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House of Commons
Session 2006 - 07
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General Committee Debates
Pensions Bill

Pensions Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, David Taylor
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Banks, Gordon (Ochil and South Perthshire) (Lab)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Burt, Lorely (Solihull) (LD)
Creagh, Mary (Wakefield) (Lab)
Heppell, Mr. John (Vice-Chamberlain of Her Majesty's Household)
Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)
Keeble, Ms Sally (Northampton, North) (Lab)
Lancaster, Mr. Mark (North-East Milton Keynes) (Con)
Laws, Mr. David (Yeovil) (LD)
Penrose, John (Weston-super-Mare) (Con)
Plaskitt, Mr. James (Parliamentary Under-Secretary of State for Work and Pensions)
Pritchard, Mark (The Wrekin) (Con)
Purnell, James (Minister for Pensions Reform)
Selous, Andrew (South-West Bedfordshire) (Con)
Smith, Ms Angela C. (Sheffield, Hillsborough) (Lab)
Waterson, Mr. Nigel (Eastbourne) (Con)
Alan Sandall, Committee Clerk
† attended the Committee

Public Bill Committee

Thursday 25 January 2007


[Mr. Roger Gale in the Chair]

Pensions Bill

1.30 pm
The Chairman: Good afternoon, ladies and gentlemen. Before we start, the hon. Member for Eastbourne, who is leading for the Opposition, has raised a point that I should have covered in my opening remarks.
I have a standard practice about stand part debates. As far as I am concerned, it is often convenient to discuss the breadth of a clause at the start rather than at the end, because it makes other things easier in the course of debating amendments. I have no problem with that whatsoever. However, that is all right on the very clear understanding that hon. Members cannot have two stand part debates. If I let hon. Members go slightly wider than I otherwise might in debating the amendments, they should not be surprised when I say at the end that the clause has been satisfactorily discussed and I am not permitting a stand part debate. It is in hon. Members’ hands, so they should make up their minds and decide how they want to play it.
Mr. Nigel Waterson (Eastbourne) (Con): Good afternoon, Mr. Gale. Thank you for your helpful indication. Perhaps it will be helpful at this stage, although we are dealing with amendment No. 28, to say that I intend to go quite wide in speaking to the next group of amendments, which is headed with my amendment No. 1, to obviate a stand part debate on the link, as it is called in these circles.

Clause 5

Up-rating of basic pension etc. and standard minimum guarantee by reference to earnings
Amendment proposed [this day]: No. 28, in clause 5, page 5, line 26, at end insert
‘including those claimed by British citizens living abroad’.—[Mr. Laws.]
Question again proposed, That the amendment be made.
Mr. Waterson: I was in the process of talking about ageing rock stars, the benefits of retiring to Florida rather than Vancouver and how one might deal with the costs of a prime ministerial holiday in one’s mansion. We have already had a lengthy debate this morning, which has been helpful and important, about frozen pensions and how those are to be addressed.I was saying that we Opposition Members have considerable sympathy with the concerns expressed to us, as well as to the Government and other parties. This matter will be fed into our general policy review.
The cost of £400 million, to which I want to return in more detail in a moment, could be spent on this or another deserving cause, because—except in the twilight zone occupied by the Liberal Democrats—the rest of us have to make the demands on the public purse fit the financial envelope, as it is tweely called.
Mr. David Laws (Yeovil) (LD): Welcome to the Chair, Mr. Gale. I am grateful to the hon. Gentleman for giving way and glad that we are having a constructive debate. Does he acknowledge that, as I said at the end of my comments, my proposal was not the £400 million cost that he has cited, but a far more modest proposal only to uprate the frozen pensions from here on in, which could be done initially at a much lower cost than he suggests?
Mr. Waterson: Not necessarily. However, I want to deal with costs and pick up some of the hon. Gentleman’s helpful points. I hope that he will not take it personally when I say that I was not entirely convinced by his attempt to chip away at the cost of the measure. However, we are in the hands of the Minister and his officials on the matter of the true cost. I have some comments to make, so perhaps the hon. Gentleman will bear with me. If he feels like intervening, that would also be helpful.
The Minister answered one of my questions in December, saying that the
“cost of uprating the state approximately £400 million of which...£320 million represents the cost of uprating the basic state pension.”—[Official Report, 14 December 2006; Vol. 454,c. 1341W.]
I am not clear what the other £80 million represents, but perhaps he will tell me later. To return to an intervention that I made on the hon. Member for Yeovil, I am interested to know whether any amounts could be netted off against that. Is it a gross or net figure? I asked the Minister another question in December, about
“how many...Canadian and...Australian pensioners residing in the UK are in receipt of...pension credit and...other means-tested benefits; and what the total annual cost is.”
He said:
“The information is not available as nationality data is not collected by the Department’s administration systems.”—[Official Report, 8 January 2007; Vol. 455, c. 194W.]
That is bad news, I suspect, for the policy for a universal citizen’s pension—but we do not want to go there at the moment.
That raises an interesting question, because there is an assumption about which I think there was an exchange between the hon. Members for Yeovil and for Northampton, North earlier in the debate. The assumption is that we are talking about relatively well-to-do people, who have even been suggested to be more likely to vote Conservative. However, I remember Norman Tebbit once saying to me that he would like to impose a tax on people with gravel drives, Volvos and ponies. When I asked why, he said that those were the kind of people who often voted Liberal Democrat.
Mr. Laws: It depends how long the drive is.
Mr. Waterson: I think he meant long gravel drives.
That may not be the read-across. As the hon. Member for Northampton, North said, we must also work on the basis that some people move abroad for pressing family or even health reasons and others perhaps escape to southern Spain because they will save on their fuel bills, although I understand that they will still get their winter fuel allowance, which must come in handy. Likewise, there will be people in that kind of grouping who go to places like Canada or Australia. They are not getting an uprated British state pension and will therefore be subject, presumably, to the relevant means-testing of benefits in those countries, be they the equivalent of pension credit or whatever.
There are some savings to be netted off. The Treasury is already saving money on the latter group, because not only is it not paying them their uprated basic state pension, but it is not paying them the means-tested benefits that they would certainly be claiming if they were still in this country. I am open to correction by the Minister, but my understanding is that pension credit, for example, is not payable to a UK pensioner living overseas. Equally, there must be Australians and Canadians, for example, living here, in straitened circumstances, with no uprated pension, who are claiming means-tested benefits at the moment.
That £400 million is a suspiciously constant figure—I have a vague recollection of that being bandied around by Conservative Ministers when the same issue was raised in correspondence quite a few years ago. However, it would be nice to know whether that figure was net or gross and whether it takes into account any of the factors that I have mentioned. It would certainly be helpful in our Conservative policy review to know exactly what sum we are talking about, so that we can look at it realistically.
John Penrose (Weston-super-Mare) (Con): Although I am sure that helping the Conservative party would be a big factor in Government thinking, in order to give them greater incentive to look into the netting-off costs surely that set of data is potentially very valuable. If the data were not available because they are not systematically collected, the Government might collect them, if not on a universal basis then on a sample basis—perhaps for groups of people from some of the countries that my hon. Friend mentioned, representing the largest numbers of pensioners abroad. Then, if we did go into reciprocal arrangements for pensioners from such countries, the Government could workout what the savings would potentially be. If the£400 million cost was reduced, the Government would want to burnish their credentials for righting an injustice, just as anyone else would.
Mr. Waterson: I am grateful to my hon. Friend for that comment. Indeed, the opportunity may come sooner than we think. It is not just a matter of copyfor the Conservative party. We understand thatthe Chancellor is looking for some eye-catching announcements to make in his first 100 days. Who knows? This could be one of them—particularly if the figures can be massaged downwards.
I assume that the Minister quotes £400 million as the cost of uprating the present pension in line with prices, not earnings. It would be interesting to know whether he has the figures for the future cost, assuming that the legislation is passed by both Houses. The hon. Member for Yeovil might have touched on the matter, but his speech was so long that I am afraid I thought that I was going to retire before the end of it and move to a sunnier clime, preferably one with a reciprocal agreement. If he did not touch on it, I certainly will. I assume that the cost will be significantly higher, but no doubt we will hear about that, as the Minister is paid highly—compared with us—to know such things. For the moment, the working figure is £400 million.
I am moving into phase 6 or 7 of my speech—there are another 15 to go—but I wanted to mention reciprocity. The standard letter that is dusted off on these occasions by whoever is in power says, “Well, yes”—I paraphrase—“we’d love to do this, but of course those people haven’t got a reciprocal agreement with us, and that’s terribly unfair. If only they had, we’d be more than happy to write the cheques.” I asked a question recently; I am not sure whether to the Department for Work and Pensions or the Foreign Office. I asked, of all the countries with which we did not have reciprocal agreements, with how many countries was the UK currently in negotiation to establish them? The answer seemed to be none.
I have two things to say to the Minister. First, if reciprocity is still one of the main reasons why the Government are not prepared to change their position, what will they do about it? Is it not worth at least commencing negotiations with the Governments of Canada and Australia? I understand anecdotally that the Government of Australia would be quite keen.
Secondly, an interesting issue has been raised with me by the Canadian pensioners through John Markham. Is reciprocity and the existence of a bilateral treaty actually a prerequisite to making uprated payments? Although Australia and Canada have said that they would be prepared to enter into reciprocal arrangements, are those arrangements strictly necessary to the uprated payments, or is that merely a convenient excuse for not making them? While I am about it, I ask the Minister to undertake to review why his Department or the Foreign Office are not engaged in negotiations, and to indicate whether he has any intention of opening any such negotiations with those friendly Governments.
Mr. Waterson: Ah, but is it? That is an interesting point, and I confess with great shame that I had not really considered it.
Mr. Laws: Will the hon. Gentleman give way?
Mr. Waterson: Let me just deal with that point. I assume, as I mentioned a moment ago, that at least some of those pensioners are getting payments from their host Government. Nobody in this country seems to be collecting those statistics. One would think that the Canadian Government, for example, would have an interest in getting talks under way.
1.45 pm
Mr. Laws: Is the hon. Gentleman aware that the Governments of Australia and Canada have expressed a strong view on that matter? They would like a reciprocal agreement and they are incredibly frustrated at the persistent refusal of the UK Government to enter into negotiations.
Mr. Waterson: I am grateful for that intervention, and I was about to go even further than that. According to my informant Mr. Markham—I have not had a chance to verify this, which the Minister no doubt can—both Canada and Australia have started to index exportable pensions unilaterally. They have putin place their side of any reciprocal arrangement, assuming that that would be a pre-requisite.
As well as undertaking to return to us on that point, on which he might need to write to the Committee—I am relaxed about that—will the Minister consider starting such negotiations, if appropriate, as part of assessing the net cost of the issue to the taxpayers? While he is about it, will he update the Committee on the Carson case, which is still waiting its turn at the European Court of Human Rights? I have not heard much about it recently. Ms Carson lost her case initially, I believe in the House of Lords, and is now waiting for a hearing at the ECHR. The Department for Work and Pensions seems to be spending a lot of time and money in European courts of one sort or another at the moment, which is good news for the lawyers—so no complaints there.
I endorse much of what the hon. Member for Yeovil said. The issue is perennial, and it is important for those in Government and those who aspire to Government to have a somewhat clearer picture of what the obstacles are and what the real cost of doing something about it will be.
The Minister for Pensions Reform (James Purnell): I thank the hon. Member for Yeovil for tabling the amendment that has enabled us to have this important debate. It has been fascinating, and the hon. Gentleman was both extensive and expensive—a bit less expensive than normal, I grant. He was obviously stung by accusations of excessive proposed expenditure on the first day of our proceedings and is trying to rein himself in.
There was an interesting discussion this morning on whether the amendment would gain the Conservative or Liberal Democrat votes. I am not sure whether the Tories will be taking Bosnia-Herzegovina, South, at the next election after the remarks of the hon. Member for Eastbourne.
