SOCIAL SECURITY (CONTRIBUTIONS)

HC Deb 15 December 1977 vol 941 cc1089-111

11.43 p.m.

The Under-Secretary of State, Health and Social Security (Mr. Eric Deakins)

I beg to move, That the draft Social Security (Contributions, Re-rating) (No. 2) Order 1977, which was laid before this House on 1st December, be approved. I understand that it will be for the convenience of the House and particularly of hon. Members who have a special interest in these matters if we discuss in the same debate the other motion relating to social security, which is as follows: That an humble Address be presented to Her Majesty, praying that the Social Security (Contributions) (Consequential Amendments) Amendment (No. 2) Regulations 1977 (S.I. 1977 No. 1953), dated 28th November 1977, a copy of which was laid before this House on 1st December, be annulled. My right hon. Friend the Secretary of State for Social Services has carried out the review of national insurance contributions he has to make each year under the Social Security Act 1975. He has had regard to the present level of the National Insurance Fund and the likely level of future expenditure from it and, in the draft order now before the House, he has proposed revised rates and levels of contributions from 6th April 1978. Before coming to the details of these adjustments of contributions, I think the House will find it helpful to be reminded of the background to them.

April 1978 is an important landmark in the provision of cash benefits by the State. This is when the Social Security Pensions Act 1975 takes effect and employees will begin to build up for themselves, on an earnings-related basis, better provision for retirement, widowhood and chronic ill-health.

A special feature of the new scheme is that it will work in partnership with good occupational pension schemes, so that employees who are members of such schemes may be contracted out of part of the new State scheme benefits by their employers. Thus, employees will build up for themselves greatly improved benefits either entirely through the State scheme or by a combination of State and occupational pension provision. The new pensions scheme begins to provide full pensions, protected against inflation, in 20 years' time and makes it possible for millions of employees to look forward to retirement on half pay. I am glad to acknowledge that these developments in benefit provision had the general support of all parties when the Pensions Bill was before the House in 1975. Our concern now is to set revised rates and levels of contributions to finance the start of the new provisions. This gives special significance to the draft re-rating order.

The new scheme, like the present one, will operate on a pay-as-you-go basis. In other words, in broad terms the aim will be to match income with expenditure. The Pensions Act recognised that contributions for employees who were not contracted out and who would be building up rights to the newly improved benefits under the State scheme would need to be increased next year. The Act also provided for contracted-out contributions to be at a reduced rate on earnings between the lower and upper earnings limits in recognition of the responsibility for benefit provision being taken over from the State by the occupational pension scheme. The self-employed, unlike people who work for an employer, will not be covered by the new earnings-related pension arrangements. My right hon. Friend has taken account of these various factors in setting new rates and levels of contributions which are fair to the different types of contributor.

The report which the Government Actuary has made on the effect on the Fund of the proposed new rates and levels of contributions shows that on given assumptions as to factors such as the levels of unemployment and earnings there will be a small deficit of about £25 million in 1978–79. This small decrease in the face value of the Fund does, however, represent a substantial fall in its real value as measured by the cover it provides for the payment of benefits at the increased rates which will be established at next year's review. Nevertheless, we believe that it is right to accept a fall in the face value of the Fund on this occasion in view of the good surpluses which have been created in recent years.

I turn now to the details of the changes in Class 1 contributions—that is, those affecting employees and employers—which the order would make. I shall deal first with contributions for employees who are not contracted out of the State scheme. As I have mentioned, the Pensions Act recognised that there would need to be increased contributions in their case from April 1978. There is power to set these contributions at rates which are not higher than 6.5 per cent. for employees and 10 per cent. for employers. As the Government Actuary's report shows, with rates at these levels the Fund still fails to break even and my right hon. Friend has therefore concluded that Class 1 rates for employees who are not contracted out should be raised from the present 5.75 per cent. to 6.5 per cent. and for their employers from 8.75 per cent. to 10 per cent.

In my opening remarks I referred to the set of regulations that is the subject of the Opposition's Prayer. The effect of these regulations is to raise the lower earnings limit for Class 1 contributions from £15 to £17.50 a week, which is the current level of the basic retirement pension, and the upper earnings limit from £105 to £120 a week, which is a little less than seven times the pension rate. These changes are in line with the requirements of Section 1 of the Pensions Act.

