My Lords, I am aware that the noble Lord, Lord McKenzie, cannot be present today for personal reasons. Given the circumstances, I should be happy to have further discussions with him about his Amendment 7.
Yes, that would be all right.
Amendment 7 not moved.
Schedule 12: State pension: amendments
Amendments 8 to 10
Moved by Lord Freud
8: Schedule 12, page 51, line 37, at end insert—
“In section 1 (outline of contributory system), in subsection (1)(a), after “this Act” insert “or any other Act”.
In section 13 (Class 3 contributions), in subsection (2), omit “contribution”.
After section 19A insert—
“19B Extended meaning of “benefit” etc in Part 1
In this Part references to “benefit” or “contributory benefit” include benefit under Part 1 of the Pensions Act 2014.””
9: Schedule 12, page 52, line 17, at end insert—
“(5ZB) Regulations under subsection (5ZA) must provide for crediting a person with such contributions as may be specified in respect of periods on or after
(a) a spouse or civil partner of a member of Her Majesty’s forces,
(b) accompanying the member on an assignment outside the United Kingdom, and
(c) not of a description specified in the regulations.”
10: Schedule 12, page 52, line 17, at end insert—
“In section 122(1) (interpretation), in the definition of “benefit”, after paragraph (c) insert—
“(For the meaning of “benefit” in Part 1, see also section 19B)”.”
Amendments 8 to 10 agreed.
Clause 24: Abolition of contracting-out for salary related schemes etc
Moved by Lord Whitty
11: Clause 24, page 11, line 38, at end insert—
“( ) The power conferred by subsection (2) on employers to amend occupational pension schemes does not override the powers and duties of Trustees of such schemes nor any duty to consult members of such schemes and their representatives in accordance with the terms of such schemes.”
My Lords, with Clause 24 and Schedule 14 we deal with the impact of the ending of contracting out on existing occupational, or work-based, pension schemes. The impact is pretty severe, being up to 5% of the income of those schemes. The Government have provided some measures in Schedule 14 and Clause 24 that allow employers effectively either to increase the contributions of employees but not of employers or to cut back on the benefits of those schemes. I do not approve of that way of dealing with the situation for either the public or the private sectors. Of course, ending contracting out impacts on both sectors. Although Clause 24 is primarily about the private sector, there are a couple of related questions on the public sector that I should like to put to the Minister.
I declare an interest as a vice-president of the Local Government Association and as a long-term member of the GMB. I am therefore particularly concerned about the local government scheme but other public sector schemes are also affected. In Committee the Minister indicated that he was prepared to have discussions with the LGA—and, presumably, parallel discussions with other public sector employers—to consider how the loss to its funds could be made up.
I understand that a meeting took place on
As to some of the schemes which are now in the private sector, Amendment 14 goes some way to meeting the concerns expressed on behalf of the post-privatisation schemes where guarantees were given that there would not be any diminution in the benefits from such schemes at the point of privatisation. So anyone who was in a scheme before that point should have been covered. I welcome that. However, I have a concern about the definition of “protected person”. The amendment refers to it being defined in regulations, whereas the schemes to which the Government have referred in their statements on electricity, railways, nuclear decommissioning and coal do not cover all the people who were given guarantees post-privatisation. For example, the guarantees for gas workers were written into the deeds of the scheme but were nevertheless promises backed by the Government. I should therefore like to know how far into the area of protected persons the regulations are likely to go. If the noble Lord wishes to write to me on that front I would be grateful but, in any case, out of equity, it ought to be addressed in the same way for every group of workers affected during that period of major privatisation of the utilities and other nationalised industries.
Of course, the Government have provided in Clause 24 and Schedule 14 a way out for others who are in private sector schemes. The way out is hugely detrimental to the members of those schemes in that it gives the right of override to employers—not to the scheme—to alter the terms of that scheme in order to make up the effects of the ending of contracting out, which can be up to a 5% deficit in such schemes. As the Bill stands, that ability to override is without reference to trustees, without invoking any consultation with members and without negotiations with trade unions or other worker representatives. Amendment 11 seeks to ensure that the rights of trustees are protected and that their legal responsibilities are recognised; that the trustees will be involved in any alteration of the scheme; and that consultation will be conducted in accordance with the terms of the scheme. Amendment 13, tabled by my noble friend Lady Turner, goes further and requires a ballot of members of such schemes. Unless we do that, we are seriously undermining the whole system of trusteeship of private sector occupational schemes.
I hope that the Minister will be able to tell me that Amendment 12 is unnecessary because it is in the existing law. I hope that is the case but the terms of Clause 24 and Schedule 14 which allow for override and alteration are extremely wide. It should have been the law and it was generally accepted that it was the law post the Maxwell scandal and the reforms that led to the requirement that schemes could not at any point retrospectively change the accrued benefit of members up to that point. In other words, the scheme could be altered subsequently but anything accrued up to the point of change could not be retrospectively downgraded. Amendment 12 seeks to ensure clearly that this is the case.
We need clarity from the Government on this and we need their vision for the future of occupational work-based schemes because there is a contradiction in the Government’s position. On the one hand, we are engaged in a system of auto-enrolment to increase the coverage for workers who hitherto have been outside occupational schemes, and in principle we welcome all that. On the other hand, the effects of the Bill, without mitigation of the kind I am suggesting in Amendments 11 and 12, will undermine and even destroy the viability of many existing schemes. It is not just the final salary schemes that we are talking about here, or career average schemes or simply defined benefit schemes. It will also apply to or have implications for all occupational pension schemes, partly because of the financial effect but also because the viability of pension schemes depends not only on the funding arrangements and the rigour with which those schemes are managed, but on the mutuality between the members, the employers and the funders under which those schemes are set up. That is reflected in the trustee arrangements; expectations are based on that mutuality continuing and on that trustee protection. If that goes, then members’ and potential members’ trust in such schemes goes too. We need to hear clearly from the Government what their intentions are for this sector.