I wish to explain the reasons for the stance of both Conservative and Labour Governments and answer as many as possible of the questions that have been asked. As has been explained, we currently uprate state pensions abroad where we have a legal obligation to do so or a reciprocal agreement. It is always slightly unfair to point out the effect of amendments, because Opposition spokespeople do not always have the access to legal advice that we do. I therefore do not say this in a heavy-handed way, but I am not sure whether the amendment would do what the hon. Member for Yeovil intends, unless he really is trying to rein himself in financially. It would apply only to people with category B, C or D pensions and therefore only to those who have not contributed to their pensions through national insurance. I am sure that that was not the hon. Gentleman’s intention.
Mr. Laws: I am grateful for the opportunity to clarify the point. If I slipped up at the margin, I am happy to apologise. The Minister is right about my intention.
James Purnell: I am glad to have clarified that. The cost of that particular amendment would be only£14 million in the first year. I think that that includes backdating, but I am not entirely sure. I shall correct that statement if it was not right.
The key issue is what the overall cost of the hon. Gentleman’s suggestion would be. He was right to say that the figure of £3 billion is the cost of reinstating what people had before and the figure of £400 million is the cost of paying everyone at the level of the basic state pension going forward from now. The hon. Gentleman tried to say that he did not think that was necessarily what should happen. I accept that he wants to control the expenditure and see if there is something that is more affordable. However, he would be creating another knock-on difficulty by doing so.
The heart of the hon. Gentleman’s argument is that there is inconsistency between people in different countries. His proposal would create inconsistency within countries so that people who had retired in Canada 20 years ago would stay on the frozen amount and people who moved from Canada after such a proposal was in place would be uprated. If not, we are back in the language of £400 million.
Mr. Laws: I am sorry to take up so much time, Mr. Gale, but perhaps it might be helpful if I intervened to ask the Minister whether he understands the amendment’s intention. It is a probing amendment so, notwithstanding his comments, I hope that it is still relevant. The intention would not be to bring people’s pension up to the existing state pension level, but to index—with the new index—pensioners going abroad and those pensioners who are abroad, but only from their existing level, not from the full basic state pension.
James Purnell: I thought that I was making exactly that point. I was saying that there would then be an inconsistency. Someone in Canada would be uprated from the level at which they are now, which is their frozen level. I was referring to someone who moves there now.
Mr. Laws: Yes.
James Purnell: In trying to deal with an inconsistency between countries, the hon. Gentleman would then be creating an inconsistency within countries. It is not an insuperable problem, but it pushes us back to the position whereby, if we wanted a solution that was completely consistent in his terms, we are looking at the original cost.
Mr. Laws: I half understand the Minister’s point, but does he not understand that it is completely different to suggest that someone who is retiring abroad for the first time should do so in the knowledge that a better indexation regime was in place? Arguably, thosewho left 20 or 30 years ago and knew what the circumstances were should not necessarily expect their state pension to be uprated to the existing level. It is reasonable for them simply to reinstate the uprate.
James Purnell: The hon. Gentleman is welcome to intervene on me as often as he wants, given that what he said is exactly the Government’s point. We make clear through Directgov and the Pension Service what people will be receiving when they go to different countries. I am saying that his proposal, which he is trying to make more modest financially, would still leave inconsistencies between different individuals in the same country.
The hon. Gentleman is trying to limit the immediate impact of the cost. He and the hon. Member for Eastbourne asked me to estimate the immediate amount. If the current amount of frozen pension is uprated by prices, the additional cost would be£30 million. If it were uprated by earnings, it would be £50 million in 2007-08, the first year. However, as people move overseas that cost would escalate over time, so long-term projections are that the costs would rise by upwards of £2 billion in 2050, based on earnings uprating from 2012.
Mr. Waterson: It may be my fault but, given what on the face of it are quite low figures the Minister referred to, how do we reach the figure of £400? What is the relationship between the figures?
James Purnell: Let us consider those who moved to Canada in, say, 1985. They would immediately go from the frozen pension to today’s level of a pension in the United Kingdom. Obviously, that is a large uplift. Doing that for all people who live in frozen pension countries would take us up to £400 million. The figure of £30 million is, I think, based on the assumption that whatever they receive now would start to be uprated in line either with prices or earnings.
Mr. Laws: The Minister is being extremely patient, for which I am grateful. Will he clarify the figure of£30 million that he has described? It seems to have increased rapidly from the last parliamentary answer that I received on the issue. Admittedly, that was at the end of 2005, but I would not have expected it to have varied hugely. The estimate given by the now Chief Secretary in the parliamentary answer for the initial uprating cost in the first year was £20 million. The Minister has given a figure of £30 million. Will he explain the difference?
James Purnell: I am happy to write to the hon. Gentleman. I would guess that the difference is due to the increase in the number of people going abroad, to which he referred in his speech.
I accept that the hon. Gentleman thinks our reasons for not uprating are inconsistent, but the thrust ofthe policy is clear, as it was under the previous Government: we have limited resources and we need to prioritise our spending. Our main priority must be pensioners living here and we want to ensure that their standard of living continues to increase. Like both the hon. Gentlemen, I have met Mr. Markham and he makes an eloquent case. I have tried to explain to him, as have previous Ministers, that our obligation with limited resources is to people in this country. We have always made that clear to people when they have decided to go to other countries. Of course, we must meet our obligations to pensioners living in the European economic area and in those countries with which we have a reciprocal agreement.
As the hon. Member for Eastbourne said, our policy has been tested twice in the courts in the UK, and I can update him on that subject. After the final UK stage, Ms Carson had six months to decide whether to take the case to the European Court of Human Rights in Strasbourg. In 2005, we were made aware that she and 12 others had made an application to the European Court of Human Rights. We are unlikely to know whether it is successful until early in the summer of 2007, so the hon. Gentleman has plenty of time for the policy review group to make its mind up.
John Penrose: I would like to make a point on costs before the Minister moves on. Given that he has provided us with a series of updates on costs, which I presume are based on gross costs and do not include the netting effects to which my hon. Friend the Member for Eastbourne referred, will he undertake to ask his Department to do some sampling of individuals who are here from other countries, particularly countries with which we do not have reciprocal arrangements, so that we can work out whether those costs estimates would be significantly reduced? If they would, it might alter the views of his party and others on the relative importance and feasibility of uprating.
James Purnell: As the hon. Gentleman no doubt knows from his work on the Select Committee on Work and Pensions, the financial framework within whichthe DWP operates means that it has to make fairly significant economies. I therefore cannot commit to a research exercise that could be expensive, but I am happy to see whether there is any further information with which we can provide him before the end of the Committee.
Mr. Waterson: An equation that would only cost the Minister a postage stamp would be for him to ask his opposite numbers in Canada, Australia, South Africa and so on whether they have any data or are prepared to spend any of their budgets to find out about the number of British pensioners receiving means-tested benefits from their Governments. That is also an important part of the calculation. The money that he is saving—not personally, but for the British taxpayer—comes from people who would be entitled to pension credit, council tax benefit and all the other means-tested benefits had they stayed in this country. As it is, they are claiming benefits in another country.
James Purnell: I am happy to write to the hon. Gentleman and other hon. Members with whatever extra information is available. The point that he is making would only hold if the reciprocal agreement allowed some netting off of those two factors. Money would not automatically be saved for the Exchequerif we uprated in other countries and they had an associated reduction in their means-tested costs.
2 pm
John Penrose: Following on from the suggestion of my hon. Friend the Member for Eastbourne, I suggest that the Minister should correspond with his opposite numbers not only in countries with which we do not have a reciprocal agreements, but with his opposite number in the US, with which we do. The US Government must have data on the number of people to whom they are paying pensions over here and we might even have, on our computer systems, information on the number of people over there to whom we are paying a state pension. We must have addresses for those people.
James Purnell: Obviously, we know who we are paying overseas because we have to pay them but, as I said, we are happy to share with the Committeeany information that we have before the end of proceedings.
I want to put the uprating of state pensions abroad into context and respond to some of the points made by the hon. Member for Eastbourne about its extent. He was right to say that more than 1 million people living overseas are in receipt of a UK state pension, the annual cost of which is about £2 billion a year. Of that 1 million, about 530,000 live in countries where we do not uprate state pension payments. Those cost about £820 million a year. I have explained the cost of changing that on a reciprocal and forward basis.
In summary, our position is unchanged from thatof previous Administrations. It is a long-standing approach. I recognise the arguments made by Mr. Markham, as well as those made by the hon. Member for Yeovil, who is trying to find an affordable solution that addresses some of the inconsistencies. I hope that I have explained why any solution that gets rid of all inconsistencies will mount up costs very quickly—£400 million now, but with the increasing trend towards greater migration, those costs will build up significantly. So we need to prioritise resources and I have made it clear that we think that pensioners living here are the priority. That is why our position is the same as that of the last Conservative Government.
Mr. Waterson: I got the vague idea that the Minister was reaching his peroration and wanted to make sure that he will deal with reciprocity—is it necessary at all and will he start negotiations with any of the countries concerned?
James Purnell: It must have been my Athenian tones that made him realise I was perorating.
Mr. Waterson: One can always tell.
James Purnell: I do not think it would be appropriate to start negotiations on bilateral, reciprocal agreements when the Government’s policy has not changed. That would put the cart slightly before the horse. Of course, it is not legally necessary to have a reciprocal arrangement before making such payments. Any Government could do that unilaterally. The question is whether it would be sensible to do so. We think that it would be inappropriate to make such a decision without a reciprocal arrangement. However, the key point, which I have made already, is that we have our priorities, for which we have set out our reasons. With that, I urge the hon. Member for Yeovil to withdraw his amendment, but of course it is entirely up to him whether he does so.
Mr. Laws: I think that we have had a good debate, although I must be careful in making that claim because I seem to have spoken for the vast majority of the time that we have spent discussing the amendment.
To begin on a positive note, I must say that the tone of the debate has been non-party political. The arguments on both sides have been more reasonable and measured than those I have heard on other occasions. That might be because I did not threaten to press the amendment to a vote—the approach of the hon. Member for Northampton, North—or perhaps Mr. Markham and others deserve the credit for lobbying the Minister and other parties in the House in order to sell their strong case. Perhaps it is because the Minister and the hon. Member for Eastbourne accept that there is an extremely strong moral and intellectual case against the existing pensions set-up, which, to be frank, we have arrived at for no logical reason, as successive Ministers have accepted.
I was somewhat cheered by the hon. Member for Eastbourne’s speech because it was a little more positive than the comments made by his otherwise charming colleague, the hon. Member for Daventry (Mr. Boswell), who spoke on the issue in a Standing Committee debate last year, at which the Under-Secretary led for the Government. The hon. Member for Daventry was very unsympathetic to taking action, but the attitude of the hon. Member for Eastbourne is slightly warmer. He indicated that the matter would be part of his party’s policy review and, helpfully, that he does not have a closed mind. The issue is finances and affordability, not accepting the principles of the existing system. I encourage both the Conservative and Labour parties to accept that there is an irrationality and an injustice that deserves to be addressed when a Government can find the money to do so.
The hon. Gentleman started this afternoon by referring to confusion about cost. I hope that I did not add to that confusion during my contribution, but that is something that others are better able to judge. However, the Under-Secretary has at least provided a more realistic assessment of the costs than other Ministers have given. In the past, some Ministers have used the figure of £3 billion, despite the fact that nobody is arguing that all of the unpaid pension upratings dating back decades should be paid back. The hon. Member for Eastbourne came to the figure of £400 million. We now have a clear understanding that that figure represents both the cost of uprating the pension at the appropriate rate, and uprating the pension to the existing basic state pension rate level. Therefore, £400 million is not only an uprating cost, but a cost arising from an increased basic state pension.
2.8 pm
Sitting suspended for a Division in the House.
2.23 pm
On resuming
Mr. Laws: When we were interrupted, I was saying how I had been mildly encouraged by the comments of the hon. Member for Eastbourne. We will no doubt return to that in due course.
