'.—The Secretary of State shall, at intervals not exceeding five years, invite the Social Security Advisory Committee to appraise whether the definition of income from capital under this Act remains appropriate and to make recommendations for any change in the formula or coverage of relevant regulations providing an implied income from such capital.'.—[Mr. Boswell.]
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
The Committee will feel much better for that lively debate. I am conscious of the passage of time and that
this is the last substantive new clause that has been selected for debate. In a way, it brings us back to technical considerations, but it also has important wider policy implications.
I am always astonished at my own moderation and at my ability to give.
I am concerned that my Whip feels that I am unduly modest. I will move into attack mode—it might be safer.
I tend not to use extravagant language, except possibly in the confines of my home, so I shall have to use an agent. In this case, my agent is Mervyn Kohler, who is known to many of us as the public affairs director of Help the Aged. In commenting on the treatment of capital in clause 15, he lets drive, saying:
''The prescribed rate should be on the face of the Bill, and expressed as a number in relation to the rate set by the Monetary Policy Committee of the Bank of England, perhaps calculated as a six-month average. It is iniquitous to assume a 10 per cent. return on capital and to leave this as a matter for regulation (not even requiring the positive affirmation process described in 19(2)''.
Those familiar with the Bill will know clause 19 as the regulations clause. Mr. Kohler bitterly attacks the concept and operation of clause 15, which we have already discussed, and to which I shall not return. However, he is right to express concern about it. Of course, we are not beholden to anyone and we will make our own judgment about how to present our concerns.
I shall deal first with the assessment period. The assessment period is set at five years, and the suggestion is that there should be a review every five years. That is no accident. Every five years, the sort of period during which a normal case would not be varied in relation to pension credit, there should be a fresh look at how the capital formula is determined or transmuted into income. That builds on the idea of Help the Aged. The really meritorious part of the comments of Help the Aged, apart from its attack on the Government, was the suggestion that there should be some objective test or process by which the process of taking notional capital and converting it into income should be carried out. It suggested a link to the Monetary Policy Committee rate, so that one could read off an implied capital rate. In my proposal, I want to leave slightly more discretion for Ministers, but the principle touched on by Help the Aged is important. We need an independent body that we can run such issues past. We have an admirable example, in doctrine and in practice, in the Social Security Advisory Committee.
The new clause proposes that, every five years—that is consistent with the assessment period—the Secretary of State should invite that advisory committee to see whether the definition of income under the Act remains appropriate and to make recommendations for any change in the formula for implied income. That is a modest and reasonable proposal. We have already said that there are concerns about treating capital as income. However, Ministers have made the point that it is much easier if it is treated in that way, because capital is easier to capture than income flows, which may vary, and we certainly
do not want a situation in which persons who find that their income is diminishing cannot benefit from changes in their assessment. There may be cases in which capital increases and we have to ask whether income follows that, and whether their high notional assessment is actually fair. I pass over the matter that the working tax credit, as introduced in the Budget, will do away with the test of implied income altogether, so there is now inconsistency between the various tax credits.
I suppose that the biggest concern, which is clear from the comments of Help the Aged and other pensioner organisations, is that the Government will set a 10 per cent. notional rate of return on capital in excess of £6,000, as they have suggested. That is a bit steep to put it mildly, even in present circumstances.
If I were to make an alternative suggestion, the Minister of State would immediately say that I had made a policy pronouncement. With greatest respect to the Under-Secretary, charming as she is, it is for Ministers to decide the figure. I do not want to make a suggestion; I want the Social Security Advisory Committee to make suggestions. It can do that independently, without my figures or the Minister's.
Ministers have pointed out that 85 per cent. of pensioners are below that starting point of £6,000 capital. That may change over time, which is also relevant to our proposal in the new clause. They also said, when we debated clause 15, that the implied average rate of return on capital as pensioner income is attenuated by the bottom tranche. If it is zero on the bottom £6,000, the average rate is reduced, and there is no point in arguing with that. However, while that may be true of the average rate, it is not true of the marginal rate of return, which is expected to be 10 per cent. I challenge the Minister to find me a reliable security on which I can have a reliable return of 10 per cent. on capital at the moment. In the present circumstances of a low-inflation economy, it would be necessary to look for a special set of circumstances such as a person of advanced age—over 75—who bought an annuity. Because a high loading is put on the possession of capital, there is an implied suggestion that pensioners should dis-save or annuitise their existing capital assets, which might not be a good idea. People working for our team have done some exemplifications on the figures, and it is difficult to understand how a pensioner can possibly receive as much income as under the 10 per cent. formula set out by the Minister.
I do not want to belabour the point, but we understand that the Government—and especially the Chancellor—want a degree of stability. I quoted the Prime Minister with approbation this morning, so I shall be kind to the Chancellor this afternoon to preserve balance. However much the Government want stability and feel that they have achieved it in
relation to monetary policy, which my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) has essentially approved, major changes could take place quite suddenly in inflation or interest rates, for example. Such changes would affect the returns on capital.
