My Lords, each year the Secretary of State is required by the Social Security Administration Act 1992 to undertake a review of social security and state pension rates to consider whether benefits have kept pace with inflation or, in some cases, the increase in earnings. This review is due to begin shortly, and the Secretary of State will report to Parliament in November.
The Bill before us suspends for one year the requirement to undertake a review of trends in earnings and to increase certain rates in line with those trends. This is because the effects of the Covid-19 pandemic have caused distortions in the labour market, which have been reflected over two years in highly atypical trends in earnings growth. Last year, they slumped by 1%; this year, we expect them to increase by over 8%.
The Bill therefore replaces the link with earnings, for one year only, with a requirement to increase these rates at least in line with the increase in prices, or by 2.5%, whichever is higher. The relevant rates are: the basic state pension; the full rate of the new state pension; the standard minimum guarantee in pension credit; and survivors’ benefits in industrial death benefit. Normally, the Secretary of State considers a specific reference period to measure earnings growth as part of her review. That same earnings reference period has been used for the past decade.
In preparing for the review last year, we saw an unprecedented fall in average earnings as a result of the Covid-19 restrictions we introduced to protect lives and the NHS. That is why we changed the law for one year to set aside the earnings link; otherwise, these state pensions would have remained frozen. The Secretary of State then decided to increase most of the relevant rates by 2.5%, once she had completed her assessment of the increase in prices, which was 0.5%, as measured by the consumer prices index.
As we prepare for this year’s review, the economic context is very different now that our economy and businesses have reopened. Figures published by the Office for National Statistics yesterday confirm an increase in earnings of 8.3%, which is over two percentage points higher than at any time over the last two decades. These growth figures have been distorted due to the slump in wages at the start of the Covid-19 pandemic, along with millions of people having moved off furlough and back into work. The Government do not believe that it would be fair to younger taxpayers to increase these rates by such a high percentage, on top of the 2.5% increase last year, when earnings slumped by 1% and inflation stood at 0.5%.
Therefore, I am seeking the agreement of noble Lords to set aside the earnings link once more in 2022-23. I stress that this is for 2022-23 only; after that, the link with earnings growth will be restored. As I mentioned earlier, in place of the earnings link, the Bill requires the Secretary of State to increase the relevant rates at least in line with inflation, or by 2.5%, whichever is higher. We will know what the relevant CPI figure is on 20 October, prior to Committee.
My Lords, I recognise that while the 8.3% increase in earnings figure will reflect the exceptional pandemic impact on labour markets, it will not account for all of that increase. I have two real concerns flowing from this Bill and the public debate surrounding it: first, the growing assertion that pensioners have been excessively benefiting over recent years; and, secondly, that the removal of the earnings uplift for this year may be a Trojan horse for removing earnings on a permanent basis.
The state pension provides both an income for existing pensioners and a firm foundation on which workers can save and build for their income in retirement. Providing such a foundation was an integral part of pension policy reforms, which included increasing savings through auto-enrolment and raising the state pension age. It was the stated premise for the new state pension introduced in 2016. The Government presented it to Parliament as supporting pension savings so that current generations of workers had a decent foundation on which to build for retirement.
A fall in the value of the state pension against average incomes impacts existing pensioners but makes future pensioners poorer as their private pension savings would go to replacing the fall in the state pension, rather than improving their overall retirement income. Earnings are an essential part of the uprating formula to avoid future generations becoming poorer relative to average or median incomes and because of the spread of means testing.
Figures published by the DWP and the ONS reveal that in 2020 benefit income, including state pension, was the largest component of total gross income for both pensioner couples and single pensioners. It was 57% for single pensioners, and nearly two-thirds of the total income for single female pensioners was benefit income.
Pensioner poverty, when measured against median disposable income, has risen from 13% to 18%. That dominance of the role of state pension income will persist long into the future and may well increase. Although income from occupational pensions was 32% of total gross income for pensioner couples and 27% for single pensioners, those figures are likely to fall as future generations have declining access to more generous occupational pensions.
My Lords, it is a great privilege to follow the noble Baroness, Lady Drake, a renowned expert in this field, as indeed are many other noble Lords participating in today’s debate, unlike myself. Some of her points were very interesting. Clearly, she approached this argument from a position of expertise based on wide financial and economic knowledge. My contribution will be very much principle-based, but from listening to her, there is some common ground between us, although what I have to say is rather different.
