Clause 23 paves the way for schedule 12, which is quite long. It might be helpful to run through what that schedule does. The first part amends existing legislation by incorporating references to the new state pension. We have to ensure that, where there are current laws that refer to the state pension, the new single-tier state pension is covered. We had to go through a lot of legislation to ensure that we amend all relevant references.
Part 2 amends current legislation to maintain the existing state pension scheme for people who reach state pension age before the introduction of the new scheme, so that there are transitional provisions. Part 3 covers the savings credit. To be clear, within the pension credit system there are two parts: the guarantee credit and the savings credit. The legislation provides that, post-2016, the savings credit will not be an element of the pension credit for single-tier pensioners.
We obviously need transitional rules. A claimant who does not meet the criteria may still qualify if in a couple and the other member qualifies. For example, if someone claims pension credit before 2016, that person is a single-tier pensioner and therefore in a couple getting the savings credit. This measure allows that person to go on getting the savings credit; we will not take it off as the person goes through 2016. Regulations may specify the circumstances in which entitlement is restricted for those cases.
Finally, part 4 amends a range of provisions relating to the introduction of the new state pension, including things such as repealing redundant provisions in the Pensions Act 2008 for consolidating the additional pension, as well as changes to legislation on bereavement benefits. Most of that, apart from the savings credit change, is consequential and technical. Therefore, I commend clause 23, which facilitates schedule 12, to the Committee.
I thank the Minister for elaborating on the clause and the accompanying schedule. He is right to say that most of it is technical and consequent on the Bill’s provisions. He did justice to the savings credit issue, which is probably the most pertinent in a broader sense. The abolition of savings credit under the new system has prompted significant concern, and he pointed out, with some justice, that the credit is very complicated. As I recall, he said that if anyone could explain how savings credit works to him, he would give them a brass penny. There is truth in that point.
One of the thrusts of the Bill is to simplify the system, which everyone supports. However, there is the question of how the savings credit relates to the reduction in means-testing. I note that the Government’s rhetoric on the Bill’s benefits has increasingly depended less on the reduction of means-testing. When the White Paper first emerged in January, there was a focus on the proposed system being simpler, cost-neutral and encouraging an incentive to save. The fourth element was a significant reduction in means-testing. It had even been said that means-testing would be abolished. I do not suggest that the Minister used those words—he did not—but that was the way the means-testing debate was framed.
However, when one digs down into the impact assessment and looks at means-testing projections under the Bill, the reduction is relatively modest. Most of the expected reduction is a product of the abolition of the savings credit. Those who benefit from savings credit are a group whom Government Members, at least implicitly, have often spoken up in favour of when criticising aspects of the pension credit. That is because those who benefit from savings credit have some savings, and would otherwise lose out from the pound-for-pound reduction via means-tested benefits. It is worth giving the savings credit issue an airing in this context. Will the Minister elaborate on how many people will lose from the disappearance of savings credit, who they are and how much they might lose? My understanding is that it will not be an enormous number, but that there could be some pretty steep cliff edges as one moves from the current system to the new one. How does the Minister see the changes in savings credit playing out in the medium to long term?
I am pleased to have the opportunity to speak on this issue and particularly about savings credit, although we do have a whole schedule here. Interestingly, the schedule does indeed bear out what the Minister has often said about the very long tail that attaches to some pension provision.
I was trying to get my head around how many people could possibly still be entitled to a category D pension, because the original recipients of a such a pension would, I think, have retired before 1948. I tried to think of what the circumstances might be. We see these stories in the newspapers, after all—the 18-year-old who married a much older man, was then widowed and somehow never built up better pension provision, and is still eligible for a category D pension. Presumably, the Department thinks that some people have hitherto been entitled to such a thing. That illustrates quite well that, in legislating for pensions, we create long-term entitlements and liabilities. That is why it is very important to get things right.
We also know that the way in which we legislate can have unintended consequences. Savings credit gets a great deal of criticism for being extremely complicated, and it is probably the least-claimed element of the whole pension credit system. Figures for those eligible for the pension credit who do not claim it show that the savings credit is probably a big contributory factor to the inefficiency of the system. Its original intention was benign: to counter the criticism that people who had savings, who had tried to provide for their retirement, were particularly harshly dealt with in losing entitlement to pension credit. Perhaps it was an unduly complicated way of dealing with the issue, perhaps there was a better way, and perhaps some people will argue that they said at the time that this was exactly the wrong thing to do.
