§ [Relevant document: The memorandum relating to these Orders contained in the Fourteenth Report from the Joint Committee on Statutory Instruments (House of Commons Paper No. 34-xiv of Session 1995–96).]6.54 pm
§ The Parliamentary Under-Secretary of State for Social Security (Mr. Oliver Heald)
I beg to move,
That the draft Social Security (Minimum Contributions to Appropriate Personal Pension Schemes) Order 1996, which was laid before this House on 13th March, be approved.
§ Madam Speaker
I understand that with this, it will be convenient to discuss the following motions:That the draft Social Security (Reduced Rates of Class 1 Contributions) (Salary Related Contracted-out Schemes) Order 1996, which was laid before this House on 13th March, be approved.That the draft Social Security (Reduced Rates of Class 1 Contributions and Rebates) (Money Purchase Contracted-out Schemes) Order 1996, which was laid before this House on 13th March, be approved.
§ Mr. Heald
The independent Government Actuary issued a consultation document in August and has taken account of responses in preparing his report to the Secretary of State. My right hon. Friend the Secretary of State has taken account of his advice in preparing his own proposals, which are before us today. They were laid before the House together with the three orders and the Government Actuary's report on 13 March.
On the current system and future proposals, we recognise that people need to be able to invest with confidence in their pensions. The Pensions Act 1995, which received Royal Assent last year, is intended to ensure that their investment will be safe. At the same time, we took the opportunity to make the system of contracting out more attractive. We responded to charges of complexity by breaking the current links between state and private second-tier provision, and we widened the appeal of contracting out by introducing a system of age-related rebates for contracted-out money purchase schemes and appropriate personal pensions rather than the current flat-rate rebate for those contracting out on a money purchase basis.
On the contracted-out salary related schemes rebate, the flat-rate rebate currently paid in salary-related schemes is 4.8 per cent. Of that figure, 1.8 per cent. goes to employees and 3 per cent. to the employer. The changes we propose to the contracting-out system mean that the basis of the rebate calculation has to be changed.
Had we continued the old system, the rebate would have been 4.4 per cent., which would reflect the decline in the accrual rates of guaranteed-minimum pensions. In future, it will be based on the cost of providing benefits of an actuarial value equivalent to the state earnings-related pension scheme given up rather than, as at present, the cost of providing the GMPs. In other words, the rebate is now higher than it would have been under the previous system, to reflect the greater liabilities now undertaken by salary-related schemes that contract out—for example, inflation proofing.
The independent Government Actuary took account of those changes, developments in SERPS provision and up-to-date actuarial assumptions. He reached the 442 conclusion that the rebate should be set at 4.6 per cent. from April 1997. My right hon. Friend the Secretary of State considered his advice and decided to set the rebate at that level. We propose that 1.6 per cent. should go to the employee and that, as now, 3 per cent. will go to the employer.
We remain committed to the widest possible choice of pension provision. Currently, some 10 million people are members of salary-related schemes, which form a key element of pension provision in the UK. We believe that our proposals will ensure a sound basis for their continuing operation and development.
I shall deal now with age-related rebates for those who contract out into appropriate personal pensions and contracted-out money purchase schemes. People who contract out of SERPS in those two ways receive the same flat-rate rebate as those in salary-related schemes, except that people over the age of 30 with a personal pension receive an additional 1 per cent. That extra amount recognises the need for the rebate to be higher for older people with personal pensions. The nearer a person gets to retirement, the higher the initial investment has to be to match the state pension forgone.
Age-related rebates are the logical next step, and one which we pledged to introduce some time ago. Two of the orders laid today set out the respective age-related rebates for both COMPS and for personal pensions for each of the next five years, starting in April 1997. For COMPS, in the first year the rebates will range from 3.1 per cent. of relevant earnings for the youngest members to a maximum of 9 per cent. These rebates will be available partly as a flat rate 3.1 per cent. deduction from national insurance contributions. This deduction will be split, with 1.6 per cent. for employees and 1.5 per cent. going to the employer. Any additional age-related payment up to a total ceiling of 9 per cent. will be paid directly to their scheme by the Department of Social Security at the end of the tax year.
The age-related rebates for personal pensions will also be paid directly to the member's scheme at the end of each tax year. The rates will vary in the first instance from 3.4 per cent. for the youngest members to a maximum of 9 per cent.
We have capped the age-related rebates at 9 per cent. rather than allow rebates at much higher levels for older scheme members during the early years of the scheme, but we have ensured that the great majority of those with appropriate personal pensions should be best advised to remain with them, now and in the future. By imposing a 9 per cent. cap, we have been mindful of restraining the cost to the taxpayer of all this, too.
In deciding on the level of expenses and charges of pension providers to be used in calculating these age-related rebates, we have also sought value for money. Necessary and reasonable charges and expenses of providers and the correct amount to be invested on behalf of the member are both crucial in calculating the levels of appropriate rebates for money purchase pensions. In deciding that, we have taken the Government Actuary's advice on what were the charges of the more efficient providers. That again reflects our aim to be fair to pension holders, pension providers and the taxpayer.
