State Pension Credit Bill [H.L.]

HL Deb 29 January 2002 vol 631 cc175-206

8.42 p.m.

House again in Committee on Clause 15.

Lord Hodgson of Astley Abbotts moved Amendment No. 86:

Page 9, line 18, at end insert— "( ) For the purposes of this Act, a person's earnings shall not include any income arising from rent or the release of equity in a person's principal place of residence.".

The noble Lord said: With this amendment we come back to the questions that we were discussing before we adjourned with regard to other income and other assets. I do not suppose that the amendment is by any means perfectly drafted. But I should like to explore the Government's intentions on this matter because it is an issue that may well affect a number of potential recipients of the pension credit.

The people to whom I refer are those with modest earnings who have taken advantage of the right-to-buy legislation and have probably now paid off their mortgage. They therefore have an unencumbered capital asset in the shape of their home, disposal of which is, of course, capital gains tax-free. Therefore, when the Minister referred to an unlevel playing field in the treatment of savings, this is another area where there has already been quite a tilt towards a particular asset.

It is likely that such people will wish to remain in their homes in their old age. Their home may be in an area with which they are familiar, where their friends are around them and where there are social facilities that they understand. But, bearing in mind their overall wealth, they may wish to use that asset to extract value from it. There are clearly several ways in which they could do so: they may wish to receive rental income from renting out a room to a student or someone who is temporarily residing in the area where they live; they may wish to enhance their standard of living by releasing part of the equity of the house—there are building societies that offer that particular facility; or they may wish to raise a loan taken out against the home by means of a mortgage which will be repaid after their death either by selling the house or by their heirs paying off the mortgage.

I am anxious to find out from the Government where that capital asset and the potential income that flows from it, some of which may be lumpy in the shape of equity release and some of which may be a stream of income in the shape of rental income, fits into this proposal. I look forward to hearing the Government's response. I beg to move.

Baroness Noakes

I rise to support the amendment in the name of my noble friend Lord Hodgson. The treatment of homes is clearly significant. It represents the major capital asset for the vast majority of pensioners. My noble friend's amendment refers to excluding certain forms of income from earnings, although I believe that he had in mind a broader definition of income for that purpose. My concern would be to ensure that the kind of income or gains of which he spoke would be excluded. Perhaps I may ask the Minister to confirm that the value of the capital asset—the home—is not included in the capital for these purposes and, in particular, not for deemed income calculations.

Baroness Hollis of Heigham

As I understand the noble Baroness's last question, the principal residence—a home—is not included at any point; nor are what I would call "personal chattels". such as furniture, fixtures, a car and such other items. The use of some capital to buy a replacement car, and so on, would also be exempt from any problems in this regard. I believe that that is a sensible definition which, I hope, will be of help.

Amendment No. 86 asks that we do not treat as earnings income arising from rent or from the release of equity in a pensioner's principal place of residence. As the noble Baroness said, such forms of income would not, in any case, normally be treated as earnings. However, I am sure that it would be more helpful to the Committee if we dealt with the intention behind the amendment, which, I suspect, was to probe our proposed treatment of such income streams.

Currently fewer than 5,000 pensioners who claim MIG also receive income arising from rent in a pensioner's principal place of residence; in other words, from boarders or lodgers. Such income is riot defined or treated as earnings. Those pensioners benefit from varying levels of disregard depending upon the terms of their boarding or sub-letting arrangement. A disregard of £4 or £13.55 per week is applied for lettings without board—the level of disregard depends on whether heating costs are covered in the charge—and a weekly disregard of £20 is applied for lettings with board.

This is a complex area and we intend to cover in regulations the detail of the level of future disregards. We are seeking to simplify the rules as they currently stand. It is estimated that just under 10,000 pensioner households entitled to pension credit—unlike the 5,000 who receive MIG—will have income from boarders or lodgers. I can assure the noble Lord that the new rules that we introduce for this income stream will be at least as generous in all cases as those currently in place in relation to MIG.

I turn to the second issue concerning equity release schemes whereby a pensioner sells all or part of his home for an annuity and retains the right to live in the home for the rest of his life. Such schemes can be used to provide additional income in retirement to supplement pensions or to pay for long-term care or home repairs. The home is the largest investment for many pensioners and some plan to use it as a source of income in retirement.

We intend that under pension credit the capital available from an equity release scheme will be treated as are any other savings or capital holdings used to provide income in retirement. Such capital will be taken into account in the income assessment for the purposes of determining entitlement to the guarantee credit and rewarded in the savings credit.

In common with many of the other income streams that we have discussed in relation to Clause 15, our policy on equity release schemes aims to strike a balance between reforming the capital rules so that they are fair and simple and avoiding destabilising the personal finance market by incentivising one form of providing for retirement above others. This is "level playing field" stuff. If we were to treat income from equity release schemes more favourably than other forms of capital—by disregarding such income, for example—the result would be to increase the incentives to take out equity release schemes. Such a policy would treat home owners more favourably than other pensioners at an estimated cost of £25 million.

Pensioners can derive income from their principal residence by renting out rooms to lodgers or boarders or by taking out an equity release scheme on the value of their home. As we develop further the detailed treatment of different forms of income within the pension credit regulations, we shall no doubt revisit these issues. However, I hope the noble Lord is reassured that we are committed to treating pensions with such income streams with fairness and increased simplicity. I urge the noble Lord to withdraw the amendment.

Lord Hodgson of Astley Abbotts

I am grateful to the Minister. One matter on which I am not clear concerns equity release. If one had no savings other than a principal sum released from one's home, over and above the £6,500, which is free, the rest will have a deemed income stream of 10 per cent attached to it. Am I right in thinking that?

Baroness Hollis of Heigham

I am not sure where the noble Lord is coming from. If the equity release scheme provides an income flow analogous to an annuity, or something like it, it will be treated in that sort of form. The read across is to income flows not capital, and therefore to notional income derived from capital for these purposes. After all, someone could take an equity release scheme for 25 per cent, 50 per cent or 75 per cent of the value of house, depending on the person's age and so forth. I believe that that should be treated as income in a similar way to other forms of retirement pension income.

Lord Hodgson of Astley Abbotts

It is just that that equity release does not have to take the form of annuity. An equity release can take the form of a capital sum, which may be used in any way one wishes. It does not have to be put into a savings instrument carrying a fixed return. It can be just a capital sum, for instance, a mortgage, out of which one has a capital sum which can subsequently be deployed. Let us suppose that that sum was £20,000, for whatever reason, and one had no other savings. Would £19,000 therefore carry a £1,900 pension savings credit?

Baroness Hollis of Heigham

My understanding is that if there were no other savings, and we are talking of a lump sum, that would be the case. If I am wrong on that, I shall write to the noble Lord.

Baroness Turner of Camden

Before the Minister sits down I wonder whether she could answer a question I have. A number of financial services providers have been putting home income plans on the market with a view to attracting pensioners who have a property but a very low income, and persuading them that they can add to their income through a home income plan. I take it that income from a home income plan will be covered by what the noble Baroness has just said?

Baroness Hollis of Heigham

Yes, that is my understanding.

Baroness Barker

Before the Minister sits down, one of the purposes for which people use equity release is in the repair of property. If equity was released for that purpose, presumably it would not be taken into account? I refer to calling down small amounts of money in order to make capital repairs.

Baroness Hollis of Heigham

I do not know. Perhaps I may follow that through. I cannot see how that would fit into any obvious policy point with which I am familiar. Perhaps I may check on that. The read across to capital is where one has capital because it has come as a lump sum. If some of that capital is used for purposes which you and I would regard as perfectly sensible, in other words, one is not getting rid of that capital by divesting it in order to increase one's pensioner credit—for example, by buying a replacement car or replacement furniture and probably, but I shall check, repairing one's home—that would then be acceptable. That would not be regarded as divesting oneself of capital which one has perfectly properly drawn down from one's property. However, if that is not the case, I shall write to the noble Baroness.

Lord Hodgson of Astley Abbotts

I am grateful to the noble Baroness. We have had a useful exploration of this topic. As I said, this is a probing amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Barker moved Amendment No. 87:

Page 9, line 18, at end insert— "( ) For the purposes of this Act, a person's income shall exclude royalties, up to a maximum of £1,000 per year."

The noble Baroness said: All the amendments we have discussed so far on the subject of earnings have, by and large, dealt with income which is either predictable or within the control of the person who receives the benefit. Amendment No. 87 is a probing amendment to raise the issue for when the department considers what will be done about the minority of pensioners—I accept it is a minority—who are receiving small amounts of unpredictable income.

I imagine that the noble Baroness will say that the five-year assessed income period will deal with many such problems. Indeed, it will. The torment of people who receive small amounts from books which, by definition, were not terribly popular but generate enough to put them over a weekly limit, is well known to people who deal with benefits.

