Pensions Bill

Public Bill Committee, 4 July 2013.

Martin Caton (Labour, Gower)

I understand that, when clause 13 was debated on Tuesday afternoon, schedules 8 and 9, clause 14, schedule 10, clause 15 and schedule 11 were debated with it, and that the debate on those measures had ended. With the consent of the Committee, I shall put the questions on them together.

Clause 16 - Pensioner’s option to suspend state pension

Steve Webb (Liberal Democrat, Thornbury and Yate)

Good morning, Mr Caton. It is a pleasure to be back. Clauses 16, 17 and 18 deal with not claiming the state pension at state pension age. I was tempted to put off the discussion, but I think that we ought to get on with it. The current system is complicated. I happen to have with me the 64-page explanatory document that we have published on the topic of deferring the state pension. It is a real rip-snorter. I will not read it all out, but just give the Committee a feel for some of the issues that arise.

Under the current system, there is a choice between drawing the state pension later and receiving a higher pension, or drawing the state pension later and receiving a lump sum. The way in which the deferral increments are worked out means that there is an extra percentage on the pension when it is drawn, while the way in which the lump sum is worked out is different and, bizarrely, relates to the Bank of England base rate. There are times when, if an actuary were making such a decision, the person should choose increments and there are other times, depending on interest rates, when the person should choose the lump sum.

Matters also depend on the person’s tax position. I shall spare the Committee from hearing the full version of the process in respect of the tax treatment of the lump sum, but give a flavour of its complexity. Under the heading, “Tax on your lump sum payments”, the advice states:

“If you choose a lump-sum payment after putting off claiming your State Pension, you will have to pay tax on it, but the amount of tax you may have to pay on your lump sum is worked out differently.”—

Differently from what, I am not sure. It continues:

“The lump sum is not added to the rest of your income to work out your total income for tax. Instead, the rate of tax due on your lump sum will be the highest main rate of tax that you pay on your other income. That includes any weekly State Pension you get once you have started to claim it. Special rates of tax that apply to savings and dividends you may get are not counted”.

We have an odd situation. We recognise that people might not want to take their state pension on time but that what to do is a difficult decision to make and that, sometimes, according to what the base rate of the Bank of England happens to be, they should make a different decision.

Clauses 16, 17 and 18 provide for the delay in taking the single-tier pension, but make the process more simple. Under the provisions, when people defer their state pension, they receive a bigger pension when they draw it. We envisage that the rate of deferral will be broadly actuarially fair. At the moment, there is a financial incentive to defer that is equivalent to about 10% on the pension per year of deferral, but we believe that the right figure would be in the order of 5% although a lot depends on changes in longevity and so on.

We have not outlined such figures in the Bill, and we will discuss the regulatory process for making such changes when we reach a later amendment. However, the basic idea is that single tier is all about simplicity, and about people knowing where they stand. All we are doing under the clauses is not replicating the rules on lump sums and, principally, making matters more simple. The popularity of lump sums has been declining in recent years, partly because of low interest rates, as a result of which people receive a lower lump sum that they would have received.

When I first approached the issue of deferring a state pension, I assumed that it was all about people making carefully calculated decisions about extending their working lives, coinciding that with retirement and so on. It turns out to be a lot messier than that. It concerns people who do not claim, people who forget to claim and people who—for as long we are equalising men and women’s pension ages—wait until their partner is of pension age, and they both retire together. It is not fundamentally a simple incentive mechanism to encourage people to work longer. There are all sorts of strange reasons why people defer their pension. They sometimes do so accidentally; they sometimes do it for years.

If people want a lump sum at a later time, they can operate a do-it-yourself version of the lump sum. In other words, people can draw their pension at pension age and just put the money aside in an individual savings account, for example, and draw it when they would have drawn the lump sum. The complexity of the lump sum option does not give citizens a lot, as they can essentially do it for themselves and, particularly given current interest rates, might even get a better return if they invested their money somewhere else rather than at the rate we currently give of base rate plus 2%.

We are not, then, depriving anyone of the chance to build up a lump sum, as they can do that themselves. In addition, the tiny bit of the system we are discussing is massively complex. A streamlined system, in which if someone takes their pension late they get a bit more, and a fair amount more that is unsubsidised, is a cleaner basis on which to proceed.

Clauses 16 and 17 set out the fact that people can suspend their state pension. We will also allow people who have begun to draw their state pension to—I do not like this word—“de-retire”; they will have the option to say, “On reflection, I do not want my state pension” and go back into a period of deferral. However, we will not have a lump sum option. Clause 18 deals with a rather obscure feature of the current system, whereby the increments paid for deferred pensions overseas are uprated but the main pension is not; we are taking out that anomaly.

That gives the gist of clauses 16 to 18. I know that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to discuss the regulatory framework with regard to clause 17; we will come back to that. I hope the Committee will agree that the new system is cleaner, easier and cheaper to administer, and simpler for citizens.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I shall work on the assumption that we are dealing with clause 16 alone. I thank the Minister for the explanation he has given us. He is absolutely right that the current system is very complex. I was struck by his explanation of the different ways in which one can draw a greater state pension by deferring it; I certainly was not aware that if one draws one’s pension later on and gets a lump sum, it is calculated on the basis of the Bank of England base rate plus 2%. One learns something new every day.

The Minister referred to the calculations regarding what someone who defers their pension will be able to get in the future, but he is not putting the figures in the Bill; I will come back to that issue when we discuss clause 17. I was struck by his argument that deferral is not fundamentally an incentive mechanism to make people to work longer, but instead is often the product of a variety of personal and social circumstances. I took his overall argument to be that, on that basis, the complexity of the lump sum option is not necessary, because it does not necessarily act as an incentive to work longer. He also set out his view that individuals can build up a lump sum for themselves via ISAs and other savings vehicles.

The Minister is right to say that the system is complex. One thing he is keen on is that the Bill reduce complexity where possible without creating unintended consequences. I cannot see any unintended consequences of the simplification of the system in clause 16 and have no further observations on the clause.

Martin Caton (Labour, Gower)

Can I clarify a point, Mr McClymont? You spoke just then only to clause 16. Do you wish to vote separately on clauses 16, 17 and 18?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Indeed.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East for his support. Although I will not speak further to clause 17 stand part, I anticipate that he might wish to speak to his amendment 15; I will be happy to respond to his remarks on that.

Clause 17 - Effect of pensioner postponing or suspending state pension

Martin Caton (Labour, Gower)

With this it will be convenient to discuss amendment 15, in clause 45, page 23, line 36, after ‘section 3’, insert ‘17(5)’.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

We now come not only to clause 17 but to amendment 15, tabled by the Opposition. To pick up on what I was saying a moment ago, we support the Government’s move to end the ability of people to receive a lump sum after deferring their pensions, for the reasons I gave.

However, the Minister mentioned that he would not calculate at this stage the amount that someone would get when they defer their pension under the new system. The Bill gives the Minister the power to set the amount that people will receive as a result of deferral. It is a wide-ranging power that has significant implications for deferred pensions. Put simply, the ordinary person will be interested in how much they will get if they defer, and that is the crux of the matter. Clear guidelines need to be issued by the DWP to offer security and confidence to those who are considering deferring their entitlements. The Minister mentioned what he thought the calculation would be. Will he return to that point so that I can scribble it down? He speaks too fast for my handwriting. If he gives me another chance, I will get it down on paper.

There is a broader dimension to the Bill, which clauses 16, 17 and 18, but specifically 17, illuminate, which is that, as often happens, the actual nitty-gritty, which is not in the Bill, will be done under regulations. The calculation of how much one can get is important if people are considering whether to defer, so we are asking that, under clause 45, the Minister will return to the House to address the issue when he sets the rate that will apply to those who defer. The calculation will determine the value of a deferral to an individual who is thinking about deferring or choosing to defer, so it is important that the Minister or Secretary of State come to the House to account for the decision on what will be the amount received as a result of deferral.

I am not sure whether the proposal is controversial. As we discussed on Tuesday, the job of the legislature is to scrutinise the Government’s decisions. Although we support the move to end the possibility of a lump sum and the new system for deferral, we need to know how much someone will get from deferring. When they have finished that calculation, the Government need to explain to the House what the rate applicable will be. I look forward to the Minister giving me the chance to scribble down what he thinks the calculation will be.

Sheila Gilmore (Labour, Edinburgh East)

The ability to get a larger pension through deferral is in some ways a counterpart of the relaxation of fixed retirement ages; it acknowledges that in many ways we are seeing a very different sort of life pattern. We often discuss this in terms of increased longevity and the burdens that that places on us in society. The other aspect is that there are many people who have not only increased longevity, but increased healthiness, and they are able to and desire to continue working. There are many different groups of people, but one of those groups wants to continue in employment, full time or part time, past what we traditionally regarded as the fixed retirement age. The ability to defer the pension is obviously an attraction.

There seems to be a general acceptance that the current formula is very generous and makes deferral particularly attractive, but we would not want to see that jump to the other end of the scale and be in a position where all of a sudden a very poor option is made available. It is about knowing what that is and having an opportunity to debate that so that we can get the balance right. That is not necessarily about providing an over-generous settlement, but equally we should not want to create a situation where those who come to the point of making a decision decide that deferral is not worth it for them and that they should not bother when, in fact, by deferring their retirement they would continue to contribute not just through their skills, but through tax payments to the Treasury as they draw earnings.

From that point of view, deferring pensions is potentially advantageous. It is certainly advantageous to workplaces that do not want to lose people who are fit and able to make a valuable contribution. I hope that the amendment will be accepted as that would allow the Government to have a debate on the level at which such a measure would be set out and the impacts of any decision.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Members for Cumbernauld, Kilsyth and Kirkintilloch East and for Edinburgh East for raising this point. It is entirely legitimate to debate the form of parliamentary scrutiny that different aspects of the single-tier pension should have. Where we feel that there is a substantive central element of the single-tier proposition, and the start rate seems to us to be substantively central, we have proposed that that is covered by affirmative regulations.

Where decisions are less on policy and more on the actual numbers, which will depend on data on the latest estimates of life expectancy, we think that provided we have been clear about the policy—we have set that out now for the Committee and it can scrutinise that and decide whether it agrees—the nuts and bolts of that number is a second-order issue. I entirely take the hon. Gentleman’s point that that matters to people; it is about how much pension they will get. It is, however, worth keeping this in context: fewer than one in 10 of the people who draw a state pension get any increments; the vast majority of people draw their state pension on time.

In terms of the division between affirmative and negative resolutions, we are making clear that our policy is that the rate of increment that people get for delaying their pension should be actuarially fair; that is the principle. To give an illustrative figure, we propose that for every 10 weeks a person defers taking their pension, they get an extra 1% on their pension. Earlier, I rounded that up crudely to state it as about 5% a year, as opposed to the current figure, which is about 10% a year. We are therefore halving the advantage given for deferral.

On the link between deferral and longer working lives, it is worth saying that the state pension is no longer a retirement pension and it has not been for more than a decade. People do not have to retire to draw their state pensions, so people can—and do—carry on working past the state pension age while drawing their state pension and we do not mind that; we are very happy about that. Recent figures show that more than 1 million over-65s are now working and many of them will be working and drawing a state pension.

Again, on the idea that deferral is about longer working lives and encouraging people to work longer, I would say that it is much more messy and complicated than that. There is no problem or inconsistency if people want to work and have a pension; indeed, having a pension and working enables people to stage their retirement so that they can work part time while drawing their state pension and gradually phase into retirement.

I entirely agree that the House wants to know the policy, and I set it out. However, in the spirit of the amendment proposed, I want to make a further offer: we will be happy to publish the advice on which we set the number. We will ask the Government Actuary for advice on the level of increment that would provide a fair return, which is our policy, and we will publish that. Just as, for example, the Government Actuary currently advises us on the level of the contracted-out rebate, we publish that advice whether or not we accept it, so there is plenty of precedent for that model. We are transparent about the advice we receive and, if we come up with a different number, we have to explain why.

We are happy to put it on the record that we will do that. We will ask the Government Actuary at the relevant time how much the increment should be if we want to be actuarially neutral. Our policy is to set the regulations on that basis. We do not want then to have a nugatory debate in Committee—“The law says it’s the affirmative procedure, so we have to”—when all we have done is ask the question we have said we have asked, got the answer the experts have given us and done what we said we would. We do not want us to have to gather in Committee to go through all that.

Of course, even if we do not do what I have just described, the fact that something is subject to a negative resolution does not prevent us from having a debate in Committee about it. Hon. Members can pray against it, we can have a debate on it and obviously the House can express a view, but whether the procedure is affirmative or negative, the regulation is unamendable, so it is not as if one way allows it to be changed and the other does not. If the Committee does not agree with the policy, now is the time to say so. We have set out what the policy is. What follows, assuming the Committee agrees the policy, is the technical stuff—the actuaries coming up with the number and us acting in line with that.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I apologise for stopping the Minister in full flow. I thank him for the offer to publish the advice on that basis, which is to be welcomed. I was struck by his suggestion, on the point about what the payment would be, that this policy would halve the advantage given by deferral. Can he say a little more about what the logic of that decision is? We know that, in a cost-neutral Bill, there will be places where money is laid out and places where money is recouped. Is this one of the areas where money is being recouped, or is there another justification for it?

Steve Webb (Liberal Democrat, Thornbury and Yate)

There are two justifications. One is certainly financial. The measure does save us money. If we did not do what I have described, in 2020 the scheme would cost another £200 million a year and in 2030 another £300 million a year—significant sums. However, the justification is also conceptual. We do not have much evidence that spending money on incentivising people to defer their state pension and take increments really does anything. The hon. Gentleman was generous enough to admit that he did not know about the lump-sum option. Many people do not. We do not think that there are lots of people outside the House sitting down to read the whole of our 64-page booklet, although clearly there are some.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I just want to clarify what the Minister has said. I can exclusively reveal that I was aware of the lump-sum option; I just was not aware of the method by which the lump sum was calculated.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I apologise: I traduced the hon. Gentleman grossly unfairly.

Significant sums of money are involved. What are we spending £200 million or £300 million of taxpayers’ money on? It looks, on the face of it, like an inducement to defer pension. Has that led to many people working much longer? There is not really any clear-cut evidence of that. We cannot just throw a few hundred million pounds around here or there without pretty strong evidence that it is doing something, and we do not think that it is doing a great deal. For individuals, it might be, but there is no strong conclusive evidence that it is at an aggregate level. That is money that we could put into bits of the system where I think we would all agree we really want it.

Sheila Gilmore (Labour, Edinburgh East)

On the effectiveness or, indeed, the purpose of the scheme, I wonder whether the Minister has any views on the fact that the arrangements have not been in operation for a terribly long time and therefore might not be very well known, and whether there has been any significant change in take-up following the removal of the fixed retirement date.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am not sure that I understood the final part of the hon. Lady’s question, but one of our dilemmas with regard to deferral is that we cannot tell that someone has done it actively. All we observe is that they are not receiving a state pension. We do not know at that point whether they are going to receive a lump sum or choose increments. When people have started drawing it, they can—“de-retire” is the wrong word, because they do not have to be retired, but hon. Members will know what I mean: they can go back to not having it.

The issue is trying to get a grasp on what people are actually doing. We have done a certain amount of research on this and, because of the system’s complexity, it is very hard. If someone is five years away from pension age, they can know what the law says the increments will be, but they cannot know what the lump sums will be, because they do not know what the Bank of England base rate will be in five years’ time, so it is just not money well spent in incentivising longer working lives. It is pretty clear that if we have £300 million to spend, we could do an awful lot more with it—for example, working with sectors of the economy where people drop out at 53, say. We could do an awful lot more in a much more targeted way than this policy.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Will the Minister fill in some of the history of the desire to encourage people to defer, and explain how the current policy proceeds from that and marks a break with it? It might be useful for the Committee to have a sense of where that came from and why the change is necessary now.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We are in a slightly odd transitional period. Although increments have been in place since the 1970s, the lump sum was an innovation in 2005. I think it was the Pensions Act 1995 that proposed that the rate of increment be enhanced—that was partly to do with the equalisation of state pension ages under that Act in 2010—and then I think it was the 2005 legislation that brought forward to 2007 the 2010 proposed changes to increments. There has been a lot of fiddling with all of this.

There has been a belief that surely if we give people bigger pensions for delaying them it must do something, but it is hard to see any clear-cut evidence for that in the data. The policy has evolved, with the best of intentions. I do not criticise that—I might even have been quite complimentary about it at the time—but having looked at the evidence, I have been surprised that deferral is not the calm, rational, carefully worked-out thing that makes people work longer.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am struck that the Minister says honestly what his own position might have been at the time. I can assure him that we have no evidence to that effect; we have not been digging down on it.

I am struck by a point that will be pertinent to some of the discussions we have next week. The Minister had assumed a rational approach by individuals but, when the evidence is looked at, it turns out that people do not respond to those signals. I have always taken the view that his time at the Institute for Fiscal Studies made him too much of a believer in rationality, so it is interesting to hear him confess that perhaps rationality does not always proceed in the way one might hope or expect.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I have long given up on rationality. I am sure the hon. Gentleman is right. Therefore, we need a system that is simple for people and which acts as one would expect—that if one puts off the pension, one gets a bigger pension in a fair way. That is what we are proposing. I could share the fine detail that I have just remembered from the 2002 Green Paper, “Simplicity, security and choice”, Command Paper 5677, which had a 100-page covering leaflet explaining all the options. That makes me think that, on balance, we are going in the right direction now.

I hope I have reassured the Committee that we are being absolutely transparent about the policy we propose. It is an actuarially neutral increment rate. We are being transparent about the advice we receive; it will be published. We will base regulations on that policy. If the House thinks we have failed to do that, it will have the opportunity to pray against the negative resolution. On that basis, and at the risk of a nugatory affirmative debate, I encourage the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East not to press his amendment.

Mark Reckless (Conservative, Rochester and Strood)

I thank the Minister for his explanation. His overall point that the policy should be actuarially fair, and the evidence he has produced for that, means that there is no need for a positive resolution statutory instrument, but the debate has drawn out some important issues. I am a little sceptical about some of his numbers. It is not that I am sceptical about him or his analysis; I simply emphasise the uncertainty around the issue.

The number of people working past traditional retirement ages—perhaps an extra 1 million people—makes the uncertainty great. There is also the change in the pension requirements whereby employers cannot make people retire. Because of the way that changed, and because of the cut-off date, I fear that a significant number of people were forced into retirement prior to that date who would have preferred not to retire—the employer knew they would not be able to carry on afterwards—and that reduced the number of people temporarily who might have carried on working later and increased the chance of deferral.

After that, some people were able to carry on working. At the same time, there were significant pressures—the collapse in annuity rates because of the more general problems in the economy—on older people to keep on working. I think, therefore, that there are strong pressures pushing many more people into working longer. With that, there is at least a stronger rational argument for many of those people to defer their pensions, particularly given the generosity of the existing scheme. It is important to emphasise the availability of that generosity in relation to people of a certain generation retiring before April 2016. I asked the Minister on Second Reading about people whose retirement date was before April 2016 but who had triggered a deferral, and whether they could carry on deferring at the more generous rate post-April 2016. I recall that he answered, “Yes, they could”, but for some extraordinary reason it does not appear to have been picked up by Hansard, so if he could confirm that for my constituents again now, I would be grateful.

On the Minister’s numbers, he mentioned an extra £200 million by 2020, over a seven-year period from now, but an extra £300 million by 2030. Did he mean an extra £300 million in addition to the £200 million? If not, I do not understand why the amount by which that sum was rising would only be £10 million per year during the decade of the 2020s, given the £30 million or so per year in the earlier period.

The option is not particularly well known, and a lot of people might not have made rational decisions about it, but I wonder whether in a world where more people are working longer, it might become something that people are better advised and informed on and whether, particularly in the three years to April 2016, we might see significantly more people taking that option, not least because they could entrench the right to continue deferring past April 2016.

The situation will therefore be actuarially fair afterwards, but even that raises questions, because I am assuming that the deferral rate will be common for men and women, which suggests that—at least on the way such things used to be done—it will be actuarially generous for women and stingy for men. Are we required to do this on the basis of the European Court of Justice ruling, or does it apply only to private sectors? Is the Minister choosing to do it that way for the state pension, or does EU law now require it? Will he and the Treasury look more closely at the sums involved and emphasise trying to understand how the sums could build up over the next few years? I wonder whether the sums’ incentive could be significantly greater than might have been assumed. I entirely recognise, however, the difficulty of the environment for modelling likely take-up, given the large things happening to the economy and the ability to carry on working past retirement age.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend for his forensic questioning, and I hope to offer him some reassurance. To assure him and the Committee, we anticipate publishing the number around the time the Bill receives Royal Assent. In other words, all being well, by around Easter 2014 the number will be out there, so people will know it two years ahead of things happening—there will not be any uncertainty. The question raised by the amendment is whether, having published the number, we would have to debate it or whether we would have to do so only if someone asked for a debate. That is what the amendment does. I can assure him, however, that people will know two years ahead of the date what the number is, which will enable them to plan.

