§ The Secretary of State for Social Services (Mr. Norman Fowler)
I beg to move,That the draft Social Security (Class 1 Contributions Contracted—out Percentages) Order 1982, which was laid before this House on 3 March, be approved.
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
With this we are to take motion No. 3 on the Order Paper:That the draft State Scheme Premiums (Actuarial Tables) Amendment Regulations 1982, which were laid before this House on 3 March, be approved.
§ Mr. Fowler
The two statutory instruments to be debated are compact and have modest titles. The reports that I laid before the House and the Government Actuary's report laid with the statutory instruments reveal the true importance and technical complexity of the underlying issues. This is the first occasion on which we have reviewed the terms for contracting out of the earnings-related additional component of the State retirement pension scheme, terms that were embodied in the Social Security Pensions Act 1975, which took effect in April 1978. The revised terms take effect from 1983.
The 1975 pensions Act was a considerable political achievement. Under its provisions a partnership has been forged between the State and good occupational pension schemes. The partnership has a bearing on the pension rights of all employed persons directly or indirectly. About half the working population participates fully in the State scheme, but over 10 million employees are in occupational pension schemes contracted out of the State scheme. Occupational pension schemes had investments of about £50 billion in 1979, and currently the figure is more likely to be about £75 billion. About half this amount is invested in equities, and about a third in fixed interest securities. So, in short, we must recognise, first, that we are dealing with an important social issue—the pension rights of millions of people in this country—and secondly, we must recognise that pension schemes are a vital source of institutional investment.
The contracting-out arrangements have been a major success. The Government have re-affirmed their commitment to the partnership with occupational pension schemes and in reaching our decisions we have tried to ensure that that commitment is reflected in the revised terms. At the same time, our overall objectives have been to maintain stability and to treat all the parties fairly.
Perhaps I may remind the House of the history. The 1975 Act at last provided for substantial pensions related to earnings during working life. The State scheme provides a flat-rate pension for everyone who meets the contribution requirements. In addition, a substantial earnings-related pension will become available as the new scheme matures. But the difficulty was basically to ensure that these provisions worked in harmony with occupational pension schemes whose members already contributed to earnings-related pensions. Indeed, it is because occupational pension schemes got there first that the complex fabric of contracting-out arrangements evolved.
The overriding objective was plain enough. Good occupational pension schemes were to have the option to contract out of the earnings-related element of the two-tier State scheme. They would pay lower national insurance 892 contributions but would have to satisfy the Occupational Pensions Board of their ability to meet strict conditions aimed at safeguarding members' rights. Most importantly, they would have to guarantee a pension—the guaranteed minimum pension—broadly equivalent to the State additional pension. At the time it greatly troubled employers and their advisers that occupational schemes would be entering into an open-ended commitment as accrued rights would be related to future earning trends. There was also uncertainty about the future return from investments.
To allay those anxieties the Labour Government made important concessions on two fronts. First, they introduced a contingency margin by making the national insurance contribution reduction 7 per cent. rather than 6½ per cent., thus deliberately allowing a ½ per cent. for contingencies. Secondly they agreed to other safeguards that would apply when schemes had to buy back into the State scheme. In the first debate that I took part in from the Front Bench on the original pensions Bill, there was a great measure of political consensus. In Opposition we welcomed the concessions for which we and the pensions industry had pressed.
That is the background to the current review. Under the 1975 Act I have a statutory duty to review at least every five years the national insurance contribution reduction, which is the subject of the draft order, and the cost of buying back into the State scheme, which is the subject of the draft regulations. In August 1981, my Department issued a consultative document containing a technical analysis by the Government Actuary covering much the same ground as his report now before the House.
I shall concentrate on the contracted-out contribution reduction which is probably the most important issue, because of its impact on the overall viability of contracting-out. The Government Actuary's analysis shows 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 employers and the pension interests have with justification argued that their decision to contract out was based on the terms that Parliament offered. They argue that it would be a breach of faith to revise the terms in a way which eroded the original political concessions and the original political consensus.
There is a balance to be held. Employers with contracted-out schemes and the pensions interests would prefer an abatement to 6½ per cent. but would prefer to go no lower. Such an adjustment was expected because as the new arrangements mature a lower level of accrual has to be funded. However, some others like the TUC favour a 1 per cent. abatement to 6 per cent. They argue that the Government Actuary's analysis demonstrates that, if the reduction is more than 6 per cent., full rate contributors to the national insurance fund in effect subsidise contracted-out occupational pension schemes.