Before I finish I wanted to say a few things about the Minister’s comments. I was mildly cheered by their tone and, if his colleague would allow me to say so, I felt that that they were slightly more consensual—perhaps influenced by the rest of the pensions debate—than the last time we debated this subject. The £3 billion figure was not bandied around too much and we had a sensible debate on the £400 million figure and other options.
The Minister was kind enough to say that hehas met Mr. Markham, who represents many of the disadvantaged pensioners that have had their pensions frozen. He was kind enough to put it on the record that Mr. Markham made an eloquent case. I would have liked him to have gone further and said that it was not only eloquent but persuasive, because I think that it is. However, the Minister did not slam the door on this matter quite as decisively as has happened in the past, when the Department for Work and Pensions has given the impression that it regards the financial obstacles as impossible to deal with and that, even if money were on offer, the proposal would never be a priority. That has been my impression of their position up to now. I think we reached the point today at which the Minister had some sympathy for the case that has been made.
The only argument the Minister made against the proposal was a financial one. He commented on the potentially anomalous position and whether that could be easily improved by other changes, namely indexing from now on only for new pensioners and for those who have already moved abroad based on their existing state pension level. He said that doing so would create some anomalies, presumably because in his mind somebody who has gone abroad as a new pensioner would have a higher state pension, but the same level of indexing as someone who had already been in the country for 10 or 20 years, who would have the frozen level of the basic state pension and only have the indexing on top of that. Under the proposal that I am floating, there would be that gap. It is inevitable if the measure is to be implemented affordably at some stage. Our aim was to offer ways of delivering the policy change in a way that would be financially viable.
Mark Pritchard (The Wrekin) (Con): Is the hon. Gentleman suggesting having reciprocal arrangements with every country on the planet with which we do not currently have such arrangements? If so, how has he calculated that into his vague cost projections, taking into account the record emigration that he has mentioned?
Mr. Laws: I am proposing neither reciprocal arrangements with the British overseas territories, because we would be negotiating with ourselves, nor huge, prolonged negotiations with countries where there are no British pensioners. I would want reciprocal arrangements between the United Kingdom andthe big four countries with the largest number of pensioners, which the hon. Gentleman knows that we are really talking about: Australia, Canada, South Africa and New Zealand. That would be sensible. The hon. Member for Weston-super-Mare made an excellent point when he said that, if we are to talk about this matter sensibly in relation to the cost, we need to understand how reciprocal arrangements would impact on the costings. It would be absurd for any UK Government to say that they would not seek to achieve a reciprocal arrangement as part of a deal on the issue. I do not imagine that any of the parties represented in the Committee would want to do that. As I said, we ended up with a more sensible debate about costings.
I accept that, in the scenario that I have outlined, there would be British pensioners living abroad in the same country with different pensions, depending on whether they retired there 30 years ago or now. I merely say that no pensioner in either category would not be in a better situation than now and would not welcome that change, even if they wanted to seek moreover time.
Some disagreement remains on the costings. There was disagreement about the base cost in the first year of linking to the retail prices index, which the Minister’s predecessor said would have been about£20 million about a year or so ago. Now the Minister has come up with a new figure of £30 million. He is right to say that more British pensioners are moving overseas, but there certainly has not been that proportionate increase in the past year or so. Unless a vast number of people are fleeing life under this Government to go to other countries, an increase of such proportion is not justified. It would be interesting to hear where that figure comes from.
The Minister helpfully gave us some indication, which we needed, as the hon. Member for Eastbourne said, of what the additional cost would be now that we have to earnings-link rather than RPI-link in future. I think that the Minister mentioned £50 million, compared with £30 million. I hope that he will write to clarify some of these points and clarify the costs for the out years, where the expenditure rises. I accept that it rises; if it did not, it would hardly be such a big issue.
John Penrose: Going back to differentials between pensioners in various countries whose pensions are frozen because they have arrived at different points in the past, I presume that that must be the case already, with people who arrived 10 years ago having their pensions frozen at a different level from someone who arrived last year. If I understand it correctly, if those people took up the hon. Gentleman’s proposal, the differential between those pensioners in those countries will be no more or less unfair. Is that correct?
2.30 pm
Mr. Laws: The hon. Gentleman is quite right. I do not think that the majority of pensioners living abroad in those circumstances would regard my proposals as a step backwards. In my view, they would most certainly see them as a step forward, although not large enough.
As I said, in conversations with some of the pensioner groups concerned I have spelled out that I do not believe that any UK Government elected in the foreseeable future would consider making the issue such a priority that they would be prepared to accept the £400 million—or £600 or £700 million—up-front cost. I have made it clear that we need to consider how to make the change affordably. However, it would be much less unjust than the existing system. Of course, over time, it would mean that the stock of pensioners living overseas, if I can put it in such crude economic terms, would be living in an acceptable situation rather than in the existing unacceptable situation.
The hon. Member for Weston-super-Mare raised an extremely interesting point about whether the costings include relevant nettings off that might be appropriate in the circumstances. He asked particularly about offset arrangements and what assumptions might be made. It would be useful to know. I understand that the Minister would be undertaking a very large task indeed if he asked his officials to come up with reliable figures spelling out to the last decimal place the essential implication, as it would be highly uncertain, but it would be interesting to have it confirmed that there is an assumption of no offset agreement in the existing figures and to have advice on any orders of magnitude that he might sensibly give as to what those offset agreements could be worth.
There is a wider economic issue, which I will not even attempt to explore in this debate or we will be here the entire day. That issue is what the cost is of UK pensioners moving abroad. In certain cases, not only might they pay less tax than they would if they had stayed here, but they would not make the same claims that they would have made on the national health service and other services. That is a much more complex economic case, which could be studied only as part of a much wider review, rather than the sort of thing that we are asking the Minister to do.
After all that, we have come to the point where even the Minister is willing to accept that we could be talking about much lower cost figures if we chose to manage the transition differently. That is extremely helpful. Despite the lack of priority that the Government believe they should give pensioners living abroad rather than in this country—he finished with the point that the Government’s real duty was to look after pensioners in the United Kingdom rather than abroad—I would gently point out that under his proposals, he will give to pensioners in unfrozen countries almost 50 per cent. of the benefit not only of the existing RPI uprating but of the earnings uprating.
What the Minister did not put on the record, which would be interesting to hear now or when he writes us his lengthy letter on the subject, is how much he will now fork out in addition to the RPI costs for funding an uprating with the earnings link the pensions of UK citizens living abroad in countries where the pensions are not frozen. My guess is that that figure must be quite significant. It is interesting that the Government are trying to defend their present position by maintaining that they will focus only on pensioners living in Britain, because they are actually quite happy to fork out a huge amount of money to earnings-uprate the pensions of UK citizens living in the unfrozen countries. He did not mention it, but presumably they did not consider before introducing the Bill the interesting issue of whether there should be an earnings uprating for those pensioners, or whether they would keep it at prices or share some of the potential proceeds of uprating one lot at earnings to uprate some other lot closer to prices, rather than freezing them. That is a big anomaly.
I hope that behind his ministerial front and the inevitable “no” that all Ministers have to give to potential changes in policy until they say “yes”, the Minister is even more persuaded by Mr. Markham than by this debate that there is a very powerful intellectual and moral case against the existing uprating policy. If the only case for it is financial, the Government should be seeking to commission reports into precisely the economic issues that we have discussed to see whether the fundamental injusticecan be remedied. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Waterson: I beg to move amendment No. 1, in page 5, leave out lines 32 to 38.
The Chairman: With this it will be convenient to discuss the following amendments: No. 29, in page 5, line 38, at end insert
‘; or by a percentage not less than the percentage by which the general level of prices is greater at the end of the period than it was at the beginning, whichever is the higher.’.
No. 2, in page 5, leave out lines 39 to 41.
No. 31, in page 5, line 41, at end insert—
‘(3A) The general level of earnings shall be defined as the Average Earnings Index.
(3B) The general level of prices shall be defined as the Retail Prices Index.’.
No. 3, in page 5, leave out lines 42 to 44.
No. 4, in page 6, line 13, leave out from ‘shall’ to end of line 14 and insert
‘determine the general level of earnings as set out in subsections (8A) and (8B).
(8A) If the average earnings index (including bonuses) for the whole economy for September in any year is higher than the index for the previous September, the Secretary of State shall as soon as practicable make an order in relation to each sum mentioned in subsection (1), increasing each sum, if the new index is higher, by the same percentage as the amount of the increase of the index.
(8B) In making the calculation required by subsection (8A), the Secretary of State shall in the case of the sums set out in subsections (1)(a) to (1)(d) inclusive, round up the result to the nearest 10 pence.’.
No. 33, in page 6, line 14, leave out ‘he thinks fit’ and insert
‘may be approved by resolution of each House of Parliament’.
No. 5, in page 7, line 3, at end insert—
‘(6A) The Secretary of State must, within six months of the beginning of the Parliament referred to in subsection (6), inform Parliament by means of an oral statement of the date at which the provision set out in this section could be afforded.’.
No. 78, in page 7, line 3, at end insert—
‘(6A) The Secretary if State must, on or before 5th April 2009, announce his decision as to the date from which he will implement the provision set out in this section.’.
I have already indicated that I am prepared to allow a wide-ranging debate on this group of amendments on the understanding that it is at the core of the clause, so I do not envisage any call for a stand part debate thereafter.
Mr. Waterson: Thank you, Mr. Gale—that is very helpful. The clause is extremely important and therefore deserves a full debate. I hope that all the issues that we wish to raise can be fitted into it with a modest amount of indulgence from the Chair. I shall first summarise some of the amendments and then discuss the background to them.
I hope that amendments Nos. 1, 2, 3 and 4 are fairly straightforward. They are designed to remove the almost complete carte blanche that is being given to the Secretary of State to determine how uprating is undertaken. It might seem slightly churlish to raise the matter when, after years of campaigning by all sorts of outside groups, not least the National Pensioners Convention, the Government have decided to restore the link with average earnings. However, the clause is incredibly vague about how that is to happen.
Proposed new section 150A(8) in clause 5 states that
“the Secretary of State shall estimate the general level of earnings in such manner as he thinks fit.”
I am sure that there is no intention that he will toss a coin or use a pin, but paragraph 149 of the explanatory notes summarises the situation as follows:
“In practice this means the Secretary of State will be able to decide which measure or index of earnings growth should be used for the purposes of earnings uprating.”
That is not quite good enough. Having won the prize of the restoration of the link, we should have a little more clarity about the basis on which the Government are going to approach the issue.
Paragraph 3.24 of the White Paper states, baldly, that during the next Parliament the Government will
“re-link the uprating of the basic State Pension to average earnings.”
Their commitment to that is perfectly clear apart from the issue of its timing, which I shall come on to. The amendments would provide greater certainty about how this important element of the Government’s package of reforms is implemented.
I should concede, before somebody else says it—particularly the Minister—that there is a precedent for the sort of wording that appears in the clause: I believe that it is in the Social Security Administration Act 1992, which was introduced under the previous Conservative Government. However, there is also a more recent precedent for a much tighter drafting of such uprating legislation in section 34 of the Employment Relations Act 1999. It is used to uprate, among other things, the maximum week’s pay that is used for calculating statutory redundancy pay in line with the movements of prices measured by the retail prices index.
I cannot for the life of me understand why the Government should be unwilling to state in the Bill exactly how they will approach the issue of the link. Amendments Nos. 1, 2 and 3 are all consequential upon amendment No. 4, which makes it clear in the Bill that the Secretary of State will take the average earnings index—including bonuses—for the whole economy in September in any given year and use that as the basis.
You may wonder whether there is any substance to this point, Mr. Gale. The concern is that there are a number of different measures that can be used but this seemed the most obvious and fairest one to put in place.
In addition to the strange provision that the Secretary of State can decide
“in such manner as he thinks fit”
proposed subsection (3) does not require
“the Secretary of State to provide for an increase in any case if it appears to him that the amount of the increase would be inconsiderable.”
Again, that seems a bit odd. If there is an increase, it should be acted upon. It would be nice to know how this Minister would define the word “inconsiderable”.