My noble friend the Minister made a strong case for suspending the pension triple lock for one year only. The key argument for me is one of fairness, something which pensioners will recognise too if they look at this from the perspective of their own experience. However, I share with the noble Baroness, Lady Drake, the view that this should be a suspension for one year only, and I would certainly seek my noble friend’s confirmation that this is not a step towards permanently breaking the triple lock.
I make this point particularly on behalf of the over-75s—the silent generation, as they are described by researchers—and on behalf of older baby-boomers. When people comment on this who are not necessarily as informed and expert as the noble Baroness and many others here today, reference is made to what is seen as recent generosity to pensioners by way of pension payments. What gets overlooked is that older pensioners contributed a lot throughout their working lives.
These pensioners faced and overcame many challenges. I am talking not about the war but about growing up in an era when being poor meant that you went without or, maybe later, having to bring up a family on a three-day week. I am talking about the kind of people who did not enjoy free university education either. Although they may have bought their homes, which have gone up in value during the past few decades, before the 1980s getting a mortgage was probably harder than it is today. My point is that they got through all that without the advantage of the kind of benefits which are available today or were put in place after 1997 and caused among a lot of people a real sense of unfairness.
My Lords, the noble Baroness, Lady Drake, talked about a Trojan horse. With the Trojan horse bearing the Greeks, at least those in Troy thought they were getting something that was beneficial. With this Bill, I am wondering what the benefit could possibly be to anybody.
The Minister and the noble Baroness, Lady Stowell, suggested that the Bill is about fairness, but I suggest that there is something rather more insidious here. The Bill is allegedly to make a change for a year. The same has been said about overseas aid. The same person, perhaps, has been drafting memos to Ministers saying that this is all because of Covid and is for just one year. However, for those people who will lose the uplift for this one year, just like for those people overseas who will lose the benefits of overseas aid “for just this one year”, this does not feel fair. It feels incredibly painful.
My real concern is this: how can anybody be sure that this so-called one-off proposal is one-off? As the Minister has already told the House, it is not exactly a one-off because the Government had a one-off change last year, when they said that they wanted to change in order to be more generous. I am not quite sure in what way they were being generous last year. As I understand it, the triple lock has three elements. The earnings component was negative last year and inflation was at 0.5%, but the 2.5% uplift would have been in place anyway, so I am not sure why any change was required. Perhaps the proposals for 2022-23 are indeed a one-off.
All the reasons that the Secretary of State has given for the proposals relate to Covid. They all seem to suggest that the potential rise in wages or earnings of around 8% is because of the return to work from furlough and the end of the Covid arrangements. In that sense, the Secretary of State might be right. She said that the rate of increase in earnings is “unprecedented” and a
My Lords, I agree with the Government that the state pension triple lock needs reforming—but not, I am afraid, with these proposals. As many Members will know, I have spent much time recently with colleagues in the Intergenerational Fairness Forum, which I am privileged to chair, considering a new system for funding social care, with the aim of fostering intergenerational cohesion and mutual support across the generations—something I think we all agree would be extremely positive. One of the forum’s recommendations was that the pensions triple lock be replaced permanently by a double lock, whereby it rises in line with average earnings or with inflation, whichever is the highest. We propose that any revenue saved by this measure should be ring-fenced and redeployed to fund social care.
We believe that our proposed double lock is justified because since 2010 the brunt of social security and tax credit changes has been borne by people of working age. We also agree with the House of Commons Work and Pensions Select Committee that, provided the state pension is maintained at the current proportion of average earnings, the aim of the Government to ensure a decent minimum income for people in retirement to underpin private savings will have been achieved. A double lock would also continue to protect people depending on the state pension against any periods of high inflation—a risk that, as we know, we may once again be facing.
We have strongly recommended that, alongside the state pension double lock, the Government should undertake a major social marketing campaign to encourage greater take-up of pension credit by those who are entitled to have it. It is dreadful that the estimated rate of pension credit take-up is just 60% and I hope the Minister will be able to give me an assurance that the Government have concrete plans to improve take-up of this vital benefit.
If these two measures were combined, pensioners living in poverty would be better supported, as they are entitled to be under the pension credit rules, while other pensioners would make a fairer contribution to the burden borne by wider society at a time when public expenditure is constrained. They would also share the benefits of economic growth, when it occurs, by retaining the historical link between pensions and average earnings. This combination of measures supports intergenerational fairness and social cohesion.
