§ EARNINGS FACTORS
§ 'The Social Security Act 1975 and the Social Security (Miscellaneous Provisions) Act 1977 shall be amended in accordance with Schedule (Earnings factors) to this Act in relation to earnings factors.'. —[Mr. Major.]
§ Brought up, and read the First time.4.15 pm
§ Mr. Speaker
With this it will be convenient to take Government amendments Nos. 144 to 148 and Government amendment 143.
§ Mr. Major
New clause 29 is a fiendishly complex provision for which the hon. Member for Derby, South (Mrs. Beckett) can take part of the blame or credit, according to her own inclination. The hon. Lady teased my hon. Friend the Minister for Social Security in Committee with the complexity of the provisions that had to be introduced last year following the 1985 Budget changes in national insurance contributions. I could understand why she did so and, I recall, she did so rather effectively. She will be glad to know that we are now introducing new clause 29 and its accompanying schedule, 35 which will greatly simplify the position. Let no one, least of all the hon. Lady, doubt that we are a listening Government in this respect.
At present, both flat rate and earnings-related benefit depend on an individual's earnings in any one year on which national insurance contributions are payable. However, the legislation is cast in terms of contributions and that is what employers and the Department of Health and Social Security computers record. To make the link between contributions and earnings, the Social Security Act 1975 and the Social Security Pensions Act 1975 use a device called earnings factors as a multiplier to derive from contributions paid a figure approximating to the earnings on which they were payable. The earnings factors then become the buildings blocks of benefit entitlement. The House may well think that this is a tortuous way round, and I agree. However, that is what the legislation at present does.
The introduction in the 1985 Budget of lower rate contribution bands without any alteration in benefit entitlement did, as the hon. Member for Derby, South (Mrs. Beckett) intimated in Committee, throw considerable complexity in what was already complicated machinery. Because differential rates of contribution are paid for those with different levels of earnings the value of contributions now gives no exact indication of the earnings to which they relate and hence, the amount of benefit entitlement. Without modification that would have meant that people with lower earnings, whom the national insurance contribution concessions were intended to help, would lose benefit entitlement.
To overcome that problem we introduced, as a temporary expedient in 1985, regulations to allow the earnings factors to be boosted. They were rather complex regulations, but they were introduced so that no one would lose out on benefit. That was intended only as a temporary expedient until the primary legislation could be amended. New clause 29 and its schedule now seek to derive earnings factors directly from the earnings on which class 1 contributions are payable and thus avoid the need for the boosting regulations we currently have. Therefore, to that extent only is it a deregulatory measure. I think that it will be generally welcomed in the House, without exception.
Unfortunately, the House does not have visual aids. Were it to have them I would be able to show an immensely large and complex set of regulations which we hope, in due course, will no longer be needed. Social security legislation tends to complexity, if not opacity, too. Regulations expressed entirely in algebraic formulae do nothing to make the law understandable to those affected by it or those administering it, with the possible exception of my hon. Friend the Member for Bristol, North-West (Mr. Stern) who showed a remarkable facility for such regulations in Committee. This amendment will remove the need for the artificial boosting arrangements and will enable earnings factors to be calculated more simply. Contributors will still have the advantage of lower rate contributions if they have low earnings, and their earnings-related benefit will link directly to their earnings, as was the case before last year's budget changes.
Therefore, this new clause enshrines the beneficial effect of the reduced rates of national insurance contributions. I hope that the House will agree that this is a sensible amendment which ties up the loose ends left 36 over from the 1985 contribution changes. It is a change which we would have included in last year's Social Security Act, if there had been sufficient time to sort out the details of this rather lengthy amendment, which would simplify life for employers and for the DHSS. Moreover, it will reintroduce precision into the calculation of earnings factors. The present boosting regulations are, for all their complexity, clumsy and are no more than a stop-gap. They were never believed to be more than that. Beneficiaries will continue to receive the benefit to which their contributions properly entitle them. Therefore, I commend the new clause to the House together with amendments Nos. 143 to 148 inclusive, which are technical, and consequential.
§ Mrs. Beckett
The Minister suggested that the existence of this new clause shows that this is a listening Government. It appears to me that its necessity shows the danger of listening to the Treasury, since it was clearly the Department's inability to convince the Treasury of the problems which might arise from the way in which the national insurance contributions were hastily shoved into last year's Bill which has led to the problem. However, we are glad to see it resolved to a degree at least, especially if it makes regulations less complex.
§ Mr. Stern
Echoing the comments of the hon. Member for Derby, South (Mrs. Beckett), one is delighted to hear that this is a listening Government. However, from my hon. Friend the Minister's introduction to the clause I would suggest that the Government do not always listen to their own Department.
