HL Deb 27 July 1976 vol 373 cc1278-85

7.55 p.m.

Lord WELLS-PESTELL rose to move, That the draft State Scheme Premiums (Actuarial Tables) Regulations 1976, laid before the House on 12th July, be approved. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. The regulations arise out of the Social Security Pensions Act 1975 which received Royal Assent almost a year ago. Your Lordships will recall that this Act establishes a new State pension scheme made up of two parts: a basic pension and an additional earnings-related pension. Members of good occupational pension schemes may be contracted-out of the additional pension and half the additional widow's pension, but the occupational pension scheme must provide at least an equivalent pension. This is known as the guaranteed minimum pension.

The Act provides for the guaranteed minimum pension of an employee who leaves contracted-out employment before his scheme's pension age to be preserved by the scheme and revalued in line with the movement in earnings generally, by 5 per cent. or 8½ per cent. per annum. If revaluation is at the 5 per cent. rate a limited revaluation premium has to be paid to the State scheme which will then provide any revaluation in excess of 5 per cent. If a pension scheme ceases to contract-out, responsibility for the guaranteed minimum pension may either be retained by the scheme or transferred to another contracted-out scheme if approval is given by the Occupational Pensions Board. Otherwise the guaranteed minimum pension or the accrued rights to guaranteed minimum pension must be transferred to the State scheme by payment of a pensioner's rights premium or an accrued rights premium. The regulations before us set out how limited revaluation premiums, pensioner's rights premiums, and accrued rights premiums are to be calculated.

During the passage of the Social Security Pensions Act through Parliament the great concern of the pensions interests was over what became known as the "open-ended commitment". They were concerned that if a scheme should have to cease contracting-out the full extent of the scheme's commitments should be known in advance. The Government made a number of important concessions to meet those fears and most of the concessions are embodied in these regulations. The Act requires that the regulations are to be made only after consultation with the Government Actuary. This has been done, and I am sure that your Lordships will agree that it is inconceivable that regulations as complex as these should be made without such expert guidance.

The very fact that we are here discussing the regulations results from the con cession made to make these regulations subject to the Affirmative Resolution procedure. The other concessions are that the actuarial tables must always be based upon the assumption of an average yield on investments not less than the assumed average increase in earnings; in other words, the assumption is that there will never be a negative yield situation. The premiums will vary to reflect current yields on investment. In this way the amount of premium payable is related to the money which a scheme would get by realising assets to pay the premiums. Finally, in calculating the amount of guaranteed minimum pension to which the premium relates, a revaluation rate of 12 per cent. may be taken in each of the last five years before contracting-out ceases instead of revaluation in line with the movement in earnings generally. Perhaps I should add that this applies to a firm which is going to withdraw from the contracting-out scheme.

These concessions were made by the Government in order to get a pensions scheme which had the general approval of the people of this country. There had been enough dispute about pensions and all concerned wanted a scheme which would get off the ground and which would last. The Pensions Act provides such a scheme and the Opposition, TUC, CBI and pensions interests have all played their part with the Government in getting a consensus on pensions based upon partnership between the State scheme and occupational pension schemes. I am sure that this same spirit will be seen in discussing these regulations.

There has indeed been very full consultation with the TUC, CBI and main pensions interests. In January a Consultative Document prepared by the Government Actuary was circulated. This explains the basis on which the actuarial tables would be set out. Draft regulations taking account of the comments made were circulated on 15th April. The regulations before us have, in turn, been prepared in the light of the helpful comments which the Government received. As a result of these consultations, the number of tables has been reduced from about 160 to 10 by having only one alternative table for each standard table and obtaining the other alternatives by a very simple formula—if anything in this is simple. This enables us to avoid having minimum and maximum market level indicators. Also, the market level indicator will be measured over the first five working days of the month in which contracting-out ceases so that the amount of premium will be known before a scheme ceases to be contracted-out.

The House will appreciate that these Regulations are very technical. They are; let me be frank. I have found, from bitter experience, that they are very difficult to understand. They set out the three elements needed for calculating a premium. First is the amount of guaranteed minimum pension to which a person is entitled at the time a premium has to be paid. This is converted to an annual figure called the "accrued rights factor". Secondly, there is the "market level indicator" which has to be calculated. This is the device for relating the premium to current yields on investments. The formula is set out in the regulations and is based upon figures compiled by the Financial Times (which I hope is an acceptable one) the Institute of Actuaries and the Faculty of Actuaries. Thirdly, there are the actuarial tables themselves which are set out in the schedules to the regulations. If the market level indicator is 100, a standard table is to be used. Otherwise, the alternative table is to be used. To calculate the premium, the amount is taken from the appropriate table according to the person's age and sex. The amount is multiplied by the market level indicator to give the premium for £100 of accrued rights factor and the result is then adjusted according to the actual amount of accrued rights factor involved.

A word about the timing of the regulations. The market level indicator is, in part, based upon the index number applicable to 20-year Government stocks. It is generally accepted that this index has shortcomings and I understand that a more suitable index is being prepared. The Government have decided to go ahead with these regulations now and to revise them when the new index is available so that employers and schemes know the kind of premiums they will have to pay. They need this information in order to decide whether or not to contract out and it would be wrong to delay the regulations for even a few months.

