HC Deb 11 June 1975 vol 893 cc575-83
Mr. McCrindle

I beg to move Amendment No. 9, in page 15, line 11, leave out "2/" and insert "3".

Mr. Deputy Speaker

With this it will be convenient to discuss Amendment No. 10, in page 15, line 14, leave out "4/" and insert "5".

Mr. McCrindle

The reason for the comparative harmony on the Bill, apart from the fact that we might all be weary of what has come to be known as "pensioneering", is that both sides see it, as they have repeatedly said, as a partnership between the State and the pensions industry as a basis for future pensions provision. The Government have made it clear that they are anxious to encourage good occupational schemes and to ensure that as many people as possible are encouraged to contract out and, therefore, to be brought within the benefits of such schemes.

The attractiveness of the contracting-out terms to employers becomes as a result the acid test of the Government's sincerity of purpose. The amendment suggests that the proposed terms are inadequate and unacceptable. If they cannot see their way, even at this late stage, to improving the terms, I doubt whether the partnership to which they aspire can effectively be achieved.

The amendments refer to the increases in the percentage reduction of contributions to the State scheme by employers and employees when they are contracted out; in short, the encouragement given to employers to contract out from the State scheme and become part of an occupational pension scheme.

We are asking for a total of 8 per cent. against the 7 per cent. suggested by the Government. It will be incumbent upon me to prove that unless this increase is granted the scheme for partnership between the State and private pension schemes will not be a success. The figure of 7 per cent. which the Government propose is significant. Originally the proposal was that it should be 6½ per cent. In other words, in asking the Government to move on this matter we should on the face of it be pushing at an open door. Arguments have been deployed before and have seemingly persuaded the Government to change their mind. Between publication of the White Paper and the appearance of the Bill they were persuaded that 6½ per cent. was too low a figure to encourage employers to contract out.

Of course, I recognise that the Government Actuary, having been obliged by the power and force of the arguments to move once, will make it extremely difficult and will require a very powerful case to be made before we can expect him to move again. I believe that a sufficiently powerful case exists to justify the amendment.

The case revolves around four main reasons why our proposal is justified. First, we believe that the assumption of a 1 per cent. positive return on investments relative to earnings, which is part of the assumption underlying the Government Actuary's conclusions, cannot be sustained. We should like to hear far more justification of the Government's acceptance of that before we can accept it as a valid ground for resisting the pressure we are putting on tonight. I listened in Standing Committee to the Minister's explanation, and it is partly because I was unconvinced then and remain unconvinced now that I put it as the first reason for the Government listening to our argument.

Secondly, the Bill is aimed at giving equality to women to become members of occupational pension schemes, and that fact has been warmly welcomed on the Opposition side. With equal pay almost upon us the balance between men and women in occupational schemes is likely to change. Equal access to these schemes between men and women is to become the order of the day. This equal access makes it imperative that employers be given an appropriate encouragement to contract out. We contend that that encouragement is not present at 7 per cent as envisaged in the Bill, but is present at 8 per cent as we propose.

It is interesting that, although the professional organisations have differed widely in their reactions to other aspects of the Bill, it appears that they are united in agreeing with us that 8 per cent is the level at which there would be true encouragement to employers to contract out.

11.45 p.m.

Third, there is a risk to be undertaken by employers who contract out. This has never been more so than in the investment climate now prevailing. We know that we are on powerful ground here because it was on this basis alone, as we understand it, that the Government Actuary was persuaded, between the publication of the White Paper and the Bill, to approve an increase from 6½ per cent to 7 per cent in the contracting-out reduction terms.

We believe that, that risk having been recognised, the incidence of inflation and the continuing uncertainty is such that the ½ per cent in return for the risk factor is insufficient. As the Government have already accepted the case about the acceptance of risk as a reason for improving the terms, we believe that we can do no better than underline the continuing need to re-examine the risk factor.

Fourth, and perhaps more controversially, occupational pension schemes will be expected, in future as in the past, to lead the way in providing benefits above the minimum. In the past such schemes have acted as catalysts for the State. That is as it should be. If confidence is to be instilled into employers to contract out, to encourage the development of ever better terms within these schemes, the terms of contracting out must be made more attractive.

If there is a marginal doubt in the mind of the Government about whether they can concede this the matter is so important that the benefit of the doubt must be given to the employers so that the occupational schemes may be able to blaze the trail to better benefits.

The Bill is presented as being a breakthrough for women. For the first time women are to have equal access to occupational pensions schemes. In all seriousness and weighing my words carefully I must ask: what if there are no occupational schemes to which to have equal access? I do not overstate the case when I say that, apart from public service schemes and some large existing private schemes, that could be so if the encouragement to contracting-out is as marginal as it appears and if the climate remains as uncertain as it is.

