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Also see the "Immoral Dimension"
"In my judgment, the remedy of the expatriate United Kingdom pensioners who do not receive uprated pensions is political, not judicial. The decision to pay them uprated pensions must be made by Parliament." (Burnton J in Annette Carson and the Secretary of State for Work and Pensions).
This view was accepted by Laws LJ and his fellow appeal judges.
Law and Politics
It is the business of government to make laws for the society it governs. There is no curb on the power of a tyrannical government to make laws which unfairly disadvantage minorities, except the sense of "natural justice". Ministers and Civil Servants, lawyers and judges sometimes lose sight of the moral principles that ought to underlie all law-making. Freezing of pensions transgresses these moral principles, the principles of natural justice.
How did pension freezing come about?
Originally pensions were paid only to UK residents. In 1929, as part of the reforms following the introduction of contributory pensions, payment was extended to all of "His Majesty's Dominions". From then until 1946, the age pension was a flat amount of 10/- per week. No increase was made in the weekly rate until 1946, when, anticipating on the National Insurance Scheme due in April 1948, the post-war Labour government increased it to 26/- per week but did not make it payable to non-residents, including those in the Dominions. This seems to have been the first step in the policy of freezing pensions.
DSS said it was because overseas residents were not expected to contribute to the new Scheme, a justification difficult to understand considering that incumbent pensioners residing in the UK would not be contributing under the new scheme either.
The weekly rate of pension was increased several times during the next 10 years. Although some of the annual amounts of increase look small by 2003 currency values, in fact the total increments from 1948 to 1974 represented annual compound growth of 8.5%.
Pensions were still frozen for overseas residents, but agreements were concluded with various countries, starting with France in 1948, whereby pensioners resident in selected countries had their pensions increased in line with UK resident pensioners.
In the words of Laws LJ in the Carson appeal,
Since the National Insurance Act 1946 came into force, the general position has always been that British pensioners who are not in Great Britain have not received uprated …...
In saying "the general position has always been" Laws overlooked the fact that nearly one half of pensioners resident outside Great Britain now have their pensions uprated every year. The countries in which uprated pensions are paid form just as diverse a group as the frozen countries.
By what law are pensions frozen?
The Social Security Contributions and Benefits Act 1992 is a continuation of the legislation that has governed social security over the years. In section 113 it provides that:
(1) Except where regulations otherwise provide, a person shall be disqualified for receiving any benefit under Parts II to V of this Act, and an increase of such benefit shall not be payable in respect of any person as the beneficiary's wife or husband, for any period during which the person
(a) is absent from Great Britain; or ……
Note that the "increase" referred to in this section is not the annual increase in pension due to indexation; it is the additional benefit payable where a beneficiary has a wife or husband who is classified as dependant. The details of how the disallowance of pensions is applied and disapplied and reapplied are convoluted, and are not relevant to this discussion.
No guidance is given in the Act as to how the wide discretion conferred on the Minister to allow or disallow pensions and other benefits to non-residents should be exercised. No general scheme is proposed, no principles enunciated. Apart from routine Parliamentary approval of the regulations, the choice of countries to benefit from pensions uprating is left entirely to the Secretary of State.
Suffice it to say that the result is chaotic, as was admitted by Laws LJ:
I should notice also what was said in the Third Report (January 1997) of the House of Commons Social Security Committee: "It is impossible to discern any pattern behind the selection of countries with whom bilateral agreements have been made providing for uprating."
The lack of definition in the powers conferred by Section113 enables the Minister to conclude agreements for reasons quite unrelated to the social obligations implicit in a contributory pensions scheme. Such a wide discretion can lead to a species of tyranny.
Have the powers been exercised in a way that is consistent with natural justice?
Of the range of benefits payable under the Act, many emulate the theory and practice of insurance; indeed the scheme is often called the "National Insurance Scheme". Some like unemployment and sickness benefits meet generally short term contingencies, and wide Ministerial powers may be appropriate so as to protect the revenue from fraudulent claims from those absent abroad.
But for lifelong benefits, such as age pensions and widows' pensions, the only obvious need is to establish periodically that the recipient is still living. So why should these powers be applied to denying increments to residents in a random selection of countries, often with quite perverse results - like two people of the same age, with the same contribution history, and residing in the same country, receiving greatly different amounts of pension?
Regularly cited as a precedent in order to assert the primacy of domestic law is: X. v ITALY: DECISION of 5 October 1977 on the admissibility of the application of Article 1 of Protocol 1:
If this provision can, in some circumstances, include the right to derive benefits from a social security system, the interested party must, in order to establish that right, satisfy the conditions set by domestic law.
The condition set by the domestic law in this Italian case was that the pension would be secured provided that contributions had been paid. Frozen pensioners have paid their contributions, yet courts have allowed Government claims that all requirements of domestic law must be met, without examining whether some might be discriminatory and hence morally repugnant. For example, would any court accept that the uprated pension was not payable to non-Aryan citizens?
If all overseas pensioners - or perhaps all outside the EU had their pensions frozen, it would be discriminatory but at least consistent. There is no principle of law or justice which suggests that pensioners living in some countries should be treated less fairly than those in other countries.
