§ 3.10 p.m.
§ The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)
My Lords, I beg to move that this Bill be now read a second time.
I am delighted to have the opportunity to debate the principles on which the pension credit will be based. Peers who spoke on the uprating Statement welcomed the most important elements while, understandably at this stage, expressing caution as regards other aspects of the policy.
For many pensioners who need it, the pension credit will provide not only more money, but a fairer system which will treat pensioners with the decency they deserve. I was glad that the noble Earl, Lord Russell, was able to say that this would be the answer to his prayers—I am not sure whether that is exactly the right word, given the noble Earl's convictions—because it will abolish the upper capital limit that at present denies some pensioners any help. I look forward to debating the areas of concern over the coming weeks and convincing noble Lords that the pension credit is a soundly based and well constructed social policy.
The pension credit forms the major part of the Bill, but first perhaps I may touch briefly on Clause 18 dealing with the position of widowers. This forms the final instalment of the work we have undertaken to establish bereavement benefits that treat widowers and widows equally. As a result of an oversight in the drafting of the Welfare Reform and Pensions Act 1999, if a widower is receiving a pension from his late wife's contracted out pension scheme, there is no power to make a contracted-out deduction. That means that currently he receives a pension as though his late wife had not earned a contracted-out pension, when in fact she did. Clause 18 removes the double provision and restores the position that the House intended. I regret the oversight.
Returning to the pension credit, I was grateful for the comments of the noble Baroness, Lady Greengross, after the uprating Statement. In a few sentences she encapsulated the main considerations that were in our minds. First, it is necessary to concentrate on helping the poorest pensioners. Secondly, we must see that those who have saved modest amounts for their retirement are rewarded for their thrift and effort, not penalised. Thirdly, we must tackle the obstacles that put people off taking their pension entitlement.
There is a high degree of consensus in the House about the importance of tackling pensioner poverty. There is also agreement that we must ensure that future pensioners receive a decent income in retirement. Perhaps there is less consensus on how to achieve that, but I am sure that over the coming weeks we shall debate the issue.
The yellow booklet that we published at the time of the First Reading of the Bill—The Pension Credit—The Government's Proposals—sets out the Government's pension strategy and, in particular, the reasons why we 140 are introducing the pension credit. Since that provides the essential background and helps to explain why we are spending £2 billion in this way, I shall summarise the Government's pensions strategy and cover the important role of the pension credit in achieving our objectives.
The 1998 Green Paper, Partnership in Pensions, set out a new framework for reforming both state and private pensions. The aim was to ensure that everyone could enjoy a decent income in retirement. Encouraging saving lies at the heart of this strategy. At the time we said that the pension system, both state and private, was failing to provide enough support for today's pensioners as well as failing to provide security in retirement for tomorrow's pensioners.
In particular, too many of those who could afford to save were not doing so or were not saving enough. Roughly 40 per cent of all employees and workers were not making any voluntary provision for their retirement. Thus they were heading for poverty in retirement.
The gap between better off and poor pensioners was growing. On average, pensioner incomes have been increasing faster than the incomes of those in work, but too many were left behind. Some 2 million over 60 year-olds were living at or below inadequate income support rates. The incomes of the richest fifth had risen by 80 per cent, while the incomes of the poorest rose by only 30 per cent.
For those who could not afford to save, the state provision through SERPS was inadequate because the previous administration halved its value. SERPS did not provide enough support for people on low earnings or for people with broken work records due to caring for children or through disability. Of course, SERPS was always fatally flawed in that it gave the least help to those who needed that help the most.
People also lacked confidence in the pension system following the Maxwell affair and the scandal of pensions mis-selling. The foundation of our reforms was and remains the principle that those who can afford to save have a responsibility to do so. In return, the Government should support those who cannot afford to save.
The House will know what steps we have taken to improve the situation through the minimum income guarantee (MIG), winter fuel payments and other measures. As a result, around 2 million of the least worst off pensioners are better off, while the poorest pensioners are £800 per year better off.
For those who can afford to save, we have improved the options available with the launch of stakeholder pensions in April. For those who cannot afford to save, we shall implement the state second pension from April of next year. As that scheme matures it will provide dramatically better provision for 18 million people on low earnings or who are unable to work because they undertake caring roles or are themselves disabled.
Where does the pension credit fit in with our proposals for a state second pension and for stakeholders? The pension credit is essential to the 141 overall coherence of the pension system. It will form the third piece of legislation and finally complete the jigsaw. It will provide the mechanism for ensuring that we can tackle poverty among today's pensioners without undermining the incentive for future pensioners to save for their own retirement. The principle is that those who can afford to save should do so, but also that the Government should support those who cannot afford it.
But that principle presents us with a difficult structural puzzle. The yellow booklet highlighted the inevitable tension between the present arrangements for lifting today's pensioners out of poverty while also ensuring that today's workers have a clear incentive to save. We must lift the poorest pensioners out of poverty by increasing their income, but at the same time we must restore the incentive for people to lift themselves. How those two apparently conflicting pressures are balanced is the question which the pension credit seeks to address.
The minimum income guarantee is not ungenerous and thus forms an element of the structural difficulty. That is because by 2003 it will lift pensioners from the retirement pension level of around £77 per week to a basic income of £100 per week. However, having ensured that all pensioners receive a decent basic income, we then have to deal with the problem that it is therefore not worth saving for a pension that would not lift the pensioner clear of MIG. To achieve that, a pension of at least £100 per month is needed.
The situation that we inherited means that at the moment it is not worth it for people to save towards a modest occupational pension of perhaps £100 per month, or if they have a bigger pension, for their spouse to inherit it because they would be no better off than if they were in receipt of MIG. We believe that the pension credit will provide an elegant solution that targets substantial sums on helping the least well off and tapers that help for pensioners further up the scale of income distribution. So we shall tackle pensioner poverty in a precise way but we shall also ease the stark disincentive to save that has been inherent in any relatively generous safety net arrangement that has been put in place until now.
The pension credit will resolve the structural puzzle by ensuring that those who save even modest amounts—by saving in a second pension or by putting money aside in a building society account or an ISA—will gain from having done so. At the moment, too many people do not gain.
The pension credit will build on the other long-term reforms that we have already made by ensuring that we reward the thrift of those who have worked hard all their lives, but who feel let down because they are often no better off than people who have saved nothing.
If not today, then at a later date, I am sure that will be told that this will increase means testing. Certainly, many more pensioners—single pensioners living on incomes of up to around £7,000 per year and couples with incomes of up to around £10,000 per year will receive extra pension income. However, to say that the pension credit will be means tested implies that we will 142 treat pensioners as though they were under the dreaded family means test of the 1930s, or that we will perpetuate the post-war discretionary scheme under which the National Assistance Board intruded into every element of a pensioner's financial affairs—looking week by week at every penny they had and monitoring every change, for example, by examining the lustre vase on the mantelpiece. That simply will not be the case. As will become clear, we intend to make a marked cultural shift in the way in which pensioners are treated. I suggest to the House with all due respect that we shall do a disservice to pensioners and their willingness to take up their entitlement if we continue to use the language that serves to stigmatise that which is their right.
For example, from age 65 we will set awards for long periods, normally five years at a time, as opposed to the weekly assessment that lies behind the principle of income support. That will further reduce the intrusion that pensioners rightly complain of and which is an important contributor to the stigma they feel. We shall ask them to report only major changes in their lives such as, for example, the death of a spouse. They will of course be able to ask for their pension credit to be increased at any time should their other sources of income reduce.
There is another element to the Government's strategy which is also relevant, although it is not a part of the Bill. We must do more to ensure that the service we give to pensioners and to people below pension age who are providing for their retirement focuses on what they want and need from the Government. Research—plenty has been undertaken—has helped to tell us what pensioners dislike about the ways in which traditionally they have been treated by the old Department for Social Security. In many cases that reaction has gone beyond "dislike" and has resulted in pensioners not taking up their entitlement. When that happens, they risk and endure poverty.
Research report 100, Overcoming barriers, older people and income support, published in 1999, gives some clear evidence. Attitudes are important. In the past, too many pensioners felt that there was a stigma attached to claiming the old income support. The processes of making a claim, reporting changes in income and so forth put people off. The research showed that the processes people have to go through must be made more dignified. It also showed that the pension service must reinforce the message that pensioners are entitled to this help. We need others in society to make it clear that they believe that this entitlement is legitimate. We must make the information freely available, simplify forms, integrate the process, and back it up with a quality pension service.
The service that we offer makes a huge difference to pensioners' decisions about applying for MIG. We have already improved access to pensioners' entitlements with the telephone service and the claim form, which has been reduced in length from 40 pages to 10. There is much more to do before we can say that the service is excellent, or even yet good enough. But that is our ambition—one which I am sure is shared by the whole House.
143 Over time, we shall integrate our processes so that, at the point of retirement when people are invited to claim their basic state pension, we shall be able to use that opportunity to establish their entitlement to pension credit. They will then enjoy that for five years. As noble Lords will know, the entitlement even to state retirement pension is not automatically a simple one, particularly if people have less than complete pension records. We shall be able to do, so to speak, a waterfront of their income at the time at which they claim retirement pension and then give them a secure income for the next five years.
We are also developing the capacity to write to all 11 million pensioners periodically to ensure that they are kept up to date with changes to pensions and to provide them with information about their entitlement. That is important, because the income of many pensioners declines as they get older. Even those who start above the pension ceiling may find that at some stage they become entitled to a savings credit, particularly if one goes up related to earnings whereas their own pension is related only to prices. We want to make sure that they receive the income as soon as they are entitled to it.
During this debate, not only shall I be told that pension credit is a form of means testing—although I have done my best to address that issue; I shall also be told, with perhaps a little more justification, that pension credit is complicated. Many noble Lords who will contribute to the debate will understand the detail that must go into a pension scheme. But, at its core, pension credit is structurally simple.
First, there is a floor below which a pensioner's income should not fall. That is the guarantee level. A single pensioner will be able to rely on having at least £100 a week to live on, using illustrative rates, and a couple £154 a week. It is simple arithmetic. The pension service will top up their retirement pension, whether it is complete or incomplete, to £100 a week as their basic guarantee.
Secondly, through pension credit we shall reward those over 65 who have made some provision for their retirement above the level of the basic state pension. This is the savings credit. So the guarantee element of the credit takes the level up to £100—the MIG figure—and the savings element is the wrap-around of the modest occupational pension. We shall give them 60 pence in the pound up to a maximum of about £13.80 for a single pensioner or about £18.60 for a couple—again, using illustrative rates. That savings credit will take the thrifty above the floor.
Let us take the example of a pensioner with a modest occupational pension of 100 a month. It might be an elderly widow who is perhaps 80 and who is receiving only half of her husband's pension. At this moment in time, that elderly widow with an occupational pension of £100 a month might just as well not have the extra amount at all. She gains nothing from it; it does not take her above what she would receive if her husband had never invested in an occupational pension. It takes her up to under the MIG level. But with pension credit 144 that same elderly women will receive an additional £60 per month (60p in the pound) on top. That is the reward element. For such people, the point of saving for a pension, however, modest it may be, will become clear for the first time. This is fairly simple arithmetic and I hope that the concept of the pension credit is clear. Of course, the pensioner does not have to do the calculation. The skill is in helping pensioners to know that there is an entitlement for them to apply for.
I suspect that I shall be accused on a third count: I shall be told that the pension credit discriminates against women. Again, I challenge that statement. It does not. Women are the main gainers from the introduction of pension credit. More than half of the recipients will be single women. By comparison, only one-sixth will be single men. In many ways, women will do very well from the pension credit, particularly because they live longer than men and, over time, inflation may erode the value of any second pension or savings that they may have. Pension credit will also be valuable for widows who inherit only half of their late husband's second pension. It is a valuable way of narrowing the inequality that persists, and will persist, until women's pensions catch up with those of men.
However, there is a problem that we have had to tackle, and it is right to share it with the House. The pension system does not yet treat men and women equally. In this instance women are the beneficiaries of discrimination but that does not make it legally acceptable.
State pension age will be equalised at 65. However, that could not be done at a stroke: it was necessary to move to this over time, so that people could build it into their financial expectations. Pension credit must cope with that transitional inequality, while itself treating men and women equally. I ask your Lordships to think about how we were to cope with transitional inequality, knowing that the goal was the equal treatment of men and women at the end of the process, and treating them equally at every point towards that end, while dealing with inequality as it currently stands in terms of retirement age.
Noble Lords will have noted that, at the start, the guarantee element—which takes income up to £100 a week—will be paid to both men and women from age 60. So for the poorest pensioners we are equalising for both men and women at 60. But this will move to age 65 between 2010 and 2020 in step with the basic state pension.
In the mean time, men and women aged 60 and over will all benefit from the fairer capital rules, which have been welcomed, from the streamlined pension service, and from the simplification of the rules, which I am sure we shall debate thoroughly in Committee.
However, the unequal treatment men and women receive in relation to the basic state pension persists in the mean time. This means that there is no way of giving the savings credit—the sums over £100 a week—to men and women under 65 on equal terms,short of reducing men's state pension age to 60, in advance of raising it again in a few years' time for everyone to 65. We cannot do it; we are stuck. 145 Therefore, what we are doing is equalising the guarantee element at 60 for men and women alike and equalising the reward element for men and women alike at 65. That is why we are doing it in this way. That said, I repeat that women are by far the largest beneficiaries of pension credit, but above all it is the older and poorer women who will benefit, who are most in need.
Noble Lords will have noted the commitment to increase the guarantee credit in line with average earnings for the rest of this Parliament. This and rising take-up will increase the cost of pension credit. The cost of the savings credit will rise too. We have projected forward as far as 2050. This shows that expenditure on state pensions will remain largely unchanged as a proportion of GDP. Therefore, we have concluded that pension credit is and will remain affordable and sustainable.
I am sure that I shall also be told in this debate—and I expect nothing less from my noble friend Lady Castle—that it would be better to increase the basic state pension in line with average earnings. I disagree profoundly. That would not lift the poorest out of poverty; all that would happen would be that an amount would be deducted from their minimum income guarantee sums; and it would go to many in this House—possibly in due course myself—which would be unreasonable. It woulddo nothing to help in terms of poverty. It would do nothing to tackle inequality—because the differentials among pensioners would remain the same if all received the same. Furthermore, it would not be financially sustainable. By 2030 the cost of earnings linking the state retirement pension would be £29 billion, more than twice the cost of the changes that we are introducing with pension credit; and most of the money would not go to those who most need it.
Pension credit is a radical departure. It builds on all that we have done to tackle pensioner poverty by raising the level of income pensioners can expect as a minimum. From next year, the Government will be spending £6 billion a year extra on pensioners above the 1997 level, and, of this, £2.5 billion will go to the poorest third. In weekly terms the youngest poorer pensioners on the MIG will, by April, be £23 a week better off. Couples will be £33 a week better off. Pension credit builds on this by adding a further £2 billion to reform the old capital rules, to give pensioners the reward for saving and to protect these gains in housing benefit. So even those pensioners who do not gain from pension credit but receive housing benefit will see the same increase in applicable rates. So they will gain too. Pensioners who qualify will, on average, gain £400 a year.
