Clause 3 (Hansard, 19 May 1986)

§ Mr. Kirkwood
I beg to move amendment No. 160, in page 4, line 10, at beginning insert 'subject to subsection (5) below'.

§ Mr. Deputy Speaker
With this, it will be convenient to discuss amendment No. 161, in page 5, line 4 at end insert— '(5) Subsection 1(b) above does not apply in respect of an earner who is a non-qualifying earner. (6) Regulations may provide for—

(a) notice that an earner is a non-qualifying earner to be given to the Secretary of State by such person, in such manner and within such time as may be prescribed;

(b) such additional modifications to the definition of "connected employer" as may be prescribed.

(7) In subsections (5) and (6) above— "non-qualifying earner" means, in relatior to a tax week, an earner who at any time after 31st December, 1985 but before that tax week—

(a) has elected to cease to be a member of a relevant scheme which is contracted-out in relation to his employment; or

(b) does not fall within (a) above, has ceased to be a member of a relevant scheme which was contracted-out in relation to his employment but receives within six months of such cessation an offer of membership made by or on behalf of the trustees or managers of a related scheme by reference to which his employment would be contracted-out employment (if he accepted that offer) and does not within one month of its being made accept that offer.

relevant scheme" means an occupational pension scheme which is a contracted-out scheme under Part III of the Social Security Pensions Act 1975. related scheme" means, where an earner has ceased to be a member of a relevant scheme which was contracted-out in relation to his employment, a relevant scheme which is for the time being specified in a contracting-out certificate issued to—

(a) the person who was the employer of the earner in relation to his first period of employment; or

(b) a connected employer,

as a scheme by reference to which the earner's employment would be contracted-out employment if he became a member of that scheme connected employer" has the meaning given to it for the purposes of section 51A of the Social Security Pensions Act 1975 with such modifications as may be prescribed.'.

§ Mr. Kirkwood
The House will realise that the amendments seek to change the Government's proposals to introduce an incentive for persons to move into personal pension schemes. The purpose of my amendment is straightforward. It is to restrict that 2 per cent. incentive—or, as some might describe it, bribe—to cases that I consider to be of genuine concern to the state. That means employees who are accruing benefits under SERPS and, therefore, increasing the state's long-term liabilities. The amendment seeks to do that by creating a new category of non-qualifying earners, or earners to whom the incentive will not be paid. Non-qualifying earners are people who opt for an appropriate personal pension although they are currently contracted out of SERPS and accruing guaranteed minimum pensions under contracted-out schemes.
To pay the 2 per cent. incentive, or bribe, as required by clause 3 would be wrong for three reasons. First, the decision that people who are in that position must take is between an occupational pension scheme and a personal pension plan. It will not affect the long-term liabilities of the state earnings-related pension. It is essentially a choice between two forms of private sector saving. It is legitimate for people to make up their minds about that, but incentives funded by the state will merely upset the free market economy and the forces of free competition. It is strange for the Government — we rehearsed these arguments in Committee — to deny the free market economy and the forces of free competition.
7.45 pm
Secondly, the incentive is wrong because it is payable from the national insurance fund, which is contributed to by everyone through national insurance contributions and is effectively taxpayers' money. At a time when insufficient resources are available for all the demands placed on the social security system, it is wrong in principle and reprehensibly wasteful to use some of those resources to sway private sector decisions which will not reduce the state's liabilities.
Thirdly, it is wrong to introduce the incentive because, whatever view one has of personal pensions — I am prepared to countenance them—there is a risk in taking out a personal pension contract. The rewards may be great, but in some cases the losses would seem fairly difficult to bear, especially for dependants and spouses, who may lose the minimum of the death benefits payable under contracted-out schemes. It is risky to induce people by means of an incentive payable from state funds to give up a guaranteed minimum pension.
I believe that the amendment is legally permissible—at least I would not like to think there was a technical reason for refusing it — but it has an additional advantage in that it brings the incentive under clause 3, which is payable to those opting for personal pensions, more closely into line with that available in clause 7, which is payable to members of newly contracted-out occupational pension schemes. It is clear from examining the details of the clause 7 incentive that it is payable only where the member has not, since the beginning of this year, already been contracted out in the employment concerned under another occupational scheme. Therefore, it is intended only to persuade employers to take out of SERPS those employees who are accruing SERPS benefits.
88 The Government will be aware that they have caused much worry in the occupational pensions industry. I favour personal pension schemes, and it is right for people to have that choice, but I do not share the Government's confidence that occupational schemes can thole the results of the incentive, which puts them at a massive disadvantage.
The occupational pensions industry is also worried about the restructuring effects of some company plans and schemes that may accrue from some of the take-up of the personal pension plans. The Secretary of State may become a victim of his success because if many people dive out of their present occupational schemes into personal pensions, it may destabilise the occupational pensions industry. That would be a retrograde step. The Government actuary may have underestimated the take-up of the scheme. If that is so, it would put at risk some of the valuable and good occupational pension schemes. That would be a retrograde step.
Therefore, I hope that the Secretary of State will look carefully at the amendment. It is drafted with as much precision as possible. It seeks not to damage either personal schemes or occupational schemes, but to redress the imbalance and unfairness that I submit will be created by the introduction of the 2 per cent. incentive. I hope that the Government will look very carefully at this amendment.

