---

I am confident that the House will also agree that any decision to sell off part of such an historic and valued organisation as Royal Mail must, at a minimum, be subject to a vote by the people's representatives on the value of the deal on the table. A Bill would provide the most certain way of ensuring that objective. I stress to the Minister and the House the importance of bringing before Parliament for approval any proposal to sell Royal Mail. As the Bill stands, the only duty of the Secretary of State after deciding to sell is to lay a Command Paper in the Vote Office. Surely we need a little more detail from the Government, as well as a larger commitment from them to report adequately to Parliament on this vital issue. The people of our nation, in poll after poll, overwhelmingly support the Post Office-that is how they see Royal Mail, whether we like the term or not. The public see the Post Office

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and Royal Mail as the same thing. They deserve better than the cavalier way in which their Government are proceeding.

Would it not be better to accept the need for clarity now rather than face criticism in the future that not enough consultation has taken place and that the proposals have been rushed through Parliament with indecent haste? I said that a few times about the previous Bill that we discussed. The previous Government broke their neck to try to get these things through. I hope we can learn that lesson and not rush this Bill through. I hope that the Government will take the opportunity to ensure that Parliament is properly consulted on the decision to sell a part of the national institution that we all know as Royal Mail.

5.45 pm

Until now, the Government have been extremely vague about how, where and when they intend to use the powers to privatise Royal Mail. Considering the importance of this institution and the public service that it provides, the House will want a number of assurances to satisfy its concerns. The amendment goes a little way towards making clear how the Government intend to deal with these matters.

Without too much sentiment, I have to say that, when Ministers make it clear that they have no objection to Royal Mail being sold to an overseas buyer, it fills me with anxiety. How many investors care about the universal service obligation or the standards of service, pitiful as they are from my time as a Post Office worker? If we rush into a sale and Royal Mail ends up in the hands of a particular private company, we shall know what to expect, because that company has already said that the universal service obligation belongs to Jurassic history. It even questioned whether there should be six deliveries a week. We have to be very careful. I urge the Government to set down clearly in the Bill a real protection for what we have left of the service. There must be conditions or attributes which allow the Government to disqualify a buyer whose track record is one of slash and burn-witness what has been said about Jurassic history. Would the Government sell Royal Mail to anyone at all? What conditions would apply? What plans do the Government have to restrict shareholdings by investors and market operators following any trade sale or initial offering? I believe that that needs to be specified, as the amendment would do.

I expect the Secretary of State to make clear exactly how he proposes to enshrine in law the universal service provision as laid out in Clause 28 of the Bill. Such provision is extremely important to the small business customers and other customers of Royal Mail across the country. Royal Mail is currently the only universal service deliverer and there is no likelihood of anyone else coming into the market to cover parts, or all, of our country when they can cherry-pick and take the best parts of the business. Almost a decade ago, I stood on the other side of the Chamber and warned this House what would happen with cherry-picking. Sadly, every word that I said has been borne out by people picking the biggest cherries they could get. I am talking about the pre-sort downstream access arrangements that Royal Mail has had to subsidise

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throughout that period. The tragedy is that, when downstream access arrangements were introduced, we knew that was going to happen. However, we were saddled with a regulator, which we shall come on to later in the Bill, that had the wrong idea about its responsibilities, and a decade of income was lost by Royal Mail because of the way in which those arrangements were rushed through.

Is not the crux of the matter the structure of the company after it is privatised? Will it be an independent entity? Can it have a separate operation with a separate board and a head office in the United Kingdom? If, for example, it is fully owned by Deutsche Post, it may be run merely as a subsidiary of that company, with any entity in the UK having very little power over the ultimate direction of the company. One difficulty that I have is in grasping the detail and discovering what information is in the Bill about whether there will be an initial public offering-an IPO-or a trade sale at auction, whether it will happen all at once or in tranches, whether it will lead to a sale to a proven communications business or a private equity group, or whether it will mean the break-up of the company into different geographical and functional units, with parts of the business being hived off and so on. The Government have not set a clear timetable. Before any sale takes place, surely this House will want to be assured about the future of the universal service, the exact regulatory regime and the future of the post office network.

What stage has been reached in obtaining state aid clearance from the Commission? Noble Lords who were present will remember hearing of the dead hand of the European Commission about state aid. The House needs much more detail and much more information. I believe that many noble Lords on all sides of the House are anxious and want to table amendments which will, in varying degrees, bring accountability back to Parliament by ensuring that we have more information about what exactly is proposed. Requiring a further specific Bill would ensure the maximum possible involvement of Parliament in the full scrutiny of the Bill.

In certain cases, previous privatisation legislation has provided more detail. The amendments I propose are not revolutionary. For example, the Railways Act 1993 imposed a series of general duties on the Secretary of State and the franchising director in respect of the award of franchises. There were detailed prescriptions concerning to what type of entities assets could be transferred. The Secretary of State was also subject to several franchising and licensing general duties to protect the interests. I expect that all noble Lords, regardless of affiliation or none, are concerned for the users of the Royal Mail service and the users of the post office network. By implication, they will be affected by what happens. Under the Railways Act, specific measures were mentioned in more detail as set out in the Bill. The Secretary of State was also subject to a number of general duties, such as promoting the use of the railway network, promoting efficiency, promoting competition, minimising the restrictions on operators and ensuring safety. He was further obliged to promote the award of franchise statements to companies where the employees had a substantial interest.

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Many Members of this House are worried that there is not the same degree of detail in the Bill, which is why, ideally, I should like to see a new Bill introduced. Failing that, I would go for a super-affirmative resolution or an affirmative resolution procedure as such matters need considerable consideration. It would be a mistake to move forward too quickly. Remember, how Royal Mail or the Post Office suffered because of the indecent haste of the then Labour Government rushing into liberalisation long before any other European country did so. I am told on good authority that some of them have still not done it and for 10 years we have had to suffer. Parliament needs the opportunity for further scrutiny of exactly what the Government are proposing. Without any pleasure, I move the amendment. I just wish that we were not in the position of expediting the destruction of the Royal Mail, Post Office, call it what you will. As I said, it is a very sad day for me and for countless thousands of customers and workers who have the greatest respect for its history and exemplary record of service to the people of our nation. I beg to move.

Lord Skelmersdale: My Lords, as the Committee knows, I look at the Bill from a totally different perspective from that of the noble Lord, Lord Clarke of Hampstead. I look at it from the perspective of a user of Royal Mail and of the universal postal service that is contained within that contract. Wrapped up in the Second Reading speech that we have just heard, the noble Lord, Lord Clarke, makes a very valuable point about the continuation of the universal postal service. I fail to find in the Bill sufficient words to give me confidence that, post the sale, that will continue.

On the other point raised by the noble Lord, Lord Clarke, about the Royal Mail company's modernisation budget-the second provision in his amendment-the noble Lord caused me to pause and think. When you sell a business, any money that is contained within that business, such as in its bank account, is sold with the business and the price of the business reflects that. Therefore, to whom will the money that remains unspent in the modernisation budget belong? Will it belong to the Post Office or to the Government? Is it a draw-down facility or is it a cash amount? It would be helpful to know. However, if the modernisation goals had been achieved we would not be in this sorry situation, but I am afraid we are.

Lord Hoyle: I pay tribute to my noble friend Lord Clarke of Hampstead. No one else has more knowledge of the Royal Mail and the postal service than him, as he displayed. He may have gone wide of the amendment-he was right to do so-in exposing the history that has led us to this sorry state of affairs. Indeed, he will recall that I was one who supported him and warned of the dangers of going down the road of selling up to 49 per cent-I asked why it would remain there.

Turning to the amendment, I agree that we need to know more about what will happen to the universal postal service. Will it be maintained and in what form will it be maintained? It would be quite easy to destroy the universal service by pricing it out of the market, which is one thing I am afraid could happen as a result

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of the Bill. Perhaps the Minister could reassure us both on whether the universal service will continue and on whether it will still remain attractive to users of the service, which is equally important. We have had two points of view: one from the person who has been in the service and the other from the person using the service. Perhaps the Minister could provide some clarity. What provision is being made, will the universal service be maintained and will it be prohibitive to use? If it is prohibitive, it will be destroyed.

My noble friend was also right to ask how far the modernisation programme will have gone and how much will have been spent on it. It is a pity that we are where we are because there is agreement between the Royal Mail and all the unions on the need to achieve modernisation; they want it carried forward and the money is available to do it. We need these kinds of assurances. We also need to know what progress has been made towards modernisation and what has developed in the relationship between the present Royal Mail and the unions in achieving that.

It is usual to ask such questions and I know that the Minister has tried to provide us with the answers. I hope she will be forthcoming in this regard. It is not only those who have been involved in the Royal Mail as currently constituted but those who use the service who are asking questions, and they need reassurance. I look forward to the Minister's reply.

Baroness Howe of Idlicote: My Lords, I was present on the previous occasion and listened with considerable sympathy to the noble Lord who spoke, certainly not in support of what the previous Government were doing but from his own immense loyalty and background in the postal service. I remember that well. We all have a duty to reassure ourselves on the point made by the noble Lord, Lord Skelmersdale, that there is nothing that he can see, in the Bill as it now stands, that will guarantee that the service will continue. We are due more clarity on this point and, as many noble Lords have said, we are in a worse situation in many ways than we were before on the financial side. I pay tribute to what the Government have done in their plans to open up the possibility of a better future but some form of reassurance would be welcome.

6 pm

Baroness Kramer: My Lords, the statements made by the noble Lord, Lord Clarke, expressed the distress that is widely felt and which we all understand. He got to the crux of the matter when he said that a previous Government had liberalised the market in mail without first putting Royal Mail on a secure basis. I agree totally with that analysis. Just as happened with Deutsche Post in effect, Royal Mail should have had private capital brought in in that period to put it on to a secure and thriving basis before the market was liberated. We can see that.

However, I ask the House to be careful that we do not repeat that mistake. Since Royal Mail is bleeding money daily, there is urgency in dealing with the problems facing it to make sure that it survives and that a universal service provider survives. Sometimes in these conversations we might occasionally overlook the reality that if there is no secure financial future for

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Royal Mail, which requires not just the current very important modernisation programme but steps beyond that requiring considerable additional outside money to establish it as a pre-eminent and effective organisation, the role of universal service provider is indeed in jeopardy. It is making sure there is a successful financial future for this organisation that makes the universal service provider concept viable. Rather than reading this legislation as some sort of attack or as a lack of faith in the universal service provider, I see it as attempting to put into place the structural underpinnings that make the USP a realistic ongoing proposition, because consumers and those who work in the Post Office wish to see that as part of our future.

Lord Brooke of Alverthorpe: I agree with the principal point that my noble friend Lord Clarke of Hampstead made about the universal service. As the House knows, I was one of those who recognised the problem that Royal Mail was facing and who was in favour of substantial capital investment to try to help with modernisation and moving forward, but I was not in favour of 100 per cent privatisation. There is a difference between those who are now expressing concerns in a way that they did not before. The major difference is that we are talking about 100 per cent privatisation as opposed to only a very substantial part of the shares being sold.

My worry is that we could find ourselves in a position where a foreign buyer might already be in the business in a country that no longer has a universal service and that might decide in due course that it will no longer maintain a universal service in this country. That would be very bad indeed for Britain. People are waking up to what is happening in the health service, with the threats and fears that they are starting to see, and I hope that they will start to recognise that while we need change in this area as quickly as we can have it, there have to be fundamental safeguards to meet the wishes of the British people. I hope that they will recognise that there is conceivably a threat at the end of the day to the universal service.

We are governed by European Union legislation in this area to a degree. Originally, the European Union was very much in favour of the retention of the universal service. Bit by bit over the years, the European Union has changed the legislation and has eased its position on it. A number of European countries have now moved from being totally state-owned to 100 per cent privatisation, and in some of them operatives are not required to deliver a universal service. It is quite conceivable that one of those could bid and be successful in purchasing the Royal Mail. I listened to the previous debate and the assurances given by the Minister. She hopes that there will be ways in which we would avoid any such difficulty arising. Ofcom would be involved. Will Ofcom have the right to stop a foreign bidder of the kind that I have just described proceeding with the purchase of 100 per cent, less the employees' share, of Royal Mail? If so, how would it prevent the universal service disintegrating bit by bit if such a buyer were in possession of the Royal Mail?

Lord Swinfen: Apart from Royal Mail, there are a number of other providers of postal services, none of which produces a universal postal service. They all rely

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on Royal Mail to deliver the last mile, particularly in remote areas. We need something in the Bill, and I would like the Minister to tell the House how a universal postal service will be ensured by someone taking over Royal Mail. If she cannot, she must bring something forward on Report to ensure that. Otherwise, this Bill is not satisfactory.

Lord Lea of Crondall: My Lords, unless I have read this Bill wrong, Clauses 28 and 29 leave no doubts about the universal postal service. I shall put the question to the Minister the other way round. We are not debating these clauses now, but because the point has been raised it is worth looking at them. Can we take it that they mean what they say?

Viscount Eccles: My Lords, the Postal Services Act 2000 "liberalised" the postal service. There are now, I think, 49 licensed postal operators in addition to Royal Mail, which is also licensed. If that number of people were willing to become postal operators, they must have expected it to be possible to do that successfully. As the noble Lord, Lord Lea, said, the Bill quite clearly states that there has to be a universal service, so whoever buys Royal Mail in whole or in part, wherever they come from, would not be acting in accordance with the law if they did not maintain a universal postal service. That is not really the problem. The difficulty we are in is that we have had an inappropriate regulation system in which the regulator tended to believe that competition was more important than the universal service and acted accordingly.

