sheet, it is not enough to have a marvellous document setting out the assets; we ought probably to have an equally thick document stating the liabilities which both the noble Baroness who moved the amendment and the Minister seem to be piling up for us in the future.

Baroness Hollis of Heigham

Amendment No. 111 seeks to exclude the requirement for low earners to have earnings at or above the annual lower earnings limit to benefit from the low earner's boost to £9,500.

But the state second pension is a contributory benefit based on earnings factors. To have an earnings factor a person must have had earnings on which national insurance contributions have been paid or treated as paid. Therefore, the effect of the amendment would be to give the low earner's boost to anyone who had as little as one week's earnings in a year over the weekly lower earnings limit (£67 from 6th April).

The Government want to help the poorest pensioners. That is why we have introduced the minimum income guarantee and the rest of the package. The basic state retirement pension is a secure foundation but it was never meant to support the lifestyle that most people want today. Most people have a second pension—60 per cent of pensioners have income from an occupational pension; others have income from savings.

The Government believe that the best way to have secure retirement is to use the basic retirement pension as a solid foundation on which to build a second pension. That is what this Government's policies will deliver for millions of pensioners.

Perhaps I may briefly explain how our proposals for the state second pension will benefit low earners. It will reform SERPS so that it refocuses help on those who need it most and who have the least opportunity to build up good second pensions themselves: 4.5 million low earners will get more than double what they would have received under SERPS; 2 million carers and a similar number of long-term disabled people will build up a second tier pension for the first time. I was pleased that the noble Lord, Lord Goodhart, felt able to welcome our proposals for the state second pension.

I should like to remind the Committee that, without our pension reforms, by 2050 around one in three pensioners would have to rely on the minimum income guarantee. Our reforms will reduce that proportion from one in three to one in five. We shall be lifting over 2 million pensioners off MIG, and people will remain above it for a considerable time.

Let us take, for example, someone who earned as little as £3,500 throughout their working life (£60 to £70 a week). That person will retire on a combined pension of £85 a week in today's earnings terms and will stay clear of the minimum income guarantee for nine years. Couples do even better. Their pension will keep them above MIG for 21 years. Most people over 65 are in couples; they are not single people. The reference will be to single people when the earnings period relates to the late 1970s and the 1980s.

Members of the Committee, and certainly my noble friend, will recognise that it is a fundamental principle that someone in an earnings related pension scheme cannot build up a pension which is more than his or her average weekly earnings. The amendment would give the low earner's boost to anyone who had as little as one week's earnings in a year over the weekly lower earnings limit (currently £67).

There would be every incentive for the economically inactive to find part-time work for a single week just to qualify for the state second pension. We should not forget that the retirement pension is a contributory benefit and that it is not possible to get a qualifying year for basic pension on the basis of one week's contributions alone. But this amendment would give a year's entitlement to the state second pension for precisely that—only one week's contributions. So someone who had only ever earned the equivalent of £67 for one week in a year (an average of £1.29 a week) would receive a state second pension of £54 a week. As well as being costly, that cannot be right in principle in an earnings related second pension scheme. Or, more typically, someone who earned £40 a week—for example, 10 hours at £4 an hour working in a café, and who worked a fortnight during the summer and received £80 a week—would under my noble friend's amendment receive a state pension of £54, higher than her average earnings of just over £40 a week. It cannot be right to have a pension scheme which produces a higher pension than a person would have earned in earnings alone, when it is meant to be an earnings-related pension.

Perversely, the amendment would not include those who had earnings of less than £67 for every week of the year. So someone earning £50 a week, or £3,000 a year, would not benefit, but someone earning only £70 in one week and nothing for the rest of year would.

If the aim of the amendment is to target the poorest employees, regardless of the contributory principle, it is likely to be wide of the mark. Many of the lowest earners are to be found in households with another higher earner, or where there are other sources of income.

Indeed, many of the poorest pensioners would not benefit from the increase to their state pension income at all, particularly where they do not have entitlement to a full basic pension. That is because it is taken fully into account in assessing entitlement to income related benefits, so their overall income would not increase.

The basis for calculating the state second pension will be the same as that for SERPS; that is, the earnings factor—it is an earnings related pension. The amounts are all based on the earnings on which someone has paid national insurance contributions in the course of a year; they are calculated on an annual basis.

So to calculate entitlement to additional pension under state second pension on a weekly basis, we should need to revise the entire way we calculate additional pension. It would mean assessing pension entitlement on a weekly basis which would hugely complicate the assessment of entitlements and place an impossible burden both on employees and on our operational systems. For employers, the collection of information would be mind-boggling in its complexity. And it would require the Inland Revenue to record that information on every person's account. That is 52 times the amount of work involved in the current annual system.

We believe that our proposals for the state second pension strike the right balance in providing extra help for those who need it most and the prudent use of resources. It has been widely welcomed. It is the building block on top of the state retirement pension which in future will take so many of our older pensioners out of poverty. On the basis of my explanations, I hope that my noble friend will withdraw her amendment.

Lord Higgins

I have listened with care to what the Minister has said. However, if I understand it correctly, she has related the amendment entirely to stage 1 of the second state pension. She has not related it at all to stage 2, when it ceases to become earnings related, and much of the argument that she has advanced becomes irrelevant. I may have failed to understand the point, but that seems to be the case.

The noble Baroness referred to the second state pension as a contributory benefit. We have often discussed what that expression means. The noble Baroness must, surely, distinguish between a contributory benefit and a deemed contributory benefit. I am not sure how to word it. The Government have already gone down that road. However, it is still far from clear whether, even if the Government deem the contribution to be made, it will cost them any money because at the end of the day it is merely offset by the minimum income guarantee; or whether carers, who are to receive the marvellous help (as everybody describes it) from SERPS and so on, will benefit.

The noble Baroness put forward a number of figures to show the proportion of people who would fall outside the minimum income guarantee. I do not have the exact figures before me. I believe that reference was made to one in five. At all events, the Minister argued that there would be far fewer people subject to the minimum income guarantee. As to stage 2 of the second state pension, that depends on what assumptions are made about prices and earnings respectively. I am not clear what assumptions the Minister makes, and perhaps she can tell the Committee.

6.30 p.m.

