HL Deb 26 February 2004 vol 658 cc387-402

2.39 p.m.

Baroness Hollis of Heigham

rose to move, That the draft order laid before the House on 22 January be approved [7th Report from the Joint Committee.]

The noble Baroness said: My Lords, I beg to move the first order standing in my name on the Order Paper. I confirm that both orders standing my name are compatible with the European Convention on Human Rights.

Although draft orders are a routine annual event they are still an important part of the Department for Work and Pensions' business. The Guaranteed Minimum Pensions Increase Order is laid each year and the increase—in line with the retail prices index, capped at 3 per cent—is needed to prevent inflation eroding the value of the occupational pension rights which a person has built up through being contracted out of the state system. This year the increase will be 2.8 per cent—the annual increase in the retail prices index to September 2003. I am normally chastised by the noble Lord for being brief about GMPs, but as he knows at least as much about them as I do, I am confident that that will satisfy him. However, it may not satisfy the noble Baroness, Lady Barker.

The uprating order will, as usual, increase most benefits from April in line with the RPI for national insurance benefits and the Rossi index for income-related benefits. For the 12 months ending in September, the RPI increased by 2.8 per cent and, in the same period, the Rossi index rose by 1.8 per cent. The difference is because housing benefit is independently financed.

Although this order, in the main, keeps to those standard rules, I would like to mention some benefits in particular and achievements of this Government in the work and pensions arena. I realise that the noble Lord has already threatened us with a blue skies disquisition on the interaction of national insurance tax and the future finances of the country, but perhaps he will allow me to go into some particularities before he widens the issue.

I want to begin with the issue of parents and children. We are continuing to help the poorest families. As your Lordships may remember, last year we aligned the child allowances in income support and jobseeker's allowance with child tax credit rates so that those families benefit from the increased generosity in these tax credits. Indeed, all the child allowances will be increased by more than the Rossi index, which is usually used to uprate income-related benefits. From April, the allowances for children up to age 19 will increase from £38.50 to £42.27. This is worth an increase of £180 a year for each child to families on income support or jobseeker's allowance: that is £130 a year more than our commitment to uprate in line with earnings.

As a result of personal tax and benefit measures introduced since 1997, families with children in the poorest fifth of the population will be, on average, by September 2004, £2,900 a year—nearly £60 a week—better off in real terms. This new investment means we are on track to meet or exceed our PSA target to reduce the number of children in low income households by a quarter by 2004 on a before housing costs basis.

I turn briefly to pensioners. We continue to show our commitment to tackling pensioner poverty. In this order, we are again doing more for those pensioners who are most in need. Pension credit, introduced last October, guarantees a minimum income and directly rewards the savings and second pensions of pensioners on low and modest incomes. We will, as we did in every year for its predecessor, the minimum income guarantee, increase the guaranteed minimum income in line with earnings. In April, it will rise from £102.10 to £105.45 for a single person and from £155.80 to £160.95 a week for a couple.

Through pension credit, those who have worked hard and saved hard have started to see the benefit of their labours. Those with savings may still be entitled to some pension credit even with income up to around £144 for single people and around £212 for couples. In addition, the introduction of pension credit marked the end of the intrusive weekly means test and the rules which excluded people with £12,000 or more in savings from any help.

In 2004–05, as a direct result of the pension credit, and in conjunction with winter fuel payments and free TV licences for older pensioners, we will see that the poorest third of pensioner households will have gained £1,600 a year—over £30 a week better off than they were in 1997.

Already, 2.6 million people in around 2.18 million households are receiving pension credit. More than 1.5 million of these households are gaining on average £11.80 a week more than before pension credit was introduced. In line with our aspiration to get all those who are eligible to claim and receive their entitlement, we are continuing with our take-up campaign in the media, press and through the local service of the Pension Service. We planned a sensible phased approach for take-up of pension credit to ensure that we built on lessons learnt from previous campaigns. Indeed, 4.1 million tailored information packs have been sent and by June this year we will have written to all pensioner households that were not previously receiving the MIG. No pensioner should lose out as a result of this approach. Special arrangements have been made to allow the Pension Service to backdate and pay arrears to 6 October 2003 (or the date of entitlement if later) where people apply before October 2004.

