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Lord Higgins: My Lords, I am puzzled by the Minister's use of the word "ignored". Are we to understand, for example, that income from an ISA will not be taken into account in the calculation—that is, that it will not affect the individual's benefit?
Baroness Hollis of Heigham: My Lords, capital will be ignored but the income from it will be taken into account. At present, where a person has three or four small building society accounts, all that capital comes into play. If it exceeds the £6,000 or £12,000 range, that capital will disqualify the individual from MIG top-up, even though he may have a modest retirement pension.
In future, it will not be necessary to see every building society pass book. There will be an assumption made about the flow of notional income from the capital held by pensioners. There will be no individual assessments based on the capital in each account. All that will interest us is the notional income, not the amount of capital—which could otherwise cut off entitlement. One can have capital of up to £36,000 as a single pensioner. The notional income would still just about bring the pensioner within pension credit, if he or she has no other income. I hope that that explanation meets the noble Lord's point.
Lord Higgins: My Lords, I do not understand. Is the Minister saying that the value of a PEP will be taken into account and that the deemed income derived from it will affect the pension, or will the actual income from
the PEP be taken into account? Given what happens to the value of PEPs on equity markets, goodness knows how that will work.
Baroness Hollis of Heigham: My Lords, it is the deemed income. That is the point of the simplicity of the rules. I will return to that matter after I have addressed other questions. All capital will be lumped together and a deemed notional income will be extracted. The simplicity compared with the existing system is that once an individual's capital holding goes above a certain figure, he or she is denied any support. That will no longer be the case. The notional income, not the capital ceiling, will come into play. That is where the new simplicity and greater generosity comes on board.
We are assuming two thirds take-up in the first year. Take-up in the first year of family credit was about 50 per cent. By 1998-99, take-up was about 80 per cent in cash terms. After moving to working families' tax credit, about half those who could have claimed family credit but did not went on to draw WFTC. One reason was that the amount individuals would have drawn in family credit was tiny. Any benefit takes time to build. I have no reason to think that pension credit will not build in an equally satisfactory way.
I was curious that the noble Lord, Lord Higgins, denounced the Bill for bringing so many pensioners within means testing because the minutes of the all-party group on disability—my bedside reading—on Tuesday, 27th November, included a contribution from the noble Lord's honourable friend, Mr. Boswell. He suggested that the group should consider ways of targeting the 29 per cent of pensioners in fuel poverty and the 22 per cent of disabled people in fuel poverty instead of the current universal approach to pensioners. Mr Boswell was not calling for no means testing of pensioners but for the targeting—presumably means testing—of the universal winter fuel payment for pensioners.
I wonder whether Mr Boswell consulted the noble Lord, Lord Higgins, to ensure even a modicum of consistency between the Opposition's approach in the two Houses on the issue of means testing. Left to Mr. Boswell, we would means test the universal benefits that we already have; left to the noble Lord, we would universalise the means-tested benefits that we have It would be nice if the honourable gentleman and the noble Lord could agree their position on that and related issues before Committee stage.
The noble Lord, Lord Higgins, said that somebody with a part-pension would be treated unfairly compared with someone who made a full national insurance contribution. The noble Lord adopts a curious position. It seems to me that someone who has made the full national insurance contribution all their working life should not be treated in the same way as someone who has not. It is right that retirement pensions and recognition to pension credit should reflect that.
Earl Russell: My Lords, in an increasingly global economy many people spend part of their lives working out of this country—for reasons for which they deserve no reproach.
Baroness Hollis of Heigham: My Lords, that may be so but it is a question of whether such persons are contributing towards the funding of the retirement pension that they will subsequently draw. I refer to the case suggested by the noble Lord, Lord Higgins, where someone with a pension of £67 and an occupational pension of £25 would, at the moment, see no advantage because that would keep them below the £100 ceiling. In future, under the new system, they would get a guarantee and a pension credit, and their total income would be not £100 but £109. Therefore, although they would not be in the same beneficial position as someone with a full contributions record, they would still be better off. I hope that the noble Lord thinks that that is a balanced approach.