The problem with the universal service is that it is a monopoly. As noble Lords will have seen from the lobbying that they have had, it has been said that it will become a privatised monopoly. However, it is not a natural monopoly but a completely artificial one. It is not like a railway line or a water pipe. In my part of England, the so-called final mile is absolutely nothing like a final mile but a final 10 miles. It is running about on the roads, which are a public asset and nothing to do with the assets of Royal Mail or the Post Office. There has been confused thinking about whether the so-called final mile is an advantage or a disadvantage. The private operators are trying to tell us in this House that it is an advantage, an asset that enables people to charge monopoly prices. In fact, that is not what has happened. It has been entirely the reverse. The final mile is a disadvantage to Royal Mail. Therefore, in the progress of this Bill, we should concentrate more on regulation and the prospective system of Ofcom than upon anything else.

Lord Razzall: My Lords, I apologise for not being in my place on the previous day or at the beginning of the Second Reading-style speech made by the noble Lord, Lord Clarke, which of course I would have missed at Second Reading because he did not deliver it. Am I not right that this issue should be dealt with under Clauses 42 and 43? I thought that we would talk about the Ofcom relationship to the universal service obligation in relation to those clauses. I am very puzzled that we are having this discussion now. As I have said, the noble Lord, Lord Clarke, made a Second Reading-style speech, and no doubt ranged very widely over the topic.

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Lord Young of Norwood Green: My Lords, I support this amendment. At this juncture, I am happy to share the same analysis, if not completely then certainly key parts of it, with my noble friends Lord Clarke and Lord Hoyle. Like the noble Lord, Lord Brooke, I confess that I was not on the side of the angels or the angels as defined by my noble friend Lord Clarke on the previous occasion, but on this occasion I share his analysis.

We and fellow Peers of several party affiliations and of no party affiliation, as we have seen in this interesting debate, have submitted amendments that seek to ensure that the sale of Royal Mail meets four main objectives if it goes ahead. First, it should be done in a timely fashion, which does not present the prospect of an endless cloud of doubt hanging over the future of the company. Secondly, proper measures should be taken to ensure that value for money is gained for the taxpayer and that the company is not sold at too low a price. Thirdly, there should be greater clarity and accountability than the Bill currently provides. Certainly, a number of speakers in this debate have expressed that concern. Fourthly, a privatised Royal Mail should be put on a secure footing and not be subject to the ravages of asset stripping or disintegration, or be doomed to failure because of the circumstances which this Bill creates.

The proposed 100 per cent privatisation is at the heart of our concerns about the future of the universal postal service. At Second Reading, I think that I declared my interests as a former employee of the GPO, albeit at the time when it reigned over telecom as well as postal, and a significant involvement in the union as the company changed from a nationalised company on the telecom side to a privatised company. We are concerned about the future of the universal postal service. I share the points made by the noble Lord, Lord Skelmersdale, on the future of the nation's post office network.

Private shareholders are more likely to argue that it is unsustainable and too costly, which will undermine the universality of the service. Many rural, distant or sparsely populated areas are costly to reach. I did not agree with every part of the analysis given by the noble Viscount, Lord Eccles, but he rightly reminded us that the final mile is rather a metaphorical term, given that it can be sometimes 10 miles or more. The danger with a totally privatised Royal Mail is that a private company will not necessarily want to invest in a business burdened by a costly universal service. Such a company might lobby the regulator and the Secretary of State to reduce the level of such a service.

My noble friend Lord Clarke was absolutely right to remind us that one potential buyer has already commented in very blunt terms. Noble Lords might recall that the managing director of TNT, Pieter Kunz, said that the universal service obligation was,

"a kind of Jurassic Park and we should get rid of it".

We are not indulging in a sort of fantasy or paranoia when we draw to the Minister's attention the view that some potential buyers have of a universal service obligation. The noble Lord, Lord Swinfen, drew to

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our intention the importance of making this Bill absolutely clear and his concern that it is not clear in its current state.

I was interested in the point made by the noble Viscount, Lord Eccles, about the way in which the regulator functioned in the past in relation to competition being more important than the universal service obligation. He is right. I think that we got that wrong, although it is not fashionable to admit that. While I did not agree with the conclusion made by the noble Baroness, Lady Kramer, that it needed private capital first, I certainly could not help but acknowledge her point about regulation and the way in which it was introduced and functioned.

6.15 pm

Clause 30 sets out the terms of the universal postal service obligation, which includes the requirement to collect and deliver mail six days a week at one price anywhere in the country. The universal service obligation also has other elements, including letter packet delivery, letter and packet collection, affordable and uniform tariffs, registered items, insured items, and legislative petitions and addresses. It includes, as we agreed during the previous Bill-it is unfortunate that the noble Lord, Lord Low, is not in the Chamber-services to the blind and partially sighted.

The Bill proceeds to provide for changes to the level of the USO in Clause 33 in particular. We will later in our scrutiny look at the ways in which this Bill might deliberately or inadvertently open the door to a diminution of the universal service. The Federation of Small Businesses stated that the universal service obligation,

"must be protected and services must not diminish. Any change to the scope of the USO could have a negative impact on small businesses".

Again, that was referred to at Second Reading. The point about how reliant on that universal service delivery small businesses are is fundamental. There is an environment in which more and more of them require their products to be delivered to distant parts of the country as a result of people buying on the internet.

Ministers have helpfully-I think it was helpfully-pointed out that Ofcom would be obliged under Clause 29 to conduct within 18 months a market review rather than a review of the universal service itself. I am sure that the House would appreciate an elaboration of what limits would apply to that market review. However, it is very clear that, under Clause 33, Ofcom may initiate or be required by the Secretary of State to conduct a review of the universal service obligation that could begin at any time-18 months, 12 months or even six months-after the Bill becomes law. After that the Secretary of State could, by order subject to affirmative procedure, instigate a reduction in the universal service.

It is not just us who are expressing our concern here on the opposition Front Bench. After all, the Delegated Powers and Regulatory Reform Committee recently pointed out its concern in a very helpful and succinct comment on this Bill entitled: "Clause 33(5)-alteration of minimum requirements for universal postal service". It states:

"Clause 29(1) requires OFCOM by order (subject to no Parliamentary procedure) to set out the services which a universal postal service should provide. Clause 29(2) requires the service to

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include, as a minimum, the services set out in clause 30 (minimum requirements such as daily delivery of letters Monday-Saturday, a uniform public tariff, etc). The order by OFCOM cannot alter the minimum requirements. However, clause 33 provides a power for OFCOM to review the extent to which the minimum requirements reflect the needs of users of postal services. If OFCOM carry out a review (and they may be directed by the Secretary of State to do so) the Secretary of State may then, by order subject to affirmative procedure, amend clause 30. The Secretary of State is not constrained necessarily to follow any conclusions of the review. The Committee makes no recommendation on clause 33(5), but draws it to the attention of the House as a significant power which would allow the Secretary of State to alter the minimum requirements for a universal postal service set out in clause 30".

I trust that the Minister will respond to the committee's genuine concern about the nature of this legislation and the fact that it is not good enough in its protection of the universal service.

Ministers might protest that they have no intention of reducing the universal service. I have no reason to doubt their good intentions, but if the Bill permits such a diminution, a future Minster might decide to use it to that effect. Indeed, we will propose amendments to give effect to the Minister's wish to maintain a universal service at its current level, but my point here is that the move to 100 per cent privatisation magnifies these concerns for the future.

On page 81 of his December 2008 report, Modernise or Decline, Richard Hooper rejected the notion of 100 per cent privatisation, saying that,

"This option would only be appropriate and feasible if modernisation had been completed".

Unfortunately, as we know, while good progress is being made on that front, we still have some way to go. It is only fair and right that we should have an assessment of how the Secretary of State will ensure that the provisions of the universal postal service will be maintained following disposals. This will also be a critical question for anyone thinking of buying into the business. It is fair and right that we should know what progress has been made with the modernisation programme, and how much of the budget has been spent. My noble friend Lord Clarke drew the modernisation programme to our attention. The noble Lord, Lord Skelmersdale, also expressed concern about what would happen to that money. Will the owner of the privatised Royal Mail be able to squirrel away the modernisation money for its own use? I trust that the Minister will deal with that in her reply.

The new owner will benefit from the fact that the Government are taking on the burden of the pension deficit. How will that be accounted for? I can well remember that when British Rail was privatised and Railtrack was formed as a private company to look after the infrastructure of the railways, track, signalling and so on, it had an enormous provision buried deep in its books, which was a payment from government for the so-called Thameslink 2000 project. The central point of it was a major realignment of the Underground tunnels and passenger access under Kings Cross station in London. The year 2000 came and went and the project had not been carried out. For all that time, the millions and millions of pounds provided for the project sat in the coffers of Railtrack. How can we be sure that nothing like that will happen in the case of Royal Mail? On one level, it could be said that this is quite a modest amendment.

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Given the nature of the debate and the concerns that have been expressed across the Committee, I hope that the Minister will deal with these issues in her reply. We have asked for information and we need reassurances, if the Government intend to go ahead, to ensure that the sale is conducted in a proper and reasonable manner, if and when it takes place.

Lord Razzall: My Lords, before the Minister responds, could I make one point that I think is important? In the context of a number of comments by noble Lords, there is an assumption that the cost of the universal service obligation bears most heavily on remote areas. However, the figures for Royal Mail show that that is actually not true. The real problem does not lie in Orkney and Shetland; it lies in Hampstead and Norwood Green.

Baroness Wilcox: My Lords, we have had a great debate across the Committee, which has been provoked by the noble Lord, Lord Clarke, whose credentials are immaculate in this area. I missed hearing him in the debate on Second Reading because he was not able to be here for it, so we have been able to listen to him today, when he has had the opportunity to put his words on the record. It is a great occasion for us to listen to him. I may not agree with everything that he says, but I believe in the absolute sincerity of what he says, given the background from which he comes.

I share the noble Lord's desire to ensure that the universal postal service is maintained throughout the United Kingdom and I suggest that that is what binds us all together today. Given that we all want to see the universal service maintained, I suggest that we have no time to waste in getting the finances that we need to ensure that that is possible. It is the overriding purpose of the package of measures set out in the Bill. We need to ensure that the universal service is maintained both for the deliverers of that service and, as we heard, for the customers who need to use it. My noble friend Lord Razzall quite rightly referred to Part 3 of the Bill, which we will discuss in detail in future Committee sessions. It confers on Ofcom a primary duty to protect the universal postal service and gives it the powers to deliver that duty. A disposal of shares in Royal Mail may mean a change in ownership from the public to the private sector, but the obligation on Ofcom to ensure the provision of a universal service will remain.

Lord Skelmersdale: My Lords, perhaps I may briefly interrupt my noble friend. Does that mean that the original purchaser of Royal Mail will be bound by the UPS?

Baroness Wilcox: I think that the answer to that question is yes. In fact I am sure that the answer is yes. The universal postal service is protected by Parliament throughout this regulatory framework, not by the Government's ownership of Royal Mail. I hope that that gives some comfort to my noble friend Lord Skelmersdale and, if he has the stamina to stay with this Bill through all its stages, I hope that by the end he will feel that he has a lot more comfort than obviously is the case now.

As part of its duties, Ofcom will ensure that the minimum requirements of the universal service as set out in the Bill are upheld. As we know, the minimum

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requirements are above those set out in the European postal services directive in terms of the requirement to deliver letters six days a week and for a uniform tariff and service to apply. Ofcom is required to report annually to the Secretary of State on its activities, which in future will include how it has performed against its primary duty to ensure the provision of the universal service. The Secretary of State is required to lay that report before each House of Parliament. Therefore, I do not believe that Parliament would be served by an additional report on the future of the universal service at the time of sale.

The noble Lord, Lord Brooke of Alverthorpe, asked what will happen if a privatised Royal Mail no longer wants to provide a universal service. Royal Mail is rightly proud of providing a universal postal service and there is no reason to expect that to change, but in the unlikely event that Royal Mail no longer wishes to provide it, the regulator, Ofcom, will have a primary statutory duty to secure the provision of the universal service and has been provided with the regulatory tools to ensure that the service is maintained. In the first instance, Ofcom would do this by imposing regulatory conditions on Royal Mail that would oblige it to deliver a universal service. Ofcom will also have the power to impose penalties on companies found in breach of the regulatory conditions.

The noble Lord was also concerned that foreign owners could run down Royal Mail. Whoever owns the Royal Mail, as the universal service provider, will still be required to provide that universal postal service. The regulatory regime set out in Part 3 will ensure that. Ofcom, the proposed new regulator, has confirmed that it is satisfied that the powers in Part 3 are sufficient to protect the universal service. We will not let nationalist criteria stand in the way of the right deal for Royal Mail and the taxpayer. Investment is a global business nowadays. For example, around a third of the listed shares in Deutsche Post are owned by UK investors.

The noble Lord, Lord Young, was concerned that a future owner of Royal Mail might lobby Ofcom to reduce the minimum requirements of the universal service. As he will be aware from Clause 33, there can be no such change without an affirmative resolution both in this House and in the other place. This Government have been clear that they have no intention of supporting any such resolution. As we will discuss in later sessions, Clause 33 is a vital new safeguard for Parliament.

Modernisation of Royal Mail is also not directly related to ownership. The company has to modernise whether it is in the public sector or in private ownership. Modernisation does not end with the current transformation plan. If Royal Mail is to succeed and provide our universal service, ongoing modernisation will need to be an integral part of its DNA, so while the current modernisation plan is fully funded, it is clear that Royal Mail will need to go further and faster. Royal Mail therefore requires ongoing capital investment over a long period. Despite the good progress that is being made on the current transformation plans-and here I praise the management and the CWU on that progress-Royal Mail needs upfront cash, which it simply cannot generate for itself at the

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moment. It needs access to flexible capital, which, given the EU state aid requirements, the Government cannot provide.