Furthermore, we are honouring our promise to increase the basic state pension by at least 2.5 per cent during the lifetime of this Government by increasing it in line with the RPI which, as I have already mentioned, is 2.8 per cent. This means an increase from £77.45 a week to £79.60 a week for single pensioners and from £123.80 to £127.25 for couples. And we will continue to uprate by at least 2.5 per cent in future years during the lifetime of this Parliament. These measures help all pensioners, with most help going to the poorest.

We are, of course, able to introduce measures to give extra help to those who need it most because of our success in building a strong economy. Our policies have resulted in the highest employment figures on record and the lowest unemployment rates since 1975. We have seen UK unemployment fall from nearly 3 million 10 years ago to less than 1 million today. The New Deal must be seen as playing a key part in this success. It has helped nearly half a million young people into work; nearly 165,000 long-term unemployed people into work; and more than 220,000 lone parents into work. This, of course, has a positive effect on the economy by way of lower social security spending and higher tax returns. As I know from working with lone parents who have returned to work through the New Deal, it has helped enormously in terms of quality of life. We believe that this uprating order further delivers on our promises. I beg to move.

Moved, That the draft order laid before the House on 22 January be approved [7th Report from the Joint Committee].—(Baroness Hollis of Heigham.)

2.45 p.m.

Lord Higgins

My Lords, as on many previous occasions, we are grateful to the noble Baroness for spelling out the details of this year's uprating order. It is a traditional debate. The level of increases appears to be somewhat related to the electoral cycle. In the middle of the previous cycle, there was the notorious 75p increase, followed by a much-more-than-inflation increase. This being an in-between year, it appears to be in line with the various indices to which the noble Baroness referred. What happens next year remains to be seen; perhaps sending out the cheques for baby bonds will suffice as an alternative.

Be that as it may, we have always on these occasions had an extremely wide debate. We have previously commented that our debate is wide while that in another place tends to be narrow. That is no longer so. They followed our example a couple of days ago and debated the basic state pension, means testing, take-up, advertising, lone parents, pension poverty, failure of the Government's computers and even the Child Support Agency. I do not propose to go quite that wide, but rather I want to raise more fundamental factors. One common feature goes through all these events; they are mostly extraordinarily complex and are getting more so. That is a real problem and one of the reasons why we put forward our proposal to shift the balance towards the basic state pension in future.

I cannot help feeling that if one could wave a magic wand and go hack to 1997, many aspects of pensions and so forth would be a great deal better. But of course other things have improved. I come increasingly to the view that the danger is that the next generation of pensioners will either be at the bottom end of the scale, subject to means tests and the level of income that that implies, or, if they had previously been above that level, will find they are less well-off as pensioners than were their predecessors. An article in last Sunday's Telegraph was headed, How life begins at 50 in the grey revolution—if you can afford it", but there will be an increasing percentage of people who are on means-tested benefits and dependent on the state for their retirement. To some extent, that is alongside the massive deterioration in company pensions, which were for so long a major beneficial feature of our system, in terms of the closing of final salary schemes and restrictions on them, compared with the situation in 1997.

This is a traditional debate and one inevitably has a sense of déjà vu. Indeed, one can even predict that one is going to have a sense of déjà vu, if that is not too philosophical a way of looking at the matter I very rarely read my own speeches—in fact, I do not believe that I ever do if I can help it—but I thought that I should look at my speech from last year. One thing that emerged was the extraordinary way in which, when replying, the noble Baroness seemed to treat the problem of the wind-up of pension schemes as a relatively unimportant matter. However, we now have ahead of us a massive Pensions Bill, which seeks to deal with that problem and on which, no doubt, towards the summer we shall spend many happy hours.

Another traditional issue is the continued determination to stick to the fact that one has to take an annuity at the age of 75—an issue on which your Lordships defeated the Government twice and, equally, had those defeats overturned in another place. I believe that that has become more and more of a problem because annuity rates are now at an extremely low level, having come down from a relatively high one. The Government are now borrowing vastly more than they intended—£37 billion as against an original estimate of around £11 billion. Inevitably, they can do so only at higher rates of interest and that, in turn, will mean that annuity rates rise. However, as each month passes, a number of retired people will have to take out an annuity at the age of 75 when, in my view, it is likely that the annuity rates will increase. That seems to me quite wrong, and I still hope that the Government will manage to do something about it.