On the specific question about my hon. Friend’s constituents and people whose state pension age will arrive before the implementation of the single tier, any deferral will be on current terms for as long as they defer. Even if they deferred past 2016, they would remain in the current system. In a sense, there is no rushing to defer: someone either is or is not a single-tier pensioner—if someone is a single-tier pensioner, they get the new accrual rate; if they are not, they get the old one. That will apply whatever happens.

On the costings, we must bear it in mind that the £200 million and the £300 million are heavily rounded numbers, so we cannot divide by four, 10 or whatever and infer an annual figure. We are simply saying that this is clearly a significant amount of money. The £200 million would be the extra cost of the scheme by 2020 if we kept the old increments going, and £300 million would be the extra cost by 2030 if we kept the old increments going—it is not another £300 million, but a total of £300 million.

The point I was trying to make is that those sums are significant and, as my hon. Friend says, they could get bigger. That is even more of a reason to set a fair, neutral rate, rather than an incentivised rate, because there is a lot of dead weight—a lot of people will defer because they were going to defer anyway, and we would just give them some cash. If we want to spend public money to enable people to work longer, my strong view is that keeping people in the labour market in their early 50s who might drop out because of ill health and a bad back is money vastly better spent than spending it on giving people slightly bigger increments because they draw a pension at 67 and not 66. That feels to me like the right balance of spending.

My hon. Friend is right that we would set the same rate for men and women. Although I am not a lawyer, I am about to become one: under European Union law, any rate would have to be the same. Domestic regulation in the UK would have to be the same as outside the UK, and it would therefore have to be gender neutral, as he expected. I hope I have answered his queries.

Mark Reckless (Conservative, Rochester and Strood)

The Minister referred to the £200 million extra; I am still unclear whether that is extra compared to now, or whether some of that £200 million has already accrued from people taking their increments. I would also like to emphasise that of course, people are not paying national insurance after the state requirement age, so that is also a significant incentive for them to stay in the work force.

We have discussed the 51 to 53 group, and the Minister has come up with various scenarios in which they benefit, compared with where they lose out. We should also emphasise that the current opportunity to retire and have the increments at such a generous rate is available to them but will not be available to people retiring after the single tier.

Steve Webb (Liberal Democrat, Thornbury and Yate)

On the costing, the question I asked was: “If we were to continue with the current system of increments—that is 10% for a year rather than 5% for a year—how much extra would we have to spend?” That is where the £200 million figure comes from. For people who have already deferred, we are talking about those who defer under the single-tier system. Anybody who has already deferred is baked into the baseline, as it were.

Clearly, our guesses are based on current behaviour. One could think that reducing the deferral rate might discourage people from working longer, but as my hon. Friend says, there are plenty of pressures that will lead to more people working longer. Inevitably, we have made an estimate. The fact that the number has eight zeros on the end makes it big, in my book: it is £200 million. I am absolutely not convinced by the slightly random and haphazard way in which we currently spend the money, compared with spending it outside the system or with what we are doing, which is recycling it within the system so that it enables us to pay £144, and not £143 and something or other pence. It just seems to be a better trade-off.

I hope I have been able to reassure my hon. Friend, and I encourage the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East not to press amendment 15 when the time comes.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I was interested in the dialogue between the Minister and the hon. Member for Rochester and Strood, who raised some significant questions. I was struck that, in the final part of the dialogue about the savings going forward, the Minister talked about the Government’s guesses being based on current behaviour. He also said that the Government anticipate publishing the parameters within which the deferral numbers will be set in 2014. I thank him for moving a little further by offering to publish the Department’s advice on how the numbers will be calculated.

I have a general view, which covers other parts of the Bill but applies specifically to this issue. The Minister will know from what I said a moment ago that I am very sympathetic to the argument that the incentive system appears to work with the grain of people’s rational behaviour, but, when one looks at the data, it is not clear that it is communicated effectively—it is not clear that enough people know about it and that it therefore works in the way the previous Government intended.

However, as the issue has been discussed further, the numbers involved have become a little muddier. We know that, in a cost-neutral Bill, as the Minister clearly and honestly stated, there will be areas that involve significant savings, as well as other parts of the pensions landscape where there is greater spend. In that circumstance, and given my general view that scrutiny is better than a lack of it, we will press the amendment to a vote under clause 45, asking that the Minister or the Secretary of State return to the House to deal with the issue when setting the rate applicable to those who defer.

Martin Caton (Labour, Gower)

As I am sure you know, Mr McClymont, you will have the opportunity to choose whether to press or withdraw the amendment when we come to the clause to which it pertains.

Clause 19 - Prisoners

Steve Webb (Liberal Democrat, Thornbury and Yate)

There is a clue in the clause’s title. We have to decide, because we are creating this thing called the state pension, who can get it and who cannot, and the clause makes rules for prisoners. The Committee will perhaps not be surprised to learn that we are maintaining the existing rules for prisoners: single-tier pension payments are not applicable for the period during which people are prisoners. I do not think that will be a great surprise, and I commend the clause to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I do not have much to add to the Minister’s brief comments; I suspect the clause will have widespread support in the Committee and outside it.

Clause 20 - Overseas residents

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I beg to move amendment 6, page 10, line 12, at end add—

‘(5) A review of overseas residents’ uprating entitlement shall be conducted on a cross-departmental basis within six months of Royal Assent to this Act. It shall consider in particular whether the savings attributable to non-entitlement could be more effectively made in other areas of health and social care, and whether there are potential economic benefits to uprating the pensions entitlements of overseas residents in line with UK-resident pensioner’s entitlements. The review shall report to the Secretary of State for Work and Pensions, and a copy of the report shall be laid before Parliament.’

The issue is the uprating of pension benefits across the world for UK pensioners. One anticipates that the Minister’s initial response to the amendment will be along the lines of, “Not another review!”

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Gentleman has seen my notes.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

We are not going to say anything about that. The issue is interesting for a couple of reasons. There is clearly a lack of uniformity in the uprating of the pensions of UK pensioners who move abroad. In many countries there is a reciprocal agreement, so that such pensions are uprated in line with changes in uprating made by the UK Government. In other countries, however —Australia and Canada being among the most prominent—there is no such agreement and pensioners who move abroad effectively have their UK state pension frozen. They go abroad and stay abroad, and it is never uprated.

We all know how important pensions uprating is generally. We spend a lot of time talking about it, and it is critical to ensuring that pensions maintain their buying power. I will not go too far into the triple lock, which the Minister commented on the other week, very honestly, in the Financial Times. Of course, that was about indexing and uprating, too.

When one first considers this issue, it seems rather odd. If a British pensioner moves to the USA, their pension is uprated, but if they move to Canada, it is not.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Does the hon. Gentleman recognise that, although uprating pensions is one issue, this is also about the exchange rate, inflation in the country the person has gone to and other things, and that their pension is merely part of meeting the cost of day-to-day life?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I agree absolutely with the hon. Gentleman. To develop his argument further, one would need to compare those factors in a country such as Canada with those in a country such as the US to see whether they neutralised the impact of an individual’s UK pension not being uprated. In general terms, however, he is entirely correct. One’s standard of living in retirement depends on factors other than uprating. The Opposition are not hostile to the Government’s position of continuing not to uprate pensions in countries where they are not currently uprated. The Minister has spoken about the cost of doing so, which I understand to be in the region of £600 million.

Richard Graham (Conservative, Gloucester)

Is the hon. Gentleman aware that page 15 of the explanatory notes spells out:

“Regulations under this clause will be made taking into account provision under relevant treaties, such as those in respect of the European Union, and bi-lateral treaties providing for reciprocity…and which cover up-rating”?

Does that influence his approach to the clause?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I reassure the hon. Gentleman that I am aware of that. We are talking, however, about countries where there is no reciprocal agreement, rather than about those where there is. We can all unite in welcoming the fact that pensions in countries where there is a reciprocal agreement will be uprated in line with whatever is decided in the House.

Richard Graham (Conservative, Gloucester)

I suppose the key question, therefore, is whether the Opposition really believe that providing automatic uprating in countries that are not covered is the best use of taxpayers’ money. Subject to confirmation from the Minister about the exact sums involved, will the hon. Gentleman confirm that his party would provide those funds by cutting different areas of Government expenditure, and if so, which areas?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I note that the hon. Gentleman has moved rapidly into his common register of: “What would you do?” As I had just started to say, we are not hostile to the Government’s position of not uprating overseas residents’ pension entitlement in countries where there are no reciprocal agreements, because the cost is important. As I develop my argument, I hope he will see that we want to reach a definitive judgment on the costs and benefits of such uprating rather than calling on the Government to undertake to do so. We are absolutely not doing the latter.

There is significant media interest in the matter, which hon. Members on both sides might have encountered. I have been clear that no such commitment can be made if the cost is as significant as the Government say it is. I suspect that hon. Members agree that the situation looks odd at first glance and might repay closer analysis. The Minister might say that such analysis has been undertaken, and I would be pleased to hear from him what sort of analysis the Government have done.

Richard Graham (Conservative, Gloucester)

I suppose one of the issues at stake here—the hon. Gentleman is right to raise this—is that the anomalies for people who retire, and then go and live abroad and find that their pensions are paid at different rates, are considerable, even in countries with similar structures, climates or whatever. Therefore, there is a potential issue about how aware pensioners are of the difference it will make to their pension if they go and live in another country. Does he think there would be any way of tackling that issue of information?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman makes a very good point, and we have spoken already in this Committee about how individuals and families perceive their circumstances. Everything is relative. People’s notions of fairness and unfairness are based both on their perceptions and on the reality of how those around them, on their street and in their community, are being treated.

I shall give an example. If a pensioner moves to Canada, they are not uprated; if they move to America, they are. The hon. Gentleman’s point about information is an important one. Communication is always important. To be fair, I referred a moment ago to the significant press coverage of this in the last year or so. That is testament to the efforts of the International Consortium of British Pensioners, which is pushing that aspect of the issue. However, if the situation is not going to change, given that these anomalies have grown up over 50 years or more, there might be a case for the Government doing their best—if they are not already doing so—to get that information about the differences out there.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Will my hon. Friend give way?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Of course.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

I am concerned about the issue of winter fuel payments. As we know, for people living in the United Kingdom the payments are subject to weather conditions here. What does the hon. Gentleman feel about the issue of winter fuel payments for people living abroad? If they lived somewhere such as Australia, which is nice and warm, those payments would not be made, but if they lived in Canada or, for that matter, America, which saw some very cold weather this year, how would that be sorted out? Does he have an idea?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am delighted to see that so powerful is the spirit of co-operation in this Committee that the hon. Gentleman referred to me as his hon. Friend. I am very pleased at that. [Hon. Members: “We’re all friends here.”] I do not say that in any spirit of satire—I mean it sincerely. On the winter fuel allowance, it is hard to know where we have got to. I read in the newspapers that one part of the Government was very keen to have the winter fuel allowance only go to UK-resident pensioners, and then we heard that that was not possible. Again, I am going by the newspapers rather than anything I could take as being a matter of record.

Steve Webb (Liberal Democrat, Thornbury and Yate)

A normally reliable source was the Chancellor at the Dispatch Box, when he said in the spending review that, in future, we would not be paying winter fuel payments to countries hotter than the warmest region of the United Kingdom.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Given our climate, that will not be very many countries, but I thank the Minister for that clarification, while probably not agreeing that the Chancellor is the best source of factual information. That would take us into a whole other debate, Mr Caton. [ Interruption. ] Again, my hearing is terrible. The hon. Member for Gloucester was suggesting something from a sedentary position that I could not pick up. I am happy to let him intervene, if he wishes.

Richard Graham (Conservative, Gloucester)

That is a very kind invitation and not one I could possibly refuse. Returning to the Pensions Bill, which is the subject under discussion this morning, I suppose that the question of information to pensioners is one side of the equation, but the other side, which is much more difficult, is whether this Government—indeed any Government—would ever contemplate trying to rationalise some of the agreements, or lack of agreements, we have with other countries, so that the system was slightly more explainable. Does the hon. Gentleman have any thoughts on that issue? Perhaps he could remind us what the last Labour Government did in that respect.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I must say that is the first time I have seen an hon. Member pour a glass of water during an intervention. It showed a certain élan and style. I thought we were in for a longer intervention; indeed, I thought the hon. Gentleman was hunkering down for the long haul.

The hon. Gentleman raises the issue of rationalising these agreements. I am not quite sure what that would entail. Does he mean rationalising existing agreements? I assume that we cannot rationalise an agreement that does not exist, so it would have to be a rationalisation of existing agreements. I cannot imagine that the Government would be keen to do that, but the Minister might have more information than I do on that issue.

As the hon. Gentleman has argued previously, however —and argues again now—the current situation certainly strikes one as quite odd. He made a point about the previous Government. These anomalies existed under the previous Government; there is no doubt about that. I was not in Parliament before 2010, much to my disappointment, but certainly many of these reciprocal agreements are long-standing, as is the lack of reciprocity in some cases. It is legitimate to put that on the record.

I will return to trying to construct the argument for the amendment. The Opposition are not saying that the Government’s attitude is wrong on the uprating of overseas residents’ pension entitlement. To take up the hon. Gentleman’s point, the amendment asks for a cross-departmental study—I know that is asking for trouble in the first instance—on the implications of this policy for pensioners deciding to live abroad. However, this is not just about the side of the equation that says it will cost the Exchequer money to uprate the pensions of those who do not live in countries with reciprocal agreements. Is there also a benefit from encouraging pensioners who wish to live abroad and who then are not such a burden on state services or public services?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Is the hon. Gentleman content with the language of our pensioners being “a burden” on the nation?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I do not think it is unfair, and I am surprised by the Minister. What I said was “a burden on state services”. We know that there is talk in all parties in the House about the need to ensure that public services are affordable. We need to think about the best way to use our public services, and it does not seem unfair to propose a cross-departmental study that would carry out a cost-benefit analysis of uprating these pensions on a reciprocal basis.

Mark Reckless (Conservative, Rochester and Strood)

Because of this “burden” on the public services that the hon. Gentleman refers to, with the study that he is proposing is he potentially looking to encourage pensioners to move abroad to countries that would be more attractive if he were to ensure the uprating there? Is that his objective?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That is not my objective or intention. However, the Minister will be aware—and I suspect that other Members will also know from representations they have received—that the ICBP is keen, as I understand it, for the Government to carry out a cross-departmental study of the overall costs and benefits of UK pensioners living abroad. Its view is that the Government focus very much—perhaps understandably, from the Government’s point of view—on the cost of the uprating, without conducting any analysis of the fact that these pensioners are no longer drawing on UK services, and I take into account the Minister’s point about being A “burden” or otherwise. That is a question that is at least worth considering.

There is that sense that if a pensioner is in America they are uprated and if they are in Canada they are not, but this is not just about America and Canada. To put some numbers into this debate, about 565,000 pensioners living in 120 countries, including Australia, New Zealand and Canada, have their UK pensions frozen at the rate prevailing when they left the UK, despite their having paid years of national insurance contributions. That is a significant number of pensioners. It means, for example, that someone who started drawing a UK state pension while in Australia in 1983 would today still receive £34 a week, which is about £60 less than the current rate. I think we can all agree that that is a significant difference.

The Minister might be able to provide more information, but my understanding from what I read in the paper—I am not suggesting that it is a matter of record necessarily—is that the Australian Government are pushing quite hard on the issue. I imagine that it brings its own potential problems for Australia if pensioners receive so little from their state pension in their country of origin. As I said, if someone started drawing it in Australia in 1983, they would still be receiving £34 a week as opposed to around £95 a week if it had been uprated. That is a pretty significant difference, even before thinking about inflation and other issues that the hon. Member for Plymouth, Sutton and Devonport mentioned a moment ago.

More than 500,000 pensioners are affected in 120 countries where there is no reciprocal agreement and the UK state pension is not uprated. That contrasts with arrangements for hundreds of thousands of people who retire in 16 countries in the EU and the US where the state pension is uprated each year as though the recipients were still in the UK. As has been said, the anomaly has existed for a long time. The Government have reciprocal agreements with some countries, but have not signed any new agreements since 1981 according to my notes.

The Government estimated—I am sure the Minister will explain this in more detail—that in 2012 it would cost £655 million to uprate frozen pensions, and they do not intend to change a policy that has been in place for decades. Given the pretty poor job the Chancellor is making of the economy, I see why the Government would not be keen to think about spending £655 million to change this policy, and given how tight money is and how debt continues to grow, I see that point and do not contest it in itself, but it is a significant contribution to this debate to have the relevant facts and figures.

The ICBP has been pretty successful with this issue in some of our newspapers. It has been successful because it strikes one as odd that one can move to some countries and have an uprated UK pension, but that in other countries one cannot. To take the point made by the hon. Member for Gloucester, if one moved abroad unaware of that disparity in uprating arrangements, one could imagine it being a bit of a shock to find that one’s pension was not uprated.

Richard Graham (Conservative, Gloucester)

On that very point, does the hon. Gentleman agree that it would be worth while for the Department for Work and Pensions to consider including in some communication about the details of a forthcoming pension when an individual is about to retire, a line saying, “Should you decide to go and live overseas, you should be aware that this may have an impact on your pension. Please see the website for further details”? The relevant website address could then be given.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That is a sensible, even ingenious suggestion for getting the information out. It seems eminently sensible and something that the Government might want to consider. There may be some obstacles to that that I am not aware of, and the Minister might want to comment on that, but to me that seems to be an ingenious suggestion.

The Minister, in one of his earlier contributions, referred to how his view had changed on the lump sum for deferral. The International Consortium of British Pensioners thinks that he changed his mind on frozen pensions. It says that back in the footloose and fancy-free days of opposition he was a supporter of uprating frozen pensions and it provided me with information to that effect. To change one’s mind is not a crime, but if he once had a different view, that is probably because it is one of those issues that seems like it might demand attention when one looks at it outside the context of decisions on Government finances. Perhaps he will have more to say on that.

In fully assessing the impact of overseas pensioners on the public finances, consideration should be given to the benefit that the UK economy gets from the expatriate pensioners who reside outside the EU. The Minister cautioned against the use of the word “burden”, but, whatever word one uses, we are aware that we are in an ageing society and there is pressure on our public services. The International Consortium of British Pensioners would welcome a proper cost-benefit analysis on that.

This issue will not go away. There was pressure on the Backbench Business Committee to schedule a debate. Although I do not think that that happened, the issue certainly appears in the press and I have seen evidence of Government Back-Bench Members who take this seriously.

Mark Reckless (Conservative, Rochester and Strood)

I am surprised and not sure whether the hon. Gentleman is wise to adopt the position of the International Consortium of British Pensioners as the Opposition’s own in the debate. In the study that he calls for, does he also want to look at the reciprocal costs of overseas pensioners moving here and possibly placing a “burden”—to use his word—on public services?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the hon. Member for Rochester and Strood for that intervention.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Gentleman is showing off that he can pronounce that.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Yes. When one has a constituency with a name as long and difficult for hon. Members to pronounce as mine, I feel it is only right that I do my best to get the pronunciation of hon. Members’ constituencies right.

To take up the hon. Gentleman’s point, he suggested that the Opposition are adopting the position of the International Consortium of British Pensioners. We are not. This comes back to the point about the Opposition’s job being to probe legislation: I am trying to point out that that consortium takes a view on an issue that affects it. It has done a reasonable job in recent times of bringing this issue to the public’s attention and it is not unreasonable to put its view on the table and ask the Government to respond to that.

Even as uprating pensions went up the political agenda, I have been clear that the case for that in countries where there is no reciprocal agreement has not been made. I am not criticising the Government on that, but asking whether there is a case for a cross-departmental study that will, once and for all, assess the overall cost to the public purse, given that it strikes me as “odd”—I use that word carefully—that in some countries pensions are uprated and in others they are not. It is in that spirit that we propose the amendment. The campaign that has been run by the International Consortium of British Pensioners has some traction, so it does not seem unfair to ask the Minister his current view on the matter. He produced a number last year, and given his number-crunching background, I am sure that it is based on solid evidence. I invite him to say a little more about that if he wishes.