It is the basic duty of the Government to seek to maintain a fair balance between the interests of those who are participating fully in the State scheme and those whose pension rights are secured in contracted-out schemes. We saw a very real risk that if the contracted-out contribution reduction was to be set at 6 per cent., some schemes might cease to contract out or wind up completely. The hon. Member for Pontypridd (Mr. John) will confirm that that is a message from the pensions industry.
893 Future expectations could have been seriously affected. But there are other repercussions of a significant shift away from contracting out. There could be effects on the stock market as schemes sold investments to pay the national insurance fund for buying back. In the longer term the balance in the partnership between the State and occupational schemes could be upset. The level of institutional investment could be permanently depressed. And most importantly the State "pay-as-you-go" scheme would bear more of the burden for providing income in old age. We must also recognise that the funding of occupational pensions schemes results in substantial investment in British industry and such investment was never more vital than at present. All those considerations convinced me that it would be wrong to run the risk of significant switch to contracting back into the State scheme.
However, it is equally clear from studying the Government Actuary's report that a contribution reduction of 6½ per cent. would be difficult to justify because it would significantly improve the current terms for contracting-out and would diminish the cash inflow to the national insurance fund. That shortfall would have to be made good by full rate contributors, that is those not in contracted out schemes, and their employers.
The Government Actuary's report shows that for purely actuarial reasons the current overall' contribution reduction of 7 per cent. should be reduced by ¾ per cent. to 6¼ per cent. by ½ per cent.—because of the lower level of accrual, and by ¼ per cent. to reflect the actual age and sex mix in the contracted-out population. The 6¼ per cent. option is no better and no worse than the current terms. The most important feature is the contingency margin for the average scheme between the gain from reduced contributions compared with its costs of covering contracted-out commitments. With a 6¼ per cent. contribution reduction, the margin is 7.9 per cent. almost identical with the current margin. After carefully considering the Government Actuary's report and taking into account the arguments put forward by all the interested parties and our assessment of the wider issues, we have decided that the best balance is struck by abating the current contribution reduction of 7 per cent. by ¾ per cent. to 6¼ per cent.
I turn to the apportionment of the 6¼ per cent. between employer and employee. I make no secret of the fact that our final decisiions on this review were made in the run-up to a Budget in which we wished to help industry as well as individuals. We saw the opportunity to help contracted-out employers on a modest scale by sharing the ¾ per cent. 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 result is that, of the ¾ per cent. extra to be paid by contributors, 0.4 per cent. will be paid by employers and 0.35 by employees. This means that the 6¼ per cent. reduction in the contracted-out rate will now be shared employer 4.1 per cent and employee 2.15 per cent. So I hope that employers will acknowledge that we have recognised their case as far as possible, given the need to strike a fair balance between the interested parties.
When we come to the changes in the buy-back terms contained in the draft regulations, the position is that contracted-out schemes may in certain circumstances 894 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. That device was introduced basically as a political concession to protect occupational schemes which would have had to sell investments at the ruling market price to raise cash for premiums. It is clear from the Government Actuary's report, and it is generally recognised by those who contributed at the consultation stage of the review, that the present arrangement has persistently worked to the 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 occupational pensions schemes joint working group has written to me about the buy-back terms, to express some anxiety about the effect of the increase in buy-back premiums in the event of a serious deterioration in the investment market. The eventualities envisaged seem on the face of it to be fairly unlikely. Even if they did occur, they would not necessarily mean that any change need be made in the Government proposals for buy-back terms. That is because of the 12 per cent. earnings ceiling. Certainly there can be no cause for concern during the first two or three years of the phasing-in of the new arrangements. The joint working group offered to let me have fuller details of the difficulties that it foresees, and I shall of course be happy to consider them. Whatever they might be, there seems no reason to interfere with the Government's proposals during at least the early part of the phasing-in period, and I hope that the House will approve the instruments as they stand, irrespective of anything that might emerge from further representations. As I have said, if the joint working group will let us have further details of its precise misgivings, I shall be happy to consider them further, and if a joint discussion would be the best way of resolving doubts here I again would be happy to arrange that. The matter is fairly technical and it may be that the best way to proceed would be for the actuarial experts of the joint working group to get in touch with the Government Actuary to describe their technical worries. The Government Actuary tells me that he would also welcome that. Both I and my hon. Friend the Under-Secretary of State for Health and Social Security will listen carefully to anything further that is said in the debate on the matter.
In explaining our approach to the review, I have referred to the need for stability. The review comes only four years into the 20-year maturity period of the new arrangements. Our aim has been to maintain confidence in those arrangements. I have acknowledged that the 1975 Act was a considerable political achievement and I referred to the spirit of co-operation which existed between the main parties when the original terms were settled. I have no wish to disturb that consensus. But above all I ask the House to recognise that the decisions that we have made take into account the interests of all affected parties and seek to strike a fair balance between them.