These changes mean that an employee who earns £80 a week, which is approximately the amount of average earnings for men employed full time, and who is not contracted out will pay an extra 60p a week in contributions. The corresponding increase for his employer will be £1. For an employee earning £35 a week the increase will be 26p, with an increase of 44p for his employer. The maximum increase will be payable by employees who earn £120 or more a week. They will pay a further £1.76 a week, of which 98p a week results from the increase in the earnings limit, and their employers will pay an additional £2.81 a week. Increases in the limit result in people whose earnings are above the limit paying additional contributions from the start of a tax year, whereas lower earners face an increase immediately they receive a pay increase.

Turning now to contracted-out employees, the Pensions Act provided for these employees and their employers to pay at rates which are 2.5 per cent. and 4.5 per cent. respectively lower than for other employees on earnings between the lower and upper earnings limits. Accordingly, on the first £17.50 a week of earnings the rates will be 6.5 per cent. for employees and 10 per cent. for employers and on earnings above that level the rates will be 4 per cent. and 5.5 per cent., respectively. This means that on any level of earnings above £25 a week there will be a reduction in liability compared with 1977–78.

For example, the contracted-out employee earning £80 a week will have his weekly contribution reduced by 96p. The maximum reduction—of £1.40 a week—will be for a person earning £105 a week. These reductions are, of course, apart from any contributions or additional contributions payable to the occupational pension scheme.

There will be no change in the rate of contributions payable by those married women and widows who retain the right to reduced contribution liability. They will therefore pay 2 per cent. of earnings, subject to the new earnings limits, whether or not they are contracted out.

I come now to the self-employed. As the House knows, it has not been possible to include the self-employed in the new earnings-related pension arrangements. They will, however, continue to qualify for a basic retirement pension and other benefits as well. Under the present arrangements the self-employed get good value for the contributions they pay, but when fixing the level of their future contributions liability it is necessary to take account of the changes being made for other contributors. It would appear very unfair indeed to the self-employed if they had to continue to pay on the present basis whereas contracted-out employees, with whom it is reasonable that they should compare themselves, will get a reduction in liability and qualify for more benefits. The new rates for the self-employed have therefore been worked out on the same basis as those for contracted-out employees. What we have done is to start by looking at the contribution payable for full members of the scheme and making a deduction from that to allow for the benefits which the self-employed cannot get.

The result is that all the self-employed will pay lower contributions; and this will help them, if they wish, to make extra pension provision for themselves. I will now give details of the proposed changes. The Class 2 rate is being reduced from £2.66 a week for men and £2.55 for women to £1.90 a week for both men and women. The Class 4 rate is to be reduced from 8 per cent. to 5 per cent. The lower limit of annual profits or gains on which Class 4 contributions are paid is being increased from £1,750 to £2.000. The upper profits limit is being increased from £5,500 to £6,250 a year to correspond with the new upper earnings limit for employees. The effect is that a self-employed man's liability for contributions will be reduced by about £39 a year at the lowest level of earnings and by a maximum of about £164 a year on earnings of £5,500 a year.

In referring to the reduction in Class 4 contributions I ought to mention that, unlike other contributions, which are normally paid weekly or monthly, Class 4 contributions are normally paid half- yearly the first payment being in the January of the tax year to which they refer. Thus the first time that Class 4 contributions will be due for payment at the reduced rate will be January 1979.

There are two other changes under the draft order before us. First, the level of earnings below which a self-employed person can be excepted from liability is being raised from £875 to £950 a year. Secondly, the voluntary Class 3 contribution is being reduced to £1.80 in consequence of the reduction in the Class 2 contribution to £1.90. In addition, for the sake of completeness, I should mention that under the Pensions Act from next April employees and the self-employed will not be liable to pay contributions for any work done after reaching pensionable age, which is 65 for a man and 60 for a woman. An employer's liability will not be affected by this change.

Before concluding my remarks there are two points which I must make about future contributions so as to avoid possible misunderstandings. First, the reduction allowed for contracted-out contributions will not stay permanently at the present level. This reduction has been fixed to take account of the cost to occupational pension schemes of funding the benefits which the State scheme would otherwise provide. This cost must be expected to fall over the years and the contribution reduction for the contracted-out can accordingly be expected to decrease progressively, with corresponding increases in their contributions.

Secondly, what I have said about the contracted-out is also relevant to the self-employed now that their liability is being calculated on the same basis. Although Class 2 and 4 contributions will at first be much lower than at present, it is inevitable that they will rise progressively in real terms as the contributions of the contracted-out go up. It should, however, be possible to keep the new level of liability until 1983, apart from changes to the Class 2 rate and the Class 4 limits, because of rises in the general level of earnings.