Sheila Gilmore (Labour, Edinburgh East)

I think all of us, even before the introduction of the Bill, have encountered the considerable campaign being run by people who feel aggrieved because they have not benefited from uprating over a fairly lengthy period. It is easy to say, “They chose to go abroad, so on their own heads be it,” but the e-mails and letters that I have received have given me a sense that people feel particularly aggrieved about the anomalies in the system. If the rules were the same for everybody who drew their pensions abroad, I am sure that people would still feel sometimes that things were difficult but they would not perceive any unfairness between different groups.

Obviously, the issue is an historical one, and it is the result of reciprocal agreements made by previous Governments. I understand that it is a long time since any such agreements were entered into. Will the Minister explain why that is? Some of the countries with which agreements have been made come as quite a surprise, and there does not seem to be any pattern to them. I suspect that it depends on where the other countries are coming from. I imagine that some of the pensioners who are affected retired to what they probably saw as sister countries, or countries from the Commonwealth family, assuming that they would benefit from uprating, whereas in fact those who retired to other countries such as the United States are the ones who get the advantage of uprating.

Not all of those living in Britain who have made their contributions and retired will necessarily be paying tax, although some certainly will, while those who are overseas generally will not be. The payment of tax in this country is not necessarily a criterion that determines whether an individual’s pension is uprated. Whether it is uprated or not, or the extent to which it is uprated, depends on policy in this country.

My hon. Friend on the Front Bench was treated to a degree of lecturing from the Minister about the perils of responding to lobbying groups and outside agencies and giving them the impression of being supportive. The Minister must agree that others have been prone to that in the past. Indeed, I understand—he may correct me if I am wrong—that he took a rather different view when he was in opposition, during which time he was quite supportive towards the lobbying groups, which may have made them anticipate even more strongly a potential breakthrough in their campaign. I understand that the Minister told some of the campaigners:

“I agree that pensioners who earned their pensions by paying national insurance contributions have a strong case for the value of that pension being maintained in line with inflation, and I am actively seeking such a change. As you may be aware, there is currently a Pension Bill”—

this is in 2004—

“passing through Parliament. I will take this opportunity to table an amendment, seeking to uprate the ‘frozen pensions’ of expatriates.”

If that was the Minister’s view then, he has clearly changed his mind. The experience of office—of being in the Administration—can certainly lead one to realise that these things are not as simple as one thought. I make that point—the Minister himself mentioned the positions previously taken by the Opposition—to show that this is a trap into which one can fall.

Latterly, some people have tried to argue that their lack of residence and, therefore, their lack of a claim to services that they might otherwise be claiming should be taken into account and offset against the cost of increasing their pensions. Without figures, it is difficult to judge whether there is something to that argument. I have certainly received e-mails from individuals saying, “If we all came back, there would be additional costs. You should take that into account.” I am not sure whether people would necessarily come back, and there are probably strong reasons for people wanting to live out their retirement abroad. Those might include family reasons, and people might have moved to be closer to their children or to other members of their families. They may be sun-chasers—people who feel they will have a more pleasant style of living, given Britain’s relatively temperate climate.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Does the hon. Lady not recognise that one reason why people may decide to come back is that we have a free national health service? Indeed, a number of my friends have decided to come back specifically for that reason. All of a sudden, they found themselves having to meet costs, which they do not have to do on the national health service.

Sheila Gilmore (Labour, Edinburgh East)

I can understand that some people might well do that. They might also come back for other reasons; as they get older they might decide there are advantages to coming back, depending to some extent on where their families are.

This issue is going to run and run. It has obviously run for many years. Successive Governments have looked at the cost of the increase and have baulked at it; they have not felt it was a top priority at a time when they had other issues, relating to people in retirement here, to deal with.

If some of these questions and arguments could be answered with some clear information, however, the issue could be put to bed, although perhaps not entirely. We would be better able to say, “We have looked at the issues you have raised. We have still concluded”—if this is the Government’s view, which I suspect it is—“that your arguments are not as powerful as you think.” That would be a stronger basis on which to resist what will be the constant iteration of this issue by people who feel fairly aggrieved at the position they find themselves in.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

As my hon. Friend develops her argument, it strikes me that one of the powerful points she might be making is that a cross-departmental review would be a way to get clarity on this issue once and for all. Is that the argument she is making?

Sheila Gilmore (Labour, Edinburgh East)

Yes, indeed. It seems clear that the matter comes up successively, and not necessarily even when pension measures are going through Parliament, although clearly at those times there is a more powerful incentive for campaigners to make yet another push.

It is a continuing issue, which has been raised by many people who do not feel that they should have lost out by going abroad. They certainly cannot understand why things differ so much from one country to another—that has nothing to do with their circumstances or their choice. They do not have a say in such things as reciprocal arrangements; they are outwith their control.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Does my hon. Friend agree that views on the issue in the House are not a question of party? I recall that early-day motions on it have had a significant number of signatures from Government Back Benchers, so it appears that the anomaly is quite striking.

Sheila Gilmore (Labour, Edinburgh East)

That is right, and I suspect that the sense that parliamentarians of all parties support the claims is a source of constant encouragement to people in believing that if they could get a proper hearing the matter could be dealt with. That is why new measures going through Parliament, or Committee scrutiny, lead to a renewed push.

If there is sympathy within Parliament for the case that is made, as there appears to be, perhaps it is appropriate now to consider the question in the round, deal with the arguments, and come to a conclusion. That is the reason for the amendment.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am happy to respond to amendment 6, which was tabled by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. As arranged, I shall also address clause 20 stand part to avoid a repetition of that debate.

Clause 20 replicates the current arrangements for the state pension for the single-tier pension. It has absolute continuity and simply leaves things as they are. The review that the hon. Gentleman’s amendment proposes would be a review of the whole policy, which would of course apply to all existing pensioners as well. Clearly, the single-tier pensioners will initially be a very small proportion of the people affected by the policy.

Quite properly, the question was raised this morning about telling people whether their pensions are not going to be uprated if they go to certain countries. I was confident that we did and I happen to have the information that we provide. When people are planning to retire and they ask us for a statement of what they are going to get, we issue them with leaflet DWP40, which goes out with the state pension statement. The leaflet is called “Your State Pension statement explained”. I can confirm that on page 21 there is a section headed “UK State Pension payments outside the UK”, which explains that, although someone can get their UK state pension anywhere they live, if they live outside the UK and get a UK state pension, they will not get annual increases unless they live in—there are various categories—European economic area countries, Switzerland, or

“a country that has an agreement with the UK to allow these increases.”

So we are clear that unless one of those categories applies, people will not get increases.

Similarly, when we issue the claim pack four months before people reach state pension age, we issue them with form DWP23, which also has a section headed “UK State Pension payments outside the UK”. The text is similar to the text I just read out and it also points out that what happens when people come back to the UK:

“If you live in a country where your UK State Pension is not increased, your UK State Pension may be increased for the time when you visit the UK or certain of the countries where the annual increase is paid.”

So, at two very important points, when people ask for a forecast—or a statement as we now call them—or when people are told four months before state pension age about their pension, we flag up that important information. It is also on the www.gov.uk website; it is in leaflet PM2, the general guide to state pensions; and in leaflet NI38, “Social Security abroad”, issued by our colleagues at HMRC. If someone asks for a leaflet about social security abroad, they get that information. So we seek to provide the information quite extensively.

As for those who are abroad, it is important to understand that two countries dominate: I understand that just short of three in four of the people we are talking about are in Canada or Australia. It was suggested that the Canadian and Australian Governments would like us to increase pensions in such cases, and indeed they would. That is because they have means-tested state pension systems. If we were to increase state pensions in Canada and Australia—for nearly three quarters of the people we are talking about—that would be a saving to the Canadian and Australian Exchequers at the cost of the British taxpayer, not necessarily to the benefit of the British citizen living abroad. There would be British citizens whose incomes would be above the level at which they qualify for the means-tested pension in those countries, but they are not the folk whom people are most concerned about—the folk who have nothing else to live on. They are by definition the folk who have something else to live on, as my hon. Friend the Member for Plymouth, Sutton pointed out. People will go abroad—

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

And Devonport.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The people of Devonport will also go abroad with occupational pensions and savings and so on, so it is the whole picture that matters.

Heather Wheeler (Conservative, South Derbyshire)

I have spoken on the issue in the Chamber, and I am grateful to the Minister for explaining the differential between means-tested benefits in those countries that constituents and ex-constituents have written to me about. It is helpful to have such information on the record.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clearly, that is true of those two countries; it is not true in all countries. If people have other pension income, they might not receive the means-tested pension but, if they do have other pension income, only part of their total income will not be uprated.

It would be a mistake to think it is always the case that people live their working lives in Britain, retire and draw pensions, and then emigrate. I am tempted to hold a sweepstake because, in fact, the Committee might be startled to learn that, of United Kingdom pensioners overseas, the proportion of those who moved as pensioners is 2%. The remainder all moved at a working age. Some of them might have moved just before drawing their state pension, but quite a number of them moved well before that time.

It is important to be aware that countries such as Australia have, in the past, sought properly to recruit skilled British workers of significantly below pension age. It is an incorrect picture to imagine that all British pensioners overseas worked all their life in Britain, retired just before or at pension age and are now on a pension. A significant number of British pensioners overseas went to Australia to work when they were in their 30s or 40s, for example, and have lived there for a significant part of their lives. They will have been building up pension rights under the Australian system; they will have only part of their income based on the British system, and only that part will not be uprated.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Will my hon. Friend clarify that such people will have ended up also paying into the Canadian, Australian or, for that matter, American national insurance systems? They would end up receiving moneys under those systems, as well as from the British Government.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes, my hon. Friend is entirely correct.

There is clearly a diversity of circumstances, but we are not talking about a million people all wholly dependent on the British state pension who would all benefit if we were to uprate it. It is a much more mixed pattern than that. To be fair, if I were the Opposition and the shadow Chancellor had told me that I could not spend money, but I wanted to sound sympathetic, I would have asked for a review. We understand the thinking behind the amendment.

The hon. Member for Edinburgh East suggested earlier that I had been sympathetic in the past to those covered by the clause. In fact, I have a sympathetic view towards them today. I understand their argument. She referred to an amendment that I had tabled in 2004. It was less than perfectly drafted. It would have constantly uprated the pension of everyone throughout the world, so I did not quite get it right. The fiscal environment in 2004 was a bit different from what it is now. Our estimated cost of uprating from now on and dealing with the non-uprating that has happened to date is £695 million a year. There is a danger when calculating pensions that we stop noticing zeros, but that is a serious sum and, as I have said, some of it would not even benefit those for whom it is intended.

Such cases have indeed been to the House of Lords and the European courts, all of which have found in the Government’s favour, saying that our action was lawful. There is a danger that, as soon as we say that we should uprate going forward, someone would say, “Hang on a minute, I retired 20 years ago. Not only should you pay me the pension that I would now be getting if it had always been uprated, but I want all the money for the period since I left the country for all those years in the interim period when it was not uprated. If it’s right to uprate it now, why didn’t you uprate it last year, the year before and the year before that?”

We are talking about billions of pounds. There is a real risk to the Exchequer with such a proposal. If we accepted amendment 6, and said, “What harm could a review do?”, we would raise expectations in a way that would disappoint. The hon. Lady said that I had been sympathetic in the past, but that I am now somewhere adjacent to the levers of power. I would not put it stronger than that. She said that I had let people down by failing to deliver. I want to make it clear that all three political parties—probably all four, if the hon. Member for Upper Bann (David Simpson) were here—went into the 2010 election with manifestos that promised this group of people precisely nothing. It is important to put it on the record that nobody who voted in the 2010 general election and took the trouble to read our manifestos should have thought that anyone was promising them action on this point. I did not promise it in my manifesto, and I do not think that anybody else did. Although I understand, having been sympathetic to the case over the years—I remain so—I was quite explicit when I asked for people’s vote that I was not promising action on this point. The worry is that a review would just raise expectations again; we have seen the results of that, so I would be very reluctant to do so.

To get a sense of scale here, the majority of the money that we pay in state pensions outside the UK is in non-frozen-rate countries. We pay around £3 billion a year outside the UK, of which about £2 billion is in non-frozen-rate countries. The majority of the money that we pay outside the country is uprated, but clearly, for historical reasons, in some cases it is not, as we have discovered.

It was suggested that a review would settle matters once and for all. I think that is naive. If the review found that there was not a significant Exchequer saving, or something like that, we would go back to another campaign and another set of posters. It would not settle matters once and for all. We owe pensioners consistency and clarity of legislation. The position has been the same under successive Governments over decades. The Bill, with the new single tier pensions, proposes exact continuity with the existing regime. On that basis, I do not believe that the time and cost of a review would actually achieve anything. Such a review could look at a lot of issues. However, as has already been pointed out in arguments about people going overseas and so not using the NHS, we could change the rules, but we would have no guarantee that folk would not come back and use the NHS anyway. Some of the arguments about hypothetical long-term saving are a bit thin.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister is speaking about potential benefits, or otherwise, and I take his point that there is no guarantee that pensioners would not come back to use the NHS. Am I right in remembering that a study was undertaken on behalf of the International Consortium of British Pensioners by an economics consultancy, and would he care to comment on that? I remember that he analysed it quite closely at the time.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes, I believe that an organisation called Oxford Economics was paid by the International Consortium of British Pensioners and, interestingly enough, came up with a report that the ICBP felt supported its case. I read the report in full, and it makes some pretty heroic assumptions about future behaviour—there is some polling and so on—and to call it highly speculative would be charitable. We do not know how people’s behaviour will change, but, as we have discussed, a lot of people have retired or moved many years ago, so even if we thought that there was some impact on movement, there would be a huge amount of dead-weight in economic terms. That is to say, we would pay extra pension to people who had absolutely no intention of coming back anyway in the assumption that we would save a bit of money from people who might otherwise have come back but did not. It is very unconvincing. Does the hon. Gentleman want to intervene? No, he is just scratching his head.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am stroking it.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I do apologise; he is stroking his head.

I have lost count, but I think this is the fourth review that we have been asked for so far. I am not convinced that this one would add any more than the first three. Our position is clear, and at this point clarity is what people need. I recognise the concerns of the affected groups, but at a cost of £700 million, with a possible knock-on into billions if backdating was pursued, I do not believe that it is a priority for the Government. On that basis, it would be wrong to have a review to raise expectations, and it is right that clause 20 should stand part of the Bill.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is a pleasure to serve under your chairmanship once again, Mrs Main. I thank the Minister for his response. I was struck by what I took to be his position—he said that he remains sympathetic to this case, but I was not clear about whether his view was that if financial circumstances allowed, he would wish to uprate these pensions. That was a little ambiguous.

I was also struck by the Minister’s comments on the Oxford Economics report. From the little he said about it, I take him to be saying that its assumptions about movement are that pensioners who might otherwise not be able to move abroad would be encouraged to fulfil their desires and do so. The Minister’s case seems to be—I remember this from his response at the time—that the study’s assumptions are not credible enough for the Government to base policy on them. That is not an entirely unfair position.

I have one question. The Minister talked about raising expectations unfairly. Is it his view that a review would raise expectations unfairly? I am not clear whether his view is that an analysis would be difficult to undertake. I think he was saying that a study would be possible on a cross-departmental basis, but he is concerned about consistency and he does not want to raise pensioners’ expectations unfairly. I do not think we should dismiss the question of expectations out of hand.

I was struck by the Minister’s observation that only 2% of British pensioners move overseas as pensioners; that is a striking figure. He went on to say that a significant number move just before retiring. It would be interesting to find out whether that is the case. Does he have a figure on that? I take his point that a significant number move well before retirement; however, they will have made contributions into the UK system, and the issue of uprating remains for them.

My hon. Friend the Member for Edinburgh East quoted a 2004 amendment. I was not aware that the Minister tabled that 2004 amendment, but he has given us full disclosure. Of course, it is not a crime to change one’s mind, but I am not clear from his response whether he changed his mind because he no longer supports the principle of uprating frozen pensions, or whether he retains the principle but cannot support uprating due to the country’s financial circumstances and the continuing deterioration of the economy. I am not 100% sure about that.

Our amendment would call on the Government to conduct a cross-departmental study of the costs and benefits to the Treasury of uprating pensions. It is a financially focused measure. However, I take the point that uprating pensions would potentially have a significant financial cost. I have listened to the Minister’s reply and, although I would welcome further clarity on his position on the principle of this matter, I do not intend to press the amendment. I beg to ask leave to withdraw the amendment.

Clause 21 - “Old state pension”

Steve Webb (Liberal Democrat, Thornbury and Yate)

As you correctly discerned, Mrs Main, this is not the most contentious bit of the Bill. I am not sure any of the Bill is contentious, but this clause certainly is not. It simply provides definitions of the phrase “old state pension”, as used earlier in the Bill. For brevity, clause 22 also provides general definitions, which are uncontentious. I commend clause 21 to the Committee.

Clause 23 - Amendments

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 23 paves the way for schedule 12, which is quite long. It might be helpful to run through what that schedule does. The first part amends existing legislation by incorporating references to the new state pension. We have to ensure that, where there are current laws that refer to the state pension, the new single-tier state pension is covered. We had to go through a lot of legislation to ensure that we amend all relevant references.

Part 2 amends current legislation to maintain the existing state pension scheme for people who reach state pension age before the introduction of the new scheme, so that there are transitional provisions. Part 3 covers the savings credit. To be clear, within the pension credit system there are two parts: the guarantee credit and the savings credit. The legislation provides that, post-2016, the savings credit will not be an element of the pension credit for single-tier pensioners.

We obviously need transitional rules. A claimant who does not meet the criteria may still qualify if in a couple and the other member qualifies. For example, if someone claims pension credit before 2016, that person is a single-tier pensioner and therefore in a couple getting the savings credit. This measure allows that person to go on getting the savings credit; we will not take it off as the person goes through 2016. Regulations may specify the circumstances in which entitlement is restricted for those cases.

Finally, part 4 amends a range of provisions relating to the introduction of the new state pension, including things such as repealing redundant provisions in the Pensions Act 2008 for consolidating the additional pension, as well as changes to legislation on bereavement benefits. Most of that, apart from the savings credit change, is consequential and technical. Therefore, I commend clause 23, which facilitates schedule 12, to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for elaborating on the clause and the accompanying schedule. He is right to say that most of it is technical and consequent on the Bill’s provisions. He did justice to the savings credit issue, which is probably the most pertinent in a broader sense. The abolition of savings credit under the new system has prompted significant concern, and he pointed out, with some justice, that the credit is very complicated. As I recall, he said that if anyone could explain how savings credit works to him, he would give them a brass penny. There is truth in that point.

One of the thrusts of the Bill is to simplify the system, which everyone supports. However, there is the question of how the savings credit relates to the reduction in means-testing. I note that the Government’s rhetoric on the Bill’s benefits has increasingly depended less on the reduction of means-testing. When the White Paper first emerged in January, there was a focus on the proposed system being simpler, cost-neutral and encouraging an incentive to save. The fourth element was a significant reduction in means-testing. It had even been said that means-testing would be abolished. I do not suggest that the Minister used those words—he did not—but that was the way the means-testing debate was framed.

However, when one digs down into the impact assessment and looks at means-testing projections under the Bill, the reduction is relatively modest. Most of the expected reduction is a product of the abolition of the savings credit. Those who benefit from savings credit are a group whom Government Members, at least implicitly, have often spoken up in favour of when criticising aspects of the pension credit. That is because those who benefit from savings credit have some savings, and would otherwise lose out from the pound-for-pound reduction via means-tested benefits. It is worth giving the savings credit issue an airing in this context. Will the Minister elaborate on how many people will lose from the disappearance of savings credit, who they are and how much they might lose? My understanding is that it will not be an enormous number, but that there could be some pretty steep cliff edges as one moves from the current system to the new one. How does the Minister see the changes in savings credit playing out in the medium to long term?

Sheila Gilmore (Labour, Edinburgh East)

I am pleased to have the opportunity to speak on this issue and particularly about savings credit, although we do have a whole schedule here. Interestingly, the schedule does indeed bear out what the Minister has often said about the very long tail that attaches to some pension provision.

I was trying to get my head around how many people could possibly still be entitled to a category D pension, because the original recipients of a such a pension would, I think, have retired before 1948. I tried to think of what the circumstances might be. We see these stories in the newspapers, after all—the 18-year-old who married a much older man, was then widowed and somehow never built up better pension provision, and is still eligible for a category D pension. Presumably, the Department thinks that some people have hitherto been entitled to such a thing. That illustrates quite well that, in legislating for pensions, we create long-term entitlements and liabilities. That is why it is very important to get things right.