We have also, as the noble Earl, Lord Russell, was kind enough to notice, tackled the long-standing criticism about the way in which income from capital is taken into account. It is important to emphasise that the proposition in the Bill was a product of consultation. It was heavily influenced by organisations such as Age Concern, the FSA and others. The reward for savings, or "savings credit", as it is described in the Bill, is for those with a modest occupational pension that otherwise would not lift 146 them clear by very far of MIG. Pensioners have been asking us for this for decades. It will ensure that those who put something aside for their retirement will be better off for having done so. It is fair and it promotes saving.
Pension credit represents a huge cultural change. We want to put behind us everything that led pensioners to associate income support with charity, poverty and means testing. The decision to set the income assessment for five years at a time is part of that, but we shall debate many other measures in Committee. I welcome your Lordships' suggestions as to how we can further strip the residual stigma out of targeting to ensure that pensioners enjoy that which is their right. I commend the Bill to the House.
Moved, That the Bill he now read a second time.— (Baroness Hollis of Heigham.)
§ 3.31 p.m.
§ Lord Higgins
My Lords, I am sure that the House is grateful to the noble Baroness for her usual expert explanation of the Bill and for the various points that she has made. I thank her, too, for the briefing that she has arranged for those who wished to study the detail ahead of the debate.
I begin by declaring an interest as chairman of an occupational pension scheme. The noble Baroness has anticipated some of the arguments that she expects me to advance. I am grateful for that by way of commercial. She even included one that I had not even thought of, or at least not yet.
It is a slightly strange title for the Bill—State Pension Credit Bill. One half of it is not a credit at all, but MIG under another name; and the other half' has nothing to do with the state because it allows people to keep a little more of their hard-earned savings. No doubt we can discuss that issue later, or when we go into Committee on the Motion that the Title he postponed.
One of my arguments which the noble Baroness was right to anticipate was that of complexity and the related problem of take-up. The House will know that Help the Aged has estimated that only 1.7 million pensioners take up MIG, although 2.5 million are entitled to it. That is a serious matter about which all of us should be concerned. Part of the complexity arises because of the constant changes in terminology. We seem to be moving from the now well-known minimum income guarantee to something that in many respects is a part of the pensions credit under a different title.
The issue of complexity needs to be seen in the context of the Government's overall system of social benefits. I suggested when we debated the uprating Statement that we were reaching the stage whereby probably no one in the country understood the system, except perhaps the noble Baroness. I pointed out that since 1999 there had been five new tax credits for families, three of which were then scrapped and two more added. When I raised the issue last time, I thought that if the noble Baroness could enumerate 147 them, that might be a sign that someone in the country understood the system. She did not respond then—perhaps she will on another occasion.
At all events, the points about take up and complexity are extremely important. We discussed earlier the minimum income guarantee form. I hope that the noble Baroness can make the form available to the House, perhaps before Committee stage, so that we can see it with regard to the pension credit provisions. I realise that the Government want to deal with the problem by introducing the pension service in place of existing institutions. None the less the complexity of such forms is a matter of concern. It is argued that under this system, people will do most of the form filling by telephoning the pension service, which will complete the form and send it back to the applicant for approval. That is likely to be an expensive process. My 33 years' experience of Friday evenings spent interviewing pensioners suggests that it will be a difficult system to operate. We shall have to see how it works, but it would be helpful to see the form.
Another matter that causes concern is the fact that much of the Bill will be implemented by statutory instrument. It is sensible in pensions legislation to implement by statutory instrument those parts of the Bill that will be varied in the future. But it seems that many of the proposals that will be dealt with by statutory instrument are permanent, so I believe that they should be in the Bill itself. Again it would be helpful if the noble Baroness could let us have drafts of the various statutory instruments that will no doubt be immensely complicated.
Some other aspects of the Bill are causing concern. Surprisingly paragraph 2 of Schedule 1 refers to "national insurance numbers", which the noble Baroness seems to have overlooked. We know the deficiency of those. Perhaps that is one of the detailed issues that we shall be considering.
Having said that, of course, we welcome the increase in money for pensioners. It would be foolish not to do so, but we have considerable doubts about some of the other aspects of the Bill. The change in capital limits is welcome, as is the abolition of the weekly means test, and so on. We are not saying that the Bill is entirely bad. Extra money for pensioners is obviously a good thing and there are other aspects that we welcome.
However, its scope is comparatively limited. The people who will be helped by the pension credit provisions fall within a narrow range. An article in the Sunday Times of 2nd December reported a number of cases of people on modest incomes who would not gain from the proposals. We are concerned that as people go up the income scale the marginal rate of tax, or withdrawal of benefit, will be as high as 40 per cent. When we discussed that matter previously I said that I was concerned that there would be even higher rates of withdrawal for people on housing and council tax benefits. I understand from the Minister that that will not be the case. It is clear that many people will suffer 148 withdrawal rates of 40 per cent, which is the top rate of income tax, but will the Minister confirm that no one will suffer withdrawal rates of more than 40 per cent?
Some of the people involved in this measure will be those who are compelled to draw their annuities at age 75. If they are on low rates of annuity, which many are as a result of the fall in annuity rates, they will benefit from the pension credit element in the Bill. The issue of drawing annuities at 75 is important. There has been a great deal of publicity, and recently commercial firms have made proposals that would appear to overcome the difficulty involved in having to draw an annuity at 75. I do not know whether the noble Baroness can say anything about that at this stage, but I understand that discussions have taken place between the Treasury and her department.
The noble Baroness is right to say that the question of means testing, which she prefers to call targeting, is important. The basis of the Government's programme on pensions has been to increase means testing time and again. Will she say what percentage of pensioners will now be subject to means testing; what percentage of the total population are subject to means testing; and give us the same figures in terms of absolute numbers? It seems that we have a system in which, to misquote Beveridge, we are being means tested from the cradle to the grave. That is certainly not what he envisaged. That is a problem. I realise that the noble Baroness is rightly seeking to remove the stigma involved. We are in favour of that, but the reality is that we are increasingly building an effectively means tested pensions community that is growing ever more into a dependency culture.
Savings is another important issue. Will the Bill encourage people to save? The Government's system has created a series of different classes. Those who are below the minimum income guarantee level will get nothing if they have any savings. Those on low incomes will not get very much. People affected by the pension credit will certainly gain and those above that level will be taxed.
The Institute for Fiscal Studies takes the view that the growth of MIG in line with earnings will unambiguously discourage savings and believes that the conclusion is ambiguous on the pension credit aspect of the payment. The IFS does not believe that the two parts of the Bill, taken together, will increase savings.
I have a specific question for the Minister relating to the income that is taken into account in the course of the complicated savings calculation. I am not clear about the position of a pensioner in the system with a very low income. They might be entitled to the pension credit if they have savings, but if they do not have any savings and do a little part-time work—helping in a supermarket or something of that kind—will that income in any way attract a credit? I am also not at all clear about the position of savings income from PEPs and ISAs. It is totally outside the tax system, but will it also be excluded from the calculations when assessing whether someone is entitled to a pension credit?
149 I am also concerned about the position of the part pensioner—someone who does not get a full national insurance pension because their contribution record is deficient or for whatever other reason. The issue has been raised by groups as diverse as the National Federation of Post Office and BT Pensioners and the Association of British Insurers. The AB1 puts the case clearly. It says:Under current proposals, less than full entitlement to the BSP"—the basic state pension—.will mean that the first part of a pensioner's personal savings will he used to bring them up to the level of the BSP and will not attract the additional saving credit. For example, if a pensioner has an incomplete contribution history and receives a BSP of only £67, but has £10 from a personal pension, they will receive the guaranteed income … but no credit for their savings".That is unfair. When I made my maiden speech in the House of Commons, a very long time ago, I was concerned with the people who were left out of the national insurance scheme when it was introduced. I eventually persuaded the then incoming Government, as the first action that they took, to pay to non-pensioners that part of the pension that was not covered by contributions. Alas, those affected are all long since dead. A similar situation arises in this case. It is not right to have the situation that I have just described if the part pensioner is not getting that part of the national insurance contribution that is not covered by contributions. I hope that I have got that the right way round. I hope that we can give some consideration to that point in Committee.
A number of outside bodies have estimated the cost of the Bill. The Chancellor has said that the pension credit will cost £970 million in 2003–04, rising to just over £2 billion in 2004–05. However, we have to look at the cost of the proposals over the long term, when people come to retire in 10, 20 or 30 years. Other estimates suggest that the cost over such a period could be very large—around £10 billion a year in current prices. Given the experience of SERPS, we have to consider whether the overall costs of the Bill are financially sustainable in the long run.
My final point relates to the overall policy on pensions as far as the private sector is concerned. The Government have rightly paid tribute to the role of occupational pensions in our system of private provision, hut there are real problems with the run-down of surpluses because of the state of the stock market, the Chancellor's actions on advance corporation tax, a change in the basis of valuation by the actuarial profession and a change in accounting standards under FRS 17 by the accountancy profession. We are much better placed than any other country in Europe, but all those issues are seriously affecting the bedrock of our system. Some of the people in the occupational system with small pensions will gain from the Bill. That is welcome. However, it is time that the Government paid attention to some of the problems affecting the basis of the pension of many people in the occupational side. They are likely to be adversely affected if there is an increasing move away from final salary schemes towards defined contribution schemes.
150 Overall, the Bill should be welcomed. Its aim is to address a serious problem. However, there are a number of aspects, particularly on means testing—despite what the noble Baroness says—that require careful scrutiny. When scrutinising previous legislation, such as the Social Security Fraud Act 2001, we made great progress, with the co-operation of the noble Baroness. I hope that we can improve the Bill before it goes to the Commons.
§ 3.48 p.m.
§ Baroness Barker
My Lords, I begin, as always, by declaring an interest. I am an employee of Age Concern England. In doing so, I must make it clear that, while the work of my colleagues in Age Concern will inform my comments, as it informs other Members of your Lordships' House, it will not determine the views that I express on behalf of my party.
I am something of a neophyte in pensions debates in your Lordships' House. I was most grateful to the Minister when, a couple of weeks ago, she sought to reassure me by saying that I should not worry because this is really just a technical Bill. Having spent the past two weeks reading copious material on the subject, I am beginning to understand the full horror of her statement. I now know that when the Department for Work and Pensions describes something as "just technical", it is a bit like a character in a Harry Potter book describing quidditch as "just a game".
As we begin our scrutiny of the many proposals in this short Bill, it may be useful to remember the Government's stated aims for their programme of reform of tax-benefit integration and to assess the proposals on that basis. The Government's stated principles for its programme, set out in the consultation document, are tack ling poverty, promoting incentives to work and save, maximising take-up, targeting support on those who need it most, improving customer services and increasing efficiency. Those factors should form the basis of any analysis of the Bill—as should the question of the extent to whichthe proposals fit with the reality of older people's lives.
In short, there are elements within the Bill, such as the abolition of the hated capital limits and the end to weekly assessment which will be very welcome. Other elements, such as the extension of means testing—despite the Minister's comment, there will still be means testing—and the end of the age-related addition will not be welcome, especially when three quarters of the recipients of minimum income guarantee (MIG) are over age 75. So it is our task, as the noble Lord, Lord Higgins, has just said, to make the overall package more worthwhile and workable.
It should also be borne in mind that 15 years ago, the value of the basic state pension and of what was then called supplementary benefit was roughly the same. Anyone who had savings on top of the basic state pension was generally better off. However, as it became apparent that the standard of living "guaranteed" by supplementary benefit was very poor, successive governments put money into means-tested support. As a result, a huge gap has opened up 151 between the basic state pension and the guaranteed level of the means test. While that has been good to a certain extent in overcoming poverty, it has been bad news for savings incentives. It is that perverse incentive which this "savings credit" seeks to rectify. I imagine that that part of the pensions credit will be welcomed by many pensioners, when they understand the proposals. However, any joy will be tempered with the realisation that for those on less than the full basic state pension there will be no such reward under the level of £77.50.
As the Minister hinted, it is already apparent that pension credit is fiendishly complex. It seeks to combine three separate objectives—a minimum income for the poorest pensioners; a reward for those who have saved and a future reward for tomorrow's pensioners to encourage saving; and to wrap those up together in one unhelpful title of pension credit. Complexity is a barrier to each of the Government's five objectives. Both the name and the combination of so many different elements seems unlikely to assist potential pension credit beneficiaries to know whether they are likely to be eligible—which does not bode well for take-up.
Many briefings from different organisations have focused on the fact that the word "credit" is itself off-putting. That word implies loans and debts, which many pensioners avoid like the plague. Moreover, there is another element of potential confusion. The term "pension credit" was used in the Welfare Reform and Pensions Act 1999, to refer to a woman's entitlement to her spouse's pension were they to divorce. What research has been undertaken among older people in respect of that term and what evidence is there that it will either help or hinder take-up? If there has been no research, what plans are there to pilot the scheme and measure take-up? There is great merit in choosing titles that are descriptive. Have the Government therefore considered entitling these proposals, for example "pensions savings reward" which is a good description of their function?
The extension of means testing, as the noble Baroness flagged-up, is likely to act as a disincentive to claim. Five million pensioners are likely to be brought within the scope of means testing. While for new claimants the retirement check will ensure that entitlement is established, identifying existing pensioners who are eligible may be very difficult. It is also questionable whether people will want to divulge their full circumstances when most will be eligible for much less than £13.80 extra per week.
Another potential problem arises from the proposed five-year assessment. While most pensioners' circumstances remain fairly constant for long periods, that is not so for all. The Bill assumes that the Government will know what will happen to a person's pension in the interim—but will they? The Government will probably assume that any income from a private or occupational pension will rise with inflation. However, many people will have worked for several employers and will have retired with a number of small pensions. Each pension scheme may have a 152 different provision. Some will rise with inflation; some will have limited price indexation; some may not rise at all if the fund's trustees so decide. How will the Government identify changes to income? Will there be any restriction on how often an individual or a couple can ask for a reassessment? If at the time of reassessment it is evident that a pensioner has been underpaid, will there be any facility for backdating entitlement?
A major test of these proposals will be the extent to which they encourage people to save for their retirement. As the Bill currently stands, it is difficult to say whether it will have the desired effect or not, as so many different elements are unclear now and are subject to change by the current and future governments. The Institute of Actuaries has observed that the pension credit is really a benefit taper of 40p in the pound and will result in a smaller penalty being applied to some savings than is currently the case. For the group of people at whom the Bill is aimed, would it be preferable to put money into a pension or saving, knowing that it will, in effect, be taxed at 40 per cent, rather than simply spend it? It is difficult to see how people will be sufficiently well informed to be able to make such changes. For example, how will it be possible to predict if and when the £6,000 disregard level will be reviewed or uprated?
The Minister said that the Bill is a building block in a range of Government proposals, and in that respect it is very necessary. In my professional life, I advise the boards of trustees of small organisations about their employment duties. Over the past two years, I have been trying to explain to people that it is ethically correct to provide a pension, even when for them to do so is difficult because they have limited funds. Boards are concerned that they may do their staff a disservice on retirement. That is a huge problem and one that many employers are only just beginning to recognise.