The other perennial issue is that of the Government's commitment to moving from a 40–60 split between private and public provision for pensions to one of 60–40. That has been described by the noble Baroness as an "aspiration" of the Government. However, as these debates take place each year—this is the sixth or seventh that I have had with the noble Baroness—one cannot help wondering whether the split is moving in the right direction. It is all very well having an aspiration but if, year after year, the ratio is moving in the wrong direction, perhaps one should consider whether something is wrong with the policy. Can the noble Baroness tell us whether, compared with last year, it is felt that the 40–60/60–40 split is better than it was 12 months ago?

Baroness Hollis of Heigham

My Lords, in the light of the noble Lord's own party's commitment to raising the state pension in line with earnings, how does he believe that would impact on the 60–40/40–60 split?

Lord Higgins

My Lords, I refer the noble Baroness to the splendid leaflet that we published on the way in which that is to be financed. Having said that, perhaps I may also turn to the other major problem which is arising in this area so far as concerns the savings ratio generally. The extent to which the public/private sector split takes place depends to a significant extent on the way in which savings either increase or decrease. I consider that to be a desperately worrying situation. In the six years from 1998 to 2003, it was never more than 5.7 per cent. In the six years prior to that—up to 1997—it was never less than 9.1 per cent. That is a massive change in the savings ratio and, again, perhaps the noble Baroness can tell us what the ratio is at present.

The other problem is that the savings issue is affected by the way in which means-tested benefits have increased so massively under the present Government and as a result of the Chancellor's passion—that would be one way of putting it; "preoccupation" would be another—concerning the issue of tax credits and so on. But, against that background, it is increasingly worrying that, unless one saves a substantial amount of money, ultimately, when one comes to take one's pension, one gets nothing for it because it is all means-tested away. The estimates relating to that have varied: Mr Frank Field said that approximately £70,000 must be saved, and I believe that my honourable friend Mr Willetts said that a figure significantly higher than that is required. Supposing that an individual saves £60,000 by the time he retires, can the noble Baroness tell us what benefit he will receive which does not means-test away the proceeds of those savings? I believe that this is having a very serious effect.

The noble Baroness repeatedly says that it is wrong to speak about means-testing and that one should speak about targeting. She has constantly adopted that theme. It is supposed that means-testing is a better way in which to target poor pensioners, but that is a serious misunderstanding of the real issues. The means test is well targeted only if the benefits are taken up. Many problems have arisen because, although the means-tested benefit appears to be targeted on a particular group of people, in reality it tends not to hit a high percentage of those people because the benefit is not taken up. Looking at the recent report of the Public Accounts Committee, of which I was chairman for some time—I believe that I was the previous chairman—the way in which the non-take-up of benefits is reflected in the figures is very worrying.

That is particularly true so far as concerns the pension credit. One can realise how anxious the Government are—quite rightly—to encourage the take-up of these various benefits, but I am rather puzzled by the extent of the advertising, which consists of massive, full-page advertisements. I also have grave doubts about the value of full-page, as against half-page, advertisements. I suspect that people mostly turn them over. However, in an example that I have here, which no doubt cost a huge sum of taxpayers' money, more than half of it contains no information whatever. I consider that to be very worrying. The section which states: The new Pension Credit. Pick it up. It's yours", has a paragraph which reads: And now, for the very first time, those 65 or over who have modest savings, investments, or income such as a second pension … could get extra money as well". However, I believe I am right in saying—the noble Baroness will correct me if I am wrong—that it means that one keeps rather more of one's own money, which is not really the same as saying that one receives extra money. The noble Baroness shakes her head and waves her hands up and down, but it is not the same thing. To say that a person will receive extra money is rather misleading. That is not to say that I am against advertising; I am all for the pension credit being taken up, but I believe that the way in which it is being advertised is not as efficient as it might be and, to some extent, the advertisements seem to be misleading.