I hope that the explanation I have given about the proposed changes in contributions will have enabled hon. Members to see that the annual exercise of setting new rates and levels of contributions is this year very much part and parcel of the new improved pension scheme. The Government believe that the new contributions are fair as between different types of contributor and that they will enable the new scheme to start on a sound financial basis.

I commend the order to the House.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

I understand that it will be convenient to discuss at the same time Motion No. 7 That an humble Address be presented to Her Majesty, praying that the Social Security (Contributions) (Consequential Amendments) Amendment (No. 2) Regulations 1977 (S.I., 1977, No. 1953), dated 28th November 1977, a copy of which was laid before this House on 1st December, be annulled.

11.55 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I am grateful to the Under-Secretary of State for his helpful explanation of the order, which, as always, is a complicated one to understand. But behind his bland and, at times, almost self-congratulatory speech lie a number of issues which should arouse the curiosity and perhaps even the suspicion of the House.

The order represents a whole series of policy lurches. I come at once to the most remarkable tergiversation of all—the restoration of the 5 per cent. rate for Class 4 contributions for the self-employed. However this may be dressed up by Ministers—and there has been a commendable but not very convincing effort by the Government Actuary in his report—this is nothing other than a belated and, I hope, abject confession that we, the Tories, throughout this issue have been right and they, the Government, have been wrong.

From the moment that the Government decided to change the 5 per cent. Class 4 contribution which was in the 1973 Act to 8 per cent., which they did in the Social Security (Amendment) Act 1975, they were met with the furious protests of the self-employed, who felt that they were simply being made to pay additional taxation.

The Government argued again and again that this increase from 5 per cent. to 8 per cent. was wholly justified by reference to the figures. I could weary the House, but I will not, with a whole series of quotations in which Ministers sought time and again to justify the increase to an 8 per cent. contribution against the arguments deployed from this side of the House. I shall content myself with one quotation, from the late Brian O'Malley when he sought to persuade the House to reject a Lords amendment to insert a 5 per cent. instead of an 8 per cent. rate. He quoted a long string of figures seeking to justify his argument, and he went on to say: these figures support to the hilt the Government's claim that we are simply preserving the ratio set in the 1973 Act between self-employed and Class 1 contributors".—[Official Report, 11th December 1974; Vol. 883, c.647.] The Under-Secretary of State would now have us believe that 5 per cent. is the right figure from next April onwards, and yet—a point that he did not make—the self-employed after April are going to get exactly the same benefits as they are entitled to now. If 5 per cent. is right then, why has 8 per cent. been right for the last three years? When are the Government going to promise to repay the self-employed the additional 3 per cent. that they have filched, quite unfairly, from them over the last three years?

The Chancellor of the Duchy of Lancaster once said in the House—I fear that I have been unable to trace the quotation, but I think I have it roughly right—"If your opponents steal your clothes, you would be wiser to criticise their morality than complain about their sartorial elegance". I welcome this repentance on the part of Ministers, but I am bound to say that, in the light of their past and oft-repeated declarations, this repentance owes more to their search for votes in an election year than to any fine actuarial calculation.

Mr. Stephen Ross (Isle of Wight)

I suppose that right hon. Gentleman could not possibly accept that the Lib-Lab pact had something to do with it, or that my noble Friend Lord Banks had something to do with it, but I think that at least Lord Banks deserves some credit.

Mr. Jenkin

I am not sure how much credit to give to Lord Banks. I read his speech in another place. The only thing that has changed is that the Government have lost a lot of seats to the Tories and realise that they have to make some concessions to the case that we have been making.

Mr. Joseph Harper (Comptroller of Her Majesty's Household)

indicated dissent.

Mr. Jenkin

Perhaps the hon. Gentleman has forgotten Workington, Stechford, Walsall, North and the rest. The Government are really having to scratch around for votes, whether by ski-ing down Everest in the nude or not I do not know.

The language used by Lord Wells-Pestell in another place is scarcely the language of actuarial calculations. He said: my right hon. Friend the Secretary of State"— I am glad to see him here— —"has tried to be as fair as is humanly possible in a matter of this kind"—[Official Report, House of Lords, 12th December 1977; Vol. 387, c. 1889.] Yet his hon. Friend has sought tonight to justify the change by referring to a series of complicated actuarial computations. That was not the language of an actuary. That was the language of a politician, and it fully justifies my claim that this owes more to a search for votes than to any actuarial calculations.