The Bill does not make clear what, for the purposes of pension credit, will be deemed earnings. The abolition of the 16-hour rule will be welcome, as the noble Lord, Lord Higgins, has indicated. However, without a determination of earnings, it will be extraordinarily difficult for individuals to plan retirement income with any coherence. Similarly, the Pension Provision Grou, in its commentary on the pension credit proposals in March 2001, pointed out the need to ensure that the measures do not provide an incentive to retire early. My party shares the Government's aim of enabling people to be economically active as long as possible. Does the scheme acknowledge the need not to penalise people who defer taking a state pension and therefore receive an increment when they finally do so?
A significant flaw in the scheme is the restriction of the savings credit to women over 65. Women between 60 and 65 will not be eligible to receive the savings credit. It seems strange that while entitlements such as the winter fuel allowance and concessionary travel are being equalised at 60, savings credit will be withheld. The Minister may say that the scheme is based around the state pension for men, for which those age 60 to 64 do not qualify. However, men of that age can still 153 claim MIG. If a fundamental principle of the Bill is to encourage savings, why penalise younger older women for doing just that?
Another significant issue is the way that pension credit will relate to other benefits and charges—specifically housing benefit, as mentioned by the noble Lord, Lord Higgins. Can the Minister confirm that payment of pension credit will not lead to loss of income from either housing benefit or council tax benefit? The current taper for an individual receiving both benefits is 85%. For every extra £1 a week income, recipients only gain 15p. Pension credit will remove the 100 per cent income withdrawal rate that currently applies to MIG. Will the Minister confirm that persons who receive partial housing and council tax benefit could still face a withdrawal rate of 85 per cent or more?
Another area of considerable concern is people who are either in residential care or who receive services in their own home for which they are charged. Any change in the general level of pensioner income may well have an effect on charging policies. I realise that, in an era of joined-up government, any such change would have to be the result of discussion between the Department for Work and Pensions and the Department of Health. Nevertheless, as they are issues of significant concern to many pensioners, I would be grateful to the Minister if she will consider the following questions.
Are any changes planned to the charging systems used by the Department of Health in both domiciliary charges and care home charges to reflect the changes proposed for the pension credit and the Government's policy of rewarding those who have saved?
If there are to be no capital limits for pension credit, how will those who are in care homes, or those who are charged the full rate for home care by their local authority—who often find that their capital is quickly run down—be informed when they should claim pension credit?
How will those who are in care homes, or those who pay the full rate for their home care and are on pension credit, he informed when the pension credit should be increased due to their rapidly reducing capital?
Similarly, it should perhaps be pointed out that the introduction of the pension credit will make the current system of hospital down-rating even more iniquitous. When the Government themselves acknowledge that pensioners' circumstances do not vary greatly over time and that most hospital stays are for less than six weeks, and given the disruption to other benefits such as housing benefit and council tax benefit, it seems unduly harsh and administratively expensive to withdraw elements of the pension credit when someone is in hospital, as currently happens with MIG. Does the Minister agree that, with major changes to the pension system in progress, it now makes sense to remove hospital down-rating?
As I said, as this is a short Bill, many of the factors that will determine the scheme's efficacy are as yet unknown. Most detail of the administration will be known only when regulations are laid before the 154 House. It seems from the Bill's current provisions that the Government have based much of the administration on their experience of the working families' tax credit. One of the difficulties in attempting to administer such a complex system is the diversity of the older population. Any system that applies to half the pensioner population—from those who are English speaking and fully computer literate to those who are not literate in any language or have dementia—will have to be backed up by world-class administration.
The Institute for Public Policy Research has described an "advice vacuum" for pensioners and the need to use a range of media in order to reach people. Will the Minister therefore say what opportunities, in addition to a free telephone number, older people will have for face-to-face advice? What messages will he deployed by the Government as they seek to explain this complex system?
Noble Lords will no doubt be aware that the MIG campaign was fronted by the wonderful Dame Thora Hird. In the past few days, I have found myself wondering how the Government will advertise the pension credit, and I think that the Minister may have given me the answer when she talked about simple arithmetic. I suspect that, given its audience profile, the law of this land is that every English-speaking pensioner must watch "Countdown", and that they must videotape it if they go out. They are also required to play against the contestants and mark themselves. The advertising campaign for pension credit could therefore feature Carol Vorderman doing the numbers bit, and contestants could say, "I'll have one from the basic state pension, one from my occupational pension, one from housing benefit, one from council tax benefit, one from invalid care allowance and any two small numbers from the top, please." Pity those for whom the pension credit is an insoluble conundrum.
This is a complex scheme that will be difficult and expensive to administer effectively. Although some of its elements are welcome, it contains significant drawbacks. It does nothing, for example, to safeguard the basic state pension, which is and should remain the cornerstone of any scheme for retirement income that meets the Government's five criteria. However, I give the Bill a guarded welcome from these Benches. I hope that, in our deliberations, it will be possible to improve its many provisions for the benefit of older people.
§ 4.4 p.m.
§ Baroness Andrews
My Lords, this is for me another maiden voyage: it is the first time that I have had the courage to speak on social security. I think that it is also the last time that I shall want to follow a "neophyte" speaker. This may be a technical Bill, but I hope that I will be excused if I stick to the principles and to some of the impacts—as there will be—on elderly people themselves. I must say that, in previous debates, I have been put off by the sheer brilliance of Front-Benchers, which has been counter-balanced by the lustre of Back-Benchers. I can see that the debates on this Bill will be no different.
155 I have been moved to speak because I believe that the Bill tackles one of the persistent failures in social security: the why-save syndrome. We used to hear a lot in the 1970s and 1980s about the why-work syndrome, and that was a very powerful concept, but I do not think that as much attention has been paid over the years to the why-save syndrome. The Bill will make a significant difference to a group of people who have been persistently neglected—those who have saved a little but have lost out for many years for the very reason of their thrift.
Many years ago, in the 1970s, when I began my career as a social policy researcher, we were all very concerned by the failure of the Beveridge report to anticipate the interaction of work and benefits. That failure created so many gaps and inequalities in the system. The crucial problem of the 1970s was to increase pensioners' overall income in relation to general incomes. We were also concerned particularly with women. The link with earnings and the introduction of SERPS were designed to bring a new concept of collectivity and equality into pensions provision. Those moves were welcomed by consensus.
The 1980s saw a reversal of that concept, with the language of the apocalypse, the projection of unaffordable and unfunded pensions, the dismantling of SERPS, and the break between pensions and earnings. The priority was to be personal risk and individual action. That created some very good and some bad outcomes, which your Lordships have had to deal with over the years.
One feature that has remained constant over the past two decades is the growing gap between rich and poor pensioners and the persistent failure to address the issue of pensioners with small savings. Those increasing inequalities have been thrown into sharp relief by the continued failure to reward and support those same pensioners. In recent years, that failure has been exacerbated by the very low returns on investments and savings which have made many pensioners despair entirely about the purpose of saving.
I therefore believe that the Bill is not only overdue but is extremely timely. For those who are just above benefit level—the almost and nearly poor—small lifetime savings have been a positive barrier, not a boost to income. Pensioners with small savings—an additional £20 a week pension earned after years of working in a shop, an office or the public services—have been outlawed from receiving MIG because of their savings, without the consolation of being able to fall back on larger savings. Moreover, as MIG is linked to earnings, the gap between the basic state pension and MIG will grow larger. Pensioners who find it hard to manage are precisely those who find it so hard to save for anything extra either for themselves or for their grandchildren.
I know that my mother will not mind if I pray her in aid in an attempt to illustrate an example; indeed, the pension credit system could have been modelled on her circumstances. The system will make a big difference 156 to her. Indeed, given her savings, it will assure her of an additional income of £6.40 weekly. That sum will pay her newspaper bill and her milk bill, which are not insignificant. Therefore, in the great scheme of things, £2 billion boils down to £6.40 and the payment of bills. If my mother had sufficient savings to receive the maximum credit of £13.40, it could pay her winter gas bill or home insurance bill. As the Minister said, two-thirds of those who will benefit most from the credit are women, and half of those will be among the very poorest.
Therefore, and following the noble Baroness, Lady Barker, my first question to the Minister is on the position of elderly people in care homes. May I be assured that my mother would be at no greater disadvantage should her circumstances change and she went into a care home? Will the assessment remain the same? If it does not, will there be adequate, accessible and understandable ways of explaining the change?
I believe that the Bill will resolve some longstanding issues of principle, not least the concept of a guaranteed income for the poorest pensioners. One of the crucial elements for pensioners is that they know what they are likely to receive in retirement; predictability as well as reliability are so important. The other day, a pensioner was quoted in The Times as saying:You feel much more secure when you know you are not going to get less than £100 a week. I am very pleased that the Pension Credit will help people like me who are not on income support but who have a little money coming in from pension schemes that they paid for during their working lives.I also believe that the Bill resolves some longstanding issues of process. I am delighted with the abolition of the capital limits. Those have led over the years to increasing distress as people find themselves on the wrong end of that sharp cliff of disadvantage with incomprehensible tapers that presume an income which very few have been able to realise, or have known that they have realised. I also welcome the disregard of £6,000, especially in the light of the fact that 85 per cent of those who will receive the pension credit have savings below £6,000.
Critics will obviously judge the Bill on the extension of means testing. Language is a problem. But the reality is that both Age Concern and Help the Aged have welcomed the reward for savings. They have criticisms but they have welcomed the fact that the Bill will,clearly address some areas of pensioner poverty today".That is something on which we can build as the Bill passes through its stages.
I am also pleased that the Government have shown evidence of having listened to so many people in the consultative process. The evidence of that is in the Bill before us. However, as every speaker in the debate so far has pointed out, there are serious questions about complexity and incomprehensibility. The jobs and money editor of the Guardian recently described tax credits asa thing of pure mystery".157 It was depressing to read that because if he has difficulty, I am not quite sure where that leaves the rest of us, let alone the majority of pensioners.
Some fears have been dealt with by the abolition of the weekly assessment. The fact that the pension credit will be calculated once every five years pending any major change of circumstance is clearly a huge improvement. My second question for the Minister is the following. Can she clarify the full extent of what is meant by major changes, particularly those which are bound to turn up in regulations?
Clearly, a great deal will depend on the quality of the new pension service. The simplification of the MIG form is an excellent start but we should not have to make the case for clearer and simpler language, especially for elderly and confused people for whom every form that comes through the letterbox is a threat. If they are like my mother, they put forms straight behind the clock. They do not read them and the next thing they know another, different coloured form arrives which is even more terrifying. We must address this matter at a personal level.
I make the plea that this is an opportunity to make the new pension service a personal service. This may be a counsel of perfection but I believe that every elderly person ought to have his or her own welfare rights case worker in attendance on any benefits negotiation in which they are involved. Too often they realise that their circumstances are deemed to have changed only when they receive a form, a demand or, in the worst case, a summons for repayment of benefit overpayment, or a visit from someone they do not know who speaks a language they do not understand. My third question for the Minister has been mentioned on all sides of the House this afternoon. What steps will the Government take to make sure that the pension credit does not fall prey to all the difficulties we have experienced with other pension arrangements to date?
Noble Lords will be aware that Sue Ward is a considerable expert on pensions. She argued in a recent paper for the Industrial Society that the least we should be able to expect is that pension arrangements will be fair, clear, secure and efficient. In terms of clarity, it would be even more welcome if the Minister were to announce to the House one day that we were to have a system like that of the Danes. Their pension system is as complicated as ours, but they have a single Internet site on which any individual can obtain figures for his or her entire pension entitlement, state benefits and all others without infringing rights to privacy. How very different that is from protracted negotiations with the benefits centre. I speak with a note of weariness having just embarked on such toil.
I say in conclusion that many questions will be asked at later stages of the Bill. There will be questions about designated limits, detailed processes, exclusions, the variable impact and on certain aspects of principles. But those working with and for pensioners have welcomed the Bill for what it intends to do—which is to provide greater security and greater fairness for pensioners. I too welcome it on those grounds.
§ 4.14 p.m.
§ Baroness Greengross
My Lords, I start by congratulating the Minister and the Opposition Front Bench on their speeches, which have demonstrated a notable clarity and expertise. I particularly congratulate my former colleague, the noble Baroness, Lady Barker, on her address today. We worked together on these issues over many years.
Some of the issues addressed in the Bill are ones which I remember working on over the years and discussing with the noble Lord, Lord Fowler, on many occasions and with the noble Lord, Lord Higgins. They are longstanding issues which have been of great concern. I refer to the whole issue of income in later life. One of the most frequent grievances I heard from older people was that they were not rewarded for thrift and felt no better off, and sometimes very much worse off, if they had saved than if they had not.
Although we are talking primarily about people just above the poverty line, that comprises millions of older people who believe that thrift is a good thing—that is a cornerstone of their belief—and are disillusioned bytheir experiences. We have waited a long time for action from all governments. However, if I may use a pun, it is to the credit of the Minister that, along with the Secretary of State and other Ministers, she has been open in wanting to tackle a difficult problem and aims to do so by means of the Bill. As she expected, I, too, believe that it is extremely complicated. I hope that we can simplify it during its passage through the House.
The limits have now changed. For many years the lower capital limit for extra help was only £3,000. In some cases that included the value of a home. In 1997 we even had the situation of one council ignoring the will of Parliament and forcing some older people to spend their assets down to £1,000—enough to pay for a funeral—which was rather depressing. A fine balance has to be drawn in deciding when retirement savings should be used, for example, to pay for long-term care. However, to be left with £3,000 after a lifetime seemed extremely harsh to me.
If sufficient help cannot be given to all pensioners equally through the state pension, primarily for reasons of cost, I agree—as I have said previously—that targeting available extra government resources on the poorest is sensible, first, by increasing markedly the income support levels, as has already happened, and now, secondly, by rewarding thrift. That is one of the reasons I welcomed separating income support for older people—which became the minimum income guarantee in 1998—from income support for others. However, I believe that the minimum income guarantee is rather badly named.
I welcome the principle of giving extra help to older people on top of their state pension entitlement, either to bring them up to a minimum income as of right, as MIG does, or to credit them with extra money to take account of the efforts they have made to save. However, that is the easy part. Turning all this into practice is more difficult. That is what we are now trying to do in considering the Bill.
159 I also welcome the principle of tax credits, which form part of another Bill which your Lordships will soon consider once it has left the other place. I should have liked the Bill we are discussing to be better incorporated with the changes being made to the Inland Revenue and Contributions Agency in combining tax and benefits. Through tax credits, even for non-taxpayers such as the vast majority of pensioners, the extra money could be seen as a form of "tax back". I understand that that is the intention eventually, but why not introduce it now?
In practice, I have some reservations about the way in which the state pension credit will be implemented. I hope that the Minister will clarify some points which have largely already been mentioned. I hope that we can tease them out in Committee and at later stages.
I agree with the noble Baroness. Lady Barker, that the word "credit" implies something for many people which needs to be considered carefully. It is already a little confusing to have the department's proposals called the pension credit and this Bill entitled the State Pension Credit Bill. That needs to be sorted out. If the word "state" is not incorporated then many people might believe that they are eligible regardless of their income and savings, which could create more confusion. So the word "state" is important.
I saw comment in the media criticising these proposals because they apply only to those with a private pension income of less than £3,000 and savings of less than £37,000. But I believe that the media are missing the point because the policy is targeted at those with modest savings and income in retirement. Yet the same media complain that it will cost too much and bring too many people into the means test. In my view that is trying to have it both ways. I do not believe that is fair.
