§ (1) As respects any accounting period within the meaning of Schedule 1 to the Teachers' Superannuation Act 1967 or Schedule 6 to the Education (Scotland) Act 1962 beginning on or after 1st April 1961—
- (a) paragraph 3(1)(d) of the said Schedule 1 and paragraph 2(3) of the said Schedule 6 (which relate to the sum representing interest which is to be treated as having been paid into the revenue of the teachers' superannuation account under the Act in question for each accounting period) shall each have effect with the substitution for the words from 'at the rate' onwards of the words at such rate as may be determined in accordance with regulations made by the Secretary of State with the consent of the Treasury
1081 on the amount of any balance of revenue over expenditure remaining at the end of the last preceding accounting period, and a further sum representing interest at such rate as may be determined as aforesaid on any balance of revenue (other than that further sum) over expenditure during the accounting period in question, and any such regulations may make different provision for different balances and different accounting periods and may provide as respects any balance to which the regulations relate—
- (i) for the determination of the rate of interest on that balance on the basis of a notional investment of that balance, or of any part or parts thereof, made after consultation with the Government Actuary; and
- (ii) for different rates of interest, or different methods of determining the rates of interest, for different parts of that balance;'
- (b) paragraph 4 of Schedule 1 to the said Act of 1967 is hereby repealed.
§ Brought up, and read the First time.
§ 11.0 a.m.
§ The Minister of State, Department of Education and Science (Mrs. Shirley Williams)
I beg to move, That the Clause be read a Second time.
This Clause gives the Secretary of State power, by means of regulations, to alter the basis of establishing the interest rate applicable to the teachers' superannuation accounts for Scotland and for England and Wales, at present statutorily fixed at 3½ per cent. The point was raised in Committee and I promised to give it consideration on Report.
The object is to reflect more rapidly movements in interest rates. The immediate effect is expected to be a reduction in the additional burdens which might fall upon local education authorities by way of employers' superannuation contributions.
Contributions under the teachers' superannuation schemes are not funded; they are paid into the Exchequer, which meets the cost of all the benefits. An account of income and expenditure is, however, kept, and the schemes are valued by the Government Actuary under statutory arrangements which include the crediting of interest at the 1082 rate of 3½ per cent. on the balance standing to the credit of the accounts.
Ever since his first valuations in 1933, the Government Actuary has had to report that the assets in the schemes were insufficient to meet the prospective liabilities. An Act passed in 1956 laid down new arrangements for dealing with these matters. The Government put large credits into the accounts to bring them into balance as at 31st March, 1956; teachers' contributions were increased from 5 per cent. to 6 per cent., but an assurance was given that there would be no further increase; employers' contributions were similarly raised, and employers became liable to pay supplementary contributions to extinguish, in 40 years, any deficit revealed by a subsequent valuation. The great majority of teachers are employed by local education authorities, who of course receive assistance from Government grants. The Government Actuary's valuations, relating to the period 1956–61, showed large deficits, due mainly to increases in salaries, to which schemes of this type are highly vulnerable. As a result, employers' contributions were raised automatically, under the terms of the 1956 Act, from 6 per cent. to 8½ per cent. in England and Wales and from 6 per cent. to 8 per cent. in Scotland with effect from 1st April, 1966. Further valuation reports, dealing with the period 1961–66, ought to be available next year, and local authorities are wondering what they will bring forth. In the circumstances they have drawn attention to the effect on the valuations of what now appears to be an unjustifiably low interest rate, and the Government have agreed that a change ought to be made.
The interest rate of 3½per cent. was laid down in the Act of 1925. Of course, interest rates fluctuated in subsequent years, but up to 1956, or perhaps for a year or two later, 3½ per cent. could still be regarded as a justifiable long-term rate. In fact, the 3½per cent. rate compared reasonably with the actual average yield on gilt-edged securities during the 30 years or so following 1925. During the last eight to 10 years, however, we have been in a period of nationally and internationally very high rates, often in practice associated with rapid growth in incomes. In the circumstances, the interest rate of 3½ per cent., whether 1083 or not it can be justified in the very long-term, undeniably threatens to impose undue burdens on local authorities in the next few years.