Finally, I turn to the point to which I referred in the earlier debate—I believe that the noble Baroness appeared in the Chamber at about the time that I raised it—concerning whether, more than half a century after Beveridge, we should retain the structure that he set up and concerning, in particular, the question of the contributory principle. There have been two fascinating reports on that. One was by the Social Security Committee in another place as long ago as the 1999–2000 Session. Its summary of conclusions began: Our survey of the history of National Insurance since Beveridge has led us to conclude that the National Insurance scheme has been undermined, both directly as a result of successive governments' policies and indirectly as a result of economic and social change". I emphasise the word "undermined". I believe that to a considerable extent that is true. The report goes on to deal with the surplus in the fund, and so on.

In many ways, the mechanism to which I referred in the earlier debate in which the national insurance contributions go into a fund and the fund manager decides how much goes to the health service, how much to the benefit system and so forth, is an increasing handicap as far as concerns allocating resources. We should consider more generally and strategically—I express a personal view—whether that old arrangement is true. It has never been a national insurance scheme. "National insurance fund" is a misnomer.

However, the important point of the contributions principle is that it entitles those who have contributed to various so-called contributory benefits. That is not unimportant. The report of the Select Committee on Economic Affairs of this House, published in November last year, much less than a year ago, contains some radical proposals in that context. It draws particular attention to the way in which the present scheme disadvantages women, and goes into that in some detail. Indeed, the noble Baroness and I attended a meeting a few days ago where the extent to which women are disadvantaged by contributory arrangements was discussed. However, a number of other aspects of the arrangements deserve re-appraisal.

The Select Committee did a magnificent job on the basis of an incredible amount of expert evidence and came to some very radical conclusions. First, as regards the point I have just made, it states: We conclude that the contribution basis of the basic state pension acts as a significant barrier to the acquisition by women of full state pension entitlements". I believe that is common ground between us, and is certainly true as regards the Select Committee. The committee go on to state at paragraph 8.11 of chapter 8: We therefore recommend that the basic state pension should be paid on the basis of' citizenship rather than contribution record". That is a very radical proposal in the light of the very extensive evidence before the committee.

I think everyone is agreed that this is an annual event as far as concerns the uprating of national insurance benefits and the corresponding uprating in contributions. Therefore, in the light of the committee report and more generally—the committee is concerned only with pensions not the whole of contributory benefits, which raises very complex issues—it is perhaps time, well over half a century since Beveridge, that this matter should be strategically considered.

I am grateful to the noble Baroness for her explanation, and look forward to her response.

3 p.m.

Baroness Barker

My Lords, I declare an interest as an employee of Age Concern England. Compared with the noble Lord, Lord Higgins, and the noble Baroness, I am a comparative novice in these matters. I have not sat through the many debates they have had. None the less, I, too, have turned to debates in previous years to inform my thinking for today.

Like the noble Lord, Lord Higgins, I was intrigued about the timing of today's debate. I took the importance of the timing to be that it precedes the discussions shortly to begin in another place on the Pensions Bill. I believe that there were one or two issues, particularly as regards the guaranteed minimum pension uplift, which we would do well to explore today in the light of that forthcoming debate.

In 2003 the question was put to the department that in that year the Government estimated that approximately £12 billion of public money was being spent on contracted-out rebates. At that time, my colleague in another place, Professor Steve Webb, asked how many people received those rebates. It was not possible to have an answer at that point. The Government said that they did not have the information within their famous computer system. One year on, I shall put the same question to the noble Baroness. Has the department been able to come up with that figure? Just how many people are we talking of as far as concerns contracted-out rebates? I raise that within the current atmosphere of considerable concern about the end of defined benefit schemes, which we have debated many times over the past two years.

The noble Baroness sticks firmly to the line that defined contribution schemes could be as beneficial as defined benefit schemes, were employers to make the same level of contribution. However, does she share the view that a number of defined benefit schemes are closing because defined contribution schemes are contracted in and defined benefit schemes are usually not? Does the department have any figures on how many occupational pension schemes are currently contracting back into the state scheme?

Finally on this point, what is the Government's estimate of the number of people who will be entitled to GMP for contracted-out final salary schemes who will not receive full entitlement due to the winding up of those schemes? It is important that when we debate the Pensions Bill in full we understand fully the assumptions that lie behind those schemes.

Like the noble Lord, Lord Higgins, I too looked at the wide-ranging debate held in another place a couple of days ago. I decided, like him, that there were two or three points on which it would be preferable to concentrate today. Perhaps because the noble Lord, Lord Higgins, and I had the joy of working our way through the Tax Credits Bill in all its complexity with the noble Baroness, we have an ongoing interest in the way in which it is being implemented. To a certain extent we are not surprised but remain worried that the levels of take-up have been as low as we predicted then they would be because of complexity.