We are confident that the measures will maintain the attractiveness of contracting out and promote more choice in the private pension provision available. The cost to the 443 taxpayer in the first year of the new rebate will be £7.7 billion of revenue forgone. By 2020, we expect annual savings to the national insurance fund from those contracted out of SERPS to outweigh the annual revenue then forgone on the rebate, and by 2030 we anticipate savings nearly double the costs. By 2050, savings should be some three times greater than costs. That represents a major burden lifted from future generations.
The Government have taken steps towards defusing the demographic time-bomb in the UK. A recent study by the Organisation for Economic Co-operation and Development shows that Canada is the only other country to have taken the necessary steps to do so. In fact, the OECD suggests that the UK may be able to repay its national debt and start to accumulate assets by 2030, leaving us better placed than almost any other country to meet the challenges of global competition in the 21st century.
§ Mr. Frank Field (Birkenhead)
For the first time, the Minister has given us the cost of age-related rebates. The Government Actuary's report was detailed, but the one piece of information for which taxpayers might have been looking was missing, but he has given it to us this afternoon. So that I and other hon. Members understand correctly, is the Minister saying that the costs of age-related rebates will rise from £7.7 billion in the first year that we are considering to £8.1 billion at the end of the five-year period? Are we therefore talking about the equivalent of a 5p increase in the standard rate of income tax? Will the Minister tell us again what he thought the savings would be from people who remain contracted out of SERPS and who are therefore not liable to gain SERF'S pensions as a result of these orders?
§ Mr. Heald
If the hon. Gentleman will allow me, I shall deal with that point in my winding-up speech. That would be more convenient, and I shall have the exact figures checked to see whether we are talking about 5p on income tax.
We are giving maximum scope for individuals to provide for their future, based firmly on a partnership between the state and the private sector but maximising the choices available. The orders underpin the almost uniquely strong position of the UK in meeting the challenges of the coming century. I commend them to the House.
§ 7.3 pm
§ Mr. John Denham (Southampton, Itchen)
I make it clear at the outset that the Opposition will not oppose the orders. We have many criticisms of the pensions strategy that has led to them and, so far as it relevant to do so, I shall outline a number of them. We have many concerns about the implications of these orders for future pensions policy. Again, I shall explain what they are and ask the Minister some questions about the Government's intentions and expectations.
The principle of age-related rebates is a logical development from the current situation, although the practice may leave much to be desired. The background to the orders is, of course, the introduction in 1987 and 1988 of two new measures—the establishment of contracted-out money purchase schemes, which may be described as 444 COMPS, and the introduction of the right to opt out of SERPS into personal pensions or, as they are somewhat optimistically called, appropriate personal pensions. If I refer generally to personal pensions in this debate, I shall be referring to appropriate personal pensions.
What is in dispute in the debate is not the importance and value of funded pensions but the way in which the Government have gone about promoting wider membership of funded schemes. The promotion of personal pensions has formed a key part of the Government's pensions strategy. The Government miss no opportunity to promote the sales of personal pensions as a triumph, but the detail of the orders reveals that they are considerably less than that.
The promotion of personal pensions was part of a conscious and determined attempt to reduce the future pensions of millions of working people. If we forget about funding methods for a moment, what the Government have done to pensions—pay-as-you-go pensions, personal pensions and, indeed, the underpinning of occupational pensions—leads to a reduction in future pensions.
When SERPS was dramatically reduced in value in the 1980s, the pension was cut from 25 per cent. to 20 per cent. of earnings. It became based on career earnings instead of the best 20 years. Widows' inheritance of their husbands' earnings-related pension was halved, and earnings-related invalidity benefits for those retiring on health grounds were abolished.
What was perhaps less clear at the time was that the new, reduced SERPS was to become the benchmark for the new appropriate personal pensions and for contracted-out money purchase schemes. In other words, whether one plumped for a funded or pay-as-you-go pension, the pension that one could expect for a given level of contribution was slashed.
In the beginning, the incentives to opt out, introduced at a cost to the public of £4 billion, may have disguised the link between low SERPS expectations and low expectations of personal pensions and COMPS. The high incentives may have gone some way in the short term to reducing the harm done to people on low incomes who, ill advisedly, opted out of SERPS. However, as the incentives have been cut and, above all, with the introduction of earnings-related rebates, it is crystal clear from the orders that a personal pension receiving only the national insurance rebate is not intended to perform better than the crippled level of benefits provided by SERPS.
The retirement income inquiry pointed out in its valuable appendix that a man on £10,000 a year would receive a SERPS pension worth only 10 per cent. of average male earnings. The Government intend that the same should apply to rebate-only APPs.
There can be a great deal of wild talk about how funded personal pensions could do better because of better investment returns. Indeed, Lord Mackay of Ardbrecknish said in another place yesterday:Quite often the effect of charges on a pension fund is more than outweighed by the investment performance."—[Official Report, House of Lords, 2 April 1996; Vol. 571, c. 209.]With all due respect to Lord Mackay, in the context of this debate, that statement is nonsense. It is counter to everything that the Government are trying to do in the orders.