This is a way of saying that there are a number of such small oddities. There may be a number of pensioners who receive income over which they have no control. Can the Minister say whether such issues will he taken into account in the consideration of what will be considered as earnings?

Baroness Hollis of Heigham

Along with polygamy, Amendment No. 87 takes the prize for the most ingenious amendment, or the one most coming in from offside.

Amendment No. 87 proposes a £1,000 annual disregard on income from royalties, which is equivalent to a weekly disregard of £ 18. In discussing Clause 15 and the sequence of amendments we have had, I have been trying as far as I can to share with noble Lords as much of the detail of the regulations concerning what income streams will and will not be taken into account. I understand the problem we are in where I cannot lay out a tidy shopping list of regulations. However, there are still certain infrequent or less common forms of income on which we have yet to make a firm policy decision as to how, if at all. we take them into account. Income from royalties is one such area. I have to say, frankly, that until I saw the amendment it did not occur to me to consider how to deal with a book seven years down the line when one is back down to receiving £220 per year royalties.

According to the family resources survey, there are currently some 26,000 people over the age of 60 with some income from royalties. Of those, around half have royalties below the suggested limit of £1,000 per year. Although it was not mentioned by the noble Baroness, perhaps we should consider, almost in the same breath, how public lending rights are treated, which are analogous. I am thinking of a situation in which I might receive royalties of X, but my public lending rights will be, perhaps, £247. We need to have a read across in that way.

It is difficult, because of the small survey sample sizes, to say exactly how many of those 26,000 pensioners would also be entitled to pension credit, but we estimate that perhaps 10,000 might be. Income from royalties is currently taken into account and treated as a form of earnings in relation to MIG and, compared to a continuation of the current MIG policy, the cost would be approximately an extra £5 million.

These are not simple matters. As I said, until the noble Baroness mentioned it I had not picked up on the fact that we must also consider PLR and related issues, particularly given the royalties "bunch". There are very complex rules. Most royalties are received in the first two years of a book being published. There may then be another chunk if the book goes into paperback. Equally, one may have worked over a long period of years writing the book. We therefore need an equalisation mechanism. These are complex areas. I know from my experience—the noble Lord, Earl Russell, will confirm this—that the issue is treated in complex ways by the tax system. We need to take care.

Perhaps the noble Baroness will allow me to return to the issue when we have got our head round this small, complex system. Even the Inland Revenue has considerable difficulty working out whether Schedule D or Schedule E applies and as to whether or not the book was written by virtue of one's occupation, if one is a university academic. That counts differently for tax treatment. I believe there may be some interesting questions to follow on this matter. If 1 can write to the noble Baroness and place a copy in the Library so that we do not trouble the House on Report, I shall do so. If not, she may have to revisit the matter and I shall see whether I can get a more satisfactory answer for her.

Earl Russell

I declare an interest in Amendment No. 87. The Minister's response was generous, thoughtful and helpful. However, the problem goes a little wider than just royalties. There is a problem in cases where income is received in a regular way and the amount that is coming in when the tax is due is a great deal less than at the time when the tax is assessed.

The classic example is the woman who was bankrupted by being left I million in shipping shares. The shipping shares were assessed for duty in April 1929 and the duty was payable in October 1929. ifs it possible to have some thought on that problem as well—although I hope that those particular circumstances may not recur?

Baroness Hollis of Heigham

I cannot conceive how the noble Earl can contemplate the Chancellor of the Exchequer producing a situation in which shipping shares worth £1 million in April are virtually worthless by October. The noble Earl normally tells me that he is not worried—if I may paraphrase him—about what the present Government may do but what the present government after seven may do. With regard to that situation, God knows what has happened to the economic cycle—and I bet He does not either.

More generally, to make the picture more complex, one of the things that we are trying to do with the five-year assessment period is to look at stable income. Royalties of this sum are small and irregular. If they were bunched in one or two years and were substantial, that might be a reason for delaying the five-year assessment for, say, two years if that was the main source of income, until the flow had become steady. The issue is complex. I shall write to the noble Baroness or, if necessary, we shall revisit the matter.

Baroness Barker

I have no interest to declare on this matter. I did not know that my noble friend would be joining me for this debate. We were not in cahoots on this matter. I was very modest; I did not mention any interests that any noble Lords may have, and there are quite a few who have. In support of my noble friend, I would say that in a week when Enron has been in the news, share values disappearing through the floor is not as unlikely as may have once seemed to be the case. That is not a comment on our Chancellor. It is an issue that I was sitting thinking about when the noble Baroness, Lady Noakes, was talking about employee shares and so on.

This is a small issue. I picked it as being illustrative of small amounts of irregular income which cause problems. I accept entirely that the five-year assessed income period will make life considerably easier for people in this situation. It is a fiendishly difficult matter. I had thought about public lending rights but decided, for the sake of simplicity, not to put that down. I am very grateful to the Minister and am also rather honoured to have got the noble Baroness on a subject where she appears to know not quite as much as some Members of the Committee. It is my one score of the night. I thank her for her technical answer and look forward to her writing to me. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9 p.m.

Baroness Turner of Camden moved Amendment No. 88:

Page 9, line 19, leave out subsection (2).

The noble Baroness said: Amendment No. 88 seeks to leave out subsection (2) of Clause 15. Subsection (2) confers power to make regulations to define how capital holdings will be taken into account in calculating pension credit. Paragraph 124 of the Explanatory Notes states that,

"Capital will be deemed to have an assumed rate of return for purposes of assessing entitlement to the guarantee credit and savings credit. The intention is that a ten per cent rate of return will be applied to capital that exceeds £6,000 (£10,000 in cases of people in residential care and nursing homes). Capital below this amount will not be taken into account in the assessment".

I have some difficulty with the wording of this clause which deems that an income will be forthcoming. At the present time, investments of all kinds—including long notice bank accounts—may not be yielding very much. If interest rates continue to be low and the return from investments poor, claimants could be deemed to have income which they may not actually have had.

I believe that the Government have a formula for dealing with this matter, but deeming remains on the face of the Bill. That is what concerns me. I beg to move.

Lord Hodgson of Astley Abbotts

Amendment No. 91 in this group is tabled in my name. Although I do not approach the matter in quite the same way as the noble Baroness, Lady Turner, I have a great deal of sympathy with what she has said. I find the wording of Clause 15(2) curiously open-ended and opaque. We should make the position clearer. The proposed methodology for pension credit has the fundamental unsatisfactory nature that it does not coincide with reality. As pointed out by the noble Baroness, £6,000 savings carrying no credit at all and then 10 per cent thereafter leaves one with the position that the one certainty is that the person will never earn that rate of return, either zero or 10 per cent, on any part of their savings.

That reminds one of the old statistical joke about a person with one foot on a blast furnace and the other foot on a iceberg being statistically comfortable. In the pension credit proposals—the deeming proposals there is the reference to £10,000 savings carrying an overall 4 per cent return. That may be perfectly fair and the central objective of the Government, but in terms of what interest rates are today, let alone what they may be over the next few years, it is not a generous figure. The redemption yields on long dated gilts, which is probably the nearest comparator to pension credit, are around 5 per cent and leading UK corporate bonds are around 6 to 6.5 per cent.

Amendment No. 91 seeks to make sure that if the regulations are to be set up in this way we shall have some duty imposed on the Government to have regard to the nearest comparable savings instrument—namely, long dated UK corporate bonds. That is 15 years and over. That is the benchmark savings rate that the Government can borrow at and that people might be hoping to earn as a return. It is important for the Government to have some duty to consider that in producing regulations under Clause 15(2). Further, it is an important safeguard for people receiving the pension credit in the future.

Baroness Noakes

Subsection (2) of Clause 15 takes us into the realm of fantasy when looking at income. The Minister has said that this approach was taken because of the responses to the consultation paper issued in 2000 that this was simpler for many pensioners. Being simple does not make it fair and right. It will not be right for all pensioners. Some pensioners who have little or no income will not be troubled by this rule. However, coupled with the 10 per cent assumed rate of return, it will affect a number of pensioners with relatively modest savings.

The amendment in the name of my noble friend Lord Hodgson is important. It replaces the 10 per cent assumption with a more reasonable assumption in line with fairly safe investments for pensioners' money. However, even that proposal would still produce some anomalies although with the lower rate they would not be so bad. The 10 per cent rate would mean that with capital above £12,000 the assumed rate rises quite steeply. At £25,000, the House of Commons Library calculates that the effective interest rate is 7.6 per cent; and it increases at higher savings levels.