The noble Baroness will undoubtedly be aware that last week my honourable friend in another place, Professor Steve Webb, drew attention to the levels of inquiries that have been taken by the department. In December there were 193,000 calls to the call centre; that is 8,430 calls per working day. They were handled by 1,300 staff. That works out to seven calls per day per member of staff, and more staff are to be taken on.

That is in stark contrast to what is happening elsewhere. Were Members of the House to come with me not more than two miles away to information and advice agencies which provide support to older people, they would see staff completely overwhelmed by the numbers of pensioners coming in to meet them face to face to try to understand what their pension credit entitlement is. While the department's call line may be, as we predicted at the time, somewhat "underwhelmed", out there in the real world of information and advice agencies, it is looking very grim indeed.

Were the noble Baroness to have chosen the timing of today's debate, I do not think that she would have chosen today, not in the light of the figures released this morning by the Department for Work and Pensions on take-up for income-related benefits in 2001–02. The department's own estimate shows that pensioners are missing out on £2.56 billion in benefits owed to them, and that across all groups a total of £5.87 billion is unclaimed. Not surprisingly, given its complexity, one of the worst of all performance benefits is council tax. The number of pensioners not claiming council tax benefit is 1,760,000 and a total of £770 million is unclaimed.

We know from the rather extraordinary campaign being waged at the moment that council tax is a particular problem for pensioners. Some of the poorest pensioners are not able to afford it because they cannot access easily the means to do so via the benefits system. That matter should concern anyone who is anxious to end pensioner poverty, which is one of the Government's claims.

I make two final points. First, it is interesting to go back over the historical aspect of the benefit uprating. I note that for people aged over 85 the additional amount of pension will remain at 25 pence. In the days when 25 pence was five bob it was worth having; today it is a stamp. In terms of basic entitlement, I believe that, as we have discussed with the noble Baroness on many occasions, older pensioners deserve better than that.

Secondly, I wish to refer to the Government's announcement of lump sums for deferral of pension take-up. Will the lump sum be disregarded for pension credit and will it be taxable? If it is to be taxable will that be at the basic rate or would it take someone into a higher tax band? If a person aged 65 were told that at the age of 70 he would be offered £26,000—the sum mentioned—would that be a gross figure, which would become £20,000 net? The reason for asking that is that people must know what their income position will be so that they can do what the Government are encouraging them to do, which is prudently to plan their income for retirement. If the sum is going to be taxable then, as the noble Lord, Lord Higgins, has told us on many occasions, there are many other kinds of more advantageous savings vehicles available to them and they need to know that—particularly as many of the people we shall be talking about are people who will be working part time.

It is important at this stage, before we start the Pensions Bill, that everyone has a clear understanding about what assumptions are being made about these things. If the pension credit is to have a hope of working I believe that the misunderstanding of its basic level must be overcome among those people who are supposed to be its beneficiary. People still say, "But that is for people who do not have anything; I have got something in the bank". It is a benefit which is not easily communicated to beneficiaries. If we do not overcome that and if we ignore the even lower level of take-up figures than were supposed at its inception then we shall see very many more people in poverty.

Baroness Hollis of Heigham

My Lords, we have all been re-reading in Hansard last year's debate to see to what extent issues have moved on. Some of the issues being raised, particularly those by the noble Baroness, Lady Barker, were to try to scope some of the questions for the Pensions Bill. It was a good try, but the Pensions Bill will not be coming to your Lordships' House for a while. However, I may he able to help her on some of her statistical information. In so far as I cannot, I shall obviously write to her with the knowledge that I have.

Perhaps I may first turn to the main points made by the noble Lord, Lord Higgins. First, his fears—and I shall share his fears if they are right—about the possible growth in pensioner inequality in incomes over time. Secondly, he pressed me about savings ratios and the interaction with an increase in means-tested benefits. Thirdly—and he was very much joined in this by the noble Baroness—the eligible non-recipient issues; in other words, the take-up statistics, on which I would like to spend a little time. Finally, he came back to an issue which he has explored in this House before; namely, the interaction of national insurance tax and the intellectual viability, and social viability possibly, of the national insurance scheme. I think those were the main issues that he raised.