The Government Actuary himself—a very learned gentleman—has clearly been hard put to it to reconcile his professional integrity with the Government's electoral considerations. When he comes to what the contribution of the self-employed should be, in paragraph 33 of the report, he states: Unfortunately the necessary data are not available for a precise assessment of these contribution rates. I do not blame the Government Actuary. He has been faced with a totally impossible situation and has made the best of a bad job.

Before the self-employed throw their hats in the air, I advise them to make a close study of paragraph 34 and table 4 of the Government Actuary's report, which shows that the rates for self-employed will double in real terms over the next 30 years. If these calculations have any relevance, therefore, their newfound reduction is likely to be very short-lived. With great deference to Sir Edward Johnston, the Government Actuary, I find the whole exercise remarkably unconvincing.

I believe that the self-employed are entitled to an open investigation of the relative benefits they enjoy and the contributions they pay, and the next Conservative Government will certainly implement the public pledge I gave earlier this year to a conference of self-employed and small business men.

The next volte face which the order embodies relates to employees who are contracted into the State scheme. Hon. Members will know the history of this. The 1975 Act envisaged a combined contribution of 161 per cent., made up of 61 per cent. from the employee and 10 per cent. from the employer. However, the right hon. Member for Blackburn (Mrs Castle) made it clear on 18th March 1975 that These initial rates are not yet firm. They should be regarded for the moment as illustrative only"—[Official Report, 18th March 1975: Vol. 888, c. 1499] But when Ministers came to the House with their order in 1976 they came with an increase in contributions for the current year which produced a huge surplus for the National Insurance Fund. As we explained at the time, that was done for Exchequer considerations—to fund the borrowing requirement. But the Government obviously felt that the figure of 161 per cent. was likely to be too high next April, and they tabled an amendment to the Social Security (Miscellaneous Provisions) Bill to enable a lower figure to be specified.

On 16th December last year, the Under-Secretary told Standing Committee A: The present state of the National Insurance Fund makes it likely that the next autumn's contribution review will lead us to want to establish lower rates than those from the start of the new stheme".—[Official Report, Standing Committee A, 16th December 1976; c. 64–65.] The hon. Gentleman said "likely". That was a year ago, when he said that it was "likely" that we would have lower rates. Yet here we are, a year later, right at the top of the limit that the Government could impose by order-161 per cent.

So far from there being a surplus in the Fund, the Government Actuary's report envisages a small deficit on the year. Why is that? What has happened? We know that unemployment is much higher than the Government envisaged and that inflation was much more rapid this last year than they had envisaged. Is that the reason why the Government have changed their mind and that, so far from its being "unlikely" to be lower, it is right at the top?

We must also take note of the assumptions in the Government Actuary's report. These are assumptions that he has to take from the Government. It says that next year unemployment will rise by only 120,000, that earnings are to rise by only 10 per cent. and that prices are to be taken as increasing by only 6½ per cent. As Pat Healey noted in The Times, those assumptions are "open to question".

I must ask the Minister to spell out what could be the effect on the surplus in the National Insurance Fund if inflation runs at a figure higher than 6½ per cent. and if unemployment goes higher than a additional 120,000. Paragraph 11 of the Government Actuary's report gives some information but not enough to enable one to make that calculation.

I remind the House that the Government got it all wrong last year. When the DHSS was examined by the Select Committee on Expenditure, it was pretty severely mauled by that Committe. Let me quote one or two sentences from its report. It said in para 5.7: The Government's calculations about the proportion of unemployed entitled to such benefits proved to be wrong. The Committee said at paragraph 5.8: The DHSS witness informed us that 'we really do not know why the number eligible for unemployment benefit has turned out to be less than had been estimated.' Last year, in its calculations, the Department provided an "estimating margin" of £300 million, but of that the Select Committee said: But the Department was unable to explain why the particular figure of £300 million was chosen, and conceded that 'it is not calculated according to any formula' and that, indeed, the Department would find it difficult to challenge the appropriateness of making the figure £200 million or £400 million. This year the figure has been omitted altogether. Perhaps that is the wisest course in view of what was said about it last year.

There is one more rather surprising point about the Government Actuary's report, and that is in para 17 and in table 3, where it looks forward over the next 30 years and compares the current forecast with the previous one. It says: account has been taken of the latest population projections, the main changes from the earlier projections being the assumption of lower births That is one report put out by the DHSS.