§ Mr. Brynmor John (Pontypridd)
These are fairly technical orders, but it would be wrong to fail to recognise 895 the effect that they have on many millions of people who pay into these pension schemes and therefore benefit from them. Their social content is thus quite high.
I shall take the points that I want to make in the rough order in which the Secretary of State made them. I shall deal first with the contribution reduction. As the Secretary of State said, the current contribution reduction for contracted-out pension schemes is 7 per cent. which was ½ per cent. above the Government Actuary's calculations, when the Bill was introduced in 1975. That was to take recognition of the risks that the occupational pensions schemes then felt that they ran.
That is important because we are seeing a continuation of anxieties. Whatever contribution is suggested, the pensions industry feels anxious about it and points out difficulties. I hope that the Secretary of State, in saying what he has about consultations, will also make it clear to the pension schemes that some of these matters were taken well into account and the difficulties were understood and were, in the event, found to be exaggerated.
The Government Actuary explains in the new report that from 1983 to 1988 we could see a cut by about 1/2 per cent. because of the fall in the average rate of accrual and by a further ¼ per cent. because of new information about the age and sex distributions of those in contracted-out schemes. This means that the neutral figure that the right hon. Gentleman has fairly put is 6¼ per cent. and not, as the press has said on some occasions, 6½ per cent. Therefore, the figure that the actuary has come up with is a neutral one, but it means that the pensions funds have scored a considerable success.
I express my disappointment by pointing out that the Government Actuary argued for a reduction of the 6 per cent. because the 1978–83 figure had incorporated a contingency margin of 7.7 per cent. to cover risks. However. during the passage of the Bill—this seems to have been largely ignored or has passed unnoticed by the pensions funds—two safeguards were introduced, or one safeguard and one development. These have made it rather clearer that they are protected. One is the availability of index-linked Government schemes, which now reduce the risks of the pension schemes. The margin of contingency risk that the actuary thought was ample to cover the risk was 4.2 per cent. That is why he suggested his figure when he raised it as the basis of his report.
What has happened is that in the new fund, as the actuary says in paragraph 48 of the report, the contingency margin is now not 7.7 per cent. but 7.9 per cent. for risk. That is increasing the contingency margin, and when we are talking about 0.1 or 0.2 per cent. we are talking about a considerable sum of money.
The Government Actuary said that the further safeguards appear to have removed the principal risk attaching to contracting out, which led the Government at the time to increase the contribution from 6½ per cent. to 7 per cent. The Government Actuary has suggested that the figure could easily be 6 per cent. with a reasonable contingency margin that was ample to deal with all events. The 6¼ per cent. seems to be a compromise between the Government Actuary's figure, backed by the TUC, and the 6½ per cent. of the pension industry. It is a truly political compromise. I am sure that the right hon. Gentleman will not necessarily take offence at that remark.
896 If there has been a splitting down the middle, which in effect will give the pension funds a substantial advantage over the next five years, I hope that he and it will remind themselves of that.
I have talked about the large sums which are involved in even marginal changes. It was estimated in an article that appeared in the Financial Times on 4 March that an extra ¼ per cent. is worth £125 million to the pension industry. As it is to be 6¼ per cent. instead of 6 per cent., the pension industry will gain £125 million.
The Financial Times article states:That the private pension schemes have negotiated this hurdle so comfortably now adds to the responsibility upon them to make rapid progress in the areas—notably indadequate transferability and lack of inflation proofing—in which their deficiencies are becoming increasingly serious.Part of my disappointment is that unless the private pension funds are to move fairly swiftly to make up the grotesque losses that occur when a man switches jobs, and to meet the failure, almost abysmal in many instances, of pension schemes to maintain their value against inflation, the advantages that are being fed to them quinquennially will ring hollow in the ears of those who are their beneficiaries and who look to the pension schemes to produce pensions that will keep them in a reasonable standard in retirement.
The way in which the 6¼ per cent. is divided means that there is a mildly regressive shift of the burden from employers to employees. The existing contribution reduction is split 2½ per cent. to 4½ per cent. between employees and employers. The 6¼ per cent. is 2.15 per cent. to 4.1 per cent., and that worsens the position of the employee by 0.1 per cent. For a person in receipt of average earnings and, therefore, on earnings above the lower earnings limit, this might mean a further £1.25 a week, Taken with the shift that the Government have made on national insurance contributions to raise only employees' contributions, the result is that the employee is suffering from a disguised tax that does not bear on his employer.