However, I would welcome reassurance from the noble Baroness on the long-term costing. I do so with the thought in mind that if it costs more than projected, the money is at least going to older people. Under the terms of the Bill it will not go to the wealthiest, which is the good side of these proposals. It is not just government spending which is going to disappear into a black hole, it will provide additional income to older people who are just above the current benefit levels.
On the extension of means testing, we have to move away from the idea that it is a stigmatising process. It has been. That is because of the way in which the whole system has developed over the years. Will those eligible for the state pension credit claim it? If they do not, we may be creating a new group of older people who will fail to take up their rights. Only if the system is fully automated will it be successful. It is a pity that our experiments so far with fully automated systems, like the Danish one, have not worked so far in this country. But if they did it would do an enormous amount to solve the problem that the Government are aiming to tackle.
160 The old, bureaucratic form-filling processes are so difficult for old people, who are sometimes not very well educated. Even the most educated among us have difficulty with forms. If one is weary and not very well, then it is an extremely off-putting experience. Anything that we can do to make the system simple will help: the five-yearly re-assessment will be a great help. I welcome that. However, we in this House should tease out how the new system of assessing income and capital can be made simpler than the discredited system which is now going to be replaced.
The explanatory notes, on page 5, refer to the pension service which will be set up from April next year and which will administer this credit. Can the Minister update the House on the development of the new pension service? It is important. It is a long-term change and it could be seen as the silver lining to the cloud of last year's inherited SERPS scandal. The way in which the old departments dealt with older people was not very good. The system did not work very well. I should like to be reassured that the new service will be able to deliver, explain and administer the state pension credit well. I, like many others, am concerned at how complicated it is. I have tried to understand how it will operate. I congratulate the Minister on her explanations. It is very important that the staff at the Department for Work and Pensions are able to deal with the scheme so that everyone can understand.
There is still some confusion as regards the age at which the credit will apply. The Minister tried to enlighten us on that. She spoke of the transitional period and the difficulty of applying the scheme equally to men and women, and I appreciate that. It is a very important issue. The difficulty is the age of entitlement to income support and so forth rising to 65 years of age from 2010 for both men and women. It applied earlier to the Travel Concessions (Eligibility) Act. It also applies to this measure. That Act had written into it eligibility for half-price local bus fares rising from the new age of 60 to 65 from 2010. Will the eligibility age for other benefits for older people also rise to the age of 65 for benefits such as the free eye test and the winter fuel allowance in 2010 and onwards? How will the Government inform people, especially women aged under 52, of these changes? We need clarification on those points.
The Bill is also unclear on earnings disregard. Rising longevity is likely to change work patterns and certainly should do so. It should become the norm that older people can continue to do paid work beyond the now very young age of 60 or 65. Many of us in this House welcome those changes! I hope that that will not be at the expense of losing all the top-up state pension and benefits. I can foresee that many older people would be able to continue to work part-time if they also continued to receive their pension entitlement in full, perhaps with a higher threshold. We need much more flexibility. I very much welcome the undertaking by the Minister, Barbara Roche, to look at these issues. I hope that all these matters can be brought together.
161 Further clarification is needed on how the state pension credit will interact with other existing benefits such as housing and council tax benefits and so forth. I believe that the noble Baroness, Lady Barker, also mentioned other charges such as domiciliary care charges, carer's benefits and other state benefits. We shall need to look in depth at all these issues.
With those reservations, I welcome the Bill. It will benefit that large group of older people who have saved, but who have been unable to save enough to be comfortable in retirement. It will also go some way towards ceasing to regard people who defer their earnings and who expect to receive them in pension form, from being considered as quite different from the younger population who receive their income from their current employment. That is why I like the basic idea that underlines this Bill. It brings the whole population together regardless of age. I welcome it.
§ 4.27 p.m.
§ Baroness Castle of Blackburn
Perhaps I should begin by conveying to the Minister the apologies of my colleague, Lady Turner, for her inability to be present in this debate today. We all know how passionately interested she is in all these questions and her participation in our debates has been remarkable. But at this moment she is undergoing a long overdue operation to her knee at the Royal Free Hospital. I am sure that the whole House will join me in sending her our best wishes for a speedy and complete recovery.
§ Baroness Castle of Blackburn
She has asked me to convey her determination to be present during our Committee debates. I am sure that that reassurance will be very welcome to the Minister.
No one would have guessed, on listening to the Minister galloping her indistinct way through her brief, that we were today taking part in a debate on one of the crucial turning points in the development of pensions policy in this country. It is all very low key, is it not? Everybody is keeping it down. The Government have very cunningly timed this debate to take place two days before we rise for the Christmas Recess, when all our minds, including mine, are on whether we have wrapped all our presents, sent all our Christmas cards and yet decorated the Christmas tree.
But I want to point out to this House what is happening. We are going to double the number of pensioners on means-tested benefit as a result of this legislation. That may not worry the Minister but it worries a number of us who do not believe that this country wants to live in the means-testing ethic to which the Government's policy is leading us.
Apart from anything else, how can they be so certain about the take-up? Dash it all, we have just heard in this debate that the Government's take-up campaign for MIG, which involved getting all kinds of celebrities almost on their knees to beg pensioners to take up the minimum income guarantee to which they were entitled, had only led, despite the expenditure of 162 considerable money, to an increase in successful applications of 120,000. You are now talking about 5 million pensioners. Do you really think that you are going to get 5 million pensioners taking up the pensioners' credit? I do not. I think that we shall be asking questions in this place in the coming years which will reveal that the take-up is as laggardly as it has been over the minimum income campaign. As more than one pensioners' body has pointed out, the elderly do not like the stigma of having to reveal their last penny in order to qualify for what they feel should be theirs as of right. I am afraid that we shall find that they will not accept the Government's easy solution of, "Oh well, that is all right. We will just tell them that it is their right".
I was a Labour MP in the House of Commons during the 1960s, when we begged pensioners to take up the national assistance or supplementary benefit. We renamed it almost as many times as this Government have renamed their benefits. First, it was income support; then it became the minimum income guarantee; now it becomes the pensioners' credit It does not matter how often you change the name or how often you tell proud people that this is not charity but their right, they will say, "Then why am I expected to fill in all these forms if it is my right?"
I acknowledge that the Government, as a result of the pressure from behind them in the years of debate on this matter, have reduced the application form for minimum income guarantee from 40 pages to 10 pages. I think that I could just about manage that, but it is hardly an "open sesame" to something that people feel is theirs as of right.
I must say that the Government do listen and sometimes act on what they hear, which is why some of us keep up our pressure in this House and refuse to accept defeat. The pensioners' credit is due to the efforts of people like Lady Turner and the rest of those who have joined in revealing that means testing penalises thrift, penalises people who have saved and put aside something for a second pension and penalises people who have not blown it all.
I remember in one of our earlier debates—I think on the pensions and welfare Bill; there have been so many and they all have different names—reading out a letter that I had received from a pensioner. She said that what she objected to was that having scraped and saved all her life—having got a little house, a little second pension and a few savings in the bank—her friend and neighbour, who had never saved a penny, received more pension than she did. I think that the House was impressed by the sincerity of that letter. She said, "I do not begrudge her it, but why should I be penalised for having been so careful?"
I think that that sort of clarion call penetrated even the Calvinistic heart of the Chancellor of the Exchequer because he suddenly said, "Oh, this Government have made a wonderful gesture—they are going to reward saving". That conversion was welcomed. Mind you, there were no credits given for the conversion to anyone else but themselves.
163 But then, you see, having accepted that we were right to say that means testing penalises thrift, hard earnings and the economic needs of this country for saving and investment, what do they do? What solution do they provide? More means testing. So we have another great paraphernalia for 5 million more.
Incidentally, I will tell you what I find interesting—there is no statement in any of the Government's documents as to what would be the administrative cost of extending means testing to 5 million pensioners. Because it costs, you know, just as private pensions cost. One pound in every £4 that you save goes on administrative costs, while, as the Office of Fair Trading pointed out in its report in 1996, the state pension, SERPS, was the most economical scheme to administer, the most comprehensive in its area and totally portable—something that could not be said about any of the other schemes and systems. But, no, that was awful.
I must tell the Minister that I am not disheartened by her rejection of my policies—not a bit. The more we see the effect of her alternative, the more my position is strengthened. I have a few instances here. It is very interesting to hear the voices that are now coming out. Age Concern has quite rightly stated in its briefing on this Bill that it believes that the best pension system is a nationally-administered state insurance scheme. Quite right. Good old Age Concern! Help the Aged has also said that it thinks the Government's present policy is misguided and believes that it would be better to revert to what we as a movement had so effectively before. The Institute of Public Policy Research—which Ibelieve is a fairly Blairite kind of body—issued a report only recently saying that the Government's whole pension policy is unravelling and that the Government should go back to the drawing-board and see what they can do. I urge the House to take seriously what is happening. The future security of millions of our people is at stake. It said that the policy is unravelling because there is no certainty that the stakeholder pension will hit its target or that it will reach the people who need it. As for the state second pension, it remains dangerously obscure.
I received a lovely boost from an article in the Observer of 9th December, just a couple of Sundays ago. It cheered me up no end. It said:It would be fairer and more cost-effective to adopt a nationally run social insurance system, with top-ups paid by the better-off, to co-exist with private saving".It concluded:exactly like the scheme suggested by Barbara Castle 30 years ago".I do not always feel like boasting about my longevity but it is nice to be remembered after 30 years. I say only this: I did not only suggest the scheme—Parliamentadopted it and the country welcomed it, as did the pensions industry. "At last", it said, "we have got a real public/private partnership that is realistic. It will work and leave out no one".
If the Observer is prepared to look back 30 years, why should not this House? Why should we not have the guts to face up to this patchwork quilt? They say, 164 "Oh yes, means testing is uneconomic, so let's slap on some more means testing". I ask you. If I were still a Minister, I should be ashamed to put that forward. I would get my lads and special advisers around the table and we would say, "What can we do? It has got to be affordable. The sky is not the limit. We all know that we are up against public expenditure limits. What is the best that we can do?" In other words, I call on the Government to listen to the public policy research people and Help the Aged, and to say, "Our policy is unravelling. We will go back to the drawing-board".
§ 4.43 p.m.
§ Lord Fowler
My Lords, it is a great pleasure to follow the noble Baroness, Lady Castle of Blackburn. The first speech that I ever made on pensions was on her Bill in 1975. Two weeks earlier, I had been appointed to the shadow Cabinet of my noble friend Lady Thatcher, much to my surprise and the great annoyance of my rivals. For the next two weeks, I immersed myself in pensions. I took advice from virtually everyone, including the noble Baroness, Lady Andrews, who made an excellent speech this afternoon. I turned up for the debate in the House of Commons with great trepidation, thinking that it would be one of the great debates of our time. I found that when the Bill was called, the House emptied: 10 people remained on one side and 10 on the othe—that is unlike what happened in your Lordships' House a few hours ago. After a while, the noble Baroness, Lady Castle, disappeared as well, to hold a press conference on why we should say "no" to the European Union.
My career has followed that of the noble Baroness in every way. I have gone into every department that she worked in, including those responsible for social services, transport and employment. In those areas, I do not think that we have agreed on anything at all. I pay very sincere tribute—I believe that I speak for the whole House—to a politician who has always fought with great courage for what she believes in.
I turn to the Bill. Not wanting to change the political habits of a lifetime, I fear that I have to say that I do not agree with the noble Baroness. In making policy on pensions and social security, there are two broad choices that any Minister and any government can make. One can give general benefits to everyone irrespective of need. The disadvantage of that is that one obviously gives benefits to many people who by most—virtually all—definitions do not need them. It is vastly expensive and, even with the clawback of taxation, it remains so. Enormous sums are involved.
Alternatively, one can try to target benefits to those who need them. I agree with the noble Baroness, Lady Andrews, who said that we should get away from the emotiveness involved in describing that process as means testing. In 1985, I carried out a social security review under the Thatcher government. I argued unambiguously for more targeting of benefits. The aim was to produce help for those who needed it and not to put a counterproductive burden on the economy. So we kept, for example, child benefit as a general benefit but we introduced family credit for low-income 165 working families who needed extra support in bringing up children. That policy was accepted and followed by the Major government. It is the obvious basis of today's child tax credit system.
I have to say that at the time and in subsequent speeches I have argued that the natural complement to that policy is the pension credit. That gives an additional pension to those who, through no fault of their own, have not been able to build up an adequate occupational or personal scheme. That may have been because there was no occupational scheme for them to build up or because of the indefensible rules of some of the occupational schemes that used to exist. I remember my father's own experience—or my mother's, as it happened. My father died aged 62, having worked for 30 years for the same company and built up a pension. However, because he had not reached the age of 65, no widow's pension came; all that was returned were the contributions that he had made. Fortunately, as a Minister, I was able to help change that indefensible position.
To be frank, I should have preferred it if my government had introduced the pension credit. I have no intention of jumping overboard just because that proposal comes from the current Government. It is long overdue, and my hope is that it will provide support for some of the most deserving people in this country.
I am of course aware of the counter-arguments. One of the chief counter-arguments is that the system is over-complex. If it can be simplified, all to the good. If it can be paid through the tax system, I am entirely in favour. My party used to be committed to tax credits, and I still believe that there is much in that system.
I also believe that a great deal of nonsense is talked about simplifying social security. When I carried out my social security review, we came across a very simple benefit called the death grant. The condition that triggered the benefit could not have been clearer. One did not need to think deeply about how the benefit was secured. There was no means test—the benefit went to the widow of a millionaire or the widow of someone on low income and in poverty. It was introduced for the very best of motives—to take away the real concern among families that they would be unable to afford the cost of a funeral. A benefit was introduced with impeccable intentions but in practice it turned out to be disastrously inadequate.
By the time that I reached the Department for Social Services, the grant amounted to £30. It was irrelevant to most people and it was entirely inadequate to those who needed it. In terms of spending, it cost £12 million to administer an annual expenditure of £17 That is the position I inherited. No government would increase the benefit but neither would they abolish it because it was regarded as politically untouchable. We did abolish it but, at the same time, we targeted spending on those who needed help. At the time, the policy was opposed by the party opposite, but I see no great rush to return to that old system.
Therefore, I do not go along with the idea that simplicity is all. There is complexity in social security just as there is in the tax system, and for very much the 166 same reason. One is dealing with millions of different people with different incomes, different needs and different positions and conditions. But that is in no way an argument for saying that one should not do as much as possible to clarify the position. We should obviously do that. But I remain the supporter of a system which gives child benefit as a general benefit and, in addition, family credit as a targeted benefit. I certainly support the idea of the basic state pension and of additional, targeted help to those who need it.
I shall retain my detailed criticisms of the Bill for the Committee stage. I believe that the very title of the State Pension Credit Bill is extraordinary nonsense. If anything, it is the taxpayers' pension credit Bill. But we all know why the Government are doing thi—it is so they can say that they have replaced the noble Baroness's state earnings related pension scheme with the state pension credit scheme. I do not believe that the mere fact that the one has next to nothing to do with the other has deterred them.