Only a few weeks later there was another report by the DHSS entitled "The Way Forward" and relating to health and personal social services. In para 1.7 of that report one sees a reference to population projections. It says: Population projections are vital to effective planning. In recent years, projections of the number of births have indicated a continuing decline followed by a swift rise. The 1976 based projections of births again show a decline followed by a swift rise but, as with all recent projections, the timing of the upward turn in the birth rate has been delayed by a further year. If one examines the chart on page 3 of the report, one sees a swift rise indeed in the birth rate. I am bound to ask the Minister which of those reports is right. Is it the one that assumes, as does the Government Actuary, a continual decline in the number of births, or is it the other report to do with the Health Service which assumes a swift rise in the number of births? What is clear is that they cannot both be right. This is a case of the right hand and the left hand—or, perhaps, the two left hands—of the Minister not knowing what the other is doing. It might be possible to reconcile them somehow, but for the life of me I cannot see how.

Then there is the vital question of the numbers contracted out of the new pension scheme next April. The Government Actuary assumes 9 million. Is that intended to be a realistic estimate, or is it an estimate that allows a margin of error? We always warned that the Government would not be able to get the full numbers fixed and settled by 6th April next year because of the appalling chaos that has surrounded the whole question of contracting out, due to the chopping and changing of Government incomes policies.

I welcome the number of relaxations of statutory requirements which the Government have announced in succession over recent months, but it will be a "damned close-run thing", if I may use a quotation. A large number of companies will find themselves right up against all the deadlines.

If the figure differs by 1 million from 9 million the effect is to alter the income of the fund by £190 million. Does the 9 million include a margin, or is it the best estimate that can be made?

Perhaps I can end on this note. My party remains convinced that the 1975 Act provides a workable, if not ideal, basis for a proper partnership between the private sector and State pension schemes.

A careful balance was struck in the 1975 Act. That has been reinforced by quite a number of new safeguards since then, but the way in which the introduction of the scheme has been handled and messed about by various incomes policies and other measures has sorely tried our continuing support.

If the Government were ever so unwise as to proceed with their highly provocative and unpopular proposal for 50 per cent. trade union control of pension funds, the bipartisan policy would end. That would be a great pity, because a bipartisan policy remains essential.

We know that there will be further developments in pensions. We shall have to deal with flexible retirement, harmonisation of pension ages for men and women, the changes embodied in EEC social policy and the concept of phased retirement. These and many other changes are on the cards. We want, therefore, to maintain a bipartisan policy.

The order does no more than launch the new scheme. Both parties owe it to the country to eschew the partisan, the provocative and the doctrinaire, so that in future years the scheme can develop on sound and consistent lines.

I hope that the Government, in their further consideration of the divisive proposals that they have in cold storage, will bear that in mind. Nothing could give greater confidence to the whole pensions movement than for them to say that they will make no major change in the pension scheme which does not have the support of all major parties in the House.

12.13 a.m.

Mr. Robin Hodgson (Walsall, North)

My right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) referred to the improvement in the treatment of the self-employed but suggested that those benefiting from the change should look behind the immediate motives given this evening and consider the more underlying factors which have governed the Labour Party in its treatment of the self-employed.

My right hon. Friend referred to the change in the political climate of the country, and particularly to the by-election losses that the Government have suffered. As one who had a particular interest in at least one of those changes, I should like to add a few remarks on that point.

Whereas the self-employed in my constituency, of whom there are many, will welcome this change, there is no doubt that they will also feel that there is much more to be done of a fundamental nature in their treatment by the Government before the damage done to them over the last four or five years will be repaired.

There is a tradition in the Black Country, in the West Midlands, of sturdy self-reliance, of people leaving the employ of large firms and undertaking jobs on their own: skilled toolworkers, locksmiths and craftsmen of every sort. Those people have been hard hit by the Government and were to a large extent responsible for their defeat in the by-election at Walsall, North.

Turning, however, from the question of the self-employed to the question of the unemployed, we have already heard of some of the weaknesses and lack of clarity in the Government's approach. After the bland assurances that we have heard in the House from the Prime Minister and his Front Bench colleagues, it is, perhaps rather surprising—shattering even—to read that the Government have instructed the Government Actuary to consider that unemployment will be higher next year than this year and that the unemployed total of 1–65 million will include 180,000 school leavers.

Reports from study groups suggest that unemployment will go a great deal higher than that and will in fact reach 2 million. The report of the Government Actuary suggests in paragraph 11(ii) that each increase of 100,000 in unemployment will reduce or worsen the position of the National Insurance Fund by some £135 million.