I contend that it is crucial for the Government to yield on this point, and I hesitate to use such a word as "crucial" at this stage in our consideration of the Bill.

The assumed return of a positive rate of interest cannot be justified in the quicksands of the present inflationary situation. The changing complexion of schemes as women are given equal access to them has not been taken sufficiently into account by the Government Actuary. The assumption that the same proportionate number of people will be contracted out as under the graduated scheme will not stand. Yet that, as I understand it, is the basis upon which the matter has so far proceeded. The Government Actuary, in our view, has forgotten the new dimension of women's equality of access and, perhaps just as important, equality of pay.

There is also the question of the risk factor, which the Government Actuary concedes is worth more than the ½ per cent. which has been yielded at the moment. Recent Press reports of pension schemes in difficulties and the need for employers to transfer large amounts to keep them afloat are proof of that, if proof be required. If occupational pension schemes are to blaze the trail, as they have done, they must be given the benefit of any marginal doubt. This is the touchstone of the Government's sincerity. Do they really believe what they say, that partnership between the private pensions industry and the Government is our only hope for taking pensions out of politics? Do they want occupational schemes at all, and are they convinced that there will be any if 7 per cent. remains an immutable figure? How can they justify running the risk of depriving hundreds of thousands of people, including women, of the opportunity of joining such a scheme because the contracting-out terms are not such as to induce the employer to set up a scheme?

I listened with care to the Secretary of State when she said that there should go forth from the House the message that we want a partnership between the Government and the pensions industry. Unless the Government can answer the point I have made, unless they can justify beyond peradventure that 7 per cent. is an adequate figure by which to reduce the contracting-out terms so as to develop the growth of pension schemes as they would wish, their protestations of sincerity and partnership will become a hollow sham.

It is my sincere hope that, without taking any further action, the Minister will be able to tell us that, having thought again about the scheme, he recognises that there may be an argument along the lines I have deployed and accepts the amendment.

Mr. Alec Jones

It could be said that the Opposition by Amendments Nos. 9 and 10 are spending money which they would have recouped from the fund had Amendment No. 1 been carried. Who would gain and who would lose as a consequence of the amendments? The contracted-out employer would gain 0.5 per cent., the contracted-out employee would lose the equivalent 0.5 per cent. of earnings up to the lower income level and the non-contracted-out employee would lose 0.5 per cent. of all his earnings.

It has been argued in Committee and again today that an amendment of this type is necessary to persuade employers that it is worth their while to contract out. The CBI, the Life Offices' Association and hon. Members in Committee all advocated alterations in the contracting-out terms, the argument being that 7 per cent. was inadequate. The Government have moved from 6½ per cent. to 7 per cent., but hon. Members—rather like Oliver Twist—are asking "Please, Sir, can we have some more?". My right hon. Friend might have been wiser to keep the 7 per cent. up his sleeve until this evening rather than give it away too soon, because his concession seems to have increased the appetite rather than satisfied a genuine need.

Many reasons have been given for increasing the contracting-out reduction. It is said that it is necessary to encourage firms to contract out, and the hon. Member for Brentwood and Ongar (Mr. McCrindle) said that this was a test of the Government's faith. The Government have spoken in favour of encouraging firms to contract out, and have given considerable evidence of their wish for a partnership between the occupational pension schemes and the State scheme. They have done, and are doing, much to encourage contracting out.

Mr. McCrindle

I do not deny that the Government have moved substantially in various directions to make possible the development of occupational pension schemes, but surely the Minister munst agree that unless employers are encouraged in the first place to contract out all the concessions made by the Government will be as naught. Surely this is the most fundamental of the changes that we must press upon the Government.

Mr. Jones

I concede that the hon. Gentleman is making a strong case. He says that this is one of the most fundamental of the changes that the Opposition seek to make, but I suggest that that phrase has been used to describe almost every amendment which the Opposition have pressed in Standing Committee and in the House. The point I am trying to sustain is that we have shown evidence of our determination to bring about cooperation. I remind the House of the improvements which were brought about between publication of the White Paper and publication of the Bill, the long consultations my right hon. Friend has had and the improvements which were made and accepted in the new clause this evening.

It is my duty to justify the 7 per cent. That is the crux of the hon. Gentleman's case. He is seeking to justify moving to 8 per cent., and it is upon me to justify 7 per cent. I start by referring to the White Paper, which proposed that the reduction should be 6½ per cent. That was the so-called neutral figure arrived at by the Government Actuary. However, we went further than that. We did so in recognition of the serious risk which the hon. Gentleman talked about this evening. In recognition of that risk, the Government increased the reduction to 7 per cent. More than that, the increased ½ per cent. was allocated entirely to the employer. I think that the hon. Gentleman must take on board that to go beyond 7 per cent. would be unfair to those contributors not contracted out of the State scheme who would have to bear the additional cost. As I have said, the contracted out employer stands to gain the 0.5 per cent. whereas the contracted out employee, and even the non-contracted out employee, would lose a comparable figure.