6.30 pm

I quote from the evidence given to the Bill Committee in the other place by the chairman of Royal Mail, Donald Brydon. He said:

"The company cannot invest in innovative new services, it cannot modernise its fleet and it cannot modernise its equipment without capital and, as we all know, the Government do not have a lot of it".-[Official Report, Commons, Postal Services Bill Committee, 9/11/10; col. 13.]

I fully appreciate that the noble Lord wants to be kept informed of progress on the modernisation of Royal Mail. I do not, however, believe that it should be a requirement in the report that the Secretary of State is required to make in relation to the disposal of shares. That is more appropriate to the annual report of Royal Mail itself. The latest annual and half-year reports have included information on progress, including the costs. For example, the 2010 annual report stated that Royal Mail has continued to modernise its operations with a further £500 million invested in the past 12 months, largely in new technology and equipment for our postmen and postwomen, bringing the total to more than three-quarters of a £2 billion investment programme since 2006.

The noble Lord, Lord Clarke, asked whether Parliament should have approval rights over transactions to sell the Royal Mail. As I said last week, we do not believe it appropriate or in the best interests of Royal Mail to conduct commercial negotiations on the Floor of either this House or the other place. The noble Lord also made a number of general comments on the regulatory framework and how it has operated over the past 10 years. As he said, we will come to those more general points when we discuss Part 3 of the Bill.

My noble friend Lord Skelmersdale asked about the funding of the modernisation plan. Royal Mail's current modernisation plan is funded by commercial loan facilities with the National Loans Fund and the Department for Business, Innovation and Skills.

The noble Baroness, Lady Kramer, is becoming a star in these discussions. She manages to put succinctly some of the things that I take a very long time to say, but that is because I mainly have to stick to my script. She has the ability to say things in a way that is clear and brings us to the nub of the issue. We have no time to waste. This is the moment for us to advance as fast as we can to protect the service that we need so badly and to make sure that Royal Mail's employees have a real part to play in the future of the company. We hope to protect the jobs and the work that Royal Mail does in the future and to improve on it.

I hope that some of these answers have been helpful to the noble Lord, Lord Clarke. I expect that he will want to reflect on them and I therefore ask him to withdraw his amendment.

Lord Hoyle: Before the Minister sits down, will she answer my point? I said that you could maintain a universal service but price it out of the market by making it unattractive to users because of the price.

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Baroness Wilcox: On maintaining the universal service, as I said, Ofcom will be watching like a hawk to make sure that there is a fair balance between Royal Mail and the consumers of the products that Royal Mail produces. Ofcom has had a good reputation in the past and we feel confident that in the future it will do its very best to make sure that all is fair.

Lord Clarke of Hampstead: My Lords, I start by thanking all those who have taken part in what has been a useful exchange of views on a whole range of subjects. Two noble Lords considered that my earlier comments were more suited to a Second Reading debate. I carefully looked at the background to my amendment and tried to draw from my experience to explain how it would affect the clause in the Bill. If I have offended the noble Lords, Lord Razzall and Lord Skelmersdale, I can only apologise.

Lord Razzall: The noble Lord, Lord Clarke of Hampstead, could never offend me.

Lord Clarke of Hampstead: That is a bonus.

I will briefly try to answer some of the points. The noble Lord, Lord Skelmersdale, was the first person to speak in the debate. I recognise that he is a most important person to the people whom I worked with all my working life: he is a user of the Post Office and Royal Mail. Every decent Post Office worker-they are all decent-knows that we rely on customers for our livelihoods. I pay tribute to him because I know from one of my first exchanges some 11 or more years ago that he was in the goods-by-post business. I always respected anybody who did not give work to the cowboys who are trying to undermine the Post Office.

The noble Lord, Lord Skelmersdale, asked how far people have got towards achieving the goals. I think that they have done pretty well. On the first goal, modernisation, there has been a terrific move. The previous Government could never answer questions about walk-sequencing machines, but we have seen those come in. We have seen changes in attendance patterns. There have been reductions in staff. It hurts when a member of staff loses a job. I would never have dreamt that the modernisation programme could have happened in so short a time as the past year or so.

Industrial relations have never been better in all the years that I have known the Post Office. There is a genuine desire to lift the Post Office and the Royal Mail in particular from the reputation that they were getting that they could not do their job. It is much easier now because there is only one delivery and you might get that in the afternoon. The rules have been changed, so there is bound to be some progress.

One thing that came out of the Hooper report, as has been said many times in previous debates, was the need for expertise in management. Everyone in the Committee will recognise the tremendous influence that Moya Greene has brought from running a big post office network in Canada and using that expertise to help us. Some of us were arguing two years ago that expertise could be found not necessarily in the board members of TNT, Deutsche Post or Federal Express. We found somebody worthy of being the chief executive and I pay tribute to her for the way in which she has welded together various different views.

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I thank my noble friend Lord Hoyle for his support. He was one of the two or three of us who sat here night after night trying to get the previous Government to understand where they were going wrong. The noble Baroness, Lady Howe, asked for clarity. That is really all that the amendments seek. What is the intent? Let us have some detail.

The noble Baroness, Lady Kramer, whom I have not had the pleasure of meeting personally, made an important point about the need for private capital. It has been required for more than 40 years. That is why in my maiden speech in this House I said that we needed access to funds so that we could have automatic letter facing machines and optical character recognition-things that we were desperately trying to get hold of but were stopped by political interference. The external finance limit was always there to prevent us from getting the money that was needed. She is right. This is urgent and it will not stop when this present programme is over. It must keep on going to be successful. I thank her for illustrating that point.

My noble friend Lord Brooke talked about the European Union, but the less I say about that the better. I have perhaps said too much before about the way in which the Government stampeded into liberalisation without thinking it through. They told the world that we would have a Post Office fit for the 21st century. That was Stephen Byers, but I will not abuse this House by going back. I say to my noble friend Lord Brooke that the sooner we start thinking about the British Post Office and the British Royal Mail, the better for all of us, instead of looking over our shoulders at what other people are doing.

The noble Lord, Lord Swinfen, also talked about clarity and the need to be clear about what we mean when we talk about the universal postal service.

The noble Viscount, Lord Eccles, talked about the inappropriate regulator and the 40-odd private people who are competing for Post Office work. I am surprised that there are not 140 when they have been subsidised by Royal Mail all these years. The noble Lord, Lord Razzall, mentioned the regulator, although I did not introduce it in this sense. The new regulator must start thinking about this issue. The question is not whether this is about Hampstead or Norwood Green. There are parts of Hampstead where you could talk about the final mile, such as North End or Spaniard's End. You could talk about the places where it takes a lot of time to deliver, such as the 140 flats in South End Close with 1,400 steps to climb. This was not discussed in the Second Reading debate, but as it has been introduced here I have a chance to respond. Thank you very much. As for Tony Young-I mean my noble friend Lord Young-it is wonderful to be on the same side as my own Front Bench. I am pleased to find that he is giving support for these measures.

I am sure that I am leaving out a lot of people, but I address my final remarks to the Minister. I thank her sincerely for her kind words. I know that every endeavour will be made to find accommodation as we go through this Bill. I recognise that she has a bit of a job on her hands, as there are so many competing interests out there, as well as in here. I just wanted to say thank you

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very much, because it has been a good debate. I shall reflect, as the Minister asked me to do, and I beg leave to withdraw the amendment.

Amendment 10 withdrawn.

Amendment 11 not moved.

Amendment 12

Moved by Lord Stevenson of Balmacara

12: Clause 2, page 2, line 3, at end insert-

"( ) that the receipts of the sale will be used exclusively for the purpose of investment in the Post Office network of branches and future investment in the delivery of the universal postal service by a Royal Mail company in so far as permitted by applicable competition and state aid regulations."

Lord Stevenson of Balmacara: My Lords, the purpose of this amendment is to ensure that the proceeds of any sale of Royal Mail are invested in the post office network and the delivery of the universal postal service. In our debate in this House at Second Reading, the Minister explained what would happen to the assets of the pension scheme at transfer. She said:

"The cash transferred to Government will be transferred to the Consolidated Fund, gilts to the Debt Management Office and the remaining assets-stocks, property, et cetera-will be transferred to a newly created government fund. They will then be sold in a measured fashion, with cash proceeds from disposals going to the Consolidated Fund".

Do you not love that "measured fashion"? It summons up an honourable Dickensian clerk selling fusty bills of exchange for gold coin. Measured fashion-what are they talking about? What century are they in? The Minister promised the Government,

"will be entirely transparent about the effect of these transfers throughout the government accounts".-[Official Report, 16/2/11; col. 776.]

Despite the words and despite my rather wild fantasy, the proceeds are going back directly or indirectly to the Treasury. There is no doubt about that at all.

There is always a presumption that the Treasury will be the beneficiary of privatisations, but surely this should not happen to the proceeds of the sale of shares in Royal Mail. In 2009, the previous Secretary of State stated to this House that,

"the Government intend to use the money received from the minority share sale to benefit Royal Mail Group, including Post Office Ltd".-[Official Report, 31/3/09; col. 970.]

In answer to the Business Select Committee, the previous Government also made it clear that the proceeds of any partial sale would be ploughed back into the postal business and used to fund modernisation. The Liberal Democrat manifesto was quite clear in proposing that the proceeds of the sale should be invested in the post office network. Royal Mail itself has stressed the need for investment in the post office network. Moya Greene has estimated the need to have £2 billion of investment over the next few years. As for the post office network, there is a great deal to be done to bring many post offices up to date and ready to survive in a fast-changing world.

We would all agree that the post office network is a suitable candidate for investment within the Royal

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Mail group. To the extent that they have provided £1.34 billion for the network, the Government seem to agree. However, if it emerges that the Government do not intend to reinvest the proceeds of the sale back into the business, that sheds a different light on the claims that they have made about the £1.34 billion. We know that half of this is fulfilling the programme of social network payments introduced by the last Government to support loss-making but socially valuable post offices such as those in rural areas. Surely we would all agree with this. The rest is set aside for investment in the post office network, including converting 2,000 sub-post offices into post office essentials or post office locals.

Noble Lords may be aware that such provision is itself becoming an area of controversy. There are certainly concerns among sub-postmasters, who have been drawing to our attention that some of this money is being set aside for temporary compensation payments to smooth the transition of sub-postmasters into either into the new model or out of the business altogether. This is associated with what they fear may mean a substantial fall in guaranteed or actual income, according to what we have heard from sub-postmasters. Be that as it may, if the receipts from the sale of Royal Mail are handed over to the Treasury rather than reinvested in the business, it will be a sad day for our post office network and all those working in them. We ask that the proceeds of any sale should be reinvested in the postal business. Insofar as this requires European state aid approval, it should be cleared in parallel with the pension fund deficit action.

The Minister has reminded us of the stark future facing postal services as letter writing declines and electronic communications grow. Royal Mail may be able to manage these changes under new ownership, presumably through economies of scale and what is called "managed decline" to match reducing turnover in the core business. But the issues facing the Post office in the future are of a different category altogether, and they will get worse if there is no long-term interbusiness agreement with Royal Mail and if the Government do not commit to use the Post Office for face-to-face transactions wherever possible in their business. We of course understand the pressure on Ministers in relation to this issue from the Treasury, but our point is that there is also a case for investment in our post office network. This probing amendment will allow the Minister to place on the record the Government's intentions regarding the proceeds of any sale of Royal Mail.

The post office network has been umbilically linked to Royal Mail for so long, that it is hard to envisage how it will transform itself when it is separated. Mutuality is mentioned in the Bill, but although we welcome that idea, mutuality of its own does not materially affect the question of how many thousand small businesses are to rethink and re-engineer their shops and businesses. How will they up their footfall, redesign their product lines, introduce efficiencies and harness the new technologies? All this will take money-far in excess of the £1.34 billion already provided-so the post offices need the proceeds from the sale of Royal Mail. I beg to move.

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Baroness Wilcox: My Lords, Amendment 12 wishes to direct any proceeds received from a sale of shares to investment in the post office network and the universal postal service. I certainly agree that the both the Post Office and the universal service require long-term funding certainty if we are to secure both their futures, but I cannot agree at this stage that the proceeds of a sale should be used for either of these purposes. For a start, it is too early to estimate the potential proceeds from a sale, and too early to estimate where the proceeds should most sensibly be used. But the Government will, of course, look to use the proceeds that they receive to part-compensate the taxpayer for taking on the £8 billion deficit in the Royal Mail pension plan.

The Government absolutely recognise that investment is required in the post office network. That is why, as noble Lords will know, we announced last November a funding package of £1.34 billion for the post office network over the spending review period-a package that will be used to put the network on a sustainable footing, not to fund a programme of closures as the previous Government chose to do. We made this upfront commitment to fund the post office network precisely because we recognise its importance to communities across the UK. Funding for the network should not be dependent on the sale of shares in Royal Mail.

The primary purpose of the package of measures in this Bill is to secure the future of the universal postal service. This package will give Royal Mail access to the flexible capital that it needs to modernise and adapt to a changing postal market on a continuous basis. It will reform the regulatory regime with an increased emphasis on the protection of the universal service and remove the burden of Royal Mail's historic pension fund deficit.

We will come on to discuss the detail of Part 3 in later sessions, but I draw the attention of noble Lords to Clause 28(3)(a), which requires Ofcom, in performing its duties under this Bill, to have regard to the need for the provision of the universal service to be financially sustainable. This is a vital new requirement on Ofcom, which was not in the 2009 Bill. The Government therefore believe that securing the future of Royal Mail by giving it access to private capital and establishing the right regulatory framework is the best way to support the universal postal service.

