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Baroness Hollis of Heigham: My Lords, it is a different case. With retirement pensions, we are talking about newcomers into the system for the state basic old age pension. That is where the £1 to £2 figure I gave comes in. A SERPS problem would be in addition to that.

Lord Goodhart: My Lords, will the Minister tell us the figures for SERPS losses and how they will be made up?

Baroness Hollis of Heigham: My Lords, the average loss for a normal SERPS payment would be about £2.50 a week as opposed to the £1 or £2 per week for the basic old age pension. It can leap up to £100 in exceptional cases where there is a question of whether a person should be opting back into SERPS from a personal pension, or other movement. We are talking about a loss of about £1 or £2 from the retirement pension and an average of about £2.50 or thereabouts from the SERPS element. All of this will subsequently come back into payment and be made good. If, as a

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result, this brought someone on retirement pension to below income support figures--it would not of course apply to someone on SERPS--we would do our best to get information to ensure that they are floated up to the income support level and make any subsequent adjustment. Some 30,000 people have been assisted in that way.

The noble Lord, Lord Higgins, pressed me on what compensation is being made available in respect of delays. Starting with age-related rebates, compensation is being paid at the rate of 0.5 per cent. of each individual payment for each month of delay. That is based on advice from the Government Actuary on a reasonable rate of compensation given current market trends. It is being paid cumulatively, and will continue to be paid until the backlog of payment is cleared--in other words, in the first month it is 0.5 per cent., in the following month it is 1 per cent., in the next month it is 1.5 per cent., and so on.

The noble Lord pressed me on how this correlates with the amount of repayment for income tax. The Inland Revenue rate for overdue tax is 8.5 per cent.--that is what it charges the customer--which is calculated as the equivalent of a borrowing rate. Obviously the taxpayer who fails to pay effectively has that money on deposit for himself or avoids having to pay back a debt. For overpaid tax--that is money owed to the individual by the Inland Revenue--the current rate of interest is 4 per cent. That is a net interest rate when compared with the rate paid by a building society. The compensation figure that we are suggesting is 6 per cent., which is more generous than that charged by the Inland Revenue. It is up 0.5 per cent. per month cumulative.

Lord Higgins: My Lords, I am most grateful to the noble Baroness. The arithmetic is very complicated. The noble Baroness said that the compensation rate is 6 per cent. Off the top of my head, I have a little difficulty in relating that to 0.5 per cent. cumulatively. I wonder whether it is not only cumulative but compound interest. Presumably the noble Baroness is saying that the figure of 6 per cent. should be compared with the 8.5 per cent. of the Inland Revenue.

Baroness Hollis of Heigham: No, not at all.

Lord Higgins: My Lords, if we are agreed that 6 per cent. is the relevant figure for the compensation in terms of an annual rate--an APR, perhaps--then presumably it should be compared with the 8.5 per cent., which is the amount charged if late payment is made. But I am open to persuasion.

Baroness Hollis of Heigham: My Lords, for once I think I can say that the noble Lord is incorrect. For example, if you are a late taxpayer, you are deferring paying a debt. If you had to borrow money to pay that debt, you would be borrowing at 8.5 per cent in the markets, whether it be by way of a mortgage or other form of loan. That is why the Inland Revenue will charge 8.5 per cent. If the money is owed to you, had that money been paid on time and been in your building

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society account or a government bond, there would be a return of 4 per cent. net. I should emphasise that these figures are tax free; the compensation is ex gratia. I trust that the noble Lord is as satisfied as he can be with that explanation.

Compensation for those claiming benefits, as opposed to the age related rebate compensation, is covered by normal departmental rules. The rules state that there must be clear and unambiguous departmental error--NIRS2 delays would constitute such error; the delay must exceed an indicator period set for each benefit; arrears must be at least £100; and the amount of compensation due must be at least £10. Compensation will be paid when full national insurance information has been provided and each benefit has been reviewed, with arrears being assessed and paid. Claims for compensation will not need to be made; cases will be considered automatically.

Lord Higgins: My Lords, this subject is a little difficult to deal with across the Floor. If I understand the noble Baroness, the figures we were discussing a moment or two ago are in relation to age-related rebates and so on. Clearly the vast majority of these people are national insurance pensioners whose arrears, I hope, are not likely to amount to more than £100. On the basis of what the Minister is now saying, they will receive nothing at all.

Baroness Hollis of Heigham: My Lords, it is quite the contrary; they will certainly get their money. The question is whether they will get compensation, which is different. It depends whether they meet the criteria. They will certainly get their money, but the question is whether their losses are such that they are entitled to compensation over and above the arrears payment. They will be paid in the normal way according to normal DSS guidelines, and I have laid out those guidelines for the noble Lord. As it is a departmental matter, it is open to the Secretary of State to review those guidelines. Certainly there is no intention at the moment of which I am aware to depart from them.