I fear that the precedent that has been set this year will be used as a precedent for further shifting the balance against the employee and in favour of the employer in subsequent years. When the Minister replies, I hope that he will reassure the House that whatever has been done in the short term, in the light of the most severe recession that we have ever experienced, will not be taken as a precedent to worsen the terms for employees. The Government should realise that they already feel aggrieved that national insurance contributions are being used to impose a disguised tax upon them. If they find that the contracting out provisions are being used to shift the burden to them as well, they will feel extremely angry, and that will sour. the relationship within the scheme.
My third point concerns the market level indicators. I think that the Secretary of State was right to skate around the intricacies of the scheme fairly niftily today am sure that none of us will go too deeply into it as none of us understands fully what has happened. That is part of my criticism of the Government's scheme. They have chosen the most complicated version, as I hope to show.
We have to take account of the short-term fluctuations in the market values of the investments of the schemes, but the Government Actuary stated in his memorandum last July that the present arrangement is actually too favourable to contracted-out schemes, as I think is generally accepted. 897 He then suggested in paragraph 63 a fairly simple amendment to the present arrangement. He said that the figure should be divided by 85 before multiplying it by the market level indicator. That may not sound the simplest scheme in the world, but the Government's suggestion, that if the figure derived from the existing formula is less than 105 the new indicator will be half of that figure plus 52½, makes the Government Actuary's suggestion sound like child's play.
My criticism is, therefore, that the Government have adopted a far more complicated formula which involves phasing in over a full five-year period. I do not believe that that is desirable. It would be better to make a simpler change now and achieve it at once in these orders rather than perpetuate the problem by phasing in over five years so that in 1988 we have to face the fact that a simpler formula must be found. This certainly is not such a formula.
Finally, I am extremely disappointed at the treatment of early leavers. As I have said before, one of the great deficiencies of occupational pension schemes is the wholly inadequate provision for transferability, in which early leavers are heavily involved. It is estimated that the average time spent in a job is 10 years, which on a very conservative calculation means four or five jobs in the average person's working life. What is the Government's estimate of the number of people who will not be early leavers from some pension scheme or other at some time during their lives? In other words, how many people will start in a particular job and pension scheme and remain in it for the whole of their working life? I would not mind betting that it is a fairly small proportion.
That highlights the importance of the treatment of early leavers, because if the provision is inadequate people changing jobs will face not only the trauma of changing jobs but the injustice that they now often feel of having to lose on their pension schemes. It is most disappointing that the Government have not taken the oportunity of this quinquennial review to make the changes called for by the Occupational Pensions Board report. That report, dated 24 June 1981, states:The Board observed that early leavers in private sector schemes often suffer a substantial loss of pension rights because their pensions are based on the salary at the time of leaving without allowance for changes in prices or earnings levels in the period between leaving and retirement age. The Board recommended that in principle early leavers should receive the same benefits for their years of pensionable service as their fellow members who stay in the same employment to pension age.That is a real difficulty to which the Occupational Pensions Board drew attention last June. Nothing has been done about it in this order, and the Government have missed a great chance.
The second point which the Occupational Pensions Board has raised is the question of franking, and that can be explained by quoting paragraph 2.21 of its report:The practical effect of revaluing the GMP"—which for this purpose is not the GNP but the guaranteed minimum pension—is reduced in many schemes, since it is permissible to use other scheme benefits, arising from service both before and after the implementation of the 1975 Act in April 1978, to satisfy the GMP test. Thus, unless the revaluation of the GMP takes it above the level of what would otherwise be the total scheme benefit, the scheme need not adjust the total.It goes on: 898At present there is considerable scope for franking, since GMPs relate only to service since April 1978. As, in the course of time, the GMP becomes a larger proportion of leavers' total benefits, so the scope for franking will be reduced.What the Occupational Pensions Board recommended, and what I would call upon the Government to ensure, is that the practice of franking benefits should change. I believe that it could be done quite easily. It would add to the sense of justice which the recipients of occupational pensions scheme feel, and I believe that the Government should have taken this opportunity to do this. If not, I call upon them to take the earliest possible opportunity to bring before the House a scheme which would outlaw this practice and make it obsolescent. Otherwise, as I have said, what the Government are doing is exposing the admittedly large numbers of members of the occupational pensions schemes to a basic injustice which the schemes themselves seem unable to remedy.
Therefore, my final word on this matter is to express my sincere regret that the Government have not tackled this matter so far and to hope that they will do so in the very near future.