There is a fiction involved in the savings credit for pensioners with these relatively modest savings. A pensioner with savings capital of £25,000, and the effective interest rate of 7.6 per cent, under the Government's proposals will be deemed to have £36.54 per week. He would not receive any guarantee credit. With the basic state pension he would be over the £100, but he would receive a savings credit of £8.38.

If that pensioner earned only 5 per cent—he would be doing quite well at 5 per cent on £25,000—he would receive only £24 a week. So the Government would pretend to themselves that the pensioner's income is just short of £122 a week and would congratulate themselves on boosting the pensioner's income by the £8.38 savings credit. However, the reality is that that pensioner has received only £109 in total including the savings credit. That is so little above the guarantee credit threshold that the pensioner might conclude that he might as well blow £19,000 of his savings, take the guarantee credit and stick at £100.

If the pensioner has index-linked securities where the yield is currently around 2.5 per cent, the position is even more dire. If that is the incentive for today's pensioners, think how little incentive the new savings credit will create for tomorrow's pensioners. I accept that it affects particularly those pensioners with savings beyond the £12,000. But those are not an inconsiderable number. I had assumed that the Government sought to create incentives for people to save for their retirement and this proposal will work in the opposite direction.

Baroness Hollis of Heigham

I shall give a general defence about the proposed treatment. Amendment No. 88 seeks fundamentally to alter the way we propose to treat capital by removing the power to assume a notional rate of income from capital held. The proposed amendment would force us to take actual income from capital into account. The Committee will recall that this was the approach that we initially suggested in the consultation document for pension credit. Indeed, it is the way followed by the Inland Revenue.

However—I keep repeating this—we listened to the views which emerged from that consultation process and took into account the clear advice of Age Concern and others. They told us that pensioners do not want the trouble of recording actual income from capital, or having to go into the building society to bring interest to account just because it suits the Government.

I think back to my mother's experience. She had a couple of building society accounts with modest sums in each. The last thing she wanted was to try to work out her gross and net interest and what had or had not been deducted at source. It is much simpler to add together the £5,000 here and £6,000 there. Those were the savings. On that basis, the first £6,000 would be disregarded with 10 per cent assumed rate of return on the remainder. That is infinitely simpler, preventing intrusions into pensioners' lives, checking and rechecking books and so on.

We are conscious of the need also for pension credit to preserve the equilibrium of the savings market. I have not sought to make political capital on this. We have gone perfectly properly through a series of probing amendments on different aspects. Whether we refer to ISAs, PEPs, annuities or employee share schemes, we seek not to privilege one form of savings over another for purposes of pension credit both with regard to the overall cost of pension credit and the stability of the personal finance market.

To put it bluntly, were we to take actual income from savings into account, as the amendment suggests, we would sikew pensioners' choices about how to invest their capital. They would seek different forms of capital from what might otherwise be appropriate for them. They would look for products where interest was low, such as Premium Bonds, or even put money under the mattress—something we do not wish to encourage.

The noble Baroness used the word "fairness". Amendment No. 88 may seem to provide a fairer way of doing things. But the noble Baroness may be interested to note that, given a choice between the Government's proposed policy and her amendment, most pensioners with low and modest savings—those are the ones we are out to help—would gain more From a £6,000 capital disregard combined with a 10 per cent assumed rate of return (the approach in the Bill) than from the proposed amendment.

The Government's policy means that more than 90 per cent of around 3.5 million pensioners entitled to pension credit face an effective rate of return of less than 4 per cent. Something like 94 per cent of all pensioners would have a rate of return of below about 5.2 per cent as a result. But the proposed amendment would cost a substantial amount, of about £400 million, and would generally benefit better-off pensioners with large amounts of capital at the expense of pensioners with more modest savings.

That is made clear when one sees the difference between that and our current treatment in MIG. At the moment in the minimum income guarantee there is a disregard of £6,000, with a cut off at £12,000. Not only is there a rate of return at £1 in £250, which is a 20 per cent assumed rate of return, but a capital ceiling at £12,000, at which point one is no longer entitled to MIG. When pressing me on this matter, Members of the Committee should remember that we are treating savings five times more generously in imputed rates of return than under the current MIG system.

I now move to Amendment No. 91. The noble Lord's amendment suggests that the assumed rate of return on capital should be set with reference to the yield on long-term UK government bonds. This is not my field. Long-term bonds are traded every day and hence their value alters daily. However, the yield on those bonds is approximately 5 per cent. For example, I am told that the yield on a 15-year bond was 4.76 per cent on 16th January of this year.

Thus the implication of this amendment would be to halve the assumed rate of interest on capital. Applying such a low return to capital, as the amendment would suggest, would distort incentives to save away from pensions into other forms of capital. I keep rehearsing the arguments about distorting the financial products market.

The Bill, as drafted, maintains the balance in the personal finance market and a level playing field. The proposed amendment would upset that balance. It would cost an extra £300 million. That cost assumes that the noble Lord would wish to see us retain the £6,000 capital disregard, with £10,000 for those in residential care and nursing homes, in order to avoid placing increased intrusion on the vast majority of those entitled to pension credit with small amounts of capital.

Quite apart from the substantial extra cost going to the better off, it would be impracticable to link this huge rate of return on capital to a price that changes every day. That would require pensioners to report capital levels more regularly and would pose a new administrative burden on the Pension Service. With those explanations, I hope that the noble Lord will feel able to withdraw the amendment.

9.15 p.m.

Baroness Noakes

I thank the noble Baroness. Perhaps I may take her back to the example I went through earlier. It referred to a pensioner who had £25,000 of capital which was producing 5 per cent. If it is a safe investment, that is probably what it would yield. There is nothing fancy about that. There is no income depression involved or special income bias. It is pretty straight.

On that basis, the pensioner would be deemed to have income which he does not have, so he would be deemed to deserve a savings credit of a much lower amount than one based on his actual income. What I cannot quite understand from the noble Baroness is why she is content with a formula which may seem fair and generous for some pensioners with particularly small amounts of capital but which is grossly unfair to those whose capital begins to rise above £12,000. I cannot see how the noble Baroness can sustain that position.

Baroness Hollis of Heigham

I do not want to be polemical, but I believe that is a bit rich coming from an Opposition who, when in power, introduced the income support system, which assumed a return of 20 per cent on capital. We are not inventing the social security system from scratch. We have turned an existing savings rule, which was both capped and seriously heavy in terms of its implication for deemed income, into something which is not capped and which for about 95 per cent of pensioners reflects a rate of return which will be either less than or at the existing rate of return from any capital in a building society account or long-term bond. I believe that that is a remarkably generous move to make and far in advance of everything that we inherited.

Baroness Turner of Camden

I thank the Minister for that explanation, which I do not find entirely persuasive. I also share the view that it is unfair to deem people to have an income which they cannot have had. I do not entirely accept the difficulty for individuals who are perhaps slightly better off and who may have earned a reasonable income during work but who are faced in retirement with not such a marvellous pension return. It is not so difficult for such people to ascertain what their rate of interest has been and to make an appropriate return as to the actual amount of. income received. I simply do not accept that that is terribly difficult.

I also understand the Minister when she says that we are talking about slightly better off people. They are slightly better off, but they are not wealthy. One is not wealthy nowadays if one has capital over £12,000 in the bank; many people have managed to save that while working hard. I do not see that they must be regarded as people who are so well off that they do not need any particular attention.

I will look carefully in Hansard at what the noble Baroness said. Perhaps we will come back to this on Report. I do not find the explanation all that persuasive. I am not concerned about what the previous government did; I am concerned about what it says in our legislation. I beg leave to withdraw.

Amendment, by leave, withdrawn.

Baroness Noakes moved Amendment No. 89:

Page 9, line 19, leave out subsections (2) and (3) and insert— "( ) Income shall be calculated in accordance with rules which apply for income tax purposes."

The noble Baroness said: The amendment covers several things that we have already covered. I shall not repeat the arguments. It covers the deletion of subsection (2), which we have just debated, and it covers the use of income tax rules, which we debated earlier. I shall not go over that ground again. However, the additional thing that this probing amendment would do is to delete subsection (3), which says that,

"Income and capital shall be calculated or estimated in such a manner as may be prescribed".

As the Minister knows, I favour the more natural definitions that are rooted in other parts of the financial system in this country, in particular the income tax system. However, given that we are not going down that route and that I am rapidly giving up hope of any form of Damascene conversion on the opposite Bench, I would like the Minister to say for what purposes she intends that subsection (3) would be used. For what reasons must income and capital be calculated or estimated in ways prescribed by the Secretary of State? I beg to move.