During the passage of the 2009 Bill, the previous Government resisted an amendment that would have required the Secretary of State to report on the Government's intentions for the proceeds from a disposal of shares. In rejecting the amendment, the noble Lord, Lord Mandelson, undertook to inform both Houses how the payment for shares would be distributed. I am happy today to give the same undertaking for this Government. I therefore ask the noble Lord to withdraw his amendment.

Lord Stevenson of Balmacara: I thank the Minister for her response, which is rather depressing in its rejection of our proposal.

My reference to the pension deficit fund dealt with the assets. Tagged on to the end of that discussion was a comment that, in return for obtaining the assets, the

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Government were also acquiring the liabilities. I am not sure that that is an exact parallel. As I understand it, the assets are real and, even if sold in a measured way, will generate cash for the country which will go to HM Treasury, but the liabilities are ongoing. If I am right, the main pension responsibilities will be met on a pay-as-you-go basis. We are comparing apples with pears. One is a substantial reduction in our deficit position; the other is admittedly a long-term commitment but does not need to be capitalised on the resource accounts. Although I accept that £8 billion is a substantial sum of money, it does not really come into the question of whether the funds from the sale of Royal Mail should go back into the Post Office.

Secondly, the £1.34 billion package-which, as I mentioned, is both a continuation of work started under the previous Government and a commitment on behalf of the present Government to ensure that the Post Office is retained on a sustainable footing-is also a mixture. As I tried to say, the evidence is that it seems to result in a reduction in the number of post offices and certainly a change in the nature of post office services very similar to that which was available before.

My third point is that, without a proper package of business activities, there is no way that the Post Office can survive, however it is organised. It is depressing to read that the latest contract for services which could have gone to the Post Office from government has been given to Citigroup to operate. I suspect that that is only the first of a number of difficulties facing the network in future.

However, this was a probing amendment. The Minister has been kind enough to share her answer with us. I beg leave to withdraw my amendment.

Amendment 12 withdrawn.

Amendment 12A

Moved by Lord Whitty

12A: Clause 2, page 2, line 3, at end insert-

"( ) a schedule of assets held by Royal Mail Holdings plc and used for the provision of directly managed Post Office branches which also details-

(i) a schedule of those assets which will be transferred to the Royal Mail company;

(ii) a schedule of those assets which will be transferred to the Post Office company; and

( ) the terms and duration of the Inter-Business Agreement between the Royal Mail company and the Post Office company."

Lord Whitty: My Lords, this is a fairly straightforward amendment, and I am sure that the Government will have no great difficulty in accepting it.

The noble Baroness will know that I have expressed some scepticism about the changes of ownership proposed by the Government. However, I have supported the proposals by both the previous Government and this one to unravel the status of Post Office Ltd from that of Royal Mail. It is important that we do that on a basis which is transparent and clear and which can therefore be the basis for future financial arrangements

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and effective and robust services to consumers of Post Office services, on the one hand, and Royal Mail logistics on the other.

Both new paragraphs to subsection (3) relate to the requirement on the Secretary of State to produce a report, as set out in subsection (2). The first, which would be new paragraph (c), requires transparency on the allocation of assets. My concern is that, because of the slightly blurred position between Post Office Ltd, Royal Mail Group and Royal Mail itself, the assets of Post Office Ltd are not as clearly recorded but must be at the point of transfer and unravelling the two parts of the business. I am particularly concerned because Post Office Ltd's property portfolio consists mainly of Crown post offices, directly administered branches, mostly located in city centres and prime locations. That is the reason for my suspicion.

Before Parliament endorses any report from the Secretary of State, it must know that the full range of assets from Post Office Ltd is to pass across to the new sector-which, initially at least, will remain a publicly owned body. Therefore, that list of assets must be complete and where there is doubt-because some sorting offices are attached to Crown post offices; and there are other complications-the assets of Post Office Ltd must be clearly delineated and not by stealth handed over or promised to any potential investor in the Royal Mail side of the business. My suspicions may be entirely groundless, but there can surely be no argument that the schedule of assets should be clear to Parliament before it makes such a decision.

The second paragraph of my amendment is probably more substantial. If we are to unravel the two businesses, it is important that the relationship between them is understood by Parliament before it gives its decision in principle. That is complicated. The inter-business agreement between Royal Mail and the Post Office is long-standing and there are a lot of inferred obligations on both sides. It is important that the Government commit to the maintenance of an inter-business agreement. The Government have previously indicated that a renegotiated inter-business agreement will take effect prior to separation coming into force. Before that, Parliament must understand what the principles of that agreement will be and whether they will reflect the current relationship between Royal Mail and Post Office Ltd or whether they are to be modified.

Some within the Post Office would argue that Post Office Ltd has hitherto been a rather junior partner in that relationship and we want to ensure that both parties to this division, this partial divorce, are on a robust basis. It is therefore important that Parliament should understand that; that the principles should be set out in the report; and that the duration that the Government are requiring the parties to stick to is clear. There are different conclusions between a short IBA and one which lasts a number of years. Clearly, there needs to be some process for modification as times change, but we also need some certainty about the nature of the relationship.

Those are not unreasonable requirements to include in the report, and I therefore hope that the Government will at least accept the principle of the amendments. I beg to move.

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Baroness Kramer: The comments of the noble Lord, Lord Whitty, arouse some questions in my mind, and this seems the appropriate time to raise them with the Committee. In an earlier Committee debate, several Members of the House talked about how important it is that the Minister's report comes as soon as reasonably possible after he has made his decision-which, of course, is well ahead of the disposal itself. I am concerned that the proposal of the noble Lord, Lord Whitty, today does exactly the opposite. It militates in the direction of forcing the report to be delayed until much later.

An asset register-so that we know which assets will go to the Post Office and which to Royal Mail-is obviously desirable, but we can be reasonably sure that for about 80 per cent or 90 per cent of the assets that will be obvious. There will be others where it is exceedingly complex and where it may take years to unravel who is the legal owner. There will have to be some sort of agreement between the parties on how that process is to be managed. I would expect that to come in the detailed negotiations between the various parties, not immediately after the Minister's decision. There could be a very long delay if we place that requirement on the report.

On the inter-business agreement, again, general terms have already been laid out in the Bill. The purpose of the Bill is to make sure that the inter-business agreement is for as long as is legally possible, but we work with the knowledge that the arrangements will have to be sorted out in detailed negotiations between the parties. That, too, would substantially delay the report to this House. I stress a point at which the noble Lord, Lord Whitty, perhaps hinted: this is not a simple matter of saying that we should keep the inter-business agreement in place for the next decade or so. I have heard many complaints, from various parts of the Post Office, at how restrictive is the current agreement and how it prohibits them entering into various kinds of business which are necessary to make them sustainable.

There are highly complex aspects to all this. While we can expect general principles to be discussed in any report, if we start putting into it great commercial and negotiating detail, we delay it and it becomes something that we see after, rather than before, the fact of the disposal. I believe that it is the preference of this Committee to see the report before the disposal and not after it.

7 pm

Baroness Drake: My Lords, the Minister in the other place, the honourable Ed Davey, has tried on several occasions to reassure stakeholders by arguing that both Royal Mail and the Post Office want an extended inter-business agreement. In Committee, he said:

"I refer the Committee to what the chief executive of Royal Mail, Moya Greene, and Donald Brydon, the chairman, said. Moya Greene said it was unthinkable that there would not be a long-term relationship between Royal Mail and Post Office Ltd. Donald Brydon said that he wanted to have the longest possible legally permissible agreement".-[Official Report, Commons, Postal Services Bill Committee; 11/11/10; cols. 121-22.]

Those are wonderful and fine sentiments. The only trouble is that the current board cannot bind a wholly privatised Royal Mail board. Noble friends have said

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that Moya Greene is a very impressive figure and a great asset to Royal Mail. Having met her, I wholly agree. However, she cannot speak for the board of a new owner whose identity we do not yet know. It is wonderfully reassuring that the existing CEO and the chairman have such positive sentiments, but they are not necessarily translatable into what will effectively be an agreement between the Post Office and any new owner.

If one looks at the Bill and the statements that the Government have made, one sees that, as things currently stand, a privatised Royal Mail has little obligation, nor is it required as part of any terms of sale, in principle or in detail, to be bound to any obligation towards the Post Office beyond the current inter-business agreement.

Many people are anxious to extend the agreement significantly beyond the current five years because there is no firm confirmation that it will be so extended. At the point of sale-because one has no idea how long it will take to negotiate and confirm the details of a purchase-there may be only two to three years left on the existing agreement. The situation could be even more insecure, therefore, because at the point of confirming the sale the Post Office may discover that its fortunes are not well favoured and have only a limited time to deal with that.

As far as I can see-I am sure that the Minister will correct me if I am wrong-the Government have to date refused any amendment that would guarantee a continued relationship between the two businesses. They have suggested that there are legal difficulties in legislating on an inter-business agreement, but they have neither detailed why such legislation would be illegal nor defined what is the longest legally permissible period for any inter-business agreement. More to the point of the noble Baroness, Lady Kramer, who said that we should not get into the detail but take command of principles, nor have the Government said anything about whether a renewed agreement or a sustained relationship with Post Office Counters beyond the five years of the current agreement would be a condition of sale, or whether there would be an expectation that any bidders would make submissions as to the relationship with the Post Office.

In reality, there are very few safeguards for keeping the Post Office contract for the long term. As things stand, it is entirely conceivable that, just a few years down the line, there will be a post office network where you cannot undertake mail transactions. That is simply a proposition of possibility under the terms of the Bill. A privatised Royal Mail will be free to cherry-pick, as my noble friend Lord Clarke said. It could select a supermarket chain to meet its requirement in urban areas, with the Post Office picking up, if it was able to, the slack in rural areas where no one else wanted to compete to deliver the service. That would have serious implications for the viability and integrity of the network.

I refer to the very appropriate comments of the noble Lord, Lord Dobbs, in his maiden speech at Second Reading, who captured the point far better than I could. He said:

"In many rural areas, far from the post office subsidising the shopkeeper, it is the shopkeeper who is now subsidising the post office".-[Official Report, 16/2/11; col. 732.]

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This is not careless speculation on my part, because I think that it is highly possible that a private owner would take such an approach. No access criteria are laid down to which a privatised Royal Mail would need to adhere specifically in relation to post offices. This is important for the small business community, which makes an important economic contribution in sustaining employment in key areas. Fifty-nine per cent of small businesses use post offices at least once a week and 77 per cent use them to send their parcels. Perhaps I may therefore put two questions to the Minister. First, what exactly are the legal constraints on extending the five-year inter-business agreement? I may be able to speculate on the legal restraints on an unlimited extension, but I am not at all sure what they are on extending it. Secondly, why are the Government not confirming that maintaining a business agreement with the Post Office for at least a further five years beyond the existing agreement is a defined provision within the terms-of-sale agreement or invitation to tender that potential bidders would have to address? It strikes me that if everyone is saying that they are so committed to Post Office Counters, one would welcome such a commitment to that being in any documentation prepared, or terms set, for potential bidders.

My noble friend Lord Whitty expressed concern about who owns the assets and how they will be allocated. If the Post Office has to compete in a world where the Royal Mail is privately owned, its ability to do so will be heavily influenced by the assets on its balance sheet at the point of separation of the businesses within the post offices.

I noted that in the Second Reading debate in the other place, the honourable Mr Ed Davey, the Parliamentary Under-Secretary of State in the Department for Business, Innovation and Skills, argued that,

"a privately owned Royal Mail will not act against its own commercial interests. It will not give up valued retail space in the heart of communities the length and breadth of Britain".-[Official Report, Commons, 27/10/10; cols. 426-27.]

He is no doubt correct that a privatised Royal Mail will not act against its own commercial interests and that it will not give up valuable retail space, but he could be incorrect in supposing that its commercial interests will necessarily lie with the Post Office. When the honourable gentleman says,

"It will not give up valued retail space",

one has to ask whether he has taken a view as to whose retail space it is to give up. If the Crown Office estate is to be with the Post Office, it is not the Royal Mail's to give up but Post Office Counters Limited's to sell. My noble friend Lord Whitty is quite right to be concerned that there should be visibility as to who owns which assets at the point of sale.

Lord Skelmersdale: My Lords, I tend to agree with my noble friend Lady Kramer on this. Although what comes out of the discussion on this amendment will be valuable to our future discussions, as it is it rather puts the cart before the horse. As far as the noble Baroness, Lady Drake, is concerned, I will ask my noble friend one question, if she will deign to answer it. Quite clearly, from what she said in our last exchanges, she has as high an opinion of me as I do of her. The Government have a policy of supporting post offices and it is quite clear that this is what they intend. The

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inter-business agreement-currently lasting five years, as the noble Baroness, Lady Drake, has just said-is one of the ways in which post offices are supported. Should her worst fears be realised and there is no future inter-business agreement at the end of the five years, does my noble friend think that the policy of supporting the post offices will continue to be self-sustaining?

Lord Stevenson of Balmacara: My Lords, I support the amendment in the name of my noble friend Lord Whitty. A couple of noble Lords have suggested that these discussions, particularly in relation to the assets, are putting carts before horses but I am not sure about that. We are really talking about the transfer schemes that are referred to in Clause 8 and Schedule 1. Those are clearly mammoth undertakings, which will take a lot of time, so while I understand the points being made that they should not be in a position to hold back the main purpose of this Bill, they really do underpin it.

The Post Office is a massive enterprise. The business has revenue of £838 million with a profit of £72 million and employs more than 8,000 staff. There are nearly 12,000 post offices, of which 500 are outreach services and 10,000 are sub-post offices. That network, taken together, is bigger than all the bank and building society branches put together so we know that its scale will require a lot of attention. It would be rather surprising if some work was not already being done in that way. First, it is necessary to identify the assets, then to get into the complicated task of disaggregating the parts of those assets which have to go to Royal Mail and the parts which have to go to Post Office Ltd.