If, therefore, the worst forecasts were to come true and we were to reach a level of 2 million unemployed, the National Insurance Fund will over a full year obviously face a reduction of some £700 million—a very substantial sum. The Minister owes it to us tonight to say something about the contingencies he has prepared for or built in for margins of error in forecasting the level of unemployment, particularly since with every month that passes the level of production continues to fall. It seems to me that to work on this basis and to allow for a deficit of £55 million is not good enough.

The second point as regards estimates concerns the question of contracting out. The report covers this in paragraph 20. I know from my colleagues and friends in insurance companies in the City that so far there has been a very low level of applications to contract out, and, unless there is to be a rush at the end, it may well be that the figure of 9 million which is given in the report will not be reached. Perhaps the Minister will tell us what the latest position is and say in particular if the period for approval is extended for a further few months after July, what the effect of that will be on the Fund as a whole.

Both these two points—the question of the level of unemployment and the question of the number of people contracted out—involve very considerable sums of money—£135 million per 100,000 difference in unemployment and £190 million per million contracted out or non-contracted out. We are talking not about small sums but about very substantial sums. The Minister owes it to us to make the position clear.

The cost of administration is rising from £380 million to £420 million, an increase of about 10 per cent. This is in line with the increase in the amount of benefit paid out or of outgoings from the fund. Is it really necessary for the cost of administration to increase pari passu? Can we not do something to increase the efficiency with which the fund is administered, so that we are able to reduce the percentage of administration and thereby ensure that the maximum percentage of contributions so hardly won from the working population reaches those in need rather than being skimmed off along the way to pay for the administration of the scheme?

I seek clarification, too, on the question of the £10 Christmas bonus. A few weeks ago we had a debate late one evening on the question whether the bonus should become statutory in future. I believed then and still believe that it should not be left to Governments of whichever party or of whatever political colour to decide whether to hand the old-age pensioners a Christmas bonus. Has the payment of this sum been allowed for in the actuarial calculations in the Government Actuary's report? Has it been allowed for payment next Christmas?

My final point concerns incentive. There is a need to get employers to employ more people and to give them productive work, and for employees to be able to want to work harder because they keep more in their pockets after all deductions. One aspect will increase employment opportunity and the other will encourage people to work hard.

The Minister's right hon. Friend the Chancellor of the Exchequer has made great play of his tax reductions. Tonight we see that a proportion of the reductions which have been passed to the working man will be removed with the increase in the national insurance contribution. The reductions were introduced with blazons of publicity, but they are being taken back by stealth at midnight. It is a pity that the need for incentive and rewards for hard work is not more appreciated by the Government.

12.21 a.m.

Mr. Tony Newton (Braintree)

It seems that my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) and my hon. Friend the Member for Walsall, North (Mr. Hodgson) have covered almost all the matters that I wished to raise. I do not want to do very much more than ask the Under-Secretary of State one question.

The hon. Gentleman has concentrated a great deal on the self-employed, and my right hon. Friend has rightly said that there has been a thinly disguised retreat from an untenable position. However, in view of the concentration that the hon. Gentleman has given to the self-employed, I should like to ask him about one specific point. It concerns an issue that the self-employed have always seen as one of the injustices of their position—namely, their coverage for health purposes if they go to Europe.

I am aware that the Chair can say that this is wholly irrelevant, but in the minds of the self-employed it has not been irrelevant. Anybody who talks to them about their social insurance will find that this point comes up time and time again. They say to me "We pay the full contributions, but if you go to Europe you can get free health cover for your children but we cannot because we are self-employed." That has been seen as one of the injustices of their position.

For two to three years Ministers have been saying" This is very difficult. We shall try to sort this out with Europe. We hope that something will happen soon." If the Chair permits, I hope that the Minister will be able to give us a brief report on the current situation.

12.23 a.m.

Mr. Peter Brooke (City of London and Westminster, South)

My remarks will be brief at this hour. However, they will inevitably go back over the ground so admirably covered by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin).

It has always seemed to me that in dealing with the nation outside there is an obligation on the House to maintain the credibility of politicians in the eyes of the public as a whole. I listened to the Under-Secretary with great care when he gave his account, and I have read the Government Actuary's report, which sets out a complicated subject with admirable clarity. I follow clearly, both in the Government Actuary's report and in the hon. Gentleman's remarks, how they have arrived at 5 per cent. for the future. However, I am bound to say that I did not hear—perhaps it was a mishearing on my part—any description of the way in which 8 per cent. has been justified in years past. If I did miss it, I shall be grateful if the hon. Gentleman will repeat that stretch of his speech when he replies.