One of the difficulties is that there is a double criticism: that the savings credit is complicated, and that it has increased the number of people entitled to means-tested benefits. That is inevitable, because its whole purpose was exactly that: to help people who were, in effect, income-poor but who had savings, meaning that more people became entitled to it. I appreciate that one of the reasons for the increasing level of entitlement—even if the credit was not always claimed—was the different ways in which the various parts of the system were uprated. As a result, there were a few anomalies in the way the system worked.
“The removal of the Pension Credit Savings Credit (PCSC) on its own will reduce the maximum income at which someone will be entitled to means-tested benefits, and so on its own should reduce means-testing.”
Clearly, if thresholds of eligibility are brought down, or a particular provision is abolished, as in this case, the number of people on means-tested benefits will be reduced. However, we have to bear it mind that that does not always mean people are better off as a result. At a very simple level, if a means-tested benefit has an eligibility threshold, as the threshold is raised more people become entitled and, it could be argued, more people are dependent on means-tested benefits. That, of course, does increase their income. If the threshold is reduced, more people will be left out. It could be said, “We have done a good thing. We have reduced the number of people who are entitled to means-tested benefits.” As with some of the other changes under this Government—for example, to tax credits—that may not be making people any better off: it is simply reducing the number eligible for the benefit in the first place.
Other witnesses before the Work and Pensions Committee had similar concerns which need to be looked at in detail. Age UK said that in its view, some people could lose a substantial amount in the initial period following the introduction of the single-tier pension. Some people who reach pension age in the early period after the reform could lose as much as £18 a week in savings credit. That is a fairly substantial sum for people who are, by definition, not on a high income.
The concern is that the way the provision operates will create losers, however much it is simplified. Simplification, while a desirable goal, has to be set against the need for fairness and the potential for creating losers. In debates such as this, we are inclined to think that if something is going to be simpler, it is inherently better and always advantageous to everyone. However, Age UK felt that this group of people could lose out as a result of the change.
My hon. Friend is setting out the issues associated with the savings credit very well, as usual. I am struck by Age UK’s argument that there may some significant losers. Those who benefit from the savings credit are people with some savings. They have tried to provide for their retirement, and under the current system the savings credit is a way of ensuring that doing so pays. Does my hon. Friend agree that, if they suddenly start getting up to £18 less, they are going to feel pretty sore?
Indeed, and that is why the matter was brought to our attention.
There are other, wider issues. The system was structured as a gateway or passport to other benefits that people could claim. The most important were probably housing benefit and—perhaps of less importance, although still significant for some—council tax benefit. That matter has been devolved to local authorities in England, but presumably there would still be some who, prior to that change, had been in receipt of savings credit and pension credit and were therefore eligible for council tax benefit. Presumably, that system is still being operated at a local level, as a passport to that benefit, because people of retirement age have been protected from the impact of the 10% overall reduction in the moneys transferred to local government. Central Government told local government that pensioners would not be affected, so I presume there is still a link. I am not absolutely sure how it works in detail, but obviously there is a link.
People need to know whether arrangements will be made so that those who would otherwise have qualified will still receive housing benefit or council tax relief, and they need to know exactly how that will work.
It is fair to say that Baroness Hollis, who gave evidence to the Committee last week—it seems so long ago—is an expert on the interaction of means-tested benefits and the social security system more widely. She could not clarify what the implications of abolishing the savings credit were for housing benefit. Does my hon. Friend think the Government need to clarify that?
I think that needs to be clarified; it is important that it should be. In the pre-legislative scrutiny report that the Select Committee prepared, we asked for more detail on the transitional protection that the Government said would be available. They told us that there would be protection for people entitled to both savings credit and housing benefit under the existing system. When we were looking at the Bill, we were concerned that the details of how that would work in practice had not been made clear.
The Select Committee called on the Government to publish a clear explanation of how the supports would operate under the single-tier pension; how the transitional protection would be put in place; how it would actually work; and how people would know about it. That request was made on the basis of the evidence that we heard. Organisations such as Age UK felt that it was a considerable issue. Its view was that the Government had to ensure, first, that transitional protection would protect those who had modest incomes and would reach the state pension age in the early years of the new single-tier pension, and secondly that they would not be worse off than they would be under the current system.
