Report (1st Day)

Part of Pensions Bill – in the House of Lords at 4:00 pm on 24th February 2014.

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Photo of Lord Freud Lord Freud The Parliamentary Under-Secretary of State for Work and Pensions 4:00 pm, 24th February 2014

My Lords, I thank the noble Baroness, Lady Hollis, for the amendment which gives an opportunity to debate again a most important issue which is close to her heart and with which I am sympathetic. Over the years we have had quite a few discussions on how the issue is best addressed.

Single-tier reforms strengthen the contributory principle and reduce disparities in outcomes between individuals. They are designed to fit with the working lives of today’s young people, who should find it much easier to plan for the future, counting on a full single-tier pension. At first glance, it may appear that the national insurance treatment of those in low-paying mini-jobs is at odds with these principles. However, I would like to explain why we think mini-jobs are not the problem they might seem to be and why, looking at how to adjust the national insurance system to combat this perceived problem, we may end up with solutions which create more problems and knock-on impacts than they solve.

The noble Baroness has been as assiduous as always in exploring all the sources to illustrate her case for change. Her central estimate was that 250,000 people would be affected. I continue to be confident in the department’s estimate of the number who—if we were to aggregate their earnings in the way proposed—would gain that extra qualifying year. That number is some 50,000 at any one time, which is fewer than one in 500 workers. This number makes perfect sense when you look at the opportunities the national insurance system provides for gaining state pension qualifying years. The entry point for workers is through the lower earnings limit, which is set at £109 a week. This is £40 below the primary threshold which is when national insurance starts to be paid. At the national minimum wage, this is just 18 hours a week for a year or six months of full-time work. There is also a comprehensive crediting system that recognises caring responsibilities and those unable to work.

The 50,000 figure is a snapshot from 2012-13 and individuals may gain a qualifying year in other years. In the single-tier system, full pension entitlement is achieved after someone has built up 35 qualifying years. People can therefore spend a third of their working lives outside the national insurance system and still gain the full single-tier amount. This was a deliberate part of our design, to recognise that people have increasingly varied careers and working lives, and yet can still reasonably count on a full single-tier pension in their retirement planning.

My noble friend Lord German inquired about the timetable for the introduction of universal credit. We are planning to pull that in for the bulk of people, virtually everyone, in 2016 and 2017. That would certainly include everyone in the workforce. The numbers beyond that are some of the people who are currently on ESA on a long-term basis in the support section.

If we were to take a similar snapshot to that of the 50,000 in 2012-13 but in 2017, we would find that individuals with the same characteristics may well be getting a credit through universal credit. This will bring at least a further 800,000 people into national insurance credits. For instance, the partner of the claimant or those on very low earnings—below the lower earnings limit—will be brought into universal credit because the Government believe that it should pay to work.

We have had a parallel discussion on zero hours, which has clearly been a source of concern around the Chamber today. There is concern at one level from the employment practices perspective. As noble Lords are fully aware, BIS is consulting on this issue. There is also a degree of uncertainty around the prevalence of this practice and whether it is increasing; as noble Lords have pointed out, the ONS is looking closely at evidence for this. However, we know that the proportion of women with two or more jobs is similar to the proportion of 10 years ago; in other words, around 5% of all workers. We are not talking about using the word “exponential”, which I have heard around the Chamber once or twice this afternoon. The number of women in full-time work rose in the past year by more than 270,000, and the number of women in two jobs actually decreased in that year by 25,000.

Clearly, when we look at zero-hours contracts, I need to make the point to the noble Baroness, Lady Drake, that I did not indicate in Committee, nor have I indicated, that the number of individuals on those contracts was small or in some way insignificant. However, the question at hand here is about access to the national insurance system and there is no evidence to suggest that being on this type of contract presents barriers to entering the national insurance system because of low pay.

Figures from the Labour Force Survey and the Chartered Institute of Personnel and Development—the CIPD—both show that those on zero-hour contracts work an average of around 20 hours a week, as my noble friend Lord German pointed out. This is enough to exceed the lower earnings limit even on the national minimum wage of £6.31 an hour. Data from the ONS suggest that the average wage for those on a zero-hours contract is nearer £200 a week. In response to the point of the noble Lord, Lord Morris, the

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S tatistics show that full-time employment in the year is up 408,000, and part-time employment has gone down by 12,000.

I understand that the amendment is permissive, and even without any evidence of a significant problem one might think it would be helpful to increase the Government’s options in this respect. However, it is simply not necessary, given the extensive regulation-making powers already available, to modify the crediting system. In response to my noble friend Lord Forsyth, it is hardly useful to have redundant legislation on the books.

This amendment would allow people to opt in to have their earnings aggregated. It is not clear that this can be achieved without requiring a very high evidence base. For instance, if we introduced a system where people could effectively send in the employee’s rate of national insurance, we introduce incentives for employers to play the system. Some will contrive to avoid employers’ national insurance but without disturbing their employees’ national insurance position. The noble Baroness, Lady Hollis, suggested that the employer need not pay national insurance. However, even if that were the case there is still a significant burden on the employer. We also could not verify the wages without disproportionate cost. This would incentivise people to underreport earnings to get into the system on the cheap.

Aggregating earnings would have significant consequences for employers, including those people who would not now consider themselves to be employers. Take, for instance, the position of a woman whose job it is to clean private houses for a few hours each day of the week. The nature of the work would mean that she is likely to be employed and could have a number of jobs with different households. Under aggregation, each of those households would need to operate a Pay As You Earn scheme. They would need to contact HMRC to open such a scheme. They would then need to obtain and familiarise themselves with payroll software and use it to report earnings under real-time information to HMRC every time they pay their cleaner.

In response to the question from the noble Lord, Lord Morris, on joined-up thinking between the DWP and HMRC, I am pleased to say that we are actually working—I suspect for the first time—in a very joined-up way to get the RTI system to work. However, we do not want to require employers who would otherwise not have to have a PAYE scheme to open one up on an ad hoc basis. The point discussed by the noble Baroness, Lady Hollis, which would allow people to class themselves as self-employed, seems slightly odd given the concern about job security that motivates the debate we have just had over zero-hours contracts. Blurring the line between employment and self-employment is a minefield from a tax policy perspective. It introduces incentives to create more mini-jobs and to play the system.

The processes required to capture and collate earnings from people in mini-jobs cannot be achieved by simply tweaking the system. Moving to the aggregation of earnings from mini-jobs can only sensibly be considered under the work on the operational integration of income tax and national insurance contributions announced at Budget 2011 by the Chancellor. As noble Lords will be aware, national insurance liability is calculated on a per job basis but income tax liability is aggregated across all sources of earnings so the issues are similar. The Government concluded that given the scale of the change that operational integration would entail and the amount of change that employers are already managing, including the introduction of real-time information, they would await further progress on these before moving forward on tax/national insurance integration.

In the short term, we are not complacent and are determined that people who do the right thing and work are treated fairly. Beyond a radical overhaul of state pensions in this part of the Bill, specifically to make it fit for today’s workers, I have described work that this Government have undertaken to expand crediting coverage for low earners through universal credit and improving monitoring of zero-hours contracts.

This amendment may be intended to place a marker to nudge the Government into taking action, but it comes without strong evidence of a problem and the type of action that it promotes is piecemeal tinkering, which could create perverse outcomes and new unfairnesses, especially in the tax and national insurance system. I hope that the noble Baroness will withdraw her amendment.