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Baroness Hollis of Heigham: Perhaps the noble Lord will help me on this matter. I do not understand his point. With regard to the savings credit, at present someone of the age of 77 with a retirement pension and some other modest savings below the MIG income will see those savings wiped out because they are offset against what they would have received under the minimum income guarantee. In future, they will enjoy the benefit of at least 60 per cent of that amount. Therefore, I simply do not understand the noble Lord's point about negative rates of savings. At

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present, there is a 100 per cent negative rate of savings between 77 and 100 so far as concerns modest second pensions.

Lord Higgins: As I mentioned, the figures that I give are based on the analysis carried out by the Association of British Insurers. The association sets out a very reasonable and, I believe, not unrealistic scenario in which someone saves 50 a month over that length of time with various assumptions about the upratings which are likely to take place and the fact that the MIG will cut in at certain points. I do not believe that that is out of line with what Mr Frank Field has suggested from time to time.

Noble Lords: Oh!

Lord Higgins: It is no good saying "Oh" about Mr Frank Field. We realise that he was supposed to think the unthinkable, and so on.

However, I believe that these are serious points both with regard to sustainability and with regard to the extent to which the Government's proposals are likely to increase savings. On the other hand, albeit for a much higher cost, perhaps something along the lines suggested by the noble Baroness in the amendments might be a better way in which to proceed.

Baroness Hollis of Heigham: Amendments Nos. 2, 3, 4, 5, 6, 14 and 15 propose a radical change to pension credit and have the effect of substantively bringing forward much of Clause 3 to Clause 2. As Members of the Committee are aware, Clause 3 introduces the savings credit and details of its calculation. Therefore, we are considering this group of amendments together with the Question whether Clause 3 stand part.

In the process, I believe that we have wandered gently over much of the territory of the Bill with which we shall deal more specifically in due course. I should like to leave some of the questions raised by the noble Lord, Lord Higgins, until we debate the amendments which relate to them rather more tightly, including the situation regarding the National Insurance Fund, and so on. I could attempt to answer them if he wishes, but these proceedings may sound more like a Second Reading debate rather than a response to the amendments. However, I can comment on some of the points, particularly the percentage of GDP.

The noble Lord rightly made the point that my noble friend's previous position on seeking uprating in line with earnings and basic state pension would have a forecast figure of something like 60 billion by 2050 and that that would be two or three times more expensive than our estimates for pension credit. I agree with him.

He also asked whether pension credit was sustainable as part of GDP. Our projections suggest that we are talking about possibly 0.6 per cent of GDP in 2020 and possibly 1.1 per cent of GDP in 2040. Compared with almost all European examples, we consider that those are realistic, sustainable and affordable percentages of GDP. I have no problems with that.

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I have tried to deal with the noble Lord's point about negative rates of return. That may or may not be true for certain assumptions, but not for people who at the moment are losing modest savings against MIG. Pension credit addresses that. It may be that some of the points raised by the noble Lord will be dealt with better when we consider such things as tapers and the like. If I need to respond to other points, perhaps I may do so later.

Perhaps I may turn to the amendment of my noble friend Lady Turner.

Lord Higgins: I entirely agree that it may be better to deal with some of the points later. Nevertheless, I was puzzled about why the Government's paper made different assumptions about uprating of the guarantee credit and the pension credit, so perhaps the Minister could tell us the Government's intentions in relation to prices, earnings or whatever.

4.45 p.m.

Baroness Hollis of Heigham: I shall address that later. At the moment the Government have made it clear that our intentions, in terms of what we shall call MIG to the end of this Parliament, are to be uprated in line with earnings. We do not propose to bind future Parliaments on that. That will be determined in due course. We have given scenarios of whether RPI or earnings-related assume different rates of growth, if you like, and as a result what projections would subsequently follow, given possible permutations. On the face of it, that appeared to be a helpful way of presenting what the future liabilities, costs, responsibilities and rewards would be to the pension sector of social security. If my officials had not produced that information, the noble Lord would be pressing me for it under certain scenarios, as we have done.

Perhaps I should comment on the odd assumptions about take-up being 100 per cent from year two. I take the noble Lord's point. All the experience shows that with an income-related benefit there is normally a slow, but steady, climb to a rate of take-up which may be 90 or 95 per cent or more. We saw that with his own government's introduction of family income supplement and we have seen it with other forms of income-related benefits.

Had we put forward any other working assumption, this would have been taken, for year two, as suggesting that that is the total number of pensioners whom we believe will claim—and that would have been a step too far. We are putting in the funding in the hope that we can get as close to 100 per cent take-up as we can. I fully accept that there is no experience to suggest that we shall hit that figure. But if we did not put in the funding, or if we had exceeded it, or if we went for a figure considerably lower than that, I would be accused by the noble Lord of building in a failure to reach our proposed target. That is why we did it like that.