Baroness Hollis of Heigham

I believe that that would entail another half-hour speech, which I am not sure the Committee would welcome. There may be some misunderstanding about what is entailed by stage 2. Under stage 1 anyone between the lower earnings limit and £9,500 will receive a state second pension as though he was earning £9,500. That is the low earnings boost. Although it is tapered, it continues for those between £9,500 and about £21,000. Therefore, there is still an incentive to remain within the scheme. We expect that under stage 2 there will be a flat rate beyond the £9,500 level which will not be earnings-related. Therefore, there will be greater attraction to move into a stakeholder pension or alternative vehicles for pension provision. It will not affect those who are under the £9,500 level. The basic thrust of the proposal, which is to use the state second pension at both stages 1 and 2 to address pensioner poverty for those with earnings of less than £9,500, remains unchanged. The change is related to what happens to those over £9,500. I hope that the noble Lord is content with that explanation.

As to the noble Lord's second point about the deemed contributory benefit, frankly, when we began to construct the contours of a pension arrangement of this kind the first option was to address only those in waged work. I recognise the work of my noble friend Lady Pitkeathley and that of the Carers National Association. The Government were persuaded that they should pay ICA precisely because they recognised that it was work, albeit unwaged. That is recognised by a substitute income. We believe that it is right, decent and proper to regard the receipt of ICA as a deemed payment, in the same way that disabled people with a fairly close connection to the recent world of work should not be disqualified because they subsequently go on to IB.

My noble friend's amendment proposes in effect that everybody should get the state second pension, because a person gets it if he is also unemployed. In a rather subtle way my noble friend seeks to ensure that everybody has a basic state pension which is at least as generous as the basic state pension and the state second pension put together. At that point the connection between earnings, the world of work and the earnings-related principle goes out of the window. Perhaps that is what my noble friend seeks to establish, but that is not a principle which features in the Government's policy. We believe that the state second pension is for those who have been in the labour market but whose earnings are so low that, if they had the older style SERPS pension, their pension would still keep them in poverty for far too long. As a result of our changes, under SERPS someone who earned £6,500 would have received about £12 or £15, whereas under our proposals he will receive £54. I hope that as a result my noble friend will not pursue her amendment; otherwise, she will destroy, possibly quite deliberately, the whole purpose and thrust of the state second pension which has been so widely welcomed outside.

Lord Higgins

The noble Baroness still has not answered the point related to stage 2 of the state second pension. At that point it becomes flat rate. We do not want to perpetuate the argument. Perhaps the noble Baroness will be kind enough to drop me a line about the assumptions on which she bases her statement that that will be of benefit to carers because at the end of the day they will get more than the minimum income guarantee.

Baroness Hollis of Heigham

Basically, for every year of caring a carer will receive the equivalent of £1 of basic state second pension. I do not understand the noble Lord's bafflement. Up to £9,500 the position remains unchanged between stages 1 and 2. The flat rate element after stage 2 applies to those who would otherwise have received a state second pension if they had earnings of between £9,500 and £21,000 under stage 1, which is earnings- related. We seek to make it a flat rate for that group so that they are encouraged into stakeholder and funded schemes.

Baroness Turner of Camden

I thank my noble friend for the very extensive explanation that she gives of government policy. I am not entirely persuaded by my noble friend's response. The noble Lord, Lord Higgins, has referred to some of the points that I intended to raise. When moving the amendment I said I believed that the real purpose of the state second pension was as much to fill the gap left by the erosion of the basic state pension as to provide a replacement for SERPS. That remains my belief. My noble friend refers to the basic pension as the basic building block. That building block will erode, and government policy is based on the assumption that that erosion will take place.

Baroness Hollis of Heigham

To continue the metaphor, it is a basic building block but the superstructure will become larger and larger.

Baroness Turner of Camden

But the superstructure is intended eventually not to be earnings-related but to be a flat rate. Having read fairly extensively the government papers on this matter, the idea of having a flat rate appears to be that that will persuade most people to look to the private market; in other words, the present 60:40 relationship between public and private provision will be reversed. In 10, 15 or 20 years the majority of the population will not look to public provision but to occupational or private pensions or stakeholder pensions; in other words, they will have recourse to the market. Therefore, I suggest that to credit people who are unemployed in the way proposed in the amendment is quite reasonable. There will not be a basic building block worth mentioning. People will already be credited in relation to the basic building block as it exists now. Since the second state pension and the basic building block are likely to develop eventually into low-grade public provision, I propose that the crediting should be against future public provision as far as concerns the unemployed. I shall not press the amendment this evening, but I am not terribly happy with the Government's response. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Castle of Blackburn

moved Amendment No. 112: Page 27, line 23, leave out from ("year") to end of line 27. The noble Baroness said: Amendment No. 112 is extremely simple. I would have thought that the point raised by the amendment would attract the sympathy of the whole Committee, perhaps even of the Minister. The amendment seeks to simplify the provisions for crediting-in. We all welcome the concept of crediting-in. We contemplated that enlargement of our policy in 1974, but we had taken such a giant leap forward in the provision of state insurance, SERPS and all the rest of it that we knew we could not do it all in one go.

If one has a provision for crediting-in carers it is only sensible to ensure that it is consistent throughout the whole area of pensions that we have been studying. Therefore, the purpose of the amendment is to provide the same criteria for crediting-in as exist in the basic state pension.

I should have thought that the Government would have been only too eager to do that; otherwise there is a grave disadvantage as between the treatment of carers in the Government's new proposals and those under the basic state pension. I refer, of course, to the definition of a "carer" as someone who is in charge of a child under six. That is whittling it down somewhat, is it not? Under the provisions of the previous Labour government, carers were defined as those looking after a child under 16.

Are the Government telling us that we shall be less humane to carers than we have been? When we discuss the great advantages of the government scheme over SERPS, for instance, we tend to forget that the Government are measuring themselves not against the original SERPS but the Thatcherite reduction of it. Under the original SERPS, the 20 best earning years was one of the greatest lifelines which could be thrown to carers and the disabled. We shall deal with the disabled a little more in the next group.

I urge the Committee to share the view of my noble friend Lady Turner and myself, and I am sure of other noble friends, that the crediting-in of carers should not be limited to those in charge of a child under six years, with the assumption that after that no real caring is needed for an older child who is probably going through some of the stormiest developments in his whole life.

It is a simple principle. I hope that the Minister will accept it. I beg to move.

The Deputy Chairman of Committees (Lord Ampthill)

I remind the Committee that if this amendment is agreed to, I cannot call Amendments Nos. 113 or 114.

6.45 p.m.

Lord Higgins

As the noble Baroness said, this is a relatively simple amendment compared with many before us. There is always argument as to whether it is best for mothers to stay at home or go out to work. The government provision seems to say that carers should go out to work after the child is six; they will no longer receive their deemed benefit contributions if they do not do so. On the other hand, it is probably true that if they go out to work at that stage, it may well be part-time rather than full-time work. Carers are more likely to work full time when their children are over the age of 11. It seems to me, therefore, that the noble Baroness's amendment has something to be said for it.