§ Mr. R. A. McCrindle (Brentwood and Ongar)
Considering that the subject matters of these orders affects millions of people, one might have hoped that we would have been having this debate in a packed House, riveted by the nuances of the debate. Clearly this is not so, and perhaps at 10.57 pm it is too much to expect; although I have an uncomfortable feeling that even if we had been having the debate at 4.57 in the afternoon the attendance on these important matters might not have been materially different.
Nevertheless, there is a small but dedicated band of hon. Members on both sides of the House who recognise the real complexity of these matters, and equally recognise the great importance that what we do in this House should be right. Upon whether we do so depends the future of a great many of our fellow citizens. The decisions we reach here this evening must be seen against the background of continuing encouragement to the development of good occupational pensions schemes.
I was pleased that the Secretary of State, almost at the beginning of his speech, reminded the House of the partnership that has developed over the last few years between the national scheme and good occupational pension schemes. Although it is now very easy to assume that this has always been so, one has only to cast one's mind back about a decade to recognise that the propensity of hon. Members on both sides of this House to engage in what was called "pensioneering" was such that one move forward by one Government in this field was calculated to be reversed by their successor. It is greatly to the credit of both Front Benches that some years ago a truce was called. While a national scheme was unfolding, encouragement was given to the development of good occupational pension schemes. Looking back over a few years, there can be little doubt that the country has benefited greatly from an end of the blatant "pensioneering" to which hon. Members were formerly subject. If we have proved anything, it is that a role exists for the national scheme and for occupational pension schemes. Long may that situation continue.
It is perhaps appropriate to suggest that the contracting-out provisions, since the scheme was introduced, have 899 been a success. One has seen the development of occupational pension schemes at the same time as the national scheme has been unfolding. The question to which one must immediately address oneself is whether the new rebate proposed in the first of the statutory instruments under discussion is fair and reasonable if occupational pension schemes are to operate and to prosper and if they are to be given the continuing encouragement that, it seems to me, was part of the deal to which I have already referred.
Unlike the hon. Member for Pontypridd (Mr. John), I would have thought that the balance that the Secretary of State has struck—this could not have been easy when one recalls the conflicting pressures that were upon him from both sides of the equation—is fair and reasonable. Pension interests have long understood that the 7 per cent. that has applied until now was intended to apply for only about five years. Now that the first period is over and the Secretary of State is duty bound to review the situation, I believe that the compromise figure that he has reached is not unreasonable.
Apart from the acceptance by most people in the pensions industry that the 7 per cent. was likely to last for only five years, I seem to recall being told—I had more than a passing interest in the progress of the Bill through Parliament in the mid-1970s—that it would reduce not from 7 per cent. to the 6.25 per cent. now being discussed, but to something like 4.5 per cent. over a period of 30 years as higher accrual rates or past service element ran out of the pension schemes. No one can have been surprised that there had to be a change. In all the circumstances, I think that the 6.25 per cent. decision that my right hon. Friend has reached is probably, on balance, about right.
The 7 per cent. that was permitted in 1976 took into account some of the uncertainties that could not be resolved because we had no experience of the new scheme. These uncertainties meant that assumptions had to be made with regard to the sex, age and earnings distribution. I do not deny, as I think the hon. Member for Pontypridd has remarked, that it has proved attractive for many contracted-out schemes. I do not regret the fact that this has turned out to be the case. It has established on a good footing the new partnership between the national scheme and the occupational pension schemes. I welcome that.
But now that we can turn our attention to the actual sex, age and earnings distribution rather than an assumed one it seems that a case could be made, as indeed the pensions interests did to my right hon. Friend, that 6.5 per cent. might in these circumstances be a rather fairer percentage if one is to be seen to be giving the continued encouragement to private occupational pension schemes, which I feel sure is part of what my right hon. Friend is trying to do.
I judge that, although the private pensions interests would have preferred 6.5 per cent. they are certainly not going to find it impossible to live with 6.25 per cent. On the other hand, if they had been obliged to accept the 6 per cent. that the hon. Member for Pontypridd was seeming to wish upon them just a few minutes ago, that would have brought some potential challenge to the continuance of the partnership to which I have turned my attention on several occasions already during this speech. I believe that there would have been a danger that if it had been brought down to 6 per cent. there would have been an attraction for some of the contracted-out schemes to contract in again, and, 900 although that would not have been a disaster, it would have had an adverse effect, in my judgment, on the continuing partnership on which I have laid some stress.
