§ 6.48 p.m.
§ Lord Cullen of Ashbourne rose to move, That the draft order laid before the House on 3rd March be approved.
§ The noble Lord said: My Lords, with your Lordships' agreement, for the convenience of the House I propose to deal in my opening remarks with the draft order to which I have just referred and with the draft regulations which appear next on the Order Paper.
§ The background to these two statutory instruments is technically complex, as can be judged from the reports by my right honourable friend the Secretary of State for Social Services and the Government Actuary. However, I shall do my best to avoid burdening your Lordships with too many technicalities and concentrate so far as possible on the social and policy issues.
§ My right honourable friend the Secretary of State for Social Services has a statutory duty to review at least every five years the terms under which good occupational pension schemes can be used to contract employees out of the earnings-related tier of the state retirement pension arrangements. In this the 1330 first review, we are making the minimum number of changes consistent with fairness to all parties; for we are but four years into the 20-year maturity of a new scheme. Before describing the changes we propose from April 1983, I should like to remind the House of the recent background to, and the structure of, the current atrangements.
§ Under the provisions of the 1975 Pensions Acts, a substantial earnings-related pension will become available as the new state scheme matures. This pension is in addition to the flat rate retirement pension. So that these state scheme arrangements could dovetail with the provisions of existing occupational pension schemes, the Act provides that members of occupational schemes may, on strict conditions, be contracted-out of the earnings-related element of the state scheme. The essence of contracting-out is that occupational schemes guarantee to provide a pension broadly equivalent to the state additional pension. To finance this commitment, national insurance contributions for contracted-out employments are reduced.
§ Originally, the Government of the day had it in mind to reduce national insurance contributions by a total of 6½ per cent., but in fact settled for 7 per cent., so that a reasonable contingency margin was allowed. This concession was particularly helpful to schemes with above-average concentrations of female or elderly employees (for whom it is more costly to provide pensions), but it was intended also to allay anxieties about the viability of contracting-out in uncertain economic conditions. Other important safeguards were introduced to apply when schemes had to buy back into the state scheme.
§ There can he no doubt that these contracting-out arrangements, which took effect in April 1978, have been a considerable success. Of the 11.6 million current members of occupational schemes in 1979, some 10.3 million were contracted-out. Occupational schemes have investments whose current value probably exceeds £75 billion. Much of this investment is in British industry. Given these statistics, I am sure your Lordships will readily appreciate that one of the Government's primary objectives is to maintain the stability of these arrangements so far as is practicable.
§ I turn now to the revision of the contracted-out contribution reduction that is the subject of the draft order. When the DHSS consulted the interested parties in August last year, it issued a technical analysis prepared by the Government Actuary. His analysis showed that a contribution reduction of only 6 per cent., a full 1 per cent. below the current 7 per cent. reduction, could be justified but that a financially neutral option would be an abatement of ¾ per cent. to 6¼ per cent. We chose this option because the ¾ per cent. abatement could be justified purely in terms of the reduced costs of covering contracted-out commitments—½per cent. because, as the average age in contracted-out schemes reduces, a reduced level of funding is required; ¼ per cent. because actual age and sex distribution data could be substituted for earlier estimates.
§ But there are other important considerations which justify our decision to opt for 6¼ per cent. We believe that to have taken a harder line could have riskezd a movement away from contracting-out. This could have disturbed investment markets and jeopardised the 1331 pension expectations of the scheme members concerned. On the other hand, to have opted for a lesser abatement would have improved the terms for contracting-out to the disadvantage of full-rate national insurance contributions—that is, those not members of contracted-out schemes. Finally 6¼ per cent. is in our judgement an admirable compromise which strikes a fair balance between those like the TUC who championed the cause of full-rate contributors by pressing for 6 per cent. and those like contracted-out employers and the pensions movement who would have preferred 6½ per cent.
§ I shall deal next with the apportionment of the ¾ per cent. abatement between employer and employee. To give a modest boost to contracted-out employers, the Government have decided to share the abatement almost equally between employer and employee rather than in proportion to the present shares of 4.5 per cent. and 2.5 per cent. respectively. The new contribution reductions from April 1983 will be 4.1 per cent. employer and 2.15 per cent. employee. It is to be hoped employers will acknowledge that we have helped them as far as possible, given the need to strike a fair balance.