Baroness Hollis of Heigham

I would have thought that the discussion that we have just had would have covered the point raised by the noble Baroness. For example, we are talking about a capital sum of £6,000 for exemption. In the past, the noble Earl, Lord Russell, for example, tried to raise the floor and the ceiling of capital limits. I used to join him in that. It is not inconceivable that a future government may wish to revisit that issue. It is equally possible that a future government might wish to revisit the issue of a notional rate of return, as we have done with pension credit. The subsections give such powers, and obviously they will be subject to the usual parliamentary scrutiny.

Baroness Noakes

I thank the Minister for that. I had understood that the rate of return was being dealt with by subsection (2), which we have already debated, and not subsection (3). However, I take it that the example that she gave shows that subsection (3) covers the capital floor and ceiling. We will consider the matter further in the context of other aspects of the clause. I beg leave to withdraw.

Amendment, by leave, withdrawn.

[Amendments Nos. 90 to 92 not moved.]

Baroness Noakes moved Amendment No. 93:

Page 9, line 23, leave out subsection (4).

The noble Baroness said: Having moved Amendment No. 93, I shall also speak to Amendment No. 94. They are also probing amendments.

Amendment No. 93 would delete subsection (4), which says that income,

"in respect of any period shall be calculated in accordance with prescribed rules".

Amendment No. 94 would delete subsection (5), which says:

"The rules may provide for the calculation to be macle by reference to an average over a period (which—

remarkably—

"need not consist of or include the whole or any part of the period concerned)".

So it can he some other period.

I have already said once or twice that some of the ways in which the clause is constructed represent a kind of fantasy world that the department occupies with regard to income and capital. The subsections allow the department to average out income. The Explanatory Notes refer to averaging out earnings, hut the powers would doubtless be used for other purposes as well. I am not sure that pensioners, who might understand averaging of income, would understand averaging by reference to periods other than that being referred to.

I shall not press further my main themes of using natural definitions of income and capital, but I should be grateful if the Minister could explain why these powers are needed. I beg to move.

Lord Hodgson of Astley Abbotts

I wish to support the amendment moved by my noble friend. Given that this is primary legislation, the provisions are extraordinarily widely and loosely drawn. As my noble friend Lord Higgins has pointed out, we do not yet have the benefit of regulations which might help in our thinking.

What gives cause for the greatest concern is the fact that there is no way of controlling any future government in respect of these important aspects of the Bill, except through regulations. I think that some form of statement included in the primary legislation would be helpful. So far we have not been able to tease out of the Government enough of their strategic thinking to give us confidence that sufficient pegs have been hammered into the ground within the primary legislation.

Earl Russell

My concerns are very similar to those of the noble Lord, Lord Hodgson of Astley Abbotts. I think that I am somewhat allergic to overprescription, a phenomenon not by any means confined to the medical profession. But in this instance I am not concerned about the policy intentions of the present Government. I am more concerned with the capacity of vires to act like minefields. They lie about and then explode under your feet many years later, when you have no idea that they are there.

In particular I am interested in the wording of subsection (4): A person's income in respect of any period shall be calculated in accordance with prescribed rules". Is there anywhere else in this Bill or in any other social security law a limitation on what some future government might prescribe under that subsection? Alternatively, is it a completely open-ended power, a pure Cambyses clause that allows the Secretary of State to do whatever he likes? That point is, I think, of some importance.

Baroness Hollis of Heigham

It would be important if it were true in that form. It is not, because any such exercise of power is embedded in a regulation which will have to come before the House either through affirmative or negative procedures. I would remind the noble Earl, Lord Russell, of what I am sure he already knows: the Delegated Powers and Regulatory Reform Committee thought that our use of regulation-making powers in the Bill was entirely satisfactory—I hope I have not put words into the mouth of the committee. It put forward no suggestions and proposed no alterations to that effect. We have been given a clean bill of health in that respect.

On many occasions the noble Earl has teased both myself and previous Ministers standing at this Box when we have had what are called the "Humpty Dumpty" clauses, in which income may be treated as capital and capital may be treated as income. When one scratches at the surface, one finds a perfectly good reason for it: it is done in order to avoid avoidance, if I may put it in those terms.

It is only sensible that a person's income in respect of any period shall be calculated in accordance with prescribed rules. The alternative would be to calculate it in accordance with no rules, which I am sure would be unwise.

By removing subsection (4), Amendment No. 93 seeks to remove the capacity of the Secretary of State to prescribe rules, within regulations and subject to parliamentary scrutiny, for how income should be calculated in respect of any period. Pension credit entitlement—the emphasis should be put on "any period" in respect of this—will be calculated on a weekly basis. The guarantee credit will be calculated by comparing the appropriate minimum guarantee with the pensioner's income. Where the appropriate minimum guarantee exceeds the income, pension credit will make up the difference.

The savings credit will be calculated by using certain percentages of the rewardable income, again on a weekly basis. Therefore, to achieve the pension credit calculation it will be necessary to ensure that both the pension credit and the income are expressed in weekly terms. Regulations will ensure that this will be the case.

For example—it is always helpful to give examples—it will allow a calendar monthly or a quarterly payment of an occupational pension to be converted to a weekly equivalent.

A further use of the subsection will be to allow the decision maker to attribute income. This would mean that income would be taken into account over the same period for which it was paid. An example would be where the weekly state retirement pension is paid at four-weekly intervals. Without the facility to attribute the payment over four weeks, the decision maker would need to take the whole of the amount into account when it was paid—that is, for one week—but take nothing into account for the remaining three weeks. That would create a situation where the pensioner was not entitled to pension credit for the week of payment but was entitled for the other three weeks. That would obviously be an unacceptable situation for pensioners and administrators.

Like the noble Earl, Lord Russell, we are all concerned about our reliance on delegated legislation. I reassure the Committee that the secondary powers to be introduced under subsection (4) would be used only to ensure that a correct amount of pension credit entitlement may be calculated. Therefore I urge the noble Baroness to withdraw the amendment.

Amendment No. 94 seeks to remove subsection (5), which contains the power to prescribe rules, within regulations, to be used to average income over a period. This power already exists within the minimum income guarantee provisions and it will be used in exactly the same manner in the pension credit calculation of entitlement—that is, it will allow the decision maker, where an income is irregular or erratic, to calculate an average, using a reasonable period for that calculation.

If the amount of income fluctuates, we want to be able to use an average figure. The fluctuation may follow a regular pattern—for example, the younger partner of a pensioner getting pension credit who is weekly paid may normally work one day a week, but on one week in four may work two days or none. In such a case, we intend that the average is taken over one cycle of that pattern.

If there is no pattern, we intend to base the average on the last two payments, if paid monthly or at longer intervals, or the last four if paid at shorter intervals, unless that would give an unrepresentative result—for example, if it included a wholly abnormal payment such as a Christmas bonus and so on. In that case we intend to provide for the flexibility to be able to use a different period which would give a more accurate, representative result.

This is a fully tried and tested method of calculating income throughout social security. It will work to the pensioner's advantage because it will provide an accurate calculation of his/her weekly income. With those explanations—as I said, it is perhaps the averaging of the period that we should be concentrating on in this subsection of the clause—I hope the noble Baroness will be content to withdraw the amendments.

9.30 p.m.

Baroness Noakes

I thank the Minister for that comprehensive reply. Those of us who have spoken to the amendments have expressed disquiet about the powers in the Bill and the way in which they may possibly be used. We shall reflect further on what the Minister has said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 94 and 95 not moved.]

Baroness Noakes moved Amendment No. 96:

Page 9, line 29, leave out paragraph (a).

The noble Baroness said: In moving Amendment No. 96, I shall speak also to Amendment No. 97, which partially overlaps with Amendment No. 98 standing in the names of the noble Baronesses, Lady Castle and Lady Turner.

We are now reaching the end of Clause 15. I believe I hear sighs of relief coming from the Front Bench opposite. Amendment No. 96 seeks to remove paragraph (a) from subsection (6). Paragraph (a) states that,

"a person is treated as possessing capital or income which he does not possess".

The Explanatory Notes refer to repeating other provisions which deem a notional income from capital disposed of solely or mainly to increase extra pension credit. As most members of the Committee will know, I am a newcomer to social security matters, but I do have some background in taxation. I am very clear that if the tax system tried to incorporate this kind of anti-avoidance provision, there would have to be extraordinarily clear rules on the face of a Bill. It would not be allowed to relegate this to prescription after the event with relatively little scrutiny.

It allows the department to rewrite history, to turn it into something that fits its concept of how pension credit should work. If a pensioner gifts his capital, thus depriving himself of income, will the Minister say in what circumstances the department will seek to deem something else? What will happen if a pensioner takes the disincentive effect of the savings credit, and he blows all his capital on a holiday or a fast car? What are the principles involved in using these interventionist powers?

