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Lord Milverton: My Lords, I have every intention of supporting this amendment, as I did the previous one. I admire the noble Baronesses, Lady Castle and Lady Turner of Camden, and I have always enjoyed listening to the comments of the noble Lord, Lord Bruce of Donington. I express my last few words here before I find new pastures in which to exercise my mind--

Noble Lords: Fight on!

Lord Milverton: My Lords, I shall fight on in the area where I live and do whatever good hereditary Peers can do, by Jove I shall! I support this amendment as I feel that what it seeks is only right and fair. I hope that Her Majesty's Government will not just listen to what is said but will also respond. There are people in this country who still need the support of this Chamber where they do not receive it from the other place down the corridor. I hope that the Government will not just listen to what is said but will also accept the amendment.

5.15 p.m.

Earl Russell: My Lords, I think that it is time to pull together some of the threads of what has been an interesting and excellent debate. I thank the noble Baroness, Lady Castle of Blackburn, for introducing it and for making us all do some thinking. There seem to me to have been valid points made on both sides. On the one hand, the erosion of the basic state pension is becoming serious. When that erosion falls below income support level, it does not result in any substantial saving of public funds. Also, of course, it is creating a fairly considerable level of hardship among a limited number of people, which is why the Government have felt the need to offer the minimum income guarantee, which is known by the somewhat unfriendly acronym of MIG. The trouble with that, of course, is that although I know that the Minister has been deeply concerned for a long time about the level of take-up--I congratulate her on all she has done--there is no foolproof way to guarantee the delivery of income support to those who do not wish to claim it. Therefore there is a real and serious problem.

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On the other hand, we on these Benches see a real and serious problem in going all the way down the road of the amendment proposed by the noble Baroness, Lady Castle of Blackburn. We have, among other things, a party conference resolution on this subject in which we abandoned the link with earnings. I have a great deal more respect for party conference resolutions than some people do, and I am proud to belong to a party where I think they deserve respect.

On this occasion I must pay particular attention to it because the movers of that resolution were none other than my noble friend Lord Goodhart and myself. I would find those words distinctly indigestible especially as I still think they were right. The trouble is that for as long as I can remember our earnings have grown faster than GDP. We have in fact paid ourselves more than we earn. The effect of that is that the money comes to be worth less over the progress of time. Were we to commit ourselves to compound that mistake by paying pensions also at a rate growing faster than GDP, again the effect could only be that the money actually received by pensioners becomes worth less, as the noble Lord, Lord Haskel, pointed out. That point is one that I do not think it is safe to ignore. But since, as the Minister has pointed out over and over again in debates on pensions, the poverty is concentrated among a particular number of pensioners without occupational pensions, the proper way to address the issue is through the state second pension. What we on these Benches look for with particular interest is how substantial and how secure and how much backed by the necessary element of compulsion the state second pension will be. As we do not know that yet we reserve judgment and therefore we reserve judgment on this amendment.

Baroness Castle of Blackburn: Can the noble Lord help me before he sits down? The state second pension will come too late to benefit millions of those to whom we refer. It will not be granted retrospectively to people who have missed out.

Earl Russell: My Lords, we accept that point. That is why we are committed to an increase especially for the over 80s, which is where we think the worst poverty is concentrated. We do not think that a blanket restoration of the link with earnings meets that need. That is why we have to tell the noble Baroness with regret that we cannot vote for her amendment.

Baroness Jeger: My Lords, I am 84. How many more 80th birthdays have to occur before this measure is granted? The latest increase has the value of a tuppenny ha'penny stamp.

Earl Russell: My Lords, our policy is that that increase should be implemented now. It is not we who are stopping it.

Lord Higgins: My Lords, I think that the whole House will agree that in the course of debates which we have had on this Bill the noble Baroness, Lady Castle, has made a quite extraordinary series of speeches of

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remarkable quality and force. We should pay tribute to the points she has made. She has been admirably supported on many of the more technical points by the noble Baroness, Lady Turner.