Some noble Lords have said that the proposals are unfair to those who have deferred pensions. We are treating people as though they are drawing their retirement pension, as it would be unfair to give them a pension credit if they are not drawing their pension. Pension credit follows retirement pension, it does not precede it.
The noble Baroness, Lady Noakes, asked about people who are simply living together. I wonder whether her noble friend Lord Fowler might help her on this issue. There are simple, standard and well-defined social security rules on whether cohabiting couples qualify as a household. Those rules will be applied in the operation of this legislation as they are elsewhere.
The noble Baroness, Lady Barker, asked about the title, and I must say that I too am not awfully keen on "state pension credit". However, her own suggestion of pension savings reward identifies only half of our objectives. We are trying to integrate the guarantee with the savings credit. That is why we chose the title.
The noble Lord, Lord Addington, said that we are being unfair to women of 60 and asked why we cannot provide the pension credit to women when they qualify for the state retirement pension at 60. As I have tried to explain, to do that we would have to extend the provision also to men at 60, regardless of whether they were receiving the state retirement pension. It is a dilemma. Although I understand entirely where the noble Lord is coming from on the issue, as I have tried to explain, we have equalised the guarantee element—which goes to the poorest—at 60 and the reward element at 65. We are seeking to treat men and women fairly at each stage.
I think that I have already dealt with the point on re-assessment. The noble Baroness, Lady Barker, specifically raised the issues of housing benefit and council tax benefit. As I said, we are carrying over a higher personal assessment allowance in housing benefit and council tax benefit so that people can enjoy the benefit of pension credit. That advantage could be realised by, for example, pensioners who are not eligible for pension credit but who have high rents and receive housing benefit. I therefore think that it is a decent and generous response.
As I have said in previous debates, the point of hospital down-rating, which is a modest sum—I think that it is about £14 for a couple after six weeks, but a
more substantial sum after 52 weeks—is to reflect the fact that social security has never gone in for double payment for the same contingency. Therefore, if part of one's costs—for food and laundry, for example—are being met by the national health service, one cannot reasonably expect those costs to be reflected in the retirement pension.My noble friend Lady Andrews and the noble Baroness, Lady Barker, asked about care homes. I can tell your Lordships that no one will be worse off because of the proposals and that people in residential care or care homes will enjoy both the savings element and the guarantee element. Whether local authorities go on to recover all or part of that in increased charging will be for them to determine in consultation with the Department of Health.
My noble friends Lady Gibson and Lady Crawley eloquently described the purpose of the pension service. Although it will be based on a telephone service, a local face-to-face service will also be available for pensioners who need it, particularly those who are frail and find it difficult to leave their home. The service will deal, for example, with winter fuel payments, retirement pensions, the state second pension, and also serve as a single gateway to provide pensioners with access to housing benefit and attendance allowance. It will produce an integrated service that will be highly valuable and help to ensure that pensioners take up the full range of services to which they are entitled. I tell my noble friend Lady Greengross that we expect to start rolling out the service in spring 2002.
I return to capital limits. Clearly, we could have chosen not to have a £6,000 de minimis rule. Instead, we could have established a notional income limit for all capital and said that people are outside the pension credit system when that notional income surpasses the pension credit figure. Such a notional figure would probably have been about 5 per cent, 5.2 per cent or 5.5 per cent. The exact figure is arguable, but those estimates are not unrealistic.
Why did we choose not to do that, but decide instead effectively on a disregard of the first £6,000 and to recover the equivalent figure from the rest of the sum? We did it because pensioner organisations asked us to do it, because 85 per cent of pensioners have savings of less than £6,000. Consequently, our response seemed to be the decent one. By adding the lower notional rate—which we are reducing to 10 per cent from the current 20 per cent—to the savings reward, the savings in pension credit for very low income pensioners will be treated five times more generously than they are currently treated in the MIG. I think that that figure shows the scale of our changes.