Baroness Hollis of Heigham

Will the noble Lord accept that in part-time work someone needs to work only 18 hours at the minimum wage in order to qualify under the lower earnings limit? The assumption my noble friend Lady Castle made, echoed by the noble Lord, is that the carer either stays at home or goes into full-time work. But he or she qualifies by working 18 hours at the minimum wage and for considerably fewer hours if he or she has a higher rate of pay.

Lord Higgins

Clearly for carers with children between the lower and higher age, the work is more likely to be part time than full time. However, I am happy to listen to the Minister's reply to the amendment.

Lord Goodhart

I speak to Amendment No. 114, grouped with the amendment. It differs from the noble Lord's amendment in only one respect. We propose that the crediting should extend to a carer who has care of a child under the age of 12, whereas in the noble Lord's amendment the age referred to is 11 years.

I have a great deal of sympathy with the view of the noble Baroness, Lady Castle. Any mother who decides to stay at home to look after her child makes a sacrifice in terms of the potential income that she forgoes. It is not right that on top of that she should also be asked to forgo her right to a pension. The idea of crediting as regards people with those responsibilities seems to us right. The question is where to draw the line.

The Government's view, here and elsewhere, seems to be that women should be given an incentive to go back to work as soon as possible. It seems perfectly legitimate for a woman with a child of six, seven or eight to decide to stay at home and concentrate on looking after her child or children. A child at primary school cannot be left to look after himself at home. In most cases, the child will have to be taken to school and picked up at three or half-past three in the afternoon. He will have to be looked after during the holidays. There are childcare facilities, but I do not think that mothers of primary school children should be required to make use of them or forgo their rights to the state second pension.

Once the youngest child reaches secondary school age, there seems a case for saying that a mother can take at least a part-time job without regarding herself as not handling her children properly. But up to that age it seems to me wholly legitimate for a mother to be able to say, "I wish to be a full-time mother. I do not wish to take even a part-time job, and my pension rights should not suffer because of it".

We have put the age at under 12 rather than under 11 because the child's first few weeks or months at secondary school may be a period of particular stress and difficulty for him or her, and it is appropriate that the mother, without loss of pension, should be able to stay at home as a full-time mother for that period. Nothing I have said is intended to indicate that mothers who prefer to go out to work are acting wrongly. But up to the age of 12 it should be for the mother to make the decision and she should not be put under any pressure by the threat of loss of pension rights.

Baroness Hollis of Heigham

Under our proposals, a person who earns less that the annual lower earnings limit (LEL) in a given year but who is looking after a child under the age of six and receiving child benefit will accrue entitlement to the state second pension in respect of that year. In effect, we are targeting extra help on people looking after children up to early primary school age. These amendments would extend that help to people looking after a child up to but less than age 11, 12 or 16 respectively.

Under SERPS, every year that someone was out of work and looking after a child meant they got a smaller pension when they retired. That is one of the reasons why women, who are most often affected, get less from SERPS on average than men. Our proposals for the state second pension will help to address that problem. Almost 1.5 million women will benefit under these proposals. Five years out of work looking after a young child will be worth about £5 a week in state second pension when that woman comes to retire. Under SERPS, she would have got nothing for those years.

With the state second pension we are seeking to give help to those who are least able to make their own provision for a second tier pension; that is, people who either cannot work or who are in work but on low wages. The first group includes carers and often mothers of children below school age, who have the least opportunity to work and to earn above the lower earnings limit. That is why they are a key target group for our help.

As Members of the Committee will know, many mothers of school-age children—that is, children from the age of five—choose to combine their caring duties with part-time work. Many of those parents will benefit from the S2P low earner's boost, even though they earn as little as £3,500 a year. As a result of the minimum wage, someone will be required to work just over 18 hours a week in order to gain access to the state second pension boost. Those who earn above the minimum wage will, of course, gain access by working even fewer hours.

Some mothers may choose to stay at home, even when their children are older. Some may have no choice because of family or other circumstances. Our intention is certainly not to criticise or punish them for that, and we are not doing so. Indeed, we are doing a great deal to help those mothers who choose to stay at home. That help includes big increases in child benefit—£15 for the first child; £10 for the second—and income-related benefits for children under the age of 11. As I say, we shall have virtually doubled their allowances between April 1997 and October this year.

However, it is the case that three-quarters of all married women are in work and approximately two-thirds of all couple mothers are in work. My noble friend Lady Castle and other noble Lords are correct in saying that the employment rate of mothers who have a child under the age of six is lower than that of those who have children over the age of six. The employment rate of couple mothers who are in work, both part and full-time, with a youngest child below the age of six is about 54 per cent, whereas it is approximately 70 per cent when the child is aged six or older.

Therefore, leaving aside the amendment moved by my noble friend Lady Castle, who would not qualify under the government scheme? So far as I can see, women with a youngest child over the age of six may not be in the labour market for one of three reasons. First, they may be women who would like to work but who have low employment prospects or other difficulties with finding employment; for example, they may have low skills. Certainly, the evidence from our New Deal is that that is the biggest obstacle to women—particularly lone parents—who want to enter the work market. We have developed the New Deal and its training facilities precisely to help people who wish to work but who currently cannot to join the labour market.

The second group of mothers with children over the age of six who may choose or wish to stay at home when their children are older, unlike the vast majority of couple mothers, are those who have a sick or disabled child. Of course, they would be entitled to the state second pension if they claimed ICA or HRP.

The third group of mothers who would not normally be in the labour market if their child is over six may be those from an affluent family who choose for the mother to remain at home until the children are older. Of course, where that degree of resource exists in the family, she could decide to maintain her second pension by means of a stakeholder pension scheme. In the case of a stakeholder pension, it will be necessary to save approximately £9 a week—that is all—in today's earning terms to provide the equivalent of the 10 years' cover, until the child is aged 16, that would be granted under S2P.

Therefore, we are focusing the state second pension on those who care for children under school age in a way which matches the choices that most mothers make. Those who choose not to do what most mothers do—that is, they stay at home because they can afford to—can receive coverage through a stakeholder pension. If they stay at home because they need to due to disability or dependency of a child, they are entitled to receive credits for the state second pension through other routes.

Most mothers take career breaks or periods away from work when their children are very young. Most mothers—70 per cent—return to work once their child goes to school. Such a decision is always a matter of individual choice. Entitlement to the state second pension would simply be one more factor for them to consider. As a result, we believe that we have the balance about right.

