Motion to Consider
My Lords, as both the Social Security Class 3A Contributions (Units of Additional Pension) Regulations 2014 and the Pensions Act 2014 (Consequential Amendments) (Units of Additional Pension) Order 2014, as they are snappily called, deal with class 3A contributions, it seems sensible that they should be debated together. I can confirm that in my view these statutory instruments are compatible with the European Convention on Human Rights.
I shall begin with the regulations. The Pensions Act 2014 introduced a new class of voluntary national insurance contributions called class 3A. These new voluntary contributions are aimed at existing pensioners and people who reach state pension age before the introduction of new state pension on 6 April 2016, and who have an entitlement to a UK state pension. It will allow them to make class 3A contributions in return for units of additional state pension, which will increase their weekly state pension. We have called this scheme as a whole “state pension top-up”.
The regulations set out the pricing of class 3A contributions. They specify the contribution rates for class 3A and the maximum number of units of additional state pension that a person may obtain. The contribution rate for state pension top-up will be set at the specific amount that each age group will need to pay in order to obtain £1 per week of additional state pension. For example, it would cost a 65 year-old £890 to gain £1 per week of additional state pension, whereas for a 70 year-old the cost would be £779.
The scheme will be open for 18 months between 12 October 2015 and 5 April 2017. It is the intention that the scheme will open on the same day in both Great Britain and Northern Ireland. However, the scheme will not be commenced in Northern Ireland until the legislation necessary to set the amount that a person will receive in return for their contribution is in place. That is because this is a devolved issue, but we anticipate that that legislation will be in place. The intention is that the extra amount of additional state pension will be subject to an overall cap of £25 a week. As the extra pension obtained will be additional state pension, it will be uprated by the consumer prices index and be inheritable in the same way as SERPS. People will also be able to defer it, in line with existing rules.
These affirmative regulations have been made jointly, as HMRC will handle applications and collect payments for Class 3A contributions while the Department for Work and Pensions will administer and pay the extra amount of additional state pension. The intention is to deliver these changes as far as possible within the existing national insurance and benefit framework so as to keep administrative costs to a minimum.
We believe that state pension top-up will be particularly helpful for groups who have little or no additional state pension—for example, women and the self-employed whose social and economic contributions were not captured in SERPS and not fully reflected in the state second pension. We have conducted two online polls to gauge interest in state pension top-up. On the basis of the first poll, which we conducted in June of last year, we estimated that around 140,000 people would take up the scheme. The second poll was carried out in February of this year and suggested interest in state pension top-up had increased to an estimated 265,000 people who would take up the scheme. We gave more detail in the second poll, which demonstrates the power of advertising. This scheme will provide people with an opportunity to boost their state pension income in a secure, inflation-proof way, with the added advantage that it provides survivor benefits. However, people will need to consider whether state pension top-up is the best option for them.
I should also point out that existing class 3 voluntary national insurance contributions, which allow people to cover gaps in their contribution record for basic state pension, will remain unaffected by this measure. The DWP and HMRC will put in place administrative arrangements to ensure that individuals applying to make new class 3A contributions are made aware that they should also check their eligibility to make class 3 contributions. I should stress that class 3A contributions will be actuarially fair and, as a result, will cost more than the heavily discounted class 3 national insurance contributions. As an example of this, in 2014-15 a person paying £723 in class 3 contributions would obtain £3.77 per week in basic state pension. On this basis a person can effectively recoup their money within four years of reaching state pension age. A different approach was required, and has been taken, for class 3A contributions to ensure that the arrangements do not become a burden for today’s national insurance contributors—hence our decision to base class 3A on actuarially fair rates, as advised by the Government Actuary. In keeping with this, the cost will be adjusted to reflect the age of the pensioner at the time they make class 3A contributions, as I pointed out in my earlier example.
I now turn to the order. We did not want people to take up class 3A contributions only to have their newly acquired additional pension clawed back by rules designed for other parts of additional pension policy. To this end, the order amends primary legislation to ensure that a person’s state pension or disablement pension entitlement is not reduced by obtaining or inheriting units of additional pension acquired from class 3A contributions. The order also applies the existing rules on inherited SERPS to the newly acquired additional state pension. This means that people will be able to inherit the class 3A top-up in the same way as they can inherit SERPS—up to 100% if the deceased spouse or civil partner reached state pension age before October 2002, tapering down to 50% minimum if they reached state pension age since October 2010.
In closing, I reiterate that state pension top-up is an entirely voluntary scheme. It will provide people with a one-off opportunity to boost their state pension with a secure, index-linked income for life, ahead of the introduction of the new state pension. I reiterate that it is actuarially fair. I would also like to take this opportunity to thank the Secondary Legislation Scrutiny Committee for its earlier consideration and analysis of these regulations and order. We have taken on board its comments in relation to the Northern Ireland situation. I seek your approval of the regulations and order, and commend them to the Committee.