My Lords, when I read the title of the Bill I thought, “Good: we will have before us a measure that covers the wide issues of the uprating of the wide range of social security benefits we have, most notably pensions, universal credit and perhaps the question of legacy benefits.” So I was very disappointed to discover that, actually, the scope of the content was purely to do with pensions.
In relation to pensions, I have sympathy with the proposals tackling a specific issue that appears to have emerged as something of an anomaly, given our recent experience of the pandemic. I think the triple lock was probably the right move when it was introduced and it has served pensioners well. However, I now have questions as to whether having such a lock in one part of the social security system actually prevents both the Treasury and the Department for Work and Pensions from truly looking at the system and its funding as a rounded whole—although I note with care the comprehensive and careful input of the noble Baroness, Lady Drake, and that of the noble Baroness, Lady Greengross, just now on the double lock. But this is an uprating Bill for the system, it is not about changing the system, so with some reluctance I accept the proposals in the Bill.
However, I now turn to my deep disappointment with the Bill. I join many noble Lords in raising a concern that the Bill does not address the universal credit uplift cut. I recall the debate in this Chamber back in February, in which many Peers expressed their concern that a Bill would not address what is historically one of the most significant cuts to social security benefits. The letter sent by the Minister outlining the content of this Bill began by stating:
“Every year, the Secretary of State for Work and Pensions is required to undertake a review of social security rates to consider whether benefits have kept pace with inflation or earnings increases.”
My Lords, I declare my interests as in the register. I would also like to put on record my thanks to my noble friend the Minister and her officials for the very helpful and thoughtful engagement that she has had on this topic with interested Peers.
This is the fourth time since 2014 that legislation for uprating of pensions is being changed, yet this time there is no impact assessment or explanation of the impact on pensioner poverty. We are being asked to approve this—the House of Commons already has—before knowing what the CPI figure that may well be used instead of the 2.5% figure will be. I echo concerns about this setting a dangerous precedent.
However, I would like to help my noble friend, her department and all in your Lordships’ House, including the right reverend Prelate the Bishop of Durham, to see that this legislation is based on a false premise and is unnecessary. It is simply not the case that this Bill is needed to avoid an 8%-plus increase in the state pension or the pension credit. Section 150A of the Social Security Administration Act 1992 requires the Secretary of State to consider “earnings”, but the law does not define this term.
The ONS has already very helpfully produced an adjusted figure to take account of the base effects from last year and the exceptional impact of the pandemic on average weekly earnings, which is the traditional measure that has been used for uprating. It has also estimated the composition effect. It has come up with an adjusted earnings figure in the range of 3.2% to 4.4%. My noble friend from the Front Bench has already suggested that the CPI figure that will be released next week could be around 3.3%.
Using the adjusted earnings figure could avoid this—draconian, in my view—legislation, which tears up years of protection for pensioners and breaks a manifesto commitment. I am sure that those of us on these Benches are particularly concerned about that. Using the adjusted earnings figure would still potentially allow significant cost savings of £3 billion or more relative to using the unadjusted earnings figure, which, as I have tried to explain, is not necessary.
My Lords, I echo the thanks offered to the Minister for the open way in which she has presented these proposals and for the extent to which she has been prepared to talk to us about them. It gives me great pleasure to follow the noble Baroness, Lady Altmann. She made a compelling case; not quite compelling enough for me to agree with it but, for the life of me, I do not understand why the Government do not agree with it. It seems a straightforward way for them to proceed. I hope that there will be further debate on this in Committee.
Other speakers have and will draw attention to the Government’s shameful decision to break their election manifesto promise to retain the triple lock, as my noble friend Lady Drake has made clear. I want to talk about what the triple lock is for, why we have it, why it is important and why it should apply to the increase to the state pension in 2022.
The triple lock was introduced by George Osborne in his Budget speech, following the formation of the coalition Government in 2010. He promised that, from 2011, the basic state pension would be linked to earnings. He went on to say that pensioners would
“be protected by our new triple lock, which will guarantee each and every year a rise in the basic state pension in line with earning or prices or a 2.5% increase, whichever is the greater.”—[Official Report, Commons, 22/6/10; col.180.]
This was the first time the phrase was used in Parliament.