Amendment No. 97 would leave out two further paragraphs in Clause 15(6). Paragraph (c) allows income to be treated as capital and paragraph (d) allows capital to be treated as income. These powers are in the same category as those to which I have just referred. The Explanatory Notes give no idea as to why they are needed. Is their purpose to try to normalise the investment policies of pensioners, to deem them as having capital or receiving income had they conducted their affairs differently? If so, what personal freedoms are pensioners being allowed to have?

I hope that the Minister will tell us what she has in mind for these powers. I beg to move.

Baroness Turner of Camden

I have an amendment in this group—Amendment No. 98—which seeks to leave out paragraph (c) from Clause 15(6), providing for income to be treated as capital in prescribed circumstances. The power already exists under the income support regulations. Income treated in that way includes tax refunds and occasional charitable payments. It would be logical to include such payments in the types of income to be disregarded. If not spent, they would automatically become part of the recipient's capital in the same way as any other income that is not spent. I await the Minister's response with interest.

Baroness Hollis of Heigham

It is right that we should explore this important issue. The three amendments have been grouped together because they all relate to Clause 15(6). The first of them—Amendment No. 96—seeks to remove subsection (6)(a) which includes important powers for anti-abuse provisions designed to prevent claimants who have deliberately deprived themselves of income and capital from securing or maximising their pension credit entitlement. Under the proposed amendment, the subsection would be removed, and with it the necessary safeguard.

We intend to retain the broad framework for guarding against intentional deprivation of capital or income that exists in the minimum income guarantee. That has been built into social security arrangements for a long time. It is not acceptable for people deliberately to reduce their income levels to maximise their pension credit entitlement. We propose to adapt the rules and guidance to ensure that while protecting the integrity of the pension credit scheme we uphold our commitment to reducing intrusion into people's lives.

In practice, the regulations will have to ensure that pensioners, especially when an assessed income period is in place, will not feel that they are limited in how they choose to spend their savings. They may want to pay off a mortgage or repay previously incurred debts. That would be reasonable financial planning in which one could engage before retirement. Other examples could be installing a new kitchen, going on holiday or buying a new car. None of those examples would be regarded as intentional deprivation of capital.

The rules governing how we consider deprivation and how we apply notional income or income from notional capital will focus primarily on gifts or similar disposal, other than between the couple, such as having one's pension paid to a third party.

Equally, when a pensioner goes into residential care or a nursing home, the value of the home, which we have previously ignored for the purposes of pension credit, becomes a capital asset. It is understandable that pensioners want to pass the value of their home to dependants. It is not uncommon for them to do so just as their health deteriorates and a stay in residential care seems likely. In such cases, however, a pensioner would be judged as having deprived him or herself of the value of the home, which would be taken into account in calculating their pension credit, as it would under minimum income guarantee provisions, and as it does in terms of charging assessments for local authority homes now.

I can assure the Committee that these are real issues and that they are at the forefront of our minds as we develop regulations. We want to get the balance right. We do not want to intrude into people's lives but we want to avoid the intentional deprivation of capital in order to maximise pension credit.

Amendment No. 96 suggests that we remove this legal provision from the Bill. But in doing so we would see the pension credit system laid open to the most blatant abuses. Pensioners could deprive themselves of income and capital. Even if we had clear evidence of a pensioner's intention to deprive himself of income or capital in order to gain pension credit, we would be powerless to take that income into account. That would not be fair on other taxpayers.

In Amendment No. 97 the noble Lord, Lord Higgins, seeks to remove subsection (6)(c), which contains the power to prescribe rules, within regulations, dealing with the circumstances in which income is to be treated as capital or capital is to be treated as income—what the noble Earl, Lord Russell, has referred to as the "Humpty-Dumpty clauses". Paragraph (c) contains the power (already contained in the minimum income guarantee) to prescribe in regulations the circumstances in which the one is to be treated as the other. It would be used in circumstances when a payment that is regularly received, or is made in relation to a particular period, should not be treated as income; for example, a pensioner may have loaned a relative some money which he or she is repaying monthly by instalments. Although it would be regular monthly income, it clearly would be in respect of capital and, therefore, we would want it to be treated as such.

Paragraph (d) represents the reverse. It is intended that the regulations made under this power will provide for the treatment as income of a payment that has the nature of an income, although it could, as a result of general law, be regarded as a capital holding—for example, it is paid regularly or in relation to a period, such as regular payments from an annuity. I should like to reassure the Committee that secondary powers to be introduced under paragraphs (c) and (d) would be used only so that a correct amount of pension credit entitlement may be calculated. I hope, therefore, that noble Lords will feel able to withdraw those amendments when we reach that stage.

Finally, I turn to Amendment No. 98, which in part is the same as Amendment No. 97. It seeks also to amend subsection (6). However, it would remove paragraph (c) only of that subsection. As I explained when dealing with the previous amendment, this subsection contains the power to prescribe, within regulations, the circumstances in which income is to be treated as capital—such as in the case of a repayment of a loan. There would seem to be little value in this subsection, but it is there for specific purposes that include benefiting the pensioner. Paragraph (c) will he used in those circumstances when a repayment received regularly, or made in relation to a particular period, should not be treated as income. That applies to a loan repayment from a relative, as I explained earlier.

If it were treated as income, depending on the rate of repayment and the pensioner's weekly pension credit entitlement, pension credit entitlement would be reduced or even extinguished. For example, a pensioner may be entitled to £15 week to bring his income up to the appropriate minimum guarantee. If the loan repayment instalments were £10 a week, the pension credit would be reduced to £5 a week. If the instalments were £50, entitlement would be extinguished. If the repayment of the loan were made in one lump sum, entitlement would be extinguished for just that one week. Thus the pensioner would need to reclaim pension credit for the following week. He or she may also need to reclaim housing benefit and council tax benefit. These situations would not, I think, be acceptable for any of us.

However, if the payments were to be treated as capital, as is the Government's intention, there would be no effect on pension credit if the capital holding were equal to or below £6,000 or if an assessed income period had been set. If total capital were above £6,000 or an assessed income period had not been set, the £1 in £500 assumed income from capital provisions would apply. Given all those examples, I hope that the Committee will agree that these provisions are benevolent; that they will ensure accuracy; and that they are indeed necessary to ensure that the Bill's proposals are treated properly.

Earl Russell

The Minister has given us a very persuasive account of what will be done under the "Humpty-Dumpty clause", as I thought she would. That is why I did not ask her to do so. However, I trust that the noble Baroness will accept that there are two equally valid questions here. First, under the present Government, what will be done under this clause? Secondly, under the powers that we are creating and leaving behind in statute, what could be done under this provision? I hope that the Minister will accept that both those questions deserve answers.

9.45 p.m.

Lord Hodgson of Astley Abbotts

I join the noble Earl in expressing that view. What may happen in the future must be a matter of concern for us all. The Minister gave a series of examples of what was good and what was bad. All that is perfectly understandable, but with the passage of time matters may be viewed differently. Reading Clause 15(6) is like reading Alice in Wonderland. Under its provisions, income can be capital, capital can be income, and people can be deemed as having capital that they do not possess. I understand the purpose behind the subsection, but someone reading it through simply could not understand it.

Baroness Hollis of Heigham

Come on! That is daft, if I may say so politely. These are well-established principles in social security legislation by which one allows income to be treated as capital. Almost every social security Bill that I have been involved with over the past 10 or 15 years has included such provisions in regard to income-related benefits. The alternative for pensioners would be much worse. If they were financially unsophisticated and made a loan, for example, which was capital and which was then repaid in instalments as weekly income, they could lose their own income in return. We are protecting them from that contingency. What we are seeking is the intent behind it. If the intent is deprivation, then that will count for our purposes. If the intent is not deprivation, we shall obviously take that into account in terms of expenditure patterns. If the flow of money comes in as though it were income when it is actually a form of capital in stages, it is in the pensioner's interest to treat that as capital, and vice versa.

There is a broader point about what governments may do 50 years from now. That is one of the reasons why we have a Parliament and why regulations are scrutinised by Parliament. If any subsequent administration, of whichever persuasion, seeks to use these provisions to abuse the purposes of this legislation and are less than benevolent in their intent to pensioners, it is for the Members of this House to be on their guard in terms of scrutiny. I cannot help it if, 20 years down the road, people fall asleep when the word "regulations" is mentioned. It is up to Parliament to stay awake.

Baroness Noakes

A few moments ago the Minister asked us to agree that these provisions are benevolent. I think I can say that neither I nor other Members of the Committee agree with her. My noble friend Lord Hodgson referred to the provision as like something out of Alice in Wonderland. I agree. One of the points that troubled me was the Minister's reference to the repayment of loans being treated as income. That really is an Alice in Wonderland idea. Earlier, I talked a great deal about income tax. Under such concepts, never in a million years would a home loan be seen as income. But there are other branches of the law—for example, trust law—where there is no way in which the repayment of loan would be income. I am beginning to worry about what kind of wonderland the Department for Work and Pensions exists in. Like other noble Lords, I want to reflect further on the Minister's remarks. We may want to return to the matter on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 97 and 98 not moved.]