We can assume that the Government Actuary is an independent, professional and honourable man. He is under a clear legislative requirement to recommend 445 rebates that would provide an actuarial value equivalent to that of the SERPS benefits forgone. His job, and what he has done in advising the Government, is to take into account the best possible estimates of the long-run rate of return on investments. I assume that the Government accept his advice on this point.
I hope that the Minister will confirm not only that there is no question of personal pensions in general beating the markets but that, if it happened over a period, the Government Actuary's future advice would have to be to reduce the level of rebates under the terms of the current legislation.
The first point to establish is that these rebates are not intended to produce better benefits overall than SERPS at its current reduced rate. Schemes can only hope on average to do so if individuals and/or employers make additional contributions.
The second issue that needs to be considered is everything that has gone wrong since appropriate personal pensions were launched. The Government worked hard to create the impression that anyone would be foolish not to have a personal pension. What was the result? The policies of more than a million people are now being reviewed because they were encouraged to opt out, rather than joining or transferring from employers' pension schemes.
The cost of the review itself has been estimated at a one-off £100 million, plus on-going costs of £50 million. The cost of compensation has been estimated at between £2 billion and £4 billion. The review is way behind time; many people have not yet responded to their pension holders. Above all, an enormous amount of money that could have been invested in providing pensions for the future is being consumed by this Government and by regulatory disaster.
A total of 3.6 million people with incomes below £10,000 a year have opted out of SERPS. The average income of a woman with an appropriate personal pension is just £6,300 a year. Nearly half those who bought personal pensions in 1987–88 have failed to make regular contributions or pay in regular rebates each year since then. Low incomes, a lack of persistence and a failure to return to SERPS at an appropriate age all constitute warnings that, in the long run, people may not be best served by personal pensions.
In recent weeks, what strikes me as a rather clever media campaign has taken place to prepare the way for a conclusion to the current Securities and Investments Board study. The message of that campaign is that there is not much wrong with the sale of pensions to people on low incomes, and that there is no need for special efforts to remedy the problem. Let me make it clear that I do not want anyone's pension to suffer: I feel no pleasure when that happens. Nevertheless, if it turns out that a combination of the initial high incentives and the above-average rate of return on equities in recent years has limited the actual damage to date, that does not mean that it will necessarily be prudent for low earners with broken work patterns to remain in appropriate personal pensions. To suggest that would be to promote a con and a deception.
I look to the Minister to give an absolute assurance that there is no question of the Government's brushing the issue under the carpet and claiming that there is nothing to worry about. I also ask him to make every effort to ensure that people are given the best possible 446 advice—to which they are entitled under the Financial Services Act 1986—and that the regulators' guidance is followed to the letter.
The main public concerns to date about the promotion of personal pensions have involved poor advice and mis-selling, but the orders, and the Government Actuary's advice, should bring home to everyone why the Government's personal pension strategy is unravelling before our eyes.
The Government have set out their conclusions about the typical costs of personal pensions; they make sober reading. Let us examine the impact of charges from a typical provider, as identified by the Government Actuary. There are initial expenses of 8 per cent. on the initial rebate, renewal expenses of £30 per annum, a 0.9 per cent. reduction in the annual return and an annuity loading of 2 per cent. on the annuity purchase price.
Let us consider the example of a person on £10,000 a year who makes a single year's contribution to a personal pension. That may sound extreme, but the Government's own personal pension statistics show that 73,000 of the people who bought personal pensions in 1987–88 had paid in only one year's rebate by the latest available date. Let us assume that that person makes a contribution 20 or 30 years before retirement. By the time that he or she retires, every penny that has been paid will have disappeared in fees and charges, and there will be nothing in the pension to show for the year at work. I do not think that people can afford that.
At the other extreme, let us assume that that same person on £10,000 a year buys a personal pension 30 years before retirement and keeps it, never missing a rebate payment until state pension age. This, too, is likely to be an extreme case: only half the people who bought personal pensions in the first year had managed to pay in rebates in each of the six years to 1992–93. More than a quarter of the savings in that case will disappear in fees and charges by the time that the person retires.
That is the position for someone on £10,000 a year; what about someone on £7,000—more than the average income of women with personal pensions? Such a person, paying a single premium, will lose every penny. The person who keeps the policy for 30 years will lose about a third of his or her savings: about £1 in £3 of the money that has been paid in will not be available to provide a pension when that person retires.
What about those on £4,000 a year? Even if they keep their policies for 30 years, they will lose well over half their savings, and that money will not be available to pay for a pension. That too may seem an extreme case, especially as some reputable companies would not sell a rebate-only personal pension to someone on twice that income; but, in 1993–94, more than 250,000 men and 270,000 women had earnings below £4,000. If their incomes do not rise, more than half a million people are set to lose more than 50 per cent. of their pension savings. In fact, the situation—even for those who attempt to keep their policies until retirement—will often be much worse. As I have said, half those who bought personal pensions at the outset have failed to make regular rebate payments. For many of those people, annual charges will continue to eat deeply into their savings.