Those people do not have a long time—or any time at all in many cases—to do what we all hope the change will encourage them to do in the medium to longer term. We are told that it will encourage people during their working lives—everybody hopes this will happen—to feel that making savings, paying into a pension and trying to boost their retirement income will be worth while. That is fair enough for people who have five, 10, 15 or 20 years ahead of them to start dealing with that, but it is obviously much more difficult for people who are very close to reaching the state pension age in the early years of the new system. Even if they wanted to, they would not be able to make that kind of provision.
So the Select Committee heard evidence and made a request. Without a robust transitional provision, there could be people less well off under the new system, which is what we are trying to avoid. We know that many people might not initially be any better off under the new system, but we do not want people to be worse off, particularly those who, by definition, have a low income—that is why they are eligible in the first place. Remember, to be eligible for savings credit, a person must be, broadly, on a low income. If a person’s income is high enough, they will not qualify for pension credit or the associated benefits because they will be deemed to have enough income. We are talking about a low-income group.
I hope that the Minister will take the opportunity to clarify how all this will work and to reassure groups concerned about this set of pensioners that proper provision will be made for them.
If I may, I want to try to bring the discussion back briefly to an aspect of clause 23: the category C pension, which the Minister and others will know pertains largely to elderly widows whose husbands reached pension age before the national insurance scheme of 1948 and who were not insured before then. Clearly, very few, if any, such widows are still alive. However, I wanted to seek his reassurance that widows who were still benefitting from a widow’s pension from husbands who died in the second world war, of which there is still a small, albeit dwindling, band—including, to give a declaration of interest, my previous landlady—will not be penalised under the changes made to category C pensions in clause 23.
We have had a spectacular show of erudition in this exchange. I happen to know the number of people receiving the category C pension—I think that the hon. Member for Edinburgh East referred to it as category D, but the one before 1948 is category C. The number of people who had reached pension age by 1948 and are still claiming is zero, but the number of surviving spouses is 20, so we are paying 20 category C pensions. We took the judgment that there would not be any new claims post-2016, and we think that we are fairly safe on that.
I can reassure the former landlady of my hon. Friend the Member for Gloucester that anyone who is drawing their pension before the single tier comes in, which I speculate that she might be, will continue to receive their pension in accordance with the current rules.
Very good. The nation’s centenarians can rest easy.
Moving on to the substantive issue, clause 23 paves the way for schedule 12, which does a lot of things, but the particular issue that we have been talking about is the removal of the savings credit for single tier pensioners. It is worth going back to why we have a savings credit, because we did not have one until the pension credit was introduced. I will explain why it became necessary, although I do not think that “necessary” is the right word, because there was a better solution at the time.
I remember the days back in the ’80s when the pension and the means test were almost the same—the difference was but 5p. Whether someone drew a national insurance retirement pension or supplementary benefit for pensioners, the numbers were essentially the same. However, over time, because of the breaking of the earnings link and what were probably ad hoc increases to the means test, the gap between the basic state pension and the means test grew and grew and grew. The previous Government took the view that it was increasingly untenable to say to people who had done a bit of saving, “For every pound that you have saved, we will take a pound off the minimum income guarantee,” as it was then known.
I always think that the savings credit was born on a whiteboard somewhere in the Treasury. It might have been at the DWP—I do not know—but it was clearly on a whiteboard, because it was so techie that only someone with a whiteboard could have invented it. Because the savings credit is so techie, people do not take it up in the numbers they should. As I think has been acknowledged, the take-up rate for people who are entitled to just the savings credit is between 43% and 48%. It is the closest thing we have to a lottery in the benefits system. If someone tosses a coin, that gives the same chance as their claiming their savings credit.
The idea was that the savings credit would be a savings incentive, but most people do not know that it exists and only have a 50:50 chance of getting it if they do. It is a post hoc effort to say, “We have done wrong by you; we will try to put it right.” It certainly is not a savings incentive. Given that the single tier tackles that head on by paying a single, simple, decent state pension above the level of the basic means test, the narrative rationale for savings credit goes out the window. If we can get rid of complexity and reward saving in one go, that is two ticks as far as I am concerned.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said we had stopped boasting about how we had reduced means-testing. I take his reprimand. We should have been boasting more.
I am always wary about being corrected by Hansard, but did I use the word “boasting”? It does not sound like the kind of word I would use.