If trust goes, then the level of opt-out from such schemes will increase. Pension schemes will be seen as non-viable. Some pension schemes will fail and the workers and the employers who have hitherto seen their pension contributions as part of deferred pay may no longer regard them in that light. Therefore, pressure might grow for them to be paid immediately. Pension schemes are the most effective form of savings but they will not appear that way if trust in such schemes disappears. That is bad for future pensioners but it is also bad for the economy if that element of relatively automatic saving is undermined. To maintain the trust, the role of trustees is vital. I would therefore like the Government to accept Amendment 11 and to indicate that the role of trustees, and therefore the trust in such schemes, would be maintained. That is not to say that alterations could not be made, but they would be made through the way in which the role of the trustees and the consultation is laid down in such schemes.
At a minimum, I hope that the Government can accept Amendment 11, confirm my understanding that Amendment 12 is indeed the law as it stands and clarify the situation of protected persons in the post-privatisation schemes. I would also like them at least to consider accepting the amendment tabled by my noble friend Lady Turner, which would delete Schedule 14 entirely, because the idea behind this whole way of overriding long-standing schemes is pernicious. Amendment 11 gives a way of doing it in effect, but doing it by consent, which is far preferable and will preserve a very significant part of the remuneration package and savings structure of the country. I beg to move.
My Lords, in this section of the Bill employers are given a new power to change the provisions of a scheme in order to cover the NI costs to which they will be subjected. They may apparently do so without having to seek the agreement of staff or their unions. As my noble friend has pointed out, this is an overriding power to which a number of us objected at earlier stages when discussing the Bill. Schedule 11 sets out the provisions in some detail.
At Second Reading I referred to the development of what we now call defined benefit schemes, and what used to be called final salary schemes, as a result of which generations of pensioners have enjoyed excellent retirement provision. There was a move some years ago to change such schemes to money purchase schemes or schemes with less generous protection. Where the workforce was strong enough, probably with active union involvement, such schemes have been maintained. There is now, as a result of this Bill, concern among those who have not yet reached retirement age that these schemes will not continue and that employers will utilise the provisions in Schedule 11 to undermine or change them. Hence my amendment, which stipulates that an employer may not change these benefits without the agreement of the current scheme members, which under my amendment could be ascertained through a poll. I hope that the Government will agree that it is reasonable for the members of the scheme to have the final say. If an employer wants to change the existing arrangements, it must be by negotiation with the staff and their representatives and by agreement. Again, I hope the Government will agree that that is reasonable. If they do not, I would like to oppose the whole clause and the schedule.
I want to make another point about so-called protected persons. This was raised during earlier discussions and referred to again by my noble friend today. The Government have agreed in principle that individuals who were members of schemes when their employing companies were being denationalised would retain their pension provision. I believe the assurance is that where this protection has been agreed by statute, it will continue. I welcome that, and would like to see an endorsement of the point by the Minister. There are others who believe that they are covered not by statute but because their own private scheme gives them cover. Because of a change of ownership that might happen, they are concerned about their position in the future. Their position is not protected by statute, only by their own scheme. These people have concerns about what might happen to their DB scheme. My amendment would provide some cover because of the necessity to get the agreement of scheme members to any changes to benefit.
I wait with interest to hear what the Minister has to say to this, and in particular what he will say about his own Amendment 14, which looks like a tentative step in our direction. I hope that it is more than a tentative step and that he is undertaking to do something of the kind that we have been campaigning for and would like to see in the Bill before it leaves this House. I support the amendments already spoken to.
My Lords, it is a pleasure to follow my noble friends Lady Turner and Lord Whitty, who have robustly set out a fundamental challenge to Clause 24 and Schedule 13, which I think the Minister is required to engage with. Would the noble Lord and the Pensions Minister argue that the loss of the rebate, without some consequential provisions, would lead to the closure of defined benefit schemes? In short, my noble friends argue that this is where it will lead, even with the override which is designed to prevent their loss. There is a fundamental difference which deserves to be addressed in the way specifically asked for by my noble friend Lord Whitty. I am sure that the Minister will be conscious of that.
On the issue of protected persons, I welcome the Government’s concession, set out in Amendment 14, confirming that they will honour the specific undertaking given to the members of these schemes to encourage them to accept privatisation of the industries for which they worked. That is exactly why this undertaking was given to them. It has been promised for some time. Belated it may be in its delivery, but it is none the less welcome and it will be a relief to the 60,000 or more members of those identifiable schemes who have been awaiting this decision.
My noble friend Lord Whitty raised an interesting question about whether this concession can be made to apply in some form to gas workers who have a similar undertaking, but which was enshrined in a different way. I would be interested in what the Minister says about that.
Were my noble friend Lord Whitty’s Amendment 11 enacted it would ensure that:
“The power conferred … on employers to amend occupational pension schemes does not override the powers and duties of Trustees of such schemes nor any duty to consult members of such schemes and their representatives”.
To the extent that this amendment requires consultation with trustees, we support it. We had an extensive debate on these issues in Grand Committee and I made clear then that our position is one of broad agreement with the change to a single-tier pension and the aim of introducing simplicity into the state pension system. We also accepted that this required an end to contracting out. However, we agreed with the arguments put forward in Committee by my noble friend Lady Drake that statutory overrides are strong measures and should be used with care in all cases, at the very least requiring an employer to consult pension trustees before exercising the power to amend a pension scheme.
It would be to the benefit of understanding the Government’s position if the Minister would make clear in his response why the Government had set their face against consultation with trustees, especially when it is preserved in the statutory requirement to consult scheme members. It surely cannot be the case that the different approach to these forms of consultation is that consultation with trustees would be meaningful, but that consultation with individual members would be anything but—indeed it would be pointless. Like my noble friend Lord Whitty, I hope that the Minister’s response to Amendment 12 will be that it is unnecessary. It is my view that this is an expression of the current state of the law.
Finally, my noble friend raised an interesting point about public sector pensions, from his knowledge of the understandings that appear to have been implied by the meeting with the LGA. We would all be interested to know when further follow-up can be expected.