So, of course, it is a political compromise, as has been said. I do not see that that was a wrong thing for my right hon. Friend to do. When the hon. Gentleman turns his attention to transferability and early leavers, I believe that if there is any continuing benefit over what he would have wished in making it 6.25 per cent. rather than 6.6 per cent. it is in enabling occupational pensions schemes to turn their attention in a way which I agree they have done inadequately so far to the whole perplexing question of early leavers and transferability.
The more I study the matter of early leavers—and I have probably done it as much as most Back-Bench Members—the more fraught with enormous difficulty I see it to be. At the end of the day we shall achieve what we want only if somebody is prepared to pay for it. I am not saying that there should not be a contribution, possibly as a result of the difference between 6.25 per cent.—and 6 per cent.-and how much more if it had been 6.5 per cent., which was part of the point I was making a few moments ago.
The really fundamental question to which I think that the House must on another occasion address itself—although my hon. Friend the Under-Secretary may care to make a passing reference to it—is whether, when we do turn our attention to transferability, the responsibility lies fundamentally with the pension schemes themselves to introduce a measure of transferability and provision for early leavers, or whether there is really an argument for Government legislation requiring that it be done. I make no secret of the fact that I would infinitely prefer the former course that the pension schemes should recognise that the social pressures upon them to move in this direction are such that they would be well advised to look at ways of achieving that objective. However, if the pensions schemes cannot or will not do this over a period, which I suppose I would put at no more than five years, I genuinely believe that there is a case for whichever Government is then in power to turn their attention to enacting this by legislation.
§ Mr. John
Will the hon. Gentleman also recognise that the preservation of the pensions against inflation is inadequate in many private schemes and would he extend the point he has made about transferability by dealing with that point as well, which he can do much more easily since it is not as difficult?
§ Mr. McCrindle
I am happy to respond, although I do not wish to make a long speech. As the hon. Gentleman will appreciate, it is not the simplest of subjects. Therefore, I shall restrict my response to saying that I have yet to discover an investment that any pension scheme could have made that would have returned 29 per cent., the level that inflation reached during the period when the hon. Gentleman served in the previous Government. Therefore, it is not simply a question of saying "Let us have pension schemes index-linked". It is a matter of recognising that unless there is an investment available to cover index-linking it cannot be done.
The present Government, unlike the hon. Gentleman's Government, have taken steps—admittedly modest—to introduce index-linked stock. Many of my hon. Friends do not particularly like that development. I welcome it, 901 because I believe that it is a step in the direction of giving some index-linked protection to members of private pension schemes in the same way as it is now extended to those in public service pension schemes.
I hope that the hon. Gentleman will forgive me if I say no more on that wide subject but turn my attention to the buy-back terms, a safety net facility introduced in case changes in the investment situation were such that a private scheme became unable to meet its liabilities. The terms are to be stiffened, according to the regulations. Many pensions interests are unhappy about the arrangements that we are discussing.
The increase in the buy-back premiums is from 51/½ per cent. in 1983–84 to 27 per cent. in 1987–88. Therefore, by any reckoning, the safety net that was represented by this facility being introduced into the 1975 Act is being progressively diminished. There are employers as well as pensions interests who are alarmed that that should be so. There is a feeling that the tendency to take the line of least resistance and to contemplate contracting-in will be encouraged by the terms, and that that would be bad for the partnership to which I have referred.
I received today a letter from the Life Offices' Association, in which the association says:Even although the changes are to be phased in over 5 years, "—a point that my right hon. Friend said should allay the fears—they could have an immediate effect on the numbers of employees who are contracted-out because some schemes may wish to buy back now rather than expose themselves to the risk of having to pay higher premiums later.My right hon. Friend must turn his attention to that genuine fear expressed by a responsible body.
The association also says that it sees no reason why my right hon. Friend should not have agreed, or should not even now agree,to defer the implementation of the revised buy-back terms pending further discussion.Of course, this will be seen as special pleading by an organisation with more than a passing financial interest, but I hope that Opposition Members will concede that it also has more than a passing interest in getting the matter right, in the interests of the millions of people who are involved in these matters.
It is not only the Life Offices Association that has indicated some unhappiness. I have here a copy of the letter to which my right hon. Friend referred, from the occupational pension schemes joint working group. The letter, dated 12 March, represents the views of the Association of Consulting Actuaries, the Life Offices Association, the Associated Scottish Life Offices, the National Association of Pension Funds and the Society of Pension Consultants—so far as I am aware, all the leading pensions interests.