This was not the Chancellor’s idea, as the noble Baroness, Lady Smith of Newnham, pointed out. We have to acknowledge that the structure of the triple lock was included in the coalition’s programme for government as an almost word-for-word lift from the Liberal Democrats’ 2010 manifesto. The link to earnings was in the Tory manifesto but the triple lock was not. Credit where credit is due to the Liberal Democrats, although I think it was probably as much of a surprise to them as it was to the rest of us that they turned out to have the opportunity to make good on their commitment. What is not clear from the manifesto, the coalition Government agreement or the Budget speech is what the triple lock was for, apart from general comments about fairness to pensioners or that pensioners deserved dignity and respect in old age.
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While we await the actual figure, I can give noble Lords an indication of the increases that will apply to these rates if inflation in the year to September 2021 were 3.3%. This is in the range expected by internal analysis. The full rate of the new state pension would increase by around £309 a year, or around £5.95 a week. The basic state pension and the higher rate of the industrial death benefit would increase by around £237 a year, or around £4.55 a week. The single rate of the standard minimum guarantee in pension credit would increase by around £304 a year, or around £5.85 a week, and the couple rate would increase by around £463 a year, or around £8.90 a week. The additional state pension is not included in the Bill, since the Social Security Administration Act 1992 already provides that it must be increased annually in payment, at least in line with the increases in prices.
I was pleased to meet several of your Lordships between First and Second Readings to discuss the Bill. We covered a number of important matters, including the future of the triple lock, different ways of measuring earnings growth in the economy, the take-up of pension credit, progress on reducing pensioner poverty, and the effects of state pension uprating on the National Insurance Fund. I am sure that these issues will arise in our discussions today, and I look forward to addressing them in more detail in my closing remarks. It is my sincere hope that we can continue to engage in this way as the Bill progresses through the House. Should any noble Lord wish to discuss any part of the Bill between its stages, my door is always open. I propose to hold a further all-Peers briefing in between Second Reading and Committee—details of this will be forthcoming.
In conclusion, the Government believe that it was right to legislate to protect the value of the state pension in 2021-22, despite the decline in earnings by younger taxpayers, who met the cost of doing so. The Government believe that it is right to protect the value of the state pension again in 2022-23, while also protecting the interests of younger taxpayers by suspending, for one year, the link with earnings growth in the unprecedented circumstances brought about by the Covid-19 pandemic. I beg to move.
Looked at from a regional perspective, in the majority of regions in England, pensioner couples have average weekly incomes below the UK pensioner couple average. This includes the north-east, the north-west, the east Midlands, the West Midlands, Yorkshire and Humber, and London.
Pensioner incomes have been stable for 10 years. In 2020
“pensioners had similar average incomes after housing costs … to … 2010”—
a statement I lifted from the DWP’s own figures and statements. Pensioner average income did increase significantly between 1995 and 2010, which also saw the introduction of the pension credit minimum income guarantee for the most impoverished pensioners.
Although it is clearly beneficial, we should be measured about the extent of the impact of the triple lock, particularly given that most current pensioners reached state pension age before the new state pension was introduced in 2016. For them, the triple lock does not apply to all of their state pension. It does not apply to the state second pension element and yet this accounts for 20% of state expenditure.
The triple lock has also operated at a time of significant cuts to health and social care spending, on which older people are so very dependent. These cuts will have contributed to the slowing down of improvements in life expectancy. We have yet to see how the NHS backlog aggravates that trend. A just-published Imperial College report now reveals falling life expectancy in urban areas such as Leeds, Newcastle, Manchester, Liverpool and others.
Pension credit, the means-tested, minimum income guarantee for the poorest pensioners—for which nearly 2.5 million are eligible but only 1.5 million claim—is not covered by the triple lock. The Government mitigated that omission by an underpin of a cash increase, but not by extending the triple lock. Pension credit is also a passport to other benefits such as reduced council tax and a free TV licence, which some 1 million of the poorest pensioners are missing out on. In the other place, the Minister advised that the department was engaged in a publicity campaign to raise awareness, but there are no figures available on any increase in pension credit claims occurring as a result. That underclaiming will be contributing to the rise in pensioner poverty.
Of course, the state pension has to be sustainable, and there are two key levers for controlling expenditure. One is making the state pension less generous over time, the other is increasing the state pension age. We risk losing sight of the significant accelerated rises in the state pension age already introduced, with more to follow. The number of pensioners has seen a fall. The full basic state pension is 10.3% higher than if it had been earnings-linked since 2011, but some of that gain will be clawed back through benefits and not applying an earnings uplift for this year.