As I said, there is the basic pension, which covers all contingencies; the state second pension, which is work-related; and there are alternatives for those whose children are older than six where either the child is needy by virtue of disability or where the income is such that there is no financial pressure. If mothers want to return to work but are impeded by virtue of their relatively poor employment prospects, we can help them through the New Deal. We believe that that is working with the grain of people's choices while respecting the situation for the taxpayer. In the light of that, I hope that Members of the Committee will not pursue their amendments.

Baroness Wilcox

Perhaps I may ask for a point of clarification. I more than likely misheard the Minister. Did she say that two-thirds of married women are working?

Baroness Hollis of Heigham

I actually said that three-quarters of married women are working. Overall, approximately two-thirds of mothers who are married are working. Of that amount, 54 per cent of those with a child under the age of six are working and approximately 70 per cent of mothers in a couple with a child over the age of six are working.

Baroness Carnegy of Lour

I do not know what the noble Lord, Lord Goodhart, intends to do with his amendment. However, when he made the point that he had worded the amendment so that it would cover children up to secondary school age, I would remind him that we are legislating for Scotland as well, where children go to secondary school a year later. Therefore, what he said did not apply to Scotland.

Baroness Castle of Blackburn

As always, the Minister's flow of statistics requires careful analysis. I do not know about the rest of the Committee but I find that when she speaks I am almost carried away on a flood tide of protestations which are so convincing that I am immediately suspicious of them. Therefore, I am sure that she will understand and forgive me—

Baroness Hollis of Heigham

I cannot resist. If my noble friend says that she is suspicious when she is almost persuaded, what happens when she is not?

Baroness Castle of Blackburn

"Almost persuaded"? I am sorry; I must be feeling rather stupid at this time of the day. I intend my remarks, as always, as a great compliment to the Minister. However, it means that I would like a little time to think through what she has said. Therefore, I withdraw my amendment for the time being.

Amendment, by leave, withdrawn.

[Amendments Nos. 113 and 114 not moved.]

[Amendments Nos. 115 and 116 had been withdrawn from the Marshalled List.]

Baroness Turner of Camden

moved Amendment No. 117: Page 27, line 29, leave out ("long-term"). The noble Baroness said: In moving Amendment No. 117, which stands in my name and that of my noble friend Lady Castle, I wish to speak also to Amendments Nos. 118, 120 and 121, with which it is grouped.

Again, these amendments deal with the whole issue of credits. The Government propose that state second pension rights should be credited for a year, throughout which a person receives long-term incapacity benefit. That would exclude the first year of a spell of incapacity during which short-term incapacity benefit is paid. It would also exclude anyone who receives incapacity benefit for only part of the year. The first of the two amendments would result in the whole year of incapacity, including the first year, being taken into account. The second would mean that a person who received long-term incapacity benefit for at least 26 weeks in any year and did not have earnings above the lower earnings limit for the year as a whole would qualify for credits. It would also apply to a person who receives short- term incapacity benefit for half the year and long-term incapacity benefit for the other half.

Amendments Nos. 120 and 121 relate to subsection (3) on page 27 of the Bill. That subsection appears to introduce the labour market attachment test. People who propose to obtain state second pension credits in respect of a period of incapacity benefit will have had to pay contributions as an employee for at least one-tenth of their working life. That seems a little unnecessary and unfairly restrictive, and the amendment would remove that test. Amendment No. 121 would enable periods of self-employment to count towards the labour market attachment test. So far as concerns that particular amendment, I must say that I am not quite certain whether it works in the way that I intended. However, as I said earlier, the intention was that periods of self-employment could count towards the labour market attachment test, which is contained in subsection (3) on page 27 of the Bill. I beg to move.

7 p.m.

Baroness Hollis of Heigham

Amendments Nos. 117, 118, 120 and 121 all relate to disabled people and entitlement to State second pension. Amendment No. 117 would mean that people entitled to short-term incapacity benefit were brought into State second pension, whereas under our proposals access is limited people entitled to long-term incapacity benefit, as my noble friend clearly explained.

Amendment No. 118 would mean that people would accrue a year's worth of S2P where they had been entitled to long-term incapacity benefit for as little as half a year, whereas under our proposals people must have been entitled for a whole year.

Amendment No. 120 would remove the 10 per cent work test qualifying condition whereby disabled people with broken work records must have worked and paid class 1 contributions for at least one-tenth of their working lives since 1978 to qualify for S2P.

Finally, Amendment No. 121 is again about the 10 per cent work test and would mean that years of working and paying class 2 contributions would count towards the 10 per cent requirement, thereby bringing certain self-employed people into additional pension provision.

Disabled people with broken work records are one of our most disadvantaged groups in the labour market. Under SERPS, every single year out of the labour market meant a smaller pension on retirement. Many disabled people who had worked for significant periods of their lives ended up with little or no additional pension because of their periodic absence from the labour market. I do not think that that was fair.

Under our proposals, long-term disabled people who are out of the labour market for periods of time will be protected. If they are on low wages when working, they will receive the extra help that we are directing at the low paid as well. I will give an example. Take a disabled man in employment throughout his working life, earning £9,500, apart from 10 years when he was unable to work: if he had retired in 2025 under SERPS, he would have received a total state pension of £64 a week in today's earning terms. Under S2P, he will receive £81, which is £17 a week more. That represents a real improvement for disabled people that is long overdue.

I turn to specific amendments. Clearly, disabled people who are out of work for long periods lose out most heavily under SERPS. That is why we are seeking extra help for those with long-term incapacity benefit, as they have the least opportunity to build up decent second pensions. Short-term incapacity benefit, to which this amendment applies, as the name suggests, covers short spells of illness and incapacity which are less likely to be disruptive to pension build-up.

Of course, there are some people who experience short but frequent spells of incapacity. They may have a fluctuating illness and may have a mental health illness and are therefore in and out of work. The linking rules in incapacity benefit mean that people in this position will eventually move on to long-term incapacity benefit. The spells of entitlement to short-term incapacity benefit can be added up until they reach 52 weeks, at which time long term IB becomes payable. Thereafter, a full year out of work will qualify for S2P.

Amendment No. 117 will bring people whose short-term periods of incapacity did not add up, in aggregate, to long periods out of work into S2P. I do not think that is appropriate because two-thirds of all IB claims which terminate are short term or, to put it another way, only two-thirds of those people who are on short-term IB do not go on to long-term IB. In other words, it is a natural break and there is a lot of "churning" at that point.