The principal point made by those bodies is that although they recognise that the terms must be changed they have a feeling that the way in which they are being changed, and the terms under which they are being changed, may put some of the occupational pension schemes in some difficulty. They have permitted me to quote the following paragraph:We have recognised that the present terms may be considered generous when measured against the interest rates of the past four years and, if so, there are therefore grounds for their 902 amendment. However, the revision now proposed fails to achieve the original objective of protecting a fund which has to realise assets in adverse market conditions.They further state that it is a matter of urgency that there should be some discussion, perhaps even as to the speed with which these terms are introduced. The House is clearly anxious to know whether the terms we are discussing are approved and whether they close the door completely. As the Secretary of State said, if they give a note of their precise misgivings, not only can discussions take place but, conceivably, a change in the order might ultimately occur, presumably requiring a further statutory instrument to be presented to the House at a later date.
The spirit of co-operation that my right hon. Friend the Secretary of State properly referred to would be seen as being rather more in operation by this impressive group of people, who have expressed concern, if the Minister were able to tell me this evening that the Government would be prepared, not just to have discussions in response to the precise misgivings being spelt out—they appear to be fairly well spelt out in the attachment to the letter of 12 March—but, if the case can be proved, to say that it is not too late to consider an alteration of the terms.
The instruments under discussion certainly do not sound the death knell of occupational pension schemes—far from it. However, encouragement continues to be required if we are to maintain this partnership. The industry is perfectly prepared to accept a reduction of the rebate to 6.25 per cent., but it is alarmed at the buy-back terms and the steepness of the rising burden over five years.
I sincerely suggest to my right hon. and hon. Friends on the Front Bench that further discussion should be embarked on to see whether we can extend the period or modify the velocity. Please could we have some further discussions of any sort? Government support for the occupational pensions industry is as important in the next five years as it has been in the past.
§ The Under-Secretary of State for Health and Social Security (Mr. Tony Newton)
It was borne in on me fairly early after arriving in the House, or so it appeared, that there were two sorts of people in the world; those who had served on the Standing Committee for the 1975 Act and understood it and those who had not and did not. It took me a little while to realise that there was a third group of people—those who had served and still did not understand. It has been all too clear this evening that there are none of the latter people in the Chamber. Indeed, the hon. Member for Pontypridd (Mr. John) and my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) have displayed formidable expertise in some of the intricacies of this scheme and I will do my best to comment on the points they have raised.
I much welcome the tone that this short and limited debate has taken, because underlying it has been the thing that the Government certainly—I know I speak for my hon. Friend the Member for Brentwood and Ongar—consider the most important aspect in the whole argument, that we should maintain the basic consensus which underlay the 1975 Act and carry it through. As both my hon. Friend the Member for Brentwood and Ongar and the hon. Member for Pontypridd said, at the end of the day—literally at the end of the day—we are talking about the rights in retirement of million upon million of fellow 903 citizens; rights which will go on being built up for decades. Their interests are primarily that we together—both sides of the House—maintain some stability and do not upset the building up of those rights and their security of a reasonable income in retirement. Considering some parts of political history in the past decade, it is a minor miracle in many ways that this degree of consensus has been built up and maintained. Ministers are very anxious to sustain that miracle.
Two principal issues have run through our debate tonight, and the hon. Member for Pontypridd injected a number of other issues, on which I shall touch in a moment. The first of the two main issues is the argument about the 7 per cent., 6½ per cent., 6¼ per cent., 6 per cent. There is not much that I can add, except perhaps to say that if my right hon. Friend wants 6½ per cent. and the hon. Gentleman wants 6 per cent. we may be about right in deciding on the 6¼ per cent. figure. There is no conclusive way in which we can prove that that was the right judgment. It was not an easy judgment for my right hon. Friend, but it was the one that he made, after careful consideration.
I come fresh to the matter, and having looked at the papers during the past few days, I too, concluded that it was probably the right compromise to reach. The hon. Gentleman spoke as though this almost enhanced the advantage of the contracted-out schemes. We see it as maintaining the status quo in terms of the balance between the contracted-out and the not contracted-out schemes. That contingency margin—the gain from the reduced contributions, as against the cost of covering the commitments of providing the pensions—is very close to what it was under the previous arrangements. That is probably the best test of neutrality in what we are doing.
§ Mr. Newton
I accept what the hon. Gentleman says. I respond by echoing what my right hon. Friend the Secretary of State said in his speech. At the very least, we are concerned not to move in a direction which runs the risk of upsetting the existing balance and of causing a flow of contracting in, with the possible effects that that might have on the stock market and on investment by institutions generally. We face a difficult economic situation, even though some of us hope and believe that it is getting better, so this is not the time to run the risk of disturbing our great investment institutions or of undermining the arrangments which have served the schemes, the country, and the prospective pensioners pretty well over the past few years. Again, that strengthens the case for my right hon. Friend's judgment. The hon. Gentleman is right to say that this is, using the word in its best sense, a truly political compromise. He and I both use the word in its good sense, and that in itself is a form of justification.