Needless to say, I believe that there are far more profound and fundamental criticisms concerning the Government's policies. My aim was to create a position in which everyone had a second pension of their own—either an occupational or a personal pension—in order to do away progressively with the need for pension credits. Frankly, I do not believe that the Government's current policy will achieve that end. That is my basic criticism in this Second Reading debate.
Currently, we are seeing companies abandon final salary schemes. There is no question of that. Mostly we are seeing people being discouraged, not encouraged, to save for their retirement. I do not say for a moment that that is all the Government's fault. Clearly it is not. Demographic trends and people living much longer than previously obviously add to the uncertainties of the cost of a final salary scheme. There is no question about that. Nor do new accounting rules, mentioned by my noble friend Lord Higgins, that put perceived actuarial deficits into company accounts have a helpful effect on the continuation of those schemes.
But the Government seem to be fundamentally at fault in at least two respects. First, I believe that the £5 billion a year pension tax introduced by the Chancellor in the 1997 Budget has had a very damaging effect. Five billion pounds a year is being taken out of pension funds, and that affects everyone who saves for their retirement. In many ways I believe that it is amazing that the Government, with so little perceived outrage at the proposal, have got away with an attack which has affected so many people in this country.
I fear that the reason is that pensions and pensions policy are perceived by the public as a rather complex area. Sometimes pension holders do not even know the details of the schemes to which they belong. I remember that we carried out a survey on the state earnings related pension scheme when we considered changing the system. We found that virtually half the people who were in that scheme did not know that they were members of it. That is a fairly dramatic example of the ignorance that I fear exists in relation to 167 pensions policy. If one then begins to talk about changes in advanced corporation tax, there is a great danger that the public will switch off altogether. The fact is that the full impact of what is taking place will not be felt now; it will be felt in the future when pensioners come to draw the pension. That is the real tragedy of what is taking place.
The second reason that I blame the Government is the impact of the rule which states that, if one has a personal pension, one must put one's savings into an annuity at the age of 75. Annuity rates have fallen and I believe that we must take account of that. The position is not the same as it was 10 or 20 years ago. People see that clearly for themselves, and many no longer regard the advantages of saving in a pension scheme as they once did. Again, the consequences will be felt not immediately but, I believe, by people who do not make proper provision for their retirement. So far as that is concerned, we shall again see a delayed impact.
I know that the Government have now said that they will re-examine the position concerning annuities at the age of 75. Personally, I do not expect a great deal from such a review for the following reason. At the TUC conference in October, the Minister for Pensions, Ian McCartney, dismissed the case as applying only to the rich. I believe that that is complete nonsense. I do not consider that it applies only to the rich; it applies to a whole range of middle-income people in this country. I believe that he would be well advised to consider that case with sympathy and with the aim of trying to encourage people to make more and more provision for their retirement. There should be no doubt or debate about that.
Therefore, I fear that many people could face an impoverished retirement unless we change policy. That is the case directly because of the Government's policies. Furthermore, I believe that there will be two nations in retirement. One will be the public sector, including civil servants, Ministers and MPs like Mr McCartney, and former MPs and Ministers like myself. Incidentally, even now MPs are pressing for a further reduction in their accrual rate. They will have their final salary scheme. I guarantee that that will be preserved, and the bill will be picked up by the state and local government; in other words, by the taxpayer.
The other nation will be the private sector and, in particular, middle-income groups which are losing out directly as a result of the Government's policies. I believe that we must face the issue and the problem that exists there.
Therefore, I say to the noble Baroness that I support the pension credit and I congratulate the Government on having introduced it. However, at the same time I deplore the way in which the Government are eroding the financial position of those in this country who save for retirement. We are not talking about rich people; we are talking about middle Britain and millions and millions of people who are trying to save for their retirement. At least the mis-selling of personal pensions could be put right, albeit in a cumbersome and lengthy process. But the £5 billion a year pension 168 tax will not be put right. We all know that. The Government do not have the slightest intention of putting right that tax, and the people who will suffer will be tomorrow's pensioners.
§ 4.58 p.m.
§ Baroness Gibson of Market Rasen
My Lords, I do not know who decided on the speakers' list today but I have obviously drawn the short straw, speaking as I do after two such formidable experts in your Lordships' House as my noble friend Lady Castle and the noble Lord, Lord Fowler.
In my short intervention I want to concentrate on only one aspect of the Bill—the pension service. I begin by explaining that I shall use the language of entitlements rather than delve into means-testing because it seems that the way that evaluation is being tackled in this Bill is different from the way that it has been tackled in the past.
We have heard much about the complexities of the Bill. However, I want to welcome one proposal in it that should make life easier for pensioners; that is, the pension service. It is a system designed to be both simpler for all to understand and fairer in its implementation. It is on that subject that I wish to concentrate today.
Like my noble friend Lady Andrews, as I read the Bill my thoughts turned to my mother. Without any doubt the current system is extremely complex. Currently my mother lives in a residential home in my home town of Market Rasen. The home is pleasant, well-run and caring. In that sense my mother is lucky, but on the downside she is 89, very frail and easily bewildered. Luckily for her I am able to assist in the running of her affairs. If I were not able to do that, I dread to think how she would have coped with the plethora of forms and questionnaires that she needed to fill in to gain the rightful payments towards her keep in the home.
So that she could receive her entitlement I filled in the forms from different authorities, couched in less than helpful language and I spent hours on the telephone to different parts of the country. My mother could not have managed to do that. Six years ago, when she became unable to care for herself, she had to sell her only valuable possession—her bungalow—to pay for her upkeep in the home. Now the money that she received for the bungalow is running out and again I am dealing with the various authorities to sort out her affairs. Already the nightmare of being pushed from pillar to post has begun.
My mother is only one of thousands of citizens all over the country whose anxieties reach breaking point if they have to deal with bewildering bureaucracy. Anything that can simplify the current unwieldy system must be welcomed. I agree with other noble Lords who have spoken that one area of simplification must be the forms that have to be filled in, of which I am sure the Minister is aware.
The pension service should not only simplify matters, but it should also establish a system whereby pensioners can receive all their entitlement 169 automatically. The first indication that the Government would introduce a new pensions organisation to deliver services and benefits to pensioners was in March 2000 and two years later it will begin to operate. As I understand it, the proposals are that pensioners will be contacted before they reach pension age to assess future income, to calculate the pension credits and to organise the basic state pension payments. After that first assessment, the pension credit will usually need to be assessed only every five years.
The pension service will deal with all pensioners issues. It will provide one point of contact for pensioners and it will act as a gateway to other services. It will provide a local service, working in partnership with local authorities and other organisations such as the health service, social services and government departments. That is a simple and sensible way to progress. I wonder why it has taken successive governments so long to arrive at this point. If only the pension service had been in effect six years ago my life would have been easier.
I welcome this part of the Bill and hope that it will prove successful when implemented. I hope that the Minister will be able to assure me that I have understood correctly the main proposals relating to the pension service and that my faith in it is justified.
§ 5.3 p.m.
§ Lord Henley
My Lords, I intend to speak fairly briefly. It is eight years since I last spoke on social security matters in this House. I believe on that occasion I was sitting where the Minister is sitting and she was opposite me. Since then things have changed a little. The department's name has changed. No longer is it the Department of Social Security, but the Department for Work and Pensions. I find it strange that work and pensions come into the department, but there is no mention of disability matters, income support and so on. Perhaps that is a point to be made on another occasion.
Eight years ago the noble Baroness was already well experienced in social security matters. I believe she entered the House in 1990 and almost immediately became social security spokesman. She has continued to serve in opposition and in government, representing that brief. I believe that all noble Lords will agree that she knows as much about the subject as virtually anyone in the House. All noble Lords are grateful for her detailed explanation of the Bill and for dealing with so many of the problems that she said that my noble friend Lord Higgins and others would raise with her. For that we are eternally grateful. She also assured us that the Bill is not over-complex. No doubt that is a matter that can be explored in considerably greater detail in Committee.
Although I know a certain amount about social security matters, my knowledge is fairly rusty. I want to make four brief points in a broadbrush manner. I hope that in Committee I shall be in a position to consider these matters in greater detail. My first point relates to evidence of the long-term thinking that is 170 necessary in relation to all social security matters, especially pensions. When the Government first came to power in 1997 we were told that they would think the unthinkable in terms of pensions reform. We saw little of that unthinkable thinking. In the end, Frank Field, who was supposed to think the unthinkable, left the department and that appeared to be that. I have a sneaking suspicion that the Bill is a further tinkering at the edges and that it will impose ever-greater burdens on future taxpayers. We have to accept that in the end the taxpayer funds the pensions of the future, through national insurance or whatever.
We have to consider the matter in the long term because pensions affect us all in the long term. Fairly major demographic changes are taking place. When pensions were first introduced at the beginning of the previous century, on average the retired lived for a relatively few number of years after retiring and taking up a pension. Thanks to improvements in medical science and in standards of living—no doubt due to the work of engineers and others—we are all living considerably longer and in many cases we are retiring considerably earlier.
In my days in the Department of Social Security we spoke of there being three people of working age for every pensioner. We also said that by the time someone like myself faced retirement age—in the year 2018—that figure would have changed from three people of working age for every pensioner to two people. Pensions are a means of transferring wealth between the generations, and it seems to me that the burden on my children will be 50 per cent greater for the same degree of provision in 2018 than at the moment.
Can the Minister confirm that those figures are still broadly correct? In the past eight years have they worsened or do we have a clearer view of what demographic changes we shall see in the coming 20 or 30 years? Is the population likely to stabilise? Will there be further demographic changes in terms of the proportion of different people of different ages? That will depend on how many children are born in the future. We know how many are born at the moment, so we can predict matters for a goodly number of years in the future. My first question relates to sustainability. What can the noble Baroness say about demographic changes that are likely to take place in the future and what will be the likely burdens?
My second broadbrush point concerns the growth in occupational and private pension provision, which was touched on by my noble friend Lord Fowler. In this country we have, and always have had, immensely strong occupational pension provision. I seem to remember quoting the fact that the total value of United Kingdom pension funds was greater than the total value of all the pension funds in the rest of the European Community put together. That gives us a terrific advantage in that our pension provision can be partly state-provided and partly provided by means of occupational and private pensions. Is there still a growth in occupational pension provision? If not, why not? What will the Government do to encourage yet further growth?
171 I am sure the noble Baroness will accept that not everyone wants standardised nationalised state pension provision. Everyone needs something different to cater for their own particular needs. Therefore, it is very important that we hear from the Government about provision beyond that provided by the state and that provided by the private sector.
My third broadbrush point concerns the complexity of the new benefit and of the Bill. I am not quite like Sydney Smith who said:I never read a book before reviewing it; it prejudices a man so".I took the trouble to glance through the Bill before coming to the House. I shall no doubt look at it in much greater detail in due course. The Bill certainly seems to be very complex, the benefit even more so.
I accept the points made by my noble friend Lord Fowler, but, of necessity, most social security provisions are likely to be very complex indeed. I accept that there must be a tension between universal benefits, which, by definition, are expensive and fully targeted, but relatively cheap to administer—although my noble friend told us about the death grant which cost almost as much to administer as it paid out—and means-tested benefits which are better targeted but more complex, and then much more complicated and expensive to deliver. There is that further tension within means-tested benefits of those with a long taper and low rates of withdrawal but including ever increasing numbers of people within the benefits and those with a much shorter taper but where the beneficiary can find the marginal rates of deduction very high indeed. I certainly remember the noble Baroness quoting deduction rates of 90 per cent or possibly even higher.
Having said that, we have over the years, and certainly when we were in government, seen a decline in the number of pensioners on means-tested benefits. Between 1979 and 1997 the number of pensioners on means-tested benefits fell from 57 per cent to 38 per cent. With the Bill, and as I understood the remarks of the noble Baroness, Lady Castle of Blackburn, we shall see a dramatically increased number of pensioners on means-tested benefits, even though the Minister seeks to argue that they are not means-tested benefits and we must not call them so. But I would certainly be interested to hear from her what she thinks will happen in terms of that decline from 57 per cent down to 38 per cent. How will that percentage increase over the years?
My final point concerns the likely effect of the Bill on future pensioners. Any state provision must always be based on the premise that individuals must be encouraged to look after themselves and that it is no good introducing perverse incentives to save. I accept that that is what the measure attempts to do. I have considerable doubts. They were spelt out much more effectively by my noble friend Lord Higgins who quoted the Institute for Fiscal Studies. There will be perverse incentives and people will in many cases be 172 discouraged from saving. There is no need to repeat what my noble friend said, but we must come back to that matter in Committee.
I look forward to the Committee stage of the Bill. I am sure that we shall be able to go through what may necessarily he a complex measure in a great deal of detail.
§ 5.14 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I start by declaring an interest as the chairman of trustees of an occupational pension scheme. It is a final salary scheme. I shall come back to that in a minute.
I apologise to the Minister for not attending her briefing session the other day. If I cover some of the points that she wanted to then cover, I apologise now.
On Monday, 10th December, just over a week ago, the noble Lord, Lord Renton, asked an Unstarred Question relating to the drafting of Acts of Parliament. The noble Lord sought to press for an effort to make Acts of Parliament comprehensible to the averagely intelligent and interested reader. Other noble Lords in that debate drew attention to the paperchase effect where, by following through a reference in a Bill to a provision in an earlier Act, one can find if that particular provision was itself a revision of yet an earlier statute. So one trawls through ever earlier pieces of legislation.
This particular proposal before us today must be a prime candidate for the Renton treatment. It is not an easy read. Therefore, I, along with other noble Lords, fear endless confusion and misunderstanding as it begins to be rolled out to a wider public.
Clearly, we want to ensure that all members of our society have some assured level of income in their old age. We want to do that and at the same time make it worthwhile for people to save.
When I was a member of another place, there was probably no issue that angered my constituents in Walsall more than to find neighbours who had given no thought for the morrow and had spent all their money. However, they were able to accrue the same or better benefits than those who had foregone their spending to build up savings for their old age. The noble Baroness, Lady Castle, attributed this fury to means testing. I am not sure that she is right. I think that the fury was directed at the unfairness of it all, rather than at the means testing. But, never mind, whether she is right or I am right, I therefore understand the thrust behind the Bill.
But, as my noble friend Lord Fowler has said, at least part of the problem that we are discussing and trying to address in the Bill has been caused by the Government. I referred earlier to my chairmanship of an occupational pension scheme, a final salary scheme. We have had to close it. From 1st December we shall no longer accept entrants to the scheme. They will have to take a group personal pension plan. We do that with regret because we should have liked to provide the opportunity for the people in this particular company to join the group scheme. But longevity, which is nothing to do with the Government, the burden of 173 regulation, which is something to do with the Government, and the tax changes, which are all to do with the Government, have meant that we have had to move to a system of benefits which, while it offers flexibility, probably does not offer over time necessarily the same benefits as a group scheme would be able to.
So, in my specific comments to the noble Baroness, I address the need for flexibility going forward into the future. We live in a changing era and in very rapidly changing circumstances. Therefore, I should like to think that we could have flexibility built in wherever possible.
The first question that I ask is about qualifying income. The yellow booklet that the noble Baroness had prepared and circulated talks about putting money aside in a bank or building society or by saving in a second pension. I was concerned about the rather narrow nature of these examples. The Bill appears to give a wider definition of income from capital and income of any prescribed description. I want to ask the Minister whether that includes dividends from shares.