There are countless examples of the ludicrous discrimination between residents of different countries. Why should pensioners resident in Manila (Philippines) have their pensions uprated, while those in Manilla (Australia) have their pensions frozen? Why are pensioners in South Africa frozen, while those in South Dakota are not? There is an apocryphal story of an old lady whose farm on the Canadian border was resurveyed using GPS equipment. It was found that her house was south of the 49th parallel, and not north as had been supposed. Her pension was then uprated.
A more realistic case was that UK pensioners in East Berlin gained indexation consequent upon German reunification.
Consider the following scenarios, all of them possible but simplified for the purpose of illustration:
Two men of the same age (let's call them "social twins") and with the same contribution record get the same basic pension on retirement. Twin A emigrates to Australia just after his 65th birthday. Twin B remains in Britain until his 75th birthday before following him, thus his pension, being frozen at a later date than twin A, will be permanently higher. Assuming that twin B emigrated in 2003, his pension will always be 38% more than that enjoyed by twin A.
Consider a man and a woman both aged 70, and with similar contribution histories, both of whom emigrated to Australia immediately on retirement. Assuming they became 70 in 2003, the man's pension will always be 15% more than the woman's pension.
These anomalies would not arise if the pensioners concerned had emigrated to Bosnia or Israel or any of the other countries where indexed UK pensions are paid.
Comparisons are odorous
In the Carson appeal, Laws LJ found himself unable to make comparisons between a pensioner resident in South Africa and one resident in (say) the USA, because of differences in the two economies. Such concern is spurious. As shown above, indefensible anomalies can arise even where two pensioners reside in the same country and are subject to the same economic conditions.
Costs of living differ widely between indexed countries and even between cities within a country. London is more expensive than Liverpool, New York than New Orleans.
Those who emigrate assume responsibility for exchange rates, cost of living, taxation etc, without asking for more. Frozen pensioners agree with the observation in the Corner case (cited in Carson):
The Commission also considers that the economic state of third countries is not a matter which domestic pension authorities should be obliged to consider.
Applying criteria to frozen countries which are not applied to indexed countries is discriminatory.
Where's the money coming from?
The annual cost of unfreezing pensions is said to be £400 million. Laws LJ quoted a much bigger figure, apparently contemplating payment of back-pay for the years of freezing. Pensioners have not sought this, but even if they did, the £3 billion would be a once-only cost and not an annual charge on the revenue. With an annual increase in the National Insurance surplus of £2.5 billion, the £3 billion deficit would be wiped off in little more than a year. With such a surplus, the yearly cost of unfreezing is tolerable, and well within the limits of error in the annual projection methods of the Government Actuary.
Fears that to unfreeze pensions would place a burden on other pensioners, implies that pensions are paid out of a limited pool of funds. Extending widows’ benefits to widowers sharply increased the number of beneficiaries, prompting a reduction in benefit levels.
The increase in the indexed population consequent on abolishing the freezing regime would be on nothing like this scale since only 4% live in countries where pensions are frozen while 24 times as many live in indexed countries, including UK. Abolishing the freezing regime would increase the number of unfrozen pensioners by 1/24th. This would not have much discernible effect on the annual growth in surplus, and need have no effect at all on the level of pensions.
Under the Act, the Secretary of State must raise pensions by the percentage increase in the cost of living each year. The increase in the Basic Pension has been a much greater percentage since the debacle year when the weekly pension rose by only 75p. The amount of Basic Pension increase is determined not for economic but for purely political reasons. Achieving complete pensions parity could be readily accommodated.
This is amply illustrated by figures taken from a report by the Government Actuary of November 2000, the year of the ‘75 pence’, to consider the cost of the out-of-line increase in basic pension from £67.50 to £72.50 as from April 2001, and another jump from April 2002. If the usual formula had been applied, the basic pension would have been £69.75 from 2001, an increase of £2.25. Instead, the government adopted an electorally popular decision to increase it by £5, an extra £2.75 over and above the rate of inflation, at a cost £1.3 billion in 2001, which in the actuary's projections rose to £1.9 billion in 2002, including the proposed additional increase of £3 in that year.
This demolishes the Laws LJ suggestion that there was a fixed pool of funds from which uprated pensions would have to be paid, and that £400 million would have a devastating effect on the NIF.
If the government had shown some restraint by making the initial increase £4 instead of £5, it could have funded our uprating and would still have won the 2001 election handsomely.
The projections for 2000-01 in the Government Actuary's report indicated that with the current joint employee and employer Class 1 contribution rate of 20.25%, income would exceed expenditure by £4.0 billion in 2000-01.
The moral dimension
While the government repeatedly avers that its prime responsibility is to use limited public funds for the benefit of the poorest pensioners in the UK, major outlays - like "electoral" increases in Basic Pension and the Winter Fuel Allowance costing £1.4 billion annually - benefit all pensioners, rich and poor alike, in cynical recognition of the fact that UK-resident pensioners constitute one third of those who vote. It is immoral to deprive half the expatriate pensioners of their full pensions entitlement in order to fund electoral strategies.
The Secretary of State has wide powers of discretion in relation to benefits payable to persons who are not resident in Great Britain. It is time for him to exercise these powers in accordance with the principle of natural justice and to accept moral accountability for his political decisions.