These are extremely difficult issues. I have always found them somewhat difficult because of two aspects of my personal involvement in politics. For more than 30 years I represented the constituency with the highest number of pensioners in the country. It has long been said that people went to Worthing to die and forgot what they came for--and it is true. Many years ago, when I made my maiden speech in the other place, I spoke about the need to give pensions as of right to those who had been left out of the national insurance contributory scheme, who were known then as the over-80s. The first thing that we did when we came into office--I was a Treasury Minister in the Heath government--was to deal with that particular problem. I notice that the noble Lord, Lord Barnett, is smiling. Against that, one has to recognise one's long-standing involvement with the Treasury, either as a Minister or as Chairman of the Treasury Committee and so on.

The basic task is to deal with the very great, real problems of pensioners. As far as concerns take up of pensions, one knows only too well that even now people are very reluctant to accept income support. One recognises all the problems but, at the same time, it remains a question of priorities.

The noble Baroness, Lady Castle, and the noble Lord, Lord Stoddart, have been very clear as to their priorities; they are set out in the two amendments we are debating. The noble Lord, Lord Stoddart, rightly reminded us that he used to be a Whip. I did not realise what an orator he was until I came to this House after he ceased to be a Whip.

The Government have sought to meet these real problems by introducing the minimum income guarantee. However, the danger here is that more and more there is a move away from the contributory principle in the direction of means testing. The problem with the minimum income guarantee-- unlike the state pension--is that it is means tested. Moreover, the particular problem with the scheme that the noble Baroness, Lady Castle, is so anxious to address is that it is a pay-as-you-go and not a funded scheme.

We must look at the problem against the background of priorities. It is now generally recognised that the state pension is inadequate. The new Minister at the Department of Social Security, Mr Rooker, for whom I have great respect, is reported as saying last week to the National Association of Pension Funds that the state pension will leave one in poverty. In the present circumstances, it is necessarily the case that the state pension has to be topped up by a degree of income support.

The Government are now engaged in a large-scale reorganisation of the overall situation and one needs to put this debate in that context. We have debated the proposals in the Bill for a stakeholder pension--which

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was referred to by the noble Lord, Lord Shore--and the proposals for the second state pension. They are likely to be before the House during the new Session of Parliament. But, as the noble Baroness, Lady Castle, pointed out to noble Lords on the Liberal Democrat Benches in an intervention, it will still not come in soon enough. It is very much a matter for the future.

I do not feel able to support the noble Baroness's amendment, despite the personal and charming way she has asked me to do so. However, we should consider whether there are some areas where we need a degree of amelioration. Inflation is proving to be a real problem, a point made by the noble Baroness, Lady Jeger. Inflation has come down radically--that is to be welcomed--but the implications in arithmetical terms for pension increases cause real difficulties. The proposed pension increase is 73p. Even more importantly, as the noble Baroness pointed out, the supplement for the over 80s is 25p. The pension increases have become derisory and are a cause for grave concern. I know the increase is set against a background of a reduction in inflation--which we all welcome--but once it comes down to such a small amount it can cause real problems.

For the future we should move towards more occupational schemes, more stakeholder schemes, the second pension and so on. In that context, I deplore the fact that the first act of the present Chancellor of the Exchequer was to remove some £4 billion from those in occupational pensions as a result of the ACT tax change. There is a degree of schizophrenia on the Government Benches as far as concerns occupational pensions--witness their proposals with regard to those on disability benefit, on which the House has expressed its view, and the actions of the Chancellor, to which I have referred.

We should do everything we can to move towards a degree of reliance on occupational funded schemes. One must hope that the proposals the Government are to bring forward in that respect are adequate and hopeful for the future. While I cannot support the noble Baroness's amendment, it is right that the Government should give very careful thought to what should be done against the background of the trivial increases we are looking at. I agree very much with the views expressed from the Liberal Democrat Benches about the need to give greater weight to the problems of the over 75s, the over 80s and so on. All the evidence suggests that they have higher costs than those at a lower level.