I therefore commend the regulations to your Lordships, having acknowledged 373that they are complicated and very technical, but having pointed out that the CBI and the TUC, and various bodies including the Financial Times, the Institute of Actuaries and the Faculty of Actuaries have made a magnificent contribution to this Scheme. I therefore move that the regulations be approved.

Moved, That the draft State Scheme Premiums (Actuarial Tables) Regulations 1976, laid before the House on 12th July, be approved.—(Lord Wells-Pestell.)

8.6 p.m.

Lord LYELL

My Lords, the gratitude of the House is due to the noble Lord, Lord Wells-Pestell, for the very lucid and detailed manner in which he explained the provisions of these regulations and, indeed, for his own expert guidance through what I found to be a complete labyrinth of legal terms. As he explained, these regulations are very complicated indeed, but the tables in the schedules, I understand, have been requested by various pension funds and institutions so that their liabilities may be determined with a reasonable degree of certainty should various contributors to a contracted out pension scheme wish to rejoin the Government occupational pension scheme. I understand that the regulations before us meet the requests of all the pension funds and to that extent I believe that they would wish me to express thanks to the Minister and to the Government.

I do not think it is for me to attempt to discuss or comment on the many details of the regulations, nor on the tables nor schedules since we on these Benches are committed to a bipartisan policy on pensions, as outlined in the Social Security Pensions Act 1975, to which the noble Lord referred. However, two points give us slight concern. One deals with the representation of non-unionists on pension funds while the other is dealt with this evening; it is the improvement of the premiums payable to the Government scheme when a contributor rejoins it.

May I ask the Minister to confirm what we believe to be the case: that the upper and lower limits on the premium liability payable by pension funds when contributors leave to rejoin the State scheme have been removed? We understand that the noble Lord's honourable friend had written a letter in June of this year to one of my honourable friends in another place and we should be grateful if the noble Lord would confirm the contents of that letter. Perhaps the noble Lord would also say a few words on the standard and alternative tables in the schedules at the end of the regulations. I find them difficult to understand; at least, they appear to be relatively simple but I think there must be a nasty catch. Looking at them, it seems that the alternative tables are reminiscent of French currency regulations shortly after 1958, when, I understand, currency was in "heavy" and "light" francs. As I understand it, the alternative tables merely push the decimal point two or three places to the right or left, but doubtless the noble Lord will enlighten us later, if he is able to do so. We are grateful to the Government for producing these regulations because they will assist pension funds in determining their liabilities.

8.9 p.m.

Lord WELLS-PESTELL

My Lords, I am grateful to the noble Lord, Lord Lyell, for his comments and observations. I must say that I should have been in very serious difficulty had I not had the advice of my advisers and the help they have been able to give me because I must acknowledge that this is a very complex matter. The noble Lord referred to a letter which my right honourable friend the Minister for Social Security wrote to Mr. Kenneth Clarke. I believe that the noble Lord said that this was in June and, just for the Record, I should like to say that the letter was sent on 23rd July. It is perfectly true that we had asked for comments and observations from a very wide field. The main comments made on the draft regulations which were circulated were that there were far too many tables and that the regulations were far too complicated. It was also suggested that the alternative tables should be provided when the market level indicator was below 40 or above 139. We were able to concede the points made by Mr. Kenneth Clarke and they have been dealt with and were not pursued.

We have also met two other comments. The first was that the regulations should be delayed until a new fixed interest of security yields index is available—I dealt with that—and we were also asked about the period over which the market level indicator should be measured. That has also been dealt with and we have confirmed this, as the noble Lord pointed out, in a letter to Mr. Clarke.

The draft regulations circulated for comment provided that if the market level indicator dropped below 40 the appropriate tables should be used and that if the indicator went above 139 the tables appropriate to that level should be used. This was because we thought that indicators below 40 and above 139 were unlikely to arise and that it would avoid printing a lot of unnecessary tables over and above the 160 which were thought to be necessary. A number of pension interests were very concerned about this and felt strongly that the tables should be extended to cover the situation if the market level indicator fell below 40. This was because, when an extreme position has been reached, the protection afforded by the link with the market yield is most needed. We accepted the arguments put forward and have now made provision for the actual indicator to be used in all circumstances. The reduction in the number of tables and by using only one alternative table in each case makes this easier to operate.

The noble Lord asked me something about the five Schedules and I shall attempt to give him an answer. Schedules 1 and 2 are for use in calculating accrued rights premiums when a scheme ceases to be contracted out, the first where the guaranteed minimum pension is subject to revaluation in line with the general movement of earnings or where the pension is being preserved and revalued at the fixed 8½ per cent. rate, and the second where the guaranteed minimum pension is being preserved and revalued at the 5 per cent. rate, a limited revaluation premium having previously been paid. The State scheme thereafter accepts full responsibility for the pension rights.

Schedule 3 is for use in calculating limited revaluation premiums, mainly when a member leaves a contracted out scheme before having reached pension age and the scheme wishes to limit its own responsibility for revaluation of the guaranteed minimum pension to 5 per cent. Schedules 4 and 5 are for calculating the pensioners' rights premiums to be paid by schemes which cease to be contracted out and where the State scheme is to take over the continuing pensions payments. Schedule 4 is for members' own pensions, and Schedule 5 for widows' pensions of deceased members. In each case, the alternative tables are to be used instead of the standard tables whenever the market level indicator is not 100, which, as the noble Lord knows, will usually be the case.

On Question, Motion agreed to.