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Baroness Barker: I have no interest to declare on this matter. I did not know that my noble friend would be joining me for this debate. We were not in cahoots on this matter. I was very modest; I did not mention any interests that any noble Lords may have, and there are quite a few who have. In support of my noble friend, I would say that in a week when Enron has been in the news, share values disappearing through the floor is not as unlikely as may have once seemed to be the case. That is not a comment on our Chancellor. It is an issue
that I was sitting thinking about when the noble Baroness, Lady Noakes, was talking about employee shares and so on.This is a small issue. I picked it as being illustrative of small amounts of irregular income which cause problems. I accept entirely that the five-year assessed income period will make life considerably easier for people in this situation. It is a fiendishly difficult matter. I had thought about public lending rights but decided, for the sake of simplicity, not to put that down. I am very grateful to the Minister and am also rather honoured to have got the noble Baroness on a subject where she appears to know not quite as much as some Members of the Committee. It is my one score of the night. I thank her for her technical answer and look forward to her writing to me. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
9 p.m.
Baroness Turner of Camden moved Amendment No. 88:
- Page 9, line 19, leave out subsection (2).
The noble Baroness said: Amendment No. 88 seeks to leave out subsection (2) of Clause 15. Subsection (2) confers power to make regulations to define how capital holdings will be taken into account in calculating pension credit. Paragraph 124 of the Explanatory Notes states that,
- "Capital will be deemed to have an assumed rate of return for purposes of assessing entitlement to the guarantee credit and savings credit. The intention is that a ten per cent rate of return will be applied to capital that exceeds £6,000 (£10,000 in cases of people in residential care and nursing homes). Capital below this amount will not be taken into account in the assessment".
I believe that the Government have a formula for dealing with this matter, but deeming remains on the face of the Bill. That is what concerns me. I beg to move.
Lord Hodgson of Astley Abbotts: Amendment No. 91 in this group is tabled in my name. Although I do not approach the matter in quite the same way as the noble Baroness, Lady Turner, I have a great deal of sympathy with what she has said. I find the wording of Clause 15(2) curiously open-ended and opaque. We should make the position clearer. The proposed methodology for pension credit has the fundamental unsatisfactory nature that it does not coincide with reality. As pointed out by the noble Baroness, £6,000 savings carrying no credit at all and then 10 per cent thereafter leaves one with the position that the one certainty is that the person will never earn that rate of return, either zero or 10 per cent, on any part of their savings.
That reminds one of the old statistical joke about a person with one foot on a blast furnace and the other foot on a iceberg being statistically comfortable. In the pension credit proposals—the deeming proposals—there is the reference to £10,000 savings carrying an overall 4 per cent return. That may be perfectly fair and the central objective of the Government, but in terms of what interest rates are today, let alone what they may be over the next few years, it is not a generous figure. The redemption yields on long dated gilts, which is probably the nearest comparator to pension credit, are around 5 per cent and leading UK corporate bonds are around 6 to 6.5 per cent.
Amendment No. 91 seeks to make sure that if the regulations are to be set up in this way we shall have some duty imposed on the Government to have regard to the nearest comparable savings instrument—namely, long dated UK corporate bonds. That is 15 years and over. That is the benchmark savings rate that the Government can borrow at and that people might be hoping to earn as a return. It is important for the Government to have some duty to consider that in producing regulations under Clause 15(2). Further, it is an important safeguard for people receiving the pension credit in the future.
Baroness Noakes: Subsection (2) of Clause 15 takes us into the realm of fantasy when looking at income. The Minister has said that this approach was taken because of the responses to the consultation paper issued in 2000 that this was simpler for many pensioners. Being simple does not make it fair and right. It will not be right for all pensioners. Some pensioners who have little or no income will not be troubled by this rule. However, coupled with the 10 per cent assumed rate of return, it will affect a number of pensioners with relatively modest savings.
The amendment in the name of my noble friend Lord Hodgson is important. It replaces the 10 per cent assumption with a more reasonable assumption in line with fairly safe investments for pensioners' money. However, even that proposal would still produce some anomalies although with the lower rate they would not be so bad. The 10 per cent rate would mean that with capital above £12,000 the assumed rate rises quite steeply. At £25,000, the House of Commons Library calculates that the effective interest rate is 7.6 per cent; and it increases at higher savings levels.
There is a fiction involved in the savings credit for pensioners with these relatively modest savings. A pensioner with savings capital of £25,000, and the effective interest rate of 7.6 per cent, under the Government's proposals will be deemed to have £36.54 per week. He would not receive any guarantee credit. With the basic state pension he would be over the £100, but he would receive a savings credit of £8.38.
If that pensioner earned only 5 per cent—he would be doing quite well at 5 per cent on £25,000—he would receive only £24 a week. So the Government would pretend to themselves that the pensioner's income is just short of £122 a week and would congratulate themselves on boosting the pensioner's income by the £8.38 savings credit. However, the reality is that that
pensioner has received only £109 in total including the savings credit. That is so little above the guarantee credit threshold that the pensioner might conclude that he might as well blow £19,000 of his savings, take the guarantee credit and stick at £100.If the pensioner has index-linked securities where the yield is currently around 2.5 per cent, the position is even more dire. If that is the incentive for today's pensioners, think how little incentive the new savings credit will create for tomorrow's pensioners. I accept that it affects particularly those pensioners with savings beyond the £12,000. But those are not an inconsiderable number. I had assumed that the Government sought to create incentives for people to save for their retirement and this proposal will work in the opposite direction.