I was asked about disability benefits by the noble Lord, Lord Addington, who has a proud record in protecting those benefits. I am happy to give the assurance that extra-cost benefits will be ignored and that the higher income-related benefits for severely disabled people will of course continue as they are.
The costs issue was raised in two forms: programme costs and administrative costs. The noble Baroness, Lady Noakes, was right to say that we are expecting programme costs to be £2 billion in the early years, increasing to about £3.4 billion by 2010. We shall shortly be publishing an analysis of the long-term costs for pension credit, setting out the assumptions on which our analysis is based. Clearly, different assumptions on prices and other matters come into play. However—in reply to the point made by the noble Lord, Lord Henley—we are confident that those costs are sustainable, not only as a proportion of GDP, but because investment in the private pensions industry has served us well. I pay some credit to the previous government on the latter point. Moreover, given that the United Kingdom demographic explosion has already occurred, we do not have a pensions crisis. We continue to have a better ratio of those in the labour market to those who are retired than most other European countries.
Your Lordships might be interested in the figures on administrative costs. Setting up an initial claim for the retirement pension costs on average £31, and we do not expect that the initial cost of setting up the pension credit will be very much higher than that. Although it will be a little higher, it will not be much more. In reply to my noble friend Lady Castle, the annual administrative cost of the retirement pension is essentially nil, and the cost of up-rating pensions will be essentially nil as it will be done by computer. The five-year review will obviously bring into play different factors.
A number of your Lordships, including the noble Lords, Lord Higgins, Lord Fowler and Lord Hodgson, have dealt with the fate of occupational pensions. They seemed to sense a vulnerability in occupational pensions because of what they allege are moves by employers to close final-salary schemes in favour of money-purchase ones. Although I think that such a move is beginning, the schemes that have closed so far are fairly small ones. The NAPF report, however, suggests a rather different story. In the past year, about 46 per cent of all employers in final-salary schemes either had a pension contribution holiday or were able to make reduced pension contributions, which they did not actually pass on to their employees.
The current state of the equity market and the transparency required by FRS17 are requiring employers again to meet pension promises in relation to which some of them have not had to make contributions in recent years. They are really rather perturbed by the size of those promises, although, three to seven years ago, they took it for granted that they would have to contribute towards meeting them. Consequently, as the NAPF report makes clear, employers are moving to money-purchase schemes, not only to reduce the risk, but to reduce the contributions that they should make. That is the problem.
Something like 88 per cent of employers in money purchase schemes contribute less than 10 per cent. Some 47 per cent, or thereabouts, of employers in final salary schemes contribute less than 10 per cent. In
other words, almost double the number of employers in money purchase schemes contribute less than 10 per cent. If employers were to contribute to money purchase schemes in the way that they contributed—when they contributed fully—to final salary schemes, the problems of long-term pensioner poverty for occupational pensions would not be of the size or order that have been described. The returns would be broadly similar.In other words, the problem is not one of FRS17 but the fact that employers are using the move to money purchase schemes to reduce their contributions. Unless that shortfall is made up by employees, they will get a smaller pension. As far as I can tell from the NAPF report, that is where the responsibility resides.
I return to a point made by the noble Baroness, Lady Barker, when she referred to a technical Bill. Inevitably, it is a technical Bill as it is both a social security and a pensions Bill which deals with highly complex matters. But behind it lies a simple principle; that is, how we ensure that pensioners are lifted out of poverty to a decent income and how we build on that by rewarding the thrift of those who have modest pensions. In other words, we are protecting the poorest pensioners from an impoverished standard of living while helping to reward the thrift of those who would otherwise be nearly poor.
It is incumbent upon the whole House to give the Bill full scrutiny and I am sure that it will do so. As my noble friend Lady Crawley said, this is a good and decent Bill. I believe that it is the final bit of our jigsaw to ensure that both those saving for their future pensions and current pensioners can look forward to a decent and comfortable future. I commend the Bill to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.
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