Mr. Deakins

I did not catch the hon. Gentleman's last point.

Mr. Brooke

I was saying that from the Government Actuary's report and the hon. Gentleman's remarks at the beginning of the debate I had no difficulty in understanding that the figure is to be 5 per cent. in future. I may have misheard the hon. Gentleman, but I did not follow his explanation why it has been 8 per cent. in the years past. It seemed that the Government Actuary's explanation would well have covered 5 per cent. in past years as well and that nothing new has happened in the current year suddenly to change the circumstances.

I would forgive the self-employed and the public at large for regarding politicians with some cynicism when we move the figures around in the way that they have been moved on this occasion.

I have a second misgiving. I am delighted that the calculations show that the figure should be 5 per cent., but there is a further obligation—it may come within the framework of bipartisan policy to which my right hon. Friend the Member for Wanstead and Woodford referred that we should not have substantial changes in these rates from year to year. If we are to nurse the economy back to health—I congratulate the Government on some of the things that they have done in the last 12 months—the Government will have to depend very much on the confidence of business men that they will be able to operate in stable conditions, in which they can rely on the underlying variables being reasonably constant from year to year.

I do not think that a switch such as that from 8 per cent. to 5 per cent., which is significant in the context of individual business men, is being fair to the business community in dealing with the economy. The problems lie in planning ahead.

12.27 a.m.

Mr. Deakins

I am grateful for the fact that at this late hour we have had a reasonably short and sharp debate, and hon. Members have not wasted their words, although some points have been repeated by successive speakers.

I shall deal first with the change from 8 per cent. to 5 per cent. There is a logical explanation for the change, although I realise that the Opposition may not accept it for political reasons.

Previously, under the national insurance scheme the self-employed were compared with the employed. By and large the self-employed received lower benefits and therefore, in total, paid a lower contribution. It was 8 per cent. compared with 14 per cent., regardless of whether the person concerned was in an occupational pension scheme. We believe that this represented good value for money for the benefits that were received.

With the start of the new scheme there is a new basis of a mixture of pay-as-you-go for part of the 23 million working population and a funded basis for those who are contracted out in occupational pension schemes. The basis of comparison could not remain the same. The comparison now becomes one between the self-employed and those employed persons who are contracted out. It would be ludicrous to compare the self-employed with the contracted-in, since, in our view, the position of the self-employed is analagous to that of the contracted-out.

In these circumstances we think that a 5 per cent. figure represents a reasonably fair assessment of the benefits that these people are getting compared with the contribution to the cost of benefit paid by those contracted out.

Perhaps the Opposition feel that in changing the basis of contribution we have changed the basis of the argument, but one cannot have a new pension scheme on a different basis from the previous scheme without considering the factors in this way.

Mr. Patrick Jenkin

Will the Minister confirm that what I have said is right—that the self-employed are getting the same benefits after April as they have had for the last three years? If 5 per cent. is to be right after April, how can 8 per cent. have been right for the last three years?

Mr. Deakins

One has to look at the scheme over a period. The point the right hon. Gentleman has made would be valid only if the contracted-out in the first year were to be paying 2.5 per cent. less than under the previous scheme while getting the same benefits. But the comparison is not valid either for the contracted-out or for the self-employed, because of the different basis on which the new scheme is operated. It is no longer a pay-as-you-go basis for everybody, but is partly that and partly a funded basis. The two are brought together in the context of the partnership between the State scheme and occupational pension schemes, which leads to a different assessment of both the self-employed and the contracted-out.

The second point mentioned by the right hon. Gentleman is important. I read the debates on this matter in Committee in December last and January of this year. We spent half the time in Committee seeking to remove a provision from the previous legislation, and that forced us to take a figure of 16½ per cent. so we had the option of anything lower than that figure. I remembered that at the time the hon. Member for Wallasey (Mrs. Chalker) and the hon. Member for Acton (Sir G. Young) said that the Government were being optimistic. But the Opposition were being pessimistic and thought that the figure should be 16½ per cent. or an even higher figure. The difference lies in the change in estimating assumptions in the past year.

Let me mention one of the difficulties that the Government Actuary faces over some of the figures on the new earnings-related pensions begun in 1975. One of the key factors concerned the difficulty of estimating the earnings-related figures during the initial stage of those contributions. That difficulty has been more or less overcome. We now face a new difficulty in terms of the numbers of contracted-out people and their earnings distribution. The matter will take time to settle down and for the Government Actuary to obtain the figures.