§ I turn now to the changes in the so called buy-back terms which are the subject of the draft regulations which appear next on the Order Paper. Contracted-out schemes may in certain circumstances transfer their liabilities to the state scheme by paying premiums. A premium reading taken from the appropriate actuarial table is subject to adjustment by a device called the average market level indicator. This device was introduced as a political concession to protect occupational schemes which would otherwise have had to sell investments at a loss in order to raise the cash for premiums. It is clear from the Government Actuary's report, and generally recognised by those who contributed at the consultation stage of the review, that the present arrangement has persistently worked to the excessive advantage of schemes and the disadvantage of the National Insurance Fund. The modification embodied in the draft regulations corrects the position while at the same time maintaining the original objective. In the interests of stability, the modification is to be phased in by five annual steps.
§ The modified formula, based on the expert advice of the Government Actuary, is intended to secure premiums which are more balanced. The gradual phasing of the increases meets the wishes of the pensions movement. However, the Occupational Pensions Schemes Joint Working Group have in a letter to my right honourable friend expressed some anxiety about the effect of the premium increases in the event of a serious deterioration in he investment markets. So far, we have only an outline of their thinking, but we are confident that there is no immediate cause for concern and that it is right to proceed with the regulations as they now stand. My right honourable friend has made it quite clear that, when he has received full details of the group's precise misgivings, he will consider the matter further. Of course, any view expressed by your Lordships will be carefully noted and brought to the attention of my right honourable friend and the Government Actuary.
§ Finally, I conclude my opening remarks by reaffirming the Government's commitment to the partnership between the state and occupational pension schemes— 1332 a partnership which ensures that the burden of providing income in retirement is shared on fair terms. I ask your Lordships to recognise that the Government have approached these reviews responsibly and objectively and have sought to maintain confidence in the partnership by striking the fairest possible balance between the conflicting interests. I beg to move.
§ Moved, That the Social Security (Class I Contributions—Contracted-out Percentanges) Order 1982, laid before the House on 3rd March, be agreed to.—(Lord Cullen of Ashbourne.)
§ Baroness Jeger
My Lords, nothing could look duller on the Order Paper than the listing of these two orders before your Lordships tonight, and it would he very hard for people who have not taken a special interest in these matters to realise that we are dealing with orders of intense human interest which affect millions of people as regards the standard of living they can expect when they come to retire. So I want to ask the noble Lord a few questions and make some observations on what sounds a very arcane and complicated matter with which one is tempted to deal rather formally, especially in view of the considerable business still before the House.
I remember in another place when the 1975 Social Security Pensions Act was brought into force. I think that was a measure of great political courage and imagination which was approved on all sides of the House, because the introduction of the right to opt out of national insurance and into occupational schemes was, I think, a very progressive and fair measure. Because so many people are involved, we must be sure that we get things right. The noble Minister has made clear that, at present, people who opt out, enjoy a reduction of 7 per cent. in their Class I national insurance contributions. The TUC, as the noble Minister rightly said, would prefer it to stay at a 7 per cent. abatement. But I understand that employers would have preferred 6½ per cent. The Government have decided on 6¼ per cent.
I do not want to go into a great deal of actuarial detail—in fact, as probably the least numerate Member of your Lordships' House, I certainly could not do so. But I was grateful that the Minister explained that the shift in this abatement and the new division mean that, instead of a share of 4½ per cent. from the employer, and 2½ per cent. from the employee, it is now moving to 4.1 per cent. from the employer and 2.15 per cent. from the worker. My arithmetic may be appalling, and I am sure that the noble Minister will correct me if I am wrong, but as I work it out it means that the workers are about 0.1 per cent. worse off. I do not know how much that would come to in money terms for a worker on average wages per week, but however little it is, considering the very big increase in national insurance contributions overall, I hope that it is not the beginning of a further shift to make the workers' contribution greater. It may seem a small matter at the moment—0.1 per cent—but I very much hope that it is not the first swallow indicating that the Government are changing their mind and deliberately going in for a policy which will worsen conditions for the employees.