Clause 15 agreed to.

Clause 16 [Retirement pension income]:

[Amendments Nos. 99 and 100 not moved.]

Clause 16 agreed to.

Clause 17 [Other interpretation provisions]:

[Amendment No. 101 not moved.]

Clause 17 agreed to.

Clause 18 [Equal treatment for widows and widowers]:

On Question, Whether Clause 18 shall stand part of the Bill?

Baroness Noakes

I shall try to be brief. I rise to speak partly because the clause has nothing to do with pension credit, but the Government have used the opportunity of the Bill to change the law as it relates to widowers' pensions. The clause heading says that it is about equal treatment for widows and widowers, but on another analysis the clause takes away entitlements that already exist in law for widowers.

I know I hat the Minister will say that the clause is necessary because a mistake was made that has resulted in overpayments to some men by comparison with women in the same position, but when the clause is made law it will result in men being paid less than they are currently paid. Will the Minister explain how the error arose? Legislative errors are much more likely when legislation is complex. How long did it take the department to spot the error? What is the department doing to ensure that some errors cannot happen again?

I am sure that the department is not pursuing simplicity as a strategy to counter legislative error. The Bill is proof of that. I should be interested to know what other strategies the department is pursuing.

How many individuals are affected by the clause and how much has been paid to them in aggregate because of the error? As the amounts involved could be significant to the individuals concerned, will the Minister tell us what the department will do to relieve hardship when the amounts paid are reduced if, for example, individuals have taken on financial commitments on the basis of a level of income that the department does not intend them to have in future?

Baroness Hollis of Heigham

The clause makes a technical amendment to the Pension Schemes Act 1993. It is necessary to ensure that men and women in the same circumstances who are entitled to bereavement benefits are treated equally. It is consequential to the introduction of bereavement benefits in the Welfare Reform and Pensions Act 1999. Those benefits came into effect from 9th April 2001. I regret that it was overlooked at the time.

The clause ensures that a widower who receives a widower's pension from his wife's contracted-out private pension scheme does not also receive a benefit from the state as if his wife had not been contracted out. That is the element of double provision. Someone who contracts out of SERPS builds up rights in an occupational or personal pension in place of the benefits that they would have received under SERPS. In return, either they pay a reduced rate of national insurance contributions or they receive a rebate of contributions paid.

Before April 1997, when the links between SERPS and private pensions were broken, those rights were known as the guaranteed minimum pension if they were in a contracted-out salary-related scheme, or protected rights if they were in a money purchase scheme. When someone who had been contracted out between 1978 and 1997 reaches state pension age, the amount of their notional SERPS for that period is reduced to take account of that part of their private pension that has been funded by the rebate. That is known as the contracted-out deduction and is to prevent double provision.

A similar reduction is made from the amount of SERPS that a widow inherits from her husband if he had been in a contracted-out pension scheme. That is to take account of the widow's pension that she receives from her husband's private pension scheme.

Before the introduction of bereavement benefits in April 2001, widowers could inherit SERPS from their wives only if they were both over state pension age when the wife died. Therefore, Section 47 of the Pension Schemes Act 1993 provided for a contracted-out deduction to be applied only in those cases.

With the introduction of bereavement benefits, widowers can now inherit SERPS from their wives if they are entitled to widowed parent's allowance or when they become entitled to retirement pension if they were previously entitled to widowed parent's allowance or bereavement allowance.

However—and this was the mistake—there is no power to apply a contracted-out deduction if the wife was in contracted-out employment. That is because no amendment was made to Section 47 of the Pension Schemes Act 1993 when bereavement benefits were introduced by the Welfare Reform and Pensions Act 1999.

Consequently, some widowers are currently receiving double provision—they are getting both SERPS and a widower's pension from their wife's contracted-out private pension scheme. That is clearly against the policy intention.

We estimate that, in the first year, from 9th April 2001, about 13,000 widowers will qualify for widowed parent's allowance. The figure includes men previously widowed who were receiving child benefit when the new bereavement benefits were introduced. We estimate that, of those, 3,000 to 4,000 men have received extra benefit because their wives were members of contracted-out pension schemes at some time between 6th April 1988 and 5th April 1997. The average amount of additional benefit that those widowers will receive is about £10 per week, although some amounts will be very small. The total annual cost would be about £2 million.

That double payment—which is what it is—was clearly against the policy intention. As the noble Baroness, Lady Noakes, absolutely rightly said, a mistake was made. As your Lordships will remember, when we introduced the new bereavement benefit, we sought to provide equal access to benefit following widowhood to both men and women. We certainly did not intend to privilege men over women in that respect, as they currently are.

As I said, we estimate that 3,000 to 4,000 widowers a year are affected. We have identified them and are writing to them when their claim to widowed parent's allowance or retirement pension is processed. We are explaining that, due to this mistake in the legislation, they will be temporarily receiving a higher amount of benefit than was intended. We are telling them how much the extra is, that we intend—subject to parliamentary consent—to change the legislation for the future, and assuring them that they will not have to repay any extra benefit they receive in the meantime.

The clause returns to the original policy intention and ensures that men and women entitled to bereavement benefits are treated equally. I hope that your Lordships agree that Clause 18 should stand part.

Clause 18 agreed to.

Clause 19 [Regulation and orders]:

Lord Higgins moved Amendment No. 102:

Page 13, line 30, at end insert—

• "(e) section 9(5),
• (f) section 15,
• (g) section 16, or
• (h) section 17(2)"

The noble Lord said: I shall be very brief as time is moving on. I certainly do not propose going through all the details of the specific items that we are suggesting should be added to the list of regulations that are subject to the affirmative resolution procedure rather than the negative resolution procedure. The only reason I rise to speak to the amendment is to tell the Minister that, if it is at all possible, it would be helpful to have drafts of the regulations before Report stage. Although many orders are important, we believe that these particular ones should be subject to rather more detailed scrutiny. Furthermore, if she is going to circulate such drafts or further explanations, would she circulate them to the usual suspects who have been participating in our debates?

Baroness Hollis of Heigham

The noble Lord, Lord Higgins, has used the amendment to press his point on the regulations. I shall seek to be helpful, but I cannot go beyond that assurance. I have a copy of the Delegated Powers and Regulatory Reform Select Committee report, which states, the bill contains a large number of delegated powers which are explained in the Department's excellent memorandum (printed at Annex 1) which I am sure will be tonight's bedside reading for the noble Lord, Lord Higgins.

The Select Committee did not consider the particular powers in detail, apart from one, but said that, there is nothing in this bill which needs to be drawn to the attention of the House". Given the standing of the Delegated Powers and Regulatory Reform Select Committee, I am mindful of its suggestions to the House. I have circulated to the noble Lord, Lord Higgins, and to the noble Baroness, Lady Barker, a memorandum, in addition to the one that went to the Select Committee, on how we seek to use the powers. If the noble Lord, Lord Higgins, wishes to write to me between now and Report and Third Reading, I shall try to be helpful and deal with any detailed examples that he is worried about. I shall do my best to respond to any such point.

Lord Higgins

The Committee will be grateful to the noble Baroness for the usual helpful way in which she has sought to facilitate our discussions. I therefore beg leave to withdraw the amendment. Amendment, by leave, withdrawn.

Clause 19 agreed to.

10 p.m.

Lord Higgins moved Amendment No. 103:

After Clause 19, insert the following new clause—

"ANNUAL REPORT

The Secretary of State shall lay an annual report before Parliament on the performance of the pensions service that shall include—

1. (a) an estimate of the take-up of the state pension credit;
2. (b) the cost to the department including details of staff and telephone costs; and
3. (c) the percentage of pensioners paid less than the maximum state pension credit because of their deficient national insurance contribution records."

The noble Lord said: Amendment No. 103 stands in my name and that of my noble friend Lady Noakes. It seeks to insert a new clause calling for an annual report to be laid before Parliament. This is an important amendment. I refer to the various issues we have raised during the course of debate. It is appropriate that an annual report should be laid before Parliament which includes, first, an estimate of the take-up of the state pension credit. Previously, I have referred to that matter. We are concerned about take-up, as, indeed, are the Government. On previous amendments we discussed the likely extent of take-up, or, rather, the likely extent of the failure to take up the state pension credit on the part of its intended beneficiaries. That being so, we must obviously keep tabs on what is happening under the provisions of the Bill. Therefore, we think that it is right to include the provision.

