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This is where my two halves of the order, to which I referred earlier, come in. Regulation 2 applies this revision to the old scheme and Regulation 4 to the current scheme, or, as my noble friend Lord Eccles questioned—and I am grateful to him for the enormous work he has put in to scrutinising this subject—do they? And that question was repeated by the noble Lord, Lord Kirkwood. From 2011 there is to be a third scheme, as set out in last year’s Act. Regulation 4 seems to cover both the current and the new schemes. I hope the Minister will confirm that when he winds up.
Listening to my noble friend Lord Eccles caused me to wonder what the position is of someone who has already intentionally reduced their income before the tribunal finding. Will variations be initiated and enforced by the commission or will they have to be instigated by the parent with care? This is a valid point. I go along with the noble Lord, Lord Kirkwood, but I have a strong suspicion that this order will be tested in the courts sooner or later. He knows much more about the courts than I do but that is my suspicion.
So in 2011 there could, and I suspect will, be three schemes in operation. This is confusing for everyone, not least the parents in question, the CMEC which has to operate them, and advisers in such organisations as Citizens Advice. Both opposition parties have encouraged the Government to migrate non-resident parents onto the newest scheme. How is this proceeding? How many people are still paying under the original old scheme? By how much has this number fallen over the past few years? For those that remain, will they skip the current scheme altogether and be migrated onto the much simpler new CMEC scheme?
The Government intend to halve the number of children living in poverty by 2010. One of the instruments for achieving this goal is the child support mechanism which is the background to this order. On the figures I have, the Government will miss their target by 500,000. Not, perhaps I may gently suggest, a very good omen for what will almost certainly turn out to be an election year. Of course, there are other mechanisms in place such as encouraging disabled people, lone parents and the long-term unemployed into work, as we will be discussing at length in the forthcoming Welfare Reform Bill. None the less, this is not going to be easy in the short term with the unemployment figures going up by the thousands on an almost daily basis and which must now stand at more than 2 million.
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Before I leave the issue of child support, I am grateful to your Lordships’ Merits of Statutory Instruments Committee for pointing out a small difference in terminology. The old scheme uses the word “departure” when referring to legitimate reasons for having the non-resident parent’s income reassessed; the newer scheme uses the word “variation”. The committee is worried that there could be some confusion between the two words and recommends careful communication from the department for the elucidation of both parents and practitioners. What, if any, are the Minister’s plans for this?
The third plank of the regulations ensures that elderly non-resident parents will continue to pay maintenance up to the new pension age, which will be gradually increased for women between 2010 and 2020 and, ultimately, when the pension age of the two sexes is unified, up to 2050. This is pertinent for those parents who receive an allowance within the formula maintenance assessment if, for example, they are eligible for the disability premium in income support. I am grateful for the Explanatory Notes here, but I do have a question: surely the provision should be that they are “receiving” the disability premium rather than just being “eligible” for it.
Despite my questions, like the noble Lord, Lord Kirkwood, I believe that these are very good regulations and I give them my blessing.
Lord McKenzie of Luton: My Lords, I thank noble Lords who have given the regulations their blessing. I shall deal first with the issue that has generated most of the debate with the noble Viscount, Lord Eccles, and the noble Lords, Lord Skelmersdale and Lord Kirkwood. I, too, offer a vote of thanks to the Merits Committee, which I know does sterling work. I served on the committee briefly—not with any distinction, I hesitate to say—and I know it does important work. I am sorry that it felt that the information it received in respect of these regulations was not sufficient.
From the tenor of the debate it seems that they may have been taken somewhat out of context. The variation of income regulations, whether the old scheme ones or the new scheme ones, were not in any way changed by the legislation that we passed last year; they have been around for a little while. But there was a change in the tax rules and, until those tax rules changed, whether you were allowed to deduct 50 per cent or 100 per cent of your pension contributions, an effective cap was put on that because it was driven by the revenue rules; generally it was 15 per cent of your income. So the concept of someone pushing 100 per cent of their income into a pension scheme to avoid child maintenance obligations simply was not possible, and it was that which changed the landscape with which we are dealing.