My noble friend Lord Higgins referred to the important question of PEPs and ISAs, but many people have taken shares in their company when it has been denationalised or privatised. Not all of them are as sadly afflicted as Railtrack; some of them have quite substantial savings built up.
In my capacity in the City, we have in many cases put ESOPs—employee share ownership plans—into companies, where people of quite limited salary aspirations and limited hours of work are able, over a lifetime, to build up quite substantial savings if the company for which they work is successful. What will he the position of these people under this particular legislation?
The second point concerns the capital disregard. The paper again bravely states that we shall abolish the rule which excludes pensioners with £12,000 or more in savings. That is a brave statement. Am I right in thinking that what has been imposed in its place is a £17,000 limit for single pensioners and £25,000 for couples? A 4 per cent attribution to the maximum amount one can receive under the savings credit would give the amounts of £17,000 and £25,000 respectively. Perhaps the Minister will deal with that when she comes to wind up the debate.
Will she also deal with the question of where the home fits into all that? I am a director of a building society in the West Midlands. It is a blue-collar society. We are talking about not highly but modestly priced homes: our average mortgage is for less than £35,000. Those are modestly priced homes in Telford and the urban West Midlands, often purchased cheaply under the right-to-buy legislation and owned by people who are not necessarily well paid but have scrimped and saved to purchase their homes.
We are being approached by an increasing number of people who, in their old age, are looking to obtain a form of equity release—that is, to use their home to obtain capital to live on, interest free, that will be 174 repaid at their death by the sale of the home. We must know where such people, who have an alternative form of savings, will fall under the savings credit.
Finally, to pick up the question raised by the noble Baroness, Lady Barker, how often will the assessment of levels—the £6,000 level and the 60p in the pound credit—take place? I leave aside the question of why such people should be charged the top rate of income tax, but if the top rate of income tax were altered, would that provision also be changed? Will the assumed rate of 10 per cent be changed if inflation and other economic circumstances change? If we take the example given in the yellow booklet of the maximum savings of about £16,000, the imputed savings rate is about 6.25 per cent—a good deal higher than is now available on gilts or most government bonds.
I understand and appreciate the objectives behind the Bill, but the detail and complexity will require considerable analysis in Committee.
§ 5.22 p.m.
§ Lord Lea of Crondall
My Lords, rise to make a brief contribution in support of the main thrust of the Bill. I shall then follow those noble Lords who have taken the liberty of making some broader points about pensions strategy.
We have heard a delicate balance of arguments, and ultimately we must all stand up to defend whatever compromise we finally arrive at—especially the overall costings, a point addressed by the noble Baroness, Lady Greengross. The theme of the debate—with the distinguished exception of the noble Baroness, Lady Castle of Blackburn—has been a growing consensus about the delicacy of the balance that we are designing, rather than any more basic disagreement about architectural faults of design.
As my noble friend Lady Gibson of Market Rasen said, that balance extends to the question of the practicability of making the entitlements approach different, and perceived to be different, from a means-testing approach—with the emotiveness that has, understandably, always been associated with that. Nowadays, the debate should not be about the pension credit versus the uprating of the state pension. We certainly need both and are getting both—although there is an upside and a downside to both. The entitlements approach is strong and, as many noble Lords, including the noble Baroness, Lady Castle, have pointed out, the Government have undoubtedly been doing a formidable amount of listening. The pamphlet on the subject is user-friendly; even I could understand it. It is a much better document than we have been used to in this area. That gives us confidence that when the provision gets off the drawing board onto the streets, the public information campaign that must follow will be one that people can understand.
My right honourable friend the Chancellor of the Exchequer may be going a little far when he implies that the process is just like filling out an income tax form, but that claim is not as outrageous as it would have been about the minimum income guarantee. There has been a growth in segmentation, or 175 variability, of pensions arrangements in recent years and, as many noble Lords have said, that will increase apace in the next 10 to 20 years.
The problem of penalising thrift is addressed quite well and the increased allowances for savings are an essential reform to remove the major objection to the current arrangements. If I may say so, if we do not like the capital limits, it is incumbent on us to say which limits we should prefer, with the relevant price tag attached to them.
The leaflet on the pension service also makes the point that there is scope for people to use the telephone to talk through their application. That is an important point. The Trades Union Congress investigated the question of what people were looking for when it set up a helpline. The problem of complexity and how to get people comfortable when talking through what is inherently a complex situation was the main feature of that investigation. All our lives are complex in that sense.
The point has been made that even for the poorest group of the population—the 2 million to 3 million concerned for the narrow purposes of the Bill—access to a private telephone is now almost universal, whether individually at home or through the warden in a residential home, and so on. In many debates we have heard stories about the financial insecurity of people—especially women—who have been caring for relatives throughout their lives. They will rely exclusively on the state pension and will find the procedure under the Bill far more acceptable and helpful than any previous procedure.
Those are not just minor points and footnotes; they are central to the concerns of people in their real lives. While it may be premature to say that Whitehall has learnt how to be customer-friendly, the new pension service concept is certainly a step in that direction.
The fact that the state pension will go up—even if the retail prices index does not—by 2.5 per cent is part of the two-legged approach that we must always bear in mind when saying that the pensioner credit will rise with earnings during this Parliament. If I may go slightly wide of the Bill, as have one or two other noble Lords, that begins to address the fact that there are serious strategy problems in the wider pensions field.
Unfortunately, it is increasingly perilous for people to look at their future prospects when there are uncertainties about retirement age. The Bill must address a technical problem relating to equalisation, but everyone knows that there is a bigger debate out there. It was touched upon by the noble Lord, Lord Henley, when he referred to the ratio of 2:1, or whatever it is. We all know that the situation will be more serious if we live to be 95. The slogan "Don't retire until you're 95" may be a good one for this House. The noble Lord, Lord Henley, who is not in his place, might like to try that out for size. It will not be a widely popular method of solving people's problems as they perceive them because they may have thought they would be playing golf before they were 95 and perhaps now they will have to join a golf club for the over-95s.
176 I did not hear many noble Lords who mentioned final salary schemes say what they would do to support them. It is a way in which employers can take money out of the employer/employee ratio; they can reduce what they contribute to their companies' pension funds. A typical employer will be contributing less to workers' pensions if we stop new entrants to the final salary schemes. There is increasing anxiety about that issue.
Another increasing anxiety is understandable. If the large pension funds—those amounting to £500 billion—are to decline, what will happen to the chronic problems of short-termism, which have been analysed for many years, in the investment cycle in British industry? If the pension funds decline, will that not have effects on that cycle?
I turn to the concerns which I want to address to the Minister. I am sure that they will not be new to her. The first relates to the IPPR. How far is the guarantee a long-term commitment, because the IPPR and other bodies are saying that it is not financially sustainable? I am sure that it is but we must ask ourselves how, from one Parliament to the next, we can work out the kind of guarantees that must be given for such an arrangement.
Secondly, the front page of the interesting leaflet on the Bill produced by the department points out that pension inequality has grown partly because original income inequality has grown. That is the unmistakable conclusion to be drawn from the graphs on the front page of the leaflet. How far can pensions policy be capable of redressing the growth of inequality in incomes at work? That is the greatest problem we have seen in the growth of social inequity in the past 20 years. Whether we attribute it to globalisation, new technology or the attack on the trade unions is a matter of opinion, but there will be great difficulty in having greater equality in pensions if there is rampantly growing inequality in incomes at work. At the end of the 21st century, we do not want the historians to look back and say that the century rubbed out all the gains made in social equality in the 20th century.
It is possible to use emotive language at both ends of the spectrum. Pension fund managers, Hermes, have called some American-style packages for the very wealthy tantamount to theft from the shareholders. It is warning that that is a contagion spreading to Britain. We must therefore recognise that there is a case for taking a pensions strategy as a whole. That is the context in which we must see this modest but important part of the jigsaw puzzle.
In conclusion, the handling of savings—the poverty trap—will not go away but I believe that it is being handled in as intelligent a manner as can be envisaged. The Government have done a good job in putting the Bill together in the way that they have.
§ 5.35 p.m.
§ Baroness Fookes
My Lords, I never thought to express sympathy to a noble Baroness so well able to take care of herself as the Minister. However, I 177 thought it unkind when earlier in the debate she was accused of galloping. Metaphorically there may be a gallop because she is seeking to ride two horses which have a natural tendency to run away from one another; namely, the immediate need to deal with those on very low incomes and the need not to deter others from saving in retirement.
I am anxious about the costs of the proposals. The noble Baroness, Lady Castle, said that she could find no indication of the administration costs of the new scheme, which will greatly increase the number of pensioners who fall within it. I am concerned about the more general substantive costs. Figures were given to us for 2003 but I can find nothing which relates to a period further ahead.
I understand the hope to be that the need for the various purposes of the Bill will lessen with time as more people are able to have second pensions. However, let us suppose that that does not occur. My noble friend Lord Fowler pointed to serious indications that the increase in occupational and personal pensions would not go according to plan. Therefore, we need to be provided with figures showing a best-case scenario and a worst-case scenario for a period further ahead than 2003. I should be interested if the noble Baroness could indicate the substantive costs as well as the administrative costs.
I now turn to the terms of the Bill. Like other noble Lords, I am concerned about the title of the benefits which are to he given. I am even more concerned about access. However, I am most relieved that I am no longer a constituency MP holding Friday surgeries to which my noble friend Lord Higgins alluded. I would not want to try to explain in detail to bewildered pensioners what is involved for them.
It would be helpful to see the draft form so that we could ascertain whether it was as simple and clear as we would wish. I would not expect to have that at Second Reading but I see no reason why we should not be given sight of it at later stages in the Bill. I hope that the Minister will be able to assure us that that can be done. A more detailed exposition of how the pensioners concerned will be targeted would also be extremely helpful.
I want to make two other points which have not so far been raised in the debate. The first is something of a hobby-horse of mine. I am dismayed, although not surprised, to see in Clause 1 that the benefits we are discussing would not be extended to anyone living outside Great Britain. I know that I go on about the subject and that it is probably boring, but I have a real concern for British pensioners living outside the European Union who gain nothing from the pension upratings. The arrangement under the Bill will serve only to make the gap even wider. I suspect that all of us shall be receiving further complaints from pensioners' organisations overseas in New Zealand, Canada and Australia when this information reaches them, if it has not done so already.
Secondly, there is an interesting clause covering polygamous marriages and how the benefits are to be distributed in those circumstances. However, we are 178 not given any indication of what the principles or practice might be. It is to be left to regulations. I share the concern expressed by my noble friend Lord Higgins when he referred to regulations which deal with a matter that is permanent, as opposed to dealing with changes where fresh regulations need to be made. We have no idea how this will be interpreted. It would be helpful if the noble Baroness could give at least some indication of how this is to be worked out.
The hour is late and I am aware that many noble Lords are looking towards the wind-up of the debate. I conclude by saying that I think that the Bill is a brave attempt to reconcile the irreconcilable. I hope that, in Committee and during the following stages, we might seek to make further improvements to the legislation.
§ 5.41 p.m.
§ Baroness Crawley
My Lords, it is a privilege to take part in a Second Reading debate which has attracted so many pensions experts, several of whom have spent their professional lives involved either in policy making or policy shaking for the benefit of older people.
In welcoming the Bill, I should like to refer to some of the observations and concerns expressed in over 400 responses to the pensions credit consultation paper that was produced this time last year. Reactions to the proposals came from a wide variety of organisations, including Age Concern—which has been referred to several times during the debate—the Alliance for Finance, the Chartered Institute of Taxation, the Fawcett Society, Help the Aged, Scottish Widows, the Transport and General Workers Union, the National Pensioners' Convention, the Northampton Afro-Caribbean Elders Society, the National Board of Catholic Women and so many others that I could go on listing them, but I shall not do so.
The vast majority of the responses that I have read expressed in general terms their welcome for the Bill, in particular as regards the issues of capital limits and the weekly assessment. En some cases, the responses went further in acknowledging the context of the Government's activity in favour of pensioners since 1997. In her opening remarks, my noble friend referred to the introduction of the minimum income guarantee to assist the poorest pensioners, the rise in the basic state pension, the recent winter fuel payments and so forth. The cumulative effect of those actions can be seen graphically in the chart set out in Annex B on page 16 of the yellow pension credit document from the Department for Work and Pensions to which my noble friend Lord Lea of Crondall referred. It is clear that the impact of government policy on the weekly income of pensioner households between 1997 and 2002 has resulted in a gain of £25 per week for those in decile 1 and a gain of £8 per week for those an decile 10, with an average gain of £18 per week. That includes the pension credit additions, after housing costs and excludes tax changes.
The undoubted beneficial impact: of government policy still leaves the unresolved and urgent issue of low pensioner income for a significant group of older 179 people to whom reference has been made in the course of the debate. I refer to pensioners with incomplete pension entitlement. That will not be resolved immediately by the terms of the State Pension Credit Bill. We know that because the legislation has been directed at rewarding modest savings. However, the Bill will benefit over 5 million pensioners, 1 million from the guaranteed income and 4 million from the savings reward. Furthermore, while welcoming the Bill as a proper response to a social security system that penalises pensioners with modest occupational pensions or savings, many organisations said in response to the consultation that they were extremely anxious to ensure that the legislation would not bring with it even further complexity in regard to accessing benefits. They hope that lessons have been learnt by the Government after the initial problems with MIG and its take-up.
That is where the new pension service, to which my noble friend Lady Gibson referred, should come in. The response paper from Katherine Rake at ESRC Sage Research Group helpfully set out a list of criteria against which to judge a well-functioning pension system. The list echoes to some extent the criteria set out by the noble Baroness, Lady Barker: first, adequacy; secondly, equity; thirdly, protecting incentives; fourthly, transparency; fifthly, stability; and sixthly, administrative efficiency. That list is useful not only to bear in mind as we progress through the Committee and Report stages of the Bill, but also to use as a set of benchmarks when judging the effectiveness of the proposed new pension service.
I understand that the aim of the pension service, which is to commence next April, is to move progressively towards a system whereby pensioners may receive automatically all their entitlements. The calculations involved in assessing people's income will be the responsibility of the service rather than of the individual pensioner. Can I press my noble friend on the Front Bench to point out why she is confident that the new service will do better than the present situation, which still leaves so many pensioners confused about their entitlements? Discussions with my 80 year-old mother and her friends—whom she refers to as "elderly ladies" because they are in their late eighties and nineties—become lively when they touch on the subject of entitlements. Those ladies are clear about most aspects of their lives, but they find the issue of pension entitlements an extremely difficult hill to climb. Is the Minister quite confident that the new service will be able to meet the anxieties that have been expressed in the course of our debate?
Several respondents to the consultation document raised the issue of women pensioners. Again, other noble Lords have also referred to this matter. As the present Chair of the Women's National Commission, I am particularly exercised about improving the retirement income of women. The issue is one of the greater scandals of modern society. So many women see their incomes shrivel as they grow older. By the time they reach retirement age their financial reward, as it were, often bears no relation to the amount of 180 caring, teaching, effort and hard work that they have put into the lives of their families. In many ways the Government have tried to address those problems, which has proved to be a challenging task.