It is, of course, not just a question of assets. I am sure that the Minister will want to refer to this; quite a lot of the Royal Mail's outstanding loans, including the modernisation loan from the Government, are secured against the assets. What effect will the splitting of the assets have on that and how will that be moderated as we move forward? Then there are the normal activities that one would expect in this sort of process about headquarter costs and shared administrative functions, which will be hard to disentangle-particularly where premises and the supervision of Royal Mail activities take place on Post Office premises.

7.15 pm

Part of my noble friend's amendment deals with the inter-business agreement and we have had a good discussion on that. My noble friend Lady Drake made a number of points on that and I will not repeat them. However they, again, go towards the question: how are we are going to see the viability both of the assets and of the ongoing business put in a way that will put beyond doubt the questions that we will have in this House and in the other place about how this goes forward? This issue, again, contains many unanswered questions-a feature of this Bill.

If the Government do not know what the assets of Royal Mail and of the Post Office are before moving on to selling the Royal Mail or handing over the Post Office to mutual ownership, they may well end up

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selling the people of this country very short. That will certainly increase the risk of asset-stripping and of selling at too low a price. In the nature of price comes the nature of who will buy it and, by changing the parameters here, we may well end up with a different company-one that is, perhaps, less preferred. My noble friend Lord Whitty's amendment seeks to get a proper record of Royal Mail's assets in the division between it and the Post Office, and draws attention to the vital role that the IBA will play. I am sure that we will come back to these points later in the Committee's deliberations but, at this stage, I support the amendment.

Baroness Wilcox: My Lords, Amendment 12A seeks to require the Secretary of State to include in his report to Parliament details of the assets held by Royal Mail Holdings plc and asset transfers between Royal Mail and Post Office Ltd. It also requires the Secretary of State to report on the terms and duration of the inter-business agreement between Royal Mail and Post Office Ltd. Currently, Royal Mail Group Ltd and Post Office Ltd each already own the vast majority of the assets they require to carry out their own business. However, it is likely that some residual asset transfers will need to be carried out before any disposal of Royal Mail shares is completed. That is why the Bill contains the transfer scheme powers set out in Clause 8 and Schedule 1. These powers give the Secretary of State ultimate control over which assets sit with what company.

However, there is no set timetable for the transfer of these assets. That may be taken forward before a decision has been made to undertake a disposal of shares in Royal Mail, or it may happen after. If the latter is the case, the Secretary of State would clearly not be in a position to provide details in his report to Parliament as required by Clause 2. Relevant information relating to a transfer of assets will, however, be set out in the transfer scheme or schemes made under Schedule 1. Transfer schemes may impact on third-party contracts and agreements with Royal Mail and Post Office Ltd. I therefore assure the Committee that details of the schemes should and will be made publicly available.

On the ongoing commercial relationship between Royal Mail and the Post Office, there was significant debate in the other place about the inter-business agreement-the IBA-particularly about its duration. The Government's view is that legislation is not the appropriate place for the commercially sensitive terms of a relationship between two independent businesses to be settled. Contractual negotiations between these businesses will involve a complex interaction of many different factors-such as pricing, volume, service levels and duration-and such negotiations would not be improved by government intervention.

The noble Baroness, Lady Drake, was concerned that the current board of the Royal Mail cannot bind the actions of a future, privately owned Royal Mail. I am afraid that I take a different view on that. Any legal agreement entered into by Royal Mail will remain legally enforceable for its duration whoever owns the company. The Government have been clear that we will ensure that the chairman of Royal Mail fulfils his commitment to Parliament to conclude the longest legally permissible agreement with the Post Office before the two companies are separated.

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The noble Baroness, Lady Drake, also asked about the legal barriers to including an inter-business agreement of 10 years in the Bill. Legislation requiring an exclusive arrangement between Royal Mail and Post Office Ltd for, say, 10 years would face significant risk of legal challenge for being incompatible with competition law. Guaranteeing a revenue stream to the Post Office would also face the risk of a successful state aid challenge. It is important to note that a successful state aid or competition law challenge to the Post Office's commercial relationship with Royal Mail that struck down the contract would present a serious threat to the Post Office network.

My noble friend Lord Skelmersdale asked whether the Post Office would be self-sustaining if the inter-business agreement ended. As I said, the chairman of Royal Mail has been clear that he has no intention of letting it end.

I am well aware that the House, like the other place, is in need of reassurance regarding the ongoing relationship between the two companies and the future of the post office network. I note the comments of my noble friend Lady Kramer, who voiced her concerns in that area. I hope that I will be able to provide further reassurance on those issues when we discuss Clauses 4 to 7, which relate to the future ownership of the Post Office. If the noble Lord is content, I therefore ask that he withdraw his amendment so that I can give the matter further consideration after all the issues have been discussed in full.

Lord Whitty: My Lords, I thank the noble Baroness, particularly for her last few sentences; clearly we may well come back to the matter on Clause 4. However, I did not find the rest of what she said very reassuring.

I am grateful to the noble Baroness for referring to the legal difficulties on the inter-business arrangement. However, there are different legal opinions on it. If it is primarily the Government's view that an ongoing agreement would run up against both state aid and competition laws, before we complete consideration of the Bill it would be helpful to have an opinion that spells that out in writing. The question asked by the noble Lord, Lord Skelmersdale, is absolutely pertinent to this. If a legally defensible agreement between Royal Mail and Post Office Ltd could not be sustained in law, how can that be compatible with the Government's very clear-and, frankly, very political and public-commitment to maintaining a post office network of roughly this size? I do not think it is possible to square that circle, which raises deeper alarms than I had when I tabled the amendment. I am certainly not arguing that the inter-business agreement in its present form should last for ever, but both Houses of Parliament will need to be reassured as to which principles of that agreement the Government will see sustained through the ongoing relationship between the two parts of what is currently the Royal Mail Group. I hope that we get greater clarification when we move further into the Bill but, if anything, this short debate has alarmed me more.

I have also been alarmed more on the assets; I am not sure that the Minister alarmed me, but the noble Baroness, Lady Kramer, definitely did. She effectively said, "We can't set out in the report to Parliament"-the

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trigger for giving the go-ahead to the Secretary of State-"what assets we are and are not privatising". In previous privatisations, on occasions there have been huge schedules about that. We do not have such a schedule attached to the Bill, and I do not propose that we do. There may be some obscurities attached to that schedule, in which case some footnotes may be needed.

Baroness Kramer: I fear that the noble Lord, Lord Whitty, may have misunderstood me; I obviously was not clear. If I remember correctly, the report comes after the Minister has taken the decision but before the actual disposal. After the fact of the disposal-that is what the noble Lord is now discussing-a clear schedule would be available. However, we are talking about a report to Parliament, which most of this House welcomes, coming at a far earlier stage than is normal.

Lord Whitty: But, my Lords, the report to Parliament provided for in Clause 2 is a necessary stage for the Secretary of State to go through before the disposal actually takes place. I agree about the decision in principle; I do not seek to delay that or take things out of sequence, but when Parliament discusses the report it needs to know what is and is not being privatised, at least in broad terms. The reasons for not saying so that the noble Baroness adduced-that we could not do so until we saw the final details of the negotiation-really alarmed me; as I said in my opening speech, there are some pretty good assets here. If a negotiation went on whereby the decision of the putative buyer was rather marginal as to whether it went ahead, and someone said to it, "Okay, we'll throw in a couple of dozen prime-site Crown post offices in our major city centres. Does that make it any better?", that would cause all parliamentarians a degree of alarm. Therefore, if the register of assets is dependent on the negotiations, we have something to worry about. I would have thought that the Government ought to know pretty clearly which assets go on one side of the line and which are on the other already, although they may have to sort out one or two things. If it is subject to negotiations, and if any premises that have a faint double usage by the two parts of the business could go into the bundle offered to the incoming investor taking over the Royal Mail side in whole or in part, the viability, the effectiveness and the asset base of the Post Office Ltd side of the business come into question again.

I hope that we return to those issues. I come out of the debate somewhat more alarmed than I went into it.

Amendment 12A withdrawn.

House resumed. Committee to begin again not before 8.26 pm.

Social Security Benefits Up-rating Order 2011

Motion to Approve

7.27 pm

Moved By Lord Freud

That the draft order laid before the House on 3 February be approved.

Relevant documents: 16th Report from the Joint Committee on Statutory Instruments.

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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): My Lords, I also speak to the draft Guaranteed Minimum Pensions Increase Order 2011. I am satisfied that the orders are compatible with the European Convention on Human Rights.

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. Such increases are in line with the growth in prices or 3 per cent, whichever is the lower.

The uprating order embodies two notable changes this year. This is the first uprating after the restoration of the earnings link for the basic state pension, and the order introduces a clear and consistent approach to price measurement with the move to the consumer prices index, thereby putting the annual uprating of social security benefits on a sustainable footing for the future.

I know that noble Lords will welcome the coalition Government's immediate fulfilment of the promise to restore the earnings link for the basic state pension. Not only that, but we have also given a triple guarantee which means that the basic state pension will be increased by the highest of earnings, prices or 2.5 per cent. As a result of those actions, it is estimated that the average person retiring on a full basic state pension in 2011 will receive £15,000 more in basic state pension income over their retirement than they would have done under the old prices link. Through these policies for the basic state pension, we will provide a solid financial foundation for people's retirement income.

The basic state pension goes to more than 11 million pensioners in this country, and is the most efficient and equitable vehicle for distributing resources to pensioners. From this April, the standard rate for the basic state pension will increase by 4.6 per cent. That means an increase of £4.50 a week, taking the weekly rate from £97.65 to £102.15. This is in line with a promise made at the Budget to increase the basic state pension in line with the retail prices index in 2011. In subsequent years the triple guarantee, with the consumer prices index used to measure prices, will apply.

In the other place, there was an accusation that we have had to override the triple guarantee this year because the relevant CPI figure-3.1 per cent-would have resulted in too low an increase. This is not the case. We made a promise to increase the basic state pension in line with the RPI in April 2011 if it showed the highest growth. It did, so that is what we are doing. There is no override here; we are simply fulfilling a promise. We have also ensured that our poorer pensioners see the benefit of the increase in the basic state pension by ensuring that the standard minimum guarantee in pension credit rises by at least the cash increase for the basic state pension this year. Therefore, from April 2011 single people on pension credit will receive an above-earnings increase to their standard minimum guarantee of £4.75, which will take their weekly income to £137.35. For couples, the increase will be £7.30, taking their new total to £209.70 a week.

I will now turn to the second notable change I mentioned; namely, the switch to the consumer prices index as the measurement of prices for benefit and

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pension uprating. This is not the first occasion on which we have discussed the CPI and it will not be the last. Indeed, we will be returning to it tomorrow in our deliberations in Grand Committee on the Pensions Bill. Nonetheless, I hope noble Lords will permit me to take this opportunity to outline our thinking on the matter again. It has been said before but bears repeating that the purpose of the annual uprating exercise is to ensure that the purchasing power of social security benefits is protected against inflation. It is not to give the highest increase possible.

We believe that the CPI is the most appropriate measure of inflation and one that is fair to the taxpayer. As the Chancellor announced at the Budget, the move will save almost £6 billion a year by 2014-15. We do not claim that it is a perfect measure of inflation, but it is the most appropriate and is the measure used by the Bank of England to measure the general level of price inflation. The key difference between the RPI and the CPI is the so-called formula effect. Put simply, the CPI is calculated in a way that takes account of the choice available to consumers who can trade down to, or, in the jargon, substitute cheaper goods when prices rise. RPI is not and arguably overstates inflation as a result.

A basic principle of economics is the law of demand, which states that, all other factors being equal, a rise in the price of a good will cause consumption to fall and vice versa. A key driver of this is substitution: as prices rise, consumers will substitute away from higher-priced goods, choosing less costly alternatives. Substitution can occur in different forms. There can be substitution among brands or types of products, such as brands or types of ice cream; across different store outlets and across time. This is known as elementary or lower-level substitution. There can also be substitution among items in different product categories-such as between ice cream and cupcakes, or bus rides and train rides-referred to as substitution at higher levels of aggregation.

The geometric mean in the CPI is used only at the elementary aggregation, or lower level. There is no higher-level substitution assumed. A good way to think about substitution is to employ the concept of elasticity. Price elasticity is a measure of how responsive demand is to changes in price. Higher-price elasticity means that small changes in price lead to a large shifts in demand and vice versa. Where a good is described as having unit elasticity, a 1 per cent rise in price will lead to a 1 per cent fall in consumption and vice versa. This is a common way to represent demand behaviour in economic literature, in the form of the Cobb-Douglas utility function. For a given basket of goods, the Cobb-Douglas function assumes a unit elasticity of demand for all goods in the basket.

How does this relate to the geometric mean? Economists have shown that the geometric mean is an exact reflection of the cost of living if the elasticity of substitution is equal to one; that is to say, if a 1 per cent change in price leads to a 1 per cent change in consumption. The arithmetic mean is appropriate if the elasticity of substitution is equal to zero; in other words, if price change has no effect on consumption. Clearly, there are some goods for which price change will have little or no effect on consumption, because there is no recourse to a substitute good which has

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increased less in price. One example would be petrol. That is why the arithmetic mean is used in the CPI to combine petrol prices. In fact, the arithmetic mean is used in 30 per cent of the CPI's basket of goods for precisely that reason. Other goods it covers include electricity, newspapers, transport and postal services.