We had one concern with proposed subsection (4) which is about adjusting
“the amount of the increase so as to round the sum in question up or down to such extent as he thinks appropriate.”
Our fear on this side is that it would be more appropriate to round up in every case. However, there may be some good accounting reason for the Minister taking that view. We will listen to what he has to say with great interest.
If the hon. Member for Yeovil will forgive me, I will deal briefly with the Liberal Democrats’ amendments Nos. 29, 31 and 33. I am keen to hear them develop their case for those. Amendment No. 29 seeks to put in an alternative, namely prices versus earnings, which has been provoked by the recent shock increase in inflation. It would be interesting to hear the arguments for and against. I am delighted to see that great minds think alike and in amendment No. 31, they have reached a similar view on the right index to use, namely the average earnings index—I assume that they mean the one that includes bonuses. However, they may have some technical reasons for taking a different view.
Mr. Laws: Obviously, I will be able to make my own speech in my own time, but on the important issue of whether the uprating will be at prices or inflation—whether there will be inflation underpinning to make sure that if earnings are below inflation people do not end up with a real cut in their pension; I think I am right in saying that that was the 1970s formulation—since that is a fairly clear cut issue, is the hon. Gentleman not minded to give rather stronger support to our amendment than he has done so far?
Mr. Waterson: In fairness, I have said that I am keen to hear the hon. Gentleman develop his argument. He talks about a 1970s formulation but we are not in the 1970s. We will discuss the history of the link and some of the mythology that has grown up around it, but it is important to remember what the 1970s were like in terms of public finances, roaring inflation and so on.
Thanks to the golden legacy that this Chancellor inherited and which has stood him in relatively good stead until recently, we have lived in a low inflation world. However, I will listen to what the hon. Gentleman says and will not rule it out entirely. Nevertheless after all these battles over many years to restore the link with earnings, it seems slightly odd to be returning to the alternative of prices, but I will return to that if I may.
I was not going to speak to amendment No. 5 because amendment No. 78 actually represents second thoughts on this matter and is a slightly preferable way of approaching the same point. I regard amendment No. 78 as the most important. Basically, it is about the timing of the decision. The Chancellor has been through a long personal odyssey in respect of restoring the link. As part of building up a reputation—justified or otherwise—for financial prudence, he always argued that restoring the link could never happen. I shall deal with that in a bit more detail when I consider the history of the arguments about restoring the link.
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We all know that the Chancellor’s initial reaction to the Turner report was grudging, to put it mildly;the Treasury made a significant attempt to sabotagethe whole affair. In the meantime, the Chancellor has obviously had a lightning conversion. Even so, the furthest that this legislation goes is to say that the link will be restored in 2012, or 2015 at the latest. The Minister will no doubt correct me, but I assume that that is still subject to the affordability criteria that the Chancellor set out a while ago.
What strikes me as odd from a political point of view—unless an eye-catching announcement is to pop up in the Chancellor’s first 100 days as Prime Minister—is that I assume that the Chancellor is saying that we would go through the entire next general election campaign without knowing whether the change would happen. Let me be straightforward: I have drafted amendment No. 78 for that precise reason. It would require the Chancellor—he may then be Prime Minister—to announce the decision before the likely date of the next election.
At the moment, all that hard-pressed pensioners have from the Chancellor is an IOU—he will or might link pensions to earnings in 2012 or 2015. As I said, even then he has made it clear that that is subject to whether it is affordable at the time. The amendment would call on the Chancellor to announce the decision on uprating the state pension and inform Parliament of that decision on or before 5 April 2009.
Mr. Laws: I understand the purpose of the amendment. Although he has picked out that date, is it the hon. Gentleman’s strong view that it should be before the next general election? Will he give the same commitment on behalf of his own party? Will it be able to state before the next general election the timing that it would propose?
Mr. Waterson: As I have said in a different context, we are still engaged in a policy review. The hon. Gentleman has reminded me of a point on one of his amendments that I failed to deal with and will come back to in a minute. The answer to his question is that it seems unreal that under present Government policy, we would go through the next election campaign without a commitment on the issue.
James Purnell: I suspect that the hon. Gentleman’s intention at some point is to tease my party about whether our policy is agreed, and rehearse all of that. He will be glad to hear that it is completely agreed—and, indeed, in the legislation. Is not the answer to the question that he was just asked not that his party will come to a view on the issue in time, but that it has answered it already? In our Second Reading debate, the shadow Secretary of State said:
“We believe, however, that restoring the earnings link to provide that stability is affordable now.”—[Official Report, 16 January 2007; Vol. 455, c. 673.]
It is not that our policy is unclear, but that his is; he is disagreeing with his own shadow Secretary of State.
Mr. Waterson: No, I am not disagreeing with anyone, except possibly the Chancellor. I am trying to tease from the Minister when the restoration of the link will happen and why it is inherent in the Bill that we would have to sit quietly through an election campaign with no commitment. That is a perfectly simple point.
James Purnell rose—
Mr. Waterson: Before I give way to the Minister again, as I am happy to, I remind him that if the Conservatives had won the last election, we would already be implementing the restoration of the link.
James Purnell: Perhaps the hon. Gentleman should have saved that answer for this question. Is his policy that the link should be restored now? Or will the Conservative party review that issue and decide later?
Mr. Waterson: Our policy is clear and is basedon being the current Opposition. We await the comprehensive spending review in the summer. We are trying to extract from the Minister—although it is a bit like drawing teeth—what precisely the commitment to the new policy is. I have made the point that the decision could come as late as 2015, or not at all if there is an affordability problem.
I was explaining why we had chosen 5 April. I appreciate that one school of thought says that there might be a general election later this year, but if we discount that, the most likely date is May 2009. The Government cannot get away with going through that campaign without coming clean on such a crucial decision. There are 2 million pensioners living in poverty who deserve an answer. If the Chancellor and the Minister, as one of his potential acolytes, cannot give that assurance, that suggests that they know more about the future problems of the British economy than they have admitted to.
Mark Pritchard: My hon. Friend is absolutely right to ask why there is a mystery about the vagueness from the Government on the issue. Despite the Minister’s distraction strategy, which we heard a moment ago, they are the Government and we are the Opposition. The Government should support the amendment, because my hon. Friend is absolutely right. There are2 million pensioners who want to know whether the restoration will really happen. That strong caveat—subject to affordability—is worrying for many of the pensioners whom I represent. I hope that they can get more clarity today, as a result of the Government’s supporting such a sensible amendment.
Mr. Waterson: My hon. Friend is absolutely right.
Mr. Laws: I support the hon. Gentleman in his call for more transparency from the Government on the issue, but I am a bit confused about what the Conservative party’s policy is. To give the hon. Gentleman credit, his party said before the previous general election that the earnings link in the basic state pension should be restored in this Parliament. I would have assumed that he would now be in favour of that, but he seems to be saying that he is not sure that the link should be restored immediately. I cannot understand when, between now and the general election, the Conservative party changed its mind on the issue.
Mr. Waterson: The short answer is that we did not change our mind, but the electorate did not choose us. It is clear—I was just refreshing my memory from the document—that we promised to restore the link with earnings at the previous election. If a Conservative Government were in power now, we would no doubt be on the way to implementing that. That is the first point.
In a sense, I am trying to be helpful to the Chancellor, who will presumably be the Labourleader and the Prime Minister by then. I know thatthe Minister is itching to intervene again, but surely the Labour party will not fight the next election on the basis of not having a policy on when the Government are going to uprate the state pension with earnings rather than with prices. Why not put that in the Bill? Does the Minister want to intervene?
James Purnell: No.
Mr. Waterson: The Minister just tensed for a moment—the question will have to remain a rhetorical one for now, although I shall return to the detail.
On a smaller point, I am reminded that I failed to deal with amendment No. 33, which the hon. Member for Yeovil tabled. As I read it, it seems to say that instead of being up to the Secretary of State, the decision would have to be approved by a resolution of each House of Parliament. I am not entirely sure that we would go along with that. We believe that the Secretary of State of whatever party should makethe decision. The important thing is to nail down the approach that he should take in the Bill. Presumably, there will be an uprating debate every year in both Houses of Parliament. However, I do not want to draw the hon. Gentleman on that issue before he has had a chance to develop his own case.
I come now to some of the broader issues raised by the clause. There is a mythology about restoring the link. It is helpful to refer to the Library briefing on the matter, although it may be thought a bit of a sissy thing to do. It is rather a good brief on this occasion, so I shall do so. There is a myth that there was a long golden age when there was a link between earnings and the basic state pension. That is simply not true; it is a bit like the golden age of British Rail before it was privatised. I do not remember it being a haven of good service, edible food and timely arrivals and departures. In the same way, there is a myth about the earnings link.
The Labour Government elected in February 1974 introduced social security legislation and a National Insurance Act 1974, which provided for all long-term benefits to be increased in line with earnings or prices, whichever were more favourable, reflecting the 1970s point that the hon. Member for Yeovil raised a moment ago. There was a brief period when there was a link. The Conservative Government elected in 1979 was committed to controlling inflation. Patrick Jenkin, the new Secretary of State for Social Services, made it clear that what he called the ratchet effect of the increase in pensions could not be sustained given the state of the economy. Therefore, in 1980 the link was broken.
Ms Angela C. Smith (Sheffield, Hillsborough) (Lab): In 1980, the basic state pension was worth 25 per cent. of average earnings. By 2006 that figure had fallen to 16 per cent. I suggest, therefore, that the break with earnings has had a real impact on pensioner prosperity, despite real-terms increases in the pension over that period.
Mr. Waterson: I do not disagree with much of what the hon. Lady said. That is one reason why my party, before the last election, fixed on the policy of restoring the link. It was not an easy thing to do; we were the only party to go into the last election with that promise. Not even the Liberal Democrats made such a promise, which must have been an oversight. It was, and remains, an expensive thing to do and we took a lot of trouble to work out costings.
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Mr. Laws: I shall not make a partisan response to the hon. Gentleman’s latest comment. Does he accept that there was a bit more to it than financial constraints when the link was broken under a Conservative Government getting on for a decade later? The link was broken not only because of the affordability issue, but because the Conservative Government’s philosophy did not favour an earnings-linked basic state pension. At that time, there was a rather different approach, including by some of the other parties that are represented here today.
Mr. Waterson: I agree with the hon. Gentleman thus far: the then Conservative Government gave enormous priority to encouraging and building up private and occupational pension provisions. Hence the comments of the right hon. Member for Birkenhead (Mr. Field) that, when Labour took office, we had the strongest pension provision in Europe and now we have one of the weakest. Towards the end of the last Conservative Government, we had more assets in pension funds in this country than the whole of the rest of Europe put together. That proud achievement of our Government has been much unpicked by this Government.
We start from the mythology that the wicked Tories put paid to something that had been in place for many years, whereas it had in fact only a brief history under a Government who eventually collapsed under the weight of their own financial incompetence. At the last election, we painfully worked out a policy that would allow us to restore the earnings link in this Parliament. Why did we do that? There were three reasons. First, it was the right thing to do.
The second reason was that it is the most reliable way of getting help to the pensioners who need it most. When we debate new clause 2, we will have a longer discussion of the great means-testing controversy. We will not have the benefit of oral evidence, sadly, so I shall have to do the best that I can. Some 1.5 million people do not claim their pension credit, and other benefits, such as council tax benefit, have very low take-up rates.
The third reason, which will also become more relevant later in the context of the delivery of property and personal accounts, is about providing a decent platform upon which people can build their own pension provision during their working lives. As I said, I do not want to get too much into the means-testing argument.
For years, post-1980, all of us politicians would address meetings of pensioners at which someone would be guaranteed to say, “What about Maggie scrapping the earnings link in 1980?” I am not sure what I was doing in 1980—oh, I had just fought my first seat in 1979. I do not know what the Minister was doing; I would not even speculate.
James Purnell: I was in primary school.
Mr. Waterson: It was a very long time ago, but it remains a powerful image for many pensionerswith long memories. I have a vivid recollection of announcing to a pensioners parliament at the National Pensioners Convention in Blackpool our policy of restoring the link. I even got some boos from people who could not bear the thought that it was the Tories, and only the Tories, who were proposing that. I told them to get over it.