We need to see this in total. Successive Governments allowed the value of the basis state pension to decline relative to earnings, from 26% in 1979 to around 16% by 2008. The Labour Government agreed to restore the earnings link, and the triple lock has resulted in the basic state pension rising from 17% of average earnings in 2011 to 19% in 2020. However, the new state pension has now replaced the basic state pension and the second state pension, and it applies to those reaching state pension age from 2016. It was set, as reported by the Government and the DWP, at a value just above the pension credit guaranteed income for the poorest pensioners, indexed by earnings, which the Government stated was sustainable and reduced pensioner benefit expenditure over the long term as a percentage of GDP, even taking into account the triple lock.
There is a cohort of retired people who are clearly better off, with access to generous occupational pensions, but that should not affect the perceptions of the financial position of pensioners as a whole. For the top fifth of pensioners, the largest source of income was their occupational pension, and they received a larger percentage of their income from earnings. Legitimate intergenerational fairness concerns, when looking at the most well-off pensioners, may be better addressed through the tax regime and national insurance rules for those working over the state pension age. Indeed, the Government have taken such a step in applying the 1.25% national insurance levy to the earnings of those over the state pension age. Weakening the state pension would be regressive, hurting those pensioners who most depend on it, and having the least impact on those who have a larger alternative source of income.
Turning to my second concern: the removal of the earnings uplift provision, even for a year, may be a Trojan horse for its permanent removal. When at the meeting that the Minister referred to, I asked whether there was a guarantee that it would be restored. I had the rather ambiguous answer that that will have to be argued next year.
The OECD figures reveal that in the UK, the average earner receives a replacement rate of income of 28.4% at retirement from the state pension, well below the OECD average of 58.6% and the EU average of 63.5%. However, in the UK, when workplace pensions are included, the net replacement rises to 61% compared to OECD and EU averages of 65.4% and 67% respectively. That tells us that the UK pension system relies heavily on private pension saving to fill the gap. Auto-enrolment is intended to maintain such a reliance, but it can do so only if the state pension is maintained as a firm foundation for those savings, at least holding its value over the long term against earnings. Otherwise, the savings of younger workers will be covering the fall in their state pension rather than improving their retirement income, and they cannot fill that gap.
Private pension contributions above the statutory minimum will be impacted by the rise in national insurance contributions. There will be a substitution effect, particularly in the private sector where, prior to the pandemic, some 60% or more of workers were in SMEs and a very significant proportion of them in small and micros. Therefore, it is very important that this combination of the firm foundation and private savings is protected.
Can the Minister tell us—for the record and on the record, unequivocally—whether the Government are committed to maintaining the state pension as a firm foundation, holding its value against average earnings over the long term as a minimum upon which future workers, including young workers, can build for their retirement? Can the Minister also confirm that this Government will not reduce the value of the basic state pension relative to average earnings?
I agree with others that we need to make sure that our pensions and benefits system keeps pace with the changing world, which should include reviewing pensions policy as today’s younger boomers get older—but on that I would defer very much to the experts who will contribute to today’s debate. However, if we work on the general principle of fairness and that contribution is important to the legitimacy of the welfare system and to people’s willingness to keep paying in even at times in their life when they are not in receipt of benefits, we should also recognise the experience of today’s older pensioners.
As I have said, I am sure that many noble Lords can and will make a better economic case than me to justify the point that I am making, and some noble Lords may want to have an economic argument to claim that I am wrong, but I think that older pensioners, especially at a time when we are suspending the triple lock, need to hear us recognised not just what they have contributed in financial terms but that they have coped in situations without the kind of support that families and younger people receive now. Just to be clear, I am not arguing for a return to the past nor am I calling for us all to get nostalgic; the world is a very different place now and today’s challenges are different. However, it might give older pensioners some confidence in the future that they are not going to see and yet hope for their children and grandchildren if we parliamentarians argue that there are lessons about financial management, getting our priorities right and making choices which they taught us and we must not forget. Indeed, they need and want us to promote those lessons as principles which remain as valid today as they have always been. I say all this because I think these are things which we know and sometimes take for granted, but that does not mean that they are not points that are worth restating and which people need to hear us say.
To pursue the principle of fairness, I want to ask my noble friend the Minister a question about working-age people. I know that she, like me, believes that it must always pay people to get work: work must always pay and it must always be the best option. As we come out of a phase where people have got used to support such as furlough, when people may need to take on extra hours because of the end of the temporary uplift in universal credit and when we face rising energy costs and other cost of living increases, what is the Government’s position on reviewing and changing the universal credit taper rate so that people can enjoy greater returns for more hours at work?