The Clause proposes that the method of determining the rate of interest should in future be laid down by the Secretary of State by means of regulations. Unfortunately, it is by no means a straightforward matter to adjust the 3½ per cent. to a more appropriate rate. In the first place, it is necessary to take account of the schemes' long history. Some of the money now standing to the schemes' credit derive from payments made before the second world war, going back, in fact, to 1922. In addition, there are the large balancing credits which the Government put into the account in 1956 which in fact more than doubled the then existing balances; the interest rate of 3½ per cent. was a significant factor in calculating the credits, and although this does not necessarily mean that they should be tied to this rate for all time, it is not a straightforward matter to adjust them.
When we look to the future, although an attempt will be made in the first set of regulations to introduce arrangements that will not need constant adjustment, it seems reasonably certain that they will need to be reviewed from time to time in the light of changing economic conditions. In the present period of rapid change and development, the flexibility of regulations seems to be the right answer. Notional investment of the kind envisaged by the Clause follows the practice now being applied to the other large public service pension scheme which is financed similarly, the one covering employees in the National Health Service, and of course smaller schemes covering the Atomic Energy Authority.
So far as England and Wales are concerned the regulations will be made under Section 15 of the Teachers' Superannuation Act, 1967, which provides that they shall be subject to negative Resolution and that the Secretary of State is required to consult representatives of local education authorities and teachers appearing to him to be likely to be affected. Naturally the main discussions in the first instance will be with the local authorities, because they will bear the financial impact. Similar arrangements will apply in respect of the Scottish regulations.
1084 The immediate effect of the new proposals is likely to be to relieve local education authorities of some of the additional burdens which might otherwise fall on them as a result of another valuation under the existing arrangements. The next valuation reports should be available next year, and the Clause cannot under the terms of existing legislation affect the rate of employers' superannuation contributions until the beginning of the financial year after they are made. Although credited to the teachers' superannuation accounts, employers' superannuation contributions are, in fact, paid into the Exchequer, which may thus be surrendering a significant, though perhaps unwarranted, source of prospective income.
The amounts involved are, of course, substantially reduced by their effect on Government grants to local authorities, but even so the Clause might move an appreciable part of teachers' superannuation from the local education authorities to the Government. It is impossible at this stage to give any firm figures, as the new interest rates remain to be determined in consultation with the other interested parties, and we cannot anticipate the results of the Government Actuary's valuations, for which all the necessary data are not yet available.
§ Mrs. Margaret Thatcher (Finchley)
I thank the Minister of State for keeping me in touch the whole time with her intentions about tabling this new Clause. I noted that in her very detailed explanation she pointed out the results of the last quinquennial review would not be available until next year, but also that the purpose of the Clause is to reduce the burden on local authorities. Very clearly there will be some net cost to the Exchequer. I appreciate that she cannot tell me exactly what that will be, for the reasons she has given, but it would be helpful if we could have some idea of the order of the amount that this cost will be. Over the quinquennial period, will it be £1 million, £5 million or £10 million? It would be helpful if the hon. Lady could give some idea within those limited figures.
§ Mrs. Shirley Williams
Once again I should say "subject to reservations". The figures on which the valuation will be made are not available, and there is the further reservation that the whole matter 1085 is subject to discussion with local education authorities. Broadly speaking, if there was a reduction in supplementary contribution of about 1 per cent.—at the last valuation the increase was approximately 2 per cent.—this would cost a gross figure of about £6 million a year. In general terms, allowing for rate support grant, there would be an additional figure of about £2½ million per annum. If based on the 2 per cent. decrease in contributions the order could be about twice that figure, although it might be less.
§ Question put and agreed to.
§ Clause read a Second time and added to the Bill.