What about the remainder of the index, the 70 per cent where substitution is implied by the use of the geometric mean? Do people really substitute away from goods which have risen sharply in price to those which have not? Is the geometric mean appropriate? Noble Lords will not be surprised to find that there is a body of empirical evidence that people do substitute and that the geometric mean is an appropriate reflection of that. In Australia in 2009 a study by Ivancic, Diewert and Fox found that, in the overwhelming majority of cases, elasticity of substitution was much closer to one than to zero and therefore that the geometric mean was a more appropriate reflection of consumer behaviour. One of their key findings was that consumers are very responsive to price changes at the elementary aggregate level, the level on which the geometric mean operates. However, the study went further, finding that even the geometric mean might not fully capture substitution, with some elasticities exceeding one. There is separate evidence, for example, that brand-level elasticity is often more in the one and a half to two range.

Closer to home, also in 2009, the Scottish Government published an overview of evidence on food prices. Within this, the use of TNS Worldpanel market data showed that consumers do respond to higher food prices by substituting within a general category of food. I hope that this reassures noble Lords that consumers do substitute when prices rise; not necessarily that they substitute all the time, for the geometric mean does not demand that; simply that some people will substitute when an item has risen sharply in price and there is a good substitute.

The CPI deals only with substitution on the elementary aggregate level, the lower level. In the United States a widespread view developed that their consumer prices index was overstating inflation by not taking account of substitution behaviour. The US Advisory Commission to Study the Consumer Prices Index, also known as the Boskin commission, was concerned about substitution bias-concerned that their CPI was overstating inflation by not taking into account consumer substitution. However, the commission's report made the point that higher-level as well as lower-level substitution was an important part of consumer behaviour.

Suffice to say that the theory and evidence for consumer substitution is compelling, that the geometric mean is an appropriate method of capturing that behaviour and therefore that the CPI's method of aggregation is superior. That is why the geometric mean is used in the consumer prices index of the United States, Canada, Australia, Denmark, Finland, Ireland, Italy, Luxembourg-I could go on; I will go on-France, Portugal, Spain, Sweden and Austria. You get the picture.

Once we accept that the use of the geometric mean, where appropriate, is superior, then we have accounted for most of the gap between the CPI and the RPI. In

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fact, it has accounted for an average 0.53 percentage points of the average 0.88 percentage point gap since 1997, or 60 per cent of the gap. Already it seems that the CPI is the more suitable index. People tend to gloss over the fact that most of the gap is contributed by methodology, which experts agree is superior, and concentrate on the basket of goods instead, so it is to that factor that I will now turn.

The CPI excludes mortgage interest payments, which are not relevant to the majority of pensioners and benefit recipients. Only 7 per cent of pensioners have a mortgage, and many working age benefit recipients can get help with their housing costs. As noble Lords will know, it was mortgage interest that caused the RPI to fall in 2009 and, consequently, many pensions to be frozen. Without mortgage interest, the RPI would have grown 1.3 per cent rather than fallen 1.4 per cent in the relevant period. The CPI grew by 1.1 per cent in that same period. This illustrates the significant effect that mortgage interest can have on RPI inflation, and it is not a cost relevant to most benefit and pension recipients. There are other housing costs, of course-rent, for example-but, since the CPI already includes rent, we need not concern ourselves with that.

What about owner-occupiers though? The ONS is working on incorporating owner-occupier housing costs in the CPI. It is not something that can simply be dropped in, and the work is currently at an early stage. We will monitor this work closely and look seriously at the new index when it is close to production.

In correspondence with the UK Statistics Authority, the Royal Statistical Society has made some suggestions with regard to the CPI. Naturally, we welcome the ONS's continuing statistical development programme. However, let us not lose sight of the fact that the Royal Statistical Society has issues with the RPI, to which I shall return in a moment.

Increases in line with the growth in the CPI maintain benefit and pension value as well as putting the system on a more sustainable footing, allowing the Government to focus help where it is needed most. In short, it is fair to recipients and to the taxpayer. I mentioned the Royal Statistical Society. You will often see reports of its concerns with the CPI in correspondence to the UK Statistics Authority. Have any of those reports mentioned its repeated calls for the RPI's methodology to be improved, given that it arguably overstates inflation? I suspect not. The Institute for Fiscal Studies' report on the Budget said that the CPI's methodology was,

"a sound rationale for the switch".

For a final word on the CPI, let us look no further than that longstanding Chancellor, Mr Brown, who said:

"It is more reliable ... It is more precise".-[Official Report, Commons, 10/12/03; col. 1063.]

That is the consumer prices index-not a perfect index, but more reliable, more precise and more appropriate. I commend these orders to the House. I beg to move.

Lord McKenzie of Luton: My Lords, I thank the Minister for introducing these orders and for that journey through geometric means, elasticity of demand

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and Cobb-Douglas. I am certainly reassured to know that the geometric mean works only at the elementary aggregate level. He has certainly given us plenty to read this evening in time for tomorrow's further debate on this issue when we get to pensions.

The Guaranteed Minimum Pensions Increase Order presents no problem to us. Although the general level of price increase has been based on the CPI, not the RPI, the limiting factor is the 3 per cent cap, and we can support this order. However, the more substantive benefits uprating order is an altogether different proposition. Of course, we are not supposed to vote against it as it is includes matters that we support, such as the uprating of the basic state pension by the RPI, but we will not vote for it since, as we have heard, it is the start and signals the continuance of the switch to uprating by reference to the CPI. When it comes to debating these things, the Minister is right that there is no perfect index; an index measures what it measures.

The Minister made great play of the triple lock and the re-linking of the basic state pension with earnings. This is something that we support, and why not? After all, we locked it in as a requirement into primary legislation. We should remember that it was a Conservative Government who broke that link at a stroke. It was a consequence of this that when we came to government in 1997, our priority was to target maximum resources on the poorest pensioners. This was helped through measures such as pension credit, which meant that by 2007-08 there were 900,000 fewer pensioners in relative poverty than in 1998-99, as measured by the 60 per cent contemporary median income. On average, pensioner households were £1,500 a year better off in 2009-10 as a result of the tax and benefit changes than if the 1997 policies had simply been rolled forward. The poorest one-third of pensioner households were over £2,000 a year better off.

7.45 pm

I should say that we recognise that the order before us relates to the basic state pension and the S2P. Issues concerning occupational pensions and the revaluation of preserved pension rights were dealt with by an earlier order in December last year, when the Secretary of State again used the CPI as the basis for revaluation, and they presage the order for public sector pensions, which will similarly be laid before us before 18 March. Those issues might spill over into the debate that we have today.

On the basis of the GAD report that accompanies the order, assuming that uprating continues to be done on preceding-year increases, it will be 2013-14 before the earnings increase at 2.6 per cent will determine the basic state pension increase. For the period covered by the report to 2015-16, the 2.5 per cent underpin would never determine the uprating, and for two years-2012-13 and 2013-14-where the CPI and earnings respectively would under the Government's proposals, the RPI on the old basis would produce a better result. Despite the triple lock, then, uprating by the RPI for 2012-13 and 2013-14 would have produced a better result.

The Minister has placed much reliance on the switch to the CPI as being the most appropriate measure of inflation for uprating pensions and benefits. It is somewhat

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surprising, notwithstanding the Minister's comments, that the Government have abandoned the policy at the first opportunity and held on to uprating the basic state pension by the RPI and the minimum-guarantee element of pension credit by a mixed rate of 3.6 per cent that is designed to preserve the full basic state pension increase.

The Government announced last year the use of the CPI as a basis for determining the percentage increase in the general level of prices for a range of matters. It is widely acknowledged that the CPI as a measure of inflation will generally be below the RPI; I think that the Minister acknowledged that. That is reflected in the GAD report, which shows it to be below the RPI by 0.4 per cent to 1.6 per cent for the period to 2015-16. It is also reflected in the June 2010 Budget Red Book, which by 2014-15 expects the Exchequer to save some £6 billion a year because of the switch. The saving will come at the expense of those on benefits, tax credits and public sector pensions.

As we have heard, the Government's arguments in favour of the CPI are that it is a headline measure of price inflation, that it uses a standard international classification system-we heard about the other countries that use it-that a single index across all upratings is best, and that the CPI is most suitable for use as a single index. For pensioners, it is argued that the CPI is preferable because it uses a methodology that implies that consumers will switch to cheaper goods when prices rise. On coverage, the challenge is that the RPI includes mortgage interest payments, which are not relevant to the majority of pensioners, although there is the recognition that the CPI, while excluding mortgage interest, also excludes certain other indirect housing costs. How does that argument run for benefit recipients as well as for pensioners? How does switching to cheaper goods operate for poorer households? If households are living at the margin, at the cheapest level that they can, at the moment because of their circumstances, what does switching in that index actually mean for them?

We have to look at other comments on the CPI/RPI indices. The Minister quoted the IFS research. The IFS notes that the CPI tends to give a lower rate of inflation for two reasons:

"Because of both the formula effect and the fact that items excluded from it tend to rise in price more quickly than average prices, the CPI tends to give a lower rate of inflation than either Rossi or the RPI ... This means the decision to link benefits to the CPI is likely to save the government money"-

We know that. It continues:

"These savings will cumulate over time: in any given year, the differences between different measures of inflation may be small, but over many years the difference in the value of benefit payments will be substantial".

The IFS analysed the government rationale for the switch. Part of its conclusions was as follows:

"Overall, then, we find that the move to CPI-uprating is not clearly justified by the coverage of the CPI being more appropriate for all benefit recipients, particularly for those of working age. Nor do our results suggest that the switch from RPI to CPI as part of the triple lock guarantee for the basic state pension was obviously justified on coverage grounds: whilst we find the majority of pensioners in receipt of other benefits are insulated from the costs excluded from the CPI, if we include state pension recipients

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as well, the proportion insulated falls to between 31.5% and 32.2% of pensioner households, similar to the proportions insulated for working age households".

The Minister referred to the Royal Statistical Society and the UK Statistics Authority. A letter from the Royal Statistical Society said:

"As we all know, the CPI was originally the Harmonised Index for Consumer Prices ... constructed in order to compare price movements between EU countries; its methodology and coverage are on agreed EU definitions. Lack of agreement over the treatment of owner occupier housing costs, of particular importance for the UK, means that these are still excluded; it is debatable whether its exclusions of items such as council, vehicle excise duty, trade union subscriptions and television licences, and its inclusion of spending in the UK by foreign residents, are appropriate for all purposes. Its methodology, specifically the comprehensive use of the geometric mean at the lowest level of aggregation, has many supporters. It is approved by some other international bodies as well as the EU. However, some would argue that it is not the best approach for products where consumers are typically slow to substitute newly cheaper outlets, brands or varieties for existing more expensive ones".

In October 2010, the UK Statistics Authority replied, saying that the CPI should become the primary measure of consumer price inflation once the inclusion in the index of owner-occupiers' housing costs had been achieved. It said:

"We continue to regard both the Consumer Prices Index ... and the Retail Prices Index ... as important measures of consumer price inflation. We believe that the CPI should become the primary measure of consumer price inflation but only when the inclusion in the index of owner occupiers' housing costs has been achieved".

We consider that there is a persuasive case for making a change to CPI uprating for a period of time, provided that recipients of benefits did not lose out in growth and earnings. If that were the case, we could have a discussion on that as part of the deficit reduction plan, but the switch goes way beyond the period when the deficit should have been dealt with, which is why we are unable to support that long-term switch. A temporary expedient deal to help with deficit reduction is not on offer. It would be wrong to sign up for the long term, given the profound consequences that it would have for pension rights and for benefits.

We have had an interesting debate about the construct of indices, but we should not lose sight of what our deliberations mean for pensioners and for those on benefits. Most people struggling on income support or on the basic state pension with pension credit would be somewhat bemused by the abstract debate that we are having about what a proper measure of inflation is.

This order covers a multitude of changes to benefit upratings, and I would like to ask the noble Lord a couple of questions. I have ploughed through this but I cannot profess to have read every line. Does the order contain any changes to the capital limits-the savings limits-in calculating benefits? I think not. There are some changes to the non-dependant deductions in the calculation of benefit; these were presaged in earlier debates and government announcements. What assessment has been made of the impact of those changes, which are basically ramping up the loss for non-dependants in a household, on housing demand and the related impact on housing benefit?

Are there any fundamental changes in the order to income disregards? Is the full income disregard for child maintenance payments now fully in place?

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I conclude with one further question on indexation and uprating. Before the last election, the CSPA-the Civil Service Pensioners' Alliance-wrote to all three parties, particularly about the impact of index-linking on the future of pensions. All three parties responded. In a letter dated 27 April 2010, Philip Hammond, then shadow Chief Secretary to the Treasury, said:

"Indexation of pensions in payment is an established part of pensions legislation. The Conservative Party has no plans to change the current index-linking of public sector pensions in payment. We agree with the view that the right to indexation of pensions already accrued is part of the accrued pensions rights, and those rights will be protected".

Does the noble Lord contend that what he has now proposed for index-linking is consistent with that assertion?

Similarly the Liberal Democrat shadow Pensions Minister at the time, now Pensions Minister, Steve Webb, said in a letter dated 12 April:

"We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pensions rights that have already been built up. I have confirmed that I regard accrued index-linked rights as protected".

Does the noble Lord think that that commitment is to be honoured?

Tonight's debate has focused mostly on the two issues of the basic state pension and of CPI/RPI or any other form of index-linking. Contained within this order is a raft of changes to benefit levels that will have a significant effect on the lives of many. We are not able to support the order in its totality because of the long-term commitment that it presages to the switch to the CPI. On that, we must remain apart.