“distorted reflection of earnings growth.”—[Official Report, Commons, 7/9/21; col. 185.]
How has she come up with this assertion? Is she sure of it? Can the Minister explain to the House whether the Secretary of State has done this analysis herself or engaged somebody else to analyse how far the increase in earnings in 2021 is associated with Covid? Could it not be that some of the rise in earnings is because of Brexit? After all, many of the EU nationals working in the United Kingdom before Covid, which just about coincided with Brexit and began just before the end of the transition period, have not come back to work here, and employers are now being urged to increase wages, particularly for those who drive heavy goods vehicles, for example. That is not about Covid. It is about the long-term consequences of Brexit. Nobody can claim that that is the impact of a year.
If those consequences are indeed for the medium to long term, can the Minister explain to the House what preparations the Government are making for the scenario in which earnings continue to rise in what the Secretary of State might think of as “unprecedented” or “distorted” ways? What safety and security can she give to pensioners who thought they were supported by the triple lock that they will not be told next year, yet again, “This is another anomaly and we just have to make a change for just another year”? Once a precedent has been set, the danger is that it becomes a tradition and never changes.
Of course, that does not happen the other way round. On the temporary uplift in universal credit, the Government said, “Oh, we’ve got to take that away because it was only temporary”. I believe that the noble Baroness, Lady Stroud, will talk about this in more detail later in the debate, but I add my support to anybody in your Lordships’ House and elsewhere who will make a case for keeping the £20 uplift because taking money away from people—particularly the most vulnerable in society—is far more difficult than if you never gave them that £20 in the first place.
Many of the people who have benefited from the £20 uplift were not on universal credit before the start of the current crisis. They have had to go and seek universal credit only since the start of the pandemic. It is very easy for the Secretary of State to say, “They can work a little bit longer; they can do more hours.” But they might already be working as many hours as are legally possible. They need the support, and we should think about being generous.
I have a few questions for the Minister. There is not an impact assessment on these proposals, because we are told it is just for one year, so an impact assessment is not required. It may not be required, but it would be good practice, and it would help many of us making these decisions to understand what the impact is going to be. Perhaps the impact will not be as great as some of us fear. If pensioners who are concerned about the loss of the triple lock could be reassured, surely that would be in even the Government’s interest. So, could the Minister explain why there is not going to be an impact assessment and whether it would not be a good idea to have one?
The triple lock, a very good policy brought in by the coalition—originally a Liberal Democrat proposal—was so good that the Conservatives put it in their manifesto for 2019. So it is a government pledge. Members of your Lordships’ House, if asked to support the triple lock, would presumably feel honour bound under the Salisbury/Addison convention to support it. How can we then be asked to turn away from it? Why should we? As a Member of the Opposition Benches, I could think it is great that a Government are not delivering on their manifesto pledges; as a Liberal Democrat, I know all too well the difficulties that can face a political party that turns away from its manifesto pledges. But as a Member of your Lordships’ House—somebody who is tasked with legislating on behalf of the most vulnerable—surely it is incumbent on me, and every Member of your Lordships’ House, not to play politics but to think about the implications of turning our back on this pledge.
I understand that 8% might be too much to increase pensions by this year, but perhaps a middle way could be found. Could the Minister please think about that, take it back to her department, talk to the Secretary of State and consider whether a slightly better proposal could be brought back and whether amendments could be brought forward in Committee? If the Government do not bring amendments, the Opposition Benches will and perhaps some Members of her own Benches will as well.
When we are considering a Bill that is so conscious of inflation and the broad economic environment, my question to the Minister is: why is this argument not being applied across the board? Why, since the Government are so consciously accounting for the economic environment for pensioners, are they not doing the same for benefit claimants, which they have stated in their letter they are obliged to do? The removal of the £20 uplift in universal credit and the quiet 0.5% increase in universal credit are tiptoeing around a serious issue affecting hundreds of thousands of lives and pushing many—including an estimated 290,000 children—back into poverty.
I have to say to the Minister that I have lost count of how many people have thanked me for speaking out on the universal credit cut. I was not going to speak in this debate; it was that public pressure that made me do so. Hence, if this House can legitimately find a way of ensuring that, through this Bill, the other place is given the opportunity to properly debate the £20 cut, I would support that. If there is no such mechanism, we might have highlighted a deficit in our polity. I also support the question asked by the noble Baroness, Lady Stowell, on the earnings taper in universal credit.