My Lords, under the current system it is possible for defined benefit schemes to contract out of the additional state pension, giving up entitlement for additional state pension in return for a broadly similar occupational pension and payment of a lower national insurance rate for both employer and employee. When single tier is introduced, there will no longer be an additional state pension for defined benefit schemes to contract out of. Employers with such schemes will therefore no longer receive a national insurance rebate in respect of contracted-out members.
Employers will need to find ways to recoup the costs that the loss of the rebate brings. Unless they are able to do that, many employers will be forced to close their schemes. Clearly, members are not served by their pension schemes closing and the Government are committed to supporting the continuation of defined benefit pension provision. To that end, we are providing a statutory override to allow private sector employers to make limited changes to their schemes to adjust for the additional cost due to the end of contracting out. This is part of our wider state pension reforms. The majority of contracted-out workers in the private sector who reach state pension age in the first two decades of single tier will get enough extra state pension to offset the increase in national insurance they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes.
Noble Lords have made clear their concerns that the override is not abused by employers and that trustees and members are properly consulted about any changes. I fully recognise those concerns. The override allows for limited changes to future accruals and/or future contributions where the scheme rules would otherwise prevent that. I make it absolutely clear that the override does not permit the employer to ignore other rules about how the scheme operates. For example, it does not mean that an employer can avoid notifying trustees or members of a change, or refuse to carry out a consultation, if scheme rules would require this. Indeed, existing legislation requires that members are consulted on any significant rule changes before they are made. In response to the query from the noble Lord, Lord Whitty, that will remain the case. In addition, we have every reason to believe that employers will want to engage with trustees about how best to respond to the end of contracting out and believe it is in their best interest to do so.
Schedule 14 provides important safeguards, such as limits on the use of the override to prevent an employer from making changes beyond those necessary to recoup their increase in national insurance contributions, the need for an actuary to certify the changes and protection for members’ accrued rights. We will put further safeguards in regulations—for example, to ensure that the employer cannot create their own assumptions for the purposes of the calculation but must draw on existing assumptions used by the scheme.
Amendment 11 concerns protection for trustee powers and duties. As I have said, the override does not prevent the scheme operating normally. The only powers or duties that the override applies to—and therefore that the amendment would protect—are those that require trustee consent to changes or provide that only trustees can change scheme rules. Where these powers stay in place, they would make the override unusable, which in turn could encourage employers to close their scheme. Amendment 11 also seeks to ensure that the statutory override does not trump any duty to consult scheme members and their representatives. Such an amendment is unnecessary as scheme rules and existing legislation requiring member and representative consultation are not affected by the override.
The Government recognise that a trustee’s fiduciary duty to the scheme’s members may put them in a difficult position if they are required to agree scheme changes that, at face value, are detrimental to the member. However, the statutory override does not prevent the employer from engaging with the trustees on any scheme changes they are considering. It is in the employer’s interest to engage with trustees on proposed changes. Trustees are responsible for administering the pension scheme. All schemes need lead time before any changes can take place, to allow for IT systems to be updated and changes to the title deed to be made.
Part of Amendment 12 seeks to protect current members’ accrued rights. The Government absolutely agree that any accrued rights should be protected and preserved, and I reassure the noble Lord, Lord Whitty, and other noble Lords that the Bill already provides such protection by way of paragraph 3 of Schedule 14. This refers to the protection of “subsisting rights”—the term used in pension legislation—for both scheme members and their survivors.
Amendment 12 would also remove the stipulation that changes made in respect of future members have to correspond to changes made in respect of current members. It is important to remember that the override will enable employers to offset the additional cost of national insurance that arises from April 2016. The amendment would broaden the override. An employer could set different contribution rates or different rates of accrual for current and future members. I do not believe that that would be right. The increased national insurance costs to the employer from 2016 will be the same for both groups of members, and the Bill as drafted ensures that the override reflects that.
Where an employer chooses to use a statutory override to reduce future benefits rather than increase contributions then Amendment 13, tabled by the noble Baroness, Lady Turner, would require present members of a pension scheme to agree to the proposed reductions. This would place an additional burden on the employer, as it goes further than the existing requirements to consult. It would also mean that employers would be more likely to choose to make changes to contributions simply to avoid the administrative expense and burden of conducting a poll. It therefore removes much of the flexibility for the employer to make changes to future benefits or contributions, or a combination of these two. Instead, they would be faced with increasing contributions or closing the scheme.
Amendment 15 would simply remove Schedule 14 from the Bill. I have already explained that Schedule 14 is vital. It sets the parameters for the override and contains many safeguards for members.
I turn now to Amendment 14, tabled in my name. This relates to the long-awaited response—long-awaited by the noble Lord, Lord Browne, if no one else—to the protected persons consultation. It provides that protected persons are excluded from the scope of the statutory override. Noble Lords will be aware of a small group of approximately 60,000 individuals employed on the railways, including by Transport for London, and in the electricity, coal, nuclear waste and decommissioning industries who were given guarantees at the time of privatisation. Legislation passed at that time limits employers and trustees in their ability to change scheme rules.
The Government consulted on whether employers should be permitted to use the statutory override in respect of these workers and published the outcome earlier this month. This is a finely balanced issue where the arguments are highly polarised. We received many responses with strong views expressed on both sides and from many different and conflicting interests. On one side, we were strongly urged to honour the promises made to this small group of individuals at the time of privatisation. On the other, employers and their representatives argued that it is important for all scheme members to be treated the same way when contracting out ends and said that, if protected persons are excluded, they would seek other ways to offset the loss of the national insurance rebate.
The Government have decided to honour the promises made at the time of privatisation, which in many cases have been subsequently reaffirmed by Ministers. Due to the interest expressed in the outcome of this consultation, my Amendment 14 seeks to make explicit the exclusion of protected persons from the scope of the statutory override. Regulations will specify who is considered a protected person in relation to the affected schemes. We intend to set this out to capture those persons who we described in our consultation response. In that response, we set out that we are aware that relevant legislation covers protected persons in the electricity, nuclear waste and decommissioning, coal and rail industries, including Transport for London. The gas workers, who were mentioned by the noble Lord, Lord Whitty, are not protected by statute. The matter of the gas workers was consulted on and the current intention is to exclude people protected under legislation.