Baroness Lister of Burtersett: My Lords, I wish to speak particularly on the shift from the RPI to the CPI. The Minister in the other place acknowledged that no single index is perfect, and the noble Lord, Lord Freud, said something similar this evening. Given that, I argue that the criterion that we should use is which index best protects the living standards of some of the poorest members of our society. That is not the CPI. Typically, the CPI rises more slowly than the RPI-15 times in the past 20 years, according to the Minister in the other place-and, of course, that is why it represents a spending cut. We should not underestimate the significance of this shift, which is easy to do when we get caught up in technical jargon about geometric means and so forth. A 2008 Joseph Rowntree Foundation study concluded that uprating policies have big effects over time. This change will have a very damaging effect over time on the living standards of some of the poorest members of our society. As my noble friend Lord McKenzie has said, these are people for whom substitution is rather difficult because they have already substituted a lot in adapting to living on such low incomes.

8 pm

I do not want to get involved in debates about geometric means and so forth with the Minister; I want to stand back a step. Over the years, I have read many uprating debates. That is a rather sad occupation and I can see that not many people share my interest. I might be wrong but I cannot remember one debate in which people have stepped back and asked what for

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me is a fundamental question: are the benefits that we are uprating adequate in the first place? Therefore, I would like noble Lords to reflect on the question of benefit adequacy when we are considering the uprating of benefits. I want to focus on the adult jobseeker's allowance and income support rate, because that is the rate that has been most neglected and because the failure to improve it in real terms has blunted the impact of the very welcome improvement in children's rates under the previous Government. I will spare the Minister the trouble of pointing out that my own party's Government contributed to the neglect of this rate because I am on record as having been critical of that neglect despite achievements in children's benefit rates.

A recent Joseph Rowntree Foundation paper said that a single person who is able to work and who has no dependent children will be living on £65.45 a week on current benefit rates. This money will have to cover all items of expenditure apart from housing costs, including food, clothing, water, heating, lighting and travel. The foundation says that it is therefore reasonable to ask how adequate this is as a basis on which to live. To help answer that question the foundation developed a minimum income standard-what ordinary people believe is needed not just to ensure food, warmth and shelter but sufficient resources to participate in society and to maintain human dignity, consuming the goods and services that are regarded as essential in Britain today.

According to my colleagues in the Centre for Research in Social Policy at Loughborough University, the single adult income support/JSA rate is only 41 per cent of the minimum income standard. The Joseph Rowntree Foundation comments that while there is no suggestion here that benefits ought to be at the level of the minimum income standard, the sheer scale of the shortfall is indicative of the fundamental inadequacy of current levels. My colleague Donald Hirsch of the CRSP has calculated that this shortfall will increase significantly as a result of the switch to the CPI. He projects that the minimum cost of living index, which he constructed to uprate the minimum income standard, could rise by 9 to 18 per cent more than the CPI over the next decade.

Another indicator is provided by the Marmot strategic review of health inequalities, to which I made a very minor contribution. This showed that the benefit rate of a single person is only 50 per cent of the poverty line and only 46 per cent for a childless couple. Marmot drew particular attention to the vulnerability of pregnant women living on benefit, and particularly of younger women under 25 who receive only £51.85 a week. The Marmot review called for a minimum income for healthy living to enable people to live a physically and mentally healthy life and as crucial to reducing health inequalities.

Yet another indicator that illustrates the impact that uprating policies have is how benefits relate to average earnings. I was sent a graph by Professor Jonathan Bradshaw of York University that shows that the ratio of JSA for a single person to average earnings was in 2009 roughly half the equivalent of 40 years ago. I cannot help but reflect on the comparison between what we expect an adult on benefit to live on and what we in this House can claim. We expect a single adult to live for a week on not much more than

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a fifth of what we can claim for a day. I could not live on £65.45 a week and I wonder whether the Minister could.

I draw attention to a benefit-child benefit-that will not be uprated in April because of the three-year freeze. I remind noble Lords that when child benefit was introduced in the late 1970s, it replaced child tax allowances as well as family allowances. At that time there was cross-party consensus that child benefit should be treated as akin to personal tax allowances in recognition of the impact of children on taxable capacity. That seems to have been forgotten by policy-makers. I cannot help but draw attention to it when the Government laud the fact that they are increasing personal tax allowances by more than the rate of inflation. Of course, that is no help to those who are too poor to pay tax, whereas increasing child benefit would help this group-families with children.

I express my regret at the switch to the CPI because it will mean a further deterioration in the living standards that are achievable on benefits that are already inadequate for healthy living and for ensuring human dignity.

Lord Beecham: My Lords, it is a pleasure to follow my noble friend Lady Lister, who has for many years been a leading advocate of improving living conditions for many people and who has made a distinguished contribution to national debate.

Like perhaps only a few noble Lords present, but like perhaps many more who are not present, I ought to declare an interest in the Guaranteed Minimum Pensions Increase Order, as I am entitled to claim a state pension although I have not yet done so; it is temporarily deferred. Having said that, I enjoyed the speech, or economics lecture, given by the Minister. I would have enjoyed it more if I had understood it more, but I suspect that, even so, I am slightly ahead of many of those who will be subjected to the effects of these orders. The Minister and the Government have claimed enormous credit for advancing the date by which earnings related payments will be made, but they have done so at a time when average earnings are not increasing. They have made a fairly safe bet because, had they relied on the earnings index, I suspect that there would have been no increase at all. They are therefore making the provision a little earlier, but its effect will be felt at probably about the time it would have been under the previous Government. We should remember that when the RPI fell, the previous Government ensured that a 2.5 per cent increase applied.

Mention has been made of a number of distinguished bodies that have commented on the RPI. We can all choose arguments from what they have said and written that advance our own side in the debate. I hope your Lordships will bear with me if I cite selectively, just as the Minister did. The Royal Statistical Society has said that the CPI fails to reflect the spending patterns of pensioners and the rising costs that they face. The Institute for Fiscal Studies has shown that most pensioner households are not shielded from many of the costs excluded from the CPI. The UK Statistics Authority has said that it does not believe that the CPI should become the primary measure of price inflation until housing costs are included. Other costs are not included, for example changes to council tax.

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The Minister will no doubt point out that council tax is frozen and indeed it is-for three years in most cases. That freezing has been affected by top-slicing the grant to local government in the first place, but I leave that aside. There will be a temporary benefit in terms of council tax increases not bearing on the incomes of families, although the elasticity of their demand is extremely limited in any event, as both my noble friends have pointed out. However, while that is the case for the time being for council tax, it should be borne in mind that council tax benefit will be cut by 10 per cent in two years' time. The Government, in an Answer by the Minister to my Written Question of some time ago, made it clear that they had no intention of promoting the take-up of council tax benefit, despite the fact that £1.8 billion of council tax benefit is unclaimed, largely, although not exclusively, by the very pensioners to whom this measure applies and by other low-income families. In fact, under the new index, the changes and reductions to council tax benefit, the failure to promote take-up, and the apparent reinvention of the 19th century Poor Law-because council tax will eventually be determined not on a national basis but by individual local authorities-it seems that pensioners and others in low-income groups face an onslaught on their living standards.

As both my noble friends have pointed out, the geometric mean will not signify very much to people living on very limited incomes. They feel that they will fall behind many in their communities, and that will certainly be the case nationally. It is particularly disturbing, as my noble friend Lord McKenzie pointed out, that this is not just a temporary measure designed to help tackle the deficit but a permanent change at the expense of many of the poorest in this country that will also affect those on modest fixed incomes in their later years.

I very much regret that the Government have seen fit to bring forward these proposals. As my noble friend said, we shall not oppose them tonight, but their impact will be serious and will certainly reduce the quality of life of far too many people in this country.

8.15 pm

Lord German: My Lords, perhaps I may follow that speech by the noble Lord, Lord Beecham, by also declaring an interest. I am in receipt of my basic state pension and I suppose that I should be thanking the Minister for his announcement that I will be earning, on average, £15,000 or more during my lifetime. However, I am particularly grateful that the measure increasing pensions restores the link with earnings. For many of us here who have campaigned on platforms at election time, the issue of re-linking pensions to earnings has been asked for on virtually every occasion when there has been an audience of prospective and actual pensioners who were concerned that the link had been broken and wanted it to be restored. I am therefore deeply grateful that the triple lock will replace the double lock.

I shall come to the issue of RPI and CPI in a moment, but I should first say that the orders demonstrate that we need a less complex system. Noble Lords on the other side have said on several occasions that this

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is a weighty document containing many changes. That reflects the complexity of the arrangements in our benefits structure and the calculations that flow from it. I welcome the simplification that will occur when the Welfare Reform Bill is enacted.

However, I agree that my noble friend will have to respond to the question of whether these measures will satisfactorily protect the worst-off in our society. That is the test we must put before him. Some measures that are not in the orders will support particularly the long-term employed-the Work Programme, more apprenticeships, and the more rigorous, enlarged and targeted work experience programme that will produce dynamic changes and have an impact upon the take-up of benefits overall.

I turn to the CPI/RPI debate. It is clearly difficult to produce a set of proposals that will be understood by people who are not in this Chamber and who want to hear a simple explanation. Geometric and arithmetic means are not words that roll off the tongue as you sit talking after watching the evening news on television. It is difficult to understand the complexity unless you can understand what lies behind it. What I take from this is what I call the old Tesco/Waitrose test regarding upper and lower shelves, whereby when you make a substitution, you might move shop or shelf when choosing products, in order to make savings in your weekly bill. There is something in that, given that the former Prime Minister, when he was Chancellor, said that CPI is a better measure of substitution. That is a matter which the mathematicians are beginning to grapple with.

However, it is clear that when compared with the UK no country in the western world has such a statistical difference between the two indices. The majority of other countries use the CPI index, but why is there such a difference here between the two indices? We need to understand why, and that was what the Royal Statistical Society was attempting to do. It is not just about whether there is something wrong with using the CPI, but about why there is a gap between the two indices that does not occur elsewhere. That again relates to the way that the formula is constructed. As we know, the formula includes a difference of between 0.5 per cent and 0.8 per cent, and we need to understand that better in future.

Therefore, it is not a question of which is the better index, but of which is the right index. It is not that one is a good index and one is a bad index; we are looking for the right index which measures inflation and how prices are rising. It may well be that we have not got that right in the past and that we are now looking for a change. However, I note that the opposition party in the shape of its leader, and reinforced here tonight by the noble Lord, Lord McKenzie, is prepared to accept CPI as an interim but not a permanent measure. That means that there is a sense that they generally agree with the former Prime Minister that there is a role for this index, although they may disagree about its long-term purpose.

What we do know, as international comparisons tell us, is that CPI is a much more stable measure. I was interested to hear the remarks of the noble Lord, Lord Beecham, concerning the pension. One effect of

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the methodology used by the previous Government was that the pension rose by 75 pence a week. Of course, it is not reasonable for people to be told that prices have not risen appropriately in that period. We need a stable measure which reflects people's understanding of how prices have risen during the year.

As we heard from the Minister, housing is reflected in CPI in terms of rent but not mortgages. Work is now being done to improve the involvement of house prices and housing measures within CPI, although we know that only 7 per cent of pensioners have a mortgage. It is important to reflect on the value of the basic state pension, to note that in future the triple lock will work to the benefit of pensioners, and, if I read the newspapers correctly, that the basic state pension will be uplifted even further, which will give people a basic entitlement in tier 1. I hope that that will occur.

Lord McKenzie of Luton: I hope that the noble Lord will forgive me for interrupting. I accept what he says about the triple lock on the basic state pension, but does he acknowledge that applying CPI to S2P on a long-term basis would reduce what would otherwise be payable?

Lord German: The basic pension is bigger than the additional pension. In the long run, the earnings link is worth 2 per cent more than prices, and CPI is 0.8 per cent less than RPI. Therefore, the increase in the basic state pension can be set against the change which will occur with CPI for S2P. It is very important to see the connection between the two. Of course, as the noble Lord, Lord McKenzie, will know, there is much talk in the ether about an improved single-tier pension, and I think that that will be the test. Not only would it benefit people through the measure that I have just described but in the future it might improve matters even more.

Lord McKenzie of Luton: I am sorry to interrupt the noble Lord again, but how would he factor into his assessment occupational pensions which, in terms of future indexation, could be subject to CPI rather than RPI?

Lord German: I was very grateful that the Government did not put the override in place, because of course it should be up to occupational pension schemes to make up their own minds according to their rules. Clearly, if RPI were written into the contract that already existed, that would apply and the schemes would be able to stay with that. Most pension schemes will be able to make that choice, and I hope that there will be a debate among pension fund members about the way in which that might be put into place. It is also very important that pensioners with accrued benefits under RPI should have those benefits maintained and that, if the choice is made to change, CPI should occur only after the CPI regulation hits the deck.

Going slightly beyond this issue, I want look at the packages in the round and I also want to ask the Minister some questions. I am pleased that there was no override, and I wonder whether the Minister can

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confirm what I have just said regarding accruals for occupational pension schemes. Will the switch to CPI see the pressure on occupational pension funds reduced? I know that some figures have been produced regarding the reduction in pressure on some occupational pension funds. I should be grateful if the Minister could update us on the current thinking on that matter and on the current analysis of who is going to move and in which direction.

My final question relates to the much bigger world of the reforms proposed by the noble Lord, Lord Hutton. What are the Government's thoughts about the direction of travel of the matters that we are discussing today, and how will that impact on the public sector pension funds? Will the Government be responding to the noble Lord, Lord Hutton, and in what timescale? People will want to understand the Government's direction of travel, both on the basic pension and on public service pensions, which I imagine are a cause of concern to many people at present.

Lord Kirkwood of Kirkhope: My Lords, I should like to make a few comments at the end of what is always a very important annual occasion. There have been occasions in the past when colleagues in the House have not considered it appropriate to look at social security benefit uprating orders, but these orders are extremely important for the people whom they affect and it is right that we should spend time looking carefully at the provisions. I am not surprised that more colleagues do not participate in these debates, as they are extremely complicated, particularly this year when we are contemplating wholesale changes in the benefit system. It is particularly difficult to foresee the impact that some of these announced changes will bring in future.