I wish now to deal with the points put forward on population projections. There is probably a genuine misunderstanding about the birth projection figures quoted in the two documents. Paragraph 7 of the Government Actuary's report refers to the change from the earlier projections set out in paragraph 34 of Command 5928. That document was published three or four years ago. There need be no inconsistency between the limited comment in the present report about lower births and what is set out in the document entitled "The Way Forward". All the Government Actuary is trying to say is that the 1976-based projection assumes a lower number of births than did the 1973-based projections used in Command 5928. The fact that births may decline and then rise is relevant to both projections. The trend is the same; it merely relates to an absolute level.

The right hon. Gentleman made an important point about the number of those who have contracted out. I think he was wondering why the Government had instructed the Government Actuary to assume that the figure would be 9 million when about a year ago the figure was 8 million. I refer the House to an article in the Department of Employment Gazette in May this year which set out the numbers of employees in occupational pension schemes over a period of 40 years. The relevant figures show that in 1971 there was a total of 11.1 million people in occupational pension schemes; in 1975 the figure rose to 11.5 million. There may be a marginal increase for the 1976 period. On that basis the Government Actuary and the Government have had to be guided in choosing a proper figure, but it is still an estimate because we still do not know how many will contract out. I am glad that the hon. Gentleman acknowledged the efforts of my right hon. Friend the Minister for Social Security in recent parliamentary statements and answers.

In terms of the various concessions, time limits, and so on, the figure of 9 million is based on the present estimate, but next year the Government Actuary may say that the figure was wrong and should be 81 million, 9 million or even 10 million. One does not know. We have to make the best estimate we can.

Government policy has already been stated on the subject of member participation, and there is nothing more I can add. The right hon. Member for Wan-stead and Woodford (Mr. Jenkin) will know that we are unable to take any immediate legislative action.

The hon. Member for Walsall, North (Mr. Hodgson) spoke of a possible rise in unemployment figures. Heaven forbid that that will be the case, but he suggested that if that were to happen it would be a drain on the fund. The Government Actuary, in paragraph 11, has set out the consequences. But we have a balance in the fund which, at the end of next year, will be about £3,800 million, and that will cushion the blow if that estimate is wrong.

The hon. Gentleman referred to administrative efficiency. I queried the point about administrative costs when going through the Government Actuary's report. The £380 million shown for the current year and £420 million for next year are estimates of the administrative costs of collecting and recording contributions and of paying out fund benefits. They represent abount 4 per cent. of the fund's turnover—that is, the benefit expenditure or contribution income, but not both.

The cost of administering an elaborate system of social insurance does not seem excessive at 4 per cent. The increase next year over the current year's costs is largely accounted for by the higher wage bill to be expected. The Government Actuary was instructed to assume that salaries would not grow by more than 10 per cent.

The hon. Gentleman also asked about the Christmas bonus. Nothing has been allowed for in the Government Actuary's calculations, which have to reflect the statutory provisions for benefits. I remind the hon. Gentleman that the bonus has been paid out of the Consolidated Fund, not out of the National Insurance Fund.

The hon. Member for Braintree (Mr. Newton) talked about the position of the self-employed and the EEC. I accept what he said about the concern of the self-employed, but I do not want him to leave the House with the misleading impression that the Government have been dragging their feet on this matter. There is a long explanation which I have given to a large number of hon. Members in the form of letters when their constituents have raised matters with them. The general position will be known to hon. Members. Article 51 of the Treaty of Rome refers only to employed persons and their dependants, not to self-employed persons. Therefore, in effect, we have to take the rest of the EEC along with us in a way which some member countries obviously find great difficulty in doing. Indeed, it is hard to expect them to extend to our self-employed, when on holiday or business in those countries, concessions which they do not give to their own self-employed. There is a working party in Brussels looking into this matter. We hope that it will gradually thrash out the problem in a way that will achieve harmony and acceptance within the Community.

I hope that I have answered all the points that have been made in the debate. I commend the order to the House. We are, I hope, making a bipartisan approach to pensions. I am sure that, having launched the new pension scheme, as the years go by we might not have such long debates on the various assumptions that have to be made when these orders are presented to the House.

Question put and agreed to.

Resolved, That the draft Social Security (Contributions, Re-rating) (No. 2) Order 1977, which was laid before this House on 1st December, be approved.