We also know that the way in which we legislate can have unintended consequences. Savings credit gets a great deal of criticism for being extremely complicated, and it is probably the least-claimed element of the whole pension credit system. Figures for those eligible for the pension credit who do not claim it show that the savings credit is probably a big contributory factor to the inefficiency of the system. Its original intention was benign: to counter the criticism that people who had savings, who had tried to provide for their retirement, were particularly harshly dealt with in losing entitlement to pension credit. Perhaps it was an unduly complicated way of dealing with the issue, perhaps there was a better way, and perhaps some people will argue that they said at the time that this was exactly the wrong thing to do.

One of the difficulties is that there is a double criticism: that the savings credit is complicated, and that it has increased the number of people entitled to means-tested benefits. That is inevitable, because its whole purpose was exactly that: to help people who were, in effect, income-poor but who had savings, meaning that more people became entitled to it. I appreciate that one of the reasons for the increasing level of entitlement—even if the credit was not always claimed—was the different ways in which the various parts of the system were uprated. As a result, there were a few anomalies in the way the system worked.

The Work and Pensions Committee heard evidence on the savings credit from a number of people. A reduction in means-testing was broadly welcomed. The Institute for Fiscal Studies told us:

“The removal of the Pension Credit Savings Credit (PCSC) on its own will reduce the maximum income at which someone will be entitled to means-tested benefits, and so on its own should reduce means-testing.”

Clearly, if thresholds of eligibility are brought down, or a particular provision is abolished, as in this case, the number of people on means-tested benefits will be reduced. However, we have to bear it mind that that does not always mean people are better off as a result. At a very simple level, if a means-tested benefit has an eligibility threshold, as the threshold is raised more people become entitled and, it could be argued, more people are dependent on means-tested benefits. That, of course, does increase their income. If the threshold is reduced, more people will be left out. It could be said, “We have done a good thing. We have reduced the number of people who are entitled to means-tested benefits.” As with some of the other changes under this Government—for example, to tax credits—that may not be making people any better off: it is simply reducing the number eligible for the benefit in the first place.

Other witnesses before the Work and Pensions Committee had similar concerns which need to be looked at in detail. Age UK said that in its view, some people could lose a substantial amount in the initial period following the introduction of the single-tier pension. Some people who reach pension age in the early period after the reform could lose as much as £18 a week in savings credit. That is a fairly substantial sum for people who are, by definition, not on a high income.

The concern is that the way the provision operates will create losers, however much it is simplified. Simplification, while a desirable goal, has to be set against the need for fairness and the potential for creating losers. In debates such as this, we are inclined to think that if something is going to be simpler, it is inherently better and always advantageous to everyone. However, Age UK felt that this group of people could lose out as a result of the change.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

My hon. Friend is setting out the issues associated with the savings credit very well, as usual. I am struck by Age UK’s argument that there may some significant losers. Those who benefit from the savings credit are people with some savings. They have tried to provide for their retirement, and under the current system the savings credit is a way of ensuring that doing so pays. Does my hon. Friend agree that, if they suddenly start getting up to £18 less, they are going to feel pretty sore?

Sheila Gilmore (Labour, Edinburgh East)

Indeed, and that is why the matter was brought to our attention.

There are other, wider issues. The system was structured as a gateway or passport to other benefits that people could claim. The most important were probably housing benefit and—perhaps of less importance, although still significant for some—council tax benefit. That matter has been devolved to local authorities in England, but presumably there would still be some who, prior to that change, had been in receipt of savings credit and pension credit and were therefore eligible for council tax benefit. Presumably, that system is still being operated at a local level, as a passport to that benefit, because people of retirement age have been protected from the impact of the 10% overall reduction in the moneys transferred to local government. Central Government told local government that pensioners would not be affected, so I presume there is still a link. I am not absolutely sure how it works in detail, but obviously there is a link.

People need to know whether arrangements will be made so that those who would otherwise have qualified will still receive housing benefit or council tax relief, and they need to know exactly how that will work.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is fair to say that Baroness Hollis, who gave evidence to the Committee last week—it seems so long ago—is an expert on the interaction of means-tested benefits and the social security system more widely. She could not clarify what the implications of abolishing the savings credit were for housing benefit. Does my hon. Friend think the Government need to clarify that?

Sheila Gilmore (Labour, Edinburgh East)

I think that needs to be clarified; it is important that it should be. In the pre-legislative scrutiny report that the Select Committee prepared, we asked for more detail on the transitional protection that the Government said would be available. They told us that there would be protection for people entitled to both savings credit and housing benefit under the existing system. When we were looking at the Bill, we were concerned that the details of how that would work in practice had not been made clear.

The Select Committee called on the Government to publish a clear explanation of how the supports would operate under the single-tier pension; how the transitional protection would be put in place; how it would actually work; and how people would know about it. That request was made on the basis of the evidence that we heard. Organisations such as Age UK felt that it was a considerable issue. Its view was that the Government had to ensure, first, that transitional protection would protect those who had modest incomes and would reach the state pension age in the early years of the new single-tier pension, and secondly that they would not be worse off than they would be under the current system.

Those people do not have a long time—or any time at all in many cases—to do what we all hope the change will encourage them to do in the medium to longer term. We are told that it will encourage people during their working lives—everybody hopes this will happen—to feel that making savings, paying into a pension and trying to boost their retirement income will be worth while. That is fair enough for people who have five, 10, 15 or 20 years ahead of them to start dealing with that, but it is obviously much more difficult for people who are very close to reaching the state pension age in the early years of the new system. Even if they wanted to, they would not be able to make that kind of provision.

So the Select Committee heard evidence and made a request. Without a robust transitional provision, there could be people less well off under the new system, which is what we are trying to avoid. We know that many people might not initially be any better off under the new system, but we do not want people to be worse off, particularly those who, by definition, have a low income—that is why they are eligible in the first place. Remember, to be eligible for savings credit, a person must be, broadly, on a low income. If a person’s income is high enough, they will not qualify for pension credit or the associated benefits because they will be deemed to have enough income. We are talking about a low-income group.

I hope that the Minister will take the opportunity to clarify how all this will work and to reassure groups concerned about this set of pensioners that proper provision will be made for them.

Richard Graham (Conservative, Gloucester)

If I may, I want to try to bring the discussion back briefly to an aspect of clause 23: the category C pension, which the Minister and others will know pertains largely to elderly widows whose husbands reached pension age before the national insurance scheme of 1948 and who were not insured before then. Clearly, very few, if any, such widows are still alive. However, I wanted to seek his reassurance that widows who were still benefitting from a widow’s pension from husbands who died in the second world war, of which there is still a small, albeit dwindling, band—including, to give a declaration of interest, my previous landlady—will not be penalised under the changes made to category C pensions in clause 23.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We have had a spectacular show of erudition in this exchange. I happen to know the number of people receiving the category C pension—I think that the hon. Member for Edinburgh East referred to it as category D, but the one before 1948 is category C. The number of people who had reached pension age by 1948 and are still claiming is zero, but the number of surviving spouses is 20, so we are paying 20 category C pensions. We took the judgment that there would not be any new claims post-2016, and we think that we are fairly safe on that.

I can reassure the former landlady of my hon. Friend the Member for Gloucester that anyone who is drawing their pension before the single tier comes in, which I speculate that she might be, will continue to receive their pension in accordance with the current rules.

Richard Graham (Conservative, Gloucester)

I am grateful to the Minister and will be delighted to give her that good news for her 100th birthday in three weeks’ time.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Very good. The nation’s centenarians can rest easy.

Moving on to the substantive issue, clause 23 paves the way for schedule 12, which does a lot of things, but the particular issue that we have been talking about is the removal of the savings credit for single tier pensioners. It is worth going back to why we have a savings credit, because we did not have one until the pension credit was introduced. I will explain why it became necessary, although I do not think that “necessary” is the right word, because there was a better solution at the time.

I remember the days back in the ’80s when the pension and the means test were almost the same—the difference was but 5p. Whether someone drew a national insurance retirement pension or supplementary benefit for pensioners, the numbers were essentially the same. However, over time, because of the breaking of the earnings link and what were probably ad hoc increases to the means test, the gap between the basic state pension and the means test grew and grew and grew. The previous Government took the view that it was increasingly untenable to say to people who had done a bit of saving, “For every pound that you have saved, we will take a pound off the minimum income guarantee,” as it was then known.

I always think that the savings credit was born on a whiteboard somewhere in the Treasury. It might have been at the DWP—I do not know—but it was clearly on a whiteboard, because it was so techie that only someone with a whiteboard could have invented it. Because the savings credit is so techie, people do not take it up in the numbers they should. As I think has been acknowledged, the take-up rate for people who are entitled to just the savings credit is between 43% and 48%. It is the closest thing we have to a lottery in the benefits system. If someone tosses a coin, that gives the same chance as their claiming their savings credit.

The idea was that the savings credit would be a savings incentive, but most people do not know that it exists and only have a 50:50 chance of getting it if they do. It is a post hoc effort to say, “We have done wrong by you; we will try to put it right.” It certainly is not a savings incentive. Given that the single tier tackles that head on by paying a single, simple, decent state pension above the level of the basic means test, the narrative rationale for savings credit goes out the window. If we can get rid of complexity and reward saving in one go, that is two ticks as far as I am concerned.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said we had stopped boasting about how we had reduced means-testing. I take his reprimand. We should have been boasting more.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am always wary about being corrected by Hansard, but did I use the word “boasting”? It does not sound like the kind of word I would use.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I think the hon. Gentleman pointed out that we used to proclaim four benefits of single tier and had stopped banging on—I do not think he used that phrase either—about one of them. The reduction in means-testing is quite significant. I refer the Committee to page 26 of the impact assessment. The particularly attractive stacked bar chart shows that if one focuses on the new pensioners coming in—the single-tier pensioners—the proportion who will draw pension credit halves. I pause for dramatic effect. That is a very significant change.

At the last DWP oral questions, Members on the Opposition Front Bench were shouting “2%” at me, because the proportion of means-testing in the entire pensioner population fell by a relatively modest number. The point is that people who are retired and get older can drift on to pension credit. The obvious example are people who work past pension age, stop working, and become entitled to pension credit. The stock of pre-single-tier pensioners has a tendency to flow on to pension credit, which provides an upward momentum in and of itself.

We are going against that tide with the single-tier pensioners. For the flow of new pensioners, we are substantially reducing dependence on pension credit. We are not substantially reducing dependence on housing benefit; I entirely take that point. If a person has significant housing costs, they will not, in many cases, be clear. However, I think that a world in which pensioners do not have to claim multiple means-tested benefits has got to be a better one, because it means more money is spent on pensioners and less on bureaucracy.

Not only are we reducing means-tested benefit dependence quite rapidly for the flow—more rapidly than might appear from our charts about the whole pensioner population—but we are reducing the proportion who have to jump through two lots of hoops, or three if council tax benefits are counted separately. Many pensioners will welcome that.

Sheila Gilmore (Labour, Edinburgh East)

Will the Minister comment on whether simply reducing the numbers makes a significant difference to people’s standard of living? Numbers can be manipulated to say that fewer people are entitled to means-tested benefits, but, as with the group on savings credit, they might actually be worse off.

Steve Webb (Liberal Democrat, Thornbury and Yate)

That is an entirely fair point. It would be fatuous for us simply to say, “Aren’t we clever? We’ve just abolished means-tested benefits, and isn’t it great that fewer people are on it?” But we are not doing that. What we are doing is reducing the need for those things. By paying a single, simple, decent state pension at £144 a week, fewer people will need means-tested benefits. It is true that we have stripped out a bit of the system for which there is no long-term rationale, which reinforces the trend towards the balance of expenditure being on the pension, rather than on the means test.

I was asked for numbers on the scale. The Age UK figure, which was quoted, is the maximum possible savings credit—there is a maximum—and from memory I think the figure is £18 a week, which is of the right order for the maximum savings credit. The typical notional loss—I stress that it is notional—in 2020 will be about £11 a week, but that will be partly offset elsewhere in the system. The median notional reduction in net income will be about £8 a week for the savings credit losers, who will be about 1% of the pensioner population at that point. There is a set of people who will get about a tenner a week less.

It is worth stressing that they are notional losers. We are not taking cash away from anybody. Nobody who is getting savings credit will have it reduced by a tenner a week, or extinguished. A set of people who hypothetically will fall within the scope of the savings credit—which they pretty certainly do not know they are going to get—will not get it. It is still less money than they would have had, but I suspect that the number of angry letters that I and my multiple successors will get about the amount of savings credit someone thought they were going to get and did not get will be countable on the fingers of one hand. It is so complicated. Most people will say, “You have told me what I’m going to get. I’m going to get a single, simple, decent state pension and my own savings on top.” There will be minimal means-testing in many cases; it is just a cleaner system. The rationale for the savings credit was understandable when it was introduced, although it was complex. In a single-tier world, it has no lasting purpose.

As for the transitional issue, had we simply abolished the savings credit and made the knock-on change to the housing benefit system, we would have had far more low-income losers. The housing benefit system has what is technically known as a “bit” in it equivalent to the maximum savings credit. The idea was that, if people received the maximum savings credit, they did not want the housing benefit system coming along and clawing back everything that had been given to them through the savings credit. There is an element in the housing benefit system for the maximum savings credit. We are retaining that element, even though we are abolishing the savings credit, so that we do not create additional housing benefit losers. That is how we plan to approach the issue.

The revised system of support of housing benefit for pensioners needs to be worked through in a universal credit world, where housing benefit for non-pensioners is part of universal credit. We therefore need to think carefully about the housing benefit world for pensioners, which is why we have not set it out in detail. That remains a work in progress. However, we have said that, for five years after implementation of the single tier, we will retain the housing benefit protection, and that will give plenty of time to draw up a new system. I hope that, with that reassurance, the Committee is content that clause 23 should stand part of the Bill.

Clause 24 - Abolition of contracting-out for salary related schemes etc

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I beg to move amendment 16, in clause 24, page 11, line 37, at end insert ‘but may only do so with the consent of the employee trustees.’.

The clause takes us into the realms of some of the more granular aspects of the ending of contracting out. It was the subject of considerable evidence heard at Select Committee sittings and at our evidence sittings last week. Subsections (2) and (5), as well as schedule 14, give employers the powers to amend employee contributions and benefits in their occupational schemes to an extent limited to recouping the cost of the extra national insurance that the employer will have to pay as a result of the end of contracting out.

I said earlier in our proceedings that the contracting-in, contracting-out dynamic under the Bill was perhaps its most significant and complicated part. For those who are contracted out in the public sector, the increased national insurance contributions will have to be absorbed either by the public services themselves or by the Government. It is fair to say that there is some obscurity about how the national insurance contributions will be made up in the public sector, given that more than 5 million employees are in final salary defined benefit schemes, which led to their being contracted out of the second state pension. In the private sector, there are 1.6 million active members of private sector defined benefit schemes.

The amendment would not impact the 5.4 million active members of public sector DB schemes, as the power under the Bill does not extend to public service schemes. The ability to recoup the national insurance contributions applies only to private sector DB schemes. Our proposal would enable an existing protection for members’ benefits under legislation or schemes to be subject to trustee consent. As it stands, the Bill will enable the existing protection for members’ benefits under legislation or scheme rules to be overridden. There is a statutory override. I am sure that the Minister will say that the Government also want to take the power to exempt schemes from that override.

It is unclear how the Government intend to proceed on certain aspects of the private sector DB schemes, specifically protected schemes. Leaving the protected schemes aside, as things stand there will be a statutory override. That includes specific statutory protection given to members in former nationalised industries when they were privatised, and also measures of protection that employers in times past have agreed to write into their schemes.

To put it straightforwardly, we have in the private sector 1.6 million members in final salary defined benefit schemes who have been contracted out of the state second pension because their company pension scheme is going to give them as good a deal as they were getting from the S2P. Central to the Bill is increasing national insurance contributions as these individuals are brought back into the state system. To make the numbers work, to get to a cost-neutral system, there will have to be some pretty significant savings somewhere. It is fair to speculate that a decision has been taken that one way to make those savings—certainly to get the Treasury’s consent, if not to make the system cost-neutral—is that those in private sector DB schemes will have to absorb that pretty significant national insurance increase.

What does that mean for the members of those schemes? A scheme will have to decide how it absorbs those costs. We heard evidence from the CBI and others. The Minister fairly put the viewpoint of the employees to the CBI regarding protected schemes. That view is: “We were promised when these schemes were privatised under a previous Conservative Government that the conditions of our pension were protected; that we could not, by law, have a worse outcome at any stage than we had at the time when our industries were privatised.”

The Minister put that view pretty straightforwardly to the CBI. I do not think I am doing the CBI an injustice if I say that its representative’s response, not unreasonably, was along the lines that the money has to come from somewhere, and if it does not come from an adjustment to the rules of these schemes, it will come from the employees’ pay packets, because the business will have to absorb the cost one way or another. As I understand it, the CBI favours enabling these private sector DB schemes to absorb those costs, whether through higher contributions from scheme members or, potentially, a lower accrual rate of pension going forward.

This is a thorny issue. We suggest in the amendment that trustee consent should be required to make the changes. For example, we heard from witnesses from the employee side of the argument that the ending of contracting-out and the associated increase in employer NI is in principle no different from any other risk employers with DB schemes might face, and there is no sound justification for the Government’s disturbing the existing balance of power in the schemes.

The Minister may or may not agree at this stage, and the situation is not entirely clear, certainly so far as protected schemes are concerned. Some on the employee side argued in written evidence and in witness sessions that the extra cost to employers is no greater than might arise in the event of a small change in market interest rates. There was no suggestion of intervening to protect scheme members who lost out when the Government amended the statutory basis of pension increases from RPI to CPI. The Government should allow the resulting problems for employers to be dealt with through established processes, whereby changes can be effected by negotiation and agreement.

Based on what we heard in the oral evidence sessions, my sense of the argument from the employee side is that an overriding power based on the ability to recoup a set amount could result in great unfairness. There may be no correspondence between the variable amounts members may gain from the single state pension and the amounts they may lose if employers are allowed to determine unilaterally the form of contribution and benefit changes in occupational schemes.

There is something to be said on the point that there might not be a correspondence between the variable amounts members gain from the single state pension and the amounts they may lose if employers are allowed to adjust the terms of the occupational DB scheme of which these employees are members. The Minister will doubtless say, rightly, that in some instances, what a scheme member currently in a contracted-out private sector DB scheme will lose through the mechanism for absorbing the increased national insurance contribution, they might gain—and more—from the ability to get a significantly higher state pension. The calculations are difficult, however, and I am not sure the Government have done such a calculation.

As things stand, someone who is contracted out into a final salary scheme can only get, at most, the basic state pension of around £110 a week. Under the new system, as they are brought back into the state pension, it will be possible—certainly in theory and in practice for some individuals—to get to £144 or whatever the level of the new state pension is set at. That is a significant benefit, although again, the calculations are difficult. It depends on circumstances, how close the recipient is to retirement, whether it is possible to buy back in, and so on. That issue must be considered, but it is not necessarily as simple as it first appears.

The TUC told us of its opposition, in principle, to the statutory override in clause 24 and schedule 14. It would regard an amendment such as the one we have tabled as a far from ideal solution; indeed, I would not claim that it is wildly enthusiastic about our amendment. I am sure hon. Members remember the TUC’s evidence session. I asked what it thought about an amendment such as this, on trustee consent, and it said that it would be an improvement. [Interruption.] I did not catch what the hon. Member for Tamworth said; I invite him to let me hear what he is saying.

Christopher Pincher (Conservative, Tamworth)

I asked whether it was a united response.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is fair to say that those who represent employees, the trade unions, strongly oppose the statutory override. It is important that the Committee hear that argument. The TUC says that because the cost calculation will be made at the aggregate level rather than per individual, it is expected that many individual scheme members will be worse off, although the impact will be neutral overall.

As the Work and Pensions Committee pointed out, the DWP has not undertaken an impact assessment of those affected by this measure. Schedule 14 requires actuarial certification of scheme changes to ensure consistency with the Bill, but we believe this protection is insufficient. Schedule 14 indicates that the Government also intend to apply the override to protected persons, meaning individuals transferred from public sector employment due to privatisation with a legal guarantee that their pension entitlements could never be altered without their consent. The TUC is strongly opposed to this measure.

The TUC has quite a lot of experience of pensions, understandably, because historically, pensions in the occupational sphere are bargained between employers and employees. My hon. Friend the Member for Middlesbrough South and East Cleveland was a trade union organiser. He is close enough for me to hear not so much what he is saying as the noise emanating from him—[Interruption.] I caught the last word the hon. Member for South Derbyshire said: I think it was script”. I must invest in a hearing aid.