My Lords, I thank the Minister for his very full exposition of the regulations. I welcome him to what I think is his first appearance as a DWP Minister. He is very welcome to join this club of aficionados. I am sure that his colleague, the noble Lord, Lord Freud, has given him a fair idea of what to expect.
These regulations are broadly uncontroversial and there is no difficulty in accepting them, but I thought that while I was here I would ask some questions that arise. We welcome the fact that the Government have undertaken more research, as we asked for collectively in Committee on the Bill. However, the noble Lord, Lord Freud, said that the Government would,
“look to consider qualitative research to find out what sort of barriers there may be to taking up class 3A contributions”.—[Official Report, 13/1/14; col. GC19.]
It is not clear to me—or, I think, to others—how the research undertaken is qualitative in this sense. It seems to follow the previous research and to gauge only the level of interest. If the Government have undertaken that qualitative research, would the Minister share its results and tell us what he thinks the barriers are to people taking up class 3A NICs?
There is also the question that was raised in Committee by my noble friend Lord Browne of Ladyton about winners and losers. The only factor that will be taken into account in pricing a class 3A contribution will be age. No account will be taken of any regional or occupational differences in life expectancy. Have the Government done any work on the likely distributional effects of the scheme? Given that the scheme is actuarially fair in pricing, and the proposal is that over time the policy will be broadly cost-neutral, as far as the Government have said, if some people are getting a good deal, is it the case that others must be losing out? Presumably, those who lose out will be those with shorter than average lives, but have the Government done more work on this? Who do they think the winners and losers will be?
In addition, we also asked in Committee—I know that the Minister was not involved but I assure him that we did so—for a proper estimate of the number of people who may take up the offer, based on the latest research. The Government now estimate that around 265,000 people may take it up. The Minister does not need to answer because he has indicated that that is the case.
Will advice be provided—and if so, what kind—to ensure that people can make an informed decision on whether making class 3A contributions is the best option for them? There are significant considerations for individuals, such as their life expectancy, that may be significantly affected by where they live in the United Kingdom, by whether they are married or in a civil partnership or likely to be so, and by any other income or savings they may have.
When the Bill was in another place, the then Minister said that the Government would,
“put in place administrative arrangements to ensure that individuals who apply to pay class 3A contributions are made aware that they should first check their eligibility to pay class 3 contributions”.—[Official Report, Commons, 17/3/14; col. 578.]
How in practice will that be put in place? In its recent briefing, the Pensions Advisory Service said that this is complex and many people will not know whether it is worth paying voluntary NICs until the DWP can provide a single-tier pension statement. Can the Minister give us a response to that?
I know that there are a number of questions here but pensions are quite important to a lot of people, and it is essential that we take the opportunity in this House to clarify things. The Government have mentioned a cooling-off period of 90 elapsed days during which people can change their mind. How have the Government arrived at that number, and how will that interact with the guidance—or the lack of it?
I appreciate that I have put a number of questions whose answers might be complex and detailed. While I hope the Minister is in a position to answer them today, it is certainly acceptable to receive a reply in writing.
I thank the noble Lord, Lord McAvoy, for his comments and his kind introduction to the aficionados’ club. I look forward to discussing these issues with him over the months and years ahead—with us in Government and his party in Opposition, I trust. I am very grateful also for his general support for these regulations and the order. I will try to deal with the issues that he has quite reasonably raised.
The first related to the barriers to class 3 contributions and who was likely to take up these opportunities. As he rightly acknowledged, I gave the figure of 265,000. What research and evidence we have is in general terms, but it seems to be more attractive to women who have had career breaks and the self-employed who have not contributed to SERPS and a second state pension. He is also right about it being actuarially fair and cost-neutral.
The noble Lord talks about there being winners and losers, but that is not how it is seen by either potential beneficiaries or the Department for Work and Pensions. This is an entirely voluntary scheme to help people who have taken advice. We will stress, both on the website and on a hotline service that is going to be available in Great Britain and Northern Ireland, that people should take advice. Every situation is going to be different. He is right to suggest that it would not be so attractive to people who are not married or in a civil partnership or to people with a lower life expectancy; that is true. Online there will also be—my noble friend Lord Freud would benefit from this—an instant calculation of how much is payable by a person at a given age. The advice that we will be giving to people taking up class 3A contributions will be to check their eligibility for class 3 contributions to see if it is right for them.
Lastly, in answer to his question about why the cooling-off period is 90 days, I think that is a common period. If I am wrong on that, I will write to him. I do not think there is any particular science to it but it is standard practice in these matters to have a 90-day period, and I think that is fair. With those comments, I hope that I have dealt with the questions that the noble Lord raised. I thank him once again for his contribution and support, and I commend these regulations and the order to the House.