The Inland Revenue is currently carrying out a review of the complex area of the extent to which benefits should be included in earnings for national insurance purposes. The results of the review are not expected for some months, if not longer. I entirely welcome the intention of my hon. Friend the Minister in the new clause, not only to simplify the present complex regulations, but to bring the simplification in from April 1987, but I wonder whether he is underestimating the complexity that already exists, and the extent to which any regulations introduced at this stage in connection with earnings will be outdated in the near future by Inland Revenue practice. I commend my hon. Friend's effort, but I wonder whether it is not a little premature.
§ Mr. Roger Freeman (Kettering)
I concur with my hon. Friend the Member for Bristol, North-West (Mr. Stern) in his comment about the complexity of the regulations. I did not have the honour to serve on the Standing Committee that examined the Bill, much to my regret, but surely my hon. Friend's general point is right, that for the ordinary member of a pension fund—either a member of an occupational pension fund, or an employee who merely has the benefit of having made national insurance contributions enabling him to receive the basic state pension or the earnings-related state pension — the calculation of some of those figures is almost beyond comprehension.
I should like to make a suggestion to the Minister, because it is difficult to explain complicated issues such as those in new clause 29 in relation to the calculation of earnings factors. We expect literature from the Government about the specific provisions for portable pensions, which are greatly to be welcomed, and which the House has already dealt with in two earlier new clauses. 37 I urge the Government, particularly the Department of Health and Social Security, to be extremely clear and brief in the publications and advice offered not only to employers, who have the responsibility for making many of the calculations involved, including those entailed in new clause 29, but to employees, such as those in occupational pension schemes.
Those employees will shortly be faced with the important decision about whether to opt out of or join an occupational pension scheme, and will want to know exactly how they will be affected by the calculation of the guaranteed minimum pension, for example. The effective date for the 2 per cent. incentive payment that is to be made to those who establish their own personal pensions has already been reached—the scheme has run from 1 January this year. Therefore, important decisions will have to be taken, and it is important that all Government documents and advice given by the DHSS and Ministers to employers and employees is crystal clear.
§ Mr. Stern
I should like to reinforce my hon. Friend's point. From his accountancy background, which he shares with me, does he agree that the definition of "earnings" has exercised the courts for about 100 years, and that it is generally acknowledged that no satisfactory definition yet exists? In the light of that, does he agree that, given that we are now importing the same difficulty into social security regulations as already exists in taxation law, we are stepping into a minefield in which we need to go extremely carefully?
§ Mr. Freeman
My hon. Friend is absolutely right. With respect to my colleagues, I find that few understand the basis of calculation of the guaranteed minimum pension. Earlier this afternoon we debated the effect on the actuarial profession, which is being consulted not only about the actuarial tables involved in an earlier new clause, but about other provisions, for example, the precise requirements to be laid upon the trustees of occupational pension funds in calculating transfer values. Those actuarial calculations are extremely complex. I am sure that my hon. Friend will agree that we should pay tribute to the actuarial profession for its contribution so far to the deliberations not only on the Bill but on some of the proposed regulations to be issued under it.
I support my hon. Friend the Member for Bristol, North-West in his main point, about the documents to be issued by the Government later this year in relation to the calculation of earnings factor and also the advantages and disadvantages of personal pensions. I hope that the regulations and explanatory documents will be as clear as I know the Government can make them. This will be an important decision for many people. I hope that the Government will take that point on board.
§ Mr. Major
I entirely understand the blandishments of my hon. Friend the Member for Kettering (Mr. Freeman), and will consider them. I agree that seeking to provide simplicity in Government communications is necessary and throughly desirable, particularly in complex areas. We have engaged consultants to advise on a whole range of communications, including pensions. I should like to précis their brief in a single word—simplicity. I hope that that thought will commend itself to my hon. Friends the Members for Kettering and for Bristol, North-West 38 (Mr. Stern). We entirely understand what underpins their remarks, and we shall attempt to meet them as far as we can.
Employers will not be involved in calculations under new clause 29. They will merely have to record the amount of earnings on which contributions have been paid. It will not affect personal pensions. The definition of "earnings", to which my hon. Friend the Member for Kettering referred, will be the definition that is already used for contributions.
My hon. Friend the Member for Bristol, North-West, referred to the Inland Revenue review. He may have misread the intent of the regulations, as I am advised that they will not be affected by the review that is now being carried out by the Inland Revenue. Here, we enter an extremely arcane area. It might be most appropriate if I were to write and set out to my hon. Friend precisely why we believe that the Inland Revenue review will not be germane to the regulations.
§ Mr. Stern
I am grateful to my hon. Friend for his comments and his offer, but his comments are a little surprising. I shall await his letter with greater interest given that I think that the Inland Revenue review strikes at the heart of what my hon. Friend is trying to do. The review is trying to determine which earnings, in the form of non-cash earnings, should or should not rank for national insurance contributions. Given that we are discussing earnings factors that will be based on the earnings that rank for contributions, I am surprised to learn from my hon. Friend that the review is not germane, but I shall await his letter with great interest.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.