Secondly, we suggest that the cost of the provision to the department, including details of staff and telephone costs, ought to be included in the annual report. As we mentioned earlier, a department should take suitable measures to ensure that as many people as possible are aware of the provision and whether they are entitled to it. However, one also needs to have some idea of what the cost of the provision is likely to be and whether it is too high or too low. One should also take account of the actual cost of the state pension credit itself as that is closely correlated with the extent to which it is taken up.

Thirdly, the amendment refers to those pensioners who are paid less than the maximum rate of pension because of their deficient national insurance contribution records. Provided that we do not manage to make provision for them at later stages of the Bill, we should have some idea of how many are involved and to what extent they suffer if they are not treated fairly. However, that is a matter to which we shall return at later stages. We shall have to consider to what extent the provisions of the Bill as they now stand are or are not fair. This is an important amendment. My noble friend Lord Hodgson of Astley Abbotts has an amendment grouped with this which I shall leave him to address. We hope that the Government can accept this proposal which is extremely sensible and is not unprecedented. I beg to move.

Lord Hodgson of Astley Abbotts

Amendment No. 104 in my name is grouped with Amendment No. 103. I should like to begin by making clear that I strongly support the amendment in the name of my noble friend Lord Higgins. It is clearly important with such a complex Bill that Parliament should hear a bout its operation on a year by year basis. The annual report is clearly a good way of doing that.

However. I should like to go further. The annual report mentioned in the amendment proposed by my noble friend is essentially a bird's eye view. I am concerned about the operation of the proposal from the point of view of those who will receive the pension credit. I am looking, so to speak, from a worm's eye view. Service level indicators are, of course, increasingly prevalent as a measure of corporate performance. I believe that they could usefully be brought into play here. The kinds of areas that I have in mind are, for example, standards set for telephone answering. Earlier the noble Baroness, Lady Barker, mentioned the use to which the telephone is likely to be put in the implementation of the new proposal. We all know that that kind of operation can lead to endless requests to -Press five, press three, press six, press seven", followed by, "I am afraid that all our lines are busy. Please call again later". That kind of response will infuriate people who seek to take advantage of the pension credit or are entitled to it. A service level indicator for that kind of thing would be a good way to make sure that the scheme is properly implemented.

Clearly, implementation will be absolutely critical. There could be similar SLIs for response times to correspondence and response times to reviews and appeals. No doubt, other Members of the Committee and the Minister will have their own views as regards what constitute the critical aspects of service level performance. Clearly, to be effective SLIs need to be published in advance and a report needs to be produced later showing how the department managed—or did not manage—to achieve the levels set for it in the following year. That is a useful way of adding to the annual report. Those who will receive a pension credit will find comfort in that, in that they will be able to see how the scheme operates. I hope that the Minister will look with favour on the amendments.

Lord Fowler

I strongly support these very important amendments. Until this point in Committee we have necessarily been dealing with a great deal of detail. The amendments are more general but they are also entirely basic. They would require monitoring of what takes place once the Bill has been enacted. All the commentators talk about pre-legislative scrutiny. I in no way decry that; it is obviously very important. However, the big gap in our defences involves post-legislative scrutiny—scrutiny of the wad in which legislation works in practice.

In the pensions area, the intentions of legislation and of its authors can be defeated by the way in which legislation is implemented. Mistakes can go on for years. There was an example of that only last week. The widows of thousands of former soldiers were deprived of many millions of pounds in pensions, in some cases for as long as 50 years, because of a blunder by the Ministry of Defence. The Income and Corporation Taxes Act 1952 made pensions tax free if they were, granted on account of medical unfitness attributable to or aggravated by naval, military or air force service". The Royal Navy and the RAF followed that ruling and did not deduct tax, but civil servants administering Army pensions failed to take account of the legislation and continued to tax. As I said, that went on for about half a century. Had it not been for the efforts of one man, it would doubtless still be going on now.

We could also consider a case that I know only too well—that involving widows and the state earnings-related pension scheme. The intention of the legislation was absolutely clear. It was to bring widows' entitlements entirely into line with occupational schemes. The legislation was introduced by myself in a Statement in the other place. We debated the legislation on Second Reading and in Committee, and I even published a separate leaflet on the subject. My Minister of State, who went on to become Prime Minister—John Major—promised a publicity campaign. However, we moved on after the 1987 general election. There was no publicity campaign and one leaflet continued to give the wrong advice for years afterwards. Ministers took responsibility but in fact the leaflet never went near Ministers, as the Permanent Secretary said in her evidence. It did, however, go through the hands of more than 100 civil servants. Had there been a checking process—this is my point—it is inconceivable that such a mistake would have taken place or lasted for so long.

My point is that we must improve our monitoring process. Personally, I should very much like to monitor the impact of the Government's £5 billion a year pensions tax, which they have imposed and which I believe is having a dire impact on pensioners of the future. However, that is probably beyond the scope of this Bill.

However, our ability to monitor the effectiveness of the legislation is not beyond the scope of the Bill. As I made clear at Second Reading, I support the Bill and giving the extra entitlement to many thousands of people, who often, through absolutely no fault of their own, have not had the opportunity to build up an adequate pension. That is why I support the principle and practice of what is being done. But it is in everyone's interest that the Bill works as it is intended to do, that the credit is efficiently administered, as my noble friend Lord Hodgson has just said, and that it reaches the people whom it is intended to reach.

I believe that the type of provisions set out in these two amendments should be an essential part of all our legislation. I consider the post-legislative scrutiny in this country to be woefully inadequate. I believe that this Bill can put that right, at least so far as concerns pension credit. I suppose that it is too late for the House to divide. I am a new boy in that respect but I suspect that that would be highly unpopular on the other side. However, I hope that we can return to the matter on Report. I believe that there is a consensus on all sides that this is an area that needs to be tackled urgently, and there is absolutely no reason why we cannot tackle it now in this legislation.

Baroness Barker

The hour is late and I shall not delay the House for very long. I wish simply to add to the arguments that have already been deployed. Throughout the Bill there has been a great deal of discussion about the assumptions on which the pension credit is based. There have been a great many misgivings about some of those assumptions. But in what I hope the Minister will accept has been a very constructive debate, there has been a large degree of consensus that we should seek to take the Minister and her department at their word.

Members of the Committee who have already spoken are absolutely right. In many respects this is a theoretical construct. I return to a point that I made at Second Reading: one of the tests of this measure will be the extent to which it fits in with the lives of older people. On that I believe that a great deal has yet to be proved. A measure of this kind, which will take so many pensioners within its scope, has within it a great deal of potential to go wrong. It may not; I hope that it does not.

However, I believe that not only will the proposals be informative for the purposes of this and future social security legislation but they will perhaps have a profound effect upon tax legislation, other benefits legislation and, in particular, legislation which comes increasingly from the Department of Health. Given that so much decentralisation is taking place in that department, its legislation is extraordinarily difficult to fathom. For all those reasons, which go beyond the scope of the Bill, I believe that the measures are important. I hope that the noble Baroness will accept them.

Baroness Hollis of Heigham

I was fascinated to listen to the point made by the noble Lord, Lord Fowler, about pre and post-legislative scrutiny. In terms of, on the one hand, the use of pilots so that one has a learning loop before one extends possible policy nation-wide and, on the other, the amount of what I call "tracker research", in which we try to check the implications of our policy for the individuals concerned and thus again to have a learning loop, and in terms of all the legislation in which we have been involved since 1997, I should have thought that a person like the noble Lord who had followed the developments of social security over the past few years would recognise that we have tried very hard to build that in where appropriate. It is absolutely right that not only should there be pre-legislative scrutiny; there should also be post-legislative scrutiny. I hope that the noble Lord will accept that we have a fairly honourable record in that respect and in many ways have broken new ground.

I turn to the amendments. Amendment No. 103 would require an annual report on the performance of the Pension Service to be laid before Parliament. Amendment No. 104 would require an annual report on the planned service levels and past performance of the Pension Service to be laid before Parliament.

The amendments would ensure accountability and transparency for the service that we provide to our pensioner customers and clients. I wholeheartedly support that objective. I believe it is inconceivable that we would not report publicly on all aspects of the Pension Service in exactly the same way as we do in relation to the Child Support Agency, and so on. But this reporting should not be limited to the areas listed in the amendment. These areas are indicative and I am sure are not meant to be exhaustive.

I can assure the Committee that the arrangements we have in place for reporting on the performance of the Department for Work and Pensions should provide Parliament with a comprehensive assessment of the performance of the Pension Service. The precise nature is still being developed, but we shall have arrangements in place which clearly detail the performance of the Pension Service each year and which are robust enough to more than meet parliamentary reporting standards.

