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Lord Higgins: My Lords, I declare an interest as the chairman of a company pension fund.

Moving these Motions in another place, the Secretary of State began by saying:

"this year I am able to increase some benefits by more than the rate of inflation. We are able to do that because of our success in helping people into work".—[Official Report, Commons, 25/2/2002; col. 500.]

That was an unexpected remark by the Secretary of State. The implication would appear to be that if unemployment goes down, pension increases go up—not an argument normally deployed. It is true that both affect the National Insurance Fund but if that argument is made, what would happen if unemployment were to rise? Would pensions then go down? That seems an odd correlation to draw.

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One problem has been the substantial fluctuation in the uprating of pensions. One year we saw the notorious 75p increase. The following year, ahead of a general election, there was suddenly a £5 increase. This year the increase is to be £3. If we understand the last Budget correctly, in future the increase will be no less than 2.5 per cent—but this year the figure is only 1.7 per cent.

We join in welcoming the various changes that the noble Baroness has announced, such as the ILF earnings limit, maternity benefits, support for children age two and three who are disabled, and earnings relief for the severely disabled. They are greater, as the noble Baroness rightly stressed, than the RPI increase. Benefits generally under the RPI and the Rossi index are 1.7 per cent. We need to put that in the context of the position generally with regard to pensions.

First, I want to comment on hospital downrating. On Third Reading of the State Pension Credit Bill on 25th February, there was widespread welcome in all parts of the House for the Government's proposal to extend from six weeks to 13 weeks the period before an individual's benefits are downrated. On that occasion the noble Baroness did not mention—neither did the Secretary of State in the other place—that change would not be happening until autumn 2003. Between now and then, people who are in hospital for more than six weeks will have their benefits downrated. It was a little ingenuous of the noble Baroness not to mention that point. Our welcome would clearly be more enthusiastic if that improvement were to take effect immediately.

Baroness Hollis of Heigham: My Lords, that is a little ungallant of the noble Lord. That whole debate took place in the context of the State Pension Credit Bill and the timing of that associated with hospital downrating. It never occurred to me that an announcement about what we were going to do on the State Pension Credit Bill and hospital downrating in that context in February would be assumed to be coming into effect six weeks later.

7.45 p.m.

Lord Higgins: My Lords, when the noble Baroness replies, perhaps she will explain why it is necessary to delay the change until autumn 2003. It would be better if the change could be made before then. If there are good reasons for not doing so, we will consider them. In any event, people in hospital during the intervening period will not enjoy the benefit of the change until autumn 2003.

Other points raised during the downrating debate related to whether the figures were updated to allow for changes in circumstances. It is common ground in all parts of the House that household expenditure now is very different from when the system was originally introduced. The noble Baroness suggested that I should raise that matter in this debate.

I looked for some clue in the orders. All I could find was the note from the Joint Committee on Statutory Instruments, which refers to Article 19 and Schedules

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6 and 7, which set out the amount by which housing benefit entitlement is reduced for a period in hospital. I understand that those reductions will be increased between now and when the underlying change comes into effect, and then increased thereafter for people who are in hospital for more than 13 weeks. Why are those increases to take place?

We asked 10 days ago how up to date are the deductions now being made and which will continue to be made. I suggested that there ought to be regular updating, to take into account—as is done with the RPI—changes in household expenditure. When was the pattern of expenditure that is taken into account for the downrating rules last reviewed, revised and brought up to date? Perhaps the Minister could explain also why there does not appear to be any downrating change except in relation to council tax and housing benefit.

As to setting the upratings in the broader context of pensions provision, the Government hope that over time, the proportion of pensions met by funded schemes will increase to 60 per cent, with only 40 per cent from the state. The changes since 1997 give cause for concern. We—I refer to the usual suspects, who are in their places—spent many hours considering the stakeholder pensions Bill. That legislation, I say with regret, has proved disappointing inasmuch as many stakeholder pensions seem to be replacements for existing arrangements and many of the people entering into them are not those originally targeted.

Doubts are increasingly being expressed in the press about the state second pension, which we also spent several hours debating on a separate, large chunk of legislation. A leader in the Financial Times on 4th March commented:

"The current plan for a combination of the two state pensions"

—that is, the basic state pension and the second state pension—

"is likely to provide only the rough equivalent of what the old basic state pension provided at its peak—a little above 20% of average earnings".

That will not be a helpful level of benefit on which to rely. The article goes on, predictably, to draw attention to the fact that anyway, the amounts are likely to be overtaken by the increase in the minimum income guarantee.