That is the trade unions’ position. They are strongly opposed to a statutory override in principle and in practice, and oppose the application of the statutory override to the protected schemes. The Government’s position on non-protected schemes is clear. The statutory override will apply, and those who run the schemes will be able to adjust the benefits or contributions to absorb the significant national insurance rise. We know it is significant because the Government have calculated that an extra £5.5 billion a year in extra national insurance contributions will go to the Treasury from 2016 when the new state pension begins. The bulk of that will come from the increase in national insurance contributions in public sector schemes, which have 5 million members rather 1.5 million. It is unclear how the increased national insurance contributions in the public sector will be met because the Government have not wanted or are unable, rightly, to reopen the public sector pensions settlement undertaken by the Chief Secretary to the Treasury, the right hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander).

We are talking specifically about private sector DB schemes that have been contracted out. It is clear that the statutory override for these schemes, other than protected person schemes, is a consequence of a larger reform the Government are undertaking. As people are brought back into the system, their contracting out, by definition, must end. Given the opportunity for individuals to buy back into the state system and to get up to a higher state pension, we do not oppose that.

Protected schemes are protected because when the last Conservative Government privatised industries, the workers were promised that the terms and conditions of their pensions would never be worse than at the moment of privatisation. The argument is that having to absorb those national insurance contributions will result in the deterioration of those terms and conditions.

The Minister wants to give himself the power in the Bill to exempt such schemes from the statutory override that the rest of the private sector DB schemes will have to undertake. It is not unfair to say that the Minister’s position remains undecided. He was straight in putting the employers’ case to the CBI and the CBI’s case to the trade unions in Committee last week, but according to his evidence, he had yet to come to a decision on whether the protected schemes should be exempted from the statutory override.

The amendment, which adds the words

“but may only do so with the consent of the employee trustees”,

would bring the trustees four-square into the matter. Often, they will be involved naturally, but the amendment would ensure through legislation their involvement in the negotiation process. We do not yet know what the Government’s intentions are. I await the Minister’s response with particular interest, given the ambiguity that still surrounds the Government’s intentions, and I ask him to take seriously our proposed amendment on this thorny issue.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Thank you, Mrs Main, for allowing me to serve under you. What I am about to say will be short, brief and to the point. I will try to make sure for the sake of the Minister that I do not end up troubling the back-room staff, who might also be here. I hope that this will be simple.

The LGA came to speak to me earlier this week and raised one or two issues about what the impact of the proposal would be. Perhaps the Minister will clarify the Government’s position. The LGA was most concerned about the impact it was going to have on local authorities and also on health services, too. I want to add to those the impact it will have on our armed services. As my hon. Friend the Minister knows, I represent a naval garrison city. I am keen to make sure that monies spent on the defence budget will be spent on the front-line job of defending our country and making sure that we reward our service people accordingly.

When the LGA came to speak to me, my understanding was that it was talking about how it might need a 3% increase for employers, as far as national insurance is concerned, and a 1.4% increase for employees. I know that it has also been to speak to my hon. Friend the Member for Burton, who may wish to correct me if I get any part of this wrong, because he probably has an even better understanding of the issue than I do. However, the LGA would be grateful for clarification. I have raised the issue with the Minister, but it would be helpful if it were to be rehearsed publicly so that we can understand where we are going.

I am also concerned about the significant impact on the council tax payer. If it is the case that local authorities have to absorb the cost, that will be passed on to the council tax payer, and—surprise, surprise—I happen to be a Conservative who believes in low taxation and wanting to make sure that my council tax payers, especially the pensioners and the elderly, are not going to be forced to pay even more money.

Perhaps, if we are expecting local authorities to do things without receiving the money, there is a real opportunity for us to review what we are asking local authorities to do in the first place; I wonder whether we ask them to do significantly more than we think. That is all I want to say. I hope that it is reasonably clear.

Sheila Gilmore (Labour, Edinburgh East)

It was always going to be complex to make the changes required. For many years, we have had a system that assumed that if people were in a defined benefit scheme—in the public or private sector—they would be contracted out. That was part of the whole structure of the scheme that we have had for probably 30 to 35 years. Even though individuals are not always fully aware of all that is going on, that is how matters have been structured.

Of course, at various times, different Governments have attempted to put those who are not in such schemes in a similar position through some form of state provision with varying degrees of success, and with disruption and break-up of the various alternatives.

To look from the perspective of the pensions reforms introduced in 1975 by Barbara Castle, the assumption was that we would have one group of people covered by employers’ schemes and other people who would never get into those—although at that time there was still hope that those would still expand—who would be covered by a state scheme. It has taken us a long time to get to the point we are at now. I accept that we need to do something about contracting out, because, if we did not, it would be difficult to manage the change.

We also have the problem that there are now only a limited number of DB schemes in the private sector; I believe that only 13% of private sector schemes are open to new members. Others are still open for existing members’ future accrual, but there are some instances where existing members had their schemes ended and switched to a different form of provision.

When the Work and Pensions Committee looked at that, the National Association of Pension Funds said that it anticipated that one in five of those schemes still open to new members would close and switch to a DC scheme. Concerns were expressed when we took that evidence, as they have been throughout this process, that the change to encompass the new single-tier pension could speed up the demise of the remaining defined benefit pensions, particularly in the private sector.

Some will take the view that DB pensions are all but dead anyway, so that would not make much difference, while others are anxious to retain what remains of them. That includes a substantial number of employers who see a benefit in having defined benefit schemes, such as attracting and retaining skilled employees, and see their retention as the right thing to do.

There is a concern, however, that as we now have to go through this change, it may be yet another factor, of which there have been many, that sees defined benefit schemes falling by the wayside. We have argued across the House on numerous occasions about whose fault that is, with fingers pointed at various Government policies.

We know that some policies, including some of those implemented in the 1980s, had an impact on defined benefit schemes, just as those implemented by the previous Government did. Other factors have been equally, if not more, important, such as the longevity risk and the fact that some schemes were started on a set of actuarial assumptions that have been confounded by the events of recent years.

Actuaries, despite everything, seem not to be particularly good at catching up with that; they seem to be behind events rather than predicting them. Therefore, what seemed to be fairly safe assumptions 20 years ago have turned out not to be. In the face of that, regardless of any other governmental changes, a number of employers have taken the view that the risk of maintaining the schemes is too high. We would all prefer not to see these pension reforms being used as another reason for more of the schemes to go out of business and for people not to have that protection.

When we took evidence, a 2017 start date was assumed for the single-tier pension. Most of the main collective organisations, such as the NAPF, the Association of British Insurers and the CBI, accepted that the changes were necessary as there had to be some adjustment. The reason for having some adjustment for schemes—this is where the statutory override comes in—is that on a balance of risk, the concern was that if existing DB schemes did not have the ability to change the way they operated, it was even more likely that such schemes would simply be closed by employers.

If faced with higher national insurance contributions and no means of adjusting their schemes to take that into account, an employer might simply say, “This is the last straw. We have had this, this, this and this over the years. We have been trying to keep DB schemes because we are the good guys”—as the Minister said—“but this is the last straw.”

Hence the proposal for schemes to be able to make adjustments to contribution levels, or, I suspect, largely to benefit levels. Schemes will make their own choices on that, but given that employees are going to be paying higher national insurance contributions as well, I suspect it may be seen as easier to adjust future benefits rather than expect people to pay more in the present.

There is, therefore, the suggestion that there should be some leeway. I understand that, because in the scheme of things it would perhaps be tempting to say, “No, they shouldn’t do that; they have just got to absorb it.” However, since there is another exit, which is to get out of the scheme altogether, we could be shooting ourselves in the foot. Hence the proposals here.

The question then is how employees can be satisfied that all is in order and that the opportunities are taken to make changes that go beyond what is necessary to provide for the additional national insurance contributions. There are concerns that in some cases, because changes are being made anyway, such changes might be greater than is essential. Where is the safeguard for the scheme members in all that? One safeguard would be that trustee consent should remain necessary before the changes can go ahead. That is the protection for employees and that is the purpose of having trust-based schemes in which trustees look after the interests of scheme members.

If the case is well made, I do not think that trustees are necessarily going to be a block. They have to look at the balance of risk as well. They understand that we cannot deny reality and say, “Oh well, we are not going make any changes,” if that results in a decision that would not be for them to make. It would be for the employer to say, “Well, that’s it then. We are away from DB altogether.” I think that trustees would take a balanced view and that they understand the balance of risk, but the continuing involvement of trustee consent would give employees the safeguard.

I assure hon. Members that the only script of any description that I am speaking from is the Work and Pensions Committee report. We on that Committee heard and discussed considerable evidence on this issue. The other issues that arise are partly to do with the change from 2017 to 2016. I have already said that most of the umbrella organisations that gave evidence on this subject were reasonably satisfied at that point that there was time to make the changes and that they could manage the process.

However, subsequent to those organisations’ evidence to the Work and Pensions Committee, the date changed: it was brought forward a year. At the time when that change was announced, a number of organisations expressed concern about whether it would make things more difficult and the risk that it could make the implementation of the changes unworkable for pension funds.

On hearing the announcement of the change of date, the NAPF said that it was still supportive of the reforms, but that

“the Government must ensure that the implementation of these changes is workable for pension funds.”

It also pointed out that we now have a tight timetable for bringing forward the changes, which brings us back to the question: if it is too tight or seems too difficult, is there a risk that employers will simply decide to shut up shop rather than go through the process? In the words of the NAPF:

“It would be a shame if big mistakes were made in a rush to implement the changes.”

As we know from bitter experience of pension policy that inadvertent consequences of what seem to be good ideas are all too common, it is important to listen to those words.

In our unanimous report, the Select Committee’s conclusion was:

“it is self-evident that having one year less to prepare for the ending of contracting-out will impose a significant burden on both groups of stakeholders. Having previously appeared to listen and respond to the concerns of pension schemes and employers about the impact of the STP, the Government has now sprung this earlier implementation date on them. We believe it is therefore the Government’s clear responsibility to work with these key stakeholders to ensure that the transition to the ending of contracting-out is as smooth as possible and that already beleaguered Defined Benefit private sector occupational schemes do not suffer further adverse consequences.”

I am sure that the Minister will have taken cognisance of those comments and will have been working as hard as possible since then to ensure that the bringing forward of the date does not adversely affect those schemes.

The situation is different in the public sector. It sometimes feels as if one bit of Government—one bit of public spending—will be taking money to pay out to another, and the Government as a whole will have to decide how to deal with that. There will doubtless be calls from local government and other Departments saying, “We need our funding increased to pay the higher contributions.” I hope that the ground is well prepared, not just for that—although it will interesting to see what the Government have to say about how they will resolve the additional expenses and how Departments and local government will be equipped to deal with the increased cost—but for the increased cost to individuals.

I understand that the maximum additional national insurance payment that employees will be expected to make is about £480 a year. That will make a significant difference to people’s bottom line, when they look at their payslips and see that they are suddenly paying more national insurance and their take-home pay is down. Although the trade-off is what happens later, it is always difficult to manage expectations because most people are more interested in what they get in their pay packet today than what they will get in the future. What communication strategy does the Minister have for that? If there is no strategy, there might be a lot of disappointed and angry people.

The Government’s own words to the Select Committee—the Minister may have more information for us now—were that

“90 per cent of those reaching State Pension age in the first two decades after implementation”—

of the single-tier pension—

“will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension.”

Nevertheless, that leaves 10% for whom that is not the case, so there are some trade-offs and some people will be in a more difficult position. It is extra-important, therefore, that we get it right.

Finally, has the Minister made further progress in relation to his ambitions for “defined ambition”? There was some discussion about it in Select Committee and, for those who might not know, “defined ambition” is an attempt to improve the pension provision for those predominantly in defined contribution schemes. We shall be discussing many such schemes under other parts of the Bill, but the current measure will spread a bit more of the risk and perhaps encourage employers to take on a little more provision in respect of their employees. Unlike defined benefit, which places a large risk on employers who take on big liabilities, defined contribution places a lot of the risk on the individual rather than the employer. The employer contributes, but the risk is transferred substantially to the individual.

When the Minister was giving evidence to the Select Committee, he said that he wanted defined ambition to be in operation by 2017 and that,

“We are working non-stop on the plans.”

It would be illuminating to know how much progress the hon. Gentleman has made, given that his timetable has been somewhat shortened since he said that.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Replying to amendment 16 requires me set out a little bit about the clause and to put matters in context. As has been discussed, when contracting out ends in 2016 for defined benefit pension schemes, the rebate that employers have enjoyed hitherto will be no more. There will be nothing to contract out of, and the rebates will no longer be there. Clearly, that is a substantial additional cost to employers and, in respect of private sector employers, I am talking from memory about £700 million. It is a significant sum for private sector employers.

Among other things, the Bill allows the employers to change their schemes so that they recoup exactly that money. For example, if they have a scheme that accrues benefits at a 60th of a final salary for each year and they lose the rebates, they might change that 60th to a 70th, or whatever the actuary says is the right number. The provision is not intended to allow firms to go further. To reassure the hon. Member for Edinburgh East, I draw attention to the fact that schedule 14 specifically precludes the use of the power to go beyond recouping the lost rebate. The power can be used only for the lost rebate.

We have built in flexibility so that the power can be used more than once. A firm could, for example, not go the whole hog in the first instance if it did not consider that it needed to, but with the confidence that, if it did need to, it could come back for the balance. We considered making firms take such action all in one go, but the worry was about firms that would take the whole lot out of the scheme, although some might not choose to do so.

We must reassure firms that do not have to offer occupational schemes. As the hon. Lady said, they are the good guys in many senses. To encourage those firms to be willing to carry on offering defined benefit pensions, which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching an agreement. That would be the norm. It would be quite proper. It is worth remembering that such employers offer the benefits as part of the remuneration package, and to generate good will with their employees. The strong incentive, therefore, is still to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that.

Heather Wheeler (Conservative, South Derbyshire)

I am happy to put on the record that I have regular meetings with the unions at Rolls-Royce, which employs a lot of people who live in south Derbyshire. To allay its fears, I am pleased to hear the Minister refer to ongoing discussions and conversations with the trustees, and to say that good firms will carry on such an excellent procedure for their employees.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The Rolls-Royce plant in Bristol employs many of my constituents, and I shall soon be meeting its trustees and trade union representatives to discuss such worries. I am of the view that if we say to employers that, when push comes to shove, they may not be able to recover that money, if this coffin has any room for more nails in it, that would be the final nail; it really would kill off DB. I do not think any of us want this entirely welcome reform to state pensions to have that effect.

Amendment 16 says that there should be an override for “employee trustees”. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will recognise that in law there is no such thing as an employee trustee. He may be referring to member-nominated trustees, or he may just mean trustees. His amendment is defective as it stands because we do not know what an employee trustee is. Is it a trustee who is a current employee? Is it a trustee who has been an employee? Therefore, I take it as a probing amendment, which sets out the hon. Gentleman’s position.

However, the amendment is rather odd. Let us suppose the hon. Gentleman means member-nominated trustees. There would then be two categories of trustee: trustees whose consent is required and trustees whose consent is not required. That seems to be the logic of his position, but it is a misunderstanding of the notion of what a trustee is for. All the trustees have a fiduciary duty to all the members. It is not the case that the member-nominated trustees are there to look after the workers, and the firm’s nominated trustees are there to look after the firm. A trustee acts in a fiduciary role for the entire membership of the scheme. Therefore, the amendment would create a rather unwelcome division between different sorts of trustees with different powers. It is undesirable on that basis.

If the firm were to say, “Well, we won’t kill off the DB scheme, but we will recover the money through lower pay rises and pay cuts”, that would be incident on the entire work force. The members of the DB scheme would keep their DB pension rights, but the entire work force of the firm would pay for it. It would be unfair to leave firms no way of taking the money from the members of the scheme, but allow them to recoup it from people who are not in the scheme. Almost by definition, employees who are not in the scheme have worse provision than employees who are in the scheme. It would be very odd for the firm to recoup the cost from the people who have inferior pension provision.

The issue of whether it is fair for people who pay more NI to have their workplace pension accrual reduced, for example, comes back to what we call “something for something”. The hon. Member for Edinburgh East accurately quoted our estimates. We estimate that, across the public and private sectors, 90% of people in the next 20 years will get back more through enhanced state pension than they pay in, even taking account of an employer offset on the accruals on their employer scheme.

If a person works for Tesco—I use Tesco as an example because it is a big DB scheme, not for any other reason—their Tesco accrual might be lower if the statutory override is used, their employee national insurance will be higher, but they will be accruing a £144 pension, not a £110 pension. The vast majority of people—lower paid workers in particular —will get back more than they pay extra in NI. Even in the private sector—the override does not apply in the public sector—we estimate that 80% will get back more than they put in. There will be some for whom that is not the case, but the vast majority of workers, in particular those on lower wages, will get back more, even if the employer uses the override power.

It is worth remembering that all we are doing is putting those employees on exactly the same rate of national insurance as anybody else. They will accrue exactly the same state pension as everybody else. The hon. Gentleman gave some current estimates of the numbers contracted out at the moment. By 2016, on current trends, we estimate that there will be a whisker under 1 million private sector workers contracted out. The numbers affected are continuing to drop, and we think there will potentially be 1 million fewer public sector workers, depending on trends. Therefore, the numbers affected will be somewhat lower than the hon. Gentleman indicated. We are giving firms the override as a reserve power. Most firms will want to do this in a negotiation, but they do need the reserve power.

The hon. Gentleman raised the issue of protected persons. We have consulted on that issue, and we are still considering our response. There might be a set of schemes to which we do not apply the override. For example, if someone was in a privatised firm where there is statute that protects their pensions, it would go against that potentially if we were to say that the employer in that industry can in any case change the rules of the scheme.

We have to weigh up the rights of the members of the scheme—as the hon. Gentleman, the GMB and the TUC said—against the position of the employers. Clearly, the employers have got protected and non-protected workers. Would they recover the rebate wholly from the non-protected workers? Does that create even more of a two-tier work force and industrial relations problems? If they do not do that, and pass it on to the consumer, does that mean higher rail fares, energy prices or whatever it is? It is a complex issue. We will publish our conclusions later in the summer, but we have not reached any yet. We recognise the arguments on both sides on that point.

My hon. Friend the Member for Plymouth, Sutton and Devonport was approached, understandably, by local government organisations asking what happens if they have to recoup the lost rebates from council tax and so on? To clarify, the rebate money comes from employee and predominantly employer, and from public and private sector; predominantly the public sector because of the work force.

The Chancellor has made it clear that part of the rebate money will go to do two things that I think we all agree are worth doing. One is to enable from April 2014 employers to offset the first £2,000 against their national insurance bill. That will enable, for example, a small firm potentially to pay no employer national insurance. Part of the rebate money will do that. Part of it will contribute towards what are called the Dilnot social care reforms. The cap on social care and changes to inheritance tax are part of that mix as well.

That does still leave a significant multi-billion pound unallocated amount from the rebate. Crudely, if one thinks of that unallocated amount as being broadly the employer public sector rebate, that is the figure to which my hon. Friend referred. That is a transfer within the public sector. That is money that the Exchequer will no longer have to pay to local government employers, armed forces employers, schools, hospitals and so on. That money will come in or not go out from 2016-17 onwards.

The House will be aware that the comprehensive spending review just announced ceases at the end of 2015-16. It is, therefore, entirely a matter for the Chancellor of the Exchequer of the day to decide what to do with that money. The Chancellor, hypothetically, could decide to allocate all of that money back to public sector employers from whence it has come. If he or she were to decide to do that at that point the employers, about whom my hon. Friend is concerned, would be more or less in exactly the same position as they were before. They would be reimbursed for the loss of the rebates.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Is the Minister’s advice, if I wish to take this any further, that I should write to the Chancellor of the Exchequer about it?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Far be it from me to advise my hon. Friend. Clearly, that will be a decision taken by the Chancellor of the Exchequer and, assuming that our right hon. Friend will still be in that role at that point, that might be something my hon. Friend will wish to do. I hope that clarifies the situation. Clearly, it will be a matter for a future Chancellor to decide the allocation of that money.