Amendment No. 118 raises the question of the need for a whole year's entitlement to long-term incapacity as a gateway to S2P. The principle underlying S2P is to look at someone's position over a complete tax year. SERPS operates on the same principle. I do not think that there is a compelling case for altering the whole-year principle, particularly since long-term IB is normally paid for long periods covering several years. Long-term IB is not a benefit which people move on to and off and on to and off. They do on short-term IB, but not once on IB long term.

There will be a question mark against the equity of introducing part-year rules for disabled people but not for carers, an issue to which we will return probably on the next amendment.

The remaining amendments, Amendments Nos. 120 and 121, relate to the 10 per cent work test. I will set out the principle. S2P will continue to be a contributory benefit. It is not aimed at permanently disabled people who have no contact with the labour market. They are covered by the non- contributory parts of the benefits system, both before and after retirement age.

One of our key aims is to ensure that disabled people with broken work records can still build good second pensions, saving where they can afford to do so, and receiving extra state support where they cannot. This means maintaining a link between work and entitlement to additional pension. The test in question is designed to prove some work attachment. It is a fairly modest requirement; 10 per cent is equivalent to two years of working life at the outset of S2P, gradually increasing to a maximum of five years after 2024. We think that is about the right balance between encouraging work and saving, on the one hand, while at the same time protecting disabled people who cannot work for periods during their lives.

Amendment No. 120 would remove the test altogether, which I do not think would be right, for the reasons that I have explained.

Amendment No. 121 would enable periods of self-employment to count towards the 1[0 per cent work requirement. This brings in the wider question of pensions for the self-employed. We recognise that the nature of self-employment is changing. We recognise that there are real questions about which we have consulted as to how best to encourage the self-employed to save for their retirement. For example, there are questions about the provision and how compulsory it should be. The issue of whether they were brought into S2P was indeed part of our consultation exercise and we are still considering that. I think that there are arguments fairly finely balanced as 10 whether one should compel self-employed people—whose businesses they may regard as their pension—to be required instead to pay into a pension direct, with the problems that might produce for their cash flow. We do believe that as a result it would be premature to accept an amendment on the question of S2P and the self-employed at the moment. I am sure that we shall return to it in due course.

In conclusion, our proposals on the state second pension will do a great deal for disabled people with broken work records. Indeed, it brings them into additional pension provision for the first time. Of course we could go further, but I think that we have it about right. People will receive it if they are on long-term IB; they will receive it if they are in work—over £67 a week throughout the whole of the year; they will receive it if they have fluctuating conditions that have been covered by the linking rules. Given all that, the only year when someone would normally lose that benefit entitlement is the year one moves off short-term into long-term incapacity benefit. I think that we have it about right. I hope that, as a result, the Committee will not wish to pursue these amendments.

Baroness Turner of Camden

I thank the Minister for this very comprehensive explanation of the Government's policy. Of course, she has again referred to new SERPS rather than old SERPS, SERPS as it originally was. But I will let that go. The Minister knows that I supported old SERPS and was not very happy about what happened to it.

However, everybody would want to encourage disabled people to take up employment wherever they can. The problem is, as everybody knows, that it is not easy for many. It was because of that that it was felt necessary to look again at the provisions in the Bill in relation to disabled people. I am not at all certain that I entirely accept everything that my noble friend has said, but certainly she said a lot and very fast. will look at it in detail in Hansard. If I think that I ought to return on the issue of disablement and rights for disabled people, I will do so, but in the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.118 not moved.]

Lord Goodhart

moved Amendment No 119: Page 27, line 39, at end insert— ("(e) the pensioner—

1. (i) did not have an earnings factor for the year equal to one greater than the qualifying earnings factor for the year; but
2. (ii) would have had such an earnings factor if he had earnings equal to the lower earnings limit in each week in which paragraph (b), (c) or (d) would have applied to him if the words "throughout the year" had been omitted.").

The noble Lord said: The amendment raises an issue on the same subject as the last group of amendments, but in a somewhat different form and it is concerned with a different problem.

Under the new Section 44A of the Social Security (Contributions and Benefits) Act 1992 which is inserted by Clause 30 of this Bill, that section does two things. First, it effectively treats anyone with earnings below the lower earnings threshold, which is £9,500, but at or above the level that qualifies for contributory benefits, as having earnings equal to the lower earnings threshold. Secondly, it treats some people as having been credited with earnings that they did not actually have. Clause 44A(2)(a) deals with the former issue. Subsection (2)(b), (c) and (d) deal with the second aim—that is, the crediting.

People can apply for crediting for the state second pension if the invalid care allowance or incapacity benefit is payable or if they have home responsibilities of certain kinds which preclude them working. But in each case, that condition must be satisfied throughout the whole of the year. That may well disqualify a pensioner in respect of the year of entry and exit; that is, the year during which invalid care allowance or other benefits were first payable and the year in which they cease to be payable.

It is possible that in the year of entry or exit, someone may qualify under paragraph (a) because he has had an actual earnings factor above the qualifying earnings factor; in other words, because his earnings have been sufficient to qualify him for a pension in that year. But he is less likely to qualify under paragraph (a) if he gives up the job and transfers to, let us say, invalid care allowance or home responsibilities early in the year or if he is lower paid and, therefore, takes a longer time to reach the qualifying earnings factor. For pension rights to depend on the time of year at which the status changes from earnings to credited earnings creates wholly random anomalies.

Secondly, for pension rights to be more difficult to obtain for the poor than for those with higher earnings is plainly unjust. The purpose of this amendment is to avoid the anomaly. It allows pensioners to claim an earnings factor for the entry or exit year by combining actual earnings under paragraph (a) for the period in work with notional weekly earnings for the period when they are entitled to invalid care allowance, incapacity benefit or have home responsibilities. Those notional weekly earnings are treated as equal to the lower earnings limit.

The potential exclusion of entry and exit years is plainly unfair. An answer along the lines of this amendment seems simple and would exclude most, although not all, of the unfairness. It may well be that the wording could be improved but the principle seems to me to be obviously correct. I beg to move.

Baroness Pitkeathley

I am happy to support this amendment to which I have added my name. That is because the contribution condition requiring receipt of invalid care allowance during the whole of a year causes problems for carers.

It causes problems for two groups of carers in particular: first, those who have lost ICA because the person being cared for has had one or more periods in hospital or in respite care, which in total amount to more than 28 days in six months. The second group comprises those who have lost ICA because they have earned more than £50 occasionally but whose earnings over the year do not reach the lower earnings limit for national insurance contributions.