I support what is in the Bill—slightly reluctantly, as I have said—but I am deeply concerned at its massive omissions. These mean that hundreds and thousands will not be adequately supported through our social security system this winter and into the year ahead.
We hear that this is for only one year and that there may well be a restoration of the earnings link. However, the triple lock—I agree with noble Lords who have already mentioned this—is not an ideal uprating mechanism in any case, especially since the new state pension. It is the 2.5% figure that is the anomaly; it has no social or economic justification. Yet we are being asked to remove the earnings link, which I am convinced from many years of working on pensions policy is the most important part of pension uprating, because the 2.5% figure was used last year.
The UK state pension is hardly a king’s ransom. It is the lowest in the OECD, as the noble Baroness, Lady Drake, explained, and still below the 1979 levels, relative to average earnings. Millions of pensioners have no or very little income other than the state pension. Indeed, the pension credit designed for the poorest pensioners has always been uprated only by average earnings; it has never been triple-locked. The triple lock was a political construct that did not properly protect the poorest pensioners, yet here we are being asked to remove the earnings protection from the pension credit.
We have been down this road before. In 1979 Mrs Thatcher removed the earnings link from the basic state pension. As others have said, at that time it was worth 26% or so of average earnings. Subsequent to that, in 2010 it was worth 16% of average earnings. At the time there was some justification for removing the earnings link because we introduced a very generous state earnings-related pension, so that could carry the earnings uprating for pensioners.
The state earnings-related pension scheme, subsequently replaced by the state second pension, did provide earnings protection for many pensioners. However, millions—particularly the poorest pensioners, the lowest earners and mostly women—do not have the earnings-related bit of the state pension because they were not credited into it, they were not in the labour force long enough, they were caring for others, and so on.
We are therefore left looking at the basic state pension, the pension credit and the new state pension in this Bill because the additional parts are uprated only by prices, which is appropriate as they are mostly earnings-linked anyway. I argue that we are setting a very dangerous precedent if we fail to recognise the importance of protecting the poorest pensioners against falling behind the rest of society in earnings.
Let me give some figures. Average earnings are £540 per week. The basic state pension, after the triple-lock increases since the 2011 changes, which I supported at the time, is now £137.60 per week. The new state pension, which was brought in to encompass and incorporate the earnings-related bit of the state pension and the basic state pension for future pensioners, is now £179.60 per week. The pension credit, which the poorest and usually oldest pensioners rely on, is £177.10. We are not talking about well-off pensioners here.
We are now debating not increasing the state pension, their pension or the pension credit in line with average earnings, as adjusted by the ONS. This breaks a triple promise to pensioners. Breaking the triple lock, as proposed in the Bill, breaks only one of those promises. From the triple lock it retains the prices commitment and the 2.5% commitment—although I find that figure difficult to justify—but it breaks three promises: first, the triple-lock manifesto commitment, a political promise; secondly, the legal commitment to increase pensions at least in line with earnings; and thirdly, the legal commitment to increase pension credit at least in line with earnings.
We could still honour all these promises without the risks that this legislation entails if we used the adjusted figure. I urge my noble friend on the Front Bench, her department and noble Lords in this House to see what the CPI figure is when it is released next week. If, as expected, it is around the 3.3% level, I urge them to bear it in mind and to recognise that using the adjusted earnings figure would be a better way to amend legislation. It could, perhaps, be explicitly stated in primary legislation that the earnings index used should be at the discretion of the Secretary of State and could be adjusted in exceptional circumstances. I also urge my noble friend to consider the dangers of taking this protection away from pension credit.
Finally, I echo the call for a formal, comprehensive review of pensioner benefits and uprating to assess the triple lock, including the retention of the minimum 2.5%, and for rolling tax-free benefits such as winter fuel payments into a higher state pension which would then be taxable. This would allow us to avoid this constant round of having to amend legislation because previous commitments to uprating had caused problems.
I hope that we will be able to improve this Bill. I am very much looking forward to hearing the words of my noble friends Lady Stroud and Lord Freud on the issue of the uprating to universal credit.