I think the hon. Gentleman pointed out that we used to proclaim four benefits of single tier and had stopped banging on—I do not think he used that phrase either—about one of them. The reduction in means-testing is quite significant. I refer the Committee to page 26 of the impact assessment. The particularly attractive stacked bar chart shows that if one focuses on the new pensioners coming in—the single-tier pensioners—the proportion who will draw pension credit halves. I pause for dramatic effect. That is a very significant change.
At the last DWP oral questions, Members on the Opposition Front Bench were shouting “2%” at me, because the proportion of means-testing in the entire pensioner population fell by a relatively modest number. The point is that people who are retired and get older can drift on to pension credit. The obvious example are people who work past pension age, stop working, and become entitled to pension credit. The stock of pre-single-tier pensioners has a tendency to flow on to pension credit, which provides an upward momentum in and of itself.
We are going against that tide with the single-tier pensioners. For the flow of new pensioners, we are substantially reducing dependence on pension credit. We are not substantially reducing dependence on housing benefit; I entirely take that point. If a person has significant housing costs, they will not, in many cases, be clear. However, I think that a world in which pensioners do not have to claim multiple means-tested benefits has got to be a better one, because it means more money is spent on pensioners and less on bureaucracy.
Not only are we reducing means-tested benefit dependence quite rapidly for the flow—more rapidly than might appear from our charts about the whole pensioner population—but we are reducing the proportion who have to jump through two lots of hoops, or three if council tax benefits are counted separately. Many pensioners will welcome that.
Will the Minister comment on whether simply reducing the numbers makes a significant difference to people’s standard of living? Numbers can be manipulated to say that fewer people are entitled to means-tested benefits, but, as with the group on savings credit, they might actually be worse off.
That is an entirely fair point. It would be fatuous for us simply to say, “Aren’t we clever? We’ve just abolished means-tested benefits, and isn’t it great that fewer people are on it?” But we are not doing that. What we are doing is reducing the need for those things. By paying a single, simple, decent state pension at £144 a week, fewer people will need means-tested benefits. It is true that we have stripped out a bit of the system for which there is no long-term rationale, which reinforces the trend towards the balance of expenditure being on the pension, rather than on the means test.
I was asked for numbers on the scale. The Age UK figure, which was quoted, is the maximum possible savings credit—there is a maximum—and from memory I think the figure is £18 a week, which is of the right order for the maximum savings credit. The typical notional loss—I stress that it is notional—in 2020 will be about £11 a week, but that will be partly offset elsewhere in the system. The median notional reduction in net income will be about £8 a week for the savings credit losers, who will be about 1% of the pensioner population at that point. There is a set of people who will get about a tenner a week less.
It is worth stressing that they are notional losers. We are not taking cash away from anybody. Nobody who is getting savings credit will have it reduced by a tenner a week, or extinguished. A set of people who hypothetically will fall within the scope of the savings credit—which they pretty certainly do not know they are going to get—will not get it. It is still less money than they would have had, but I suspect that the number of angry letters that I and my multiple successors will get about the amount of savings credit someone thought they were going to get and did not get will be countable on the fingers of one hand. It is so complicated. Most people will say, “You have told me what I’m going to get. I’m going to get a single, simple, decent state pension and my own savings on top.” There will be minimal means-testing in many cases; it is just a cleaner system. The rationale for the savings credit was understandable when it was introduced, although it was complex. In a single-tier world, it has no lasting purpose.
As for the transitional issue, had we simply abolished the savings credit and made the knock-on change to the housing benefit system, we would have had far more low-income losers. The housing benefit system has what is technically known as a “bit” in it equivalent to the maximum savings credit. The idea was that, if people received the maximum savings credit, they did not want the housing benefit system coming along and clawing back everything that had been given to them through the savings credit. There is an element in the housing benefit system for the maximum savings credit. We are retaining that element, even though we are abolishing the savings credit, so that we do not create additional housing benefit losers. That is how we plan to approach the issue.
The revised system of support of housing benefit for pensioners needs to be worked through in a universal credit world, where housing benefit for non-pensioners is part of universal credit. We therefore need to think carefully about the housing benefit world for pensioners, which is why we have not set it out in detail. That remains a work in progress. However, we have said that, for five years after implementation of the single tier, we will retain the housing benefit protection, and that will give plenty of time to draw up a new system. I hope that, with that reassurance, the Committee is content that clause 23 should stand part of the Bill.