Notwithstanding that, it was assumed—wrongly as it turned out on the basis of the tribunal’s judgment—that the issue which arose because of the change of the tax rules could have been dealt with under the pre-existing regulations relating to diversion of income. This has now been cleared up. The judgment stated that that did not work because it was not a diversion of income—it was not paying a dividend or a salary to a spouse that you were not taking yourself—but a taking of income and diverting and deploying it in a certain way.
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Lord Kirkwood of Kirkhope: My Lords, another one will be along in a minute. That was a very lucid and clear explanation, which I understood. However, the way to deal with this is to have a catch-all provision for the decision-maker to take account of these things, using his common sense.
6.45 pm
Lord McKenzie of Luton: My Lords, I was going on to say that the changes to the regulations do not apply only to deploying income by way of pension contributions. They would apply equally to other payments that gave rise to a reduction in income for the purposes of the assessment. In effect, the process is substantially what the noble Lord is suggesting. There is an opportunity for the commission to make changes to the assessment. Those changes can be appealed against: there is a process whereby the non-resident parent, or the parent with care, can contest the evaluation. I think that that is what the noble Lord is seeking and that, in large measure, is what we have.
The challenge that we faced with these provisions was not that they were ineffective in capturing income that was diverted: it was access to the provisions, because they required—and still require—a claim for their use, typically by the parent with care, before they can be put into effect. That was the issue that we discussed and I cannot recall that we spotted that deploying income to reduce an assessment could not be caught by these regulations.
I understand the issue of having two systems and two sets of terminology. We should recognise that we are very much in transition. As the noble Lord, Lord Skelmersdale, said, we will move on in 2011 to what will be, in effect, a third system. Once we have gone through the transition and everyone has been migrated, we will end up with one system and one set of regulations common to all of those who are dealt with by CIMA.
Lord Skelmersdale: My Lords, how long will this take?
Lord McKenzie of Luton: My Lords, under the original timetable that we discussed, the new basis for assessment will be introduced in 2010-11, and it will take up to three years for the migration to be completed. We discussed that timescale openly when the legislation went through, and it still holds good.
We want to make sure in particular, as we move towards the new system, that the legislation provides a duty and power for the commission to investigate variations, so that when it is possessed of knowledge that flags up that the diversion or deployment of income to reduce maintenance is heading in an unreasonable direction, there is a process whereby it can potentially trigger a claim, so that these provisions can bite. That issue is still less than clear. It is absolutely right to say that historically, the variations route has not been particularly effective for parents with care; not because the calculation is unclear, but because of the process that had to be gone through to establish it. That is something that can and will be fixed by the 2011 scheme.
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I turn to the question of whether to put on a cap of 50 per cent. When we looked at the basis of assessment for the new calculation, we debated frankly whether to put a cap on pension contributions. What persuaded us to rely instead on the improved variations route, now made more effective by these regulations, was the reliance on gross data from HMRC. That was a significant change in the basis for dealing with child maintenance. It took us away from the problems of the past, when we relied on non-resident parents to declare income. Being able to rely on HMRC data that come automatically through the system is crucial. In relation to occupational pensions, the data come net of the gross payment. That is why we did not look to cap pension contributions; because we would have had to use that data, analyse it in some other way and go back to the problem of not having speedy data on which we could rely.
Viscount Eccles: My Lords, I am not sure that what the Minister has just said applies to salary sacrifices because they are not income at all. They are a payment that the employer does not make, and therefore I do not think they count as income and do not come through on the individual’s tax return.
Lord McKenzie of Luton: My Lords, the noble Viscount makes an interesting point about salary sacrifices but the point I was making was about occupational pension payments, which are deducted—
Viscount Eccles: Yes, my Lords, but one of the tribunal decisions, which has been the cause of some trouble, was about a salary sacrifice scheme. It is not just this one case that has gone to a tribunal; there have been others. The one that has been quoted is fine, but in the salary sacrifice case the tribunal ruled that it could not be taken into a diversion-of-income consideration because it never was income; it was a salary sacrifice and was therefore never paid to the individual.