On Second Reading, I gave your Lordships some examples from my personal experience and that of the Carers National Association.

I am absolutely certain that it is not the Government's intention to penalise carers either for taking advantage of a respite care break or for attempting to combine paid work with caring. On the contrary, I know that the Government's aim is the opposite of that. Evidence of that is given to us in the National Strategy for Carers which is working successfully. But penalising carers is what happens, however inadvertently, because of that throughout-the-year rule. Therefore, I urge the Minister to think again about this and to think about some small changes which may be made which would be of great benefit to carers.

7.15 p.m.

Baroness Hollis of Heigham

Amendment No. 119 would allow people with an earnings factor below the qualifying earnings factor for the year to benefit from the low earner's boost in state second pension where they were entitled to invalid care allowance, home responsibilities protection, or long-term IB for part of a year. The amendment does not cover those receiving severe disablement allowance, but I suspect that that may be an oversight which the noble Lord would rectify were he to revisit this matter.

Our proposals for a state second pension will give carers and long-term disabled people the opportunity to build up entitlement to a second pension for the first time. From the outset, some 2 million carers, including those caring for young children, and a similar number of disabled people, will begin to build up entitlement to the state second pension. Each qualifying year will be worth approximately £1 a week in additional pension in today's terms. There will be no limit to the number of years of caring which can count towards state second pension entitlement. Since the state second pension, like SERPS, is a contributory benefit, there will be a simple work attachment test for disabled people at the point of retirement.

Entitlement to the state second pension will be calculated on an annual basis on a person's surplus earnings, as is the case for SERPS. That is the amount by which someone's earnings exceed the annual lower earnings limit. That means that we need to look at someone's earnings over the whole of the tax year in question. That is consistent with the annual returns made by employers on each employee's earnings in the preceding year. For example, someone who has earnings between the annual lower earnings limit and the low earnings threshold for the year in question will benefit from the low earner's boost. Someone who has been entitled to invalid care allowance or long-term incapacity benefit throughout the year will be credited into the state second pension. We believe that in the interests of consistency, fairness and operational manageability, this is the right approach.

There are also some practical difficulties associated with the amendment. For example, HRP is not available for part years of caring activity. It would be quite difficult for employers or the department to move to a system which calculated entitlement on a weekly basis. That is why we believe that it is necessary to meet the qualifying criteria for the whole year.

It may be that this amendment confuses the two different ways of qualifying for the state second pension. It would allow someone who is entitled to ICA, HRP or long-term IB for part of a year to "top up" an earnings factor otherwise below the annual lower earnings limit, so that he could benefit from the low earner's boost. He would be mixing and matching the two qualifications which occur in the course of a year.

I understand the thinking behind this amendment. For example, someone may have six months on ICA which will qualify him and six months in work above £67 which, if it were for the whole of the year, would have qualified him. I can understand the argument that such a person should not lose a full year's entitlement. Interesting and important points have been raised. It is a very difficult issue both in terms of the read-across to other situations, particularly that of HRP, and in its practical implementation, as I have suggested. There would need to be a follow through of such a calculation for anyone with credits for a part-year. There would be a need to look at contracted-out cases and HRP. Employers would have to be asked to keep weekly records.

As the Minister handling the Bill in this House, I can say that we have already wrestled with that issue. There are very real difficulties in what the amendment seeks to achieve, even though I understand the thinking behind it, which is well intentioned. In order to give the Committee some assurance, I am willing to take the amendment away to see whether we can meet the issues raised The amendment presents almost as many anomalies as it may solve at present. But that does not mean to say that we cannot look at it again. I am sure that the Committee will understand that I make no absolutely no commitment because if we could have found an easy solution to the problem, I like to think that we should have found it already. But I understand that the Committee may want us to reflect on what has been said this evening and, in that spirit, I suggest that the Committee allows me to do so.

Lord Goodhart

I am grateful to the Minister for what is at least a moderately encouraging reply. I accept that there may be technical problems and that the amendment which I drafted is not necessarily the best way forward. But there is a serious problem with entry and exit years. Let us take the obvious case of someone in receipt of invalid care allowance. Let us imagine that the person who is being cared for dies during, let us say, the month of February, so there is not a complete year; but the period between the date of death and 5th April is insufficient to enable the carer to get a job and build up an adequate earnings factor in that job.

It seems to me that there needs to be some solution to that problem. I am greatly encouraged by the fact that the Minister has accepted that there is a problem. Therefore, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 120 and 121 not moved.]

[Amendment No. 122 had been withdrawn from the Marshalled List.]

Clause 30 agreed to.

Clause 31 agreed to.

Schedule 4 [Additional pension.]:

Lord Goodhart

moved Amendment No. 123: Pa c 102, line 9, at beginning insert ("Subject to paragraph 1A,"). The noble Lord said: In moving Amendment No. 123 I shall speak also to Amendment No. 124. The purpose of these two amendments, particularly Amendment No. 124, is to accelerate the maturity of the state second pension. I believe I have already made clear that the S2P has a good deal to be said for it. However, one of the problems is that it will take a long time to deliver its benefits. Indeed, by 2047, which I think will be beyond the lifetime of any of us presently in this House, it will be quite generous.

The Earl of Mar and Kellie

I will be 98.

Lord Goodhart

I am not sure that my remark applies to everybody. Perhaps one or two of us may still be around.

Baroness Hollis of Heigham

Perhaps I may ask the noble Lord why he looked behind him instead of across the Chamber!

Lord Goodhart

I was not sure who was behind me. By the year 2025, the poorest 20 per cent of pensioners will still be only £1.30 per week better off, according to a Written Answer given by the Government to my honourable—not yet right honourable-—friend in another place, Steve Webb.

All existing earners who are not contracted out have a SERPS entitlement. As pointed out by the noble Baroness, the S2P will be more generous than SERPS to lower earners. The amendment will enable lower earners to claim a full S2P in a shorter time by substituting a year of S2P for a year of SERPS. The amount of the S2P is calculated under Schedule 4 to the Bill which inserts a new Schedule 4A into the 1992 Act in its usual confusing way, which makes it almost impossible for anyone to understand what is wing on in the Bill. That starts on page 102.

The idea behind the amendment is that if, in any year after the S2P has been introduced (let us call that "Year X") the amount of the S2P earned in that year is larger than the amount of SERPS earned in any given year before the S2P is introduced (let us call that earlier year, "Year A") the contributor can give up his right to SERPS in respect of Year A and claim the S2P twice over in respect of Year X. The following year, Year Y, the contributor can do it again in respect of another SERPS year. The process can continue until the contributor reaches pensionable age or has used up and exchanged all the SERPS years which are worth exchanging. In some cases that means that the contributor could qualify for the full S2P in as little as 20 years.