I turn now to the question of capital limits, which the House debated earlier but on which it arrived at no conclusion. Pensioners who have as little as £3,000 capital will find that their ability to receive income support is eroded. Pensioners who have capital of £7,000 will find that it is eliminated altogether. We should give greater priority to these areas. While fully recognising the passion with which the noble Baroness has spoken, these amendments do not represent the right priority in the present circumstances.

Having said that, against the background which has been outlined by many noble Lords, we should consider whether more cannot be done in the areas

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that I have mentioned to help pensioners generally. One hopes that in future it will be possible for pensioners to have a more secure existence than they have under a pay-as-you-go scheme which depends on the decisions of Ministers and the Government.

When they stood for election, the Government said that pensioners will share in rising national prosperity. I am not clear about how the Government propose they will do so--unless the Minister is prepared to accept the noble Baroness's amendment.

5.30 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, my noble friend Lady Castle has explained the purpose of Amendment No. 2, which is to allow for uprating contributory benefits each year in line with the growth of prices or earnings, whichever is the greatest. Amendment No. 3 seeks to increase the basic state pension to £75 a week. We have debated these issues both in Committee and on Report. I am not sure whether your Lordships will expect new arguments from the Government at this late stage.

Basically, the Government's belief and position is that these amendments would prove to be very expensive and are badly targeted. They may help pensioners who are better off, but they will do nothing much for the poorest. That is at the core of our objections to these amendments.

The Government believe that it is right to target help on pensioners where it is needed most, which means extra help when it is cold, with healthcare and with travel. We are spending an extra £4 billion--money contributed by taxpayers, as has been pointed out by the noble Baroness, Lady Park--by the end of this Parliament to help today's pensioners.

My noble friend Lady Castle asked whether pensioners will share in rising prosperity; a point also raised by the noble Lord, Lord Higgins. The Government stated that pensioners will have a share in rising prosperity. That is exactly what is happening. Let us remember that since 1979, on average, pensioners' incomes have grown faster than those of any other broad group of the population. I am sure that all noble Lords will welcome that. Their incomes have grown by 70 per cent in real terms, compared to an average of 40 per cent for the rest of the population. The proportion of pensioners on means-tested benefit has fallen by almost one-third, from 57 per cent to 40 per cent. However, that growth has been unequal. The incomes of the top 20 to 40 per cent of the pensioner population have grown by over 70 per cent, but those of the bottom 20 per cent of single pensioners have grown by only 28 per cent. We all know that what has happened is that inequality has widened among pensioners. Four-fifths of pensioners have enjoyed a standard of living which has increased faster than that of the rest of the population. I am delighted that that is so. However, the bottom one-fifth has been left behind. The rate of increase in living standards for those pensioners has been only barely half as much as

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for the rest of us. As the noble Lord, Lord Higgins, made clear in his speech, that is where we have identified that help is most needed.

My honourable friend Mr Rooker was right when he said that we do not expect any pensioner to live on the basic pension alone. We never have expected that. Second pensions, SERPS, in the future the state second pension, occupational and personal pensions have all had the effect, for those pensioners who receive them, of producing a real increase in standards of living nearly twice that of the population as a whole. It is the poorest pensioners on whom we must concentrate our help; namely, those who do not have the resources to support themselves decently and comfortably in retirement.

I ask noble Lords to consider the figures. If we had done as my noble friend asked and increased the basic pension and linked benefits to £75 a week in April 1999, it would have cost over £4 billion gross. However, raising the state pension across the board is not the way to help the poorest pensioners. To restore the earnings link to today's rate of pension would make virtually no difference to the better off and would not be enough for the poorest. But it would cost the country over £1 billion next April, rising to £7.6 billion in 2010. Increasing a £75 pension by linking it to earnings would be even more expensive and would cost £10 billion by 2010.

