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Benefits Uprating

Volume 520: debated on Wednesday 8 December 2010

With permission, Mr. Speaker, I should like to make a statement about the uprating of pensions and benefits for 2011-12. I shall place in the Vote Office full details of the new rates that are due to come into force from the week of 11 April 2011 for each pension and benefit, and arrange for the figures to be published in the Official Report.

As the Chancellor said in his autumn statement, we have taken

“decisive action to take Britain out of the financial danger zone.”—[Official Report, 29 November 2010; Vol. 519, c. 530.]

Our decisions today about uprating are part of the plan to ensure we both get on track and stay on track, now and in future.

The Department for Work and Pensions is continuing its comprehensive review of social security policy, including pensions and benefits uprating. As many hon. Members will know, an important component of the future plans for uprating pensions and benefits is the move to the consumer prices index—the CPI. For 2010, additional pensions and benefits were held at their 2009 levels because the retail prices index—the RPI—was negative, at minus 1.4%. In those circumstances, many people saw no increase in their pensions or benefit. Why did the RPI fall? It was mainly because of falling mortgage interest payments, but only 7% of pensioners have a mortgage. People with earnings-related pensions lost out because of a fall in costs that did not benefit them. Had the CPI been used to measure the change in prices last year, benefits such as additional state pension would have been increased.

The CPI is the headline measure of inflation in the UK as well as the target measure used by the Bank of England, and it is internationally recognised. The CPI uses a methodology that takes better account of consumer behaviour in response to price increases. The Government believe that it is right to use one appropriate index for uprating additional state pensions, public and private pensions and social security benefits, and that CPI is a more appropriate measure of changes in the cost of living of pensioners and benefit recipients than RPI. In addition, the House may be surprised to learn that the RPI excludes the spending patterns of the poorest pensioners.

For all those reasons, the Government have decided to move to the CPI. I acknowledge that over the long term the CPI tends to rise more slowly than the RPI. However, the question is not which is the higher or lower number but which is the most appropriate way to track and measure the changes in average prices. The coalition will ensure that the value of many important pensions and benefits is maintained through a rise of 3.1% even in these tough economic times. In addition, steps have been taken to protect low-income families with children through above-indexation increases to child tax credits. Such measures are better targeted on low-income families and will ensure that the measures in the Budget and spending review, of which the move to CPI was a part, will have no measurable impact on child poverty in the next two years.

For consistency, we also announced on 8 July that we would move to CPI as the basis for calculating the statutory minimum increases for revaluation and indexation of occupational pension schemes. Hon. Members will wish to note that the annual revaluation order, which implements the decision, is being laid before Parliament today, together with our consultation document which sets out proposals and seeks views on the impact of using CPI for private sector occupational pension schemes.

The consultation document includes three main proposals. First, we propose legislation to ensure that schemes that choose to stay with RPI do not have to pay CPI in those years when CPI is greater than RPI. We do not intend to put an additional burden on schemes. Secondly, we plan to include indexation and revaluation on the list of changes where employers are required to consult with their employees. I was surprised to learn that schemes had been able to change indexation and revaluation without any duty to consult employees. We will change that. Thirdly, we need to consider what to do when schemes specifically state that RPI should be used and when they do not have the power to amend scheme rules.

I know that many people will have been alarmed by press speculation that we were planning to override scheme rules. We were tempted to respond to the inaccurate reports in this morning’s press, but we were keen that this announcement should come out in a formal, structured way and to the House first of all. However, I am pleased to announce to the House that, contrary to press speculation, we do not plan to grant schemes a modification power to make it easier to use CPI when they do not already have the power to amend scheme rules. We believe that members’ trust in schemes and the scheme rules could be severely damaged if we intervened to give schemes the power to change their rules when the scheme does not already have such a power. Trust in pensions is important and I believe that intervention demands strong justification.

Finally, I should like to turn to one of the early actions of this coalition Government: the restoration of the earnings link for the basic state pension. Unlike the Opposition, who had 13 years to make that important change but failed to do so, the Government made good on the pre-election promises to restore the link with earnings and delivered that promise within months of coming into power. In fact, we have gone further. We have protected the future value of the basic state pension with a triple guarantee that it will rise by the highest of the growth in earnings, the growth in prices or 2.5%. The triple guarantee means that even in times of slow earnings growth, we will never again see a repeat of small rises such as the 75p rise in 2000.