At best, the orders reveal that a quarter of savings will be lost in the case of a typical pension provider; at worst, more will be lost—up to and including every penny. I believe that 447 we should be grateful for the Government Actuary's study. A decent Government would have published such figures themselves, as would an effective regulator. That has not happened, and we all know why. The Government have been pouring savers' money down the drain as if there were no tomorrow, and they do not want anyone to find out.
However, the Actuary and the Government have based the orders on the impact of charges from what is described as a more efficient provider. Even here, a single premium would lose 27 per cent. of its value over 30 years, while a policy receiving rebates continuously for 30 years would lose £1 in £5 of the money saved. Given the cost of typical providers, even the more efficient ones, neither individuals nor society can afford to waste savings at such a rate. Every pound that is eaten up could provide a pension in the future. What an irony: the Government said that they wanted to save taxpayers' money in the future, and they have ended up wasting savers' money today.
It should be noted that not everyone is convinced that the Government Actuary's estimates of the cost are correct. As his report makes clear, Ministers have announced that they do not intend age-related rebates to incorporate an allowance for flat-rate charges. His figures reflect Government policy; they do not necessarily reflect what is happening in the real world.
Responding to the Actuary's consultative paper on 25 November 1995, the joint working group comprising the Association of British Insurers, the National Association of Pension Funds, the Association of Consultant Actuaries, the Society of Pension Consultants and the Association of Pension Lawyers—a group whose views should not be taken lightly—expressed surprise at the outcome of the review of charges levied by personal pension providers.
Referring specifically to the section of the Actuary's report that dealt with the most efficient providers, the group expressed the view that providers with low initial charges would have higher annual charges, and that there would be fixed policy fees. Insufficient weight had been given to marketing costs. The consensus was that the charge on competitively priced APP contracts was likely to be around 8 per cent. of each rebate, plus 1 per cent. per annum of the accumulated fund, plus a policy fee—generally linked with the retail prices index or national average earnings, at between £1 and £3 a month—and twice the cost of purchasing the annuity shown in the orders.
The group pointed out that younger people, people with rebate-only contracts, people on lower incomes and people who are contracted out for short periods, or who switch to new policies from time to time—for example, job movers who rely on group personal pensions—could lose badly unless adequate provision is made. A powerful voice from the industry has said very clearly that the costs for even the most efficient providers have been set at too low a level, and that many people's pensions will be damaged.
The Government have made a policy decision. They have decided to base age-related rebates on what they call the reasonable costs and charges of the more efficient personal pension providers. By definition, however, most personal pension providers are not more efficient—their costs are higher.
448 The contrast between the typical and the more efficient provider has placed Ministers on the horns of a dilemma. What were the Government to do? Should they listen to the industry, which pleaded with them to recognise its real costs, no doubt amid dark hints about telling everyone that they should opt back into the state earnings-related pension scheme? That would have been viewed, however, as padding out the costs of less efficient companies selling high-cost pensions.
On the other hand, the Government could do what they have done: base the rebates on more efficient providers, but what is to happen to all the people who do not have a pension from a more efficient provider? They will suffer. Their rebates will be too low to cover the real costs of their pensions. Their pensions will suffer as a result of the Government's decision.
Of course, to pad out the costs of less efficient providers with taxpayers' money would have caused outrage. To allow the pensions of millions of people to be cut by high charges is a disgrace. It must have been a difficult choice to make. Faced with the choice between outrage and disgrace, the Government chose disgrace. No doubt their decision was coloured by the consideration that higher rebates would mean higher tax or national insurance and less scope for pre-election tax cuts. We can imagine the Chancellor of the Exchequer and the Secretary of State for Social Security saying, "Most people don't understand all this, anyway. They'll never realise what we are doing to them."
I would have some sympathy with the Ministers who had to take the decision if it were not for two things. First, I sympathise more with people whose savings are being wasted; and, secondly, the whole mess is of the Government's making. They have been driven by a desperate desire to cut spending on SERPS, and have not put a cost-effective and efficient alternative in place.
My criticisms are directed at the Government, not at pension providers. There have been individual problems with some people and some companies, but the Government cannot escape the fact that the current shape of the industry, with all its attendant costs, is the Government's creation. It has grown in response to the Government's contracting-out legislation and regulatory framework. The fact that so much of savers' money is being eaten up and will not be available to generate pensions is the Government's fault and no one else's.
I should like to turn to some of the other important issues that are raised by the rebates. What does the Minister anticipate will happen to the balance between APPs and SERPS? Does he expect more people to opt out or to opt back in? Does he expect older employees to keep their policies to retirement, or people to opt back into SERPS once the 9 per cent. cap on the rebate is reached? In his opening statement, he gave the impression that he thought that people would keep their policies to retirement, but in The Sunday Telegraph of 31 March, Mr. Ron Spill, pensions consultant with Legal and General, suggested that there were still pivotal ages for contracting back into SERPS: about 55 for men and 45 for women. What does the Minister expect to happen, and what assumptions has he made about that?
Will the Minister place on record his view of how the rebate levels that have been set for salary-related schemes, money purchase schemes and appropriate personal pensions will affect the balance between these different 449 types of pension provision? There are substantial costs involved in the rebates. As far as I can make out from the orders, overall administration costs in approved private pensions are some five times as high as in occupational pension schemes.