This issue has been a running sore for a long time. What happened when Labour won the election in 1997—nearly 10 years ago? Did they rush to do anything about it? Of course, they did not, and the Chancellor has had some hard-edged things to say about it. In 2000, he said:
“We can’t go back to the earnings link. What we must do is help the poorest pensioners and people on modest incomes.”
In 2003, he said:
“I have to tell the House that to revert to the pre-1980 position—an earnings link with pensions—would, by the end of the period, raise deficits by 3 per cent. a year just to cover this one item, with the long-term sustainability of the public finances undermined.”—[Official Report, 10 December 2003; Vol. 415,c. 1063.]
James Purnell: Of course, the Chancellor was making the point that to restore the link in isolation without ways to pay for it in the long term would have been unaffordable. The hon. Gentleman may want to confirm that his policy was not to restore the earnings link for ever, but to do so for just one Parliament. He did not have a policy for making it affordable in the long term.
Mr. Waterson: With all due respect to the Minister, it is a bit of a cheek to tell us that our policy was for only one Parliament when he is telling us that the Government will not restore the link for another Parliament.
To return to the Chancellor, just as revealing is what he said when the Turner report was published. He said that
“there is no issue of principle about the pension being linked to earnings. The question is this one that Lord Turner himself has acknowledged today, an eight billion pounds cost...Tony Blair and I are totally agreed”—
that is a first—
“about the importance of dealing with this affordability question.”
As for off-the-record comments, the Financial Times reported that the Chancellor had written to Adair Turner—or Lord Turner, as he now is—telling him that he should not assume that the current link of the means-tested pension credit benefit to earnings would continue beyond 2008. The same source—the Financial Times is usually quite accurate on these matters—said that the Treasury was “apoplectic” about the proposals and
“doing everything it can to undermine them.”
Apoplexy is something that the Chancellor does very well. BBC News Online reported that
“the chancellor plans to ‘shelve’ a key part of the Turner report.”
So this Labour Government were not bouncing into office in 1997, determined to put right a massive injustice that had been going on since 1980.
Ms Smith: Does the hon. Gentleman acknowledge that, from 1979 to 1997, the net income of the poorest 20 per cent. of pensioners grew by 28 per cent., but that the net income of the richest 20 per cent. of pensioners grew by 76 per cent.? Does that not show that means-testing in relation to the pension credit was the important thing to do to address pensioner poverty?
Mr. Waterson: I shall say two things about that. The statistics on the rise in pensioner incomes in the 1980s and 1990s are very much affected by those who had occupational and private pensions and those who did not. I forget the exact figures, but there was a very impressive increase in pensioner incomes for those who were entitled to occupational pensions. Of course, it was a centrepiece of our policy to try to get more and more people into such schemes, and I think that we had a lot of success in doing so. That was important.
On pension credit, there are two schools of thought on the Government Benches. There are those who say—I think that the right hon. Member for Birkenhead, for example, has come around to this viewpoint—that pension credit was always or should always have been a temporary expedient that solved a particular problem over a short term of years, although 2 million pensioners are still living in poverty. Then there are those, such as the Chancellor, who may feel that it does not matter too much if such a high and rising proportion of the population is subject to means-testing. It gives the state that control on which the Chancellor is so keen.
Ms Smith: All the evidence shows that the pension credit has addressed some of the extremities of pensioner wealth and prosperity. It has built part of the foundation for the pension settlement that we are discussing here today.
Mr. Waterson: That is a point of view, but I am not sure that I wholly buy into it myself.
I was saying that the Government came to power in May 1997 determined, one would have thought, to right this particular wrong, but not a bit of it. Then, of course, there was the famous 75p increase in the state pension. Ever since, until very recently, and through many of the latter years of opposition, the basic attitude of the Government was that restoring the earnings link was unaffordable. In fact, that word was thrown at us when it became our policy before the last election—we were told that it was unaffordable. So there has clearly been a sea change in the Government’s attitude, which I welcome. The Minister is tensing again, but that may just be because this is a Thursday.
As we are not to have a clause stand part debate, I think it right to make it clear where we are in terms of the history of the earnings link. Labour politicians— including the Chancellor, no doubt—have often been quite cynical in portraying us as the wicked Tories responsible for breaking the link to earnings. I stress again that it was something that happened over a short period. The economy collapsed because of the failure of the pre-1979 Labour Government. In 1980, based on public finances and roaring inflation, we made absolutely the right decision. Until relatively recently, the Labour party had no plans to restore the link. The initial reaction to the Turner report was apoplectic, as we have heard. Indeed, I recall—it is coming back to me—that the Government got very narked because they felt that it was not even part of Turner’s terms of reference to consider the state pension in the first place.
The Parliamentary Under-Secretary of State for Work and Pensions (Mr. James Plaskitt): I have listened carefully to the hon. Gentleman recounting the history and to his efforts to explode the mythology that he says surrounds the previous Conservative Government’s decision to break that link in 1980. As I understand it, his argument turns on the issue of affordability. He refers to the state of public finances and to inflation, and he prays those in aid of the reasons why that Government decided to break the link. Is he sayingthat the link to earnings remains contingent on low inflation? If a future Conservative Government were to restore the link and then lose control of the economy, as they did before, and we returned to high inflation, is it likely that the link to earnings would be broken again?
Mr. Waterson: That was not just one hypothetical question, but a series of them—piled one on top of another. I am sure that the Under-Secretary was not involved, but it was a Labour Government who lost control of inflation and the economy and had to go cap in hand to the IMF prior to 1979. No one should forget that. If fault is to be apportioned, it was their fault that the link had to be broken in 1980. I make no apology for saying that.
The Under-Secretary asks me to commenton whether a hypothetical future Conservative Government would lose control of the economy and inflation. We have no intention of doing so. It is this Government who seem to be losing control of inflation. We have the highest rate of inflation for how many years? I forget off the top of my head—I think that it is 17 years. It is up to 3 per cent. Perhaps he would like to explain that to pensioners.
As the Under-Secretary has got me started, may I remind him of recent research showing that the real rate of inflation for pensioners is more like 9 per cent? Why is that? It is because council tax bills have doubled under this Government. Any help that the Government were going to give came only in election years—surprising that! Energy prices are also to blame, and the Government have failed to work out a proper energy policy. We are not talking about 3 per cent.—worrying though that is—but 9 per cent. for the very people that the Bill is supposed to help.
Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): Probably the only advantage of my longevity is that I remember the situation from 1979 to 1980. If my memory serves me right, one of the great disappointments when the Labour party lost power in 1979 was that they missed out on the huge bonanza of North sea oil and gas, which the Conservative Government enjoyed and squandered in tax cuts. How does the hon. Gentleman factor that in to the debate on the affordability of pensions at that time?
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The Chairman: Order. I am beginning to regret saying anything. I indicated that I would allow a degree of flexibility, but there is flexibility and flexibility. It would be quite helpful if we began to concentrate on one or two of the matters slightly closer to the amendments.
Mr. Waterson: Yes. I will not even begin to deal with whether Callaghan should have gone to the country in 1978—
The Chairman: Order. No, the hon. Gentleman will not.
Mr. Waterson: There is a phrase—something about church and waiting. Where was I? North Sea oil—it is our oil, no it is their oil.
Let me conclude by looking at some of the comments from outside bodies about the decision and its timing. Help the Aged said:
“Taken together the reform package must inspire a momentum of change in people’s behaviour, helping to re-shape attitudes to and confidence in savings for pension provision, as well as counter-acting the disincentive to saving created by the current regime of means-tested benefits.”
Help the Aged make the point that, under the projections, the total cost of the state pension, state second pension and pension credit—currently 5.2 per cent. of GDP—will still be 5.2 per cent. of GDP by 2020, and that it will be 6.7 per cent. of GDP by 2050. On the face of it, that looks like quite a healthy increase. However, over that period, the briefing goes on to say:
“the older population will be increasing dramatically, and this30 per cent. increase in GDP spend will be spread around an older population which will then be 50 per cent. larger.”
Referring to pensioner poverty, it then says:
“some two million older people are living below the official poverty line (60 per cent. of median income)”,
but roughly 1 million of them are living
“below 50 per cent. of median income”.
Help the Aged says that
“this Bill does nothing to help today’s older people”.
The National Pensioners Convention talk about the 2012 date:
“Pensioners’ incomes relative to the wider population will continue to fall for up to 6 years...3 million of today’s pensioners will not live to see the link restored”,
“the basic state pension will have fallen to just £75 a week in current terms or 12 per cent. of average earnings.”
One demand, which may be unrealistic, is the restoration of the link between the state pension and average earnings or prices, whichever is greater, and which should happen from April 2007. After what we heard about the computer on Tuesday, that sounds a little unlikely, unless it can all be done manually.
The Equal Opportunities Commission, which has been extremely helpful, particularly in briefings on carers and women, says:
“It is also regrettable that today’s pensioners are not given a stake in the package until the basic state pension’s link to average earnings is restored—2012 at the earliest, by which time the BSP will have depreciated still further in value.”
3.18 pm
Sitting suspended for Divisions in the House.
3.47 pm
On resuming—
Mr. Waterson: I want to deal finally, as I move into section 4 of my speech, with the views of outside bodies. There has not exactly been a chorus of undiluted pleasure at this part of the Bill’s package. The Occupational Pensioners Alliance states:
“the Bill does nothing to address the significant issues faced by today’s pensioners...the Government proposes to introduce the link to earning in 2012 at the earliest. This is at least two years later than the recommendations of the Pension Commission. Consequently, millions of pensioners will become poorer because of the slower rate of RPI increases as compared to the buoyancy of earnings.”
Help the Aged supports my amendments Nos. 1, 2, 3 and 4:
“We believe it is vital that the introduction of the earnings link is not a false promise. We believe it will be helpful to pin down the definition of earnings and remove the proposed flexibility for the Chancellor to decide on how earnings should be calculated.”
Finally, Age Concern says:
“current pensioners will not benefit from the important reforms contained in the Bill”,
and refers to the Chancellor’s escape clause that
“the link will be made in 2012 subject to ‘affordability and the fiscal position’”.
Age Concern went on:
“it is imperative that the date for the reinstatement is on the statute rather than remaining subject to the vagaries of the political environment.”
I would agree with that. It is the whole point behind amendment No. 78.
To sum up, the first issue in my amendments is the crucial one of how the Secretary of State should approach the calculation of the rise in earnings over the previous 12 months. We think that it should be on the face of the Bill. The Minister might have some perfectly good technical arguments against that, and I am happy to listen to them, but it seems strange that that provision is not in the Bill in such an important context.
There is also the wider issue of restoring the link. We agree with the Government about restoring the link with average earnings—more accurately, they agree with us because we got there first—and the earlier the better, all other things being equal. We agree, too, that it is a question of affordability. We are just surprised that there seemed to be a problem with announcing prior to the next election when that will happen. Otherwise, it is just an amorphous promise about something that will happen one day or perhaps never, and is costing the Chancellor nothing.
James Purnell: The hon. Gentleman says that the Conservative party got there first. I hope he will agree that its policy was slightly different. It was to stop the crawl of new rights under the state second pension. It was to increase for one term the basic state pension in line with earnings, but to pay for it by taking money away from people who contributed into S2P. That is not the policy that we are following.
Mr. Waterson: I am not suggesting that the policies are on all fours in every detail. Indeed, we were not proposing to increase the state pension age at that stage, but we shall debate that matter another time. I am happy to concede the Minister’s point.
There is common ground between us—the Government and the Government-in-waiting—but affordability is key. As long as the Government are the Government, they are the ones who should be able to tell us about affordability. It puts too high a strain on our credulity for the Government to say that they will not know whether the policy is possible and affordable until the beginning of the next Parliament at the earliest. They should be able to say that in 2009. Unless the Minister comes up with a blinder of an explanation, I certainly intend to invite the Committee to press amendment No. 78 to a Division.