Lord McKenzie of Luton: My Lords, it seems to me that salary sacrifice, if you are forgoing something for another benefit in some other form, is a diversion of income. I hang on to my point that in terms of constructing the basis of the new scheme, this was done on the basis of needing to have HMRC data that could be used straight away without needing to be adjusted in any way. If people were playing the game in terms of the level of their pension contributions, and if, as they overwhelmingly do not, people routinely did not seek to abuse the system, we would just take that data. If we had to say, “Well, only 50 per cent of it is allowable”, then there would be some other process in the system. That is what we looked aside from, and looked instead to rely upon the variations—the diversion of income—as now bolstered so that it addresses not just the diversion of income but also the issue of getting income and then deploying part of it, which nets off the income in a way that produces an unsatisfactory result.
I hope that that has explained why we have ended up where we are. The noble Lord, Lord Kirkwood, is looking a bit sceptical. I am happy to run over this again or perhaps talk to him afterwards, but I am sure he will reflect on our discussions. That is the substance
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The noble Lord, Lord Skelmersdale, raised the changes regarding the disability premium. That was nothing to do with changing the age at which pensioners might be responsible for the child maintenance; it is just that in the old scheme, and in that scheme only, an allowance that the non-resident parent—or, I think, the parent with care—could get was described in terms of an allowance that was receivable by the age of 60. That is changing because it is linked to pension credit, which is linked to state pension age, which, in turn, is changing for women. The noble Lord asked whether the proper description of that should be “receiving” or “entitled”. I would like to take that point away and look at the detail of the regulations, and I will write to him about it if necessary.
I thank noble Lords for their engagement on this. It has clearly exercised the Merits Committee, which is good, and the challenge is entirely appropriate. I hope that I have been able to explain why this particular component of the regulations has gone in as it has. I hope, therefore, that the regulations will be supported.
Guaranteed Minimum Pensions Increase Order 2009
Copy of the Order
5th Report from JCSI
Motion to Approve
6.55 pm
Moved By Lord McKenzie of Luton
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton): My Lords, I am satisfied that the orders are compatible with the European Convention on Human Rights.
The uprating order will increase most national insurance benefits by the retail prices index for last September, which was 5 per cent, and most income-related benefits will increase by the Rossi index, which is the retail prices index excluding rent, mortgage interest, council tax and depreciation and was 6.3 per cent on the same date.
The Guaranteed Minimum Pensions Increase Order provides for contracted-out defined benefit schemes to increase their members’ guaranteed minimum pensions that accrued between 1988 and 1997 by 3 per cent. Increases are capped at this level when the retail prices index exceeds 3 per cent.
This year, the uprating order that will come into effect from April will add almost £6.2 billion to government spending. Of this, almost £4 billion will go to support pensioners, £1.2 billion to working-age
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For pensioners on the lowest incomes, the order will increase the standard minimum guarantee in pension credit by £5.95 to £130 a week for a single pensioner. Couples will see an increase of £7.25 to £198.45 a week. These increases are the highest since pension credit was introduced in 2003.
This year, we will be spending more than £13 billion more on pensioners than if we had continued with the policies that were in place in 1997. Pensioner households are on average £1,600 a year, or £31 a week, better off and the poorest pensioner households are on average £2,200 a year, or £42 a week, better off than they would have been under the 1997 system.
We have taken further action this year to help pensioners. For example, this winter we have increased the winter fuel payments by £50 for households with someone aged 60 to 79 and by £100 for households with someone aged 80 and over. We are helping further by making an additional Christmas bonus payment of £60 this year. This takes the total value of the Christmas bonus for 2008-09 to £70. This additional support will not just help pensioners; it will help all of the 15 million people who receive the Christmas bonus, including those people receiving disability or bereavement benefits.
Noble Lords may have seen a Written Statement tabled by my honourable friend in the other place that relates to issues concerning payments of invalidity allowance to pensioners from April 2009. The Statement highlighted a technical error that means that some pensioners might not receive correct state pension payments from April. Around 45,000 people may be overpaid and around 25,000 underpaid, depending on their circumstances. The weekly overpayments will range from 5p to a maximum of £3. The maximum underpayment will be £1.80 a week. Any customer who has been underpaid will receive the arrears owed to them. We will not seek to recover any overpayments. Customers need not take any action.