Those are significant amounts of money, but for the most part that money would go not to the poorest pensioners, who would see it docked off their income support levels, but to those who have generous occupational pensions, savings and the like. That is what my noble friend's amendment would do. It would mean that £10 billion would be spent on pensioners who already have seen a welcome generous increase in their living standards, and whose current living standards are supported and augmented by occupational pensions and savings. However, that £10 billion would do little or nothing for the poorest pensioners--those who have not participated in the improvements in living standards--because it would be taken off their income support. Is it right to spend £10 billion to help those above the benefit level and to do nothing for those below it?

My noble friend and other noble Lords have referred to the increase of 75p in the basic pension. I hope that noble Lords are not arguing for a return to the days when high inflation meant that there had to be compensating cash increases in the state pension. I have said cash increases, because those were not real increases. They compensated for the increase in the cost of living. In 1991, for example, pensions went up in cash terms by more than £5, but inflation was running at nearly 11 per cent. It may have been a large cash increase, but it gave pensioners no increase in buying power and, because the economy was failing badly, pensioners lost out because high inflation eroded their savings. Low inflation is part and parcel of our aim of ensuring long-term economic stability rather than the boom and bust of the past. It may mean smaller increases in the basic pension, but it also means

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that pensions and savings better hold their value and it offers much better prospects for sustained capital growth, which means much better prospects for tomorrow's pensioners.

My noble friend Lady Castle suggested that the proposed amendments could be paid for from the surplus in the National Insurance Fund and through taxation. I regret that my noble friend misunderstood the figures I set out in a previous debate on the National Insurance Fund. It did not occur to me that, with my noble friend's huge experience of this area, she would not already know of the sums held in the National Insurance Fund, especially as the amendments she is proposing would have been funded by it. However, we must maintain a significant working balance in the fund to cover forecasting errors--for example, on the numbers in employment who pay contributions--and the risk of disruption in receipt of revenue due to unexpected events.

I believe that the noble Lord, Lord Goodhart, identified that the surplus over and above that working balance would be eliminated in two years if we increased the pension to £75 a week. In addition, the Chancellor will of course already have taken account of this surplus in determining his fiscal stance. It could not be spent without altering that fiscal stance or raising equivalent revenue elsewhere. If we raised pensions now along the lines of my noble friend's amendment, it would mean an annual spending commitment now and every subsequent year into the future, and that would have to be funded.

My noble friend Lady Turner suggested that we would claw back much of that expenditure through the tax system. I regret that I do not think that that would be the case. The Chancellor of the Exchequer's recent changes have lifted 200,000 pensioners out of tax, so that two-thirds of all pensioners--some 7 million people--will pay no tax at all. Only 2.5 million pensioners pay tax at 23 per cent and only 150,000 are higher rate taxpayers. In practice, very little of the enormous cost of these amendments would be clawed back through the tax system. Indeed, I am sure that noble Lords would not want to extend taxation to pensioners in order to claw back expenditure.

The noble Lord, Lord Goodhart, raised several issues, including a point that he quoted from a Written Answer given to his honourable friend Professor Steven Webb. I fear that the noble Lord may have seriously misunderstood the Answer, although that may be the fault of the drafting of the Government's reply, when he said that the state second pension would not be of much help. The £1 or £2 figure that he suggested would be the roll-up figure is in fact the annual figure for each year of credits so that, for example, a carer who had taken on care duties for 30 years would receive a state second pension of £30 or more as an annual figure and not a full figure.

I turn now to the foreign comparisons made by the noble Lord and by my noble friend Lord Stoddart, who said that the UK and the US lagged well behind foreign countries in the contribution the state made to pensions as a percentage of GDP. That is quite true,

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precisely because in this country--and all credit is due to the previous administration who supported such measures--pensions are largely funded by the private £60 billion occupational pension industry. So far as I am aware, the only other country with a comparable funded pension industry in the private sector is the United States. As a result, in both countries, through the development of partnership, pension poverty has been addressed by the private and the public sectors working together. In most of continental Europe, it has not. That is precisely why those countries are facing a pension funding crisis, as indeed they are.

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