The new rate for the basic state pension will be £102.15 a week for a single person—an increase of £4.50 a week. From April next year, single people on pension credit will receive an above-earnings increase to their minimum guarantee of £4.75, taking their weekly income to £137.35. For couples, the increase will be £7.30, taking their new total to £209.70 a week. Separately, to help manage expenditure, the Chancellor used his spending review statement to announce that we will freeze the savings credit maximum. Over time, the savings credit has resulted in more and more pensioners being caught up in the means-tested system. Freezing the savings credit maximum helps us to focus resources on the poorest pensioners.

At a time when the nation’s finances are under severe pressure, the Government will be spending an extra £4.3 billion in 2011-12 to ensure that people are protected against cost-of-living increases. We have protected the basic state pension with our triple guarantee and we have confirmed that most people on pension credit will benefit in full from the cash increase enjoyed by those on the basic state pension. Our move to CPI for the uprating of the majority of other pensions and benefits will result in an uplift of 3.1 per cent from next April and will set the future of uprating on a more appropriate, consistent and stable basis that is fair to individuals and the taxpayer. Throughout this statement, I have outlined our firm commitment to ensure that no one is left behind, and I commend the statement to the House.

I thank the Minister for giving me advance sight of the statement today. Both sides of the House agree that we need to cut the Budget deficit, even if we differ in our approaches, but let us be clear from the outset that what is set out today is not about deficit reduction. Making this permanent change from the use of the retail prices index to the consumer prices index, the impact of which will be felt long after the deficit is long gone, is an ideologically driven move that Labour opposes. If it were a time-limited change, we would consider whether it was a fairer alternative to deep cuts in departmental expenditure and would be willing to work with the Government on it. We would have supported a time-limited change to uprating, but why would the Government change the uprating of benefits in a way that will have an impact after the deficit has been reduced if not for ideological reasons? I agree that we need to get the economy back on track, but why will we be punishing the poorest in society and our pensioners even when the economy is growing again? Can the Minister confirm just how much worse off people will be over the next 10 years as a result of the switch and, correspondingly, how much money it will save the Government?

The Minister has conceded today that CPI will rise more slowly than RPI, but he says that the question is not about which index is higher or lower. That might not be the question that he wants to focus on, but for millions of pensioners and low-income families up and down the country, that is exactly the question to focus on. They will be asking how they will make ends meet following these changes. What advice would the Minister give to people who will be worse off year in and year out as a result of his decisions today?

Let us look at the detail. The Minister has outlined the Government’s commitment to continue Labour’s policy of restoring the earnings link for the basic state pension with a triple-lock guarantee. [Interruption.] The Government Front-Bench team may laugh, but they know that we committed to doing that and they are doing nothing more than continuing with our policy. Given that the Government are usually so intent on regressive cuts, the announcement in the Budget sounded too good to be true. The Minister’s statement has confirmed that when something seems too good to be true, it usually is. His statement means that millions of pensioners will see the value of their pension fall every year, and that will be compounded by the increase in VAT, which will leave couple pensioners worse off by £275 a year and single pensioners worse off by £125 a year. To what extent will the Government’s combined measures on the change in uprating of the state second pension, the state earnings-related pension scheme, public sector pensions and the VAT increase wipe out any benefit to pensioners from the triple-lock guarantee?

What of the Government’s previous promises? Before the election, the Minister said:

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

That is quite clear, I think, but today the Minister has confirmed that people who have paid into the state second pension, the state earnings-related pension scheme or a public sector pension throughout their working life will see their pension in retirement uprated by CPI, not RPI, as they had thought, which changes the rules of the game for pensioners and those coming up to retirement.

In just one week, we have seen the Lib Dems break their promises to students and to pensioners. The Minister will know, but for the benefit of others I shall remind him, that I have written to him to ask him to set out why he believes that CPI is a better measure of inflation for pensioners. I have copied that letter to the UK Statistics Authority, which on 6 October said:

“We believe that the CPI should become the primary measure of consumer price inflation but only when the inclusion in the index of owner occupiers’ housing costs has been achieved.”

I have not had a response to that letter, and given his attempt at explaining today, it is clear why.