Finally, there have been discussions between the LGA and others, and there was a meeting with the DWP and HM Treasury as well as the DCLG, and they have agreed to meet further with the LGA to ensure that options are considered in an informed way as part of the next spending review. I understand that other sectors, such as the higher education sector, are likely to be party to these discussions.
Will my noble friend allow me a moment’s intervention? I was present at that meeting, and I found it very interesting to have a representative of HMRC there. One of the principal conclusions I drew from that meeting was that there was an agreement between the LGA and HMRC that they would examine up front any arrangement for the distribution of additional funds from HMRC to local government pension funds, and would get the process sorted out in advance so that if money became available the method of distribution would be quick and would help them in their procedure. Can my noble friend confirm my understanding that HMRC is onside with this?
My noble friend is probably way ahead of everyone in this Chamber at this moment on this matter, but I think I can simply answer yes to his understanding. As he says, whereas final decisions tend to get taken at a relatively late moment, if the processes are well organised, that matters less and they can be effectively activated.
The ending of contracting out is an inevitable consequence of the state pension reforms. We want to manage this as smoothly as possible and to minimise impacts on employers, schemes and individuals. I have set out why the override is necessary and why the amendments tabled by the noble Baroness and the noble Lord would make the override unworkable. Amendment 11 would in many cases allow trustees to block changes to the scheme and would increase the risk that employers would simply close their schemes. That is why I urge the noble Lord to withdraw his amendment.
My Lords, I thank the Minister for that. There is quite a lot in there which has cheered me up slightly—not everything, but bits of it. I am grateful for this update on the LGA position. We will watch this space. I am interested to see that there are other sectors that could be involved in that. I welcome the Minister’s statement in relation to the consultation of members of the scheme. I think I am quoting him correctly that the override does not affect the duty to consult, that the Government support the continuation of DB schemes and that the rules of such schemes on consultation are not affected by the override.
That deals with the consultation with members of the scheme, but it does not effectively deal with the trustee position, and the role of the trustees is very important in the future of the schemes and in future faith in them. The Minister said that trustees are bound to consult; yes, they are possibly bound to consult. The override clearly applies in his mind, and I presume the intention of the override is that in those schemes that require trustee consent, the employer, using Clause 24 and Schedule 14 can override the need for that consent. That seems a pretty fundamental alternation in the role of trustees. I hope that, even at this late stage, the Government would reconsider that position.
I am grateful for the Minister’s view on accrued rights and the fact that Amendment 12 is not, therefore, needed. I am less grateful for his indication that “protected workers” will not apply to those who are protected on the word of the Government of the day but not actually embedded in statute. This applies principally to the gas workers and I suspect I will be in correspondence with him about that.
The central point of this group of amendments is that, in this clause, the Government have, effectively, overridden the governance structure of work-based occupational schemes by attacking the very fundamentals of trusteeship. That is a mistake. Over the years, many changes have been made at the behest of employers and with the agreement of trustees. Some of these were detrimental to future members because of the financial position of the scheme or legislative changes. Trustees are unlikely to be unable to recognise the need for such changes, but to override and delete trustee consent is a very serious step which the Government should be much more hesitant about taking. However, for the moment, I beg leave to withdraw the amendment and thank the Minister for some of his other remarks.
Amendment 11 withdrawn.
Amendments 12 and 13 not moved.
Moved by Lord Freud
14: Clause 24, page 11, line 42, leave out subsection (4) and insert—
“(4) The power may not be used—
(a) to make amendments that apply to a member who is a protected person in relation to a scheme, or
(b) to amend a public service pension scheme or a scheme of a description specified in regulations under this paragraph.
(5) Regulations must define what is meant by a protected person in relation to a scheme for the purposes of subsection (4)(a).”
Amendment 14 agreed.
Schedule 14: Power to amend schemes to reflect abolition of contracting-out
Amendment 15 not moved.
Clause 27: Periodic review of rules about pensionable age
Moved by Baroness Turner of Camden
16: Clause 27, page 13, line 29, leave out from “to” to “and” in line 30 and insert “the type of work undertaken and the degree to which this may impact on health and life expectancy”
My Lords, this is a short amendment dealing with the section of the Bill that allows for the periodic review of rules about pensionable age. When I read it, I was concerned that there was nothing at all about the type of work people undertook before they retired. At Second Reading, I said that there were many people who were quite happy to go on working past normal retirement age but it depends on the kind of job you do, whether you are well paid, whether your job has authority, whether you enjoy your job and so on. However, there are many people who do work that is very necessary if the rest of us are to lead reasonably comfortable lives, such as people who work in construction and other industries where there is strenuous activity and, sometimes, danger. It is not a good idea to have elderly people in this kind of work.
It is too late in the day to make a long statement about this, but if there is to be a review of retirement ages it must be understood that people do very different types of work and it is not a good idea to think that one size fits all. I hope the Government will realise that in a periodic review of retirement ages it is sensible also to take on board the kind of work being looked at and the sort of people who are expected to do it. If they do not, it will not be very popular and may lead to problems in the future. You do not want future problems in a pensions Bill, so I suggest the Government think very seriously about this. I quite like Amendment 17, which is also concerned with a review of how retirement age is judged and brings a range of representatives of parties, including trade unions, into consultation, which is also very sensible. In the mean time, I beg to move.
My Lords, in speaking to Amendment 16, I shall also speak to Amendment 17 in my name and that of my noble friend Lord Browne. We on these Benches agree with the principle of raising the state pension age to reflect longevity. We accept the need for periodic reviews of the state pension age. Where we differ from the Government is on how best to do that.
Fixing the state pension age is never easy. There is always an issue of fairness at stake. Having a careful, evidence-based review before taking any future decisions on changes to the state pension age is a crucial element of ensuring fairness between generations. However, sometimes fairness requires a consideration of difference, particularly differences in longevity and health. The Government are setting considerable store by actuarial information on average life expectancy. However, while average life expectancy tells us something—mostly quite a lot about medical advances and their ability keep us alive for longer—it does not tell us very much about our health in retirement or differential mortality rates.
