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Baroness Hollis of Heigham: My Lords, we have had a short, but, as usual, to-the-point debate, with some detailed questions. I shall do my best to answer the points raised. I have been scribbling away during the debate. If I have overlooked any points, I shall follow them up with correspondence.

The noble Baroness, Lady Buscombe, did a splendid attacking job, although I hope that she will accept that perhaps not all the attacks landed. But let us not worry about guerrilla warfare on these occasions. She asked about the 75p increase in the basic rate pension and the implications of a lower departmental spending plan. She asked also where the missing money--in the region of £90 million--had gone.

The matter needs to be set in context. Because inflation and therefore RPI levels and unemployment are under control, the expected level of growth is less than half of that we inherited from the previous government's spending plans. As a result, the 75p increase properly reflects the RPI. Overall expenditure on the social security budget is down because of reduced unemployment and reduced economic inactivity among lone parents.

The noble Baroness asked to whom and when winter fuel payments would be made. They will be paid to an extra 1.5 million people or 1 million couples at a cost of some £85 million. It is complicated because a number of the relevant men over the age of 60 are in work. That was not the intention behind the original fuel payments. We shall be making announcements later about those payments because we do not have the automatic figures that we would have had for pensioners, for whom the payments were originally intended. We shall be contacting people with the details and the method of payment. They do not need to contact us.

The noble Baroness made some points about pension funds and the abolition of TESSAs and PEPs. She referred also to the attack on annuities and stealth, going back, I believe, to ACT. I understand why people complain that their pension fund has lower interest rates and now returns a lower annuity rate

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than they might have expected, but that must be understood in terms of three factors. First, one only receives a return of 5 per cent rather than 10 per cent compared to what one would have received in the 1980s. Secondly, inflation must be taken into account. Thirdly, we almost never hear about the resultant growth in the size of the fund, but it must be taken into account.

Perhaps I may give an example. In 1990, someone on half the average earnings might have retired with a pension pot of £31,000, which would have brought him an income of £92 per week, equivalent to £119 per week at today's prices. By 1998, although annuity rates had fallen from around 15 per cent in 1990 to 9.5 per cent, someone with the same earnings and contribution patterns would have accumulated a fund of £97,000 because of the growth in the equity value of his pension pot, enough to provide an income of around £175 per week. That is a good 50 per cent--indeed, nearly 75 per cent--more than he would have received in 1990.

Such a person can now expect the real value of his pension to be maintained because inflation has fallen below 2 per cent. The reason for that is the high returns achievable on equities during the 1990s, for which, indeed, the previous government must take the credit, which I should wish to pay. The point is that one needs to look not only at annuity rates falling, even though inflation has fallen even more, but also at what has happened to the growth of the equity value of the pension pot. As a result, pensioners are receiving a lower return, but on a much higher pension pot to meet a much lower level of inflation than they would have done in 1990. Therefore, they are much better off. Their expectations may be somewhat different, but those are the facts.

The noble Baroness then moved on to incapacity benefit and referred to some of the issues that were raised when we debated the Bill last summer. There may just be a fundamental difference between us. Incapacity benefit, with which the noble Baroness's government replaced invalidity benefit, was not designed to be a top-up to an early retirement pension. It was meant to be an earnings replacement benefit for those who were struck down in their working life and needed an earnings replacement benefit which was more generous than the ordinary unemployment benefit. That was the purpose of it. It became instead, on the one hand, a replacement for unemployment benefit for those who had no recent connection with the labour market and, on the other, a top-up for pensions. Our reforms were designed to bring it back to its original intent.

Earl Russell: My Lords, I hope the Minister will not encourage us to resume arguments on which we have spent a good deal of time already.

Baroness Hollis of Heigham: My Lords, I am doing my honourable best to answer the points raised by the noble Baroness. Had she not raised invalidity benefit and what she regards as the inappropriate response of

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government, I would not now be seeking to respond to her points. If I am guilty of anything, it is of attempting to answer the noble Baroness's question.

Finally, the noble Baroness raised, as did the noble Earl, Lord Russell, a point about capital limits. I take the point entirely that they have not been raised since 1990. I wish that that point had occurred to the Benches opposite--the government at the time--in 1991, 1992, 1993, 1994, 1995, 1996 and even in the Budget of 1997, when they could have tackled the problem which they now draw to our attention as lying so long in neglect. We are committed to raising those capital limits as resources allow. We have reviewed them, and so on. But as and when will be determined not by the Department of Social Security but by the Chancellor of the Exchequer at the time that he judges appropriate.

I turn now to the points raised by the noble Earl, Lord Russell. He conceded that the Liberal Democrat position has always been that old age pensions should rise not in line with earnings but with prices, and he accepts, as I do, that that presents us with a problem. What happens is that, as average earnings increase, although pensioners do not fall behind in real terms, nonetheless there is widening inequality. As earnings rise higher, there is, by definition, a wider stretch of incomes. That is true and it is certainly true of pensioners. We have seen pensioner incomes overall increase by around 68 per cent--incomes in the country as a whole by around 30 per cent--so that pensioners on average have done much better than the rest of the country.

However, the noble Earl is absolutely right to say that there is a particular problem for poorer pensioners. The bottom two deciles, who for the most part are single widows over the age of 75 with no access to occupational pension schemes and not much access to SERPS because they were not themselves in the labour market, have fallen behind. That is why--the noble Earl is right to press us on this point--we are putting so much effort into the minimum income guarantee. We hope and believe that that is a short-term problem in the sense that now there are as many women in the labour market as men so they will be coming forward in the future as a cohort with their own pensions, to float them off those bottom deciles. We have a temporary problem while existing pensioners--mainly older single women and widowed women--have no access to other than state benefits. That is why the minimum income guarantee is important.

The noble Earl asked about the secure delivery of MIG. We are working on that. We are working on automatic delivery and we are working on the national campaign. We hope to make statements fairly quickly.

The noble Earl's final point was about the average earnings of young people and income support as a percentage of income of those in work. I was muttering to my colleagues on these Benches "10.1 per cent". I knew where that point was going to come from. The noble Earl was right to say that those figures exclude housing benefit, which in many cases effectively more

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than doubles the income. But, if taken after housing costs--it is perfectly proper to take it after housing costs--I would draw to the noble Earl's attention this point. I know that we are probably rehearsing tomorrow's debate. There are wide differences between the replacement ratio of income support or JSA to earnings for young single people compared with families with children.

The noble Earl will accept that the figures for families with children are different from those of single people. What matters is not just the level of benefit income but the length of time someone spends on that benefit income. It is the persistence of poverty that scars rather than any one snapshot point in time. I would remind the noble Earl--I am sure that he does not need reminding from me--that two-thirds of men on JSA are off JSA within six months. In other words, being on JSA or income support at those levels is fortunately a temporary phenomenon for most people. The people who remain--that is where poverty lingers--are those of working age who are lone parents, their children and of course the poorest pensioners whom we have already mentioned.

There is of course the severe hardship scheme. I would again seek the noble Earl's help in publicising it because, to my knowledge, well over 80 per cent of all claims going in for severe hardship payment are successful. Therefore, it is a decent scheme. It is perhaps not as fully used as it ought to be. Whether it is the exceptional scheme, the severe hardship scheme or the hardship scheme--there are three different schemes for different benefits--all have a very high ratio of success to application. If the noble Earl can help us to encourage people to apply for those, he will be doing them a service.

I hope that I have answered the points raised by the noble Baroness and the noble Earl. On that basis, I ask the House to accept the order.

On Question, Motion agreed to.

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