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Baroness Masham of Ilton: My Lords, I would just like to say: was not the cause of the downfall of the Conservative government that they did not listen to their friends? It would be very advisable tonight to listen to their friends, the noble Lords, Lord Ashley and Lord Morris, who know so much. As a disabled person myself for about 42 years, I can assure your Lordships that whatever a person's income, disability is exceedingly expensive. I do hope that the Government will listen.

Baroness Hollis of Heigham: My Lords, in proposing to take some account of pension income and incapacity benefit, perhaps I could pick up some of the points that have recently been made tonight. We are not of course means testing in any conventional sense. We are not taking into account in these proposals other income, such as a spouse's income; nor, despite the suggestion of the noble Earl, Lord Russell, are we taking into account savings and the thrift associated with them. We are talking about pensions.

As the noble Lord, Lord Higgins, knows, incapacity benefit is designed for people who lose their work through sickness or disability. If they become sick or disabled after normal retirement age they do not qualify for IB. They qualify for a retirement pension and possibly for attendance allowance, but the state retirement pension is paid basically at the same level as IB. Therefore if someone retires early and has a pension, as an alternative to their earnings as opposed

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to a normal retirement, at that point they simultaneously receive IB as well as their earning pension. That means a double coverage for the same contingency.

In the same way, perhaps I may take the example of travel insurance and also insurance of household goods. If I lose a suitcase on holiday I do not get reimbursed from both sources. You do not get double coverage for the same contingency. That is why we are taking pension income into account: not savings, not income, not a spouse's income and so on.

Lord Swinfen: My Lords, I wonder if the noble Baroness will allow me to intervene? Is she not aware that if you have to give up work and take a pension early, particularly early by a number of years, you are taking a pension at a very much reduced rate and you are not getting the amount every week or every month that you would have been getting if you had reached the normal retirement age. The pension is cut down. Therefore, the Government are giving a double-whammy to disabled people who are forced to retire early.

Baroness Hollis of Heigham: My Lords, I am afraid that I would not accept that. In the first place, from my own experience, when people do retire there is often a package in the round of added years and so on, if retirement is on medical grounds. Secondly, if the disability is of sufficient severity they will almost certainly be entitled to some level of disability living allowance which tops up their income in addition to IB. I accept that in some circumstances what the noble Lord has said may be right, but I would certainly not accept that it applies to the majority of people about whom we are talking here. There are other sources of income, like DLA, which I think he has overlooked tonight.

As I explained before, benefit for incapacity and similar allowances were introduced when very few people had occupational pensions. If someone needed to retire early through sickness or disability, there was nowhere else for them to go but on to sickness benefit. They could very seldom draw down an occupational pension, whether reduced, as the noble Lord said, or in full. In either case, three-quarters of the population would not have had that sort of access.

Now, the vast majority of people do: about 85 or 86 per cent of men, for example, have an occupational pension. Incapacity benefit, IB and its predecessor, sickness benefit, were designed to replace wages. They were never designed as a top-up to generous white-collar pensions, offered for early retirement. In the public sector, for example, there can be ill-health retirement on £25,000 a year, and such pensions cost us £1 billion a year. The Audit Commission found that in some local authorities 50 per cent of retirements are on ill-health grounds.

Overall, 22 per cent of civil servants, 25 per cent of teachers and 39 per cent of local government staff--I say nothing about the police--who retired over a five-year period did so on medical grounds. Normally they

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would also be eligible for IB; yet they have generous occupational pensions and in most professions their pensions are made up in full. That is what we are talking about. We are talking about IB which for many people who have generous white-collar pensions has become a top-up for early retirement.

My noble friend, in his usual courteous and impeccably careful way, has put forward amendments which at least accept the principle that there should be a partnership between the state provision and what people themselves provide, by way of pension. I very much appreciate the careful and considered way in which he has sought to move the debate on, but I hope I may yet persuade my noble friend that he should not insist on seeking the support of the House for his amendments.