A range of service and performance targets and indicators are well established within the Benefits Agency, the unit with operational responsibility for delivering services to pensioners at present. They include how many times a telephone rings before one answers. My complaint on performance indicators is that if one is not careful, one ends up assessing the things one can count and not the things one cannot count, which are qualitative. We then sometimes think that the quantitative is more important than the qualitative. There are issues about how we turn customer service into things which can be assessed and not just mechanically assessed; for example, how quickly one answers the telephone. None the less, we are currently developing proposals for performance indicators that will apply to the Pension Service. They will be reflected in the final route for reporting on performance of service.

It may be helpful if I remind the Committee of the reporting requirements that apply to the Department for Work and Pensions as a whole. The department will continue to present its annual departmental report to Parliament. That provides a comprehensive picture of performance across the whole department. The departmental report provides an account of departmental performance against its public service agreement objectives. It also provides an account of how the department has expended money voted to it by Parliament. That covers the cost to the department of administration for each customer group, including pensioners.

On the question of administration costs, the primary route for the majority of customers to apply for their pension credit entitlement will be via the telephone, building on the model that has become well established for minimum income guarantee. The costs for administering pension credit are expected to be broadly the same, or slightly less, than for the current telephone-based costs for assessing minimum income guarantee. That will be the result of streamlining the administration and simplifying the rules. However, until the pension credit design is finalised, that can be only an estimate.

I turn to other specific items that are listed for inclusion in any annual reporting. I, too, think it important that we focus on securing maximum take-up of pension credit and we expect the number of successful claimants to build up over time. As I said earlier, we are putting in place arrangements to ensure that everyone who is entitled to pension credit knows in good time what they need to do to take up their entitlement.

Estimates of take-up of income-related benefits are currently published annually. However, DSS Research Report No. 100, entitled, Overcoming Barriers: Older People and Income Support, provided evidence of significant under-reporting of capital by pensioners responding to the Family Resource Survey. They failed to mention it and made it even more difficult for the department confidently to estirnate take-up among pensioners. In order to tackle that problem, we have commissioned large-scale research from the Office for National Statistics and the National Centre for Social Research, which will enable us to improve the accuracy of the information we use to estimate take-up in future. If noble Lords wish to know what that research will look at, I am happy to write to them or to put a note in the Library.

Amendment No. 103 refers to the position of pensioners who have a reduced state pension because of their deficient national insurance contribution records. I think that the noble Lord and I simply disagree on how we respond to this. I think that those who have made a full contribution should have that reflected. For those who have a less than full contribution, any private money should be first set against that before they then move into the pension credit system.

The Government are committed to the evaluation of pension credit. We shall ensure that we have completed necessary baseline studies before the introduction of pension credit and will put in place processes to monitor the effects of the policy over time. The Department for Work and Pensions already has in place much of the data we need to provide an accurate baseline. As I have mentioned, we have commissioned major new research to help us to understand more about the many pensioners who will become newly entitled to pension credit in 2003. The information provided by that research will help us to understand and overcome potential barriers to take-up and assist in the marketing of pension credit when it is launched.

We are committed to maintaining effective arrangements for monitoring performance and reporting to Parliament. I can assure the Committee that the arrangements we have in place will deliver much more information than is required by the amendment. I therefore hope and believe that noble Lords will accept that the amendments we are considering are unnecessary. In the light of that I hope that the noble Lord will withdraw the amendment.

Lord Fowler

Before the noble Baroness sits down. perhaps I may say that I have listened to her and she has used a great many words. Can I ask her straight whether she is setting her mind and her face entirely against any idea of there being an annual report to this House as far as concerns pension credit?

Baroness Hollis of Heigham

No, Members of Committee, certainly not. I said that it is inconceivable that the pension agency will not be reporting annually. We need to explore whether it reports in a separate report or whether that report on the pension service is embodied in the annual report of the Department for Work and Pensions.

Our position is that we are not only deeply committed to pension credit but proud—I repeat, proud—of what we are seeking to do through the Pension Service. That will produce, for the first time, a service tailored to the needs of pensioners. In advancing that it is inconceivable that we should not want to draw the Chamber and the wider public's attention to our objectives and the degree to which we are able to meet them, including our public service level agreements. The only question is whether we end up with a ring-fenced report on the Pension Service and therefore the pension credit, or whether it is incorporated in the departmental report. We can pursue that matter on another occasion if Members of the Committee want.

The notion that we should not want to bring full information to Parliament, to the voluntary organisations and to pensioners about their entitlement and the degree to which we can encourage them to take up their entitlement and the level of service that we can now offer for the first time, is inconceivable.

Lord Higgins

Whether or not there should be a separate report is perhaps a matter to which we may return later. It depends to what extent the department's report may reasonably be regarded as a best seller. Subject to that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 104 not moved.]

Clauses 20 to 22 agreed to.

Schedule 1 [Administration]:

[Amendments Nos. 105 and 106 not moved.]

Schedule 1 agreed to.

Schedule 2 [Minor and consequential amendments]:

Baroness Hollis of Heigham moved Amendment No. 107:

Page 23, leave out lines 13 to 22 and insert— (4) Subsection (4A) below applies where a statement is made in the House of Commons by or on behalf of the Secretary of State which specifies—

1. (a) in relation to any of the items referred to in subsection (I)(b)(i) to (iv) above, the amount of the alteration which he proposes to make by an order under section 150 or 152 above or by or under any other enactment, and
2. (b) the date on which he proposes to bring the alteration into force ("the proposed commencing date").

(4A) If, in a case where this subsection applies, an award of state pension credit is made in favour of a person before the proposed commencing date and after the date on which the statement is made, the award—

1. (a) may provide for state pension credit to be paid as from the proposed commencing date at a rate determined by reference to the amounts of the items specified in subsection (1)(b)(i) to (iv) above which will be in force on that date, or
2. (b) may be expressed in terms of the amounts of those items in force at the date of the award."

The noble Baroness said: I should be in dire disgrace if I had said "not moved" to this amendment. I was hoping at least to have some modest acknowledgement from the noble Lord. Although he has put pressure on us for not producing regulations, he might at least compliment us on so far not having to bring forward a series of government amendments to amend their own legislation, which has sometimes been the fate of previous Bills.

Paragraph 17 to Schedule 2 provides for the introduction of a new Section 159B to the Social Security Administration Act 1992. The purpose of this amendment is to change the wording of the new Section 159B to prevent a technical difficulty which might arise in the pension credit decision making process. Having identified this possible glitch, I feel that it is right to introduce a preventative amendment now.

The introduction of new Section 159B to the Social Security Administration Act 1992 gives the Secretary of State the power to make routine adjustments to pension credit for uprating purposes. This includes the power to make advance decisions on entitlement to pension credit on the basis of uprated amounts after the uprating order has been made.

However, the problem we have identified is that it would not allow decisions on entitlement using uprated amounts in the time period between the Secretary of State's announcement of the uprated amounts and the date the uprating order is actually made. In other words, the decision-maker can only anticipate the new rates once the order has been made.

The Government's aim is to facilitate advance claims for pension credit and to invite invitations to claim it four months in advance of the person's date of retirement.

It is feasible that such an invitation to claim is sent, and therefore that the claim for pension credit is made, during the time period I have just mentioned—between the Secretary of State making a statement in the House of Commons about the proposed uprated amounts of pension credit, and the date the uprating order is made.

So, for example, the uprating statement would normally be made in November, but the uprating order would not normally be made until February. Therefore, people who reached retirement age in, say, April, would be invited to claim pension credit in December—four months prior to retirement age. But decision-makers would be prevented from adjudicating on their claims using the rates which would apply when the person reached retirement age in February.

Such a problem has been encountered in the past, with claims to retirement pension. The result was that advance claims for retirement pension were stockpiled until the uprating order was made, thus incurring an increased administrative burden and cost. The Social Security Act 1998 introduced a new section—Section 155A—to the Social Security Administration Act 1992 to deal with that problem.

This amendment, specifically new subsection (4A), introduces an equivalent provision for pension credit while maintaining the original powers in the current draft. It would allow decisions to be made on advance claims to pension credit based on uprated amounts where the claim related to a period starting after the uprated amounts became payable; and the Secretary of State had made a statement in the House of Commons about the proposed uprated amounts of pension credit; but the order which brought the uprated amounts into force had not yet been made.

It is essentially a technical amendment, necessary to ensure that the claims process for pension credit can take place in a logical and legally sound manner. It is right that we take action now. I hope that the Committee will accept this technical amendment.

On Question, amendment agreed to.

Schedule 2, as amended, agreed to.

Remaining schedule agreed to.

House resumed: Bill reported with an amendment.

House adjourned at twenty-seven minutes past ten o'clock.