If rebates were being paid to personal pensions at the same rate as they are being paid, in effect, to members of final salary schemes or salary-related schemes, the reduction in payment would be about £300 million: the loading for the higher costs of personal pensions involves some £300 million per annum of public money, so the issue of the balance between different schemes is of great importance.
In the past decade, there has been a consistent trend away from defined benefit schemes towards defined contribution schemes. It is difficult to quantify, but no one seems to deny that it is taking place. Next year's introduction of combined schemes, offering one set of benefits to one group of employees and another set of benefits to another, seems likely to hasten the process. The problem, in principle, is not so much the different way of generating benefits, as the fact that the shift is commonly associated with a reduction in employers' contributions to employees' pensions.
The Secretary of State has announced his intention to promote the sale of group personal pensions. He is presenting it as a way of bringing pensions to people whose employers do not currently provide them. In practice, it is more likely that they will appeal to employers who are searching for ways of reducing their contribution to an existing pension scheme and its members.
During the passage of the Pensions Act 1995, the National Association of Pension Funds, among others, expressed concern at the failure to establish a level playing field between different types of pension provision. A tilt in the value of the contracted-out rebates could influence the decision about which type of scheme an employer establishes on grounds that are not directly related to the best interests of employees.
The Government seem to have been in several minds about the treatment of money purchase schemes. Originally, they were not sure whether they should have age-related rebates at all; then they suggested that they should, but at a lower level than personal pensions, creating a differential in favour of personal pension providers. Now they have set them at the same level, in effect, as personal pensions, but at the expense, it appears, of creating an even bigger divide between salary-related and money purchase schemes.
What does the Minister expect to result from the structure of the rebates? Does he expect the rebates to hasten the shift from salary-related schemes to money purchase schemes? If so, is that the Government's policy objective? Does he have any concerns about employers who use that move as an opportunity to cut contributions to their employees' pensions? What does he expect to happen to the balance between contracted-out money purchase schemes and personal pensions? How does he respond to the view that I have received from an industry source who notes that many life offices withdrew from the money purchase market and few new money purchase schemes have been set up since 1993 because of the complexities involved?
The latest contracting-out changes continue a system that requires different administration for a money purchase scheme and for a contracted-out personal pension. The 450 arrangements for a money purchase scheme will be even more complex. As before, the employer will have to operate a contracted-out payroll for national insurance purposes with a special rebate of 3.1 per cent. Minimum contributions equivalent to the flat-rate rebate will have to be paid by the employer to the scheme trustee monthly, and, at the end of the tax year, the Department of Social Security will pay a supplementary age-related rebate to the trustees to top up the flat-rate minimum contributions.
The view is expressed that the balance in these rebates now means that there are few advantages in establishing and running a money purchase scheme, and that it is likely that employers will set up only group personal pension schemes, and that remaining money purchase schemes may be wound up in favour of group personal pensions. Does the Minister share that view? Is that the Government's objective? What does he expect the outcome to be in the balance between money purchase schemes and personal pensions?
The Government should have learnt by now that there is a close relationship between what they do and what happens in the pension industry. It would be disastrous if the rebates caused a further movement in the slide towards lower-quality pension provision and reduced pension rights, which has been the hallmark of the Government.
§ Mr. Frank Field (Birkenhead)
The Minister was kind enough to give way earlier so that I could ask a question. The reason I wished to do so was so that I and perhaps other hon. Members could be clear on the costs of the orders that we are discussing. The Minister kindly replied that it would be convenient if he answered the question in his winding-up speech. Clearly, it would be convenient to him, but it is not to the rest of us. I shall return if I can—
§ Mr. Heald
I am grateful to the hon. Gentleman. I have answered his parliamentary question on that point. The various costs are set out from the year 1997–98—when the cost is £7.7 billion—to 2001–02, when it is £8.1 billion. He should bear it in mind that, if the present system were to continue unchanged, the cost in 1997–98 would be £8 billion, not £7.7 billion, so there is no question of these being extra costs.
§ Mr. Field
If I understand the Minister aright, he is now saying that he is cutting the cost to the national insurance scheme of introducing age-related rebates. If that is the result of what he has just told us, I should have thought that the industry might have had a few things to say before we reached this debate.
§ Mr. Heald
The various different categories are set out in the answer, so that the hon. Gentleman can see the way in which the figure of £7.7 billion is calculated. The point that I am making is that, if the system remained as it is at present, the overall cost would be £8 billion, not £7.7 billion.
§ Mr. Field
I am sorry to appear so thick, but I still do not understand the answer. Are we saying that, if there 451 were no orders tonight, the cost of the scheme with the existing rebates would be £8 billion, and that with these changes that cost is reduced to £7.7 billion—in other words, some people who are currently getting rebates will get less rebate as a result of the measure because we are substantially rescheduling those rebates towards age-related rebates? I know that I am supposed to be making the speech, but I should be grateful if, at some stage, the Minister could intervene to clarify that point.