I will say a little more about the point of clause 24.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Before the Minister goes any further, could I take him back to his explanation of the Government’s position regarding the protected schemes? Is it that they have not made up their mind yet and it is a complex issue? Could he say a little about the complexities and why the Government are not able to clarify the position on protected schemes when the Bill is proceeding quite speedily through this House?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Just to be clear, clause 24 and the associated schedules provide for a statutory override, but they also provide for subsequent regulations to exempt specified employers. If the Government were to decide that certain categories that employed protected persons should be exempt, we would have to bring before the House regulations to that effect, which would then be debated. So, it is the general power that we are asking the House to accept here. I hope we will be in a position to conclude our deliberations relatively shortly, certainly while the Bill is still before Parliament. Later in the summer is the timetable we are working towards.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that elaboration. Can he say a little more about what the things are that the Government are weighing up? What we are discussing is a consequence of the ending of contracting-out, which is itself a consequence of the Government’s drive for a flat-rate state pension. I would like to get an idea from the Minister of the factors that the Government are considering as they try to come to a decision.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I hope that I have already given a brief flavour of them. On the one hand we have the important issue that pension promises were made in legislation—oral and written assurances have been made—and such promises should, ideally, be kept. On the other hand, we could argue that the people who are protected persons will still get the pension they thought they would get but some of it will come through single tier rather than through the scheme. They are contracted back in and start to accrue single-tier rights for future service. When the promise was made, the thing they had contracted out of took them down to a £110 pension and they are now heading for a £144 one, so one could argue that the spirit if not the letter of the promise is being kept by delivering part of the benefit through the state scheme from which their scheme is contracted out.

There are issues of whether the measure would make a substantive difference, which industries would be affected, and how long we would be talking about if the override were not applied—many of the promises were made decades ago, but in some cases to young workers. The issues in the energy sector might be slightly different from those in the transport sector. One of the first things we did was to trawl around the whole of Government trying to find legislation that had protected persons promises in it, and we found one or two pieces that we would not necessarily have found, in the nuclear industry for example. The matter is involved and detailed, but the substantive issue is, ultimately, a judgment call, and we are weighing things up carefully because we do not lightly override pension promises.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that further elaboration. Can he inform the Committee how many active members there are in the schemes? How many individuals will be affected by the decision on the exemption from the override?

Steve Webb (Liberal Democrat, Thornbury and Yate)

We published a consultation document on the subject, in which we estimated a figure in the order of 60,000 workers. One or two respondents found a few we had not thought of, but I think we are talking in the high tens of thousands.

We do not think, therefore, that the amendment works. If it were part of the law of the land it would not be clear what it did, because there is no such thing as an employee trustee. We do not like the idea of different categories of trustee, and we believe that the employer statutory override, within constraints, as we will discuss in a moment, is an appropriate response to the concerns, and protects the future of DB pensions. On the strength of that, I urge the hon. Gentleman to withdraw the amendment.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister referred to the wording of the amendment and observed that in law there is no such thing as an employee trustee. I can assure him that we were not trying to distinguish between categories of trustee. It was not about member-nominated trustees but about trustees generally. It has, however, been useful to try to draw the Minister out a little about the basis on which he intends to make a decision about the protected schemes, and on whether an exemption from the statutory override will be used. I observe that he is understandably keen to process the legislation through both Houses, but in this not-insignificant aspect of the Bill it is unclear what the Government will do, so we are being asked to vote for the legislation without being clear about what will happen with protected schemes.

I understand, as the Minister says, that this is a thorny issue, but from observations I have a strong sense that he is clear about the basis of the decision. He said that on the one side there was the promise that was made to the schemes’ members when the industries were privatised—he rightly said that a promise is a promise—and, on the other, that it could be argued that the promise had been kept because the individuals would be getting more from the new flat-rate state pension. It just was not clear to me what was preventing the Government from coming to a decision such that we could scrutinise that in the round as part of the Bill. However, it has been helpful to get that clarification and to ask for more from the Minister, so I beg to ask leave to withdraw the amendment.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 24, as we have been discussing, sets up the framework for the statutory override and the abolition of contracting out. We will debate schedules 13 and 14 shortly. As clause 24 indicates, schedule 13 relates to the consequential issues that must be resolved after the abolition of contracting out—I will give the Committee a flavour of that during the next debate. Schedule 14 explains how the power to amend schemes may be used and, as I indicated a moment ago, the limits on that power, including, for example, firms not being able to use it to recoup more than the extra cost of the rebate. Clause 24 is necessary to pave the way for the more detailed measures in schedules 13 and 14, so I commend it to the Committee.

Schedule 13 - Abolition of contracting-out for salary related schemes

Steve Webb (Liberal Democrat, Thornbury and Yate)

With some menace, I take my ring-binder in my hand at this point, because schedule 13 is detailed, and I am sure that the Committee will want to know what it does.

We are abolishing contracting out, which has been in the pensions system for many decades. I take great pride in abolishing contracting out. It has been a complete nightmare and creates great complexity in pensions. I still meet constituents, as I am sure do all Members, who are baffled by contracting out and do not understand why something has been knocked off their state pension. Contracting out has some extraordinary consequences. We have people whose state pension goes down as a result of being widowed because of interactions with contracted-out occupational pensions schemes. The whole thing is a complete mess, and I am very pleased that schedule 13 paves the way for what is perhaps an underrated aspect of simplification.

I will run through a few things that schedule 13 does. It makes a number of minor amendments to other legislation to take account of the fact that contracting out for salary-related schemes has ceased, so we have to change the tense of the references to contracting out. It includes some new definitions, because contracting out for DC pensions no longer happened after 2012, whereas for DB it will no longer happen after 2016, so we have to introduce the concept of first and second abolition dates. It removes the certification requirements for salary-related schemes to provide a pension of at least the statutory minimum—they are not contracted out any more, so they do not have to meet that test.

Schemes that were contracted out before abolition were expected to comply with the rules relating to the provision of a guaranteed minimum pension, or GMP, at the appropriate age for scheme members who were contracted out before April 1997. Schedule 13 ensures that in the event that the rules of a scheme did not fully comply with those requirements, they will be treated as being compliant with them. That is in order to ensure that such schemes will continue to provide scheme members with GMPs at the appropriate age. The schedule removes the requirement for the Secretary of State to review national insurance rebates every five years, because there ain’t gonna be one.

Although primary legislation is being repealed, the Bill will include transitional arrangements to ensure that contracting out activities do not stop abruptly. For example, notifications that take place before abolition will still be valid afterwards. Schedule 13 amends the early leaver and anti-franking rules so that the abolition of contracting out does not trigger either requirement. That ensures, for example, that someone who stays in a scheme at abolition will not be treated as having left simply because contracting out has ended. The schedule also makes consequential amendments to other primary legislation to take account of the end of contracting out.

I want briefly to flag up one paragraph of schedule 13, on which I know the Committee will be desperate for information. It is on the subject of GMP equalisation, which exercises the industry a great deal, so it would be helpful to put on the record what paragraph 20 of schedule 13 does, and in the commentary on that, I will give the House and the wider world the update for which they are waiting.

GMP equalisation relates to the fact that many schemes have not met what the Government believe to be their legal duty, which is to correct for the effects of uneven state pension ages as part of their pension scheme through the GMP arrangements. It is a contentious issue, but our legal advice on this is unambiguous.

The question of how schemes should best meet their GMP equalisation obligations is a complex one. Paragraph 20 allows for the Secretary of State to provide guidance on something called GMP conversion. Because it is not possible to convert GMPs into scheme benefits unless they have been equalised, this will provide guidance on an alternative method by which schemes can equalise benefits, including GMPs, prior to carrying out conversion.

We have a working group that has met twice so far. It includes such luminaries as representatives of the Association of Consulting Actuaries, the Association of Pension Lawyers, the Institute and Faculty of Actuaries, the Society of Pension Consultants and many of the relevant trade bodies. They have agreed that guidance on GMP conversion would be welcome, and they are working with us on that guidance. Our expectation is that the guidance will be provided by spring 2014. I hope that will be helpful to schemes in relation to those rather knotty and contentious issues, and I hope that schedule 13 contains everything that members of the Committee would expect it to contain.

Schedule 14 - Power to amend schemes to reflect abolition of contracting-out

Steve Webb (Liberal Democrat, Thornbury and Yate)

Schedule 14 specifies how the override power may be used and also constrains the use of that power. Paragraph 2(1) indicates that the power can be used either to increase employee contributions or to reduce the future accrual of benefits, or indeed both, but it cannot—through either or both of those measures—recoup more than the lost rebate. We will produce regulations that explain exactly what we mean by the total annual employee contributions and resolve various other definitional issues.

Under paragraph 3, the power may not be used to affect adversely the subsisting rights of scheme members or survivors. It is not about taking away rights that people already have; it is about future accruals or increases in the contribution rates. As this is complex stuff, we will require an actuary’s certificate; an actuary will have to certify that the amount that has been recovered through the measures that have been taken are within the limits and that too much has not been taken.

The power has to be used within a set time. We envisage that it will not hang around for a long time; five years is the sort of period that we are thinking about. Our friend the draftsman is back again with his rather helpful Q and A-style explanatory notes to the legislation, which say:

“Can the power be used more than once?”

We confirm, in paragraph 9(1) of the notes on the schedule, that

“The power may be used to amend a scheme...on more than one occasion.”

As I said earlier, the point is that the firm can come back for a second bite, which might encourage it not to try to get the whole lot in one go if it did not feel it needed to, but it has the comfort of knowing that if it had to come back a second or third time, it could do so. Broadly, that covers the purpose of schedule 14. I commend it to the Committee.

Clause 25 - Increase in pensionable age to 67

Steve Webb (Liberal Democrat, Thornbury and Yate)

We have reached part 2. Clause 26 is about the long-term further changes beyond age 67, but clause 25 is specifically about the increase to age 67. As has previously been announced, the state pension age is increasing to 67 over a two-year period from 2026 to 2028. The Chancellor forewarned us about it last year, I believe. It has been pre-announced. It is fair to say that having a state pension age of 67 in 2028 puts us in line with many other countries. Ireland got there first; Ireland will reach in 67 in 2021. The Dutch and the Australians will get there in 2023, the Danes and the Americans in 2027. We get there in 2028, and the Germans in 2029.

I have seen a letter-writing campaign suggesting that this is a grossly aggressive state pension age schedule that is out of line with those of other countries. It is absolutely mainstream. In many ways, one look at the longevity figures shows that frankly we are being quite pedestrian. There have been dramatic increases in longevity over the past century, and we will have changed male state pension age by only two years in over a century. People will be spending more time in retirement, even with the increases in state pension age, than they would have done some decades ago when men retired at 65.

It is often said that it is not fair to raise the state pension age because people have different life expectancies, as they do. It is worth saying that there has been a general increase in life expectancy for various socio-economic groups—the lowest socio-economic groups, and those in different parts of the country, nations and regions. Although there are substantial and important differences, any state pension age has the characteristic of having a different impact on different groups. We do not use that as an argument for not having a state pension age. We have a state pension age.

Given that life expectancy is rising across the board, often by similar amounts across different groups, raising it to 67 seems a modest and proportionate change. It is sometimes suggested, and was in our consultations, that a 10-year notice period was appropriate for changes. The Committee will note that this change does not come fully into force until 2028, fully 15 years from today. The Government cannot be accused of precipitate haste on the measure. We are in the mainstream of similar economies and, indeed, behind some of them. This is an unfunded state pension scheme; these state pensions will be paid by the national insurance payers of 2028 and beyond. We have to strike the right balance between allowing people to enjoy the growth of longevity in retirement, which we will through our proposals, and putting an excessive burden on the national insurance payers of tomorrow. We will talk about later state pension ages in later clauses.

Sheila Gilmore (Labour, Edinburgh East)

One issue that has been discussed at considerable length, including in connection with the previous Pensions Bill, is the fact that a number of people are out of the work force for health reasons considerably earlier than 65. There is a cost to Government and those individuals to maintaining them on other sorts of out-of-work benefits. Have the Government considered researching that in more depth, on the basis that some kind of provision might be made for them, even in the run-up to an increased pension age?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is right that there is a set of people who do not make it, in terms of active labour market participation, to current state pension age. There always have been. Our view is that those issues need tackling at source; to some extent they have been. The change in heavy manufacturing, coal mining and other occupations, which tended to be associated with shorter life expectancy, the decline in smoking and a set of other factors mean that the chances of making it to state pension age, even at 67, are substantially greater than even a generation ago.

The state pension age, which is one number in the system, cannot do 1,000 different things. There has to be a point at which one gets the state pension. If we think that there are differentials—different parts of the country, different social groups, different industry groups—then we have to address those issues, but if we used the state pension age to do so, it would affect so many other people in ways that make the system unsustainable that we do not think that is the relevant lever to pull. We will obviously return to these issues when we come to the next clause and discuss our longer-term strategy. I believe that the move to 67 in this clause is entirely measured, forewarned, proportionate and in the mainstream of similar economies. I commend the clause to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that explanation of the clause. I listened closely to what he said, and there was much sense in it. He is right to say that the increased pension age does not put the UK outside the broad spectrum of pension ages in similar economies. We will come to this in more detail on clause 26 and the amendments to it, but I should just say that health inequalities in the UK are, to a greater or lesser extent, more severe than in similar industrial economies. That makes the point that my hon. Friend the Member for Edinburgh East made even more powerful. The Minister said rightly that there are inequality issues that need to be dealt with at source. They emerge at pension age, but they are inequalities in themselves.

We have significant health inequalities that are relatively greater than those of other nations. I remember that not long ago Sir Michael Marmot, who is probably the world’s leading expert in health inequalities, gave an interview to the Financial Times and observed that if the UK’s health inequalities did not improve dramatically, the number of people able to work until the new pension age would be much lower than the Government are probably banking on. When comparing the UK with other countries, we must bear in mind not just the relative pension age, but how significant our health inequalities are.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Is the hon. Gentleman aware that in Plymouth there is an 11-year difference? Between people living in Plympton and Plymstock, which are not in my constituency, and Devonport, which is, there is an 11-year gap in how long people can expect to live. It is appalling.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I was not aware of the specific case in the hon. Gentleman’s constituency, but it does not surprise me. In some places in Glasgow, life expectancy is in the mid-60s but a few miles down the road it may be around 80. It is striking. The Minister is right to say that the issue must be tackled at source, but we are discussing pension age, and having heard what the hon. Member for Plymouth, Sutton and Devonport said, we must bear that in mind. Sir Michael Marmot has made it clear that health inequalities in Britain are such that some stark questions arise whether raising the pension age will work. We are talking about raising it to 67 and average longevity keeps rising, but within that average there are stark discrepancies such as that in the hon. Gentleman’s constituency.

Pamela Nash (Labour, Airdrie and Shotts)

I support the rise in the pension age to 67, but I am also worried about the life expectancy gap in different areas. The issue is not just life expectancy. My hon. Friend referred to the health of those who are expected to work longer. They may live longer, but not necessarily in the best of health. The period of healthy living has not increased as much as longevity.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

My hon. Friend makes a good point, which we will come to when we discuss clause 26. We heard Baroness Hollis talking about the difference between healthy life expectancy and overall life expectancy. She suggested that there are 10 years of healthy life expectancy, and potentially another 10 years of increasing, chronic disability. Those are huge challenges not simply for any one Government, but for the entire country. I am sure that we will go into the matter further when we consider clause 26, but the Opposition do not intend to stand in the way of clause 25.

Clause 26 - Periodic review of rules about pensionable age

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I beg to move amendment 7, in clause 26, page 13, line 33, leave out ‘person or’ and insert ‘panel of’.

Anne Main (Conservative, St Albans)

With this it will be convenient to discuss amendment 8, in clause 26, page 13, line 35, at end insert—

‘(5A) The panel shall include—

(a) representatives of the party or parties in opposition at the time;

(b) representatives of trade unions; and

(c) representatives of the House of Lords cross-benches.

(5B) The panel shall take evidence by way of evidence sessions to be held in public. It shall have power to determine its own terms of reference for evidence taking, which may include matters such as disparities in lifespan and life expectancy between sectors of the population.’.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The amendments refer to the Government’s provisions for reviewing state pension age, which include the establishment of a panel to assess rises in longevity. Clause 26 states:

“(1) The Secretary of State must from time to time—

(a) review whether the rules about pensionable age are appropriate, having regard to life expectancy and other factors that the Secretary of State considers relevant, and

(b) prepare and publish a report on the outcome of the review.

(2) The first report must be published before 7 May 2017.

(3) Each subsequent report must be published before the end of the period of 6 years beginning with the day on which the previous report was published.

(4) For the purposes of each review, the Secretary of State must require the Government Actuary or Deputy Government Actuary to prepare a report for the Secretary of State on—

(a) whether the rules about pensionable age mean that, on average, a person who reaches pensionable age within a specified period can be expected to spend a specified proportion of his or her adult life in retirement, and

(b) if not, ways in which the rules might be changed with a view to achieving that result.

(5) The Secretary of State must, for the purposes of a review, appoint a person or persons to prepare a report for the Secretary of State on other specified factors relevant to the review.”

A key issue in subsection (4) will be the proportion of a person’s adult life after they reach a specified age.

The Government want to be able to assess regularly whether longevity is increasing. That makes sense, given that longevity has increased significantly in recent decades and has so far manage to outstrip actuarial calculations about life expectancy. Our amendments are designed to beef up the panel that is mentioned in the clause.

Amendment 8 would ensure that the panel included representatives from the Opposition party or parties—a very good idea for the Opposition, although probably not so much for the Government—and representatives of the trade unions. That is important, given that trade unions continue to be the voice of those who are on the receiving end of changes to pension provision. The requirement for the panel to include representatives from the House of Lords Cross Benches is a nod to the expertise that is to be found there. Proposed new subsection (5B) would give the panel additional powers and provide for its evidence sessions to be held in public. The amendments would beef up the panel and give it greater credibility. When one reads clause 26, one gets the impression it is putting all the powers in the hands of the Secretary of State. If we are trying to get cross-party, cross-generational and cross-society support for tough decisions that might have to be made about the pension age in future, it is probably a good idea to have as wide a range of interests as possible represented on any panel the Minister might wish to set up.

The clause includes some detail on the periodic reviews to which I referred, but further clarity is needed. It is not our intention to stand in the way of the proposals in the Bill to increase the state pension age, as we discussed in considering clause 25. However, we have concerns about the mechanism for the periodic review. It is worth remembering in this context that the goalposts on the state pension age have been moved a number of times in this Parliament. We often talk about stability, certainty and long-term planning for retirement; moving the goalposts has not been conducive to those things, which we would all like to see, although I understand that by putting the review mechanism in place, the Government are trying to address that issue.

Legislation was agreed in 1995 to increase the state pension age for women from 60 to 65 gradually, over a 10-year period starting in April 2010. The Pensions Act 2011 speeds up that process so that women’s pension age will now reach 65 by November 2018; the state pension age for both men and women will then increase to 66 by October 2020. In discussions on that legislation in 2011, which I only became a part of during their dying minutes on Report and Third Reading, it emerged that a group of women were facing what we might call a cliff edge as a result of the pension age being changed again, and were facing an increase of up to two years with only a short time to prepare for that—certainly nowhere near the 10 years that most parties agree is the very least we should give individuals to prepare for changes to their pension age. I am delighted that at that time the Government agreed to modify the change so that the maximum increase any woman faced was 18 months, which was a welcome improvement. Of course, there is also the accelerated timetable for increasing the state pension age to 67, which clause 25 refers to.

The Secretary of State is asking for the power, unfettered, to review the state pension age every five years. The hon. Member for Gloucester, who is not in his place, referred a number of times to the importance of communication; as we will have a report from a person or persons every five years, there is a danger that people will fear that that means the pension age will go up every five years. That is inevitable. To reassure people, it would be useful to have a broader range of parties represented as a panel that makes the report. Also, if the Government want that power for the Secretary of State, we need more details on the procedure and mechanisms involved in the review.

The Opposition are anxious to ensure safeguards so that there are no decisions to accelerate the state pension age rapidly without buy-in from stakeholders within society. The hon. Member for Plymouth, Sutton and Devonport mentioned the Royal Naval dockyard in his constituency and the 11-year discrepancy in life expectancy; such issues will continue to arise—they are not going to disappear overnight. We know that there are significant health inequalities, and further moves to raise the pension age will bring such issues further into focus. If the Government decide to go down that route, it is in their interests to have a panel that represents the broadest possible range of opinion, while still being small enough to be effective—no doubt there would be a trade-off between the widest possible representation on the panel and its effectiveness. The Government should accept our amendments 7 and 8 and include those parties to which they refer in the review mechanism.

Christopher Pincher (Conservative, Tamworth)

The hon. Gentleman’s amendment states that

“representatives of the party or parties in opposition at the time”

should be included on the panel. Given that there is more than one party on the Opposition Benches—there are about half a dozen—does he envisage that a representative from each should sit on the panel?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman’s question is fair and pertinent. If there is a trade-off between having the widest possible representation and keeping the panel that the Secretary of State and the Government wish to set up to a manageable number, at the very least, Her Majesty’s Opposition should be represented. Anything further than that can be the subject of negotiations; but I agree with the hon. Gentleman’s fair question.