I want to raise some points which are not strictly detailed but which I think are very relevant. I understand—again subject to correction—that a change of a 1333 ¼ per cent. is worth about £125 million to the pension industry. I think that that means that the Government ought to be dealing perhaps a little more persuasively with what I must call "the pension industry". There are many schemes which affect people who have contracted out, where transferability ought to be improved. There are many people who find that, through changing jobs—which increasing numbers of people have to do—their pension rights are still adversely affected.
When we brought in the Bill in the other place in 1975 I remember being told that the average time that a worker stayed in a job was 10 years and that much of the actuarial work was based on the fact that 10 years was a fair average. I think that anyone who stays in a job for 10 years nowadays is very lucky indeed. It is the early leavers—early leavers often through absolutely no fault of their own—who are not as warmly protected as they should be in many of these schemes. If we are to encourage the occupational pension industry, then I think that we must ask for some more social justice and understanding in that direction as there are serious losses for many people when they change their jobs. I understand that the Occupational Pensions Board is concerned about this matter and I hope that we may be able to hear—if not tonight then at some future time—what notice is being taken of their representations.
Of course in most of these schemes there is no inflation-proofing. It may be that, with the changes that are being brought in, some consideration should be given at least to an element of inflation-proofing because one hesitates to think what will happen to some of these pensions in 20 years time, in terms of their buying power. The only other point I want to make about buy-back schemes has, I think, been dealt with very fairly by the noble Minister. I understand that he agrees that the Occupational Pension Schemes' Joint Working Group has expressed some anxiety about the present situation and the very large increase which is to be phased in.
The final point that I want to make concerns the basis upon which many of these calculations are made. Again I do not want to go into detail. I shall only say that I do not think that anybody can be sure that we have the formula absolutely right. For the benefit of any noble Lord who may not have this exciting document before him I shall quote from the Explanatory Note. It says:These regulations continue to provide that the market level indicators are averaged over the first 5 days on which the London Stock Exchange is open during the month in which the liability for the payment of a premium arises".It is very exciting stuff!But phased adjustments to this calculation are introduced where the average market level indicator would have been less than 105. Provision is also made for rounding".This may be absolutely the best formula in the world, but I am always suspicious of such formulae and I would be interested to know whether any consideration is being given to possible amendment which obviously we cannot do tonight. But I think that it would be wrong if these measures went through the House without us indicating, from this side at least, that we do want to see them in the framework of further, longer term consideration.
§ 7.7 p.m.
§ Lord Banks
My Lords, I should like to join the noble Baroness in thanking the noble Lord, Lord Cullen of Ashbourne, for his explanation of these measures. Perhaps I should begin by declaring an interest since I am an insurance broker and it is part of my task to advise my clients as to whether they should contract out of their pension schemes or contract them in.
I noticed in the Secretary of State's report—and I think that this sentiment was echoed in the speech of the noble Baroness—the following words:When the 1975 Bill was under consideration there was a great measure of consensus between the main political parties. There was a common will to make the proposed arrangements work and endure".
I should like to make just a brief comment on that. We on these Benches would greatly have preferred a higher basic pension and we did put forward an entirely different proposal in place of the earnings related pension. We called it the "central account idea" which I explained during the Second Reading debate in this House on 24th June 1975. But we did say that if the Government's proposals were the ones that were to be effective, and not ours, then we certainly hoped that, the decision having been made, there would be no more chopping and changing and that we would all co-operate to make them work. So there was not exactly consensus about what should be done, but there was consensus about a general effort, after the decision had been made, to make whatever scheme was chosen, work. So far as we are concerned, that still applies.
These measures are technical and not, on the whole, controversial. But, of course, as has already been pointed out by the noble Lord, Lord Cullen, they do affect all contracted-out schemes. Indeed, 45 per cent. of all those who are employed are in contracted out schemes, and that covers nine-tenths of people who are in occupational schemes. All those schemes must be reviewed in the light of the new terms. So what we are discussing this evening is of some fairly widespread significance.