We should also consider the relationship between capital generally, or particular kinds of capital, and the interest determined from it. The notes from Help the Aged express concern about the long-term valuation of real property. Many buy property as their pension fund—by buying to let, for example. Especially in London and the south-east, that property might have a high and escalating capital value but give a relatively low income when expenses are taken into account. A circumstance may arise in which a property that was tenanted suddenly falls into vacant possession and the capital value shoots up because the premium falls to the landlord, but the property produces no income at all until it is sold.
Let us consider another example. If changes were made in other benefits, such as council tax or housing benefit, the capital rules or coverage might be different and it would seem inequitable to have two sets of regulations subsisting at the same time. Until recently, for example, the rules on quantity have varied in relation to the distinction between pensioner and disability benefits.
In addition, as a matter of public policy, it may be necessary to consider whether a measure is working out fairly. A capital assessment may appear wrong, or it may become difficult to make a reliable capital assessment—on an overseas asset, for example. What happens if an asset is in a devalued currency? Will that automatically affect the assessment?
Finally, some important issues of policy might arise. We might decide to remove certain kinds of capital holdings from the system altogether. I refer, for example, to the compensation payments in which the hon. Member for Bassetlaw (John Mann) expressed interest.
None of that is intended as a policy recommendation, so there is no need to get excited about that idea. That is not to say that it is impossible to derive an implied income from capital. The new clause would mean that for a period of time, which for convenience we suggest should be consistent with the maximum assessment period in the Bill, the Social Security Advisory Committee should examine the matter and any representations that it might have received, reach an objective view and make a recommendation to Ministers. It would always remain Ministers' responsibility to receive that advice, deliberate on it and to make a decision.
The new clause would introduce into this part of the world, as the Monetary Policy Committee introduced into the setting of interest rates, a degree of objectivity and independent appraisal. That is why the new clause has considerable merit. I hope that the Minister can see that it is tendered in a non-partisan way and is designed to help make the system work better and more fairly for pensioners.
As it is the Minister of State's birthday, I propose to applaud the Government. I shall try not to make a habit of this, but in 1988, when the rules on the conversion of capital into income were introduced in their present form, an implied interest rate of not 10 but 20 per cent. was introduced. It applied not from £6,000 but from £3,000. In 1988, capital rules were applied for the first time to housing benefit, which affected many pensioners, the group about which we have been talking for the past few weeks.
Between 1988 and 1997, the then Conservative Administration did nothing about that. They left the £3,000 threshold at that level for nine years thereby eroding its real value and bringing many more pensioners into penal rates of 20 per cent. After 1997, the Conservative party decided that it wanted to sound like it was on the side of pensioners and savers, and it started attacking that regime. The hon. Member for Havant started to say that the imputed rate was too high and that there should not be a cap on the top. We had made that point somewhat earlier, but we welcomed his conversion.
The Government have done that. They have taken the cap off at the top, which means that there is no upper limit, and they have halved the imputed rate. They considered looking at actual savings income, but on reflection that would have been quite messy and the pensions groups did not want it. We have a situation in which most pensioners with savings are not in the system and there is some flexibility whereby rates can be changed if interest rates change. Indeed, we would want some flexibility in the regulation. I do not agree that we need a figure, or necessarily a formula, in the Bill.
I have no particular problem with new clause 8 and the idea that the SSAC should look at the matter. However, my suspicion is that if we let it do that and it does so every five years, which I do not have any problem with, it might well say that what we have is a darn sight better than what we used to have.
On 10 per cent. rates, the hon. Member for Daventry admitted that that is 10 per cent. on the margin beyond £6,000. Someone with £6,500 is only going to be imputed to have a tiny amount of savings income. The average rate on that is well below that of a long-deposit building society account. For once, we should stand up and say that we have been banging on about that for years, it was not addressed for almost a decade, but it has finally been addressed. Of course, we would all have liked it to have gone further, but it seems to me to be an enormous step in the right direction.
The only question is if the rate of imputation beyond £6,000 is quite high, on very low quantities of capital that is a very low average rate, but on high quantities of capital it is a high imputed rate above that that one might reasonably attain. That kind of loading is probably what we want in the sense that the system was initially a safety net. We do not want to catch small savers in it, but we probably do not want to hand out means-tested benefits to somebody with a socking great amount of savings. The SSAC may look at hard cases, of the sort that the hon. Member for Daventry legitimately raised, through that sort of
mechanism. I do not object to that, but they will be extreme cases. In the majority of cases, the Government have moved in entirely the right direction and we should applaud them for doing so.
I want to make two points. First, I want to point out that the contradiction in what the hon. Member for Northavon said is that for those pensioners who are lucky enough to have savings over £12,000 it is actually a move in the reverse direction. If the interest rate is halved and the limit is doubled, all those with more that £12,000 are worse off. Although I appreciate that not many pensioners are fortunate enough to have savings of £12,000, they do comprise an increasing number of pensioners, particularly as people inherit money from the proceeds from their parents' houses, or as a result of compensation claims. That must be borne in mind; I do not think that it fits very well with the Government's declared intention to encourage savings. There has been a reversal for those lucky enough to have more than £12,000.