The Minister has not produced any evidence to justify the change in indexation. Indeed, for pensioners and low-income families, average inflation is more than RPI and CPI, because of fuel and food costs. It is entirely disingenuous for him to claim that CPI is a better measure of inflation for pensioners when, in reality, pensioner incomes will be lower as a result. It is disingenuous as well to argue that CPI is a better measure of inflation than RPI for those on benefits. Those in that group spend more on food and fuel, so the average inflation is higher, not lower, than either RPI or CPI. Age UK says that CPI is not better, and that evidence is backed up by the Institute for Fiscal Studies. It adds that older people tend to spend more on essentials such as food and fuel, and still spend on housing costs such as council tax. I ask the Minister now, what evidence—not assertion, but evidence—is there that CPI better reflects inflation for pensioners and low-income families?

It is not just pensioners for whom this uprating makes no sense. The Government have said that, from 2013-14, they will uprate local housing allowance by CPI, rather than local rents, meaning a total disconnection between local housing markets and the housing allowance. The long-term consequences are likely to be dire, so will the Minister confirm whether that will be a permanent shift and whether he is comfortable that pensioners and low-income families risk losing their homes because of changes in rents over which they have no control?

The Government enthusiastically talk about making work pay—we would all support that—but we also hear today that they have said that they will freeze working tax credit but uprate jobseeker’s allowance. Does that not mean that the gains from moving into work will shrink every year? Will the Minister explain how that is compatible with the drive to get people back to work?

Finally, does the Minister agree with the Child Poverty Action Group, which says that the

“effective inflation rate for the poorest households was higher than RPI in recent years when the cost of basic essentials like food and domestic fuel rose much faster than other prices”?

It adds that CPI uprating will make inequality and poverty worse.

I am grateful to the hon. Lady for her questions. The CPI

“is more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old RPIX measure of spending patterns. It is more precise because… it takes better account of consumers substituting cheaper for more expensive goods.”—[Official Report, 10 December 2003; Vol. 415, c. 1063.]

How right the previous Prime Minister was when he said those words.

There is a sensible debate to be had about the most appropriate price index. The hon. Lady said that pensioner inflation is always higher. I did not notice the previous Government using a higher inflation measure for pensioners in the 13 years during which they decided these things. In fact, over the past 20 years—not the past five, which Age UK used—the average pensioner inflation and the average non-pensioner inflation were the same. In other words, there are times when it is higher and times when it is lower, as we would expect, but in the long run they are the same. Previous Governments never used pensioner-specific inflation rates; nor do we propose to.

It was good of the hon. Lady to say that she would consider the CPI for this Parliament. Obviously, we are announcing today the benefit rates for next April, so I am assuming that, in the event that the House comes to vote on these matters, she will support the benefit rates that we are proposing. It was not entirely clear to me whether she was for them or against, but I hope that, in due course, it will be clear.

The hon. Lady asked about the use of the RPI and felt, I presume, that it is a better measure of inflation. Does she believe that in the year to September 2009 pensioner inflation was negative? I have never met a pensioner who thought that their inflation was negative. The goal is to use an index that matches inflation experiences, and that is what we have done.

The hon. Lady mentions the IFS and its views on the issue. The main difference between the CPI and the RPI is not the basket of goods but how the two indexes respond to price increases. The IFS found that the substitution effect used in the CPI is a better measure for lower-income households, so its judgment is that, on that key difference, the measure that we are using better fits the inflation experience of lower-income households. I am glad she cited the IFS, because it was right on that point.

The hon. Lady raises the issue of people meeting their fuel bills, and, as my right hon. Friend the Prime Minister said, the cold weather payment is one of Labour’s ticking time bombs. This winter, it was due to fall to £8.50 a week. That was in the spending plans, but my right hon. Friend the Chief Secretary to the Treasury and my right hon. Friend the Secretary of State for Work and Pensions agreed that it was not fair—that paying people £8.50 a week this year would not be acceptable. So, we found the money to set it at £25 a week not just this winter, but for the whole Parliament, and pensioners on low incomes are better off as a result.

The hon. Lady asks about the net effect of the changes, glossing over the earnings link, which, mysteriously, was Labour policy but never implemented in 13 years. It is funny how things become implementable in opposition but not when one controls the levers of power. The earnings link on average gives about 2% a year above prices; the CPI change on average gives about 1% a year less than the RPI. So for those with low and modest occupational pensions, the net effect on pensioners of the two taken together will be positive.

We have a package of measures to protect the interests of pensioners. The earnings link over the long run will give a newly retired pensioner an extra £15,000 in state pension over their retirement, compared with the prices indexing that Labour, when it had the levers of power, applied for 13 years. That is what it applied in office for 13 years: the prices link. Within months, we have gone to the earnings link, and pensioners will appreciate what we have done for them.

