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Baroness Hollis of Heigham: My Lords, I welcome the opportunity to debate a cluster of amendments around different ways of approaching the issue of incomplete national insurance records generating an incomplete entitlement to a retirement pension on which, as I have said on a previous occasion, hinges the entitlement to savings credit. Because the amendments are sliced in slightly different ways I shall try to deal with each of them and show why they are in error. That will allow your Lordships to return to these matters at Third Reading if that is desired.

All of these amendments probe the question of how we treat people with incomplete national insurance records. We believe that those who have deficient contribution records are rewarded generously through the guarantee credit and can still gain a savings credit. The savings credit redresses an age-old unfairness. Those who have worked and saved and paid their full national insurance contributions, but have a modest occupational pension that does not float them off MIG, at the moment see no benefit for it. I believe that these amendments seek to undermine that policy and create new and different forms of unfairness.

I deal first with Amendment No. 6 in the name of the noble Baroness, Lady Greengross. The amendment could work in about three different ways and all are unacceptable. The first way in which it could work is that the pensioner was entitled to the maximum savings credit multiplied by the proportion of state retirement pension actually received. For example, if a pensioner had 50 per cent retirement pension and a second pension of £30, the pensioner would be entitled to 50 per cent of the maximum savings credit of £13.80, which will give the pensioner £6.90.

A second way of doing it is by multiplying all the pensioner's qualifying income by the proportion of state retirement pension actually received. Therefore, if a pensioner had 50 per cent retirement pension and a second pension of £30, the pensioner would be entitled to a savings credit of 50 per cent of the qualifying income of £30, which will give them £18 instead of £6.90 as in the first example.

All these ways are deeply complicated according to which way one interprets the matter. One can multiply one sum against another. One could arrive at a situation where someone has a savings credit of £6.80, £9 or something like £18. All these figures ensure that the pensioners will receive some amount of money. But in all cases that will generate other forms of unfairness.

I turn now to Amendment No. 9. I am puzzled by the noble Lord's amendment. The noble Lord, Lord Higgins, did not move it at Committee stage, but he

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spoke to it on the first day. He spoke rather wistfully of the maiden speech in which he made a somewhat similar set of points. I read that speech and I thought that it would have done old Labour proud. So I congratulate the noble Lord who was clearly well informed on the issue. He expressed the desire again that those with deficient contribution records should be rewarded under the savings credit scheme.

What I find so odd is what the noble Lord proposes in his amendment. It does exactly the opposite. As drafted, his amendment would have the effect that only the actual amount of contributory social security benefit received by the claimant should be taken into account as qualifying income for the calculation of the savings credit. That may not be what the noble Lord intended, but that is what we intend. Therefore, there is no question of our deeming receipt of more state retirement pension than that received. So we welcome the noble Lord to the ranks of the converted.

I now turn to Amendment No. 12 which better reflects the noble Lord's considerations. Again, here are other variations of some of the same points made by the noble Baroness, Lady Greengross. They have the effect of reducing the savings credit threshold to an individual pensioner's level of basic state pension where it is below the full rate expected to be about £77.

We believe that there are four possible ways in which the amendment could work. There are four possible ways in which, under the noble Lord's amendment, one could receive a proportionate reward. The first, which is what I believe the noble Lord may propose, is to start the savings credit at an individual's level of basic state pension with a 60p reward for every pound. That option benefits those with incomplete basic state pensions more than those who have contributed to acquire the full national insurance rights. That is because the savings credit would start at a lower point and build up by 60p for every pound until it reached a maximum at the guarantee level of £100.

For example, let us consider two pensioners with a total income of £100. John has £40 as a basic state pension and Simon has £77. Neither is entitled to any guarantee credit. However, pensioner John would start building up his savings credit, based on the noble Lord's amendment at £40 and receive 60 per cent of the remaining £60 of income equivalent to £36. However, Simon would receive just £13.80 since he had only £23 above the basic state pension.

On that first working of the noble Lord's amendment, it would mean that a pensioner with a lower national insurance contribution record would have a final higher income after pension credit than a pensioner with the basic, full state pension. We do not believe that that is fair because he is getting 60 per cent of the difference between his RP and the full sum.

The second way of working the matter is at an individual's level of basic state pension, with a proportionate reward for every pound, which goes back to the version of the noble Baroness. That option would build up the savings credit at a proportionate rate according to the individual's basic state pension rather than starting it as basic state pension and increasing the entitlement to 60p in the pound.

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This option would mean that a pensioner with a record of fewer national insurance contributions would also have a higher final income, after pension credit, than a pensioner with basic full state pension.

Let us consider two pensioners receiving a total of £100. George receives £40 basic state pension; Albert receives the full £77 basic state pension. Neither is entitled to any guaranteed credit. However, George, who has the £40 basic state pension, would start building up the savings credit from £40 at a rate of 30p for every £1—that is assuming that £40 basic state pension is approximately half the full amount.

George would, therefore, receive 30 per cent of the remaining £60 of income, equivalent to £18, and his final income would be £118. However, Albert, who has the full basic state pension, would receive just £13.80 savings credit, since he is only £23 above the state pension. Therefore, Albert's final income would be £113.80.

I am sorry but the devil is in the detail. It may sound easy but the point is that somebody with an incomplete national insurance pension record—using the second method of calculation, which I believe is a method suggested by the noble Baroness, Lady Greengross—would end up with more money than somebody who has paid his full whack. Now that cannot be fair. George would not receive a proportionate amount, but actually more. That cannot be fair, and I am sure that that is not the intention.

The third and fourth options involved in trying to work out the amendment tabled by the noble Lord, Lord Higgins, are a variation on a theme. It takes us back to a previous discussion that we either deem, or pay, the basic state pension to all over 65. I could go through all that, but that has been done before. However, that, again, would produce some of the unfairnesses that we have already discussed.

It would mean that somebody with a basic state pension of £40 per week and currently receiving an occupational pension of £25 per week would receive a total income of £65. He would receive a guaranteed credit of £35 to bring his income up to £100. Deeming his basic state pension to be £77 for calculating the savings credit means he would receive an extra £13, bringing his final income after pension credit to £113. Equally, he would now be better off than if he had paid his full national insurance stamp—and that is according to the third method of working out described by the noble Lord, Lord Higgins, again overlapping with the noble Baroness, Lady Greengross. That still produces the perverse effect that somebody with reduced national insurance contributions is better off than somebody with the full number of contributions because he is benefiting from the savings credit coming into play at the 60p in the £1 rate between what he actually has and the final sum.

The fourth and final option is to pay all pensioners over 65 the basic state pension at a cost of around £350 million. But what is a few pounds between friends? That cost assumes that the structure does not change. Therefore, those on a category BL basic state

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pension would be uprated to a full BL pension and those on category A would be uprated to a full category A and so forth. Additionally, the cost would double if we uprated frozen pensions of UK residents abroad—about £700 million, but let that not stand in our way.

Again, that would not be fair because we would then find that two pensioners would be receiving very different amounts. The pensioner who had paid would be receiving the same as the pensioner who had not.

However, the first part of the debate was to suggest that the proportionate method is simple. I believe that it is almost impossible to work out the detail. All the ways that we have worked it out—and we have tried about seven different versions of modelling it—produce the perverse situation in which someone with lower national insurance records ends up being better off than someone with a higher and a complete national insurance record.

The second thrust of your Lordships' argument is who actually stands to lose—

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