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Social Security Benefits Up-rating Order 2011

My Lords, I thank the Minister for introducing these orders and for that journey through geometric means, elasticity of demand and Cobb-Douglas. I am certainly reassured to know that the geometric mean works only at the elementary aggregate level. He has certainly given us plenty to read this evening in time for tomorrow’s further debate on this issue when we get to pensions. The Guaranteed Minimum Pensions Increase Order presents no problem to us. Although the general level of price increase has been based on the CPI, not the RPI, the limiting factor is the 3 per cent cap, and we can support this order. However, the more substantive benefits uprating order is an altogether different proposition. Of course, we are not supposed to vote against it as it is includes matters that we support, such as the uprating of the basic state pension by the RPI, but we will not vote for it since, as we have heard, it is the start and signals the continuance of the switch to uprating by reference to the CPI. When it comes to debating these things, the Minister is right that there is no perfect index; an index measures what it measures. The Minister made great play of the triple lock and the re-linking of the basic state pension with earnings. This is something that we support, and why not? After all, we locked it in as a requirement into primary legislation. We should remember that it was a Conservative Government who broke that link at a stroke. It was a consequence of this that when we came to government in 1997, our priority was to target maximum resources on the poorest pensioners. This was helped through measures such as pension credit, which meant that by 2007-08 there were 900,000 fewer pensioners in relative poverty than in 1998-99, as measured by the 60 per cent contemporary median income. On average, pensioner households were £1,500 a year better off in 2009-10 as a result of the tax and benefit changes than if the 1997 policies had simply been rolled forward. The poorest one-third of pensioner households were over £2,000 a year better off. I should say that we recognise that the order before us relates to the basic state pension and the S2P. Issues concerning occupational pensions and the revaluation of preserved pension rights were dealt with by an earlier order in December last year, when the Secretary of State again used the CPI as the basis for revaluation, and they presage the order for public sector pensions, which will similarly be laid before us before 18 March. Those issues might spill over into the debate that we have today. On the basis of the GAD report that accompanies the order, assuming that uprating continues to be done on preceding-year increases, it will be 2013-14 before the earnings increase at 2.6 per cent will determine the basic state pension increase. For the period covered by the report to 2015-16, the 2.5 per cent underpin would never determine the uprating, and for two years—2012-13 and 2013-14—where the CPI and earnings respectively would under the Government’s proposals, the RPI on the old basis would produce a better result. Despite the triple lock, then, uprating by the RPI for 2012-13 and 2013-14 would have produced a better result. The Minister has placed much reliance on the switch to the CPI as being the most appropriate measure of inflation for uprating pensions and benefits. It is somewhat surprising, notwithstanding the Minister’s comments, that the Government have abandoned the policy at the first opportunity and held on to uprating the basic state pension by the RPI and the minimum-guarantee element of pension credit by a mixed rate of 3.6 per cent that is designed to preserve the full basic state pension increase. The Government announced last year the use of the CPI as a basis for determining the percentage increase in the general level of prices for a range of matters. It is widely acknowledged that the CPI as a measure of inflation will generally be below the RPI; I think that the Minister acknowledged that. That is reflected in the GAD report, which shows it to be below the RPI by 0.4 per cent to 1.6 per cent for the period to 2015-16. It is also reflected in the June 2010 Budget Red Book, which by 2014-15 expects the Exchequer to save some £6 billion a year because of the switch. The saving will come at the expense of those on benefits, tax credits and public sector pensions. As we have heard, the Government’s arguments in favour of the CPI are that it is a headline measure of price inflation, that it uses a standard international classification system—we heard about the other countries that use it—that a single index across all upratings is best, and that the CPI is most suitable for use as a single index. For pensioners, it is argued that the CPI is preferable because it uses a methodology that implies that consumers will switch to cheaper goods when prices rise. On coverage, the challenge is that the RPI includes mortgage interest payments, which are not relevant to the majority of pensioners, although there is the recognition that the CPI, while excluding mortgage interest, also excludes certain other indirect housing costs. How does that argument run for benefit recipients as well as for pensioners? How does switching to cheaper goods operate for poorer households? If households are living at the margin, at the cheapest level that they can, at the moment because of their circumstances, what does switching in that index actually mean for them? We have to look at other comments on the CPI/RPI indices. The Minister quoted the IFS research. The IFS notes that the CPI tends to give a lower rate of inflation for two reasons: "““Because of both the formula effect and the fact that items excluded from it tend to rise in price more quickly than average prices, the CPI tends to give a lower rate of inflation than either Rossi or the RPI … This means the decision to link benefits to the CPI is likely to save the government