On the first issue of pensioner incomes and growing inequality, if the noble Lord were right then I would share his worries. But I would put a question mark over the matter and I am not trying to score party points. I think that in 1979 or in the mid-1970s I would have agreed with my late friend Lady Castle that the right way forward for pensioner incomes was to go—as the Tory Party is now arguing—for an earnings-linked basic state pension because the disparity in pensioner incomes was much narrower, partly because occupational savings had not kicked in. As a result an earnings link would have broadly benefited most pensioners.

That is no longer true. That is why in the past I used to have debates with my noble friend. The statistics no longer suggest that that is the right way forward, particularly if the noble Lord, Lord Higgins, is concerned about women. Given that women do not have a full NI record for the most part, any earnings link increase passes them by. Therefore, the proposal benefits men and better-off men and not women and poorer-off women.

I return to the point about pensioner inequality. What has happened since 1979 is that average wages in this country rose by about 36 per cent. The poorest quintile of pensioners rose by less than that, something like 28 to 30 per cent. The richest fifth rose by about 80 Per cent. Between 1979 and 1997 we have seen a huge stretch in pensioner income. In other words, inequality has grown with the poverty of the poorest. The question facing government—and that is why we went the way we did with pensioner credit—was, what do we do, first, to try to address the immediate problem of pensioner poverty; but, secondly, to try to prevent this problem becoming a long-term one by increasing incentives to save.

In my view the pension credit seeks to address both issues because its guarantee element will ensure that individual pensioners without any other income do not experience an income of £79 a week but one of £105. So we float people up to a more adequate level of basic income. We do that while at the same time attaching a savings element to it which means that those people with modest occupational pensions will no longer face 100 per cent MDRs. In the past, if you were a single pensioner on £77 per week with an occupational pension—say you were the widow of a local authority manual worker—of £100 per month, you would not have kept a penny of it because MIG would have floated you above that. You would have had 100 per cent docked off. In future, under pension credit you keep £60–60 per cent—of that. Therefore you are actually something like £15 per week better off. Therefore, it is worth having the modest pension.

So, the elegance as well as the decency of pension credit is that it both addresses the immediate issue through its minimum income guarantee element—the guarantee element of pensioners' poverty—while its savings element makes it worthwhile to go for smaller pensions and savings without 100 per cent deductions taking place against minimum income guarantee. That is why I believe it works and is satisfactory.

Having said that, however, it is the case—and I think we would all agree and again it is absolutely not a party point—that a basic state pension based on pension credit and minimum income guarantee will provide a minimum, but I think decent, but none the less not a comfortable level for one's old age, which is why we would all agree that people need a second pension. One of the great triumphs since the 1970s has been the growth of occupational pensions.

That is why a year a two ago we introduced for those people with very modest incomes—under about £12,000 a year—who do not have access to an occupational scheme, the state second pension, which gives a replacement income, for someone earning less than about £9,000 a year, of nearly 100 per cent, and in some case 120 per cent of his earnings in retirement.

Therefore not only through pension credit and MIG have we produced a better basic platform for pensioners now and in the future, but we have built on to that not only the occupational private provision—the security of which we hope to increase during the forthcoming Bill which we will be discussing—but also a similar ladder of a state second pension for those not eligible to go into an occupational pension. I think that that is a decent response to pensioner poverty both now and in the future.

The noble Lord accused me about our aspirations concerning the 60:40 and 40:60 ratio. All that I will say is that that remains our aspiration—he would not expect me to say anything different from that—but we expect that our public policies will continue to stabilise GDP spending on private pension provision at between 5 and 6 per cent of GDP.

The noble Lord pressed me about savings ratios and how much money would need to be floated off income-related benefits. It depends. I have not seen the higher figure of £180,000 that I have seen bandied around deconstructed; I suspect that it refers to a couple and is based on assumptions relating to housing benefit. As the noble Lord will know, 70 to 80 per cent of pensioners are owner-occupiers. In so far as one needs a large sum not to be entitled to claim means-tested benefits, that is as much a statement about the decency of income-related benefits as it is about the wealth that pensioners may need.