§ The Secretary of State for Social Services (Mr. Norman Fowler)
The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) said that he would broadly countenance personal pensions, which I interpreted as Liberal language for support, but then he made it quite clear that he favours the concept of personal pensions.
The effect of his amendment would be to withhold the 2 per cent. incentive addition to personal pensions held by people who, since 1 January 1986, have opted to leave a contracted-out occupational scheme, or have refused to join one within six months of leaving another contracted-out scheme that is operated by the same or an associated employer. I shall deal in a moment with why I am not entirely happy with that formulation.
We believe that it is important to give people the new option of a personal pension. At present the only alternative to remaining fully within the state earnings-related pension scheme is to belong to a salary-related occupational scheme. That option is open only to half of the work force. There are still "two nations" in pensions. That has been the case for the last 20 years. There are those who get a pension from their jobs and there are those who have no alternative but the state system.
The provisions in the Bill will do a great deal to change that. It will be easier and more attractive for employers to provide schemes. They will be able to contract out without the open-ended commitment of providing the salary-related pension which must not deter many small employers. The rules for contracting out will be made much simpler for those who want to offer salary-related pensions.
However, even those improvements do not go far enough. They will not give a pensions choice to everyone. Even with these reforms and changes, not all employers will offer schemes. In any event, occupational schemes may not be the best option for some people. To make choice for all a reality, we are seeking to allow people to contract out of the state scheme by choosing an individual 89 personal pension scheme with which to save for their retirement. The Bill will provide everyone with the opportunity to choose a personal pension and the type of body with which they want to save. It will give them some say in how their savings are invested and, above all, it will provide them with the scheme that suits them best.
Most of those who are now in schemes are expected to stay in them. The market research that we carried out in 1983–84 showed a high level of satisfaction among scheme members, but many of those without an occupational pension, and others — such as those who expect to change their job frequently — will want to take advantage of the opportunity that personal pensions offer. For that reason, we have put forward personal pensions. The concept of personal pensions is accepted and recognised not just by the hon. Member for Roxburgh and Berwickshire but by the public and commentators generally.
The 2 per cent. incentive payment, which is the guts of this amendment, is a small feature of the strategy to encourage the expansion of occupational schemes. When we reach clause 7, we shall explain why we think that an incentive is necessary to ensure the expansion of occupational schemes.
Much the same reason lies behind our approach to personal pensions. Employees who are not in an occupational scheme already have access to a sort of personal pension—the so-called section 226 retirement annuity contract. However, its take-up has been very disappointing. Less than 5 per cent. of the employees who are not in schemes have taken out a section 226 policy, despite very generous tax treatment and the wide range of schemes that are on offer.
There are features of the section 226 schemes that limit their attraction. They cannot be contracted out from SERPS and employers cannot contribute to them. The personal pensions that are provided for in the Bill will have a substantial edge on section 226 policies on both counts. They will be contracted out from SERPS, and we made it clear in the White Paper that the tax rules will allow employers to contribute to them. These improvements will make personal pensions a much more attractive investment than section 226 policies. However, we believe that something extra will still be needed to set the ball rolling. That is the reason for the 2 per cent. incentive.
I do not believe that anyone has seriously argued that the 2 per cent. incentive will not be effective. The concern of the hon. Member for Roxburgh and Berwickshire, and of other hon. Members, is that it will be too effective. The hon. Gentleman referred to me as being the prisoner of my own success. The arguments that have been put forward at length tonight by various pensions industry spokesmen have been directed mainly at the fact that, as clause 3 stands, the 2 per cent. incentive will go to everybody with a personal pension, whether or not they were previously in a contracted-out occupational scheme.
It has been claimed that this incentive will pose a serious threat to occupational schemes. Those claims are very much overdone, and I made my views clear in Committee. I view the claims made with a great deal of scepticism. I find it hard to believe that employees will be tempted out of a good occupational scheme just to take advantage not only of a modest incentive—2 per cent.—but of a temporary incentive, because it lasts only for five years. Employees may have other reasons for preferring a personal pension, such as the expectation that 90 they will frequently change their jobs. If they left an occupational scheme, they might be giving up the promise of pension contributions from their employer and they would have no statutory right of return to their employer's scheme. That is a matter that they will have to weigh in the balance.
I acknowledge that there still fears in the pensions industry that the incentive will damage existing occupational schemes—for example, by tempting young employees out of occupational schemes. Those who take that view also voice doubts about the strength and sincerity of the Government's commitment to existing occupational schemes. Throughout the pensions inquiry we made it absolutely clear how strongly we value occupational schemes and how much we are indebted to them for the progress that has been made. It has never remotely been part of the Government's policy or approach to threaten their stability. Everything in the Social Security Act 1985—especially the improvements for early leavers—and the new requirements and options for occupational schemes in the Bill should considerably strengthen occupational schemes.
I do not want to close the door to any change, and I shall think about what has been said. However, as it stands, the amendment is unacceptable. It would be far too rigid in its application. It would deny the incentive payment to someone who was in a contracted-out scheme for just a week — to someone who literally had joined a contracted-out scheme, had been a member of it for just a week and had then decided he had made the wrong decision and that he wanted to opt for a personal pension. I do not believe that the hon. Gentleman would want that kind of inflexibility to be incorporated in the Bill. I shall certainly think about what the hon. Member for Roxburgh and Berwickshire has said. He has made clear his support for the concept of personal pensions. I welcome that, and I believe that it will be a fresh and attractive option to the British public.