We have, of course, always known that after five years the 7 per cent. abatement in the national insurance contribution for contracted out schemes would be reduced. As more people with a larger accrual period for their guaranteed minimum pensions replaced those with a shorter accrual period, the degree of funding necessary in the occupational schemes would be reduced. Of course, some adjustment is also necessary as details about the distribution of membership by sex, age and earnings are now known, but were not known in 1975, when they could only be assumed. In the light of the Government Actuary's report on these matters, the reduction to 6¼ per cent. is not unreasonable. As the noble Lord pointed out, it is half way between the 6½ per cent. which was asked for by the employers and the pensions movement and the 6 per cent.—not the 7 per cent. as, I think, the noble Baroness said—which the TUC wanted, championing, as the noble Lord said, the cause of the full contributors—those who are contracted in.
The noble Baroness referred to a ¼ per cent. alteration in the rebate as being worth £125 million to the pension industry. I think that that figure originated in an article published in the Financial Times on 4th March, 1335 and it was, as I understood it, the value of a ¼ per cent. rebate. That was the total value of it. If you reduce the rebate by I per cent., the money goes to the National Insurance Fund, but, if you increase it by ¼ per cent., the money goes to employers and employees who make the contributions, and it does not follow by any means that it will be spent on further pensions. So I do not think that it is correct to say that it is worth £125 million to the pensions industry.
However, I agree with the noble Baroness when she regrets that the split between employers and employees is marginally in favour of employers, in view, as she said, of the recent increases which have been made in the last two or three years in the national insurance contributions of employees.
There were rumours that the Government were going to make it prohibitively expensive to buy hack into the state scheme, but I do not think that that has proved so in practice. The 12 per cent. limit on the inflation figures in the five years before buying back, which was a safeguard, remains and the average market level indicators which are used to adjust the premium in the light of market conditions—that is, the premium which has to be paid to buy somebody back into the earnings-related pension part of the state scheme—have, as the noble Lord said, been working out too favourably for occupational schemes as against the National Insurance Fund. As he also said, I think that that is generally agreed. But, as both the noble Lord and the noble Baroness pointed out, some fear has been expressed that the balance has perhaps now tipped the other way.
If the indicator is in the 70–80 range, it will add 3 per cent. to 5 per cent. over the present position each year for five years, so at the end of five years, if the indicator is in that range, the premiums would be about 15 per cent. to 25 per cent. higher than they are now. I think that obviously this must be watched, and I am sure the noble Lord would agree that it must be monitored carefully. However, on the whole, I think that the buying-back position is not substantially altered.
I must resist the temptation to talk about transferability and the inflation-proofing of occupational schemes over and above the guaranteed minimum pension, attractive as it would be to do so. These are important problems, but I do not think that they are entirely relevant to today's debate. The worst problem is the long-term financial viability of the scheme in the first quarter of the next century. I am sure that we shall have to discuss these matters seriously before long, but for today we are content that these orders should be approved.
§ Lord Kilmarnock
My Lords, I, too, should like to thank the noble Lord, Lord Cullen of Ashbourne, for his clear and thorough exposition of the origin, purpose and effects of these draft regulations and this draft order. As he has explained, they are the outcome of the first quinquennial review of the relationship between occupational pension schemes, whose beneficiaries are partly contracted out of the state scheme, and the state scheme itself, as provided in the Act of 1975, which came into effect in April 1978, almost exactly five years ago.
1336 At first sight, the adjustments here may seem of small account—a matter of fine tuning of a complex scheme which is, on the whole, working rather well. The noble Lord, Lord Cullen, with some justification, claimed success for it. However, it is an important matter, affecting, as it does according to the Government Actuary's report, some 10.3 million people. Incidentally, this report Command—Paper 8516—makes very interesting reading and provides a great deal of useful information on how the Social Security Pensions Act has been working in so far as it applies to occupational pensions. I commend it to all your Lordships who are interested in these matters.