We heard a great deal of evidence in Committee to inform our debate, and I certainly will not rehearse it all here, noble Lords will be relieved to hear. However, maybe the headlines are worth briefly restating. People are living longer, but the proportion of years in full health is not keeping track at the same rate. We have significant inequalities in health within the UK, and significant variations in mortality as a result. There are clear socioeconomic differences. There is a class divide, as managerial and professional classes live longer than manual workers by 3.8 years for women and 3.1 years for men. There is a clear geographical divide.
There is then the effect of this differential life expectancy on state retirement incomes, with the irony that those living the shortest lives post-retirement—the poorest and least skilled workers—will receive less in state pension than their better-off counterparts, but they may well have contributed for longer as a result of having spent less time in education.
If we want people to save for retirement, they need to trust the Government, to trust Parliament and to believe that their pensions are safe in our hands. The public need to know that they will not be at the mercy of political expediency, and that they will be protected from any adjustments that need to be made by ensuring that they are not made too quickly. Rather than simply being a matter for the Secretary of State, as the Bill proposes, we need a genuinely independent panel which has the kind of cross-party and independent representation that will reassure the public and give confidence to parliamentarians from across the spectrum. Our amendment proposes simply that the review body should include representatives of the opposition parties and of the Cross Benches of this House to ensure that Parliament as a whole is at the heart of this process. It would also include representatives of trade unions, who are themselves the representatives of those who are spending their ever-longer working lives saving for retirement. This broader representation will give people confidence that a wide range of views will be heard. I urge the Minister to accept it.
My Lords, as your Lordships know, the purpose of the review of state pension age is to inform the Government. The reports from the Government Actuary and the independently led review, which will feed into the review, should collect and analyse the latest data, and give the Government of the day the information they need to make what will always be a difficult and contentious decision.
We are all keen that the Secretary of State receives a report that is impartial. Because we are requiring that all reports compiled as part of the review are published and all future changes to state pension age continue to go through primary legislation, any proposal based on a report that is not impartial, credible and comprehensive will quickly fall apart when scrutinised by stakeholders and both Houses of Parliament.
Turning first to the substance of the amendment tabled by the noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, if one thing is apparent it is that there is no clear consensus on who should sit on the review, what they should look at, or how they should collect the necessary evidence. We have been clear in Grand Committee and in the other place that this Government’s vision of the review is one similar to the independent review of public service pensions. That review was run by the noble Lord, Lord Hutton, a member of the opposition Benches and an expert in his field. It was transparent, comprehensive, independent and established a consensus.
Noble Lords will also be aware that the Pensions Commission, set up by the previous Government, had three commissioners from the areas of business, trade unionism and academia: not a single politician or Cross-Bencher. That commission gained support through comprehensive and open debate about the issues and trade-offs, rather than being based on the inherent characteristics of the commissioners’ backgrounds.
In short, the amendment tabled by the noble Baroness, Lady Sherlock, and the noble Lord, Lord Browne, would preclude these two successful models. It would result in a body of at least six individuals from stakeholder groups, the other place and this House. It would not necessarily have the expertise to review the relevant data and would effectively create a mini parliamentary process before the parliamentary process proper. We do not think that is the right way to run a review designed to inform the Government. In the Bill as currently drafted there is nothing to prevent a future Government running the review in whatever way they think best. That is a key point underpinning our approach to the review—getting future Governments to take active ownership of and responsibility for all aspects of the review, instead of just going through the motions.
Turning to the factors to be considered as part of any review, I must note that in response to the recommendation made by the noble Baronesses, Lady Turner and Lady Sherlock, we do not have the data regarding the relationship between specific occupations or types of work and life expectancy and healthy life expectancy. Beginning to collect such data would be both burdensome and, I imagine, for some professions simply impossible. More generally, we do not think it is necessary to specify any factors to be considered in legislation. We have already consulted stakeholders on what factors they think are important, and stated the factors we expect to be considered in the White Paper. The Opposition are worried that by not specifying the factors in legislation, future reviews simply will not consider important variables. However, what kind of support would such a review generate?
We want to encourage all interested parties to feed in their thoughts and contributions to better involve them. Specifying factors in the Bill could send out the message that we have already thought of everything important, and that future Governments do not need to consider additional factors as they are not set out in primary legislation. Such an approach could lead to a tick-box mentality, with Governments simply going through the motions instead of taking a proper, considered approach to each review. My point is illustrated by the fact that another factor has been added to the Opposition’s amendment since its predecessor was tabled only a month or so ago. Other noble Lords have also previously suggested additional factors, including life expectancy of the lowest income decile, prevalence of smoking and quality of diet. This demonstrates that the determination of relevant factors should take place after a thorough and extensive consideration and on an iterative basis for each review.
I turn now to the review’s remit. We believe that the Government should maintain control of this to keep it focused on the task at hand. There is nothing in the Bill to prevent the Secretary of State of the day updating the remit of the review, and we—or, more importantly, stakeholders—would fully expect him or her to do just this if new and compelling factors were identified during the course of the review.
The amendment of the noble Baroness, Lady Sherlock, also requires evidence to be gathered in public sessions. Although there is nothing in the Bill to prevent some evidence being taken orally—rather as Select Committees do—noble Lords will be aware that the nature of the analysis around state pension age, such as the myriad tables, charts and graphs, does not lend itself well to public sessions. Underpinning our approach is the idea that each Government will fully own and be responsible for the review. Setting out membership and factors to be considered restricts rather than increases that responsibility. It would instead limit the scope of reviews and reduce engagement by stakeholders. I therefore urge the noble Baroness to withdraw her amendment.
I thank the Minister for his response. It does not surprise me, but, on the other hand, I still think that the type of work that people do is very important. There are, of course, already industries in this country in which there are different ages of retirement for different types of work. It is not unusual for that to happen; indeed, it is quite a common practice, if an industry is particularly stressful or difficult, for there to be a lower retirement age for that kind of work. It is not an unusual state of affairs but one that is highly regarded where it applies—and people accept it. They think, “Oh well, that sort of work is very tough, but at least you go a bit early for it. You don’t have to stay and work there—after a certain time you can go”.