As people become pensioners from April 2009, they should automatically move on to the higher rate of invalidity allowance paid to pensioners. Because the uprating order for this year does not provide the statutory basis ordinarily needed to make these higher payments, we shall be making them on an extra-statutory basis in the coming tax year. Around 7,000 customers are affected with payments worth in total around £350,000. I can assure noble Lords that the Pension, Disability and Carers Service will identify and correct cases as soon as possible and contact all of those concerned to explain their position.
The uprating order before us today also increases working-age benefits. Most working-age income-related benefits will increase in line with the Rossi index of 6.3 per cent. We use the Rossi index to increase most income-related benefits because housing costs are usually met separately by those benefits. This year’s increase means that, for example, the personal allowance for a
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Families who receive income support or jobseeker’s allowance will continue to see the full value of any increase in their child tax credit because their child-related allowance will increase in parallel with child tax credit rates by almost 7 per cent from £52.59 to £56.11.
From April, incapacity benefit will be increased by the same measure as employment and support allowance, the Rossi index, so that, over time, all customers in similar circumstances will receive the same level of support. Incapacity benefit customers with an age addition will not, as originally suggested last summer, have their benefit rates frozen. Instead, such customers with an age addition will see their overall benefit increase by at least half of Rossi; that is, 3.15 per cent. This means that they will not receive less than £95.15 a week, which is the same amount of incapacity benefit as received by someone in the support group getting contributory employment and support allowance.
I hope that noble Lords will welcome these increases at a time of economic downturn. The cost of uprating benefits for next year is almost £6.2 billion and will take total benefit expenditure for the next financial year to an estimated £142 billion. I commend the orders to the House.
7 pm
Lord Kirkwood of Kirkhope: My Lords, these are important orders and this is an important debate. A lot of the upratings are done on the basis of formulas. I am absolutely content that the Government are doing what they are required to do under the provisions of 1992 uprating legislation.
I shall try to concentrate on two points. First, I am very nervous about the extent to which childless, in-work family incomes are not being looked after as much as have been those of other categories of households in the past five or so years. It is obvious that one cannot give priority to everything but, looking at some of the figures for the support levels available under the new upratings, which take effect for rest of the year from April 2009, I fear untoward effects on people in that category simply because they are not among the target groups, such as families with children and pensioner and/or low-income households, on which the Government have rightly concentrated and where a lot of progress has been made. Will the Minister say a word about the future plans for that?
We have seen organisations such as the Joseph Rowntree Foundation quantify what levels of regular and ongoing annual uplifts in the benefits system are necessary to reach the Government’s own targets of 2010 and 2020 for child poverty. I hope that the upcoming Budget will give us some sight of the Government’s programme for meeting their target. The figures that the Rowntree foundation have produced are robust and a large sum of money, in the region of £4 billion, is involved, but its work indicates quite clearly that, where the Government have specifically targeted sums of money of that order through the benefit uprating system, the result is directly consequential
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Another increasing problem is emerging in these rather strange financial times. I have no idea what is going on in the long term and wonder whether anybody else has; it is really quite dire. The Minister will of course know that when people are tested for eligibility for means-tested benefits, there is under the established rules an imputed level of income from capital sums. The imputed level of interest is much higher than anything that my bank manager is likely to give me any time soon in these new, maybe temporary circumstances. It must be unfair that low-income pension householders, when applying for means-tested assistance to which they would be otherwise entitled, find that the department says, “Well, the interest from that £1,500 you’ve got, multiplied by 5 per cent”—or whatever the going rate is for the imputed level of interest—“takes you over the limit and therefore you are denied access to the means-tested benefit”. That is perverse and unjust in these financial circumstances. If we are in these uncertain times for as long as we might be, the Government will need to revisit the capital imputation rules for eligibility to means-tested benefits.
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