§ Mr. Heald
The point is that, at the moment, the scheme relies upon flat-rate rebates. The point about age-related rebates is that they become larger each year as the person grows older and the amount of money necessary to go into the scheme to replicate SERPS gets larger. Therefore, there is an effect of compensating some people more than previously and under-compensating others in comparison, so that one ends up with a taper rather than a flat-rate charge.
§ Mr. Field
If I interpret that intervention correctly, it means that the scheme now is weighting the subsidy towards older rather than younger workers—[Interruption.] If that is not the case, I fail to comprehend what the order is about. As I understood it, the Government needed to make substantial concessions to older workers who are contracted out of the scheme to ensure that they remained outside.
I tabled a question asking what would be the cost specifically of the new age-related rebates. The answer was given and the Minister included it in his speech. The Minister is now saying that the total cost to the national insurance scheme of the subsidy package is marginally less than what it would have been had the old orders remained in place.
§ Mr. Heald
If one looks at the overall figures, the overall reduction is £0.3 billion. The significant part of that concerns salary-related schemes rather than the age-related rebate part. As far as that is concerned, there is no significant reduction in the overall amount, but there is a change in the taper as a result of the introduction of age-related rebates rather than a flat-rate scheme.
§ Mr. Field
I am grateful for that. I shall not ask the Minister to intervene on that point again, but I shall return to it in a moment.
I have one other question for the Minister, which he might be able to answer when he replies to the debate. Perhaps, understandably, the Minister kept carefully to his brief when introducing the orders to the House. No doubt most of us in his position would have done the same. He continued at some pace when he was covering the question of charges for those who have undertaken private pension arrangements. What I could not quite grasp, because I was trying to hear him and understand the parliamentary answer that he read into his speech, was whether he thought that the charges would be reduced because of the power that the Government had over whether people would be able to claim their rebates, or whether the Government had the power to set the charges throughout the private sector for the servicing of personal pensions.
452 I shall try to keep my second point going for long enough to enable the Minister to answer that point before we end. Will the Minister use mere suasion to force down charges or, in the background, do the Government have the power if they wish not only to set charges on personal pensions in respect of the rebate, but more generally? That was the question which crossed my mind listening to him.
§ Mr. Heald
As the hon. Gentleman will know, the new rules that have been brought in on disclosure, coupled with competition and setting the rebates at a level that reflects the position of the best providers with the most efficient levels of charges, should mean that those who are purchasing personal pensions have the best possible deal. There is no doubt that those measures, working together, providing an element of transparency and competition, are creating the right circumstances for the best arrangements to be made.
There is a power, as the hon. Gentleman will know, which the Government are entitled to exercise by statute, to restrict the level of charges, but that is not something which has been done, and it is certainly competition and the element of transparency on which the Government rely.
§ Mr. Field
I am grateful for that, because it will be news to most hon. Members that the Government have always had the power to set the level of charges in the private sector in respect of servicing pensions, despite all the evidence that we have had about the size of those charges. The Government are now saying that, because of disclosure and growing competition, charges will be pushed down. If, in fact, after a period the Minister's faith in competition pushing down charges is not fulfilled, will the Government move against the industry and against some of the levels of charges that my hon. Friend the Member for Southampton, Itchen (Mr. Denham) described in his opening comments?
Secondly, I wish to move back to the question of costs. I am pleased to see the Secretary of State for Social Security on the Treasury Bench. He is adept in the public debate at saying to anyone who comes up with proposals for reform that costs must clearly be attached to such reforms and that we should be certain about what those costs are, and even consider what the rate of tax would be to implement those reforms.
What I thought was interesting about the parliamentary answer that I was given earlier today was that we have the cost of maintaining the Minister's strategy. The cost of the rebates during the next five years is the equivalent of 5p on the standard rate of income tax. If the Minister wants to join in the debate that the Opposition are beginning, on opening up the options of how social security might develop in the next Parliament, I hope that he will bring to it a clear declaration that his policy is not without costs and that, for each of the next five years, his policy is costing every working taxpayer the equivalent of an additional 5p on his standard rate of income tax.
The "Lilley package", if one can call it that, does not come without a price tag. The price tag was disclosed in the parliamentary answer this afternoon and it is a significant one. It helps to open up the debate on the Opposition Benches. The status quo will have that cost, so should we think of changing the status quo, we know that we shall be starting with 5p on the standard rate of income tax as the cost of the Government's current strategy. That was the point that I wished to make in the debate.
453 I am also pleased about the clarification that we heard earlier. While the debate was raging in the country over the appalling level of charges that some companies were making for those who had bought the Government's package, had gone private and had contracted out of SERPS, when figures were being produced showing that some people would have charges that wiped out the whole of their savings, the Government kept quiet about the fact that they had the reserve powers to direct what those charges should be.
We now know that they have those powers and have never once in one of those years sought to use them. Again today, the junior Minister has said that he is depending on competition to force down charges and safeguard people's savings. If that policy is unsuccessful—as it has been in the past five years—will the Government act to regulate charges before we rise for the summer recess?
§ Mr. Heald
With the leave of the House, I shall reply to the debate. The hon. Member for Birkenhead (Mr. Field) raised a number of issues. I dealt with most of them in interventions that he kindly let me make.