My husband, who was a pilot in the war, tried to stay in the Air Force because they were recruiting people to fly civil aircraft when the war ended. He tried to get into civil aircraft because he was a pilot, with decorations, but he was disappointed to find that he could not do so. He wanted to get into the civil air force because they had an early retirement age; he thought that he could retire at 50 and start becoming a full-time artist, which is what he had always wanted to do. But he did not manage to do that. I give that as an example, because the age of retirement was different than for general people. So it is not an unusual situation.
I still think that it is quite sensible to have a provision under which it is possible for a review to take seriously into account the type of work that is involved. However, I note what the Minister has said this evening and I shall study it with interest. In the mean time, I beg leave to withdraw the amendment.
Amendment 16 withdrawn.
Amendment 17 not moved.
Clause 30: Bereavement support payment
Amendments 18 to 21 not moved.
Moved by Baroness Hollis of Heigham
22: After Clause 30, insert the following new Clause—
“Assessed income period: indefinite period
Notwithstanding sections 28 and 29 above, any recipient of pension credit may from the age of 75 years have his or her assessed income period set for an indefinite period.”
My Lords, pensioners usually have stable incomes, especially compared to those who work, and they do not fluctuate by much. At the moment, existing pensioners on pension credit have their income and thus their eligibility assessed every five years at 65, 70 and 75. Thereafter, no further means-testing is required, although people need to report the death of a spouse or when they move into residential care. The Government are proposing to replace this light-touch system with annual means-testing every year until death, with the modest exemption of those currently already over 75, for whom means-testing has been suspended. All future pensioners will have annual means-testing until they die, which means that they will means-test, for example, a frail, 90 year-old widow.
In Committee, we argued that we would retain the current system of five-year assessments of income for pension credit eligibility and the suspension of means-testing after 75, both of which the Minister wishes to replace with annual means-testing. The Minister was not sympathetic; he tried to suggest to my noble friend Lady Sherlock that the new system would be simpler, whereas on any ordinary understanding of the word it is becoming more complicated. Eventually, he fell back on the necessity of making these savings—all £65 million or so extracted from some of the poorest people in the country.
This amendment is modest and targeted. It would permit the Government to means-test pensioners annually, as they propose to do, until the recipient is aged 75, and from then on as now those means tests would be suspended. Why this proposal? My concerns are threefold. First, the proposed changes will discourage pensioners from claiming pension credit. Secondly, it is profoundly unfair. Thirdly, it is not worth the relatively small savings that may follow.
On the first point of discouraging pensioners from claiming, we know that pensioners do badly out of means-testing, perhaps through ignorance. Many do not know what they are entitled to, especially if the husband who has always handled the finances of the family dies and his widow is not aware of what she may be entitled to.
Then there is the stigma. Even those who are aware of pension credit may deem themselves ineligible, as DWP’s own research shows, because years before they were refused another, and different, benefit. A third of pensioners now do not claim pension credit who should. They miss out on very large sums indeed—a mean average of £34 per week. Similarly, some 40% of pensioners do not claim what used to be called council tax benefit—which now has been very foolishly localised—although they should. Others do not claim attendance allowance, although they could. My late mother was entitled to attendance allowance for my late father, but I could not persuade her to claim it, because of the stigma of means-testing. It was in part because means-testing was not an effective way of helping many pensioners that I was delighted when it was built out of the new state pension, and I remain delighted.
However, given that only 80% of women will be retiring on a full state pension in their own right by 2020, and as they will no longer be able to rely on a married woman’s pension, thousands will, over time, still remain eligible for pension credit, even after 2016, over and beyond those with disability benefits, for example, and the new state pension. Therefore means-testing, as we all know, is not a good way of helping the elderly or of putting a safety net under them and ensuring that they have an adequate income. That is why I so welcome the new state pension.
My second objection to the Government’s removal of the light-touch regime of my noble friend Lord McKenzie is that it is profoundly unfair. A pensioner who retires after
I well understand the need for before and after sets of provisions, known as cliff edges, although it is usually wise to build in transitional arrangements, if possible, to smooth people’s paths, or to produce steps in the cliff face. At the very least, the Minister should not be worsening the situation of those who already fare badly out of the changes. Here we not only see a sharp difference in treatment for pensioners retiring before and after
If we think it right to abolish means-testing from the new state pension, why are we reimporting it and making it more oppressive for the already unlucky ones who do not qualify for that pension? They are doubly disadvantaged. We are not talking here about the deserving or the undeserving poor, merely the random accident of one’s birth date. The Government are deliberately widening the gap between older and younger pensioners and effectively making older pensioners, through their losses in pension credit or their failure to apply for it, help to cross-subsidise younger pensioners who are—or will be, under the new scheme—better off.
Whose state pension is the higher? Whose savings are completely untouched by the new regime? They are the younger pensioners, on whom more money is being spent. Who will become worse off and more worse off? They are the older pensioners, facing annual means tests for pension credit. It is profoundly unfair. I am surprised that the Minister does not see that and accept it.
Both concerns are heightened for older pensioners, usually widows, as they become increasingly frail and sometimes increasingly confused. As my noble friend Lord McKenzie said in Committee, they do not always keep and file papers or answer official correspondence, and may be puzzled by forms which
10 years before may have been easily understood. Is the Minister really expecting to means-test them at 80 and 85 and, if they live that long, at 90 and every year between? Do we give them no respite at all just because they are one day older than their next-door neighbour?
Bluntly, the older people get, the less likely they are to apply and reapply for pension credit correctly, and receive it. Not having enough money as a result, they turn down the heating or turn it off because they cannot afford it, and risk their health. They cannot afford helpful aids and appliances or contribute to domiciliary social care or their meals on wheels and they deteriorate quite fast—we have all seen it. They will have been means-tested every year for 10 years until the age of 75. Any small pots of money will long since have been taken into account under pension credit. Why do we keep both pursuing them and means-testing them? Their lives will become more difficult as they are widowed, their health declines, disability increases, their sight goes and perhaps their memory as well. Must we make getting an adequate income and accessing pension credit yet another task—frankly, another burden—for them? That is fine if they have family nearby, but many do not.