The hon. Gentleman beat me to the punch, because I was going to say that a review should be cross-party in nature, whether it involves one, two or three parties. Of course, if we do not have a coalition Government, there may be an extra space on the panel for another Opposition party representative. Such things remain in the future, to which we are not privy. In all seriousness, this is a thorny issue and it poses significant questions for Parliament and society. It is therefore important that we try to get political consensus. We should also get representation from those at the sharp end.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

One of the groups that could be included is GPs, because they are “front of house” and see regularly how health inequalities work.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That is a fair point, and I pay tribute to the hon. Gentleman’s interest in health inequalities. The greatest way we can make our society fairer is to reduce these striking health inequalities.

To get consensus, there should be employee representation alongside the political parties. GPs are at the sharp end. Sometimes, to understand these things it is necessary to be at the sharp end. My hon. Friend the Member for Middlesbrough South and East Cleveland has talked about people who work with asbestos and how long they are likely to live if they have been exposed to it. Such examples bring clarity to this issue.

According to mortality figures published by the House of Commons Library, of 1.2 million citizens who died between the ages of 65 and 69, 60% were in the bottom three income groups. The mortality rates of the poorest in our country are twice those of the richest. We must take great care to consider not just projections of life expectancy, but healthy life expectancy, an issue about which Baroness Hollis has spoken.

The review should take evidence in public, as our amendment states. If we are trying to get buy-in, and if the issue is about communication and making all of us aware of the challenges that longevity poses to society, there is a good case for holding the discussions in public. It is important that we have the confidence of the public and savers when we try to build consensus.

An independent commission is important. If the Government’s argument is that the state pension age might need to rise again, as a fair reading of the clause would suggest, the independence of the commission is important. As drafted, the clause establishes a largely formula-based approach to deciding state pension age in the future, and Ministers will make decisions based on information about the average life expectancy from the Government Actuary. It is not unfair to view the Minister’s observations on clause 25 in that sense. In the end, the Government will work from the average life expectancy.

We recognise that clause 26(5) also requires the Government to appoint an individual to provide the report and

“other specified factors relevant to the review.”

The Opposition do not believe, however, that that is enough to establish an independent, impartial and thorough process through which all factors relevant to decisions on the state pension age can be considered.

I believe that the Chancellor of the Exchequer referred to all the different things he has been doing to try to raise money or save money, and he said that the thing that has the biggest impact is raising the state pension age. He suggested that without the least fury, but I took from that that raising the state pension age was a Treasury decision. Given the health inequalities to which the hon. Member for Plymouth, Sutton and Devonport referred so eloquently, raising the state pension age will be more difficult to achieve in future without cross-societal support. We have heard evidence from a number of sources, and various bodies—from the Public Accounts Committee to the CBI—have expressed concern about the Secretary of State having unfettered power. Indeed, the CBI states that, when reviewing the state pension age

“there are many factors which should be taken into account such as healthy life expectancy.”

That makes our point, and the hon. Gentleman’s point, for us.

Further, the CBI believes that the review should be carried out by “non-political specialists” so that such factors can be considered. Let me make it clear that I am not an enormous fan of contracting out decisions to non-elected experts. Ultimately, the decision will have to be taken by the Government, but if they are going to proceed with the panel, it is probably wise to make the panel as effective as possible. Our amendments would help that process. Our view is that the clause as it stands does not provide clarity on the nature of the review of the state pension age. I hope the Minister will listen to our concerns and accept the amendment.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman for moving his amendment, which gives me a chance to put on the record how we believe the review process should take place and why we do not believe the amendment is necessary.

We are trying to be systematic, not ad hoc—as the hon. Gentleman suggests, we clearly do not want a future Chancellor who is short of a few bob to decide to tweak the state pension age or even, hypothetically, exceed a welfare cap that includes the tweak of the state pension age.

We are trying to be systematic so that people do not face the kind of emergency increases in state pension age that the new Government had to implement in this Parliament. People should have adequate notice—we are talking in terms of a 10-year minimum—and the process should be transparent. The steps in the transparent process are, first, that the Government of the day must identify a proportion of adult life spent, colloquially, “in retirement”—as the clause spells out, by that we mean beyond the state pension age. The Prime Minister was interviewed on breakfast television the other day, and he said:

“I think it’s fair to ask people to work a bit longer given that we’re all living longer…the idea that you should spend about a third of your adult life in retirement seems to me a reasonable one.”

That is the kind of figure we are thinking of.

One of the consequences of that model, of course, is that, as people live longer, the state does not take the whole of that longevity out of their retirement. If, for example, we are talking about roughly a third, for each extra year people are expected to live, eight months goes on working life and four months goes on retirement or drawing state pension. There is already recognition that not all of the improvement in longevity is an improvement in healthy longevity, which is part of the reason why the whole of the growth in longevity is not being snaffled up by working age.

The hon. Gentleman asked how the UK compares internationally. Perhaps encouragingly, of the 27 member states of the EU—as it was when the figures were produced—the UK ranked fifth for healthy life years at 65 for men, and third for women. That is relatively good news, although obviously there is room for improvement. Although healthy life expectancy has not risen as fast as overall life expectancy, it is still going up. For example, in the last decade for which we have figures—between 2000 and 2010—healthy life expectancy at 65 increased by 0.7 years for men and 0.9 years for women. The total life expectancy figure over the previous two decades was 1.9 years for men and 1.4 years for women. In other words, slightly less than half the improvement for men—and slightly more than half for women—was for healthy life expectancy. There is clearly a sharing of the growth in life expectancy.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister cites some interesting figures, but will he elaborate a little? That is good news, and we are pleased to hear the figures, but is there a possibility that if we dig under that average figure we have a real roaring ahead of life expectancy in some parts of the country, with a much lower rate of growth, if any, in other parts? Is that fair?

Steve Webb (Liberal Democrat, Thornbury and Yate)

In terms of England, Wales and Scotland, although there are differences in life expectancy, the growth in absolute numbers of years and months is pretty similar in the past decade or so. It is not identical, but it is pretty similar, apart from a few months either way. On the social class gradient, I can give the Committee the evidence for the past quarter of a century—a long run at this, from the early ’80s to 2006—for what the Office for National Statistics calls condensed socio-economic class, which has at one end of the scale managerial and professional, and at the other routine and manual. The Committee will be encouraged to know that the increase in life expectancy at 65 for men among managerial and professional workers was 22%, the increase for routine and manual workers was 21%—in essence, or as near as dammit, the same number. They clearly start at different levels and so on, but across the social scale we are seeing significant increases in life expectancy and in healthy life expectancy, and that reinforces the feeling that we have to travel in this direction, albeit with some care and caution.

Reverting to the process, as is clear in the clause, a future Government specifies a percentage—this Government think that up to about a third is the right figure—and the Government Actuary then comes back with a report saying, “Simply on the basis of the maths, this is the answer—this is what you have to do for future state pension ages to stay within your target.” The hon. Gentleman may underestimate the checks and balances in the process, because we do not simply take the number we first thought of, but expose the report to the independently led process. He should take some comfort from the fact that a hard-nosed Chancellor might simply have said, “We will take the number we first thought of,” or that the external review might simply have been led from within—the Government tweaked the number—but we have made it clear that we envisage an independently led review.

The model we have in mind is the Hutton review of public service pensions, so someone who commands respect across the political spectrum—in that case, the Government appointed a former Labour Secretary of State. We will not have a great panel that ticks every tick box, but someone whom people respect and who can listen to views across the spectrum and find out what is going on. Rather than putting into primary legislation that we must have a trade unionist or whatever on the panel, we can expect the person with widespread respect to be taking in the breadth of views, including employer and employee perspectives—it is a very not-new-Labour sort of amendment, which forgets the employer side of the equation and only has the employee side. Clearly, the person would want to talk to trade union representative and employers.

There are slightly different arguments about Members of the House. Bear in mind that even after the whole process has been gone through, with a recommendation and decisions made, everything requires primary legislation. This Bill does not enable the state pension age to be changed by regulation; there will have to be an Act of Parliament. The people mentioned in amendment 8—

“representatives of the party or parties in opposition at the time”—

will have hours of happy fun debating any change. Also,

“representatives of the House of Lords cross-benches”

will be giving their wisdom on such matters. They are all entirely part of the process.

We clearly have the Hutton model in mind, and a Secretary of State worth their salt will appoint someone who commands respect across the political spectrum, because the Government will want to get the legislation through and to get the changes done. There is a danger of tokenism, if we are not careful. If we go beyond a respected non-partisan person and stipulate, as in the amendment, that we have to have the trade unions, we can be pretty sure that the employers will say, “We are paying employer national insurance so we want to be on this.” If we include the opposition parties, it will be, as my hon. Friend said, which and how many. If the Cross-Benches are deemed to be the sole repository of wisdom in the House of Lords, others in the Lords might have something to say about that, and so we go on. The medical profession might be asked, as might a whole raft of other people. Before we know it, we will have an unwieldy panel when what we want is an evidence-based process led by someone who is respected.

We have taken a clear judgment, and the Committee is entitled to disagree with us, that rather than attempt to shackle future Governments we have tried to be clear about what we would do if we were carrying on in office while trying to give future Governments flexibility to respond to the circumstances of the time. We do not want all of this pre-determined because, as we know, this is long-term stuff and, ultimately, we cannot bind future Governments.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Does my hon. Friend also agree that it is not just about pensions but about making sure that there is decent housing, good health quality and all of those kind of things? Therefore, to concentrate on just one part of this in the form of pensions is perhaps not the right way of going about it. What we must do is campaign for better conditions.

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend is right that the quality of life for older people is about a whole range of things of which the state pension is an important one but not the only one. Indeed the valuable work on ageing done by the House of Lords Committee on Public Service and Demographic Change in its recent published report encouraged Government Departments to look across the piece at health, social care, pensions and so on and make sure that the needs of older people are being looked at in an integrated way. My hon. Friend was quite right to flag up that point.

The crucial point with regard to the amendment—we will come back to the substantive clause in a moment—is that the proposed process will be transparent. A whole series of reports will be published on this matter. The Government Actuary will tell us what it thinks, as will the independent panel. The Secretary of State will also lay a report. We will have reports coming out of our ears. This will be a far more transparent and inclusive process than we have ever had before. On that basis, the slightly tokenistic suggestion of having a particular group represented or someone who is thought to be particularly knowledgeable and is drawn from a particular bit of the House of Lords seems to be slightly missing the point. I encourage the hon. Gentleman to withdraw his amendment.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I listened to the Minister, but I do not accept the portrayal of the amendment or the desire for a beefed-up panel as tokenistic. Given that we are discussing very important matters in the context of significant inequalities of health and other things, as the hon. Member for Plymouth, Sutton and Devonport noted, it seems appropriate to try to think a little more carefully about how such a panel will be constituted. Let us not underestimate the significance that this panel will have. The Minister refers to checks and balances. We know that the report will be portrayed by the Government of the day as independent, fact-based and evidence-based, which is putting a lot of responsibility on one single individual. The Minister says that any Secretary of State worth his salt will be sure to appoint a top-class person. I am always a bit wary of what we might describe as good intentions. I am sure the Minister’s intentions can be so described, but he might be long gone and he might or might not be Secretary of State. [Interruption.] The Minister gestures maybe aye, maybe no. It seems that this model puts far too much focus on one individual. Without knowing who that individual is, what their qualifications are for the job or the biases or prejudices that they may bring to the task—I do not use the words biases and prejudices in a pejorative way because everyone brings to any task their own perspective—a much more reasonable way to approach such an important issue is to have in the room representatives of the various parts of society that will be very much affected by this panel and its decision regarding the retirement age. Our amendments 7 and 8, together, would beef-up the panel’s role and hopefully give people more confidence that a wide range of views will be heard. On that basis, and having listened to the Minister carefully, I intend to press the amendment to a vote.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We have covered the main elements the clause. The Secretary of State will ask the Government Actuary to produce a report on the state pension age, which will be required to maintain the proportion of adult life in retirement below a set threshold. That threshold will be set by a future Government, but we envisage that that will be up to about a third.

That report will be published and a review, led by an independent person, will comment on that and report to the Secretary of State. The Secretary of State will then make a decision, which will form the basis of primary legislation. Those reviews will have to take place at least every six years. That may seem odd in a world of five-year Parliaments, but that is because if the first review is done early in a Parliament, we would not want the next one to be rushed in the early days of the next Parliament. That provides a bit of flex in the system, but we have covered all of that.

The statistics on longevity are pretty startling. In the 1950s, a man could expect to spend about 12 years, or a fifth of adult life, in retirement. Today, that figure is 21 years, or nearly a third of adult life. There are many more examples besides that. Similar things are being done in many other countries. In Denmark and the Netherlands, the state pension age is linked to life expectancy through a formula that keeps the number of years spent in retirement constant, so the Danish and Dutch approach is more draconian than the British one. It is important to remember that we are not taking every year of enhanced longevity out of retirement, whereas some countries are doing so.

Sheila Gilmore (Labour, Edinburgh East)

While the Minister has the opportunity, will he reflect on whether the system being created is flexible enough to enable a future Government to consider having some flexibility in retirement ages? We have debated at length about differential life expectancies and the fact that some people spend a considerable time out of employment at an early age. Although life expectancy has continued to improve, those differences have proved quite stubborn. Does the system encompass such a possibility?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Lady for her question. If we allowed people to draw the single-tier pension early at a reduced rate, for the reasons she gives, that might fatally undermine the whole point of the exercise, which is to set the rate of the single-tier pension above that of the basic means-tested pension. We would find that people drew their pension a bit earlier and were then within the scope of means-testing, which would undermine the savings incentive and add great complexity to the system.

Sheila Gilmore (Labour, Edinburgh East)

The fact is that many people who are out of work at such a stage of their lives are already embroiled, to a greater or lesser extent, in means-tested systems, and one of the issues is the loss of savings. For example, people in a particular group now lose their employment and support allowance after 12 months of being out of work, which can lead them to having to use up their savings.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The evidence from around the world is that where people are allowed to take their pension early, that rapidly becomes the norm. For example, in America, people can draw a reduced state pension from 62, and the average of retirement age in America is 62. That would run completely counter to what we are trying to do, which is to encourage, enable and support people to work for longer—that is very often in their interests—and to enable them to enjoy a prosperous retirement that does not put an excessive cost on the national insurance system. To be fair, the hon. Lady’s proposal does not directly relate to the mechanism in the clause, which is simply about setting the state pension age. In a sense, there is upward flexibility, of course, because people can defer and then enjoy a higher pension, but there has to be an age at which the pension is payable.

I have some very exciting information about how that age is set in Finland, Portugal, Sweden and Norway, but I will spare the Committee the benefit of all that and simply say that what we are introducing a modest mechanism that will allow people to retire for longer, but also recognises that the system needs to made sustainable. The clause represents a systematic, fair and reasonable approach to this important issue, and I commend it to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I largely set out the Opposition’s view in the debate on amendments 7 and 8, and I have nothing further to add. I certainly do not intend to divide the Committee on the clause.

Clause 27 - Bereavement support payment

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 1, page 14, line 11, after ‘dies,’ insert—

‘() the person is ordinarily resident in Great Britain, or a specified territory, when the spouse or civil partner dies,’.

Anne Main (Conservative, St Albans)

With this it will be convenient to discuss Government amendments 2 and 3.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We move on to part 3 of the Bill, which relates to reforms of bereavement support payments. It may help to explain the purpose of amendments 1 to 3 if I briefly explain the framework of the reforms contained in clauses 27 and 28.

As the Committee will know, with the exception of changes made for widowers about a decade ago, the system of support for bereaved families has been largely unchanged since the post-war period. It was very much based on the assumption that men went out to work and women stayed at home—a woman who lost her man, lost her income, and therefore needed a national insurance benefit for herself and her dependent children. It is perfectly proper for a Government in the 20-teens to ask whether that model is any longer appropriate.

The current model has several problems. For childless widows and widowers, there are obscure and complex age rules. For example, what one might think of as the widow’s pension, or the bereavement allowance, is not payable at all for those under 45. It is payable on a tiered basis up to the age of 55, and then there are complicated contributions rules overlaying all that. Most people would feel that that is a degree of complexity. For someone who is a young widow or widower, it is hard to see why there should not be an entitlement to any help over the following 12-month period. Therefore, dealing with the gaps in the system is one factor.

The second factor is the support given to bereaved parents. As I said, the existing system almost reflects a 1940s model: a bereaved parent has lost the breadwinner, who would have supported them for as long as their children were children, and therefore, that person should have an allowance that runs for 16 years, 18 years, or whatever. Although absolutely nobody would want to be in a bereaved parent’s position, the reforms are trying to focus the financial help that is given to bereaved parents on the time of bereavement and the immediate period thereafter, while putting in place a longer-term system of financial support for those who do not return to the labour market. Therefore, the idea of the reforms, both for the childless and for bereaved families with children, is to concertina the support into a substantially increased grant, death grant, or lump sum, consisting of several thousand pounds more than the current figure, we envisage. Monthly payments will then be paid over the following 12 months; those are essentially a broken-down bit of that first lump sum. Essentially, that replaces an ongoing weekly pension that can go on for the best part of two decades, in extreme cases, with very substantial help in the first part of the period.

One of the changes we are making is to relax substantially the national insurance contribution rules. Whereas the bereavement allowance currently requires extensive payments—a lifetime’s worth—of national insurance for a full pension, we think that is simply inappropriate. In fact, the contribution rules have been so dramatically relaxed that we require only 25 weeks’ national insurance. In other words, someone must spend less than a year in the system to qualify for the payment. A problem with that, which we identified after we printed the Bill—as the Committee might work out, that is why we have tabled the amendment—is that that would mean that bereaved people around the world, who, I hesitate to say, even if they had not seen the white cliffs of Dover, had certainly spent six months in the country paying national insurance, would qualify for a bereavement lump sum. Given that the amounts of money are substantial, we did not think it the priority for the British taxpayer to pay bereavement support payments to bereaved people around the world—although, of course, we sympathise with them—who have simply had a passing acquaintance with the country.

Amendments 1, 2 and 3 together set out that there will be a test of being ordinarily resident in the country, of the sort that is familiar in the benefit system. Amendment 1 would prevent persons living in a non-EEA or non-reciprocal agreement country, without a close connection to Great Britain, coming to the country to claim the benefit. Amendment 2 provides that the Secretary of State will make regulations that specify the rate and period of payment. Amendment 3 provides that regulations may specify countries other than Great Britain in which a person has to be ordinarily resident, such as elsewhere in the EU, to be entitled to the bereavement support payment. In a sense, the set of amendments—the matters we are dealing with narrowly at this point—simply try to ensure that we pay the money to people who have contributed to the system and who are ordinarily resident here, which I am sure is what the public and Parliament would expect us to do. On the strength of that, I commend the amendments to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Amendment 1 seems pretty straightforward and I have nothing further to add. However, will the Minister elaborate on the impact of amendment 2, which would insert the phrase

“leave out ‘Regulations are to’ and insert ‘The Secretary of State must by regulations’.”?

Bluntly, what is the amendment’s point and how does that change materially affect the Bill?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman for that question, because, as I entirely accept, the answer is not self-evident. I can reassure him that it is a minor and technical amendment, clarifying that the Secretary of State will—that is the important word—make regulations under subsection (2), which specify, as one would expect, the rate of payment for this benefit and the period of payment. It requires the Secretary of State to do that; it is a tidying-up amendment.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I have given the Committee a flavour of the thinking behind these reforms, but I will just run through clause 27.

As we would expect, the trigger for the bereavement support payment is that the person’s spouse or civil partner dies. This does not apply to cohabiting couples, which may be an issue we want to discuss, but in line with current provisions for bereavement benefits this is based on legal marriage and civil partnership. It applies to people who, when they are bereaved, are under state pension age; obviously, there are different arrangements for provision for widows and widowers above state pension age, through the pension system. It is a contributory system and the contribution test is set out in clause 28, so I will not dwell on that now.

Clause 27(2) as now amended requires the Secretary of State to specify what the rate of benefit is and how it long goes on for, which we thought we probably should do. The rates can be different. For example, there could be—as we envisage—an initial rate and a rate per month, and there could be different rates again, as in subsection (4). We envisage higher rates for people entitled to child benefit. So we envisage that the lump sum would be higher for families with children. We do not currently envisage that the periods will vary between families with children and families without children, but we have put that flexibility in.