On the question of interfering in the market and setting a level by restricting the charges that can be levied, the hon. Gentleman should concede that there are dangers in such interference. If the level is set too low, there may be no provision at all. If the level is set too high, there may be a risk of exploitation of the position. So the Government's view has been and remains that transparency and competition—the new disclosure arrangements and companies competing in the market for pension business—is the best way forward. We have no intention at this stage of considering any changes in that approach.
§ Mr. Frank Field
While we all accept that charges can be so low that the industry will not be able to provide a service, the Minister also accepts that charges can be too high. There is a weight of evidence that, in some schemes, people have the whole of their savings wiped out by charges. As the aim of the Government's reform is to ensure that people have a substantial sum of pension capital, so that they will have an income and will not be dependent on welfare when they retire, surely, in instances in which the level of charges is such that it puts at risk whether a person receives an adequate pension or any pension, the Government ought not to sit back and wait for competition to push down charges. Surely they ought to flex their muscles and let the industry know that they will act if such levels of charges continue.
§ Mr. Heald
The danger in the hon. Gentleman's approach is that, if one looks at one year in isolation and says that, in that particular year, 77,000 out of 5.6 million personal pensioners paid one contribution in and they have not done so since, one gets a false picture of what pension provision a lifetime of work will achieve. That is the point that the hon. Member for Southampton, Itchen (Mr. Denham) made.
§ Mr. Denham
Is the Minister saying that it is of no consequence that 70,000 people who bought personal pensions in one year entirely wasted their pension savings and will have no contribution to their pension to show for that year? Surely to those 70,000 people that is of 454 enormous importance. A large number of people who have been in pension schemes for longer will have nothing to show for it. Surely the Minister cannot dismiss that so lightly.
§ Mr. Heald
It is a small proportion, and it is not indicative of what the result would be over a lifetime of work. The whole point of personal pensions is that they are flexible. People may pay in one year, not pay for several years thereafter, and then pay in solidly for many years. The Government have encouraged a form of pension that is flexible. The same is true of SERPS. If people pay in one year, it does not buy them much. If they have a long contribution record over years, the pension is judged on that basis, and the benefits they receive are higher.
§ Mr. Denham
Does the Minister accept that the point about SERPS is that people cannot lose a year's pension rights once they have earned them? It is wrong to say that personal pensions are the same as SERPS. In SERPS, if people work for a year and earn above the lower earnings limit, they establish a year's pension rights, which they cannot lose. Everyone accepts that the pattern that the Minister described of someone in and out of a personal pension produces a result that is bad value for money.
§ Mr. Heald
The hon. Gentleman surely concedes that one year's contributions to SERPS taken as indicative of final pension provision would not amount to more than a few pence. Any pension scheme depends on a contribution record. The Government have always recognised that, but one of the advantages of personal pensions is their flexibility. They are a vehicle that can be built on. Many people who have bought personal pensions welcome that.
It is wrong to say that there is firm evidence that rebate-only personal pensions are unsuitable for specific types of employee. Neither low earnings nor time out of the employment market necessarily means that the final personal pension will not be as high as that from SERPS. One of the reasons for that is the high levels of yield that have been achieved in the private sector in the years since 1980. The hon. Gentleman knows the figures as well as I do—10 per cent. in real terms. It is true that charges vary from scheme to scheme, but only a financial adviser, who is in a good position to judge, can determine what is the best product for an individual.
Some of the other points raised included the level of the rebates. Some detailed points were raised about that. The hon. Member for Itchen asked whether it was the Government's objective to see employers with occupational money purchase schemes switch to group personal pensions. The answer is no. The Government want to see the second tier of funded provision, which has been built up carefully over the years of this Government, protected and improved.
We should like to see more individuals taking the option of funded pension provision, if it is the right scheme for them. The hon. Member for Itchen should bear it in mind that employers are not obliged to have occupational schemes, and not all do. Group personal pensions are an additional option especially suitable to those who currently make no provision. We have no reason to think that occupational money purchase schemes will disappear.
455 As for the question whether contracted-out money purchase schemes are viable according to the pensions industry, I do not know whether the hon. Gentleman had an opportunity to read the comments by Alan Jenkinson, the highly respected policy director of Sedgewick Noble Lowndes. He said:Directly invested contracted-out money purchase schemes now start looking as attractive as personal pensions. What Mr. Lilley has done with contracted-out money purchase schemes is to bring them into line with personal pensions.I believe that the hon. Gentleman will agree that the views of someone such as Alan Jenkinson, who has spent a lifetime in the field and is well respected, are worth considering. They were some of the first comments made after the orders were laid.
The hon. Member for Itchen said that employers might use the trend towards contracted-out money purchase schemes and away from contracted-out salary-related schemes to reduce their contributions. We attach great importance to good-quality pension provision and we hope that employers will not reduce their level of contributions. We want them to make the best use of the flexibility available to them to maintain good levels of provision for their work force.