One of the criticisms that have been made is that the contribution reduction does not sufficiently allow for the effect of the Bill's provision for equal access for women or for the effect of equal pay. The supposition is that it will increase the relative weighting of women in a scheme because pensions for women are more costly than pensions for men.

I am sure that the hon. Gentleman knows that a memorandum was prepared by the Government Actuary to explain his conclusions. A copy of the memorandum was sent to the Opposition and a copy was placed in the Library of the House. Two of the specific points which I have mentioned—namely, equal access and equal pay—were specifically examined in the memorandum. First, the Government Actuary examined the assumption that the proportion of women working full-time and covered by occupational schemes in each five-year age group became as high as the corresponding proportions for male employees. That is a fairly generous assumption, but even on that basis—and it is surely a basis which most of us would find unlikely to be achieved in practice in the immediate future—the rate of reduction brought out was only 0.1 per cent. higher than on the basis adopted for the Government Actuary's memorandum.

I recall that my right hon. Friend the Secretary of State referred to this matter in Committee and that the hon. Member for Rushcliffe (Mr. Clarke) expressed some surprise and suggested that he would like to see the figures. I assume that by now he has had a copy and has seen them. I am sure he would agree that the claim that the rate of reduction being brought out will be only 0.1 per cent. higher is substantiated by the Government Actuary's memorandum. It suggests that equal access on the conditions I have spelt out would not make it necessary to move from 7 to 8 per cent., and I suggest that one could keep it down to about 6½ per cent.

12 midnight.

Similarly, the Government Actuary examined the effect of equal pay and discovered that a high proportion of women contracted out under the graduated scheme were in employment giving equal pay, such as banking, insurance, the public services and so on. To that extent the effects of equal pay were already present in the weighting adopted by the Government Actuary. On these factors a contribution reduction of 6½ per cent. at the start of the scheme would still be justified. Such a rate would give to an average earnings scheme an equal chance of profit or loss.

There remains an element of uncertainty—namely, that the assumptions adopted about such factors as the level of interest rates and increase in the general levels of earnings might not be borne out in practice. What matters is not the return on investment or the rate of wage inflation, but the margin between the two—which when averaged over long periods in the past, has been consistently favourable. However, there have been short periods when the margin was small or negative, and recent experience has certainly been unfavourable.

I understood the hon. Member for Rushcliffe to suggest in Committee that it would not be reasonable to assume that this unfavourable balance could persist indefinitely. It was precisely because of the element of risk in making assumptions about these factors that the Government decided to extend the contribution reduction by ½ per cent., making 7 per cent. in all as the initial contribution reduction. The increase to 7 per cent. represents a significant move towards accommodating schemes. To go further would be to tip the balance unduly to the disadvantage of those in the State scheme at whose expense any further increase in the contribution reduction would have to be found.

It is understandable that groups in the pension industry would prefer 8 per cent. to the 7 per cent., but I think it is right to say that the quality Press regard the increase from 6½ to 7 per cent, as reasonable and fair. I have a number of Press cuttings on this point. The Daily Telegraph on 27th February referred to the ½ per cent. increase to 7 per cent. proposed as the contribution reduction to the State scheme for contracted-out schemes and pointed out that those in the pensions and life assurance industry would be in a position to recommend contracting out as an attractive proposition to companies.

I believe that we have moved significantly towards helping the schemes that want to contract out to do so. This is a further step by the Government to show our determination to bring about that degree of co-operation.

Mr. McCrindle

The Minister has concentrated on two of the four points that I made—on the increasing incidence of women likely to come into occupational pension schemes and the risk factor. It would take too long, and the hour is too late, to challenge some of the things he said about bringing women into schemes, but I must say that the Minister did nothing to ease my fears that the risk is much greater than the Government Actuary and the Government conceded in accepting the increase from 6½ per cent. to 7 per cent.

However, I do not wish to be unduly contentious at this late hour. I can only express the hope that the confidence which the Minister shows that occupational pension schemes will develop, that the partnership to which he again at least paid lip service tonight will be carried forward. I hope that he is right and that I am wrong. But there is a residual fear within the pensions industry that the contracting-out terms might be such as to be less encouraging that I think both the Minister and I would like to see.

The best last word that I might say on this is that if one of us is to be proved right in his prognosis of what will happen to occupational pensions schemes I devoutly hope that it is the Minister.

Amendment negatived.

Forward to