The problem with letters arises in relation to the NIRS2 problem with correspondence. The machine needs to be working in order to answer problems as to why the machine is not working, if I can put it that way. As far as I am aware, it only applies to some of those NIRS age-related rebate issues, which traditionally have been generated by the computer. It does not apply to the vast field of contributory benefits. If the noble Lord is concerned about some cases, we shall be very happy to look into them.

I turn now to the way in which NIRS2 processes contributions. NIRS2 has processed more than 62 million contribution items submitted by employers for employees who have paid class 1 contributions in the 1997-98 tax year. As at 31st December, around 29 million items had been posted to account. We expect the great majority of this year's end of year returns to have been posted to individuals' accounts and be in use for benefit purposes by the end of March when the transfer takes place. The noble Lord will also recognise that there are always some contributions which, for one

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reason or another, are received after the end of the year to which they relate. So technically the noble Lord's amendment could defer the transfer indefinitely.

The normal quarterly and monthly billing and debiting arrangements for self-employed people are also working effectively now.

As I am sure your Lordships will agree, the task now is to catch up as much as possible of the outstanding work, particularly the remaining end-of-year returns and contracted-out pension rebates, and to roll out the remaining arrears of the system--in particular some of the functions which support the pensions industry, for example, in the winding up of pension schemes. The noble Lord asked both today and on a previous occasion, when we expect the whole system will be up and running with the problems resolved. Our current plans and those of Andersen Consulting are that the whole system will be available by the end of the financial year; that is, by the end of March. So in answer to the noble Lord's amendment, NIRS will be operational in any case by the time the Contributions Agency transfers to the Inland Revenue.

I hope that your Lordships will forgive me for going into this in some detail. I do not wish to belittle the problems but the message is very much that the system has not collapsed. It is not, as the noble Lord, Lord Higgins, said, a computer that has "gone down". That is not appropriate. Had NIRS1 gone down, that would have been the case and would have affected current payments. But we are talking about a new system that is being carefully piloted. Its introduction is now well under way but it is being introduced at a slower pace than the previous administration contemplated in their PFI contract with Andersen, and at a slower pace than we would have hoped because of the difficulties that we have been discussing today.

Turning to the amendments before us, the noble Lord has failed to make a case as to why the transfer of CA to IR should be dependent on NIRS2 being fully operational. The judgment we have to make is whether the risk of creating additional disruption to NIRS2 is sufficient to defer the whole transfer programme. Or, to put it the other way, we would want to be sure that deferral of the transfer significantly improved our chances of getting NIRS2 fully operational much more quickly. I do not see anything to suggest that that is the case.

The first reason, as I have said on a number of occasions, is simply that the transfer does not impose any significant additional burden on the system. The changes needed are relatively minor, largely to ensure that forms are correctly labelled and written; for example, changing an address at the top of a piece of paper. The second reason is that we have decided that those responsible for managing the system and managing the negotiations with Andersen Consulting will transfer to the Inland Revenue. It will be the same people doing the same work to get the system fully functional. Therefore there will be no loss of experience or knowledge. The recovery plans will continue across

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the Benefits and Contributions agencies and will be overseen by senior officials from both the Department of Social Security and the Inland Revenue, as now.

The third point is that it is not as if problems with the NIRS2 system have been identified only at this late stage. They were first identified last summer and we have therefore been able to plan the stabilisation and recovery arrangements for NIRS2 alongside the plans for the transfer. These are now well established alongside each other. Therefore we have been able to plan around any issues that the transfer had created. I am confident that the NIRS2 recovery programme has taken full account of the impact of the transfer.

The final point is that plans for the March changes to the system are well in hand. These involve changes other than those relating to the transfer but which need to be made at the same time. There could be additional risk and additional cost if some of the changes go ahead in March but not those relating to the transfer. I am sure that the noble Lord would not wish to add even more complexity to the problems we seek to resolve in partnership with Andersen's. Our judgment therefore has to be that proceeding with the transfer makes little difference to the NIRS2 recovery programme. Whatever occurs, the same issues must be addressed or be handled in the same way.

There is no question of our facing a choice between the transfer and paying money to those who need it. The solution proposed in the noble Lord's amendments carries its own risks. Bringing the Contributions Agency and the Inland Revenue together in one organisation has been welcomed by business as it will enable business and individuals to sort out their tax and contributions questions through a single government department. Business is anxious for us to go ahead and get the transfer up and running so we can start delivering those benefits. The Institute of Directors refers to this in a letter from which the noble Lord quoted the other day. Contributions Agency staff are keen to get on with working in a new organisation. Deferring the transfer would not only add to the complexity but would also be demoralising both for business and for staff.

I am therefore not convinced that the difficulties that have been outlined with NIRS2 are sufficient to justify a deferral or that deferral would have any effect on those difficulties. Indeed, the additional uncertainty would probably add to them and lead to a risk of even greater disruption. In the light of all that information-- I apologise to the House for taking so long to reply-- I urge the noble Lord to withdraw the amendment.

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