The Government are currently spending over £24 billion a year on benefits for disabled people: that is about a quarter of the Government's total social security expenditure. We believe it is right that the money should go to those who most need it, to those disabled people on low or modest incomes and to those whose disability needs are most severe. In other words, we are talking about those who are most likely to be in financial need and those with the most acute disabilities. Those are our priorities.

Perhaps I may just remind your Lordships that no one on IB at the present time will be affected. For the future, assuming the same proportion of IB recipients with pensions, the number of new cases who are unaffected will still be around 80 per cent. Therefore, under the Government's proposals everyone now on IB will be unaffected and in future 80 per cent will be unaffected. The 20 per cent who would be affected are for the most part retiring early with generous white-collar, often public sector financed pensions, paid for by us all, which were designed to cover the same contingency as IB is being asked to pay for: that is early retirement on grounds of sickness. That is, where the Government stand. They do not believe that that is the right or the best use of public money.

Lord Barnett: My Lords, would my noble friend allow me to intervene? She has raised the question of cost: £24 billion. If cost is the issue, could she tell us what would be the cost of allowing this amendment?

Baroness Hollis of Heigham: My Lords, I wonder whether my noble friend would allow me to go on, because I will come back to that in detail later regarding my noble friend's proposal about the number of people who will be affected. We are talking about those in financial need and those who have the most acute disability, the most financial need, those who are currently on SDA and the client group so movingly spoken to by the noble Lord, Lord Rix, on many previous occasions in your Lordships' House who are now bumping along on income support; they have SDA but they have to be means-tested for income support and they still live, in my view, a very limited life in terms of the income available to them.

What we are doing with our proposals is ensuring that those people go on to IB. In other words, those who have been born with a disability or acquire a

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disability before going into the labour market--the poorest of the poor--will see an increase in their benefits of nearly £30 a week. That is what we are doing; we are seeking to bring money to those who most need it. Not to the early retirement teachers, civil servants, university lecturers or who you will, but to those who most need it. People such as those who have learning difficulties or cerebral palsy will receive an extra £30 a week. We are seeking to help those who are the poorest among the groups of disability.

Secondly, we want also to concentrate help on those who are the most severely disabled as well as on the poorest. I hope to offer some good news to the House. Many of the concerns about the Government's proposal to take pension income into account in IB have focused on the impact on severely disabled people with progressive, degenerate diseases, or perhaps on people who have had a traumatic injury which has left them in need of care by day and night and unable to work until retirement or early retirement. I am delighted to tell your Lordships that in recognition of the special circumstances and particular needs of this group, the Government have decided that there should be no reduction of incapacity benefit at all in the case of people who are the most severely disabled; that is, those who are entitled to the highest rate of the care component of disability living allowance.

This recognises that the most severely disabled people who work and have to plan in the expectation of early retirement--because of MS or whatever--and a reduced pension are in a very different position from the school teacher, the university teacher, and so on, who retires early--perhaps on grounds of stress, depression, a lower back injury or arthritis. They are very different from the people we are talking about, such as the person who has a broken back or who has been born with cerebral palsy; they are the people who really need our help. We are therefore focusing on the poorest and most severely disabled.

In the Bill we are helping the most severely disabled with the exemption for those on the highest rate of DLA; and we are helping the poorest by ensuring that those who would otherwise be on income support and SDA--MENCAP clients and those with CP, for example--will get a £30 lift in their benefit. That is consistent with our strategy of concentrating resources on the most severely disabled people and the poorest people, those with greatest need. We will bring back an amendment to put this into effect.

We estimate that approximately 20,000 people on IB will benefit in the long run in the future. None of these pension proposals, the tapering or whatever, will affect those people with the most acute need and whose disability generates the highest rate of care--they may have MS, spinal injury or be bed ridden--and qualify for the highest of the DLA; they will be exempt. This will recognise the high cost of disability, as the noble Baroness, Lady Darcy de Knayth, said. I am sure that this will be welcome news to your Lordships. It is a direct consequence of the views expressed in your Lordships' House and urged on the Government.