This amendment is very modest. It accepts, reluctantly, that the Government intend to make some £50 million or so net savings from annual means-testing of pensioners until the age of 75. We do not have the stats to know how much would come from means-testing the over-75s, and the DWP does not know that, although I have tried to find that out. My guesstimate is perhaps £15 million or £20 million. However, after 10 years of means-testing, I suspect that there would be such diminishing returns against the cost of administration that I doubt whether the savings would be worth the distress that annual means-testing of the very elderly, increasingly disabled, increasingly frail, increasingly confused pensioners would create. I believe that the Minister understands this. We all have elderly relatives who have had somewhat difficult lives. I hope that he will accept this amendment and make the situation somewhat less difficult than he at present envisages it. I beg to move.
My Lords, in Committee the Minister came under sustained pressure on this matter from my noble friends Lady Hollis and Lord McKenzie, among others, and I am sure that he did not expect to emerge unscathed from Report. Many noble Lords pressed the Minister in Committee to try to understand what the consequences of this increase in means-testing would be. In particular, they were concerned about what would happen to those older pensioners who inadvertently, or perhaps negligently, fail to report changes of circumstances.
The Minister could not assuage our fears in Committee but wrote to us subsequently. That was helpful as it made clear what would happen. The letter he sent to us, dated
“DWP may offer an Administrative Penalty as an alternative to prosecution. That penalty is 50% of the overpayment with a minimum value penalty of £350 and a maximum of £2000”.
When a claimant makes an error resulting in an overpayment, the letter explains that,
“a DWP decision maker will consider the full circumstances of the individual case … taking into account the reasons that led to the error”.
The letter then referred us to the guidance for decision-makers. I read this guidance so that noble Lords would not have to, and that is an hour of my life that I will not get back, so anyone who feels that he would like to buy me a drink at any point to say thank you is most welcome to do so. However, having done so, I then discovered the following. Incidentally, CPen means civil penalty and DM means decision-maker. The guidance states:
“Before imposing the CPen, the DM must establish that the claimant
1. has acted negligently and
2. has failed to take any reasonable steps to correct the error that led to the overpayment”.
I accept that the word “negligently” implies something serious. However, on the “Meaning of ‘negligently’”, the guidance continues:
“DMs should note that negligently should be taken to mean acting carelessly, not paying sufficient attention to the task in hand, or disregarding the importance of what is required to be done in relation to the claim or an award”.
In other words, that is a pretty low bar.
A number of noble Lords expressed concerns—as has been done very clearly by my noble friend just now—about what happens to pensioners who might struggle to keep the paperwork together or report every relevant change. The letter from the Minister said that robust safeguards are in place to ensure that matters such as mental capacity are considered. However, the guidance also makes clear that misrepresentation can involve simply leaving a section blank, perhaps because someone cannot figure out how to fill it in at that point and forgets to go back and do so later. The guidance also states at paragraphs 09206-7 that a claimant cannot avoid responsibility for misrepresentation just on the grounds that they claim they did not know what they were doing. It states:
“Non-responsibility is limited to those who are blind, illiterate or do not fully understand a particular form they have signed. Poor education, illness or inborn incapacity alone is not sufficient to show non-responsibility. People are expected to take reasonable steps to understand what they sign”.
This is exactly the sort of reason why so many pensioners dread means-testing and do not claim benefits to which they are entitled. If the Minister does not want to accept this amendment tonight, I plead with him to do one thing. Will he please take this guidance away urgently and have it revised before this legislation ever is introduced, so that pensioners are not expected to follow these kinds of rules?
My Lords, assessed income periods were introduced by the noble Baroness, Lady Hollis, during the passage of the State Pension Credit Act 2002. At that time it was assumed that income and capital for those above pensionable age remained relatively stable and it therefore made good sense to relax reporting requirements, both for the individual and the department in terms of running costs. This was still the case in
2007 when the Government of the day introduced indefinite assessed income periods for those aged 80 or over.
The noble Baroness said just now that income and capital do not fluctuate by much. We have now tested those assumptions, analysed around 100,000 cases and come to the conclusion that there is actually a greater degree of volatility in people’s financial circumstances than she and the department had anticipated at the relevant times. In some cases, assessed income periods have allowed people to continue to receive pension credit following a change in their circumstances when they would not have been entitled to it had they made a new claim at that point. The evidence means that we have had to think again about the viability of the policy and have concluded that AIPs should be abolished. Ultimately, if we were to allow AIPs to continue, the taxpayer would be providing support to people who no longer need it. It would mean retaining a system in which we can only apply changes to retirement provision that would increase an award but cannot take account of windfalls that would otherwise see a reduction in or loss of benefit.
Let me be clear, we are not changing entitlement rules. We are changing the reporting system so that people’s benefit entitlement reflects their circumstances at the time. To that end, we are looking to simplify the reporting requirements so that we are able to support those who need it most and best target our benefit expenditure. I am of course mindful that by changing reporting requirements some people may find it more difficult to adjust, particularly those of the most advanced years who may have the greatest difficulty in contacting us. This is why existing indefinite assessed income periods in place prior to 2016 will continue.
For those new recipients, or those on fixed-term AIPs, we will have the opportunity to explain clearly what does and does not need to be reported at the point of claim or when their existing claim is reviewed. I stress that pension credit is already designed in such a way as to minimise reporting requirements. For example, changes to capital only need to be reported if their total amount exceeds £10,000. Currently, only 12% of people on pension credit have capital above that level. People would need to report new income streams, but we will continue to take into account annual increases in pensions automatically, based on what people tell us. We will also encourage people to tell us if their capital falls below £10,000 or if any income stops, to ensure that we capture beneficial changes.