Does my hon. Friend have constituents like mine, who are looking forward to increases in SERPs, and who have looked at what they received last year when the RPI was negative and the CPI was positive? Labour Members back then proposed no increase whatever in those pensions. At the same time, looking over 10 years, is it not a little disingenuous to fail to take into account what has happened to house prices over the past decade? It is unlikely to be replicated in the next decade.

I am grateful to my hon. Friend for that point. Many of the letters that I signed as a new Minister were to people complaining about the April 2010 non-increase in pension rates because they were linked to the RPI, which was negative. One of the worst things about using something that is so heavily affected by mortgage interest rates is that a pensioner with savings not only fails to benefit from falling mortgage rates, but is penalised by falling savings rates, so they get a double whammy. Neither factor will affect the CPI.

The Minister in his statement said that he will continue to freeze the savings credit maximum, and the reason he appears to give is that over time the savings credit has resulted in more and more pensioners becoming caught up in a means-tested system. Is not another way of looking at the situation the fact that, in future, fewer pensioners on low income will be eligible for pension credit?

I am grateful to the hon. Lady for her question. She is right: last year the savings credit maximum was increased—by 12p, and by 6p for a couple, so it is important to keep what we are doing in context. If, however, she is accusing us of shifting the balance between means-tested benefits and universal benefits such as the state pension, I plead guilty. We have chosen to focus scarce resources on the basic pension through the earnings link and to constrain the rise in savings credit, which is a relatively ineffective way of reaching poorer pensioners. It has a take-up rate of barely 50%. Half the people who are entitled do not even have it; everyone claims their pension.

As the Minister said, the move from RPI to CPI will lead to much more stable increases in the uprating of benefits and pensions, and the triple lock will ensure that pensioners do not fall behind the rest of society. Some concerns have been raised, however, because the CPI does not include any costs associated with housing. The Government have announced plans to consider including some housing costs in the CPI calculation, but when does the Minister expect that to be done, and what impact is it likely to have?

I am grateful to my hon. Friend, who is right that CPI rises tend to be more stable compared with the surges and freezes that we had with the RPI. On the point about the inclusion of housing in the CPI, costs in the form of rents are in the CPI already, so that is covered for lower-income renters. The CPI advisory committee is undertaking a two-year programme to see how housing costs might be included, but it has already ruled out directly including mortgage interest payments specifically, which will help with the issue that we have raised. As and when the Office for National Statistics comes up with alternative measures, we will certainly look at them, but that is without prejudice at this stage, because the work is ongoing.

The Minister draws attention to the restoration of the earnings link and to Labour’s failure over 13 years to make that important change, but does he not feel a little uncomfortable about being in cahoots with the party that broke that link in the first place?

What is a great source of pride to me is being part of a coalition Government who are restoring the earnings link. I assure the hon. Gentleman that, although the measure was certainly in the Liberal Democrat manifesto, if the Chancellor of the Exchequer had not been happy with the plan, it would not have happened.

Does my hon. Friend agree that one real benefit to pensioners that will result from today’s statement is that it gives them certainty and stability, something that, to their frustration, has been lacking over the past couple of years because of the measly and in some ways insulting changes that were made to their scheme?

My hon. Friend is right. The nature of the triple guarantee is that, whatever happens to earnings and prices, pensioners will be guaranteed a 2.5% rise. Picking up on one of the points that the Opposition spokesperson, the hon. Member for Leeds West (Rachel Reeves), made, I should say that the previous Government, in their spending plans, pencilled in a 2.4% rise in 2012. I have no idea what prices or earnings will be next year, but I do know that 2.5% is bigger than 2.4%.

If a private company alters its contractual obligations to pay its customers, it is likely to end up in court on a charge of fraud. The Secretary of State admits that CPI increases at a slower rate than RPI. Is not the measure just a simple theft of money from pensioners?

No, it is not. Each year the Secretary of State has a duty to assess the general increase in prices; that is what the law requires him to do. If the law required him to link state pensions, for example, to RPI, that would be a different matter, but that is not the duty. The duty is to assess inflation fairly, which is what we are doing. I also announced today that, when companies have RPI written into their rules and no provision for changing those rules, the Government will not allow schemes to change them, precisely for the sorts of reasons that the hon. Gentleman mentions.

My hon. Friend rightly identified in his statement that the upratings policy forms part of a much wider review of social security policy, which will include major investment in the radical universal credit. Which elements of the Government’s programme does he think will have the most impact on people of working age?