One of the reasons we have done that is that this package of measures is not about saving money. At the illustrative rates we have provided, it will cost the Exchequer an extra £110 million in the next Parliament, so it does not save money in the next Parliament. However, in the long term, as the grandfathered recipients—for want of a better phrase—of the old benefits gradually come out of the system, the replacement system will, over time, start to save money. Clearly, it would be at the discretion of a future Chancellor and a future Parliament to recycle that money back into the system, for example—as subsection (4)(b) allows—through paying for a longer period or paying more to families with children, or whatever mix a future Government wanted to use.

It is worth saying that it is not self-evident that paying for a longer period is necessarily a good thing. The reason I say that is that if we regard the payment of the lump sum and the 12 monthly instalments as being essentially a death grant, that is potentially advantageous to the recipient in two ways. The first is from the point of view of taxation. We have already specified that the lump sum will be tax-free and we are in discussions with our colleagues at the Treasury about the monthly payments, but our impact assessment assumes that they will be tax-free. Secondly, these amounts are disregarded for other benefits, such as universal credit. So, for as long as it looks like a death grant and quacks like a death grant, as it were, we can treat it in that way. If the power in subsection (4)(b) were used to make it into a two-year or a three-year payment, it would be much harder to say, “Well, you can’t tax it because it would look like a bereavement pension”, or that it could not be counted for the purposes of the universal credit. So, having a focused payment means that it is far easier to treat it in a relatively favourable way. I am simply explaining the situation; but we have left that option open.

I have mentioned the issue of not getting payment after pensionable age, and that these benefits do not apply if the death did not occur before this provision has come into force. Although we have not finalised our view, because single tier has come forward to 2016, our best estimate is that 2017 is the most likely start date for these provisions. In clause 27(7), we define what we mean by “pensionable age”.

The key principle behind these reforms is not to spend less money—more money will actually be spent in the next Parliament—but to try to reflect modern circumstances. The type of support someone needs 10 years after they are bereaved might be very different from the support they need immediately after bereavement. We see universal credit as the longer-term method of supporting any family—with adults and/or children—who are on a low income, and focusing our support for bereavement at the time of bereavement and the 12 months immediately afterward.

Pamela Nash (Labour, Airdrie and Shotts)

The Minister says that the changes are supposed to reflect modern life. However, families with parents who have decided not to marry but to cohabit are excluded. In most other comparable areas of the law, those couples are now included. Why have they not been included in this legislation?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The national insurance system, of which the payment is a part, has always been and remains based on legal marriage and, subsequently, civil partnership. The provisions in the single-tier pension for partners are for married partners and civil partners. All national insurance benefits, to the extent that marriage is relevant, are based on marriage, not cohabitation.

I entirely take the hon. Lady’s point that cohabitation is a part of modern society. She asked why we have not reflected that in the provisions. One of the biggest challenges is entirely practical. The payment is not a means-tested benefit, but when we assess a couple for means-tested benefits, defining cohabitation is a messy business. People argue about it; they go to appeal tribunals about it; and they say, “No, we are not cohabiting because I spend only one night a week there.” Sometimes we even have fraud inspectors going into people’s houses and sitting outside in cars, watching what goes on. Cohabitation is not a straightforward concept when trying to the write the law of the land.

It is difficult enough when the two parties are still alive. Imagine a situation where someone has died and someone else comes along and says, “I was the cohabiting partner of the person who has died. I would like a bereavement support payment.” We would need some evidence of that. We do not have a marriage certificate to prove it, so the question is, what would be the nature of the proof we would seek? Would we pry, at a time of bereavement, into the nature of the relationship? Would we ask how long they had lived together or whether they slept together? Would we ask whether they were the only partner? What we have found in other spheres of life is that there could be multiple people who could legitimately claim to be the partner of the deceased. Trying to ask all those questions is difficult at the best of times; at a time of bereavement, it is all the more difficult.

Clearly, an option is for a cohabiting couple to marry, after which they become entitled to all those things. Who knows whether a future Government will allow civil partnerships for heterosexual couples? In that environment, that might well be the way to deal with the point that the hon. Lady raised. I could go on at much greater length. The more we think about how we might do it, the more intrusive and difficult it looks.

Pamela Nash (Labour, Airdrie and Shotts)

I fully accept all the Minister’s points, but I am thinking about the children of those relationships. Might a way around the difficulties of judging whether a couple is cohabiting be to attach the support payment to the child? It does not matter whether the parents are together; even if the living parent was not living with the child, they would still be financially responsible for that child.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Speaking as the Minister who is also responsible for the Child Support Agency, if the deceased is a man, he could have had children by a number of different partners. That could trigger bereavement support payments to each child by each parent; suddenly there are multiple payments of £5,000, and ongoing monthly payments, when someone had paid 25 weeks of national insurance. We absolutely have to support orphans and children, but it is odd, if a man dies, for the state suddenly to say, “We are going to make a payment to a child, fathered by that man, wgi has been living with their mother” when there had been no contact for perhaps 15 years. It is hard to understand that logic.

The hon. Lady’s example is a creative one, but it shows just how difficult it would be to implement the policy. If parents are worried about what would happen to their children after one of them dies, they can have a civil marriage. That is an option. Potentially they can take insurance out. In time to come, my guess—this is not Government policy—would be that we will have a system of civil partnerships, which will probably deal with that problem. One might think that one knows it when one sees it, as it were, but the law has to cover all circumstances. It has to have a standard of proof, and I think we would be asking intrusive questions at a difficult time.

Sheila Gilmore (Labour, Edinburgh East)

The Minister says that universal credit is the solution for people after a certain period. The problem with universal credit in many cases is the conditionality, unless the children are very young. That conditionality is increasingly demanding, and a number of people have suggested that that will be exceptionally difficult when a family are coming to terms with a loss, and when others things are going on in the children’s lives as well. A longer period—not necessarily for ever—would be advantageous. The analogy has been drawn with the arrangements allowed for kinship carers. When we raised this matter previously, the Minister suggested that jobcentres could have discretion to give a longer period, but the Government are bearing down on conditionality.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady makes a fair point. It is worth saying that conditionality comes in six months after the universal credit claim starts, but someone will get a lump sum of £5,000 or so and a monthly pension. If they are in a position to do so, there may be some other occupational pension or a small amount of earnings that means that, in many cases, they can delay the start of the universal credit claim for as long as they like—for example, for a year. They could take the lump sum, the pension and any other income they have and not even initiate a universal credit claim for 12 months. Six months after that is when conditionality would start in earnest, so we are talking about 18 months.

I stress that the Government are absolutely not saying after 12 months, “Pull yourself together.” We are saying, “We want to help bereaved families at the time of bereavement and in the immediate aftermath in an intensive way, and then give ongoing long-term support to bereaved families through universal credit.” As I said when I gave oral evidence last week, we have plenty of time to liaise with and give guidance to our colleagues in Jobcentre Plus. There are already, for example, exemptions to conditionality for people who are vulnerable in various ways.

To put the other side, there is also evidence that many bereaved parents go back to work. If they were in work when they were bereaved, it would be unusual for an employer to give them more than three months’ compassionate leave. Bereaved parents who are in work are generally back in work quite soon. Those who are not may find that a prolonged period out of the labour market is not in their long-term interest.

We are absolutely not trying to hit people with a big stick when they are vulnerable; we are trying to get alongside them and support them, so that, as and when they are able to re-engage with the labour market, they have not suffered from being detached from it for so long that they cannot do so, leading to them and their children suffering all the more.

Sheila Gilmore (Labour, Edinburgh East)

In practical terms, although a lot of bereaved parents will go back to work if they are already in work, many couples’ working arrangements work because there are two of them. It is often at a time like this that a parent—whether a man or a woman—has to give up their job because it is no longer feasible in their new circumstances.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am not quite sure whether I follow the hon. Lady. I take her point that working arrangements that work when there are two people have to be rethought when there is one person, but while conditionality sounds like a big scary word, it is not. For example, it might mean having a work-focused interview and a conversation to get someone to think about what it would take to get them back to work, when the time is right. It might be about whether they have child benefit in place, for example. The system will be progressive as the children get older and go to primary school; there is the provision that we have for three and four-year-olds. We are trying to go with the grain and not be coercive, because that is not where we are coming from. Yes, universal credit has responsibilities attached to it, but we understand the needs of this particular group.

Sheila Gilmore (Labour, Edinburgh East)

Is the Minister suggesting that there will be special guidance on conditionality for this group? One of the issues around single parents is that some of the single-parent flexibilities that existed no longer exist under the new universal credit regulations. That has already given rise to concerns among groups representing single parents. The Minister may say that conditionality will be flexible, but there is concern about whether that will be written down somewhere where people can refer to it.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady knows her way round the system well, and she knows that we give extensive guidance to our front-line staff. It seems entirely appropriate that we would do so in this case. We are working through these matters as the systems are developed. The measures will not come into effect until 2017, so we have plenty of time to think through the practicalities.

The basic idea behind clause 27 is to focus support on that moment of greatest and most immediate need, when there is the cost of the funeral and all that kind of thing, and spread some of the lump sum over the year, because that is what we have been advised that people wanted. I stress that a lot of these reforms are in response to consultation. We did not sit there at the famous whiteboard and draw them up; we talked to a lot of organisations. I am grateful to the bereavement organisations that gave oral evidence. I had a conversation with them this morning to hear more of their concerns and to discuss some of these issues.

The conversation is ongoing, and we remain happy to have it, but I hope that the House will accept the basic principle of what we are trying to do. There are unfortunate exceptions in the current system, which was built around a very old-fashioned model of the way in which women in particular engaged with the labour market. However, our sense is that clause 27 is a better fit that will hopefully support the needs of bereaved families more effectively.

Oliver Colvile (Conservative, Plymouth, Sutton and Devonport)

Has my hon. Friend received any kind of communication from any of the armed forces charities, such as the Royal British Legion, and what did they say?

Steve Webb (Liberal Democrat, Thornbury and Yate)

As my noble Friend Lord Freud leads on such matters for the Department, that would generally be a matter for him. However, arrangements for forces widows, for example, are often made not just through the national insurance system, which is what we are talking about, but through war widows’ pensions and armed forces pensions, which are unaffected by these changes. Very often, a major part of the support that my hon. Friend’s constituents would have would be through mechanisms that are not being changed. However, if we have had further representations, I am happy to share them with him, assuming that they are in the public domain.

I hope that hon. Members understand the spirit in which we are introducing clause 27 and commend it to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister refers to the spirit in which the clause is being introduced. No doubt that spirit is positive, but it is worth reminding ourselves of the evidence from the Childhood Bereavement Network and Cruse Bereavement Care, both of which gave evidence to the Committee last week. The Minister referred to conversations that he has recently had with bereavement organisations. Is it his view that the organisations that gave evidence last week support the measures in clause 27?

If we look back at last week’s exchange, it was quite obvious that there was a difference of opinion between the Minister and those charities and voluntary organisations. The first thing that Debbie Kerslake from Cruse Bereavement Care said was:

“One of the big concerns is that the period is being shortened, and that will be particularly seriously negative for those with younger children. For example, those who at the moment would be able to receive benefits until the child was no longer eligible for child benefit would be getting benefits for only 12 months.”

In other words, they would get the larger lump sum and then a monthly sum of around £400. According to Cruse—and it should know—that is

“a drastic reduction in the length of time over which families are supported, and we are concerned because we believe that more than 90% of families with dependent children will lose out under the proposals.”

The Minister intervened and said:

“Obviously, the figures are not in the Bill; it is the structure that we are debating.

We do not recognise the 90% figure that you give, on the basis that if someone gets £5,000 not £2,000, that is an extra £3,000. If they get £400 per month for a year, which is roughly similar to the current rate, the extra £3,000 is gain, and therefore the only bereaved families with children who will get less will be those who would otherwise have been on the benefit for several years and, as you rightly say, this is focused on the immediate bereavement.”––[Official Report, Pensions Public Bill Committee, 25 June 2013; c. 26, Q56-57.]

I understand the point Cruse Bereavement Care and the Childhood Bereavement Network are making. Someone who claims this support for more than two years—I think that was the break even point—will lose out under these proposals. That is a serious matter worthy of consideration by the Minister. I take his point about responding to modern conditions. That is a theme of the Bill generally. But I would be interested to know whether there have been follow-up discussions with Cruse Bereavement Care and the Childhood Bereavement Network. Do they support these changes? It is pretty stark in the evidence. They say that 90% of current claimants would lose out under the new system.

Di Stubbs from the Childhood Bereavement Network said:

“We are very aware of the increase in funeral costs and things like that.”

It welcomes the lump sum. As far as I can see it does not see the lump sum increase in itself as a problem. But there really is an important point. My hon. Friend the Member for Edinburgh East, who is no longer in her place, made the point about universal credit. Di Stubbs pointed out to the Minister that three fifths of people currently receiving bereavement payments are in work. They are not claiming any other benefit. Di Stubbs suggested that adding the payments to universal credit—we take the Government’s word that universal credit will work efficiently from the start—would complicate the system for those claiming this support and who are entitled to this support. Yet the Minister’s aim is to simplify the system. There is a tension there too.

The Minister pre-empted a question I was going to ask. I wanted to ask about the cost of this new system. He said that it is projected to cost the Government, whichever Government it may be in the next Parliament, £110 million more. I take that to mean over the course of the next Parliament. After that this new system will produce savings. The Government should consider carefully the case made by Cruse Bereavement Care and the Childhood Bereavement Network regarding these changes. We can hardly think of a worse time in anyone’s life, I imagine, than a close bereavement. I have not experienced it myself. Inevitably in life it comes one way or another. That is the time when people are in difficult and vulnerable situations.

The Minister has said that that immediate period is very important and so in that immediate period of loss let us move the money around, save a bit of money in the long term and put more of it upfront. I can only refer him to what Cruse Bereavement Care and the Childhood Bereavement Network said on this issue. Di Stubbs said,

“That means that people whose child was 15 or 16, or 17 or 18 if they were in work, are the only ones who would gain under that system.”––[Official Report, Pensions Public Bill Committee, 25 June 2013; c. 27, Q57.]

They made a number of points about the moment at which a bereavement takes place. That immediate period is very difficult; it can be chaotic. I clearly remember Di Stubbs making the point that if someone has been bereaved, there is a sense that the bereavement payment paid over time until child benefit eligibility is exhausted, is something that they feel that their deceased husband, wife or partner has paid for. It is something that they continue to provide after they have gone. I am not as convinced by the Minister’s explanation as I have been during other parts of the Bill and I urge him to continue to examine matter closely, because last week’s evidence was pretty striking. The Minister refuted the 90% figure and I hope that he refers to it in his response if it is wrong and can tell us by how much and why. Cruse Bereavement Care and the Childhood Bereavement Network were keen that some amendments be tabled to probe aspects of the clause. We did not manage to get the amendments down in time, but they are the experts and struck me as reasonable and informed witnesses. There may be a dispute about the calculations about losers, but it seems clear that people claiming the support for more than three years will receive less under the new system than they would from the current. Given that we are discussing the bereaved, I urge the Minister carefully to look again at the clause and its impact. What does he understand to be the position of Cruse Bereavement Care and the Childhood Bereavement Network?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Gentleman raises some important points in a measured and fair way. Stakeholders have obviously had the opportunity to put their position into their own words, so I will not put words into their mouths, but we did consult on the general principle of moving to a lump sum or a lump sum with monthly payments as against a pension. Cruse Bereavement Care said:

“It is a simple system that would provide bereaved people with access to immediate help. It gives immediate financial support at a time when other available resources can be rendered inaccessible (e.g. frozen accounts).”

It also said:

“A quick, simple initial payment would be a meaningful help for most widows/widowers regardless of family and financial position.”

On universal credit, it said:

“If the principle is that the Universal Credit should ensure that the bereaved family are adequately supported on an on-going basis then a lump sum to help enable them to get back on their feet may be simpler and more appropriate.”

I can offer the hon. Gentleman some assurance that we did not just decide what to do and ignore these organisations. There has been quite a lot of dialogue and, as he will see, they have been quite supportive of important strands of what we are trying to do. It is clear, for example, that they would like the period to be more than 12 months and, as the hon. Member for Airdrie and Shotts suggested, they would like co-habiting couples to be included. I do not think it is any state secret that I have seen the amendments that would have been tabled had they been submitted in time and they include many of the issues referred to by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. I therefore would not pretend that the organisations would not want to amend what we are doing, but there is a lot of sympathy with the general emphasis of trying to help people more up front.

I will now respond to some of the other points raised by the hon. Gentleman. The 90% figure is based on a misunderstanding. It was based on the assumption that the only basis on which people flow off benefits for widowed parents is when the kids turn 18. Actually, people flow off widowed parent’s allowance when they remarry or when they reach state pension age, for example. In fact, the typical length of time that people spend on widowed parent’s allowance is currently in the order of four years. Although there may be extreme cases of people who are on it for 18 years, or whatever, they are very much the exception. It is more normal to think of people being on such benefits for a median period in the order of four years.

Clearly, if someone is on the benefit for four years, they will get less money through the new system than through the old one. I am not hiding that from the Committee. We have published our estimates of the numbers on the Department’s website. For the reform as a whole, we think it is roughly 50:50. With the figures that we have used, we think that 52% would get more and 48% would get less. There is a shift in the balance, however, because the reform spends extra money on childless bereaved people, who currently would not get any benefit at all in many cases. We estimate that around three quarters of bereaved families with children would get less and a quarter would get more. Within that, however, it is loaded towards those who are out of work, so the heavier losers are those who are in work. We are saying in a sense that we will front-load the money—I do not pretend that any of this is attractive; no one would want to be in this position. A working bereaved parent will get a front-loaded enhanced lump sum, 12 monthly payments and then continue their job, whatever they were doing. If it was a decent job, paying a decent wage, they would be beyond the scope of universal credit—one would have to be on a decent wage to be beyond the scope of universal credit—and that would continue. The Committee will make a judgment on that balance, but that is where in particular what are called the “notional losers” come from. One hundred percent of those who currently receive the least—the bereavement payment group who currently get the lump sum, but no regular payment—are gainers, because they get no pension at all at the moment and we will bring them into the system. I do not recognise the 90% figure.

My hon. Friend the Member for Plymouth, Sutton and Devonport asked about the Royal British Legion. I am pleased to assure him that it responded to the consultation we undertook. In that consultation, we set out two options: one was a very large lump sum and the second was the model in the Bill—a lump sum with 12 monthly payments. The Royal British Legion was in favour of the option we adopted. Within the context of the question we asked in the consultation, which suggested two options—I do not want to misrepresent its views—it favoured the option we have adopted. I hope that offers him some reassurance. War pensions and the armed forces compensation scheme are unaffected by the measures.

I hope my response has been helpful and I have been able to address the points raised. The exact figures will be a matter for a future Government; we are not setting them in the Bill. If a future Government felt that the balance between families with children and those without was not right, for example, they could tilt that balance. If they wanted to use the money that starts to be freed up towards the end of the Parliament, which will be tens of millions by the end of the Parliament in any given year—not vast sums—they could reinvest it over a longer period, which is allowed under clause 27, or in higher rates. That is at the discretion of a future Government. I simply want to stress that, assuming the measures are implemented, we will be spending more money to support bereaved families in the next Parliament than we would have under the current system.

Clause 28 - Bereavement support payment: contribution condition and amendments

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 28 refers to schedule 15, on which I will touch briefly and then move formally. The clause sets out the conditions for contributions to qualify for the benefit. As I mentioned, subsection (1)(b) says that to qualify for the benefit a person needs the equivalent of 25 times the lower earnings limit as an earnings factor and must have paid class 1 or class 2 contributions. It is probably one of the most, if not the most, relaxed contribution requirements in the system, and that is specifically to ensure that we support as many people as possible. Schedule 15 has consequential amendments, because there is no such thing as a bereavement support payment until the Act comes into force. Once that happens, various bits of law relating to social security must include references to the bereavement support payment, and schedule 15 tidies all that up.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that clarification. Even he seems to be flagging a little in the final lap today. We do not oppose the clause, and I thank him for his explanation of it and of the related schedule.

Steve Webb (Liberal Democrat, Thornbury and Yate)

On a point of order, Mrs Main. I got slightly ahead of myself when I told the Committee earlier about all the information we give people about frozen pensions. I read from form DWP 023. Had I not made this correction, I know you would have stopped me and done so yourself, Mrs Main, but the form was the forthcoming version of DWP 023, which will contain the information in future, in the autumn, but does not do so currently. I am grateful for the chance to correct the record.