I recognise fully that that is a complex idea. It emerges from the fertile brain of Professor Webb. It will need detailed information to be given to contributors. I am not sure that I have the formula quite right. Indeed, I believe that if one doubles the amount in any year under paragraph 1(1)(a). one also has to increase the number of relevant years by one, which I failed to do. If the Government can think of a simpler way to speed up access to S2P, I would, indeed, be glad to hear it.

However, I believe that much trouble arises from treating pay-as-you-go schemes as if they were funded. Under a funded scheme, it is obvious that you cannot pay a full benefit until the fund has fully built up. However, if you are making a pay-as-you-go scheme more generous, you can apply more generous treatment to past as well as future years.

The S2P will increase public spending. I understand why the Government do not want to bring in the full increase next year or in five years' time. The amendment does not do that. However, there s no need to delay the phasing in of the full increases over a period as long as 45 years. I believe that the Government should accept, if not this particular draft, at least the principle behind the amendment or come up with a better scheme for phasing in the full S2P more quickly than they propose now. Otherwise, the S2P will prove to be an extreme disappointment to any but the youngest of those presently in the employment market. I beg to move.

Baroness Greengross

I have one or two points to add on the state second pension in so far as it will affect the income of tomorrow's pensioners. I welcome the fact that low income groups will be credited into this pension, especially carers, many of whom will be working-age people caring for elderly parents.

However, perhaps I may ask the Minister whether it will be enough to give a decent income on retirement. As I pointed out at Second Reading, the S2P is expected to provide a maximum of around £50 per week in relation to today's earnings. The often-quoted example provided by the Government of a woman reaching 65 in the year 2051 who had spent her life earning under £9,500 or caring for young children was that she could expect to receive £84 per week income from the basic pension and her S2P together in relation to today's earnings, which is about £6 more than the level of today's income support. That is better than the current system. However, is it really adequate or something on which we should encourage such people to rely?

Currently, about one in five older people receive income support, the MIG. I was disturbed to learn that without any changes to the state pensions, one in three older people will be on means-tested support by 2050. As an aside, some older people, no doubt, will become eligible for MIG because they have lost half their husband's SERPS entitlement on his death; an issue we will discuss presently.

Part of the reason for the rise is the fact that the Government promised to increase the MIG by earnings which will make more and more older people eligible for it every year. However, even after the introduction of the S2P, one in four older people are forecast to be on means-tested benefits by 2050. Having checked with the DSS, I discovered that it is only when one assumes that people save an additional 5 per cent per year that we end up with the same proportion of older people on means-tested benefits in the year 2050 as now, one in five. Given that the savings ratio has fallen so much, is that realistic?

I find myself attracted to amendments such as these which seek to improve and enhance the S2P to ensure that it provides a decent income in retirement for tomorrow's pensioners, especially the low paid, the carers and those who are disabled.

Lord Higgins

Perhaps I may intervene briefly. I was trying hard to remember the quotation: O, what a tangled web we weave, when first we practise to deceive! with reference to the honourable Member in the other place.

We await with interest the reply from the Minister. However, our concern is very much what has been said a moment or two ago. The system being introduced will not produce benefits for another 25 years or so. In particular, it is not a funded scheme. What we have here is the perpetuation of a situation whereby one generation pays for the retirement benefits of the previous generation. In effect, we should have a funded scheme. With such a scheme, the people in this generation would pay for their own benefits in due course.

Baroness Hollis of Heigham

Perhaps I may ask the noble Lord for elucidation on that point. He is the first person this evening to make that point. Is he arguing that people with an income of less than £9,500 should be paying into a funded scheme? If so, how could they afford to do so? If not, where would the money come from? If it were to come from the taxpayers, would it not be the case that the taxpayers on low earnings would be paying twice over, both for future generations and to go into a funded scheme of their own? I do not see how his sums even begin to add up.

7.30 p.m.

Lord Higgins

I shall be taken a long way from the amendment in my response, but perhaps I may put briefly what seem to me to be the substantive issues here. The noble Baroness is saying in effect that certain people will be deemed to have made contributions, but that still remains simply a paper promise. In no sense is it backed up by real money. If one is to avoid a situation of continuing generational equity, we will find that we shall continue to deliver only paper promises.

For the reasons which I put to the Committee on an earlier amendment, the more that we can move towards a funded scheme—if the Government really are saying that they will deem these to be contributions—here the contributions are real rather than only notional contributions, the better. There is a danger that, although at this point the Government say that they will "deem" contributions to have been made, when it comes to the benefits covered by those "deemed" contributions to be made, we may well find that at that point there is no additional cost to the Government because the minimum income guarantee will have overtaken the second state pension.

Baroness Hollis of Heigham

I am puzzled by the remarks of the noble Lord. Perhaps he could help me on this point. If he says that for those earning £9,500 we should move from a pay-as-you-go scheme to a funded scheme, how will he respond to the argument that that generation would then have to pay twice over, both for the pay-as-you-go scheme for older pensioners as well as the funded commitments for themselves? I do not see how this method will avoid the problem of double payments, in this case payments to be made by some of the poorest people in work in the country.

Lord Higgins

It would depend on what was done about debts. It is possible for the Government to incur debts and to project for them. However, I believe that I am moving far too wide of the amendment. Perhaps I may return to this matter on another occasion. Indeed, it may be more appropriate to address it when we come to the Government Resources and Accounts Bill rather than in the present context.

Baroness Hollis of Heigham

I think that is a very good idea.

Noble Lords have put forward these amendments which would boost some people's entitlement to the state second pension during the period when it is building up to maturity. They would provide an element of' retrospective entitlement to S2P for certain people for years prior to its introduction, based on years of entitlement after its implementation, in order that individuals could build up greater amounts of additional pension.

Under the amendments, for each year of entitlement to state second pension, someone could choose to gain retrospective entitlement to state second pension for a previous year under SERPS. This would be achieved by allowing people who have accumulated entitlement to additional pension under both schemes to trade one for the other; effectively, to choose the better buy by giving up a year's entitlement to SERPS in return for doubling the value of a year of their state second pension entitlement. I hope that I have understood the detail here.

Furthermore, in order to ensure that as many people as possible would benefit from this proposal, Amendment No. 124 also requires that anyone to whom it would apply should be identified and notified of how they could maximise their additional pension entitlement in this way; namely, by trading in low-earning SERPS years and replacing them with the low earners' boost, still related to low earnings but now related to the higher earning S2P years.