If the Government are not in a position to explain matters, the economy will be in deep trouble and even 2012 and 2015 as target dates will come into question. My present inclination is that I wish to secure Divisions on amendment No. 78 and amendment No. 4.
Mr. Laws: We have already spent a considerable time on clause 5. It would therefore be tempting to rush through some of the issues to avoid being detained any longer. However, we are discussing one of the most important clauses in the Bill, so it is necessary to spend a full and proper amount of time scrutinising it. Speaking for myself, I am confident that we shall catch up time over the next few days in respect of our initial aspirations.
The clause is important for two reasons. It is the most immediate, politically resonant and economically significant part of the Bill. It is not changing the state pension age in 20 years or so, which to many people seems extremely distant. That is perhaps why not many of our constituents have written to us to complain about the changes. It is not about the hideous intricacies of the state second pension, which is not discussed widely in pubs throughout the land.
The clause is the most interesting resonant political part of the Bill because it will impact on people’s standards of living in several years’ time. Furthermore, I must say in fairness—our debate so far reflects this—that it has been one of the big, sensitive issues in pensions policies since the 1970s. It is an interesting matter for people because it will make a difference to them in the near future. It is something that everyone can understand, not only here but in the pub at Yeovil and elsewhere.
There is a third reason that the clause and the amendments are particularly important, and not only for the short term. They are all about different aspects of the Bill’s uncertainty. I shall not go back over all the history that we have debated already. My knowledgeis not as extensive as that of the hon. Memberfor Eastbourne who has had more experience. Unfortunately, my knowledge is not as time-limited as that of the Minister who is younger than me. All I can conclude from the comments of the hon. Member for Eastbourne about the historical environment is thatthe United Kingdom pensions policy has been characterised for a long time by great uncertainty and change.
We had great aspirations in the 1970s about what the pension system would look like. That was discussed on Second Reading. There was unity among the three parties at the time. Matters were not pressed to a Division. Then came the changes a few years down the track. They have been extremely damaging to what all parties should aspire to deliver, which is a state pension system that is stable over time and gives people the certainty that they need to make their own decisions to save for retirement. We know that planning for retirement is a long-term issue. In the Tea Room a few hours ago, my colleagues and I were discussing the fact that many people do not think about planning for retirement until retirement is close, and that they are dissuaded from doing so by the sense that policy shifts frequently under different Governments and there is no stability.
I have received comments from many groups, including the Engineering Employers Federation and its deputy director of employment, Mr. David Yeandle, who has many years of pension policy experience. They all want the Bill to provide them with some certainty about our future state pension system so that people can make their own plans for retirement. The Government must want that, too.
The hon. Member for Eastbourne mentioned some reasons why the pensions system has been unstable over the past three decades, and he included affordability, which will always be an issue for any Government. In doing so, however, he underplayed the shifts over time in the different parties’ attitudes to what the system should look like.
There have been big shifts in philosophy. Initially, the idea was that we should have a very high basic state pension, and that the state should provide a second-tier pension. There was then a shift under the Conservative Government to a view that the basic state pension should be a much more limited guarantee for everybody, and that there should be encouragement to save with a modest safety net. In some senses, the current Chancellor and several Secretaries of State continued the logic of that policy by focusing money on means-tested benefits to target those at the bottom, rather than by guaranteeing a decent state pension for everybody.
Now the different parties for different reasons of affordability and philosophy have come to a new consensus about how the pension system should look in the future. We do not know how long the consensus will last, and those people outside this place who are currently thinking about it will wonder how reliable and certain this consensus is, and whether it will last, or whether it is just the same old stuff that we have had from politicians for 30 or 40 years in Britain—more than in any other developed country—where every15 years the pensions system shifts and changes. Inevitably, there will be changes of Government during the next few decades, and each will have their own priorities and financial constraints.
Ms Smith: Does that mean that the Liberal Democrats are committed to keeping the earnings link in place permanently?
Mr. Laws: Yes, that is certainly what we would like. It would be misleading of any party to suggest otherwise. If they do, how on earth will people know what state pension system there will be in 20, 30 or 40 years when they retire? People want certainty so that they can say, “Thank goodness for that. We now know roughly what is going on. We will make our own arrangements.” Until they have that certainty, the Government cannot deliver the second part of their pensions proposals: the encouragement of people to save for themselves in personal accounts. Nobody can possibly guess their basic state pension, how much they will rely on means-testing and their incentives to save, but those issues have run through many of our debates.
Eliminating uncertainty is not only about the politics of pensions, party statements at the next general election and whether people will receive uprating in 2008, 2012 or 2015. It is about how stable the architecture will be in the future. Given that any Government could overturn the legislation in the future—that is a principle on which our parliamentary democracy is based—it would be fair to say that there is nothing to eliminate entirely the uncertainty about future state pensions policy. That is true, and I do not think there is anything we can do about it, although certain individuals within the pension policy debate have sought to reduce that degree of uncertainty by increasing the amount of funded pensions in the system, including the state pension architecture. The more we eliminate the uncertainty, the more chance there will be that people can have confidence in the future.
4 pm
We are considering a large group of amendments, some of which were tabled by the Conservatives and some by the Liberal Democrats, but they all deal with three elements of uncertainty. I shall focus on two of those. The first is whether any Government will uprate the basic state pension by earnings. If they did, what measure of earnings would that be, and in what circumstances might they not do so? Why is there wiggle room, if I can put it that way, in the Bill?
The second element of uncertainty, which it is vital to discuss, is whether the guarantee that we are offering people means that they will get an earnings uprating or, as we discussed earlier when I intervened on the hon. Member for Eastbourne, whether we guaranteeing that we will give them whichever uprating is greater, earnings or prices. That is a vital issue and we must consider the circumstances—they are not likely to occur often, but they are not impossible—in which the earnings index is below the retail prices index. Interestingly, as the hon. Gentleman and the Minister will know, we have just had a set of RPI data, which I think I am right in saying, even though it only covers a month or so, puts the RPI above the average earnings index. If we were unlucky enough to have this great new policy introduced at the wrong time, pensioners could suddenly discover that rather than getting a step up, they have suffered a step down. We need to contemplate whether we are willing to see the future basic state pension reduced in real terms in relation to prices.
The third element of uncertainty, which the hon. Member for Eastbourne spoke about extensively, is the timing of the earnings link, on which there has been a huge amount of debate. It is difficult to understand why the Government have decided to delay and create uncertainty about whether 2012 or 2015 is to be chosen. If you do not mind, Mr. Gale, and I am sure you will not, I shall not deal with that third element of uncertainty in this speech because you will have noticed, perhaps with a heavy heart, that the group of amendments including amendment No. 32 deals extensively with that issue. No doubt at that point we will have a debate that is as long as hon. Members wish to make it. They will make their arguments at that time, and I shall make mine.
All I shall say now is that I have a great deal of sympathy with the hon. Gentleman’s attempt to create a greater degree of certainty and transparency in relation to the earnings uprating date, which is the point of his amendment No. 78. I am not entirely clear about the degree of certainty created by the policy he proposes and the timing of that, but the time for those party exchanges may be during the debate on the next group of amendments. The Minister will get his chance at that point to use all the figures that he has been building up—the money tree stuff and so on. He can relax, and perhaps when he has been refreshed and rejuvenated by the weekend, and had the chance to plough through more Labour party briefing documents, he will be able to come back and continue his story about Liberal Democrat expenditure commitments.
I invite the Minister to feel reassured that he will have a full opportunity to do all of that later. Today, he can concentrate on two important issues that have spending implications but are not in the same category as the issue of timing. Those two issues are summed up by the two best amendments in this large group, which reflect what we ought to be doing. They are amendment No. 4, tabled by the hon. Member for Eastbourne, and amendment No. 29, which I tabled.
Like some of the groups that take a close interest in pensions policy, I was very surprised when the explanatory notes on the Bill were published—I confess to being one of those people who turns to the notes before the Bill, in the hope that I will be able to understand more than 50 per cent. of the proposals. Paragraph 149 of the explanatory notes, which refers to clause 5(8), states:
“Subsection (8) gives the Secretary State discretion as to how to estimate the general level of earnings.”
It continues:
“In practice this means the Secretary of State will be able to decide which measure or index of earnings growth shall be used for the purposes of earnings uprating.”
Paragraph 144 of the explanatory notes states:
“Subsection (3) will allow the Secretary of State not to increase the amounts of these benefits where it appears to him that the amount of the increase would be inconsiderable.”
The note does not define the meaning of inconsiderable. Perhaps there is a formal definition of inconsiderable in other legislation to prevent it from being interpreted in an unduly unsympathetic way.
However, it is subsection (8) that causes concern.I raised that concern on Second Reading, and the Minister helpfully intervened to clarify the arrangements in the Bill. He said:
“The arrangements proposed in the Bill are similar to those that exist for inflation, which allow some flexibility. The measure that we propose to use is the same as that which we use currently for uprating guarantee credit in line with average earnings. Such matters change over time, however, and it is important to leave the Government of the day with flexibility in that regard.”—[Official Report, 16 January 2007; Vol. 455, c. 697.]
That created a lot of legitimate nervousness, although initially I felt that I should have been comforted by what the Minister said. Perhaps the DWP has ended up causing nervousness because, essentially, all it has done is take the existing uprate provisions and decide that the same principles and flexibilities will translate tothe Bill.
Why do the Government want the degree of flexibility referred to by the Minister? In amendment No. 4, the hon. Member for Eastbourne suggests that the Government could be much clearer on the issue. I suspect that the Minister and his Department are not seeking to pull a fast one here, but who knows what others have in mind, and who knows how future Governments will seek to use the flexibility given by the Bill? The Conservatives broke the link once, for the reasons given by the hon. Member for Eastbourne, but we do not know what will happen in the future, or what any future Government will do. Will the hon. Member for Eastbourne end up in the palatial office given to the Secretary of State for Work and Pensions? [Interruption.] It may seem unlikely to the Minister, but these things are not impossible. What would happen if he did, and there was then a great downturn in the economy? Would we end up with a situation like the one in the early 1980s?
I hope that the Minister is interested in providing clarification and increasing the degree of certainty. I hope also that he wants to include in the Bill a greater element of clarity and more certainty for the future, which would make it less likely that future Governments would mess around with the link. Of course, they could still do so and legislate to drop it at any time, but the clearer we are about what we are seeking to achieve, the more difficult it would be for future Governments to make changes.
As the hon. Member for Eastbourne said, when the earnings link restoration was being discussed within the Government—I will not make an extensive party political speech at this point, although I could do so—there was a great deal of unhappiness in the Treasury about what was being discussed. There were a lot of concerns about affordability, and all sorts of briefings from people, perhaps including the Economic Secretary, and all sorts of suggestions from the Treasury that the restoration of the earnings link would be “unaffordable”—the word used in the briefing. Then there was an extraordinary public spat between Lord Turner and the Treasury, in which Lord Turner accused the Treasury of telling porkies about the cost of his plans. That was an extraordinary spat between somebody who had been commissioned to prepare a report and who had done a magnificent, very serious job on all the costings and the Chancellor of the Exchequer, who appeared to be trying to take Lord Turner’s legs away within a few inches of the goal.
There was some unwillingness on the Treasury’s part to restore the earnings link, which the Department for Work and Pensions wanted in 2012. The Secretary of State also wants it in 2012 and is embarrassed that he has not got it. We will return to this matter later, because the Government have got themselves in phenomenal knots in trying to explain why the 2012 date might be unaffordable, but the 2015 date will always be affordable. I will enjoy returning to that matter. In some of the exchanges in the Select Committee, Conservative Members were quizzing the Secretary of State on that issue.
There is considerable doubt about the Chancellor’s commitment not only to the timing of the change, but to the substance of it. We know that the Chancellor is concerned about whether his spending plans will add up and how high a priority this change should be. Perhaps he will be tempted in future to use any mechanism to curb the cost of restoring the earnings link, not just in relation to its timing, but in terms of the get-out clauses. That is why subsection (8) can reasonably cause such uncertainty.
