Pensions Bill

I thank all noble Lords who have spoken in this debate. I say to the noble Baroness, Lady Miller, that I am sorry that her voice is troubling her, but she should be assured that it did not detract from the clarity with which she moved her amendment, even though it did not help me reach the conclusion that I should accept it. Clause 5 delivers our commitment to uprate the basic state pension and the pension credit standard minimum guarantee in line with increases in earnings. The arrangements for earnings uprating are a fundamental element of our pensions reform package, and I am grateful to noble Lords and the noble Baroness for giving the Committee the opportunity to discuss this matter. Earnings uprating is one of the big prizes in our package of reforms. We are determined to ensure that future generations of pensioners continue to share fairly in the rising prosperity of the nation, building on the progress we have already made in tackling pensioner poverty. The group covers arrangements that form part of the uprating process; namely, the measure of earnings growth to be used and the practices for paying and rounding increases in the relevant amounts. Amendments Nos. 15 and 16 and 18 and 19, tabled by the noble Baroness, Lady Miller, and the noble Lord, Lord Skelmersdale, work together to remove the degree of flexibility which the Bill gives to the Secretary of State. Amendment No. 15 would remove the need for the Secretary of State to exercise judgment regarding whether earnings had increased, and, in conjunction with the other amendments in this group, would place unnecessary restrictions on the Secretary of State. There is nothing new about benefit uprating. The first legislation which set out a process for an annual uprating exercise, and enabled rates to be increased by an order subject to parliamentary approval, dates back to the early 1970s. Before then, a separate Bill was needed each time the rates were increased. Although there have been some changes since then—for example, income-related benefits were brought into the arrangements—the process has changed very little. Just because we have done something in a particular way for many years, it is not the case that we must continue to do so. The major reforms in this Bill give the lie to that. However, in this case, the uprating process has served us well and has stoodthe test of time. Indeed, we will continue to use it for the majority of benefits which will still be uprated in line with prices. The Bill’s provisions ensure that the same process applies to earnings-linked and prices-linked uprating. I appreciate that the noble Baroness, Lady Miller, has concerns about the apparent flexibility which the Secretary of State is given, and would therefore prefer to see every element of the process specified very precisely. As things stand, however, Secretaries of State have to act reasonably when they consider questions such as whether earnings, or, for that matter, prices, have increased. She noted that if the Secretary of State acted in an arbitrary way, the process of judicial review would be readily available. In practice, as noble Lords will know, the Government use published indices produced by the Office for National Statistics. That brings me to Amendment No. 19, which in part seeks to specify a precise index for the measurement of earnings. At Second Reading, the noble Baroness, Lady Miller, set out clearly her concerns about the flexibility which the uprating provisions give the Secretary of State. Accordingly, the first part of Amendment No. 19 specifies a precise earnings growth measure to be used for uprating—the average earnings index, including bonuses, for the whole economy for September. At this point, perhaps we should discuss Amendment No. 17, tabled by the noble Lord, Lord Oakeshott, as it also seeks to define in the Bill the measure to be used to uprate pension amounts as the average earnings index. However, I note that this amendment does not specify which average earnings index should be used—there are a number of them. I should point out that the amendment also specifies that in the case of prices it shall be the retail prices index. It may be that the noble Lord included this reference to support the approach of uprating by the higher of prices or earnings, but I do not think this approach is necessary. As I have already explained, there is generally nothing new about the uprating provisions in this Bill. We wanted the provisions in Clause 5 to be consistent with those that presently govern the uprating of the basic state pension for prices. The current provisions have been in place for many years and work very well. We see no reason why the earnings uprating provisions should not follow suit. Therefore, just as current arrangements give the Secretary of State discretion over the measurement of prices, the new provisions give the Secretary of State discretion over the measurement of earnings. I mentioned earlier that the Secretary of State relies on published indices produced by the Office for National Statistics. As all noble Lords are aware, the average earnings index has been used to uprate the standard minimum guarantee since 2003. In fact we use the headline three-month average figure to July for the whole economy, seasonally adjusted, including bonuses. A provisional rate is published in September, but we tend to use the October revision. Our current intention is to use this for earnings-linked uprating in the future. I note that Amendment No. 19 specifies the September average earnings index. Using the three-month average to September would severely affect our timings, as the provisional rate for September is not published until November. That timescale would not leave us with enough time to make the necessary system and legislative changes for the Secretary of State to meet the requirements to bring the new rates into force at the prescribed time. So, while the Government do and will rely on published ONS measures, we do not think that it would be wise or helpful to specify in primary legislation a specific index to be used for the purposes of uprating pension amounts. Flexibility needs to be maintained, as it is not unknown for the publication of particular indices to be suspended, although it is some years since that last happened. That happened when the ONS suspended publication of the average earnings index between November 1998 and March 1999. If history repeats itself and the legislation specifies that particular index, these benefits could not be increased. In practice, of course, that would be unthinkable. The very flexibility this amendment seeks to remove is vital in enabling the Secretary of State to make alternative arrangements. I know from Second Reading that the noble Baroness, Lady Miller, is aware of the provisionsof Section 34 of the Employment Relations Act. Section 34 allows for the prescribed limits on payments and awards under employment legislation, such as unfair dismissal and redundancy payments, to be varied in