The implication is clear: many thought of it in pragmatic terms of keeping pensioners’ income in line with those who are in work, while avoiding the embarrassment of an under-inflation increase or one of 75p. But any triple lock based on the highest of three separate figures is bound to result in what is described as the ratchet effect; in other words, over time, the pension covered by the triple lock is bound to increase by more than the increases determined by each of the individual elements, including earnings. In other words, the job of the triple lock is not just to protect pensioners in terms of earnings or prices: it is, over time, to achieve real increases in their incomes when measured against either of these indices. I argue that this ratchet effect is an inherent part of the triple lock which is enshrined in legislation. It is not an anomaly, a statistical quirk or something to be discarded when it is no longer convenient. It is an inherent feature of the triple lock—a feature, not a bug.
Whether you agree or not depends on whether you think that the state basic pension or the new state pension are currently high enough. If you think that they are, you do not need the triple lock, but if you want to see them increased, as I do, then the triple lock has a proven track record of gaining ground on that objective. It is not pretty but it appeared to work.
Again, some credit has to be given to Governments over the last 11 years, during which, because of the ratchet effect rather than any explicit policy decisions, there has been an increase in the state basic pension from 17% of average full-time earnings to 19% in 2020. That is too little and too slow, but it is real, nevertheless. Perhaps we could have a debate about what level of flat-rate state pension we need and what should be the target when we have a ratchet effect, but it is clear that 19% is not enough; it is well short of the 26% that was reached back in 1979. These benefits are not just inadequate; there is a long way to go before they become adequate. We definitely still need the triple lock. I am prepared to take something better and faster to replace it, but it is what we have got.
It is important to emphasise that the key advantage of the ratchet—of moving towards an adequate level of the flat-rate state pension—is that it is automatic. Until now at least, it has not been affected by short-term political considerations. I am afraid that the record of all Governments between 1979 and 2010 demonstrates that we cannot rely on ad hoc decisions to achieve increases in state flat-rate pensions. We need a mechanism that, like the triple lock, builds in a presumption that, over time, there will be increases in real terms.
This brings us to the increases due in 2022, as determined by this Bill. I believe that we can and should stick to the triple lock, as provided in legislation. Taking the increases to be made in 2021, 2022 and 2023 provides an ideal opportunity to achieve a significant increase in flat-rate pensions towards a more adequate level. This can be only a good thing. No doubt, it will be pointed out that this has to be paid for, but for today’s debate I will dodge that issue, although I understand that my noble friend Lord Sikka will touch on it. I would like to make clear, however, that I support increases in taxation for those with the broadest shoulders to meet clear social need and, in particular, the restoration of the Treasury supplement to the national insurance fund.
I want to direct a few remarks to another feature of the triple lock. Too often in these discussions there is the implication that it applies to the totality of state pensions—people have repeatedly said today that the triple lock applies to state pensions. That is not correct: it applies only to the flat-rate elements. The rest of each individual state pension—whether the additional pension, increases for deferment or the graduated pension—is increased only in line with CPI. In practice, this means that those pensioners with smaller state pensions, for whom the flat-rate pension is a larger proportion of income, get a higher percentage increase. Equally, those with higher state pensions get a smaller percentage increase. This effect is magnified when you take pensioners’ other incomes into account, where the increases that they receive tend to be in line with prices or less.
I have done some calculations of the impact on pensioners’ incomes if we stick with the existing triple lock. Using data on pensioners’ incomes and looking at single pensioners, I estimate that a pensioner at the lower end of the income scale—most of whom, of course, are women—on the first decile of income distribution will see an increase of about 7.5% if we stick with the triple lock. If we net off the expected increase in CPI of around 3.5%, the poorest pensioners get a 4% increase in price terms and less in earnings. Even after that increase, they will still be on only £170 a week total income.
A pensioner at the higher end of the income scale, on the ninth decile, will see an increase of about 4.5% in their overall pension. If we net off the expected increase in CPI of about 3.5%, the poorest pensioners will get a 1% increase in price terms—in earnings terms it probably means a standstill—but the better-off pensioners are, if anything, still falling behind. So the triple lock gives the greatest proportionate help to the poorest pensioners.
I want to draw the attention of the House to a serious defect in the triple lock that needs to be addressed. There is not enough time today to go into the details, but it needs to be understood that the triple lock discriminates between pensioners like myself, who receive the basic state pension, and those who reached their state pension age on or after 6 April 2016 and are entitled to the new state pension. As the rule stands, we older pensioners will receive smaller increases than those who retired more recently, even where our rights are identical. It looks likely in the coming year that this will not be a problem, but in the longer term it is a real issue, and it will not go away.