I am grateful to my hon. Friend for stressing that, as well as setting benefit rates, the Department, led by my right hon. Friend the Secretary of State, is looking at major structural reform to ensure that work pays. The hon. Member for Leeds West asked about making sure work pays, and we need to ensure that the move into work is seamless, people know what they will get and there are not the complexities of multiple withdrawal rates. I think that history will judge this Department and my right hon. Friend’s record very favourably for putting in place the structural reform that has been overdue for far too long.

The Minister is very good at giving long, process answers to our questions, but I should like to ask him one simple, factual question. How much does he forecast the average pensioner losing over the next five years due to the switch from RPI to CPI?

My forecast is that the average pensioner will gain from our announcements today. I understand why the hon. Lady wants to pick out one little bit, but she knows that the average pensioner draws a basic state pension, which we have restored to earnings, which more than offsets any change to CPI.

The Minister rightly reminds the House about the importance of the triple guarantee, which will protect the value of state pensions. What feedback has he had on that important announcement?

I am grateful to my hon. Friend. I regularly meet pensioners groups throughout the country, and he will be reassured to know that the restoration of the earnings link has been universally well received.

The Minister will be aware that some of us who now sit on the Opposition Benches never believed that CPI was a better measure because of the fact that it tended to give a lesser increase. However, we do not deny the worth of the triple guarantee. If his concern is to protect the basic state pension, will he address the needs of those people who do not receive its full value because of the high rate of contracted-out deductions? Many people suspect that the rate of deductions is excessive and punitive, and some say that it represents a marginal tax rate of 80% or 90% on their basic state pension.

Obviously, contracted-out deductions apply not to the basic state pension, but to the additional state pension. The idea of contracting out is that a scheme that offers to provide earnings-related pensions must promise to match the benefits that the state would otherwise have provided. That may not be well understood, but such schemes and the employees who use them pay less national insurance, in return for which, the scheme promises to match what the state would have provided. I do not recognise the hon. Gentleman’s description, but if he writes to me with specific examples, I am happy to look at them.

I have been contacted by a large number of constituents who are public sector pensioners, because they are extremely concerned that the pensions to which they have been contributing and which they thought were guaranteed to increase in a certain way should be changed by the Government without any justification. Why is it felt necessary to do that? If it is so good to triple-lock the basic state pension, why is it not equally good for public sector pensioners?

To take the hon. Lady’s second point first, if we were to earnings-link all public sector pensions in payment, it would cause a massive increase in unfunded pension liabilities. She has just spent billions upon billions of pounds, apparently casually, but I am afraid we are not in a position to do that. We have done what Governments have always done, which is to assess the general increase in prices, make a figure for inflation and apply it consistently—in this case, to all social security benefits, tax credits and earnings-related pensions. By statute, public sector pensions are linked to what we do to additional pensions. What we are doing for contracted-out public sector pensions is therefore exactly what we are doing for contracted-in additional pensions.

The hon. Member for Edinburgh East (Sheila Gilmore) asked about pensioners. What pensioners and this House need to know is the difference that is made in monetary terms when pensions are calculated using CPI rather than RPI.

Under the triple lock, the increase will be determined by whichever is highest between earnings, prices and 2.5%. In the long run, the earnings figure is almost invariably higher than the prices figure, so regardless of which measure of prices is used, we will use the earnings figure. As I have said, CPI for additional pensions is about 1% a year lower. The average occupational pension in payment is about £70 a week, 1% of which is 70p a week. Under the triple lock, as I have just announced, the pension is going up by £4.50. That shows the great advantage of the triple lock.

Bill Presented

Armed Forces Bill

Presentation and First Reading (Standing Order No. 57)

Secretary Liam Fox, supported by the Prime Minister, the Deputy Prime Minister, Secretary William Hague, Secretary Kenneth Clarke, Secretary Theresa May, Secretary Vince Cable, Mr Secretary Mitchell, the Attorney-General and Mr Andrew Robathan, presented a Bill to continue the Armed Forces Act 2006; to amend that Act and other enactments relating to the armed forces and the Ministry of Defence Police; to amend the Visiting Forces Act 1952; to enable judge advocates to sit in civilian courts; to repeal the Naval Medical Compassionate Fund Act 1915; and for connected purposes.

Bill read the First time; to be read a Second time tomorrow, and to be printed (Bill 122) with explanatory notes (Bill 122-EN).