My point is that those are not 100 per cent deductions. The statement that one needs X to be floated off and that it is therefore not worth saving would be true only if, for every pound of pension, one lost a pound of benefit. Of course, that is true only within the income range of £77 now and £102 for MIG. Thereafter, one keeps 60 per cent of one's small savings and, at a certain point, there are no deductions at all because one is floated off the range of pension credit. Therefore, through pension credit we are not only addressing current pensioner poverty but encouraging future pension savings.

The issue on which the noble Lord and the noble Baroness pressed me—if I may say so, they are absolutely right to do so—is take-up. Targeted benefits are successful in addressing poverty if they are claimed. If they are not claimed, they are not doing the job. All governments have a choice. We can give £5 to everyone, including every Member of your Lordships' House; or we can give £25 to the poorest fifth. We have chosen the targeted route to address pensioner poverty. Obviously, take-up will be crucial.

We have been looking at the statistics. For this purpose, I shall concentrate on pensioner payments under MIG. The statistics only cover 2001–02; they are not the most recent ones. The first thing to recognise is that the number claiming is up: it increased from 1.43 million to 1.52 million. But because we have made the scheme more generous, more people are entitled to it. So both noble Lords are correct to say that there is a somewhat reduced entitlement claim, although the absolute number of people claiming has risen. The number of people entitled to claim has increased.

If we read the report to which I suspect that the noble Baroness, Lady Barker, was referring, which was issued today, on the estimated take-up of income-related benefits for 2001 to 2002, it is clear about what is going on with the take-up of MIG. The first point made is that although the numbers are up and the scope has increased, the best estimate of those who have not claimed is that at least one-third of them was eligible to claim only £10 and that about 18 per cent was eligible to claim less than £5.

In other words, what appears to be happening—which is unsurprising—is that those people who have least to claim are least likely to claim, because they cannot he bothered. That is not to say that some people are not missing significant sums—they are—but there is always a tail effect. When we make a scheme more generous, people who enter the scheme may, first, not know, and, secondly, have the least to claim and therefore may not bother.

Secondly, the report shows that of those people, 30 per cent go on to claim further down the line. So we bring people back into the system subsequently. That is important.

We are advertising and receiving significant responses to our calls. We want maximum take-up, but we should understand the statistics. If we increase eligibility by, say, 10 per cent, and the number claiming rises by only 5 per cent, although there is a real growth in the number of people receiving money, there is a reduction in the percentage of eligible claimants who claim. That is the present situation. As I said, we are addressing that and the important point is that, according to the report, at least one third of those currently not claiming probably go on to claim in the subsequent year. So advertising, information, telephone calls, visits, pamphleteering and so on appear to have an effect.

Finally, the noble Lord pressed me on the general point about national insurance and tax. I accept—indeed, I sought to argue myself—that the national insurance system of the 1940s was based on a different family structure, when he in work mediated the network of benefits for his family, including a dependent wife and children. The presumption was of a 40-year working life, 40-hour weeks, full employment and relatively little job mobility.

I accept that the national insurance principle has, rightly, had to be extended to cover people who are working but not necessarily in waged work—by, for example, caring for children. As a result, we have home responsibilities payments—supported, I think, by all parties—together with tax credits, and so on. I also find interesting much of the critique of the House of Lords report, because it is certainly true that, by definition, anyone who was in and out of the labour market—whether women, the chronically sick, the unemployed or those in a region with areas of relatively high unemployment—always stand to be less advantaged by national insurance than a man in a secure job in a high employment area.

However, equally—we should not underestimate this—national insurance reflects the contributions of those in work. It resonates with people in terms of the language of rights and social solidarity in a way that we should not lightly jeopardise. There are also practical issues. Income tax is charged on savings and investment income, pensions and contributory benefits; whereas NICs are not. Liability to employees' NICs stops at pension age; whereas liability to income tax continues. A key point is that both employers and employees pay NICs on individual savings; only employees pay income tax. We must find a mechanism to recoup the £32 billion a year of employers' NICs.

So there are practical issues if we were to move in the direction suggested by the noble Lord, which is to conflate the two systems.