As we see more and more increases in means testing, can the Minister tell us what percentage of pensioners are now subject to means test and what forecasts have been made for 2010 and 2020? There are mounting concerns about the matter. Reports have been produced by the Institute of Fiscal Studies suggesting that someone retiring in 2050 will need a pension pot of some £100,000 just to buy an annuity equal to the minimum income guarantee; in short, a pensioner will get nothing for the fact that he has accumulated that pot. The institute also found that MIG is unambiguously discouraging savings. Again, against the background of these orders, the declining savings ratio that more than halved between the third quarter of 1997 to the third quarter of 2001 is worrying. Perhaps the noble Baroness can tell us what is the savings ratio at present.

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The other general points in this context relate to the fact that we are really concerned with inter-generational transfers. That is a crucial point. The more one looks at the way in which things are developing, the more one begins to wonder whether the pay-as-you-go system, with all the changes that appear fairly predictable now, will be met in reality when, in political terms, claims are made. That is particularly so if the present generation does not make adequate provision for its own retirement in due course. We do not have any figure for the present value of future pension payments. I tried to get this established when we discussed the government accountancy legislation some two years ago.

I believe it is right to say that, at long last, it appears that the Government will shortly be responding to the Sharman report on these matters. As regards the state system, can the Minister say whether that report will give us an idea of what the overall situation is likely to be with regard to those future pension liabilities? Clearly it is a massive figure. Can the noble Baroness give us the figure on the government balance sheet that will show the present value of future pension liabilities? At present the Government do not produce such a figure—

Baroness Hollis of Heigham: My Lords, perhaps the noble Lord can help me a little. I do not actually understand his question. Is he referring to the liability to state public revenues to be financed by taxpayers, is he referring to the savings ratio to be held by individual people through money purchase schemes or is he talking about the cumulative sum—the £600 billion or the £900 billion—that are currently in private funds? Alternatively, is he talking about the percentage of GDP compared to Italy, Denmark or Belgium? I should be happy to give him those figures.

Lord Higgins: My Lords, the short answer to that multiple choice of questions is that I was referring to none of those figures. In the national accounts and on the national balance sheet that we now have, I was suggesting that we ought to have a figure for the present value of the Government's future pension liabilities.

Baroness Hollis of Heigham: My Lords, does the noble Lord mean FRS17?

Lord Higgins: No, my Lords; it is nothing to do with FRS17. I shall repeat what I said. I have in mind the discounted value of future pension liabilities. Clearly that is a liability on the Government's balance sheet but at present we have no information in that respect.

I have spoken for much longer than I intended, but perhaps I may say a few words about occupational pensions. This matter has suddenly become headline news. Attention has been drawn to the problems faced by occupational pension schemes, which the Government say that they are anxious to foster, as far as concerns the decline in the stock market and longer life expectancy. In addition, there was the Chancellor's action on advance corporation tax back in 1997-98.

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As the Minister will know, concerns have also been expressed on the subject of FRS17. Perhaps I may spend a few moments on the issue. I understand that the Secretary of State held consultations a few days ago on the subject. If we are to achieve the Government's objective of a high percentage of funded pensions, it is important for us to encourage occupational schemes as far as we can. The move from final salary schemes to defined contribution schemes is of concern. The argument is that the FRS17 proposal merely anticipates the European standard that will be introduced. I find that surprising. We well know that the amount in UK pension funds is more than the pension funds in the whole of the rest of the European Union. So the idea that they would have a tougher standard than ours seems rather surprising.

In that context, perhaps the Minister can tell us whether she thinks that the European standard, which is supposed to be developed in the next few years, will actually be tougher than the proposals in FRS17. It is very worrying that so many company schemes have tended to change from a defined benefit scheme to a defined contribution scheme, most notably yesterday with Marks and Spencer, which has an enormous reputation for being good as regards pension provision. If no comments are made in this respect, I am worried that there will be something of a fashionable, or panic, reaction to change in a way that will seriously affect the pensions of everyone in the country for many years to come. It will place an increasing burden on the items that are dealt with in this uprating order and on the requirement of the state to make provision instead, when it would be much better dealt with on a funded basis.

I have no particular points to make on the second order. However, its Explanatory Memorandum states:

"This Order does not impose any new costs on business".

I am not entirely clear as to why that is so. If there is to be an increase of £1.7 per cent on the minimum pension requirement, I do not understand how there can be no extra cost to business. Perhaps the Minister can explain.

The issues before us are fashionable and extremely important. If we are to appraise them correctly, the orders under discussion need to be put in that broader context.

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