It would be helpful to receive some reassurance from my noble friend on the Front Bench on a couple of points. I agree with the comments that have been made about the pension provision. That is one area where substantial progress has been made, for which I am very grateful.

I want to pick up an important point made by the noble Baroness, Lady Lister, who is probably the only person in this Chamber who has been doing uprating orders for longer than I have-she advised me about them when I was elected to the other place in 1983, which was not yesterday. She has a huge amount of experience and knowledge and she will be a great asset to this House in considering these issues in the future. She raised the point about freezing child benefit until 2014. Of course, that is against the background of deficit reduction. I defer to no one on the necessity to attack the important financial circumstances that we all face, but how will that affect the child poverty strategy? In the legislation that we passed in the dying days of the previous Parliament, the Child Poverty Act 2010, we set out the requirement for a child poverty strategy. I anticipate that that will be unleashed on us quite soon. These changes will have a dramatic impact on the staging posts of 2015 and 2020 in the child poverty strategy.

Deficit reduction notwithstanding, I hope that the Government do not make these changes in a way that makes it impossible to get to a more comfortable place

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on child poverty by 2020. If that were the case, I would be very concerned. I think that redistribution is still necessary. The noble Baroness was absolutely right to say that this benefit was a tax allowance in the days before it was converted. It is extremely important that we keep the pressure up. People like me are uncomfortable about freezing child benefit. If the Government continue to freeze it, I shall be more than uncomfortable; I shall be very upset. A word of comfort about the fact that there is a child poverty strategy in gestation and about to be unleashed on us would send me home a happier bunny this evening.

We shall return to the CPI/RPI debate, and at great length. For me, there is some conflicting evidence. My noble friend dealt with the substitution effect. I think that he is right about substitution and I concede that he is right about geometry and not arithmetic. However, I do not necessarily concede that, therefore, CPI is an appropriate measure. I think that the IFS is on his side when it comes to substitution but, on whether this is an inflation experience that is adequate and appropriate for the client group, it is on a different side of the argument. The press release that I have in front of me, dated August 2010, suggests that it believes that,

"only 23 per cent of benefit claimants are unaffected by increases in mortgage interest payments and council tax".

Therefore, the rest will be caught by the reduction. We cannot ignore that. I want to think about that more carefully and I shall study, with care, what my noble friend says about it, if not tonight then at another stage. I think that the jury is out. I think that he has won the argument about substitution but I do not think that that necessarily means that it is a safe measure in perpetuity. You only have to ask the Library not just about the short-term effects but also about the long-term effects to see that reductions in domestic household incomes are stark. Over a 20-year and a 30-year period, they are unconscionable. I hope that we in the coalition Government are not lashed to the mast on some of these things. If the CPI in the middle-to-longer term-five to 10 years-starts to pinch in a way that I think it may, I hope that we will be big enough to look again at whether it is an appropriate measure.

8.30 pm

My third point was picked up by the noble Baroness, Lady Lister. The important work that the Joseph Rowntree Foundation has done on minimum income standards demonstrates what people require to live a modest but adequate lifestyle. Some of the benefits to which she referred, and there are others, have been losing out consistently year in, year out. For example, some of the capital thresholds have been in place for a long while and are beginning to pinch in a serious way. That deserves attention. No one is suggesting that any Government are going to offer benefits at these levels immediately, but the work that has been done on minimum income standards is a measure of how far benefit rates are slipping behind year after year. It is not fair to ignore that at a time when financial distress is being faced by a lot of people. For example-and I could go on at great length about the differential impact of inflation on low-income groups-the Joseph Rowntree Foundation recently produced some work

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that reminded us that bus fares were nearly 60 per cent higher in 2009 than they were in 2000. Low-income families depend on buses. Little things like that are an important part of looking at the totality of what we are agreeing. We ought to bear in mind in these debates how they affect, in particular, the two lowest deciles of the income distribution.

I shall make two other quick points. The first I have made every year for 23 years. The Government Actuary's Department has certified the National Insurance Fund to be proof of the changes in these regulations. I remind colleagues that in 2010-11 the balance in the National Insurance Fund was £56 billion. We know that, in order to keep it safe from the requirement of a Treasury grant, the fund is required in law to have one-sixth of the expected spend safe in hand to look after emergencies, which is £13.8 billion. So we have £56.3 billion in the National Insurance Fund at a time of austerity when a lot of our families are suffering real, serious and continuing hardship. If you look at the GAD's forecasts for the next five years, you see that by the time we get to 2015 there will still be £56.6 billion in the National Insurance Fund. I am not suggesting for a moment that we should be profligate and start raiding the National Insurance Fund, but there are occasions when we should be prepared to say that circumstances are so hard and there are households that are suffering such financial adversity that it may be time to look at making use of some of those funds to help some of those families through the difficult months and years ahead.

Finally-and I agree that this is a bit of a cheap shot-the Public Accounts Committee report of 10 March points out yet again that the DWP's annual accounts have been qualified for 22 years because of the amount of error and fraud. Of course, the Government have a strategy, which I welcome. It was set out in October 2010 and has put some money-£400 million or so between now and 2015-into reducing the cost of overpayments. Although that is important work, so is the £1.3 billion underpayment identified by the Public Accounts Committee year after year. Of course, this is a measure of complexity. If we get the benefit that we hope for from the universal credit moves proposed in the Welfare Reform Bill, that will perhaps lead to simplicity, which, as my noble friend said, would be welcome. However, surely we must do something about the recognised £1.3 billion underpayment. I know that my noble friend is on the case and is deeply, personally concerned about fraud, but will he give us an assurance that he will use his best offices to get that underpayment down just as fast as he wants to get the overpayments down between now and 2015? If he does that, certainly I for one would rest happy in my bed at night.

Lord Lea of Crondall:Perhaps I may say how interesting I find the noble Lord's analysis of the difference between the RPI and the CPI. Some 30 years ago, I was a member of the RPI advisory committee when it had a great row with the Treasury about mortgage interest payments. The philosophical argument was that you cannot have the cost of money as a factor in the national income. I respect that that was always the Treasury position. It might be slightly provocative to say this, but perhaps an organisation such as the

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Office for National Statistics or the new Office for Budget Responsibility could objectively set out the pros and cons for the different purposes. Whether one is dealing with national accounts or the cost of bus fares, one has to disaggregate the RPI. This issue arises all the time. Therefore, it would be useful if the Cabinet Office or somewhere else could produce a paper on the strengths and weaknesses for different purposes of the RPI and the CPI, including European standardised statistics and all the rest of it.

Lord Kirkwood of Kirkhope: I certainly think that that is a good idea and I would support it.

Lord Freud: My Lords, this has been an interesting debate, as one would hope and expect. I thank noble Lords for their valued contributions. I should probably declare an interest in that I am due a winter fuel payment this year, although I did not get it. The DWP says that it paid everyone and I find that I am the only person who did not get their winter fuel payment.

The uprating order and the GMP increase order both legislate for increases to benefits and pensions to be paid from April, thus protecting their value at a difficult time. My overview of what the noble Lord, Lord McKenzie, said is that the party opposite was perfectly happy with the CPI in the short term and would agree with the UK Office for National Statistics on the issue if the CPI was to include housing costs in the slightly longer term. On that basis, I suspect that there is rather less between us than might appear at first instance. We are very interested in the changes that will potentially be made to the CPI if housing costs are incorporated, which is being looked at. However, as the noble Lord, Lord Lea, hinted, it is likely that that would be done not by including the changes in mortgage interest rates but by the actual changes in house values.

A lot of points were raised in the debate and I will do my best to answer as many as I can. An important point about substitution was raised by the noble Lord, Lord McKenzie, the noble Baroness, Lady Lister, and my noble friend Lord German, who pointed out that people will buy everything at the bottom, which is what one expects them to do-that was the sentiment. However, that is not what happens with this index, which it is important to emphasise. If in a given range of the cheapest items-or best value goods, whatever they are called-and one of them goes up but the rest stay the same, people will substitute the one that has increased in price with the ones that remained stable. The relative movement in those goods, rather than their absolute value at any one time, is what counts. It is really important to understand that when looking at how the substitution effect actually works.

We could probably all bore each other by quoting lots of different experts-and I think we have, so I will not bother doing so-but the noble Lord, Lord McKenzie, made the point that we abandoned the policy of the CPI when it came to it. I repeat what I said in my opening remarks: we announced the RPI for the basic state pension for the year at the same time as we announced the move to the CPI, so there has been no reversal or change. That was what the policy was.

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On the point raised by the noble Lord, Lord McKenzie, on the triple guarantee, in the current environment the earnings factor does not make much immediate difference, but over time it will make a substantial difference and pensioners will benefit from it. As I said in my opening remarks, the 1.5 per cent increase from the previous year was not reversed. Picking up on some of the noble Lord's other points, I think that he knows almost better than I do that, when it comes to mortgage interest for people of working age, benefit recipients and working people on low incomes can also get support for mortgage interest payments.

The noble Lord asked what assessment had been made of the changes that we have introduced to non-dependent deductions. The equality impact assessment on those changes has been published on the DWP website. A question was also asked about indexation rights for public service pensions. Those have been index-linked on the same RPI basis up to this point, and in future the indexation will be made on the new basis, which is CPI.

The noble Lord, Lord McKenzie, and the noble Baroness, Lady Lister, also homed in on the effect on poorer households, which is the big question here. We now have 5.8 million adults of working age living in relative poverty. As I have argued, the idea is that using the CPI will ensure that typical changes remain in line with real experience. Where we need to go in this area-a much more important point-is in the structure of the benefits system so that we strike the right balance between the welfare system as a safety net and one that sends out a clear message that work is valuable and that, if you can work, you should work.

We are modelling the big impact that will be made by introducing the universal credit. We estimate that 350,000 fewer children and 600,000 fewer adults will be expected to live in poverty-on the normal definition of 60 per cent of median household income. Some two-thirds of that effect will be because of better take-up. My noble friend Lord Kirkwood asked whether we would chase underpayments as hard as overpayments, but that is exactly how that effect will happen in practice. A lot of the effect will come from take-up by people who simply do not take up what they are entitled to.

8.45 pm

I think that comparing the minimum income standard with one particular benefit rate is dangerous; one has to take the whole package of benefits that people have in practice. However, I acknowledge, with the noble Baroness, Lady Lister, that there is a shortfall compared to the minimum income standard. There is then a fall against median earnings-60 per cent of median earnings is what we are targeting for poverty-and then there is a fall further to benefits. However, the least fall is for pensioners.

The noble Baroness, Lady Lister, made some points about child benefit. Some of the savings from withdrawing child benefit from families with a higher rate taxpayer will be used to fund above-indexation increases in child tax credit. That was designed to shift support to low-income families with children. In terms of the amounts recycled, £1.2 billion of welfare savings will go back into child tax credits in 2011-12 and £1.8 billion in the following year.

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The noble Lord, Lord Beecham, asked about the exclusion of council tax changes from the CPI. Within the CPI, council tax is looked at as a tax, which is the fundamental reason that it is excluded from that basket. The main difference between CPI and RPI-60 per cent of the difference-is the formula effect. Staying with council tax benefits, I note that the cost of administering the system is just short of £1 billion-it was estimated to be £986 million in 2010. The changes that we are making include an element of discretionary housing payment, which is meant to give money to the people who need it most.

The noble Lord, Lord German, asked about the RPI. It is impossible to be ruder about the RPI than I have been in explaining why the difference between the RPI and the CPI is less here than elsewhere. The reason one could potentially be rude is that the RPI incorporates something called the "average of relatives" as its way of calculating the arithmetic mean-to the extent of 38 per cent of the total. That creates a bounce effect and that is why that particular index has been banned for international comparison. If you wanted to have a posse against the RPI, that is where the suspicions are likely to lie.

Lord Lea of Crondall: Can I just point out that that is by no means the whole argument about the merits of the RPI?

Lord Freud: It is an attempt to find an explanation for why our RPI is so different from the CPI compared with other countries. I was just looking for a clue to answer the rather potent question asked by my noble friend. It was not a complete answer, but I tried to give a more complete answer earlier.

My noble friend Lord Kirkwood asked about the child poverty strategy, which we are aiming to publish shortly. The strategy will set out our plan to transform the lives of children in poverty now and in the future. It will be a step change from previous approaches, which focused solely on income poverty, to a more sustainable and effective approach that addresses the root causes of poverty rather than the symptoms.

On the National Insurance Fund, I am sure that my noble friend Lord Kirkwood, has had this answer back many times and I almost do not want to say it again. The formal answer is that there is no fund in the sense normally meant; there is no pot of money to hand out. But I shall not go into that.

There may be one or two other items that I have not covered, but if there are I shall write and clear up all other points-otherwise I shall be here all night.

I shall try to wrap this up. We are taking an approach that seeks to balance the interests of benefit and pension recipients and the interests of the taxpayer. The CPI is an appropriate measure of inflation and one that helps to put the welfare system on a sustainable footing. The CPI is a legitimate measure for price inflation; it increases in line with real world prices and protects purchasing power. As such, there are good reasons for concluding that it is more appropriate than the RPI for our purposes. Despite the fact the nation's finances remain under severe pressure, this Government will spend an extra £4.3 billion in 2011-12 to ensure

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that people are protected against the cost of living increases. Through the restoration of the earnings link and the triple guarantee for the basic state pension, the increase to pension credit and the continued protection of benefit and pension value, we are fulfilling our commitment to ensure that no one is left behind. I commend the orders to the House.

Motion agreed.

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