One of the most delicate pieces in the mechanism linking these funds to the basic state scheme is the state scheme premium payable when contracting-out ceases and responsibility for a guaranteed minimum pension is transferred—in full or in part—from a contracted out scheme to the state scheme. According to the Government Actuary in paragraph 55, in cases where such transfers have taken place, occupational schemes would appear to have made a profit from the contribution reductions they have been allowed.
As the noble Lord, Lord Cullen, has confirmed, this is what is really behind the new mechanism for calculating the average market indicator, which determines the amount of premium payable when an occupational pension scheme ceases to contract out of the state retirement pension scheme. There are no grounds that I personally can find for quarrelling with this adjustment, though, as the noble Lord, Lord Banks, said, I think it wants to be watched.
However, like both the noble Baroness, Lady Jeger, and the noble Lord, Lord Banks, I must express some unease at the other main provision which is the subject of the draft order: namely, that in which the state contribution reduction allowed to those contracted out—those 10 million—is abated from a total of 7 per cent. to 6¼ per cent. This in itself may be reasonable. Indeed, the Government appear to have opted for a classic compromise—the noble Lord, Lord Cullen, confessed to this—between the 6½ per cent. that was acceptable to employers and the 6 per cent. argued for by the trade unions, representing full rate contributors. However, like the noble Baroness, Lady Jeger, and the noble Lord, Lord Banks, I am less than happy with the way in which abatement is shared between employer and employee. The employer's proportion goes down from 4.5 per cent. to 4.1 per cent. and the employee's from 2.5 per cent. to 2.15 per cent. The Secretary of State acknowledges in his report—Command 8518—that:This split is marginally less heavy on employers than the one which was strictly proportional to the existing reduction"."Marginal" is stretching a point, because 0.35 per cent. subtracted from 2.5 per cent. is proportionally a considerably greater reduction than 0.4 per cent. subtracted from 4.5 per cent. So the phrase "almost equally" used by the noble Lord, Lord Cullen, is not in fact quite accurate here.
One understands, of course, the desire not to increase business costs and to cushion the employer. But the proper way to do this, I submit, would have been in allowing a reduction of the national insurance surcharge rather greater than the 1 per cent. given in the Budget. The way in which the Government have chosen 1337 to do it means that 10 million people will have their pay packets further reduced—not by very much perhaps, as the noble Baroness pointed out, but it all adds up, especially on top of the recent 1 per cent. increase for all Class 1 employees. In our view, it would have been better if this abatement had been shared on a basis of strict proportionality.
§ Lord Cullen of Ashbourne
My Lords, I am grateful to noble Lords for their reception of these orders, and one or two points have been raised. The noble Baroness mentioned the employer's contribution rise, which was also mentioned by other noble Lords. Perhaps she would like to know that an employee on average weekly earnings will pay an increased contribution of no more than 12p per week as a result of the 0.1 per cent. reapportionment of the contribution between employer and employee. The noble Baroness asked me whether this was the thin end of the wedge and whether this might go on in the future, but I am in no position to give her any views on that subject. The noble Baroness also asked what the £125 million was worth to the pension industry, but the noble Lord, Lord Banks, kindly answered that matter for me.
The noble Baroness mentioned early leavers, and the noble Lord, Lord Banks, resisted speaking about it. It is a matter which concerns everybody. It really has no relevance in this particular debate we are having today, and it is a matter which of course is being studied, and studied very keenly. The noble Baroness asked about the market level indicator formula, which certainly looks on the face of it extremely complicated. The modified formula, like the existing formula, produces a single index number each month to be used in conjunction with the reading from the relevant actuarial table. The index number is readily available from DHSS officials, who do all the necessary calculations. Pension schemes individually do not need to calculate the index number. This is easily available to all concerned.
I would not wish to bring this debate to a close without acknowledging the spirit of co-operation between the political parties which has existed in recent years on pension matters. I believe that the political consensus has characterised our debate today and was indeed a feature of the approach to these statutory instruments in another place. The Government have no wish to disturb the political consensus, because we believe that there can be no better guarantee of the continuing success of the contracted-out arrangements. I commend to your Lordships these statutory instruments, which take into account the interests of all parties and seek to strike a fair balance between them. I beg to move.
§ On Question, Motion agreed to.