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It also has a direct bearing on my noble friend's amendment linking the disregard to the disability income guarantee. The Government's guarantee that he quoted applies only to people on the highest rate of DLA. My noble friend would apply it to all people, irrespective of the degree of disability. My noble friend is offering a disregard of the same value for all disabled people, whether they are suffering from stress or mild arthritis or have been paralysed by a major injury. My noble friend's amendment treats the ex-bank manager with a good pension, who has taken early retirement and who 10 years on develops depression and qualifies for IB in the same way as the King's Cross fireman with a broken back. The Government do not. I am not for a moment denying that depression is not real; I am saying that the ex-bank manager is in no financial need. His depression need generate no additional financial costs--if it does, he may go to DLA--unlike the fireman, who needs constant care and attendance. The fireman is the person we are seeking to help.

I would also remind the House that the Government have not yet confirmed the level at which pension income is to be taken into account in other cases. My right honourable friend the Secretary of State has said all along that he will review the proposal in last year's consultation document to reduce IB at the rate of 50p in the pound for every pound of pension income over £50. In seeking to specify the value of the disregard and the taper on the face of the Bill, my noble friend's amendment would pre-empt the Secretary of State's consideration of these issues and prevent him from bringing forward his own proposals. I rather suspect that is my noble friend's intention. The Secretary of State has made it clear that his figures are not set in tablets of stone. He has listened and consulted and he is reflecting on the issue. He will come back in due course with his proposed figures.

My noble friend said that he is offering a compromise. In linking the taper to the basic rate of income tax and starting the disregard at the disability income guarantee of £128, my noble friend has more than halved the taper and more than doubled the disregard. Some compromise! My noble friend's idea of a compromise is to accept the principle in theory and then to move an amendment to exclude almost everyone affected from its impact. While the Secretary of State is thinking carefully about these figures, your Lordships will appreciate that my noble friend is expecting the Secretary of State to move a very long way if there is to be any meeting of minds.

What does my noble friend's amendment mean? Take together a taper linked at the basic rate of income tax and his disregard, and what would it mean? My noble friend quoted a figure of £23,000 for a single man; only at that point would he lose his entitlement to IB. If someone was getting IB for a partner and two children, they would continue to be eligible for IB until the pension income was £39,000. My noble friend would protect the situation of someone with previous earnings of £70,000 to £80,000 and the possibility of decent savings which would generate a pension of nearly £40,000. Only at that point would my noble friend's amendment extinguish the right to IB.

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I ask your Lordships, is it really our priority that people at that generous level of income, with pensions nearing £40,000 a year, should still retain, if they have children and a spouse, an entitlement to incapacity benefit? Should they receive a level of support when we have people with very modest incomes living on income support--people with learning difficulties and the like--not getting the help and support that they should? It is about priorities--and I am asking your Lordships to judge those priorities tonight. Under no circumstances can the people protected by my noble friend's amendment be regarded as modest or in need.

In setting the level of the disregard we have to be fair to all, including people on IB who do not have the advantage of pensions and people in work who are often earning less than the level of pension that would be protected by my noble friend's formula. I should remind the House that nearly half of those on IB are in the top 40 per cent of income in this country, whether or not DLA is calculated. Many disabled people are not poor if they retire early with generous pensions.

My noble friend and I disagree. I hope that your Lordships will accept that the Government's approach is based on principle and a careful assessment of the issues. The important exemption that I have announced for people on the highest rate of DLA care will go a long way to meet many of the concerns raised by your Lordships and disability organisations. It will do far more for the most severely disabled than my noble friend's amendment. On his proposal the taper will still kick in; on ours they will be exempt altogether.

The Government's proposals are more generous to the most severely disabled people than my noble friend's compromise amendment. My noble friend, however, is more generous than the Government think right to those who have earned £70,000 to £80,000 in the past and who now have white-collar pensions of £30,000 to £40,000.

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