I know that my noble friend on the Front Bench is extremely sympathetic to the plight of the poorest older women in this country. I press her to use her great intellectual capacity within the corridors of power to ensure that that group of people—who by the very nature of the Bill, cannot be covered by its provisions—are not forgotten.
Finally, the Bill will be welcomed by many women. The proportion of single women who are eligible for pension credit amounts to 53 per cent of the pensioner population, compared with a figure for male pensioners of 16 per cent. The Government have estimated that around half of all pensioners will gain from pension credit and that two-thirds of those entitled to pension credit will be women. Half of those women will be aged 75 or over. So the Bill will be greatly welcomed by many women who have struggled to save and who have a small occupational pension entitlement. It goes some way in challenging the scandal of poverty to which I have referred.
Some organisations, such as the National Pensioners' Convention, reflected the on-going debate—which we have heard from the noble Baroness, Lady Castle—about the universality of pension entitlement. In response to consultation especially, they referred to the Bill as part of a reversal of the post-war policy to reduce reliance on means testing.
Like my noble friend Lord Lea, I do not agree with that analysis. The state pension is still the foundation of the pensions system and must be maintained at a level that is meaningful and not derisory in terms of the variety of economic circumstances in which today's pensioners find themselves, or the security in retirement of future pensioners.
However, on top of the basic pension, it is crucial that government policy responds to the reality of older people's lives in Britain today. On average, pensioners' incomes are rising faster than those of any other broad group in the population, but these improvements are by no means shared equally within the pensioner population. Building on the basic state pension by targeting the most significant state help towards the poorest pensioners and at the same time encouraging those with savings is a modern, responsible and realistic way forward.
The Bill follows on from the provision for a state second pension and the new stakeholder pension. I believe that it will be an acknowledgement of so many people's struggle to work hard and save hard during their working lifetime. For that reason, despite the problems that have been aired in the debate, I welcome the Bill.
§ 5.53 p.m.
§ Lord Addington
My Lords, after a debate of such quality, in which the Front Benches started off at a cracking pace, most of what I had intended to say has 181 already been said. Noble Lords will forgive me, therefore, if I do not go over all the ground that has been covered. I shall attempt to restrict my remarks to a couple of points.
I have two genuine questions. First, are the implications of this legislation roughly neutral for all those who are in receipt of disability-related benefit? I have found no reference to that point in any of the literature that I have picked up, but I assume that that is the case.
The second question, which the Government have been asked on previous occasions, relates to the limits of £6,000 and £1 2,000 that were referred to. Are those limits to be regularly upgraded? If they become frozen in time—
§ Baroness Hollis of Heigham
My Lords, which limits is the noble Lord referring to? There are no capital limits. There is simply notional income from whatever capital a person has.
§ Lord Addington
My Lords, I thank the Minister. The uprating of the income is what we are worrying about.
The next point relates to a serious disagreement. The Government have gone down a means testing—they prefer the term "targeting"—route in an attempt to get resources to those who they believe need them. We on these Benches should prefer a more broad-brush approach. The basic argument between us is that money will have been saved on the bureaucratic nature of the system; therefore, we shall be able to give out a universal benefit, thus getting benefit to those who actually need it. Help the Aged concurs with our policy approach; namely, that an extra £10 per week for those over 75 would achieve much of the reduction in poverty.
I agree that, overall, the Government seem to have listened to the criticisms levelled at them about the complexity of the system and its implementation. However, the main problem is that the system will be difficult. It is not merely a question of the aged being confused by such complexity. Our education system has not produced a large number of people in the lower income brackets who are comfortable with complex literature. It is a historical problem for which governments of all colours must share the blame. But people have simply stopped educating themselves in this area.
I freely admit that I do not like the idea of lots of complicated forms. I am dyslexic and I have a bad short-term memory. There are many like me. There are many others who for other reasons have literacy problems. That is potentially a major flaw in the scheme. The Government have talked about the ways in which they will get round the problem—sending out forms to everyone, a telephone back-up service and various other elements of the system. This is the real challenge for the Government. Assuming that their targeting is correct—and we do not know that—they must make sure that they get to the people in question.
182 The on-going costs of the scheme will increase the costs of the pensions system. It is merely a matter of how that balancing act occurs and how many people are missed. It is not a case of whether people will be missed, but of how many will be missed. It always is. It may simply be that a person is terrified of forms, or is not on the telephone, or does not like approaching an authority. From the age of 60, or even earlier, many people are like that.
I hope the Government will bear that fact in mind and will realise that they do not have the perfect answer. There will be casualties. They will have to be prepared to pick those people up at some point. Ultimately, as always happens in our system, the health service and other services will find themselves picking up the failures of the system if they occur.
I turn to the major flaw in the system; namely, its approach to women aged 60 to 65. The Minister made a very good attempt to square the circle and gave a full answer. However, those on state pensions should be brought into the system. It is worth repeating that there is a significant anomaly here. If a person happens to be receiving a state pension, why is he or she not included in this system? We know that it will come to an end and that there is a series of finite problems. But surely that is a major flaw.
I could talk about this subject at considerable length. However, because other speakers have covered most of the points I had intended to make, I leave the House with just one thought. Unless we are prepared to be slightly flexible and admit that there are faults in this approach—which means going back and putting in place extra layers to correct them—we shall have greater problems. We have gone down a road in this Bill which will probably make matters more complicated in the future, not less so. I hope that all those who have a responsibility in this area, if they agree to this system, are prepared to pick up the tab to make sure that this targeting is at least done with a decent sight.
§ 5.59 p.m.
§ Baroness Noakes
My Lords, as a neophyte on matters of pensions and benefits, I was delighted to find that I was in excellent company with the other neophytes, the noble Baronesses, Lady Andrews and Lady Barker. We were treated to an excellent introduction by the powerful and contrasting speeches of my noble friend Lord Fowler and the noble Baroness, Lady Castle, together with many of the other usual experts who regale us in these matters, led by my noble friend Lord Higgins and the Minister. Perhaps the Minister did gallop but I never found her indistinct.
I shall start by talking about complexity. I make no apology for venturing into this area, as predicted by the Minister, and referred to by many speakers. The new pension credit is mind-blowingly complicated. If anyone doubts that, I refer them to the definition of "savings credit" in Clause 3. I shall not read it out but I wager that even with her renowned fluency in benefit matters the noble Baroness, Lady Hollis, would have 183 difficulty making it instantly understandable to noble Lords. I am well aware that the parliamentary draftsman finds it difficult to draft financial concepts in legal language, but I hope to find a more direct way of expressing these rules in statute as we consider the Bill further.
Complexity is an important issue if we believe that citizens should be able to access and understand the laws that govern them. Some, like my noble friend Lord Fowler, say that benefits legislation is usually complex and that it is important for the Department for Work and Pensions to translate it into practical procedures. Tax legislation has become ever more complex and difficult to understand, but we should not accept inherent complexity without question. We know that with complexity comes error. An example appears in Clause 18, which we are told is to remedy a mistake made in earlier legislation. That is an example of why complex legislation is harmful. I hope that as the Bill proceeds through its Committee stage we shall strive to make it simpler.
Another aspect of complexity is the heavy reliance on regulations, already mentioned by many noble Lords. The Bill lays out the bare bones of the framework for the new pension credit, but to find out how it works we have to refer to regulations. The first three clauses, which deal with entitlement, guarantee credit and savings credit refer to five sets of regulations and seven prescribed amounts or percentages. There is more of that in the rest of the Bill.
The Bill proposes a scheme that has not been worked out in fine detail, or even in much detail at all. Even the simple concept of how income will be taken into account in calculating the savings credit will require reference to regulations made under Clauses 3 and 15. My noble friend Lord Hodgson asked important questions about how dividends or ESOPs will be treated and about equity in a person's own home. There are other questions to be asked. How will PEPs and ISAs be treated? What about pension funds that are not drawn down as annuities and index-linked savings? How will they be treated?
I hope that as we consider the Bill in detail the Minister will tell us what the regulations will contain. My noble friend Lord Higgins asked when the Minister expects to have draft regulations available. I hope that they will be available at Committee stage.
I turn to the question of the direct cost of the new pension credit, about which my noble friend Lady Fookes spoke so clearly. The Explanatory Notes say that the Bill will cost about £1 billion in 2003–04 rising to more than £2 billion in 2004–05. I understand that the difference between the two early years is because the new savings credit will not exist until October 2003—in nearly two years' time. The Government have raised expectations that pensioners will benefit from the new credit scheme, especially those with savings. Why do they have to wait so long? Is it because the department cannot process the claims quickly enough? I hope that the Minister can shed some light on that.
184 What assumptions are being made about overall take-up? The noble Baroness, Lady Castle, spoke about that issue, and the noble Baroness, Lady Greengross, referred to the difficulties involved in getting pensioners to take up means-tested benefits. Is it assumed that all entitled pensioners will have claimed what they are due by 2005, or will further costs emerge as time goes on and further claims are made? We know that about 20 per cent of potential MIG claimants fail to take up their entitlement. What assumptions are being made about the take up of pension credit of £2 billion in the estimates for 2004–05? Can the Minister say what will be the total cost if there were to be 100 per cent take-up, if, as I assume, the assumptions are made on less than 100 per cent take-up?
What are the department's estimates of the long-term cost? I understand that about £2.25 billion is in respect of minimum income guarantee, which will in effect be subsumed into the new pension credit and that the £2 billion is on top, so that when the new scheme is fully operational we are talking about a starting point of around £4.3 billion. Many noble Lords have pointed out that the estimates of much higher costs made by a number of commentators, including the Institute of Public Policy Research, which could not be described by any stretch of the imagination as a Right-wing think tank, are not sustainable. Based on calculations of up to £10 billion of long-term cost, it has calculated that the Government's proposal is not sustainable in the longer term. Does the Minister agree? If not, will she say how it will be funded in the longer term?
I turn to the incentives to save. Most noble Lords will agree that preserving savings incentives is an important aim if we are to avoid a culture of dependency on the state. The Bill takes an artificial approach to capital and income, using a deemed interest rate which the Explanatory Notes say will be 10 per cent on capital that exceeds £6,000. The noble Lord, Lord Addington, asked a question on uprating. He was possibly referring to the uprating of the £6,000 starting point that is included in the calculations. My question is slightly different. Does it mean that for all purposes the first £6,000 is to be disregarded, or does the 10 per cent rate apply to all capital if it is over £6,000? If a pensioner has £7,000 of capital, is his deemed income 10 per cent of £ 1,000—the excess over £6,000—or £7,000? By nodding, the Minister has answered my question. It is based on £1,000, which is the excess over £6,000. I thank the Minister for that.
Whichever way the figure is calculated it is clear that income deeming provisions will operate against those whose return is less than 10 per cent. That will apply to most pensioners because they will be deemed to have income that they do not have. A pensioner with capital of £25,000 who was lucky enough to receive a 5 per cent return would have an income of about £24 a week. But, under these provisions, he will be deemed to have £36 or £37 a week, which is how the credits will be calculated. He will end up not having the full amount of the deemed income and will be only a few pounds better off than if he had not saved at all.
185 I am far from sure that the new credit scheme will prove an incentive to saving. As my noble friend Lord Higgins pointed out, as the guaranteed credit rises with earnings over the next few years, that discouragement to save will become even greater. I am sure that we all want to avoid that.
The Bill refers to concepts of family. Pensioners who are married will do less well than two single pensioners, but so will an unmarried couple of pensioners living together as man and wife. I am sure that noble Lords are aware that old people are often lonely and, for all kinds of reasons, will wish to share their homes and their lives. Will the Minister explain why, when a male pensioner lives with a brother or sister or with another male, they will both have a single person's entitlement to pension credit, but if he lives with another female he may be deemed to be part of an unmarried couple, with the consequence that they receive less in total? How is living together as husband and wife to be interpreted in the rules? Are sexual relations to be a prerequisite? If so, how is the department to ascertain the information? Is this to be another intrusion into the lives of pensioners? Will the Minister also explain why homosexual relationships are to be favoured by allowing both parties to the relationship to receive a single person's entitlement?
Lastly, perhaps the Minister will say exactly what is intended in respect of polygamous marriages? Is it intended that the regulations that could be introduced under Clause 12 will allow higher pension credits to be paid to men or women who have more than one spouse?
My final topic is administrative costs. My noble friend Lady Fookes touched on the subject and the noble Baroness, Lady Castle, remarked on the lack of information about it in the Explanatory Notes, which say that the administrative costs will be discussed with the Treasury in the next spending review. Well so will everything. Are the Government saying that they do not yet know what the administrative costs will be? As many noble Lords have said, the aims of the new pension service seem admirable, but they do not sound particularly cheap, especially in the short term. When will we be told the administrative costs of the new arrangements?
I am sure that there will be many more detailed issues to discuss in Committee. I thank the Minister for the explanations that she has given today and at the very helpful briefing that many of us were able to attend last week. I look forward to hearing her response today and to our detailed consideration in Committee.
§ 6.13 p.m.
§ Baroness Hollis of Heigham
My Lords, I am pleased that the Bill has had a broad, if cautious, welcome around the House. As the noble Baroness, Lady Noakes, said, this has been an extremely well informed debate, as one would expect with contributions from two former Secretaries of State on the subject and a junior Minister, as well as others with practical experience on pensions or with Age Concern. I would 186 expect nothing less. I am even delighted that my noble friend Lady Castle welcomed the principle of rewarding thrift. I think that she was claiming credit for the concept for herself and our noble friend Lady Turner, whose absence we have missed today. She has helped me very much over the years on pension matters. I hope as a result that the Bill will enjoy their warm support. That view was challenged by the noble Lord, Lord Fowler, who also wanted to introduce such a Bill, having said at one point in his speech that on no occasion did he ever agree with the noble Baroness, Lady Castle.
I am not sure what it means when so many people claim credit for the Bill when on other occasions they never agree. It shows that the Bill is perceived as a serious attempt to address a real problem that everyone has identified. At its simplest, that problem is how to ensure the provision of a basic, decent minimum income for people, in such a way that it does not deter them from seeking to make such provision for themselves.
If that is called squaring the circle, so be it. If it is called galloping horses, in the metaphor chosen—whether elegantly or not I am not sure—by the noble Baroness, Lady Fookes, I plead guilty. It is an insuperable problem in social security. Our suggestion is to adopt a targeted and tapered response, because the alternative of universality not only misses the target, but does so at enormous cost.
I shall address the major issues that have been raised by several speakers. I started counting the questions that were asked, but I stopped at 80 or 90. Noble Lords will understand if I do not reply to all their questions tonight, but I shall write to them. I would love to have an hour to reply to all the questions, but I cannot do so unless I speak even faster than I did to start with.
The big strategic issues are complexity, means testing, capital rules and the pension service. If time permits, I shall also seek to come back on some or the more detailed questions, which are also of interest to the House, including the situation of part pensioners, housing benefit, hospital downrating, residential care, the future of occupational pensions, cost, reassessment rights and the like. I shall see where I have got to by the time that your Lordships are looking distinctly glazed, and/or bored, and/or asleep.
As the noble Lord, Lord Higgins, conceded, I tried to address the issue of complexity when I started. The structure is simple, but social security and pensions are both complex, and if the two are brought together there is inevitably a geometric increase in complexity. We know that there will be two parts—a £100 basic income together with 60 per cent of the next £23 of income, which is the difference between the £77 retirement pension and the £100 MIG.
