SOCIAL SECURITY REVALUATION OF EARNINGS FACTORS (Hansard, 27 June 1979)

§ The Under-Secretary of State for Health and Social Security (Mrs. Lynda Chalker)

I beg to move, That the draft Social Security Revaluation of Earnings Factors Order 1979, which was laid before this House on 12 June, be approved. This is a technical matter affecting what many call the second pensions scheme. Earnings factors are derived from earnings-related contributions. Amongst other things, they determine under the new pensions scheme the amount of the earnings-related additional component payable with national insurance retirement pensions and other long-term benefits and the amount of the guaranteed minimum pensions to be provided by contracted-out occupational pension schemes. The earnings factors have to be reviewed and revalued annually to ensure that they keep in line with the increase in national average earnings.

That is to ensure that, broadly speaking, when the additional components and guaranteed minimum pensions are being calculated from earnings factors, those earnings factors bear the same relationship to average earnings as they did when the contributions were paid. That is the "pre-award dynamism" of the new pension scheme.

The necessary provisions are contained in section 21 of the Social Security Pensions Act 1975, as amended by section 10 of the Social Security Act 1979, and that is the first order made under those provisions.

Hon. Members who were present will recall that when the amendment to section 21 was being debated during the passage of the Social Security Act 1979 it was explained that the purpose of the amendment in section 10 of that Act was to enable the order under section 21 to be made as close as possible to the beginning of the tax year, to enable contracted-out occupational pension schemes to calculate their liabilities for early leavers without delay. The amendment achieved that by providing that the period to be taken into account for the first review shall be the 598 latest 12-month period for which figures are available at the time that the review is carried out.

Although it was the intention to make the order in April or May, following a review carried out in April when the latest available 12-monthly index figures were those for December 1977 to December 1978, the dissolution of Parliament and the election prevented the making of the order at that time. Nevertheless, the former Secretary of State did in fact carry out the review on 17 April this year. In view of the unusual circumstances that applied, he kindly informed my right hon. Friend the present Secretary of State of his action at that time. It is therefore the earliest opportunity that this House has had in the current tax year of considering the order.

I must also explain that the original draft order which was laid before Parliament had to be withdrawn and replaced by the order that we are now considering solely because the original draft contained a coming-into-operation date of 18 June 1979. Because of the time it has taken to formulate a Joint Committee that date proved too optimistic. Even now we are regrettably having to debate the order before it has been scrutinised by that Committee. I apologise to the Committee but we have no option if we are to keep to the timetabel.

We expect that next year's order will be made much closer to the beginning of the tax year, as was intended. The Joint Committee will discuss that order before it is debated in another place if it is commended by the House tonight.

The order provides quite simply that earnings factors for the 1978–79 tax year shall be increased by 13.3 per cent. That is the percentage by which the Department of Employment's index of average earnings of all employees (new series) increased between December 1977 and December 1978.

That period was the latest 12-month period for which earnings figures were available when the former Secretary of State carried out the first review under section 21 of the Pensions Act on 17 April 1979. For the next year's review, the period will start from the end of the period taken into account for this year's review, that is, December 1978. This will enable that review, and consequently all subsequent reviews, to be carried out at 599 the beginning of the tax year and the order to be made as soon as possible thereafter.

Increased earnings factors will only start to be of relevance for the purpose of calculating the State scheme additional component from 6 April 1980. This is in respect of people who attain pensionable age, or where other relevant events occur, after 5 April 1980. As hon. Members will be aware, contracted-out occupational pension schemes need to know the increased earnings factors now for the purpose of calculating their guaranteed minimum pension liabilities in respect of early leavers.

Perhaps I ought to explain that the absence from the order of any reference to the effect of the revaluation of earnings factors on the calculation of guaranteed minimum pensions does not mean that the revaluation will not affect those calculations. Another part of the Pensions Act provides for the revaluation to be applied also to the calculation of guaranteed minimum pensions.

I think hon. Members will agree that this order is basically technical, and strictly in accordance with the provisions of section 21 of the Pensions Act as amended. I commend it with pleasure to the House.