I shall not revisit the reasoning behind what we are trying to do with S2P except to remind the Committee that under SERPS it is possible for someone to pay contributions on earnings just above the lower earnings limit for the whole of their working lives yet still retire on a state pension which is below the level of the minimum income guarantee. This will not happen when the state second pension has built up. From 2038, anyone retiring with a full working life of employment behind them, or periods of caring or disability, will receive a total of basic pension and additional pension above the MIG.

When the noble Baroness, Lady Greengross, said that she was dismayed to learn that under these proposals one in three would still be required to fall back on the MIG, perhaps I may tell her that that was a misguided assertion made by the noble Lord, Lord Higgins. The fact is that without the scheme in place it will be one in three; under the scheme it will be one in five. In part that is because of the greater generosity of the MIG at ages 75 or 80. Without that, even fewer people would fall back onto the MIG at those ages.

The state second pension will focus help on 4.5 million low earners and 2 million carers. Under our proposals, people will remain above the MIG for a considerable time. Someone who had earned as little as £3,500 throughout their working life will retire on a combined pension of £85 a week and they will stay clear of the MIG for nine years. Couples will do even better. A couple where both had lifetime earnings of £3,500 a year would receive a large enough pension to keep them both above the MIG for 21 years, which I believe is good news.

I acknowledge that the benefits in S2P take time to build up. Inevitably, that is a part of the long-term nature of pension provision. However, many of the lower paid can expect to see a significant boost to their pensions within 20 years or so. I believe that that improvement may have been rather underestimated by noble Lords when they made their contributions to these amendments.

For example, someone retiring in 2025— with earnings of just £6,500 for a full working life would get £76 per week under S2P; £18 a week more than they would have got under SERPS. Or to take a couple retiring in 2025—he earning £180 and she earning £120 a week but also caring for children for 20 years, 10 of which with carer's allowance—under SERPS they would receive £5 more than the MIG; under S2P they will have £35 more. That shows just how significant: and generous is the increase in terms of accrual rates and the low earnings boost that will come with S2P over SERPS. Perhaps I may give the Committee a third example. A woman retiring in 2051 would get £85 in today's earnings terms—£10 above the MIG levels in 2051.

I have tried to give examples to show that, although by definition this is a state second pension for those on lower earnings and therefore that pension is not as generous as many of us would wish if resources were unlimited, in comparison with having in place no state second pension, or in comparison with SERPS or the drop down onto income-related benefits, the long-term position of those who are poorer will be infinitely better than is currently the case.

We inherited a situation where a wide range of people—low earners, carers and the disabled— had no hope of a decent income in retirement. We are ensuring that we shall deliver help to those groups.

Under Amendments Nos. 123 and 124, for each year of entitlement to state second pension, someone could choose to gain retrospective entitlement to state second pension for a previous year under SERPS. That would represent a more generous increase for some, but it would do little to help those working as carers and the long-term disabled. Furthermore, it would be unfair to existing pensioners, who would not be able to benefit. Of those who would gain, people retiring in the short term would be helped least because they would have the smallest number of years entitlement under S2P to be increased.

Leaving aside arguments about unfairness, the additional complexity of the amendment would be huge, both for the department and for the individual. The Benefits Agency would be required to identify and notify anyone who might benefit from this measure and then explain how such a person might use it to maximise their entitlement to additional pension. The individual would then have to decide whether they wished to take advantage of the option and, if so, which years of SERPS they should give up and, conversely, which years of state second pension they should seek to increase, looking backwards over an earnings history of perhaps 40 years. Those with years of moderate earnings under S2P would benefit the most, because they would have years of increased state second pension entitlement to swap for years of low SERPS entitlement, whereas those with a lifetime of low earnings would gain proportionately less.

The element of pick-and-mix, which would depend on records that may not be kept adequately, along with the potential for giving people the wrong information or mis-selling, seem to me to be mind-bogglingly complex. I believe that our previous decision was right. Not only is retrospective cover for certain groups unfair to others; it does not provide the help necessary for those who form our priority groups. Furthermore, the operational difficulties, disproportionate costs and dependence on records which may be 20, 30 or 40 years out of date or which may have disappeared would mean that the proposal is simply not viable.

For those reasons, we have chosen to direct resources to the most vulnerable through the MIG as well as other measures that we have already discussed. In the light of that response, I hope that the noble Lord, Lord Goodhart, will feel able to withdraw his amendment.

Lord Goodhart

My Lords, I recognise that this is an amendment of considerable complexity and that the noble Baroness's argument has some force. Nevertheless, this is undoubtedly a serious problem. The delay before the state second pension becomes fully operative will be a matter of concern and, indeed, threatens its future—one knows how short the life of the average pension arrangement is and we have seen the number of changes that have already taken place.

There is a problem in this area. The noble Baroness has shown that in a few cases there will be substantial benefits, even by 2025; nevertheless she has not attempted to dispute that, overall, the average benefit to the lowest 20 per cent of earners will be only around £1.30 in real terms. That arises because this is an average and the specific example, for instance, of somebody earning £6,500 a year depends on somebody earning that sort of figure every year over a lifetime of earnings. As we know, average earnings vary greatly.

Baroness Hollis of Heigham

If the noble Lord will give way, this is a point I should have picked up and I apologise to the Committee for not doing so. The figure of £1.30 is the difference between the income of the bottom quartiles of pensioners in 2025 with or without the introduction of the state second pension. But this is across all pensioners—we accept that it is an average—including the poorest, oldest pensioners who retired before or shortly after the reduction of S2P and therefore have no benefit from it at all.

I have tried to argue for those who have any period in S2P by building up entitlement. They quite quickly will see an increase. But it is not reasonable to ask the Committee to talk about £1.30 which includes people who have already retired and therefore would never come within the S2P proposals.

Lord Goodhart

If we are talking about the year 2025, of course by that time the number of pensioners who will have retired before the introduction of the state second pension, which is proposed in 2002, will be much reduced. So the figure of £ 1.30 may have to be increased somewhat if one is looking at the lowest 20 per cent of those who retired after 2002. But I doubt if it will be all that much larger.

We will take this amendment away; look at it, and consider whether or not we need to bring it back, either as it stands now or possibly in some more simplified form. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 124 not moved.]

Baroness Amos

I beg to move that the House be now resumed. In moving this Motion I suggest that the Committee stage of this Bill begin again not before 8.42 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.