The other brief point that I wanted to make is purely for the sake of simplicity, and the reduction of complexity. The limit on capital for local authority charges is £11,500. There would be merit in having one uniform limit for nursing home charges and pension credit. If the two could be moved together, pensioners would better understand them, and that would end confusion.
It is a pleasure to be under your Chairmanship again, Mr. Atkinson. The debate has been interesting. I have had a very strange afternoon because I find myself in almost total agreement with what the hon. Member for Northavon has just said, which is quite something. I thought that what he had to say effectively answered many points raised by the hon. Member for Daventry, in respect of his new clause.
For the purpose of clarification, I want to tell the Committee what the effect of rate of return would be at various levels of capital savings. That will inform the debate because it is easy to forget about the disregard, and to make assumptions about the effect that that has on the notional rate of return. Of course, under £6,000 that is zero; between £6,000 and £8,000, the effective rate of return is zero to 2.6 per cent.; between £8,000 and £10,000 it is 2.6 to 4.2 per cent.; between £10,000 and £12,000 it is 4.2 to 5.2 per cent.; between £12,000 to £15,000 it is 5.2 per cent. to 6.3 per cent.; and between £15,000 to £20,000 it is 6.3 to 7.3 per cent. Only at £20,000 plus, does it reach 7.3 per cent., rising to 10 per cent. That is a vast improvement on the current situation. The hon. Member for Northavon kindly made that clear.
The substance of the new clause makes various references to the SSAC in respect of the notional rate of return. The hon. Member for Daventry suggests a mandatory reference every five years asking for recommendations. The Government have a high regard for the SSAC and for the advice that it gives. We do not follow its recommendation in every instance, as hon. Members will be well aware, but we do take seriously what it has to say, and consider its recommendations closely. We are happy to include pension credit in its remit. If the hon. Gentleman
examines schedule 2(20), on page 25, he will see that we have done so. On that basis, pension credit does come within the remit of the SSAC.
Is not the point of the new clause that it ties Ministers to referring the matter on a fixed timetable? Given the concerns from the hon. Member for Northavon about the performance of the previous Conservative Government, if such a timetable had been enacted under something similar to the new clause, the long gap that he did not like would have been run past the advisory committee, which would have made recommendations whether Ministers liked it or not.
The SSAC, as a result of the fact that the benefit will be included within its remit, will have the opportunity to comment on pension credit regulations after the usual period in any event. It will be free to look at any aspect of pension credits, as it sees fit. If the Government see a particular need for advice, it is open to the Secretary of State to invite the SSAC to look at any area of social security policy at any time. In that sense, the hon. Gentleman's new clause would, in effect, put an artificial timetable and process on any scrutiny that the SSAC might actually wish to carry out.
The Government take seriously their duty to monitor the achievements of their social policy objectives. That is part of our day-to-day stewardship responsibility, as a Government. We would not want to turn our mind to it only once every five years in a mechanistic way.
Yes, but such phraseology tends to end up meaning quinquennial. At the moment, references can be made and the SSAC can itself seek information and look at the scheme if it wishes. In many ways, the new clause would put an artificial constraint on the relationship that is created by including pension credit in the SSAC's remit.
I also point out that we shall specifically look at the capital limit annually, as part of the normal uprating process, as hon. Members would expect. Changes to the notional income from capital can be made by regulations. I agree with the hon. Member for Northavon that including figures in Bills can lead to inflexibility of the kind that one often sees in older social security legislation, which makes change difficult.
I think that there are mechanisms to examine, take independent advice on and make changes to our arrangements for notional capital. I have tried to look fairly at the new clause of the hon. Member for Daventry and have listened to what he has to say, but I genuinely think that his concerns are addressed by the arrangements already in the Bill. I hope that he might come to agree with me. The arrangements for notional income being made under the pension credit scheme are five times more generous than those under the minimum income guarantee. As the hon. Member for
Northavon has pointed out, they are significantly more generous than such arrangements have been. I hope that, in view of my assurances, the hon. Member for Daventry will consider not pressing his new clause to a vote, although he is perfectly entitled to do that should he so wish.
The Under-Secretary has consciously adopted a moderate tone in her response. I have been accused of introducing no new policies and incurring no new public expenditure, and I suppose that one should be grateful for such modest gains.
The Under-Secretary pointed out that there are some procedures and safeguards in the Bill, so that the matter could be looked at. It is important that such assurances are drawn out in our debates. All that I am really saying is that things change over time, whether she or I like or anticipate those things or not. In the interests of fairness, it should be fairly common for the Social Security Advisory Committee, and others, to examine the consequences of the Bill in the area covered by the new clause. That area will need, and I hope will be susceptible to, change.
In deciding whether to press the clause to a vote, I have been thinking that what we have achieved here is a very important development. I have been rehearsing in my mind, since the speech of the hon. Member for Northavon, the sad saga of Sven and Ulrika, which has been occupying the popular prints for a long time. We thought that he was walking out with us, but now we have found that he has really gone back to his true love, supporting the Government. I make no disapprobatory comment, except to record the passing scene and say—[Interruption.] We are getting into very deep waters indeed.
The important point is that we have had a good and, to be honest, a good-natured exchange of views on a key matter. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.