The amendment from the noble Baroness, Lady Hollis, would allow for decision-makers to set an indefinite AIP for those over 75. Through our policy of matching entitlement more closely to circumstance, we estimate that annually managed expenditure will fall by around £82 million per year by 2020. Although we have been unable to estimate the exact reduction in savings, since we cannot predict how the overall savings will break down by age group in the future, our analysis indicates that setting indefinite AIPs for those over 75 could reduce savings by around 30%; that is a figure of £25 million, which is not that far different from the £15 million to £20 million that the noble Baroness estimated. It is a high price tag on top of the protection that we have factored in for people already on indefinite AIPs. It is also a sum that we would need to find from savings elsewhere. I acknowledge that this is the upper end of the potential cost of the amendment by the noble Baroness, as discretion could be applied in setting indefinite AIPs.
In reality, as the noble Baroness will know, allowing a decision-maker discretion in an income-related benefit carries the risk of arbitrary or uneven decisions. If an indefinite AIP is not applied consistently to all those over a certain age, this also carries the risk of appeals and disputes. Quite apart from reintroducing further administrative complexity, we would still expect a proportion of these claimants to end up receiving an amount of pension credit to which they were not entitled and so we do not believe that such discretion is appropriate. This change would either increase complexity or reduce savings, or a combination of both. I know that the noble Baroness will be disappointed with this response, but I hope that I have made the Government’s position clear. We will maintain the indefinite AIPs already in place in order to protect those used to the current system. However, we cannot agree to an amendment that would raise false expectations by enshrining a power that we have no intention of invoking.
On the questions raised by the noble Baroness, Lady Sherlock, on our treatment of people who neglect to report change under the system, we recognise that people will need to adapt to the new system so we will look carefully at our communications to ensure that people have a clear understanding of when to report changes. Support is already available for older, more vulnerable customers and this will not change. Where it comes to light that a change has happened but not been reported, the circumstances of each individual case will be considered. There are robust safeguards in place when the decision is taken on whether to pursue sanctions. If, for example, a person’s state of health or mental health is considered relevant and meant that there was a reasonable excuse for their failure to report a change, a sanction would not be imposed in such a case.
On the point raised by the noble Baroness, Lady Hollis, on unfairness, I need to point out that there is not a real cliff edge here; the entitlement rules for these people will remain the same. There is a difference of treatment created by our decision to allow those on indefinite AIPs to remain so, but we believe that it is not right to change the rules that people are used to.
The other issue of concern to the noble Baroness was whether people would be deterred from claiming pension credit. There is no evidence to suggest that there will be such an effect or that having to report changes of circumstances deters people from claiming benefits.
When the Minister says that there is no evidence, does that mean that he has sought evidence and there is not any, or does it mean that he simply does not know, or what? Has he evidence to prove that there is no deterrent effect? I suspect that the answer is no.
Take-up of pension credit guarantee credit, which is aimed at the poorest pensioners, is already high at 82%. However, I think that it would be better if I offered to write to the noble Baroness on the exact nature of the evidence which I do or do not have. Actually, I do not need to write because I can tell her that her second supposition is correct. We do not have any evidence either way. With that covered, I ask her to withdraw the amendment.
My Lords, I am not going to pretend that I am not disappointed with the Minister’s reply. I thought that he showed a degree of sympathy and understanding in Committee, particularly of the plight of older pensioners in their late 70s or their 80s, or perhaps older still, who are getting increasingly frail and confused. I thought he understood that. That is why in this amendment I dropped the idea of periodic assessments and simply suggested that, while the Minister does what he thinks is appropriate or is required to do on this in terms of having annual means-testing until the age of 75, at least from 75 onwards he could abandon the annual means-testing system.
I really do not think that the Minister has addressed the issue. He said, first, that he thinks that the savings would be reduced by 30%. I suspect that that is a slightly arbitrary figure, arrived at by dividing the number of years and the percentage of savings, but it takes no account whatever of the fact that means-testing will already have excluded pensioners at an earlier stage. I suspect that at least half his savings will come from the fact that pensioners do not claim what they are entitled to, rather than them not getting what they otherwise would by having annual means-testing.
The Minister said that if those under 75 were annually means-tested but those over 75 were not, that would give rise to appeals and disputes. What evidence does he have for that? After all, we have had periodic means-testing since 2008. How many appeals have there been from people under the age of 75 against the “no further means-testing at 75” rule, and what has been the result of those appeals? I shall give way to the Minister. He ran that argument, so I presume that he has some statistics for us.
My Lords, forgive me, but trying to persuade the House that this would generate appeals and disputes and not presenting to noble Lords what is already a firm basis of evidence from the existing situation does not seem acceptable. I rather doubt that the Minister has more than a couple of handfuls of cases but we will see when he digs out his statistics. I just do not think that it is a valid argument and I have not had a shred of evidence from him or the Box to support it, although I have plenty of anecdotal evidence to the contrary.
However, my deepest concern—and it is one that I do not think the Minister has addressed—is just how profoundly unfair this is. I am baffled that he does not seem to accept that argument. He is quite deliberately building means-testing out of the new state pension, and I welcome that wholeheartedly. However, every reason he adduces for building it out of the new state pension applies equally for not continuing to means test after 75. Every argument that supports the new state pension works to support the amendment and not continuing means-testing after 75. If means-testing is so innocent, why get rid of it in the new state pension? The Minister knows as we all know, on the basis of good and effective DWP research, that means-testing is loathed by pensioners and they do not take up the benefits they are entitled to. That is what the Minister is counting on for his savings and it is profoundly unfair.
Pensioners slightly younger are built out of means-testing because the whole lot of pension credit has been thrown out of their new state pension. One day older and they are not only going to be means-tested but means-tested annually until the day they die, until they are 90. That is shameful. The Minister is widening the gap between younger pensioners, who will be much better off and with no means-testing, and the pensioners who will be staying with the old system, who are already older and poorer and who will have a lower pension and face means-testing. He is widening the disparity rather than narrowing it.
That is not good enough. It is not decent. The Minister is profoundly wrong on this but, given the lateness of the hour, obviously I will not seek the opinion of the House at this time of night. I will withdraw the amendment but with a heavy heart because it is profoundly wrong to widen the gap between older and younger pensioners at a time when we are trying to build means-testing out of the system and the Minister is reinforcing it back in again. I beg leave to withdraw the amendment.
Amendment 22 withdrawn.
Consideration on Report adjourned.