Pensions (Hansard, 9 March 1992)

§ The Parliamentary Under-Secretary of State for Social Security (Miss Ann Widdecombe)
I beg to move, That the draft Social Security (Class I Contributions—Contracted-out Percentage) Order 1992, which was laid before this House on 27th February, he approved.

§ Madam Deputy Speaker (Miss Betty Boothroyd)
I understand that it will also be convenient to consider motion No. 6 on the Order Paper: That the draft State Scheme Premiums (Actuarial Tables) Regulations 1992, which were laid before the House on 27th February, be approved.

§ Miss Widdecombe
My right hon. Friend the Secretary of State has a statutory duty to review the contracted-out terms at least every five years. The Government Actuary's report and my right hon. Friend's response were laid with the statutory instruments and they reveal how technically complex the subject is. I propose to do my best to avoid burdening the House with too many technicalities, but rather to concentrate as far as possible on the broad principles. Widespread consultations took place on the contracted-out terms in 1991 following the preparation of memoranda by the Government Actuary. His formal report to the Secretary of State took into account comments that were received.
Since 1978, schemes have been able to contract out of the state earnings-related pension scheme, known as SERPS, if they guarantee to provide a pension, which is broadly equivalent to the state additional pension, known as "the guaranteed minimum pension". In return a reduction, commonly called "the rebate", is made to the national insurance contributions for contracted-out employments.
In 1988, we introduced changes which increased flexibility and choice in contracting-out arrangements for millions of people. The way was opened for money purchase schemes and personal pensions to contract out of SERPS. In addition, the changes gave greater scope for individuals to enhance their retirement provision with additional voluntary contributions.
Some 22,000 contracted-out money purchase schemes have since been established by employers and more than 6,000 salary-related pension schemes are attracting the current 2 per cent. incentive which is payable to new contracted-out schemes. In addition, 4.7 million people have taken out an appropriate personal pension. Increased choice has meant that more than 90 per cent. of the nearly 16 million members of occupational and personal pension' schemes have been contracted out.
The Government Actuary reports that the cost of providing guaranteed minimum pensions has been decreasing as the average rate of accrual of guaranteed minimum pensions declines. That is because those who were in the scheme from 1978 enjoyed a faster rate of accrual than those who joined later. For the five years from April 1988 to April 1993, the rebate is set at 5.8 per cent. In the consultation paper issued last autumn, the Government Actuary indicated his initial view that the appropriate rate for 1993 to 1998 would be 4.68 per cent. Following consultation, he has concluded that the range of uncertainties caused by the European Court of Justice judgment in the Barber case concerning equal treatment in occupational pension schemes makes it more sensible for 699 the rebate level to be based on the costs for the first three years of the period only. He assesses that figure as 4.77 per cent. including the contingency margin in his final recommendation. My right hon. Friend has accepted both his view and his recommended figure, subject only to rounding the figure to 4.8 per cent.
As my right hon. Friend made clear in his statement to the House on the pensions rebate review on 27 February, we wish to see salary-related contracted-out schemes continuing to flourish alongside personal pension and money purchase schemes. The amount of the rebate will assist in this aim. The 4.8 per cent. rebate will be shared so that employees receive 1.8 per cent. and employers 3 per cent. That reflects the current apportionment between employees and employers.
In some circumstances, contracted-out schemes may transfer their liabilities for guaranteed minimum pensions to the state scheme. This "buying back" is achieved by paying premiums. A state scheme premium is payable when responsibility for an individual's accrued guaranteed minimum pension right is transferred from a contracted-out pension scheme to SERPS.
Actuarial tables represent the average cost of providing guaranteed minimum pensions. The cost is adjusted to allow for investment yields at the time of the buy back by a device called the market level indicator. That is to prevent schemes being in difficulty in paying the premiums if there is a fall in the market level of their investments. The recommendations made by the Government Actuary will, in most cases, reduce the level of the state scheme premium payable. My right hon. Friend the Secretary of State has accepted the Government Actuary's recommendations for this relatively small, sensible, adjustment.
Although it is not part of the regulations, my right hon. Friend has announced a new age-related addition from April 1993 for personal pension holders aged 30 and over which is entirely relevant to the wider context of tonight's debate. Personal pensions have proved an outstanding success and are now well established. More than 4.7 million people have chosen to save for their retirement by contracting out of SERPS in that way, taking advantage of the choice, flexibility and portability that such pensions can provide. Many of them would not have had access to an occupational pension scheme and they include many who would not previously have planned ahead for retirement in that way. We regard that as a significant contribution to creating a strong pensions structure for the twenty-first century.
The flat-rate nature of the rebate has meant that the advantages of personal pensions have been greater for younger than for older people. The latest information available shows that more than 50 per cent. of all personal pension holders are aged under 30 and more than 80 per cent. under 40.