line with the retail prices index. However, there are some important differences between increasing, or, indeed, reducing, the amount that employers are obliged to pay under that Act and uprating benefits. For example, under Section 34, payments can be increased or reduced only by the same percentage change in the retail prices index. Like Section 34, Amendment No. 19 dictates that pensioner benefits can be increased only by the same percentage as the amount of the increase in the relevant earnings index. So, in the scenario where the Secretary of State wanted to increase pensioner benefits by more than the increase in the relevant index, the effect of the amendment would be to tie his hands and prevent him doing so. Just as the current legislation gives discretion to uprate by more than prices, the new earnings uprating provisions give discretion to uprate by more than earnings. The Government have made use of this flexibility in recent years and uprated the basic state pension by more than the retail prices index on a number of occasions, meaning that between 1997 and April 2007 pensioners have seen a 7 per cent real terms increase in their basic state pension. I am sure noble Lords will agree that we would not want to prevent the Secretary of State increasing the basic state pension by more than earnings if he wished to do so. That is precisely what Amendment No. 19 would do—restrict his room for manoeuvre. Clause 5 provides certainty. We are legislating for our commitment on earnings uprating by replicating tried and tested provisions. The final section of Amendment No. 19 makes changes to the current well established arrangements which allow the Secretary of State to round up or down. The usual convention is to round to the nearest 5p. The amendment provides that increases are to be rounded to the nearest 10p. The provisions of the final section of Amendment No. 19 are replicated in Amendment No. 18. At present, the Secretary of State is required to review pension levels each year to see whether they have retained their value in relation to the general level of prices. If they have not, he is required to increase them. Legislation provides that this increase may be rounded up or down, "““to such extent as he thinks appropriate””." Although the legislation says that, in practice, the usual convention is to round up or down to the nearest 5p. The provisions in new Section 150A of the Social Security Administration Act 1992 inserted by subsection (1) of Clause 5 broadly mirror the provisions of existing Section 150. Section 150 gives the Secretary of State discretion to round up or down, and the rounding provisions at Clause 5 merely replicate current arrangements. Applying percentage increases to benefit rates rarely produces exact cash amounts, so rounding is a well established procedure. I should point out that pensioners do not necessarily lose out or gain as a result of rounding. Implementing the provisions means that in some years the rounding will result in the rounded figure being slightly higher than the calculated figure, while in other years the rounded figure will be slightly lower. As I outlined earlier, if the amendments were accepted, increases in pension amounts would be rounded up to the nearest 10p. That might sound fairly inconsequential, but a significant cost would be associated with that. It would mean that even small increases, including those of less than 1p, would have to be rounded up to 10p. Bearing in mind that this would be paid for 52 weeks a year to some 15 million pensioners, the costs would soon escalate. If we consider that in subsequent years the new amounts themselves would be earnings-uprated and subject to further rounding up, it is easy to see how costs would be compounded over time. Carried forward over four decades, we estimate that just one such occasion could add more than £1 billion to the annual pensions bill by 2050. I am sure that the Committee will agree that that is a considerable amount. To recap, the rounding provisions are not new. The current rule has been successfully applied for many years, and we have no reason to think that it will be any different for the rounding provisions in Clause 5. Amendment No. 16 would alter the provisions for not uprating where the increase is deemed to be inconsiderable. I have said previously that we intend the uprating process to follow the same pattern that we have used for price-uprating. It has been tried and tested. One of the longstanding features of the existing process is that, where the increase in a particular amount would be inconsiderable, it does not have to be paid. The amendment sets out in fairly precise terms the level of increase deemed inconsiderable or too low to pay. Such inconsiderable amounts would, if the amendment were carried, be carried forward to the following uprating exercise. The amendment puts that figure at anything under £1. As benefit rates are expressed weekly, that could amount to around £50 a year. I cannot say with any certainty what increase the Secretary of State would deem inconsiderable, as I am not aware of any occasion in the last 30 years on which an amount has not been increased on that basis. I think that I am on safe ground in saying that it would be considerably less than the £1 that this amendment stipulates. I have found examples of some individual benefit components that have increased, in line with prices, by as little as 15p or 20p after the increase had been rounded to the nearest 5p. Those increases were paid, so were clearly not viewed as inconsiderable. In reality, this rule would be likely to bite only if inflation, or the annual increase in earnings, were to fall very close to zero. Finally, I should point out a further important difference between the uprating provisions in the Bill and those of Section 34 of the Employment Relations Act. Under Section 34, payments are increased by statutory instrument using the negative procedure. Crucially, the annual benefit uprating order is subject to far closer parliamentary scrutiny and can be made only following a resolution of each House; so if Parliament ever considered that the Secretary of State had misused this flexibility, the solution would be in our hands. The noble Lord, Lord Oakeshott, asked me to comment on what my noble friend James Purnell said in another place. I do not know the precise context to which the noble Lord referred, but he may have been commenting on whether the uprating should be higher than prices and earnings. I think he was focusing on what would happen if rampant inflation outstripped earnings, although that has not occurred under the financial stewardship of this Government. If it did, there would be some serious issues for the economy to address. I believe that that is the context, but if it is not, I will certainly write to the noble Lord. I hope that my explanation will assure noble Lords that there is nothing sinister about our proposals for earnings uprating, and I urge the noble Baroness to withdraw the amendment.