David Yeandle of the Engineering Employers Federation came in yesterday—I think that he also spoke to the hon. Member for Eastbourne—and talked about the earnings link and whether there should be a greater degree of clarity about it. I hope that I am not embarrassing him by talking in too much detail about what he said to me, but he did an excellent job of explaining the background to the legislation and the possible motivations of the Department. He also mentioned something that I had not realised—although the hon. Member for Eastbourne had got there first—which is that there is a precedent in the Employment Relations Act 1999 for specifying in much less ambiguous terms how the uprating should operate. I understand that the relevant section of the 1999 Act covers the uprating in relation to statutory redundancy payments and other related payments. That provides a far less ambiguous basis for restoring the earnings link and is one that any future Government would find it difficult to wriggle out of. I think that I am right in saying that the hon. Member for Eastbourne has, to some extent, consciously or unconsciously, modelled his amendment on that good precedent.
If the Minister is going to say, “This is just the way we always do it”, he needs to answer the point that that is not how the Government as a whole always do it. They could be clearer about it without the world coming to an end. So there is an issue about putting the details in the Bill.
4.15 pm
There is also an issue about which earnings link the Government will use. The Minister has been clear in the House about the link that he has in mind, indicating that it will be the one used for the guarantee credit uprating. Presumably the period of time used for the uprating will correspond with the time of year at which the index is examined. That could also usefully be put in the Bill.
We know that at the moment there are at least three different measures of average earnings, and all of them have some official status. First, there is the average earnings index, which is used as the basis for the existing uprating arrangements. It has sub-components, upon which the hon. Member for Eastbourne touches in amendment No. 4: the including-bonuses index and the excluding-bonuses index. The difference between them is significant—approximately 0.4 per cent. in the past few years—and would mount up over a period of time.
We must also consider the difference between the average earnings indices that relate to the whole economy and those that relate specifically to either the private or the public sector. They are all published indices and would have very different values at different points. They could converge, but equally they could diverge significantly in a period of less stability than we have enjoyed for the past few years.
An annual survey of hours and earnings is conducted in April each year to obtain information about the levels, distribution and make-up of earnings and hours worked by employees of various occupations, industries, ages and regions. As I understand it, that survey is used in Government for purposes such as policy work on the national minimum wage; the allocation of grants based on regional pay variations, and pay negotiations. Finally the labour force survey collects a range of labour market data, including data on earnings. That is the preferred source of information on the earnings of part-time employees. I leave aside completely the pensioner prices index, because there has been no suggestion that the link should be restored using that.
Another issue that I want to touch on, mercifully briefly, is whether we should uprate using earnings automatically or whether we should use the greater of prices and earnings. I believe that the retail prices index for the latest month is up by something like 4.4 per cent. The Minister will have the figures somewhere and correct me if I have got that wrong. I think that I am right in saying that the average earnings index for the latest month is hovering at around the 4 per cent. level. We are in a position, unusual since 1997 and perhaps generally, whereby the rate of inflation is above the rate of growth in earnings. We could be in that situation again in future.
The temptation is to tell the Government what great news it was that the earnings link had been restored, and that they should go ahead and stick it in and not be too grudging about it. However, we have to consider whether we are willing to see the real value of pensions fall against the retail prices index if we go through a period of high inflation and low earnings growth. It does not take great imagination to see how one could end up in that situation. If the rate of inflation is high and is causing costs to rise rapidly, the Government might understandably want to bear down on public sector pay; we could end up as we did in the 1970s with some sort of pay deal or pay norm, or an agreement with the unions. Such things are not impossible, so we must consider whether we would be willing in such circumstances to see the pension fall in real terms. My answer—the same as that arrived at in the 1970s—is that it would not be acceptable. There has to be some guarantee that people will not see their pensions fall in real terms. That is how it was agreed before, and I see no reason not to agree it in that way again.
There is an interesting precedent on whether to use any measure other than inflation or earnings. As the hon. Member for Eastbourne reminded us earlier, in September 1999 we had a 1.1 per cent. increase in the RPI and ended up with an increase in pensions in April that was worth 75p for the single pensioner. The Government simply went ahead and delivered a 1.1 per cent. increase, adding nothing to it. Despite his relative youth, the Minister is still old enough to remember the outrage at that measly rise and he will know that the Liberal Democrats made a stand in Parliament against it and campaigned against it in the country. Pensioners were angered by that measly increase.
I invite the Minister to consider extending the same principle to a minimum level of pension increase. I do not want to keep increases to 2.5 per cent. I want to know that we will not end up with pension increases of less than the rate of inflation, as it would have the unintended consequence of pensioners becoming poorer. Again, I remind the Minister that we are legislating in hope that the settlement will last through many Governments and not just the present Government. I ask the Minister not only to give me reassurance and an explanation of his own commitment to the current policy, but to tell me how he thinks we can ensure that that consensus sticks in the future.
If it is pressed to a Division, I am very much minded to support the excellent amendment No. 4—unless I am convincingly dissuaded. I am also tempted, with the strong support of my hon. Friends, to call for a Division on amendment No. 29 if we are not successful. I promise that I shall return in the fullness of time to the equally important question of the timing of the restoration of the earnings link, when the Minister has had a chance to get together better material and better jokes about the Liberal Democrats’ spending priorities.
James Purnell: “The fullness of the time” is an appropriate way of describing this debate. However, it has been important debate and it is right that we should spend some time on it, as it goes to one of the most important proposals in the Bill.
I start by picking up where the hon. Member for Eastbourne started, when he said that the Government did not come to power with an eagerness to restore the link straight away. His remarks were historical, so I shall put them in an historical context. As I said in my intervention, the key thing is that one cannot promise to restore the link for ever unless one has a plan for funding it for ever. In the absence of a funding mechanism, it would have been profligate and irresponsible of us to make such a commitment. The Chancellor and the Prime Minister were quite right to say that it would not have been appropriate to do that and that the new Labour approach was to do things on a prudent and financially costed basis. We could not make that commitment without knowing how to fund it.
Mark Pritchard: Does the Minister agree that a prudent way might be to suggest that the restoration would last for just one Parliament?
James Purnell: One could call that prudent if one wanted to, although it might be—I am trying to think of a word that is parliamentary—slightly euphemistic. Doing that might raise people’s expectations that the link was going to last for ever, but there would not be a clear plan of how to make it so. That is not the sort of the politics in which I want to engage. It is also worth reminding hon. Members that the restoration was going to be funded by freezing the accrual of the state second pension, so the people who would have paid for it would also have been pensioners, which is a very different policy from the one that we are discussing.
Mark Pritchard: I wonder whether, in that spirit of transparency that we have talked about, the Minister would like to put it on record that that link is a guarantee for pensioners. If he cannot use the word “guarantee”, the link is not a guarantee by definition, irrespective of the timetable. Does he agree with that?
James Purnell: I suggest that the hon. Gentleman read the Bill, because that is exactly what it does. The Bill does make a guarantee. In November two years ago, Opposition spokespeople were saying that the restoration was never going to be implemented, but the Bill has done exactly that and guaranteed it. People were saying that the decision would be put off, that there would never be a commitment to it and that we would never legislate for it. However, we have legislated for the decision and I would be happy to take the hon. Gentleman through the Bill later to explain exactly how that happens.
We were right not to pledge in 1997to restore the earnings link for ever. We made it clear that it would not be responsible to do so without having a way of funding it and without facing up to the hard choices that would make it affordable over the long term—
Mr. Waterson rose—
James Purnell: Rather than finish my sentence, I give way to the hon. Gentleman.
Mr. Waterson: I am sorry—I was tensing in a menacing way.
The Minister cannot have it both ways; that is what the Liberal Democrats are for. The Labour party had 18 years in opposition, with plenty of time to work out a coherent policy and a funding mechanism. Is the Minister saying, contrary to what one of his colleagues was saying, that it was perfectly okay for his party not to have a policy in opposition and, for that matter, that it is okay for us in opposition not to be able to make the same or an even bigger commitment to restoring the link? Which is it? It seems to me that Oppositions should spend their time in opposition coming up with the policies and the funding mechanisms.
4.30 pm
James Purnell: Perhaps the hon. Gentleman should have let me finish my sentence. My next point was that we were quite clear that we could not promise to restore the link for ever without knowing how to fund it. However, over the past 10 years we have increased the amount of money that pensioners receive faster than earnings have increased. We have been doing that year to year. The income that pensioners receive from the state has risen faster than GDP. Pensioner benefits have risen faster than earnings. Even for people who do not receive means-tested benefits, those benefits have increased broadly in line with earnings.
We have never doubted the principle that pensioners should share in the rising prosperity of the nation; we have always agreed with it. Indeed, the remarkable thing today is that for the first time in a generation, pensioners are less likely than other groups to be poor. It is worth pausing to consider that. Although, by and large, pensioners are not in work and do not benefit from the increases in earnings that come from being in work, they are less likely to be poor than the working population. That is a remarkable turnaround. [Interruption.] I am happy to give way again to the hon. Gentleman, who is twitching again.
Mr. Waterson: I hope that I was not twitching, although after the Minister’s answer, I may start doing so.
I want to be clear. Until Second Reading, the rhetoric from Ministers has been that pensioners are no more likely to be poor than the rest of the population. On Second Reading, I noticed a subtle but important shift on the part of the Secretary of State, who said that they were less likely to be so. That has been repeated today. Is that now the Government’s position?
James Purnell: Yes; pensioners are less likely to be poor than other groups. That is the position, clearly set out.
Mr. Laws: Does the Minister none the less accept that almost one in five pensioners still lives in relative poverty at present? Is it not odd that a Government who have set a target to eliminate completely child poverty seem, as far as I can establish from the Minister’s parliamentary answers, to have no ambition at all to reduce poverty among that less than 20 per cent.?
James Purnell: The hon. Gentleman is wrong to say that. Obviously, our ambition is to get pensioners to take up pension credit and all the support available to them. There has been a significant reduction in the number of pensioners in poverty. He is right to say that there are still people who are not claiming what they are entitled to, but we make 1 million visits a year through the local service, for example, to make sure that they do. I am sure that the hon. Gentleman does not question that there has been significant progress and that pensioner poverty has fallen rapidly.
The issue has always been about whether the principle that I mentioned can be held in future: not only whether one can restore the earnings link in practice, but whether one can legislate to do so. Over the period, the pension credit standard minimum guarantee has also been uprated in line with earnings, although there was no legal obligation to do so. The Bill sets out a guarantee that both that and the basic state pension would go up in line with earnings, locking in our progress on pensioner poverty and giving people a solid platform on which to save.
Meanwhile, the hon. Member for Yeovil likes to say that he has a clear policy on a citizen’s pension, but cannot tell us which pension credit premium he will abolish, whether he will abolish the state second pension and where the funding would come from.
Mr. Laws: Will the Minister give way?
James Purnell: I will be happy to hear the hon. Gentleman clarify that specific issue.
Mr. Laws: This issue is serious; there will be plenty of time in the rest of our debates, including that on the next cluster, to have a good party political knockabout. I have not yet heard a single sensible reason why the Minister would not want to put the sensible proposals, including Conservative amendment No. 4, into the Bill. Can we come to the heart of that crucial issue?
James Purnell: Yet again the hon. Gentleman intervened on that point, but failed to say what his answer is. We can all deduce that he wants to pretend to have the policy without telling us how he will fund it. The record will make that absolutely clear.
I am going through the historical context to contrast two Opposition parties that do not have full, clear policies with a Government who are legislating on the basis of a clear policy—one with which the Opposition parties may disagree, but one that we have set out in legislation.
There have been calls on this Government and on previous Administrations to restore the earnings link to the basic state pension, but it has been rejected since 1980 because of the potential exponential rise in cost if it is done in isolation. What makes it possible in the Bill is the increase in the state pension age and other changes such as the abolition of adult dependency increases that we debated at a previous sitting. We have thus created the basis for a long-term settlement of the issue, which is why we can legislate on it.