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I shall return to the amendment of my noble friend. Her policy position is to replace pension credit with a state pension of a similar amount and earnings-related. The cost of that has already been addressed by the noble Lord, Lord Higgins. I have tried to put this point to my noble friends Lady Turner and Lady Castle. I am sorry that she is not in her place. We understand the reasons. It is worth reminding the Committee that that would not remove the need for income-related benefits for all sorts of reasons—even if we had an earnings-related increase and it had never been broken—because something like two-fifths of all of those currently claiming MIG would still need an income supplement either because they have an incomplete retirement pension, or because they need, and are entitled to, additional income-related benefits for such things as disability or ISME. Therefore, the notion that there is a choice between no means-testing, high retirement pensions, earnings-related and means-testing pension credit, and so on, is simply nonsense and is not borne out by the evidence. I know that my noble friend Lady Turner respects that information.

As was made clear at Second Reading, we are seeking to target benefit on the poorest pensioners and those nearly poor pensioners who currently see their modest savings being eaten away. We retain this dilemma that we are seeking on the one hand to ensure that the poorest pensioners, who have no savings, have a decent minimum income, which could be 100, but equally that those who have made modest provision will, for the first time, see some reward for it. That is fairness.

Pension credit brigades together the need to have a decent minimum income to address poverty on the one hand with fairness in our response to those who seek to help themselves on the other hand. That is what we are seeking to do.

The amendments of my noble friend remove reference to the pension credit from Clause 1 and substitute the references to the guarantee credit in Clause 2 with references to the state pension credit—not the basic state pension which of course is provided for under Part II of Social Security Contributions and Benefits Act 1992. Thus, the whole pension credit calculation would be within one clause and the guarantee credit and the savings credit would be replaced by one calculation covering both elements. I fully understand that the intention is that these amendments pave the way for the proposals made within Amendment No. 21, which seeks to insert a savings disregard into the calculation of the guarantee credit in Clause 2.

My noble friend is right to recognise the importance of this aspect of the pension credit. As I have said, many pensioners today are no better off for having saved, because in seeking to address the problems of poverty we have overtaken the efforts that some people have made for themselves. We do not believe that that provides the right incentive to save for the future.

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The savings credit will change that. It will reward rather than penalise pensioners for their thrift by giving them a savings credit, a cash addition for every pound of income pensioners have built up during their working lives.

Under the savings credit in Clause 3, we have proposed that pensioners who are 65 and over will receive a cash addition of 60 pence for every pound of second pension and income from savings that they have above the level of the savings credit threshold. In 2003 the threshold is expected to be around 77 for a single person, and 123 for a couple.

My noble friend proposes a very similar provision for inclusion in Clause 2. That is one approach and it could work for many pensioners, but we do not believe that it is sensible.

One of the problems that my noble friend simply has not recognised is that many pensioners have additional needs such as owner-occupier housing costs, disability, or caring responsibilities. We meet those needs through increases to the standard guarantee—what we call the appropriate guarantee. In Clause 3 we have ensured that those groups still benefit, with a higher lift, so to speak, from the savings credit but that they do not benefit more or disproportionately compared with those pensioners without additional needs.

Under my noble friend's proposal, her savings disregard would continue to accrue on qualifying income above the standard minimum guarantee and in addition people would be entitled to substantial savings credit. By removing the cap, those with additional needs would cost an extra 350 million because the savings element of the pension credit would become an extension of the guarantee. Thus, cases previously on the savings credit, and therefore, not passported, would be passported to housing benefit and council tax benefit. To remove cliff-edge effects would cost an additional 800 million. In addition, this amendment would add a further 100 million to the costs because the guarantee and the savings credit would be payable to those aged 60 to 64.

My noble friend's amendment, as drafted, would add a further 1.25 billion to the costs of 2 billion of pension credit. That 3.25 billion would have to be met either from an increase in taxes or from elsewhere within the Government's wider programme and agreed spending plans. Across Government we believe that we have the correct priorities.

While we accept that my noble friend's intention is to make the scheme more generous, we do not believe that, as she has cast it, that generosity is justified. We have set the qualifying age for the savings credit at 65. I explained that the guarantee is for men and women at 60 and the savings credit for men and women at 65. We believe that all pensioners over the age of 65 should have the opportunity to receive the same level of savings reward based on their savings. It cannot be right that because an individual has additional needs, they benefit disproportionately from their savings.

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In presenting the guarantee and savings credit calculations separately in the Bill, we believe that we have made clear our intent that all pensioners should have a guaranteed level of income that none should fall below. We also believe that in detailing the savings credit calculation separately at Clause 3 we are making it clear to pensioners on low and modest incomes that where they have saved there will be an identifiable reward for doing so.

I think that the amendment proposed by my noble friend would undermine those intentions and create an innate unfairness and bias towards those pensioners with additional needs including those with mortgages.

These amendments are inappropriate, extremely expensive, not well targeted and not the best way of taking forward the Bill. I hope that she will feel able to withdraw the amendment.

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