Working out the details is complex, but the complexity arises most obviously when people have an incomplete retirement pension record. Estimating that is complex even now. The structure is simple, as I have just said, and the information required is far simpler. I shall come back to that point. The capital rules have been greatly simplified and once the assessment is 187 made it remains in place for five years unless there are major changes. The noble Baroness, Lady Greengross, asked me to elaborate on such changes. They include the death of a partner, going abroad, going into hospital or changing house and having seriously different housing costs. Those are the major life events involved. However, it is a win-win situation for pensioners. They can seek to be reassessed, possibly because their income has dropped, at any time that they wish. They may only need to be reassessed every five years, unless a major event occurs. I shall also come back to the pension service, to which my noble friends have spoken so eloquently.
I have a couple of points to make on draft regulations. This is a framework Bill. It is impossible to achieve the elegance of a modern novel in legislation that amends previous legislation—although, as one of my noble friends said, not all modern novels are as comprehensible as the Bill. I hope to have the draft regulations for your Lordships during Committee stage. They will deal with some of the issues—such as polygamous marriages and so on—which have clearly concerned some of your Lordships, including the noble Earl, Lord Russell, on uprating. I am not sure why polygamous marriages should suddenly be of such fascination to your Lordships. I can only think that it was either hope deferred or aspiration being pursued. The noble Baroness, Lady Fookes, also asked about draft claim forms. I hope to have them available in Committee. I have the current MIG forms.
The crucial part of what I was trying to say is that by going for targeting and tapering we are seeking to move away from vocabularies of means testing to vocabularies of entitlement, as my noble friend Lord Lea said.
I was asked whether extending means testing will discourage those who need help from claiming. It is no longer sensible to give everyone the same. The latest figures, for 1998–99, show that the average pensioner income was £272. The bottom one fifth of couples received half that sum. The top fifth received double. Where such disparities of income have grown over the past 20 years, it cannot be right to give the same to all.
My noble friend Lady Crawley pointed out that giving the same to all would not end means testing. My noble friend Lady Castle talks as though if everyone were uprated to MIG and earnings-related, there would be no need for means testing. She is misinformed. Even if there were earnings-related additions, two thirds of recipients on MIG would still be affected. If the earnings link had never been broken, nearly one half of all pensioners would still need an income-assessed, targeted benefit because either they have incomplete pension records or have extra cost disability benefits.
Whatever system is used, there must be targeted benefits. What matters is to remove the stigma, improve communication, and ensure entitlement and take-up. To achieve that, we are seeking to map income at retirement and every five years—so there will not be weekly intrusion. We are not asking pensioners to come into an office for a "Full Monty" 188 assessment. The matter can be dealt with in the privacy of their own home. Some 70 per cent of people already set up and handle their retirement pension by telephone. I am sure that proportion will grow.
With income support, we currently need to know whether any child maintenance payments are being made—particularly in the case of a younger spouse with children from a much earlier relationship. In future, those payments will be ignored. At present, we need to know the number of hours worked. In future, they will be ignored. If a pensioner has returned to college or university for third-age learning, any educational support in the form of grants or loans will in future be ignored. Any personal injury payments, which are taken into account in various ways at present, will be ignored. Charitable and voluntary payments are to some degree taken into account at present. In future, they will be ignored. Rent from any land or second property will be ignored, as will capital sums in building societies, PEPs or ISAs—but the notional income will be taken into account.
I could treble that list but it gives your Lordships some indication that lines of assessment rightly seen as intrusive now will be stripped out of pension credit in order to get the core information needed. The assumption will be that pensioners' incomes stay steady except in the case of life-changing events. We can therefore take that interference and intrusion off pensioners' backs, so that they can enjoy a predictable income as of right.
§ Lord Higgins
My Lords, I am puzzled by the Minister's use of the word "ignored". Are we to understand, for example, that income from an ISA will not be taken into account in the calculation—that is, that it will not affect the individual's benefit?
§ Baroness Hollis of Heigham
My Lords, capital will be ignored but the income from it will be taken into account. At present, where a person has three or four small building society accounts, all that capital comes into play. If it exceeds the £6,000 or £12,000 range, that capital will disqualify the individual from MIG top-up, even though he may have a modest retirement pension.
In future, it will not be necessary to see every building society pass book. There will be an assumption made about the flow of notional income from the capital held by pensioners. There will be no individual assessments based on the capital in each account. All that will interest us is the notional income, not the amount of capital—which could otherwise cut off entitlement. One can have capital of up to £36,000 as a single pensioner. The notional income would still just about bring the pensioner within pension credit, if he or she has no other income. I hope that that explanation meets the noble Lord's point.
§ Lord Higgins
My Lords, I do not understand. Is the Minister saying that the value of a PEP will be taken into account and that the deemed income derived from it will affect the pension, or will the actual income from 189 the PEP be taken into account? Given what happens to the value of PEPS on equity markets, goodness knows how that will work.
§ Baroness Hollis of Heigham
My Lords, it is the deemed income. That is the point of the simplicity of the rules. I will return to that matter after I have addressed other questions. All capital will be lumped together and a deemed notional income will be extracted. The simplicity compared with the existing system is that once an individual's capital holding goes above a certain figure, he or she is denied any support. That will no longer be the case. The notional income, not the capital ceiling, will come into play. That is where the new simplicity and greater generosity comes on board.
We are assuming two thirds take-up in the first year. Take-up in the first year of family credit was about 50 per cent. By 1998–99, take-up was about 80 per cent in cash terms. After moving to working families' tax credit, about half those who could have claimed family credit hut did not went on to draw WFTC. One reason was that the amount individuals would have drawn in family credit was tiny. Any benefit takes time to build. I have no reason to think that pension credit will not build in an equally satisfactory way.
I was curious that the noble Lord, Lord Higgins, denounced. the Bill for bringing so many pensioners within means testing because the minutes of the all-party group on disability—my bedside reading—on Tuesday, 27th November, included a contribution from the noble Lord's honourable friend, Mr. Boswell. He suggested that the group should consider ways of targeting the 29 per cent of pensioners in fuel poverty and the 22 per cent of disabled people in fuel poverty instead of the current universal approach to pensioners. Mr Boswell was not calling for no means testing of pensioners but for the targeting—presumably means testing—of the universal winter fuel payment for pensioners.
I wonder whether Mr Boswell consulted the noble Lord, Lord Higgins, to ensure even a modicum of consistency between the Opposition's approach in the two Houses on the issue of means testing. Left to Mr. Boswell. we would means test the universal benefits that we already have; left to the noble Lord, we would universalise the means-tested benefits that we have It would be nice if the honourable gentleman and the noble Lord could agree their position on that and related issues before Committee stage.
The noble Lord, Lord Higgins, said that somebody with a part-pension would be treated unfairly compared with someone who made a full national insurance contribution. The noble Lord adopts a curious position. It seems to me that someone who has made the full national insurance contribution all their working life should not be treated in the same way as someone who has not. It is right that retirement pensions and recognition to pension credit should reflect that.
§ Earl Russell
My Lords, in an increasingly global economy many people spend part of their lives working out of this country—for reasons for which they deserve no reproach.
§ Baroness Hollis of Heigham
My Lords, that may be so but it is a question of whether such persons are contributing towards the funding of the retirement pension that they will subsequently draw. I refer to the case suggested by the noble Lord, Lord Higgins, where someone with a pension of £67 and an occupational pension of £25 would, at the moment, see no advantage because that would keep them below the £100 ceiling. In future, under the new system, they would get a guarantee and a pension credit, and their total income would be not £100 but £109. Therefore, although they would not be in the same beneficial position as someone with a full contributions record, they would still be better off. I hope that the noble Lord thinks that that is a balanced approach.
Some noble Lords have said that the proposals are unfair to those who have deferred pensions. We are treating people as though they are drawing their retirement pension, as it would be unfair to give them a pension credit if they are not drawing their pension. Pension credit follows retirement pension, it does not precede it.
The noble Baroness, Lady Noakes, asked about people who are simply living together. I wonder whether her noble friend Lord Fowler might help her on this issue. There are simple, standard and well-defined social security rules on whether cohabiting couples qualify as a household. Those rules will be applied in the operation of this legislation as they are elsewhere.
The noble Baroness, Lady Barker, asked about the title, and I must say that I too am not awfully keen on "state pension credit". However, her own suggestion of pension savings reward identifies only half of our objectives. We are trying to integrate the guarantee with the savings credit. That is why we chose the title.
The noble Lord, Lord Addington, said that we are being unfair to women of 60 and asked why we cannot provide the pension credit to women when they qualify for the state retirement pension at 60. As I have tried to explain, to do that we would have to extend the provision also to men at 60, regardless of whether they were receiving the state retirement pension. It is a dilemma. Although I understand entirely where the noble Lord is coming from on the issue, as I have tried to explain, we have equalised the guarantee element—which goes to the poorest—at 60 and the reward element at 65. We are seeking to treat men and women fairly at each stage.
I think that I have already dealt with the point on reassessment. The noble Baroness, Lady Barker, specifically raised the issues of housing benefit and council tax benefit. As I said, we are carrying over a higher personal assessment allowance in housing benefit and council tax benefit so that people can enjoy the benefit of pension credit. That advantage could be realised by, for example, pensioners who are not eligible for pension credit but who have high rents and receive housing benefit. I therefore think that it is a decent and generous response.
As I have said in previous debates, the point of hospital down-rating, which is a modest sum—I think that it is about £14 for a couple after six weeks, but a 191 more substantial sum after 52 weeks—is to reflect the fact that social security has never gone in for double payment for the same contingency. Therefore, if part of one's costs—for food and laundry, for example—are being met by the national health service, one cannot reasonably expect those costs to be reflected in the retirement pension.
My noble friend Lady Andrews and the noble Baroness, Lady Barker, asked about care homes. I can tell your Lordships that no one will be worse off because of the proposals and that people in residential care or care homes will enjoy both the savings element and the guarantee element. Whether local authorities go on to recover all or part of that in increased charging will be for them to determine in consultation with the Department of Health.
My noble friends Lady Gibson and Lady Crawley eloquently described the purpose of the pension service. Although it will be based on a telephone service, a local face-to-face service will also be available for pensioners who need it, particularly those who are frail and find it difficult to leave their home. The service will deal, for example, with winter fuel payments, retirement pensions, the state second pension, and also serve as a single gateway to provide pensioners with access to housing benefit and attendance allowance. It will produce an integrated service that will be highly valuable and help to ensure that pensioners take up the full range of services to which they are entitled. I tell my noble friend Lady Greengross that we expect to start rolling out the service in spring 2002.
I return to capital limits. Clearly, we could have chosen not to have a £6,000 de minimis rule. Instead, we could have established a notional income limit for all capital and said that people are outside the pension credit system when that notional income surpasses the pension credit figure. Such a notional figure would probably have been about 5 per cent, 5.2 per cent or 5.5 per cent. The exact figure is arguable, but those estimates are not unrealistic.
Why did we choose not to do that, but decide instead effectively on a disregard of the first £6,000 and to recover the equivalent figure from the rest of the sum? We did it because pensioner organisations asked us to do it, because 85 per cent of pensioners have savings of less than £6,000. Consequently, our response seemed to be the decent one. By adding the lower notional rate—which we are reducing to 10 per cent from the current 20 per cent—to the savings reward, the savings in pension credit for very low income pensioners will be treated five times more generously than they are currently treated in the MIG. I think that that figure shows the scale of our changes.
I was asked about disability benefits by the noble Lord, Lord Addington, who has a proud record in protecting those benefits. I am happy to give the assurance that extra-cost benefits will be ignored and that the higher income-related benefits for severely disabled people will of course continue as they are.
192 The costs issue was raised in two forms: programme costs and administrative costs. The noble Baroness, Lady Noakes, was right to say that we are expecting programme costs to be £2 billion in the early years, increasing to about £3.4 billion by 2010. We shall shortly be publishing an analysis of the long-term costs for pension credit, setting out the assumptions on which our analysis is based. Clearly, different assumptions on prices and other matters come into play. However—in reply to the point made by the noble Lord, Lord Henley—we are confident that those costs are sustainable, not only as a proportion of GDP, but because investment in the private pensions industry has served us well. I pay some credit to the previous government on the latter point. Moreover, given that the United Kingdom demographic explosion has already occurred, we do not have a pensions crisis. We continue to have a better ratio of those in the labour market to those who are retired than most other European countries.
Your Lordships might be interested in the figures on administrative costs. Setting up an initial claim for the retirement pension costs on average £31, and we do not expect that the initial cost of setting up the pension credit will be very much higher than that. Although it will be a little higher, it will not be much more. In reply to my noble friend Lady Castle, the annual administrative cost of the retirement pension is essentially nil, and the cost of up-rating pensions will be essentially nil as it will be done by computer. The five-year review will obviously bring into play different factors.
A number of your Lordships, including the noble Lords, Lord Higgins, Lord Fowler and Lord Hodgson, have dealt with the fate of occupational pensions. They seemed to sense a vulnerability in occupational pensions because of what they allege are moves by employers to close final-salary schemes in favour of money-purchase ones. Although I think that such a move is beginning, the schemes that have closed so far are fairly small ones. The NAPF report, however, suggests a rather different story. In the past year, about 46 per cent of all employers in final-salary schemes either had a pension contribution holiday or were able to make reduced pension contributions, which they did not actually pass on to their employees.
The current state of the equity market and the transparency required by FRS17 are requiring employers again to meet pension promises in relation to which some of them have not had to make contributions in recent years. They are really rather perturbed by the size of those promises, although, three to seven years ago, they took it for granted that they would have to contribute towards meeting them. Consequently, as the NAPF report makes clear, employers are moving to money-purchase schemes, not only to reduce the risk, but to reduce the contributions that they should make. That is the problem.
Something like 88 per cent of employers in money purchase schemes contribute less than 10 per cent. Some 47 per cent, or thereabouts, of employers in final salary schemes contribute less than 10 per cent. In 193 other words, almost double the number of employers in money purchase schemes contribute less than 10 per cent. If employers were to contribute to money purchase schemes in the way that they contributed—when they contributed fully—to final salary schemes, the problems of long-term pensioner poverty for occupational pensions would not be of the size or order that have been described. The returns would be broadly similar.
In other words, the problem is not one of FRS17 but the fact that employers are using the move to money purchase schemes to reduce their contributions. Unless that shortfall is made up by employees, they will get a smaller pension. As far as I can tell from the NAPF report, that is where the responsibility resides.
I return to a point made by the noble Baroness, Lady Barker, when she referred to a technical Bill. Inevitably, it is a technical Bill as it is both a social security and a pensions Bill which deals with highly complex matters. But behind it lies a simple principle; that is, how we ensure that pensioners are lifted out of poverty to a decent income and how we build on that by rewarding the thrift of those who have modest pensions. In other words, we are protecting the poorest pensioners from an impoverished standard of living while helping to reward the thrift of those who would otherwise be nearly poor.
It is incumbent upon the whole House to give the Bill full scrutiny and I am sure that it will do so. As my noble friend Lady Crawley said, this is a good and decent Bill. I believe that it is the final bit of our jigsaw to ensure that both those saving for their future pensions and current pensioners can look forward to a decent and comfortable future. I commend the Bill to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.