As I said, the Government are required to uprate the basic state pension and other contributory benefits in line with prices. That is the situation at the moment. Although the Secretary of State is given discretion about how to measure the movement in prices, in practice the retail prices index has been used for that purpose. I mention that because all we are doing in the Bill is replicating the same structure in the future. Current legislation gives some discretion to uprate by more than prices, but not by less.
I reassure the hon. Member for Eastbourne that this is the one occasion on which the computer says yes, it would be possible to do this more quickly because it is a fairly simple change. We have to change the amount that the pension goes up every year, so deciding to do it on a different basis would not be complicated.
Under the current legislation, the Secretary of State already has discretion, and that is reflected in proposed new section 150A in relation to the requirement to uprate in line with earnings.
Some of the amendments define specific measures to be used for uprating. The first clutch of those are amendments Nos. 29 and 31, which would return us to the position in the 1970s, where the pension goes up by the higher of prices or earnings. Hon. Members will be aware that that approach was not recommended by the Pensions Commission, which said that it should be uprated by reference to earnings, not by the higher of the two. The Government have taken that approach in the proposal, not because we think a future Government would not want to uprate in line with prices if they were higher than earnings, but because we think the Government of the day should have some flexibility.
The reason for wanting that flexibility is that although it could happen in innocuous circumstances it is also possible, or even likely, that in situations where there was a large discrepancy between earnings and inflation, with inflation being the higher, in times of genuine economic difficulty when inflation was rising sharply or earnings were falling sharply, the Government might need to help to stabilise the economy.
In that instance a commitment to uprate the pension in line with the higher of the two could force the Government to cut back on expenditure elsewhere or to severely limit its contribution to getting the economy back under control. I do not say that we envisage that economic situation happening under this Government, but if the Opposition were to win we would not want to tie their hands in dealing with what could be an inflationary spiral.
Mr. Laws: The Minister is being extremely direct and helpful. Can he confirm that he is saying that there could be circumstances in the future in which he could contemplate the basic state pension declining in real terms as a consequence of the uprating policy?
James Purnell: I am saying that the Government should have flexibility. As I said at the outset, the Bill allows discretion for an increase by an amount greater than earnings. That is exactly the situation today relative to prices. It is also worth remembering, as the hon. Gentleman pointed out, that this Government have decided to increase the pension by more than inflation when inflation is below 2.5 per cent. We have made that absolutely clear. What the hon. Gentleman proposes could be irresponsible in extreme circumstances. Under the Bill it is open to the Government of the day to decide to increase the basic state pension by more than earnings in a range of situations.
Mr. Laws: The Minister is being very helpful, and very clear and honest. Does he agree that this is not just a fantasy-land scenario? Will he confirm that the latest monthly figures show inflation above average earnings?
Mr. Waterson: Just to draw a line under the historical stuff, it sounds as though the Minister is really saying that the decision back in 1980 was economically perfectly justifiable and right—I think that “rational and reasonable” was how it was described by one of his hon. Friends on Second Reading.
James Purnell: We established earlier that I was barely at secondary school then, so I think that I am better off not commenting on the issue that the hon. Gentleman would like to draw me into. I shall steer well clear.
Like amendment No. 31, amendment No. 4 would define the precise measure of earnings growth to be used for uprating pensions based on a specific average earnings index including bonuses for a specific 12-month period ending September. AmendmentNo. 33 would then remove the Secretary of State’s discretion to estimate how the general level of earnings should be measured by making it subject to the approval of Parliament.
The method that we propose for uprating by earnings is the same one we use now for uprating the standard minimum guarantee and pension credit in line with average earnings. Such measures change over time, however, and it is important to leave the Government of the day with flexibility in that regard. I shall illustrate why that is important.
During the past few decades, the arrangements have been in place without causing problems, but flexibility has been exercised in how the indices have been used. For example, the Office for National Statistics suspended publication of the average earnings index between November 1998 and March 1999 following revisions to the way that data for the series were collected, which led to a review of the index. Under the hon. Gentleman’s proposals, in that situation, we would have to go back and legislate again for the next year’s uprating.
Different types of inflation measures have been used. We use the Rossi index for some benefits and RPI for others. The point is that different circumstances may call for the use of different uprating measures, and legislation must protect against any possible future changes in the calculation or presentation of given indices.
Mr. Laws: I am grateful to the Minister for his immense patience. He is being helpful and direct about why the Government have introduced these provisions, but does he understand that for many people, flexibility means potential uncertainty? It means that future Governments could choose whatever index they want in order to pay out as little as they want. He cited an example in which an entire index was suspended for a period. One might want to allow for that type of unusual circumstance in a Bill, but to allow such a degree of flexibility is to allow too much uncertainty and run the risk that future Governments will short-change the pensioner population.
James Purnell: There is always a temptation in Committee to think about hypotheticals and try to legislate on that basis. The danger, of course, is that one then ends up with legislation that is inflexible and over-regulated. That is when people at a future date might look back at the Committee and regret how we tied their hands and created a problem. Our broad approach—setting out the key principles in the Billbut allowing flexibility about regulations and implementation—is the right way to proceed.
4.45 pm
As I was saying, that is not to say that the methodof uprating will be twisted around. The method of uprating the guarantee credit element of pension credit has worked extremely well. We have shown our bona fides on that. This is simply about giving the necessary flexibility to enable us to adapt to technical changes or different approaches if we need to.
Amendment No. 1 would remove the requirement on the Secretary of State to lay an uprating order as part of the uprating process to increase pension amounts in line with earnings. Amendment No. 4 would require the Secretary of State to make an uprating order “as soon as practicable”, which is as soon as the results from a review of earnings from September to September are available. I do not know whether it was the intention of the hon. Member for Eastbourne, but that could mean having two separate uprating processes. It is not quite clear to me why he wants it to be done in September. Perhaps he would be happy for it to happen as part of the overall uprating process. We do not find the suggested approach particularly helpful. It is worth mentioning that the uprating arrangements have, for quite a long time, been working absolutely fine. We do not see a strong case for unpicking them and starting again.
Mr. Waterson: On the practicalities, I am perfectly persuadable on the dates and I certainly did not intend to provoke two upratings a year, but what about putting in the Bill what seems to us to be the obvious index—the average earnings index, including bonuses? What other index does the Minister imagine that the Secretary of State might use?
James Purnell: We have made it clear that we intend to use that index but, as I said, indices have changed in the past and might again. We would not want to have to come back to the House of Commons with primary legislation if that happened one year, so that we could uprate earnings in the future, or indeed that year.
Mr. Laws: Will the Minister therefore place on the record the definition of “inconsiderable”? I apologise if it is clear elsewhere on the record.
James Purnell: There is no definition of “inconsiderable”, but it has never been used. Presumably, the Conservatives wanted it so that if there were an inconsiderable increase, the Government could decide that the administrative costs of making a change would not be justified. However, I reiterate that that discretion has never been used.
The hon. Member for South-West Bedfordshire made a strong commitment at the beginning of the Committee, which we Labour members welcomed, not to make any spending increases. I am afraid however that there is one, which I am sure is unintentional, in the suggestion in amendments Nos. 3 and 4 about rounding up to 10p every time, instead of the current arrangement of rounding up or down to the nearest 5p. While that might seem innocuous, it has been projected to round up to a substantial £1 billion by 2050, because it would mean that whenever there was an increase of 0.1p above a certain level, we would have to go up by 10p, and a 10p on a 10p on a 10p adds up to a significant amount.
Mr. Laws: Wow, that makes me look modest.
James Purnell: I am not sure that it does; I am not sure that we are even in the territory of money saplings, but I am sure that it was unintentional. For that reason, though, it is not appropriate. I reiterate that the current arrangements work perfectly well and that we do not intend to change them.
Amendment No. 5 seeks to make the Government specify more precisely when they will make an announcement on the affordability of earnings uprating with respect to pensions, saying that it must be done in the first six months of the next Parliament. It also specifies that the announcement must be made by an oral statement in Parliament. Our policy on that is extremely clear: we will make an announcement at the beginning of the next Parliament specifying the date for introducing earnings uprating. Clause 5 already guarantees that the earnings uprating will happen in the next Parliament and it sets out the process by which that will happen. We can make the announcement within the first six months or earlier at the start of the next Parliament, or by oral statement under current arrangements without having to stipulate that in legislation. Therefore, we do not see any need to tie it down in legislation.
I am drawing to the end of my remarks. If hon. Members have any comments that they are burning to make, I will talk slowly to give them the opportunity to do so. I am grateful to the hon. Member for Eastbourne for his suggestion, which he couched in terms of saying that it would be better for the Labour party electorally if we made that announcement before the next election. However, I am sceptical about legislating on the basis of advice from the Conservative party on what would be politically advantageous forus electorally. Although I have huge respect and admiration for the hon. Gentleman, I am slightly sceptical about his good faith in that respect.
We think that the policy is absolutely clear and I have shown that it is clearer than the policy of the those on the Opposition Front Benches.
Mark Pritchard: We all have a lot of junk mail pushed through our doors, and come the next general election there will be a variety of manifestos landing on people’s doormats. Does the Minister think that the Labour party manifesto should specify the timetable as noted in the Bill, given that people will probably not have time to look at the Bill or on the internet to find out the precise timetable?
James Purnell: At the next election, we will not put forward a probing manifesto; it will be a real manifesto. In the same way that the hon. Gentleman and his Front-Bench spokesmen are working on their policy review, we will announce our manifesto at the time so he will just have to wait.
In conclusion, it is worth remembering that people said we would never legislate for this. We are legislating and the Government are united behind the Bill. I urge hon. Members to withdraw their amendments.
Mr. Laws: We have had another useful debate. At the beginning of my comments, we were looking for some certainty. Now that the Minister has spoken, we have certainty to this extent. We know that the earnings link will be restored. That may be in 2012, 2013, 2014 or 2015. We may have to wait a number of years, possibly until 2011, before we find out.
The Government’s aspiration is that the earnings increase will be in line with the existing average earnings index, but it might not be in the future. At the discretion of the Secretary of State, because of changes the Government cannot anticipate at the moment, we might switch to some other average earnings index, so we do not know whether there will be any certainty on that.
We do know that the basic state pension may fall, in real terms, in the future—in other words, increase by less than the retail prices index. It cannot do that at present, but the Minister is explicitly allowing for that in the future by rejecting our amendment, because he wants to be able to deal, and thinks that his successors should be able to deal, with financial uncertainty and the instability of the economy.
We also know that there is discretion for the Government not to deliver the uprating in line with average earnings if the increase would be inconsiderable, and we know that there is no definition of “inconsiderable”. That is not at all—this is a genuine point, not a party political point—the degree of certainty that I would look for.
We know about the timing issue, and I shall make my comments on that separately. The point about “inconsiderable” is not, perhaps, a massive one. However, the other two issues are fundamental. That the Government are prepared to contemplate allowing the basic state pension to fall in real terms, or to allow their successors to allow it to do so at the discretion of the Secretary of State without coming back to Parliament, and that the Minister is allowing himself and his successors to pick and choose which average earnings index they think is appropriate at a point in time, does not provide the degree of certainty that would be helpful and useful. It should be possible for Ministers to give themselves some potential flexibility in some of those respects—for example, with the average earnings index—if one were simply to disappear for some reason, which we cannot easily anticipate.
Perhaps with the permission of this place, one would imagine that the Government could frame such flexibility without giving open-ended freedom ofthe sort that is preserved in the Bill. Would all the Minister’s colleagues, not only in this place but in the main governing party, be happy with that? I am not suggesting necessarily that they do not trust the Minister and his intentions, but perhaps they are not sure about the conviction of the Chancellor, and they certainly might not have confidence in the reliability of future Governments.
I am very worried about the elements of uncertainty. I hope that the hon. Member for Eastbourne is considering pressing amendment No. 4,. If not, I would wish to do so.
Debate adjourned.—[Mr. Heppell.]
Adjourned accordingly at three minutes to Five o’clock till Tuesday 30 January at half-past Ten o'clock.

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