I hope that the hon. Member for Itchen and his hon. Friends concede that the contracted-out money purchase scheme and appropriate personal pension are viable options for various categories of individuals and companies. They have enabled us to expand pension provision in the private sector. I believe that it is wrong always to defend state provision at the expense of private sector provision. It is easy to become Mr. Nationalisation. The hon. Gentleman must recognise that personal private pension provision has given this country £600 billion-worth of assets—more than all the other European countries put together—which will enable us by 2030 to pay off the national debt and start accruing assets at a time when other countries will be beggared.
§ Mr. Denham
Does the Minister accept what I said in my opening speech, that this debate is not about the value of funded pensions, but about the fact that so much of the money that goes into funded pensions goes down the drain? The Government have tipped it down the drain like there is no tomorrow. We need funded pensions where people know that their savings are going to grow, be used to provide pensions and not be wasted in fees and charges. The Minister has not yet addressed that issue.
§ Mr. Heald
The Government have addressed those problems. It is easy always to carp and criticise and say that everything that the Government do is wrong—that every aspect of personal pensions is wrong, but that the principle is right. As a result of the Government's policies, 5.6 million more people have pension provision. For many of them, that will mean a far better retirement than they would have had otherwise.
I was asked why there had been a reduction in the cost of the rebate. The reduction is owing to the reduction in the contracted-out salary-related rebate. The cost of introducing age-related rebates is broadly neutral. The figures that set that out are given in my answer to a parliamentary question from the hon. Member for Birkenhead.
456 I was asked about whether flat-rate charges drastically reduced the value of individual personal pension funds in years when people could not contribute. I accept that all charges affect the total amount of funds in a personal pension, including the flat-rate charges. Not all personal pension providers levy flat-rate charges, and all such charges are now disclosed to individuals when they take out such pensions. The new age-related rebates have been calculated excluding flat-rate charges and have been based on the charges of the more efficient pension providers.
I was asked whether people earning £10,000 a year or less should invest in personal pensions. There is no golden rule that people who earn less than that should remain in SERPS. It depends on the circumstances of the individual, investment performance and the charging structure. The fact that some providers use that figure is not proof that people would be unwise to take an appropriate personal pension with another provider. The hon. Member for Itchen has said:There is no single, simple measure of whether an individual will be better off in SERPS or with an APP. This will depend on the cost and charges of individual schemes, the performance of investments and the number and level of contributions people make.That was a sensible comment, with which I would agree. It runs counter to some of the arguments that he was putting.
§ Mr. Heald
As the hon. Gentleman says in a semi-sedentary remark, it is a lot of people, but his comment in his 23 February press statement was more sensible. He asked whether I would confirm that there is no question of personal pensions beating the market. The Government Actuary was prudent in his assumptions, in estimating the size of the rebates needed to replace future SERPS that have been forgone. In practice, investment returns vary and may well exceed those assumptions. Over the past 15 years, fund returns have averaged almost 10 per cent. a year in real terms. In future reviews, the Government Actuary will, of course, take account of the latest information and assumptions.
The hon. Member for Itchen mentioned that half the people who bought appropriate personal pensions in 1987–88 have failed to make regular contributions. I have already answered that by saying that it is not sensible or realistic to assume that a short period of zero or low contributions indicates a lifetime experience. He asked whether the Government were biased against the benefits offered by salary-related schemes. I can give a simple answer: no, we are not.
The hon. Gentleman asked whether flat-rate charges that were unrelated to the level of contributions made personal pensions a bad deal. I have answered that, too. He asked whether the 9 per cent. cap would cause people to go back into SERPS. We have decided to phase in age-related rebates by means of the 9 per cent. cap, but setting the cap at that level means that the majority of the 457 current APP holders should be able to maintain their plans until retirement without imposing an excessive cost to the public funds. In so far as other commentators may not agree with that, we do not believe that they are correct. [Interruption.] I could expatiate on that at great length, but I have had advice that that would not be wise.
§ Mr. Denham
The Government's intention with the rebates is that people should normally hold their personal pensions until retirement. On that issue, the Government are saying not that people should seek the advice of an independent financial adviser, but that they should stay in their schemes because it will save the Government money and stop them opting back into SERPS, contrary to what some financial advisers are already saying.
§ Mr. Heald
I believe that the hon. Gentleman's comment was slightly mischievous. We always advise people to take independent financial advice. It is prudent to do so because individual circumstances vary. I would not wish to change that.
The hon. Gentleman carped and criticised a good deal. He and his party's spokesman on social security have been asked to think the unthinkable for six months—180 days. For ideas, they have been to Singapore, Finland, Australia and Chile.
§ Question put and agreed to.
That the draft Social Security (Minimum Contributions to Appropriate Personal Pension Schemes) Order 1996, which was laid before this House on 13th March, be approved.
That the draft Social Security (Reduced Rates of Class 1 Contributions) (Salary Related Contracted-out Schemes) Order 1996, which was laid before this House on 13th March, be approved.
That the draft Social Security (Reduced Rates of Class 1 Contributions and Rebates) (Money Purchase Contracted-out Schemes) Order 1996, which was laid before this House on 13th March, be approved.—[Mr. Heald.]