I want to take up the four further points that were raised by the hon. Member for Pontypridd and by my hon. Friend the Member for Brentwood and Ongar about early leavers, transferability, franking, and the preservation of pension rights. Although this debate does not relate directly to those issues, which are covered in the Occupational Pensions Board's recommendations in its early leavers 904 report, we are considering as a separate matter what was said by the board in its report. I hope that the institutions and organisations involved in these matters outside the House will have noted what was said both by the hon. Gentleman and by my hon. Friend. It is not for me to attempt to lay down the law tonight in a debate which is on the separate issue of the order and the regulations. The hon. Member for Pontypridd and my hon. Friend the Member for Brentwood and Ongar put their points forcibly and I have no doubt that they will be registered by those concerned outside the House.
I turn to percentage contributions and to what has been said about the possible implications of the way in which we have drawn the balance between employers and employees in dividing up the change. I am not sure that I understood the point correctly, but it seems to be suggested that the figures that we produced—which meant a reduction of 0.35 per cent. for the employee and a slightly larger reduction of 0.4 per cent. for the employer—could create a contributions increase for the employee of about £1.25 per week. I understand that a change of 0.1 per cent. would mean 12p a week on earnings of £150 per week.
We may need to explore the discrepancy in the advice, but I am advised that the change postulated of 0.1 per cent. would mean a contribution increase of 12p per week on earnings of £150 per week. I echo my right hon. Friend the Secretary of State in saying that we propose a marginally larger reduction for the employer than for the employee. That should be seen in the context in which we, and many Opposition Members, accept that one of any Government's prime concerns must be to give every possible assistance to industry, by maintaining the viability and expansion of firms, and the provision of new employment and new opportunities for employment. That is partly why we thought it right to ensure that we were not adding any further penalties for employers that could be avoided.
That is the spirit in which my right hon. and learned Friend the Chancellor of the Exchequer approached his Budget proposals and it is also the spirit in which my right hon. Friend the Secretary of State has approached the difficult decision that he had to make.
I shall comment briefly on some of the observations made about the buy-back issue. From the representations made by those outside the House and from the remarks made tonight, it is clear that at the very least it is generally agreed that the buy-back formula, as it has been operating, is fairer than originally intended to those contracted out, and therefore less fair than originally intended to the national insurance fund. Therefore, there is no great dispute about whether some move needed to be made or about its direction. In the light of the advice that we received from the Government Actuary, my right hon. Friend made the decision embodied in the regulations before the House. We do not believe that some revealed truth has been granted to us and that we are right beyond peradventure. We have not closed the door on any further consideration of the arrangements.
Some of the suggestions about the possible effects are exaggerated, given some of the built-in safeguards. y right hon. Friend the Secretary of State referred to the 12 per cent. limitation. In our judgment, that is about right. However, my hon. Friend the Member for Brentwood and Ongar asked a question and I hope that my right hon. Friend has reassured him sufficiently on that point. We are 905 ready to listen to further representations about the formula, to consider alternative proposals, and, if we are persuaded, to consider what to do. At present, we would be very reluctant to follow a path that would lead to considerable uncertainty for those inside and outside industry and to say that we shall not proceed with the regulations.
It has long been understood that after the review it was necessary to pass new regulations by April this year so that they could start to come into effect in 1983. There has been extensive consultation and my right hon. Friend has made his judgment. At present, we feel that it would be wrong to upset the process that has been set in hand and which is proceeding one further stage through the House tonight.
I hope that those outside will recognise that, just as we proceed in good faith, believing that it is now the sensible thing to do, so we also repeat in good faith our offer to listen, to consider any representations that are made—above all any specific suggestions for alternative ways of dealing with this problem—and, if persuaded, to consider what action we might take. Of course, I say that without any commitment at this stage. In other words, we are not closing the door, but for the moment we feel it right to proceed.
It has been clear to me, even on a relatively brief but deep involvement in these matters, that it is a great deal easier in this area for people to agree that they do not entirely like what is presented to them than to decide on precisely a better way of doing things. If for no other reason, and against that background, I hope that the House will pass the order and the regulations this evening.
§ Question put and agreed to.
That the draft Social Security (Class 1 Contributions—Contracted-out Percentages) Order 1982, which was laid before this House on 3 March, be approved.