money””—" We know that. It continues: "““These savings will cumulate over time: in any given year, the differences between different measures of inflation may be small, but over many years the difference in the value of benefit payments will be substantial””." The IFS analysed the government rationale for the switch. Part of its conclusions was as follows: "““Overall, then, we find that the move to CPI-uprating is not clearly justified by the coverage of the CPI being more appropriate for all benefit recipients, particularly for those of working age. Nor do our results suggest that the switch from RPI to CPI as part of the triple lock guarantee for the basic state pension was obviously justified on coverage grounds: whilst we find the majority of pensioners in receipt of other benefits are insulated from the costs excluded from the CPI, if we include state pension recipients ""as well, the proportion insulated falls to between 31.5% and 32.2% of pensioner households, similar to the proportions insulated for working age households””." The Minister referred to the Royal Statistical Society and the UK Statistics Authority. A letter from the Royal Statistical Society said: "““As we all know, the CPI was originally the Harmonised Index for Consumer Prices … constructed in order to compare price movements between EU countries; its methodology and coverage are on agreed EU definitions. Lack of agreement over the treatment of owner occupier housing costs, of particular importance for the UK, means that these are still excluded; it is debatable whether its exclusions of items such as council, vehicle excise duty, trade union subscriptions and television licences, and its inclusion of spending in the UK by foreign residents, are appropriate for all purposes. Its methodology, specifically the comprehensive use of the geometric mean at the lowest level of aggregation, has many supporters. It is approved by some other international bodies as well as the EU. However, some would argue that it is not the best approach for products where consumers are typically slow to substitute newly cheaper outlets, brands or varieties for existing more expensive ones””." In October 2010, the UK Statistics Authority replied, saying that the CPI should become the primary measure of consumer price inflation once the inclusion in the index of owner-occupiers’ housing costs had been achieved. It said: "““We continue to regard both the Consumer Prices Index … and the Retail Prices Index … as important measures of consumer price inflation. 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””." We consider that there is a persuasive case for making a change to CPI uprating for a period of time, provided that recipients of benefits did not lose out in growth and earnings. If that were the case, we could have a discussion on that as part of the deficit reduction plan, but the switch goes way beyond the period when the deficit should have been dealt with, which is why we are unable to support that long-term switch. A temporary expedient deal to help with deficit reduction is not on offer. It would be wrong to sign up for the long term, given the profound consequences that it would have for pension rights and for benefits. We have had an interesting debate about the construct of indices, but we should not lose sight of what our deliberations mean for pensioners and for those on benefits. Most people struggling on income support or on the basic state pension with pension credit would be somewhat bemused by the abstract debate that we are having about what a proper measure of inflation is. This order covers a multitude of changes to benefit upratings, and I would like to ask the noble Lord a couple of questions. I have ploughed through this but I cannot profess to have read every line. Does the order contain any changes to the capital limits—the savings limits—in calculating benefits? I think not. There are some changes to the non-dependant deductions in the calculation of benefit; these were presaged in earlier debates and government announcements. What assessment has been made of the impact of those changes, which are basically ramping up the loss for non-dependants in a household, on housing demand and the related impact on housing benefit? Are there any fundamental changes in the order to income disregards? Is the full income disregard for child maintenance payments now fully in place? I conclude with one further question on indexation and uprating. Before the last election, the CSPA—the Civil Service Pensioners’ Alliance—wrote to all three parties, particularly about the impact of index-linking on the future of pensions. All three parties responded. In a letter dated 27 April 2010, Philip Hammond, then shadow Chief Secretary to the Treasury, said: "““Indexation of pensions in payment is an established part of pensions legislation. The Conservative Party has no plans to change the current index-linking of public sector pensions in payment. We agree with the view that the right to indexation of pensions already accrued is part of the accrued pensions rights, and those rights will be protected””." Does the noble Lord contend that what he has now proposed for index-linking is consistent with that assertion? Similarly the Liberal Democrat shadow Pensions Minister at the time, now Pensions Minister, Steve Webb, said in a letter dated 12 April: "““We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pensions rights that have already been built up. I have confirmed that I regard accrued index-linked rights as protected””." Does the noble Lord think that that commitment is to be honoured? Tonight’s debate has focused mostly on the two issues of the basic state pension and of CPI/RPI or any other form of index-linking. Contained within this order is a raft of changes to benefit levels that will have a significant effect on the lives of many. We are not able to support the order in its totality because of the long-term commitment that it presages to the switch to the CPI. On that, we must remain apart.