Lord Higgins

My Lords, this may be a bad point, because I have only just thought of it, but to what extent does the noble Baroness think that the preservation of NICs, which has the advantages that she states, but which are widely disputed by the Lords' report, is the same thing as being tied to the fund? What is so odd now is that the Chancellor stands up and says, "I am putting an extra 1 per cent surcharge on NICs and it will go to the health service". But it does not; it goes into the national insurance fund.

We then find, as I said in a previous debate, that the Government Actuary apportions national insurance contributions effectively—I paraphrase—to determine the amount going to the National Health Service. The whole fund concept has become very strange now, because some of the money going to the health service comes from national insurance contributions, some comes direct; and likewise for benefits. Why we do need the fund, which, as the Commons committee pointed out, has a surplus that no one is sure should be there or not? We ought to reconsider that.

Baroness Hollis of Heigham

My Lords, I agree, but the Government would not argue that it is a fund in the sense that people normally mean, in that a pot of money is invested in stocks and securities. I do not think that the noble Lord would disagree that, essentially, that is an accounting issue where, under long-standing legislation, contributions paid in can be used only to pay for contributory benefits and where any surplus must be used to buy gilts. In practice, that means that the Government will borrow less from elsewhere. In that sense, he is right: it is not a nominal but an accounting fund, rather than a real pot of money under the bed, as it were.

Surplus contributions are used to buy gilts and to reduce money borrowed elsewhere. As the noble Lord will also know, ever since 1948 there has been an element of hypothecation of NICs to pay for health. That money has been channelled direct to the NHS—there is no simple read-across between the two but there has always been that element of hypothecation.

Lord Higgins

My Lords, I well understand that. I was going to say that I think that I wrote it; actually, I think that I approved it, which is not quite the same thing. I understand all that, but I begin to wonder at the back of my mind, this many years after the event, whether that is really a sensible accounting arrangement, because it gets in a most awful tangle.

Baroness Hollis of Heigham

My Lords, I was surprised that the noble Lord was nodding his head so vigorously in agreement with me when I read those words. If I had realised that he had written them, I would have understood why he was so enthusiastic. There is an honest and honourable debate to be had on that issue. However, there is a mindset of support for the principle of national insurance based on contributions, entitlement and rights, which one would have to be very careful to challenge. Equally I accept that society has moved on from the original concept on which it was based in 1948. There is perhaps a debate to be had.

The noble Baroness, Lady Barker, raised specific points about contracting-out and contracting-in funds. She asked me how many people had contracted out and contracted in. I have the statistics and would be very happy to let her see them. As of 2000–01, the total number of contracted-out scheme members was 14.3 million; there were 8.6 million contracted-out occupational scheme members, 8 million of whom were contracted out as final salary; 316,000 have been contracted out as money purchase; there are 5.7 million APPs and 9 million people belong to SERPS. There is relatively little evidence of change between 1996–97 and 2000–01, but I would not be surprised if there had not been change since then.

The pattern of movement of contracted-out occupational schemes has hardly changed since 1997–98; in fact, it has increased from 1999–2000 and so on. The statistics, although they are the latest that we have, are sufficiently out of date that I cannot give her a really helpful answer. There does not seem to be any significant movement, as reflected in those statistics. They seem to remain the same.

The noble Baroness asked how many schemes are contracting back into the state system. As with the figures for contracting out, the latest figures relate to the 2000–01 tax year. As the majority of schemes that are contracting in have done so relatively recently, the figures do not reflect any trend. I shall see whether we have more up-to-date information on it—I shall want that information later. I cannot be as helpful as I would wish to be, even though I know that the noble Baroness would like that material.

I have sympathy on the 25p issue. It has not been increased since 1971, when it was introduced, but there we are. The noble Baroness asked specific questions about pension credit. My understanding is that the basic state pension is taxable, therefore if you defer it, whether by increments or otherwise, it would be taxable. I do not know whether the noble Baroness had any further questions about the lump sum and its interaction with pension credit as opposed to the taxation system. We must still work out the fine detail, but we seek to ensure that anybody who would be eligible for pension credit should not be penalised for deferring by being excluded from pension credit. The precise details, whether increments or lump sum, still have to be worked out. As and when we have fuller details in the course of the Bill, we will be able to share them with the noble Baroness, and she will be able to decide whether she regards them as satisfactory.

I hope that I have answered the questions raised by noble Lords and that, as a result, they will agree to accept the regulations.

On Question, Motion agreed to.