Baroness Hollis of Heigham: I shall give a general defence about the proposed treatment. Amendment No. 88 seeks fundamentally to alter the way we propose to treat capital by removing the power to assume a notional rate of income from capital held. The proposed amendment would force us to take actual income from capital into account. The Committee will recall that this was the approach that we initially suggested in the consultation document for pension credit. Indeed, it is the way followed by the Inland Revenue.
However—I keep repeating this—we listened to the views which emerged from that consultation process and took into account the clear advice of Age Concern and others. They told us that pensioners do not want the trouble of recording actual income from capital, or having to go into the building society to bring interest to account just because it suits the Government.
I think back to my mother's experience. She had a couple of building society accounts with modest sums in each. The last thing she wanted was to try to work out her gross and net interest and what had or had not been deducted at source. It is much simpler to add together the £5,000 here and £6,000 there. Those were the savings. On that basis, the first £6,000 would be disregarded with 10 per cent assumed rate of return on the remainder. That is infinitely simpler, preventing intrusions into pensioners' lives, checking and re-checking books and so on.
We are conscious of the need also for pension credit to preserve the equilibrium of the savings market. I have not sought to make political capital on this. We have gone perfectly properly through a series of probing amendments on different aspects. Whether we refer to ISAs, PEPs, annuities or employee share schemes, we seek not to privilege one form of savings over another for purposes of pension credit both with regard to the overall cost of pension credit and the stability of the personal finance market.
To put it bluntly, were we to take actual income from savings into account, as the amendment suggests, we would skew pensioners' choices about how to invest their capital. They would seek different forms of capital from what might otherwise be appropriate for them. They would look for products where interest
was low, such as Premium Bonds, or even put money under the mattress—something we do not wish to encourage.The noble Baroness used the word "fairness". Amendment No. 88 may seem to provide a fairer way of doing things. But the noble Baroness may be interested to note that, given a choice between the Government's proposed policy and her amendment, most pensioners with low and modest savings—those are the ones we are out to help—would gain more from a £6,000 capital disregard combined with a 10 per cent assumed rate of return (the approach in the Bill) than from the proposed amendment.
The Government's policy means that more than 90 per cent of around 3.5 million pensioners entitled to pension credit face an effective rate of return of less than 4 per cent. Something like 94 per cent of all pensioners would have a rate of return of below about 5.2 per cent as a result. But the proposed amendment would cost a substantial amount, of about £400 million, and would generally benefit better-off pensioners with large amounts of capital at the expense of pensioners with more modest savings.
That is made clear when one sees the difference between that and our current treatment in MIG. At the moment in the minimum income guarantee there is a disregard of £6,000, with a cut off at £12,000. Not only is there a rate of return at £1 in £250, which is a 20 per cent assumed rate of return, but a capital ceiling at £12,000, at which point one is no longer entitled to MIG. When pressing me on this matter, Members of the Committee should remember that we are treating savings five times more generously in imputed rates of return than under the current MIG system.
I now move to Amendment No. 91. The noble Lord's amendment suggests that the assumed rate of return on capital should be set with reference to the yield on long-term UK government bonds. This is not my field. Long-term bonds are traded every day and hence their value alters daily. However, the yield on those bonds is approximately 5 per cent. For example, I am told that the yield on a 15-year bond was 4.76 per cent on 16th January of this year.
Thus the implication of this amendment would be to halve the assumed rate of interest on capital. Applying such a low return to capital, as the amendment would suggest, would distort incentives to save away from pensions into other forms of capital. I keep rehearsing the arguments about distorting the financial products market.
The Bill, as drafted, maintains the balance in the personal finance market and a level playing field. The proposed amendment would upset that balance. It would cost an extra £300 million. That cost assumes that the noble Lord would wish to see us retain the £6,000 capital disregard, with £10,000 for those in residential care and nursing homes, in order to avoid placing increased intrusion on the vast majority of those entitled to pension credit with small amounts of capital.
Quite apart from the substantial extra cost going to the better off, it would be impracticable to link this huge rate of return on capital to a price that changes every day. That would require pensioners to report capital levels more regularly and would pose a new administrative burden on the Pension Service. With those explanations, I hope that the noble Lord will feel able to withdraw the amendment.
9.15 p.m.
Baroness Noakes: I thank the noble Baroness. Perhaps I may take her back to the example I went through earlier. It referred to a pensioner who had £25,000 of capital which was producing 5 per cent. If it is a safe investment, that is probably what it would yield. There is nothing fancy about that. There is no income depression involved or special income bias. It is pretty straight.
On that basis, the pensioner would be deemed to have income which he does not have, so he would be deemed to deserve a savings credit of a much lower amount than one based on his actual income. What I cannot quite understand from the noble Baroness is why she is content with a formula which may seem fair and generous for some pensioners with particularly small amounts of capital but which is grossly unfair to those whose capital begins to rise above £12,000. I cannot see how the noble Baroness can sustain that position.
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